Zuora Inc

Good afternoon. My name is Krista and I'll be your conference operator today. At this time, I would like to welcome everyone to the Zora fiscal year 24 third quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during that time, simply press star followed by the number one on your telephone keypad. And if you would like to withdraw your question, again, press star one. Thank you. I would now like to turn the conference over to Luana Wolk, Vice President of Investor Relations and ESG at Zorora. You may begin your conference. Thank you.

Good afternoon and welcome to Zorra's third quarter fiscal 2024 earnings conference call. On the call, we have Team Zorra's founder and chief executive officer and Todd McElhatton, Zohar's Chief Financial Officer. Robbie Trauber, our President and Chief Revenue Officer, will be joining us for the Q&A session. During today's call, we will make statements that represent our expectations and beliefs concerning future events that may be considered forward-looking under federal securities law. These statements reflect our views only as of today and should not be relied upon as representative of our views as of any subsequent date. We disclaim any obligation to update any forward-looking statements or outlooks. These statements are subject to several risks and uncertainties that could cause actual results to differ materially from expectations. For further discussions of the material risks and other important factors that could affect our financial results, please refer to our filings with the SEC. And finally, unless otherwise noted, all numbers except revenue mentioned today are non-GAAP. You can find a reconciliation from GAAP to non-GAAP results for both the current and the prior year periods in today's press release. A press release and a replay of today's call can be found on Zora's Investor Relations website at investor.zora.com. Now, I'll turn the call over to you, team.

Thank you, Vala. Congratulations again. It's so great to have you back. And thank you, everyone, for joining us today. Welcome to Zora's third quarter fiscal 2024 earnings call. Q3 was another quarter where we exceeded guidance on subscription revenue, total revenue, and operating income. In Q3, subscription revenue rose to $98 million, up 14% in constant currency and 13% as reported. ARR grew by 13%. Non-GAAP operating income exceeded the high end of our guidance range by $5 million. And we exceeded our full year goal for adjusted free cash flow one quarter ahead of plan. I would say that the Q3 headline was our margin expansion. Our Q3 non-GAAP operating margin was 15%. This is a huge increase from nearly a break-even position just one year ago. And as Todd will show, our outlook for FY24 illustrates that we plan to deliver a $65 million positive swing in our adjusted free cash flow for the year. We've done this while building a durable business that delivers a double-digit growth even in this macro environment where budgets are scrutinized and deal cycles are taking longer. I would say there are two things. that have allowed us to accomplish this, our enterprise customers and our mission-critical technology. As you know, we chose to focus on the world's largest and fastest-growing companies across industries and all around the world. This gives us a customer base that many would be envious of. And in Q3, many of these companies recommitted to Zuora. We saw several expansions with multi-year commitments that drove a 20% year-over-year increase in our total RPO, or remaining performance obligations. This also helped drive our dollar-based retention rates to 108% in Q3, up one point quarter-over-quarter. Let me give you some examples. In Q3, we expanded our work with Google, Google Fiber, Alphabet's high-speed broadband internet service that spans 15 states and counting. Now, Zora will power G-Fiber's full order-to-revenue process as they continue to grow. Four, you all know we power 12 of the top 15 automobile companies around the world. Well, in Q3, one of them, which is also one of our top five customers, renewed their commitment to Zora for another five years. Not only that, in one of the world's largest telecommunications and entertainment companies, we expanded to yet another business unit, signing a five-year, seven-digit deal, which also was a competitive replacement. Of course, this isn't just about our install base. Because of our technology, our people, and our vision, companies continue to choose Zora to drive the growth of their recurring revenue businesses. For example, in Q3, FreshBooks, A high-growth leading invoicing and accounting software built for business owners and accountants came to Zora after their previous legacy systems required complex manual intervention to meet their needs. Now with Zora, they plan to streamline and simplify how they manage recurring revenue, including consumption. As another example, a leading healthcare technology platform selected Zora to power their care services We will be working with them to make their pricing and packaging more flexible, along with driving operational efficiency. And of course, we continue to have amazing companies go live on Zora. In Q3, LinkedIn, the world's largest online professional network, is now using Zora for their LinkedIn subscription revenue stream. This is within their LinkedIn talent solutions. After an in-depth search for the right partner, LinkedIn selected Zora to minimize the need for manual intervention in their revenue recognition processes and expedite their time to market. This is why in Q3 we saw an uptick in both the number of large deals and the number of customers with an average contract value at or above $250,000. We now have 453 of these customers, up by nine. quarter over quarter. In this quarter, we saw seven deals with an ACB at or above $500,000 compared to six deals in Q3 of last year. Of those seven deals, two were over $1 million. And our relationship with our system integration partners continues to be incredibly important to help us move these large companies to Zora. In Q3, we continue to see solid growth for partner source pipelines. The second thing that enables us to continue to deliver strong results is of course our differentiated technology and our constant pace of innovation. And I'm so excited that this technology is more important than ever. Why? Because we believe we are entering a new phase of a subscription economy. Let me explain. The past 15 years have been a great period of growth for subscription businesses, but today, You have all heard of the phrase, subscription fatigue, the idea that we all have too many streaming services subscriptions, or our companies have too many SaaS applications. So does that mean the subscription era is over? Well, of course not. What it means, however, is that a shakeout is now happening. And what we are seeing is the winners of the shakeout are using our technology to deliver not just recurring relationships, or recurring revenue. They are using our technology to create recurring growth. In fact, if you came to any one of our Subscribed International events, for example, in New York, London, Paris, Munich, Stockholm, or Tokyo, we showed that two dominant strategies are emerging for how to create recurring growth. The first is around consumption. In fact, our new research with BCG found an almost 3x increase in adoption of hybrid consumption models over the last three years. And so in Q3, we expanded Zora4 consumption to help companies take their unpredictable raw usage data, better understand exactly how their customers use their offerings, and translate that to the right pricing model. Companies like Aviva, a global leader in industrial software in Europe, are adding Zora for consumption to give their customers visibility into consumption habits, and with that new transparency, deliver new value to customers. We're also seeing greater recognition of our product portfolio by third-party research firms. IDC Research, for example, has stated that Zora is providing the revenue platform of tomorrow, especially with these new consumption-based capabilities. The second dominant strategy we're seeing emerge is what I'll call strategic bundling and unbundling. In this digital era, companies like New York Times, as an example, they no longer ask you to buy their entire newspaper. Instead, they've unbundled their offerings, allowing people to subscribe to just games or news or sports or cooking and more. And this is how they've grown to now more than 10 million subscribers. And so in Q3, we announced new capabilities for Zephyr that enables our customers to gain a deeper understanding of their subscribers through their own data, combined with industry benchmarks across the entire Zora customer user base, helping them drive conversion and retention through personalized offers. All of this builds on our family of market-leading products. Zora Billing, Zora Revenue, Zora Payments, Zephyr, and Azure platform, including Azure Warehouse with BYOB technology, Azure Extension Studio, and Azure Command Center with the new integration hub. In closing, for Q3, I would like to thank every CEO for their work, not just in the quarter, but for the entire year. We have built a fantastic customer base with the biggest and best brands. We have the right technology suite, which we are constantly innovating. And we have a passionate team of CEOs in place to help us take the momentum that we've seen through Q3 into Q4 and into the new year.