Zuora Inc

Q1 2025 Earnings Conference Call


spk10: Thank you for standing by. My name is Pam and I will be your conference operator today. At this time, I would like to welcome everyone to the Zuora FY25 Q1 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 this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star 1 again. Thank you. I would now like to turn the conference over to Luana Wolk, Head of Investor Relations. You may begin.
spk02: Good afternoon and welcome to Zora's first quarter fiscal 2025 earnings conference call. On the call, we have Tim Zwill, Zora's Founder and Chief Executive Officer, and Todd McElhatton, Zora's Chief Financial Officer. Robbie Traver, our President and Chief Revenue Officer, will be joining us for the Q&A session. During today's call, we'll 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 outlook. These statements are subject to several risks and uncertainties that could cause actual results to differ materially from expectations. So, for further discussion of the material risks and all the 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, Dean.
spk05: Thank you, Luana, and thank you, everyone, for joining Zora's first quarter fiscal 2025 earnings call. When I look back on the puts and takes this past quarter, I would say I feel good about the progress we continue to make against the macro environment facing the technology industry. We continue to deliver on our guidance. We continue to benefit from a solid enterprise customer base with strong expansion opportunities. And of course, we remain focused on our strategy to deliver profitable, durable growth. Let's start with the numbers. In Q1, subscription revenue was $99 million, up 10% year-over-year at the high end of our range. We exceeded guidance for non-GAAP operating income at $18.6 million, equating to a 17% operating margin, which is a quarterly record. Our adjusted free cash flow was at an all-time high of $31.4 million for this quarter, a significant increase from the $13 million we delivered in Q1 of last year. And finally, against the Rule of 40 framework, which combines growth and profitability, we are on track to exit this fiscal year at 30, up from the 26th level that we hit at the end of last year. One highlight of Q1, I would say, is our install base expansion. Our stable of large enterprise customers continues to anchor the durability of our business. Our customer satisfaction levels continue to rise as measured by Net Promoter Score. Customers continue to love our new innovations, and this is driving strong expansion opportunities. In fact, in Q1, we saw a year-over-year increase in cross-sells, with customers either adding another Azura product or adopting our technology in new business units. Some examples. Our customers are adopting additional products like Zephyr. The Economist, a leading news magazine with over a million subscribers, is a Zora billing customer that added Zephyr in Q1. Their digital subscriber base continues to grow, and they'll be using Zephyr to enhance their dynamic paywall experience. Our customers are adopting us in new business units. One of the world's largest automakers expanded with Zora to empower another business unit, this time for its software suite that manages connected services and telematics for commercial fleets. Our Zora revenue to Zora building cross-sells are working. Last quarter, we talked about Toast as a great example. Well, this quarter, we saw another Zora revenue customer, a global leader in customer experience and contact center solutions with over $1.2 billion in annual revenue. They added Zora billing with advanced consumption to help them analyze millions of customer usage data points and monetize their AI-powered support offerings. We are supporting our customers to expand into new countries or regions. In Q1, global manufacturing brand, Lexotica. They produce eyewear for brands like Oakley, Gucci, and Prada. And they expanded with us to support their eyewear subscription service in new countries. So our install base business was a highlight in Q1. In Q1, though, our new logo business continues to be affected by the macro headwinds, as we again saw companies delay large, multimillion-dollar projects at the end of the quarter. Now, as we mentioned on previous calls, we remain committed to our strategy of doing smaller, faster lands with great companies and brands. A good example in Q1 would be Mitsubishi Electric, one of the world's largest manufacturing companies with over $36 billion of revenue. As Mitsubishi Electric continues to expand beyond hardware and complementary digital services for offering like its air conditioning and factory automation systems, what they needed was a monetization suite that was built to support recurring revenue. Overall, however, the lack of large transformational deals, coupled with the seasonality of the software business, meant a lighter overall new logo quarter. That being said, we are getting more and more efficient in how we generate pipeline. We're switching to more digital and inbound techniques, and we're already seeing positive leading indicators that show improved response rates and lead generation efficiency. And so we believe that our opportunity remains strong as the year progresses. The most exciting news of the quarter, however, is our acquisition of Togai. And so I'd like to spend a few minutes talking through why this announcement is so important. Now, we've seen an increase in demand for usage-based pricing, especially in the SaaS market. Our advanced consumption solution is one of our fastest-growing products in terms of pipeline. As of Q1, we have over 50 customers that have selected our advanced consumption offering. And usage-based models continue to accelerate even further with the explosion that we're all seeing of Gen AI-based technologies. But in supporting our customers around consumption strategies, we've also uncovered a huge need that engineering organizations have around capturing and metering their usage information. And this is where Togai comes in. Togai provides a leading metering and rating solution and enables developers to directly convert raw data into usage metrics through a three-step no-code configuration builder with flexibility to monetize products in many, many different ways. This is really, really exciting. But the last thing I'll say about Togai is that this isn't just about usage-based models. There's a broader strategy going on, one that I will call total monetization. So what do I mean by that? Well, you probably know Zora as the company that predicted and led the shift to the subscription economy. And this shift has happened. Today, you and I, we're buying less and less stuff. And it sure seems like every week the CEO of another Fortune 500 company is declaring a target of shifting some meaningful percentage of their business to recurring revenue models. But now, at the subscription economy, this new world is a new normal. People are asking, what's next? Well, we believe what's next is a concept that we call total monetization. This is no longer just about standalone subscription businesses with monthly fees. It's also about one-time transactions like product sales or pay-per-view or professional services revenues or the usage and consumption model that Togai helps us power. Total monetization is about mixing multiple business models in a way that maximizes the value of your innovations in your target market. And so we see this with companies like the New York Times, which transformed and unbundled how it offers products like games or cooking or news or sports alongside its traditional offering. And they've been able to see their annual digital subscription revenues with this strategy go beyond a billion dollars a year. So if you look at the innovations and acquisitions that we have made over the last seven years, revenue recognition, payment orchestration, consolidated billing, Zephyr, consumption billing, and now usage metering and rating with the acquisition of Togai. We are no longer just a billing company. We are building what I'll call a total monetization software stack for powering any business model. And what's unique about this platform is that it's totally modularized. So you can start with billing or metering or revenue or payments. And so when you look at our customer base, you see us owning the entire billing layer in some companies. And for other companies, we're the entire payments layer or the entire revenue layer. Ultimately, our strategy is to be able to land with a new logo where our customer's pain point is greatest and then expand with them over time across the entire order to revenue process. In fact, this is our own total monetization strategy. And so in summary, we believe that our bigger opportunity is to power a company's total monetization strategy and not just simply be a billing provider. We believe the innovations and acquisitions that we've made over the last few years put us in the best position to deliver all the technologies needed to capture this emerging opportunity. And Togai is another key step in that journey, especially around the usage-based models that are exploding due to gen AI and IoT. We believe our modular approach is critical to enabling the broader land and expand strategy within our growing product portfolio that you've heard us talking about in recent quarters. And finally, we are committed to driving sustainable, profitable growth as we lead in this new era. Finally, we hope you'll join us at Subscribe Live on June 26th. in the Bay Area to learn more from our customers as we help them monetize every part of their business. With that, let me turn over the call to Todd to review our financials.
spk06: Todd. Thank you, Gene, and thank you, everyone, for joining our call. In Q1, our subscription revenue and total revenue were at the high end of our range as we continued to make strides in our profitability. we exceeded the range for our non-GAAP operating income and expanded our adjusted free cash flow by $18.4 million compared to last year. During the quarter, we continued to experience similar buyer behavior as we've seen in the last several quarters, with longer sales cycles and fewer transformational deals. ARR growth and DBRR for the quarter were impacted by customer churn, including those discussed during our last earnings call. As a reminder, the customer churn was already factored into our guidance for Q1, and we expect our growth to accelerate in the second half of the year. Despite these headwinds, we're making good progress towards exiting the year at a rule of 30 run rate, including absorbing the expenses associated with our recent Togai acquisition. We had record quarterly performance for non-GAAP operating margin and adjusted free cash flow. Now I'll run through our financial results. Subscription revenue in Q1 was $99 million, growing 10% year-over-year. Professional services revenue came in at $10.8 million, which was at the high end of our outlook, representing a decrease of 19% year-over-year. Professional services revenue was 10% of total revenue. We expect our professional services revenue mix to slightly decrease over time as we continue to expand our partnerships with SIs. Non-GAAP subscription gross margin in Q1 was 81%, up nearly 100 basis points year-over-year. This improvement is driven by continued efficiency optimization with our hyperscalers. As a reminder, in Q3 and Q4 of fiscal 24, we benefited from one-time vendor credits. Non-GAAP professional services gross margin in Q1 was negative 14%, a decline from negative 3% in Q1 of last year. Similar to last quarter, this was expected as a result of our continued investment in customers. For the remainder of the year, you can expect margins to improve with professional services margin being in the negative mid-single digit range for the whole year. Our Q1 non-GAAP blended gross margin was 72%, an increase of over 230 basis points year over year. Our Q1 non-GAAP operating income was $18.6 million, exceeding the high end of our guidance by $2.6 million, representing a non-GAAP operating margin of 17%. During the quarter, we remain disciplined in our spending. Expansion of our operating margin is a key objective toward our goal of exiting the year at a rule of 30 run rate. Our fully diluted share count at the end of the quarter was approximately 185.1 million shares using both the Treasury stock and IF converted methods. Let's dive into some of our key metrics for the quarter. Dollar-based retention rate ended at 104% down two percentage points quarter over quarter and down four percentage points year over year. The decrease in DVR was primarily driven by the churn we discussed in our last call and foreign exchange. Without the FX headwind, DVR would have been 105%. In Q1, total RPO ended at $581 million, growing 15% year over year, Non-current RPO was up 23% year-over-year to $256 million. We had a number of multi-year renewals in the quarter as customers continued to grow on our platform. At the end of Q1, we had 451 customers with an annual contract value at or above $250,000. This is up 15 customers year-over-year, but down 10 sequentially. During the quarter, some of the customers in this cohort downsized below the threshold, reflecting the impact of the macro environment on their business. We remain focused on the enterprise space, and this cohort represents 84% of our ARR. In Q1, we closed two deals with ACV of $500,000 or more, down from four in Q1 of last year. This includes two deals over $1 million, up from one last year. ARR grew 8% in Q1, reaching $404.4 million. Adjusted pre-cash flow was $31.4 million for the quarter, a significant incremental improvement of over $18 million compared to Q1 of last year. Like other SaaS companies, our Q1 typically benefits from Q4 higher billing seasonality, and we expect more normalized trends for the rest of the year. As a reminder, adjusted free cash flow does not include acquisition-rated costs and other matters. Turning to the balance sheet, we ended the quarter with $547 million in cash and cash equivalents, a sequential increase of $33 million. Total capex for the quarter was $2.7 million. Before we discuss guidance, I'd like to provide some color on our recent tuck-in acquisition. As T noted, Togai will bolster our consumption capabilities, and we expect it will broaden our ability to land and expand. From a financial standpoint, Togai's revenue is negligible, and we expect to absorb their operating costs. We are assuming the current macro trends continue, and this is reflected in our guidance. For Q2, we currently expect subscription revenue of $101 to $102 million, Professional services revenue of $10.5 to $11.5 million. Total revenue of $111.5 to $113.5 million. Non-GAAP operating income of $17.5 to $19.5 million. And non-GAAP net income per share of 9 to 10 cents, assuming a weighted share is outstanding, of approximately $149.4 million. For the full fiscal year 2025, we are maintaining our top line outlook and raising our non-GAAP operating income range while absorbing the operating expense impact of TOGAI. We currently expect subscription revenue of $410 to $414 million, professional services revenue of $41 to $45 million, total revenue of $451 to $459 million, non-GAAP operating income of 80 to 82 million dollars, and non-GAAP net income per share of 41 to 43 cents, assuming a weighted average share is outstanding of approximately 151 million. For the fiscal year, we're maintaining our guidance for DVRR of 104 to 106 percent and ARR growth between 8 and 10 percent. However, we could slip slightly below the range in Q2 and Q3. You will continue to see us drive our bottom line leverage and maintain our goal of exiting fiscal 2025 at a Rule of 30 run rate. As a reminder, we define the Rule of 30 as a sum of year-over-year subscription revenue growth plus non-GAAP operating margin. We maintain our guidance of free cash flow to be $80 million or greater for the full year. We continue to expect annual share dilution of approximately 4% for fiscal 2025. For this purpose, dilution is calculated as the number of equity awards granted, net of forfeitures during the fiscal year, divided by the total shares outstanding at the end of the fiscal year. We're committed to driving higher operating income and free cash flow. Acquisitions like Togai will allow us to attract new customers and accelerate growth for usage-based models across our customer base. We've shown consistent progress in our ability to drive improvements in profitability and adjusted free cash flow as a market leader in a mission-critical category. With that, Keen, Robbie, and I will take your questions, and I'll turn it over to the operator.
spk10: Thank you. We will now begin the question and answer session. If you have dialed in and would like to ask a question, please press star 1 on your cell phone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star 1 again. If you are called upon to ask a question and are listening via loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. Again, press star 1 to join the queue. And your first question comes from the line of Joshua Riley with Needham. Please go ahead.
spk08: All right. Thanks for taking my questions and a nice job on executing on the profitability goals here. In terms of the macro, can you help us understand what's the level of visibility you have right now into demand and has that changed over the last couple of quarters? And then along with that, as partners have sourced more deals, I think you were kind of alluding to this in the script. Has there been any change in your overall visibility into deal flow through partners?
spk05: Yeah, I'll jump in, and Robbie, feel free to add any color. Look, we still have good visibility in the pipe. We still feel good about the pipe. There's still demand, certainly, for shifting this description business models. What we really try to highlight, though, especially when you look at new logos, is companies are cautious about the large deals. And so, you know, you could define large in many different ways, but if we'll just say these are seven-digit deals, you're seeing companies continue to hesitate to pull the trigger on signing up a new vendor at that seven-digit level. And so we're not seeing, you know, those deals necessarily go away, but we're continuing to see companies cautious about those deals. And certainly, if you compare, you know, where the business has been historically from a multi-year perspective, that does continue to be a drag.
spk00: Yeah, and I think, you know, changing to your point, They're a key part of our strategy, and, you know, we have a very partner-first focus. The other thing is, you know, in the same way we closed Toast, you know, as a deal, for example, in the previous Q4, last quarter we closed an equally-sized opportunity, again, going from revenue, and it was co-sold with a partner. So we do see continued traction there.
spk05: Yeah, maybe just to bridge the two comments there, given that what we have done recently is to – bring partners more into our install base. So you're seeing as we focus on driving, you know, short-term growth from expanding in our install base, the good news is we've got a solid enterprise customer base that has expansion opportunities, and we found some good success working with our partners in our install base, where perhaps, you know, two, three years ago, the focus there has been primarily around new logos.
spk08: Got it. That's helpful. And then just on the sequential change in the customers above 250K being down 10 quarter-over-quarter. Can you just give us a sense? Should we expect this to continue to decrease throughout the course of the year? And, you know, how are you thinking about, you know, the importance of this metric, I guess, relative to historical?
spk06: Hey, Josh. This is Todd. So thanks for asking the question. Couple pieces of color here that I think are really important to pick out, so I'm glad you asked about it. We did have a small group of customers that in this current, in this current, excuse me, we had a current, we had a group of customers in this cohort, small group, That have had some challenges and we've had to meet them where they are. And that was the primary reason that we saw a decrease in that. We might see a few more next quarter happening. But the one thing that we really needed to tease out of this metric that I don't think that you're seeing is if you look at the ACV growth of our cohort of customers over 250K year over year, that is growing by more than 10%. And that's really important because that's one of the things that we said we want to land with the right customers after we land with them that we have the ability to expand. And that's exactly what we're doing with focusing on the best customers that we can really maximize the revenue potential out of them over the lifetime.
spk05: And philosophically, just to add to that, when you look at look, if there's a company that's certainly. Um, you know, need to downsell and we're looking at this 250 K limit. You know, our goal has to be to hold on to as a longer term customer. Right. We've shown again and again that, you know, when we hold on to customers for long periods of time, we're able to grow the account. So we're going to be smart about these things, but exactly what Todd said, if you look at the whole group as a cohort. They are expanding.
spk06: And the other thing I'd add, Josh, is, you know, our gross retention rate remains very consistent. And it just proves the stickiness and that this is a mission-critical product that our customers are reliant on.
spk04: Very helpful. Thanks, guys. Thanks, Josh.
spk10: Your next question comes from the line of Adam Hodgkiss with Goldman Sachs. Please go ahead.
spk07: Great. Thanks for taking the questions. I guess to start, it would be great to get an update on the business churn, you know, some of the churn you mentioned last quarter. I know you mentioned two, and also on the flip side of that, some multi-year renewals happening this quarter. So when reviewing some of your larger contracts and maybe some of your anticipated renewals for the rest of the year, what gives you confidence in the maintenance of DVRR and some of the other retention metrics versus where we are now?
spk05: Well, the number one thing is it's a sticky product. And when we can certainly see the volume that customers are putting through the system, we know how much they contracted for. We have a sense of, look, are these companies doing well? Are they growing? Are they declining? Usually for these subscription businesses, very few subscription businesses are actually shrinking. They're just not growing as fast as, you know, they might have been in previous years. And so, you know, that gives us a good strong set of visibility into how the base should be performing for a call with next four quarters.
spk06: Yeah, but I would just kind of reemphasize here, Adam, is there was no real change. The expected churn that we talked about at the end of last year is what occurred. We had a few customers that needed to do some right sizing based upon the economics. Gross retention remains really consistent, and we are comfortable with the 104 to 106 range for the whole year.
spk05: And I would say, look, that's one of the, what I believe is the strength of our business, the stickiness and the quality of our install base.
spk07: Got it. That's really helpful. Thanks. And then, you know, we've heard a lot from partners and businesses about the fairly rapid shift a lot of companies are making towards consumption billing. And I'd be curious if you could give us a sense from where we are there maybe versus a year ago on demand and then what you've seen some of your larger billing competitors that maybe didn't play in the subscription space as a niche do, if at all, to address total monetization.
spk05: Well, what we're so excited about this total monetization phrase is just to remind folks that, hey, you know, consumption is certainly on the upswing, but when you look from a long period of time, especially if you look at more mature industries like the telecom industry, you're going to always see a collection or a hybrid set of different ways of pricing, prepaid models, postpaid models, consumption, arrears, and advance, all sorts of things. Look, we're excited really about the capabilities that we have. We talked about how our advanced consumption model has over 50 customers that signed up. One of the big drivers that Robbie talked about, right, a big call center application company that was a resort revenue customer that signed up for resort billing, that was also driven by the need to do consumption, you know, usage-based. If you look at consumption-based models and you look at the call center market, you know, because of AI, it's one of the big areas where you're seeing consumption models explode, and we're certainly beneficiary of that. And of course, The last thing was the Togai acquisition, right? When you look at these consumption models, we do a great job on that billing, the rating capabilities. But more and more, we're saying developers, hey, how do we even grab the data from our systems, put it in a place that can be metered, can be rated, where the salespeople can see it, the customers can see it? And, you know, that turns out to be a big, big challenging space. Togai had a fantastic solution for it, and we're pretty excited about adding, you know, that company, that capability, and that new collection of great folks into our organization.
spk04: Okay, that's great to hear. Thanks, Dean. Thanks, Todd.
spk10: Your next question comes from the line of Joseph Vassi with Canaccord. Please go ahead.
spk09: Hey guys, good afternoon and nice to see continued growth in the user base and some new logos here. Just one on Togai, I know you mentioned that current revenue there is kind of de minimis. Just wanted to drill down a little bit into how ready for prime time the solution set is given that they really didn't have much revenue yet. Is it ready to sell? and become part of your cross-sell efforts in the base now, or is there some more R&D that needs to be done before you roll it out? And I'll have a quick follow-up. Thanks.
spk05: Yeah, look, this is, when it comes to usage metering, you know, I'll call it usage capture metering rating. It's a fairly new space. You're really seeing two types of companies. You're really seeing young startups that are probably under two years old, and you're seeing maybe companies that could come out of the telecom sector that are 20, 30 years old that they really have more dated old technology. We looked at them all, and I got to say, we were most excited about the technology that this group of folks have built. If you dig into their background, they're successful entrepreneurs. They've built successful companies in the past. We think it's a great product. We think it is ready for prime time. Obviously, you know, we're going to take, you know, call it weeks, not quarters, to do some integration of the products together. But we've been already, you know, obviously showing this to our customer base and getting a lot of good positive response.
spk09: Okay. That's helpful. Thanks, Tien. And then I know the large deal activity slowed down, but I think you did sign two in the quarter. Anything to note there on kind of why those customers are moving forward, I guess, a critical need or maybe changes in their operating environment that required it or whatever you want to add on that. Thanks.
spk05: Yeah, I love that Todd asked in color, but I do want to stress that we are still seeing big deals. What we're seeing big deals is in our customer base, and that really speaks to the quality, durability, and expansion potential that we have in our customer base. And, again, I really do believe that that is the strength of the business. What we're seeing, though, is when a company is signing on a new vendor, they're going to be a little more cautious in that area.
spk06: Yeah, I mean, adding on to what Dean said, Joe, is both of these were install-based customers, and it really plays to the strength of the Zora product. One of them, we're able to monetize as they continue to grow and take advantage of that. And the other one takes advantage of our having a multi-product portfolio. So they started with Zora revenue. Now we're moving them to Zora billing. And in fact, that billing is a takeaway from a large competitor.
spk09: Great. Nice win on that takeaway, and thanks for the color, guys. Much appreciated. Thanks, Joe.
spk10: Your next question comes from the line of Brent Thill with Jesse. Please go ahead.
spk01: Hi. This is Love Soda here for Brent Thill. Thank you, Tien and Todd, for taking my questions, and Robbie as well. Maybe the first one, on ARR growth, so the sequential change in ARR was, it declined pretty meaningfully this quarter. I guess, could you help us parse out how much of the impact was from the churn versus macro, and what gives you confidence that this could rebound in the second half of the year?
spk06: Well, thanks for the question. So I want to tease this out into three parts. One is our expansion, the second is our new logo, and the third is our churn. And so on expansion, we felt we did really well there. We did pretty much as expected, and it really speaks to the quality of our customer install base. On the new logos, we had a little bit of a slower start, but we always know that Q1 is our lightest quarter. And we're seeing nice acceleration of the pipeline, and that certainly is one of the things that gives us confidence for reaching the range for the whole year. And finally, the churn is what we talked about, one-time events. We talked about that last quarter, and that played out as expected. So, look, it's a challenging macro environment, but if I look at the quality of the specialty of our install base, which I think is going to drive an awful lot of our bookings this year, I look at our product, the pipeline, what's happening with Togai, we believe we've got the material that we need to exit the year at 8% to 10% ARR growth.
spk01: Got it. That's super helpful. And then just wanted to ask a quick follow-up on the efficiency initiatives that you have put in place. You know, could you just talk to us about what stage of the innings are we in in terms of driving those efficiency initiatives? And is there more room in terms of pushing the inbound motion to deliver further profitability as the year goes on? Thank you.
spk06: So thanks a lot, Lo, for that question also. I feel really good. We've done a lot of hard work on the cost structure. We have in place a very robust business. And frankly, you know, we've got the capacity to deliver a lot more revenue without adding a whole lot of incremental costs. So that gives me a lot of confidence on being able to, you know, meet our profit objectives. In fact, as you saw, you know, not only absorbing all of the TOGAI costs, but I raised the midpoint of where our guidance is for profitability for the year. And we're never going to be done. We're constantly taking a look at where we are in the business, where we can sit there and get incremental improvements. And we're working on that. I think if you notice, for example, we actually in absolute dollars are down about 10% in our go-to-market spend. So we feel like there's still more room to continue to optimize and get more efficient. And we've also got the capacity to deliver a lot more revenue with the current structure we have in place.
spk05: Yeah, I mean, just in case, I'll ask maybe the flip side of the question, which I think might be what you're asking. I'll give you a stat. I mean, we're generating more pipeline with fewer people than we did two quarters ago because we're just getting much more efficient and smart about it.
spk04: Got it. Perfect. Thank you.
spk10: We have time for one more question, and this comes from the line of Jacob Stefan of Lake Street. Please go ahead.
spk03: Hey, guys. Thanks for taking my questions here. Tien, I want to get some clarity. I think you made a comment about switching to kind of a new sort of lead gen strategy. I just want to get any color that you have on that.
spk05: Yeah. So I would say it's an evolution, not an entire change. But if you talk to other companies in the industry, other SaaS companies, certainly it feels like at a higher level, right, an industry level outbound cold calling through, you know, business development reps is not paying off as well as it might have been, you know, two, three, four years ago. And if you look at our value prop, right, we – We certainly are the leading evangelist in the subscription economy, but you're seeing people really come to us for different needs. You can see we have the need now to service a controller. We can service an AR team. We can service a developer. And so we are switching more towards a classic inbound model, and we're finding that to be much more efficient. And we're using more digital technologies versus human labor. and you know as you might suspect you know ai tools are certainly a big big part of that as well so we're just learning to be much more efficient in in the current environment and how to generate pipeline and we think it's paying dividends okay yeah understood um that's helpful uh maybe just kind of you know i'll ask the uh the free cash flow question here you know you guys kept guidance at 80
spk03: million plus. You know, you did 40% of that in Q1 here. You guided up on adjusted operating income. And, you know, you've also got a pretty sizable war chest on the balance sheet. So, I mean, what do the capital allocation plans look like here in the future?
spk06: Yeah, so thanks a lot for the question. So, you know, Q4, remember, we have a tremendous amount of billing, as a lot of enterprise SaaS companies do. So, that drives a lot of our collection activity that happens in the first quarter. So, you know, you always see a very strong Q1, you know, that will normalize back to normal trends as we move through the year. So we're really comfortable about where the 80 million plus is. So we're going to keep that where that is. We're also absorbing the TOGAI. Look, we would expect to see, you know, from a capital allocation perspective, you know, similar probably, let's say, $3 million a quarter of CapEx as we go through the rest of the year. And then, obviously, you're right. We've got a, you know, a very nice balance sheet, and we'll continue to use that where it makes sense for acquisitions, tuck-ins like with Togai. That will help us accelerate our growth and, you know, accelerate our product roadmap.
spk05: I think that's exactly right. I think the growth and free cash flow and the war chest, as you put it, are two big highlights to our story. A great time to have a lot of cash.
spk03: Yeah, yeah, absolutely. Okay, that's helpful. Maybe just one more here. You know, Todd, you kind of mentioned, you know, Q2 and Q3 on ARR growth might fall slightly below kind of that 8 to 10 range. But just for clarification, that The 8 to 10 will be exiting the year. I guess what kind of gives you confidence in, you know, the ramp up in Q4?
spk06: Yes, so we expect to exit the year at the 8% to 10%. And as I said, you know, what gives me confidence is extremely strong install base, what we're seeing from the needs from our customers, how we're seeing the pipeline develop. And so when I look at, you know, pipeline development, product install base customers, that gives us the confidence that we'll be able to exit the year at the 8% to 10% AR growth.
spk05: Including having a new meaningful product in our portfolio that's servicing this consumption, billing, demand that certainly we're all seeing in the marketplace.
spk04: Okay, got it. That's helpful. Thanks, guys.
spk10: That concludes our Q&A session. I will now turn the conference back over to Team So for closing remarks.
spk05: Thank you. Well, thank you, everyone, for joining us today. I want to offer up a big thank you to all our CEOs, including the new CEOs that have joined us from Togai. Our CEO's commitment really is what powers our future in this new era of total monetization. Thank you all very much.
spk10: Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.

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