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spk01: Good afternoon and welcome to Zuora's second quarter of fiscal 2025 earnings conference call. All lines have been placed on mute to prevent any background noise. And 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'd like to withdraw that question, again, press star one. Thank you. And with that, I would now like to turn the call over to Luana Wolk, Head of Investor Relations, for introductory remarks. Please go ahead.
spk05: Thank you. Good afternoon and welcome to Zora's second quarter fiscal 2025 earnings conference call. On the call, we have Team Zoe, Zora's Founder and Chief Executive Officer, and Todd McElhatton, Zora'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'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. For further discussion of the material risks and other important factors that could affect our financial results, please refer to a filing with the FTC. 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.
spk07: Thank you, Gawana, and thank you, everyone, for joining Zora's second quarter fiscal 2025 earnings call. Looking back on the quarter, I would say that this quarter was a solid follow-up to our Q1. We continue to execute our land and expand strategy while navigating the current macro environment. Let's start with the numbers. In Q2, description revenue was $104 million, up 9% year over year. We again exceeded our guidance for non-GAAP operating income, coming in at $25.6 million, which equates to a 22% operating margin. another quarterly record. We generated adjusted free cash flow of $12.2 million during the quarter. And finally, against the rule of 40 framework, which combines growth and profitability, we closed the quarter at 31. This is ahead of our goal for the full fiscal year. Looking beyond the numbers, I would say that we continue to benefit from our customer base of some of the biggest and best companies in the world. And this shows in two areas. First, this is the segment where the depth and breadth of our portfolio truly matters. And second, this install base continues to represent strong expansion opportunities for us that we can fuel through both ongoing organic innovations as well as targeted acquisitions. On the first point, let me give you an example from the quarter. I am proud to welcome Canva as a new customer. Canva is the leading online design and visual communications platform. They have over 190 million monthly users that have created over 25 billion designs. Canva came to Zora as part of preparing for their next phase of growth across both their B2C and enterprise offerings. What made the difference to Canva was our ability to combine billing and revenue to address their needs across the entire quote-to-revenue process and give them new speed and flexibility to drive their current and future pricing strategies. And Canva is not the exception. In fact, in Q2, half of our logos bought both Zora Billing and Zora Revenue to power quote-to-revenue. On the second point, once companies like Canva become customers, their growth and ever-evolving needs represent strong expansion opportunities. Here are some examples of customers who expanded with us in Q2. For instance, Zillow Group, which includes the Zillow, Trulia, and other brands that provide solutions to consumers and real estate professionals for buying, selling, financing, and renting homes. They began to use Zora billing a few years back, and in Q2, they added Zora Revenue to automate their revenue recognition and additional Zora payment modules provide customers with more flexible payment options. Another great example is a long-time customer, Aura, a great example of a fast-growing customer who has sold over 2.5 million smart rings that track fitness levels, sleep, and more. They renewed and grew with us as their subscriber base continues to grow. We've also been working with a world leader in transportation, e-commerce, and business services that generates over $80 billion in annual revenue. This customer is adopting usage-based billing models, showing that this is not just a trend for technology companies. And so in Q2, they added advanced consumption modules to turn their raw data into revenue with metering, rating, and billing. How big are these expansion opportunities? Well, if you look at the two deals, over $1 million or more in ACV that we had in Q2. Both came from within our install base. Proof that our land and expand strategy is working. And finally, of course, our enterprise customers also enhance our partnerships with leading system integrators. In fact, in Q2, more than half of our deals that were $500,000 or more in ACV were with an SI partner. Now, What's fueling our land and expand strategy is, of course, our technology and our product portfolio. Last quarter, I talked about how our vision is to build a complete monetization stack that helps our customers win with a strategy that we call total monetization. Now, what does total monetization mean? Well, there was a time, a simpler time, when a more traditional static subscription model was enough. The times, they are changing. And so now we're seeing the best companies in the world introduce a wide range of monetization strategies, such as maybe they allow customers to consume by the drip, so-called usage or consumption models that we talked about with this transportation company. Or maybe they're unbundling and re-bundling off their offerings to craft the perfect offering for each of their customers. Maybe they offer one-time transactions, such as pay-per-view or single purchases before a customer is ready to commit to something long-term. Maybe they offer prepaid models like the Starbucks card that many of us are familiar with that I use to buy my empty coffees. Or maybe they deploy hybrid models that mix and match all of the above. Over time, we believe that companies will need to be able to monetize with any business model, and this is what we mean by total monetization. And we're seeing this concept really resonate. Those of you who joined us at Subscribe Live in the Bay Area in June, So these conversations are happening with our customers and prospects. Companies are coming to us and saying, you captured the essence of what we're trying to do. And so this vision is fueling our innovation. Three quick examples from the quarter. First, our advanced consumption billing vision. In Q2, advanced consumption billing was one of our fastest growing products, in part driven by the rollout and monetization of AI features that you are seeing from almost all the technology vendors. And in Q2, advanced consumption billing is now totally enhanced with Togai. The acquisition we announced in Q1 and closing Q2, giving us some of the most advanced metering and rating technology in the marketplace today. Second, in Q2, we also announced the acquisition of SubX. to add new AI capabilities that will strengthen our Zephyr product, offering media companies an advanced AI-powered paywall solution. Through reinforcement learning, SubEx helps media companies put the right offer in front of the right customer, maximizing subscriber acquisition and conversion, all without manual testing and experimentation. And since SubEx is already a Zora partner with an integrated solution, customers can immediately take advantage of these new capabilities. And in fact, we already had joint customers like the Financial Times doing this today. And third, on the organic innovation side, in Q2, we went deeper into Zora Payments, enhancing our smart retry capabilities. If a company is trying to collect a payment and that payment fails, our smart retry in Zora Payments analyzes over 15 transaction characteristics, such as the account monthly recurring revenue, the currency, the payment gateway, to automatically retry the failed payment at the most optimal time. We're continuing to make the AI technology that powers smart retry more and more advanced. And in Q2 alone, we helped our customers recover over $120 million in lost revenue with this smart retry capability. That's an increase of over 40% year over year. And finally, this total monetization strategy. This message is resonating with the analyst community too. Earlier this month, Gartner, one of the world's most respected and trusted industry analyst firms, recognized Zora as a leader in the magic quadrant for recurring billing applications for the Zora modernization suite, placing us the furthest in completeness of vision. And that's not all. Back in June, we were named a leader by ISG Research And some of you might know of formerly as Ventana Research in all four of their subscription management buyer guides, B2B subscription management, B2C subscription management, description management platform, and then all around description management offering. ISG classified Zora as exemplary. Out of 24 software vendors, we received the highest rating in each of the four buying guides. And that's not all. Just last week, Zora Revenue also ranked number one in product and strategy in MGI's 360 Ratings and Buyer's Guide in Automated Revenue Management, or ARM. And now the last news from the quarter. We released this quarter our latest global impact report, showcasing the progress that we have made in our ESG goals and initiatives. We continue to be a carbon neutral company, And in this year's report, we took the next step. We committed to the science-based targets initiative and are working on setting both near-term and long-term greenhouse gas reduction goals, including reaching net zero. So to recap the quarter, we continue to create new opportunities for our install base to land and expand with Zora as we build out our monetization stack. This stack is helping the biggest and best companies in the world win with a total monetization strategy. Our modular solutions, both organic innovation and strategic acquisitions over the last few years, give us what's needed to capture this opportunity. And of course, we continue to focus on delivering balanced growth and improved profitability. With that, I'll turn the call over to Todd to review the finances for the quarter. Todd.
spk06: Thank you, Gene. And thank you, everyone, for joining our call. In Q2, we exceeded guidance, delivering solid results. We achieved the rule of 32 quarters ahead of plan, including absorbing the expenses associated with our recent acquisition of Togai. As a reminder, we defined the rule of 30 as a sum of year-over-year subscription revenue growth plus non-GAAP operating margin. Subscription revenue was $104.1 million, growing 9% year-over-year. Subscription revenue exceeded expectations primarily due to higher revenue share from payment processors. Professional services revenue came in at $11.3 million, representing a 10% decrease year-over-year. Professional services revenue was 10% of total revenue, and we continue to expect our professional services revenue mix to slightly decrease over time as we further expand our partnerships with SIs. A little over a third of all booked ACV was partner-influenced. Non-GAAP subscription gross margin was 82%, up over 125 basis points year-over-year. The improvement is driven by continued efficiency optimization with our hyperscalers. As a reminder, Q3 and Q4 of fiscal 24, we benefited from one-time vendor credits. Non-GAAP professional services gross margin was negative 5%. consistent with Q2 of last year. For the remainder of the year, you can expect professional services gross margin to continue to be in the same range. Our non-GAAP blended gross margin was 73%, an increase of over 260 basis points year over year. Our non-GAAP operating income was $25.6 million, exceeding the high end of the guidance by $6.1 million. representing a record non-GAAP operating margin of 22.2%. We reached our goal to operate at a rule of 30 two quarters earlier than planned. While we expect to exit the year at a rule of 30 run rate, this metric can fluctuate from quarter to quarter. Our fully diluted share count at the end of the quarter was approximately 185.9 million shares using both the Treasury stock and IF converted methods. Now, Let's dive into some of the key metrics for the quarter. Our dollar-based retention rate ended at 104% flat quarter over quarter and down three points year over year. This decrease in DBRR year over year was primarily driven by the impact of churn, which we called out on prior calls. As a reminder, DBRR is a trailing 12-month metric. Total RPO ended at $577 million. growing 14% year-over-year. Non-current RPO was up 21% year-over-year to $258 million. Once again, we had a large number of multi-year renewals in the quarter as customers continue to grow on our multi-product platform. At the end of Q2, we had 445 customers with an annual contract value at or above $250,000. These customers represent approximately 85% of our ARR. This is up one year over year, but down six sequentially. We saw several Zora customers consolidate into one contract due to M&A. It is worth noting that the total ARR associated with the $250,000 or greater cohort grew by more than 10% year over year. In addition, customers in the $500,000 grade cohort, the ARR grew by approximately 17%. We closed five deals with ACV of $500,000 or more, down from seven in Q2 of last year. This includes two deals over $1 million, up from one last year. While we are still facing high levels of deal scrutiny, especially in new business, we are starting to see some positive trends on multi-product deals. As Tim noted, half of our new logo deals we closed included both revenue and billing. ARR grew 7% in Q2, reaching $412.3 million. Adjusted free cash flow was $12.2 million in the quarter, up from $4 million we generated last year. As a reminder, adjusted free cash flow does not include acquisition-related costs and shareholder matters. Our adjusted free cash flow fluctuates on a quarterly basis through the timing of cash collections, vendor payments, and seasonality. As a result, we believe it's best to assess our cash flow performance on an annual basis. Turning to the balance sheet, we ended the quarter with $543 million in cash and cash equivalent, a sequential decrease of $3.7 million. As a reminder, we closed the TOGAI acquisition in Q2. Total capex for the quarter was $3.3 million. Turning to guidance. We assume the current challenging macro trend will continue into the second half with similar levels of deal scrutiny and elongated sales cycles. For Q3, we currently expect subscription revenue of 104.5 to $105.5 million. Professional services revenue of 10.5 to $11.5 million. Total revenue of 115 to $117 million. Non-GAAP operating income of $20.5 to $21.5 million. Non-GAAP net income per share of 11 to 12 cents, assuming a weighted average shares outstanding of approximately 152.5 million. For the full fiscal year 25, we are raising both our revenue outlook and our non-GAAP operating income ranges, as well as increasing our target for adjusted free cash flow. It is worth noting that the subscription revenue includes the revenue share from payment processors that are not included in the ARR. For the operating income, I want to point out that we're also absorbing the expenses from both of our recent acquisitions within the updated guidance. We currently expect subscription revenue of $414.5 million to $416.5 million. Professional services revenue of $41 to $45 million. Total revenue of $455.5 to $461.5 million. Non-GAAP operating income of $90 to $93 million. Non-GAAP net income per share of 56 to 58 cents, assuming a weighted average share is outstanding of approximately $150.9 million. Based on current buying behavior, we believe it is prudent to adjust our outlook for the fiscal year. with DVRR to be between 103 and 104%, and ARR growth of approximately 6%. Double-clicking on ARR, we have a robust pipeline with some hefty opportunities within our install-based customers. But given the current environment, I remain prudent about how we set expectations for the second half, as a precise timing can be difficult to predict. We 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. Based on our solid performance in Q2, we are increasing our guidance for adjusted free cash flow to be $82 million or greater for the full year. To close out, I speak with a lot of CFOs, and I'm convinced we have the right product to give companies the tools and agility needed to monetize the business models of today and tomorrow. Gartner, ISG Software Research, and MGI have declared our market leadership in this mission-critical category. In the current environment, we have taken the opportunity to dial in our cost structure and drive durable improvements in operating margins and free cash flow. This will give us the ability to drive more efficient growth in the future while maintaining or expanding margins. With that, team, Robbie and I will take your questions, and I'll turn it over to the operators.
spk01: Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star one on your telephone keypad to raise your hand and join the queue. And if you'd like to withdraw that question, again, press star one. Your first question comes from Adam Hodgkiss with Goldman Sachs. Please go ahead.
spk04: Great. Thanks so much for taking the question. Tien, I guess on the total monetization point, you noted that business model changes particularly around consumption billing or something that you're seeing and other folks in the industry are seeing. What's the plan to take advantage of that from a monetization perspective? And when you look two or three years out, what are the impacts to financials and sort of variables that you look at that get you excited about that business?
spk07: Well, the way I look at total monetization, and I appreciate the question, Adam, is it really allows us to continue the journey we've been on. In many ways, you can think of it almost as an act two where the first phase of the company was really offering, you know, billing the companies that were pure subscription businesses, right? Companies like Zoom, companies like The New York Times. And total monetization is to say, look, now that subscription businesses and recurring revenue models are becoming more prevalent, companies are really looking to be much more sophisticated and blend these different business models together. So it's not just about subscriptions. It's about consumption. It's about one time fees. It's about outcome-based fees. It's about really mixing all these things and customizing the right business model and the right pricing model for the customer. And so I see this as an opportunity for us to really go beyond billing and go beyond subscription revenue. And we're seeing just that message really resonate with our customer base. And we're seeing the analyst community really say, hey, total monetization makes sense. We can see how you really need an end-to-end solution that has billing, revenue payments, and more. And so, you know, when I look at total monetization, it's really a message that's resonating with our customer base and really allows us to continue our leadership position, ideally for many years to come.
spk04: Okay, great. That's really helpful. And then, Todd, just on the revisions lower on ARR and NRR for the year, could you parse that out for us a little bit? How much of that is just, you know, added conservatism around the environment versus anything in particular you saw in the quarter? You know, I guess we're just trying to understand to what extent you think sales cycles are maybe a little bit more elongated and that's lasted a little bit longer than you previously thought versus just taking an added level of conservatism?
spk06: Sure, Adam. I really want to be prudent as we put together our forecast. We take the guidance very seriously, and we want to meet it on a quarter-by-quarter basis. If you take a look at what we're seeing here in half two, As I mentioned, we have some meaty deals. They're in our install base, and timing can be challenging to predict. And so I really want to make sure that I give you something that we're very confident that we can absolutely achieve. And based on the current environment, I think 6% is a reasonable place for us to be. It certainly continues to be challenging. I'd also note at the same time, we brought up our revenue. We brought up, and we're seeing other ways we're able to monetize our business, such as monetizing payments from payment processors and other partners you saw that we brought up the non gap operating cat or non gap operating margin or profit by ten and a half million dollars and you also saw that we had RPO that grew 14% so when the environment improves I certainly feel that we're well positioned to accelerate growth but for the environment that we're seeing right now we really felt it was kind of appropriate to reset what we're seeing in
spk04: Okay, thanks so much.
spk01: Your next question comes from the line of Jeff Fran Re with Craig Callum. Please go ahead.
spk08: Great, thanks. Thanks for taking the questions. A couple for me first. Maybe just spend a second on CAMB. I thought that was interesting. What was the competitive landscape there, external vendors that might have been after that, as well as what was the internal environment?
spk07: They had a homegrown system that really made a lot of sense when they were small and they were just really selling in a self-service environment. But look, the journey that any company goes on is the bigger you are, the more successful you are, the more complex you have. If you look at what they are today, they sell direct, they sell enterprise, they sell consumers, they sell to schools. And so their homegrown system really wasn't working. And you can imagine a company like that Right. They've got big plans. They looked at the market. They looked at every possible solution out there. And I'm pleased to say that, you know, we really had a set of differentiating technologies that they thought was really, really important. The last thing they want to do is to, you know, two, three years from now, have to do yet another, you know, implementation of a system. And so we're pretty happy with our ability to meet their needs.
spk08: Got it. And then on the payment processors, it sounds like the payment processors are was the source of the upside. Can you just contrast that a little more color on what happened there and contrast it to what you had expected to happen there?
spk06: Sure, Jeff. We've had agreements with many partners over time, and frankly, it's an area that we're revisiting. We've not monetized it as effectively as we could. We went back and did an audit with one particular one, and there was a catch-up that we had In addition to that, we adjusted it going forward, and I would expect as we move through future quarters, you're going to see this be a source of increased revenue for us. As you know, we have over $50 billion with the payments that go to our system, and we certainly feel this is an opportunity for us to further monetize our business.
spk07: Yeah, I mean, just to add, I mean, that wasn't the sole contributor to any upside. I just want to make sure, you know, it was the one contributor. But what we really are trying to flag is, Look, the value of our customer base and the value that we've built so far, right, really gives us the ability to monetize in many, many different ways. We've talked about our land and expand strategy. That's working really well. And you're going to see us continue to find, you know, other ways to monetize this valuable customer base we have. And this is probably the first quarter we talked about this, but it's something that certainly has been in the mix for some time.
spk06: And, Jeff, I would expect that to be an ongoing revenue, and that is not part of our ARR.
spk08: Interesting. Okay, great. Thank you.
spk01: Your next question comes from the line of Joshua Riley with Needham & Company. Please go ahead.
spk03: Thanks for taking my questions. One of the things that we've heard from some of your partners is you have a pretty strong pipeline of pre-IPO customers out there, and maybe they're a little bit hesitant to spend because they don't know the timing around when they're going to go public. Just curious, is that what you're hearing from some of these prospective customers and consistent Just more generally in the marketplace that an interest rate cut and a return of the IPO cycle will help some of that new customer activity? Maybe just starting off there.
spk07: Yeah, I don't know that I want to say to predict, you know, when the IPO market is in a thaw, when interest rates are going to get cut. But I would say if you look at these companies, right, and Canva is a good example. There's certainly many more. I wouldn't say they're obsessed with exactly when they go public. I would say they're at a size and scale right now where going public at some point in the future is definitely in the cards for them. And, you know, and now is a great time to prepare, right? We had a whole set of customers going back to the 2018, 2019, 2020 that maybe went public, you know, rushed in the marketplace and then went backwards and started putting in, you know, revenue recognitions and billing systems. We've talked about some of these companies in the past, but I say a better approach right there to do it right now where things are calm so that when the IPO market's open, you're ready. I would say that is the primary mindset that these companies have.
spk12: May I add one more thing as well, Josh, which is if we look at it, a lot of the people we closed were billing and revenue, like Canva, where they're future-proofing. I think that's one of the big things. We mentioned Canva in the last piece. They've been both solutions to future-proof. The same way half of the new business deals that we did were buying both billing and revenue for that. So it ties in very well for people as they think about also future IPO.
spk06: But it certainly has been a headwind for us that, you know, as this IPO market has been slowed down, that, you know, it's something that has been a drag. And as things loosen up, that would certainly be something that would help us accelerate, but we're not forecasting that at this particular point.
spk03: Got it. That's helpful. And then just following up on the commentary around the ARR guidance update for the year, as you look at, you know, this kind of 6% level, Can you just help us understand, are you pulling back more on the expectations around new customer activity versus the cross-sell, or is it a little bit lower assumptions around both cross-sell and new customer activity? Thanks, guys.
spk06: I would say it's, you know, balanced with both. And, you know, that's certainly reflected with the DBR guidance that we gave of 103 to 104. So we certainly see headwinds in both of those areas, Josh. Got it. Thank you.
spk01: Our next question comes from the line of Rob Oliver with Baird. Please go ahead.
spk11: Great. Thanks, guys, for taking my questions. My first one is just on what you guys are seeing in terms of pricing in the market. Sounds like there's some really nice lands, including obviously Canva, some other high profile stuff in the pipe. But just would be curious to hear what you're hearing on pricing. Are people a little bit more price sensitive? Are you seeing that in your lands? And then I had a quick follow up as well.
spk07: Yeah, I wouldn't say that, I would say the dominant trend there, right, obviously it's competitive, but we have a sticky product. A lot of times these customers, you know, that we're expanding with are already customers. There's certainly a bigger trend given, you know, the last two years of an inflationary environment where companies have tended to increase their prices at a point of renewal. Our preference has been to say, hey, we have a lot of innovations. If a better way to increase the value of our contract is to introduce new innovations and add more value to customers, that's certainly our preferred way of doing them than just a flat-out price increase where they don't get additional capabilities. But I wouldn't say that we're facing increased pricing pressure, and we're managing the ability to grow our customers in a positive way.
spk11: Got it. Okay. Thanks, Dean. And then, Todd, just one for you. And there's been a bunch of questions on the ARR. And so you've answered a lot, but just I guess to follow up on there, when you look at that pipeline for the back half of the year, when you look at the renewal profile, are you handicapping some renewals that perhaps could be more challenging and perhaps a bit of a spike in churn or The last question was a good one on cross-sell versus new logo. Sounds like it's a mix of both, but if you can help us understand what your thought is relative to churn there, that would also be helpful. Thanks a lot.
spk06: We have a robust pipeline, Rob, for the second half, and I feel very good about that. However, we've got some pretty large deals during the install base. I think we have a very high confidence that we will absolutely win those deals. Timing is always a question. And with what we're seeing in the current environment, It just felt appropriate that we should adjust because if one of those or two of those drop out, it's not possible really to backfill it at the size of some of the transactions. So from our standpoint, it feels like this is a really reasonable place for us to land in the second half.
spk07: Maybe I'll add some color on top of what Todd says. Look, I'd start with the bigger picture. The bigger picture is on a multi-year basis, the shift to recurring revenues is still very much a trend that's in place. It's not going to disappear. What you saw this quarter was continued recognition from third parties, the analyst community specifically, that we've got clearly the best product in the marketplace. And overall, we feel really good about some of the trends that we're seeing in our ability to create pipe, our ability to remain competitive, and our ability to close customers like Canva or customers or expand with customers like Zillow. I think, you know, look, I'll say this for Todd. He heard from you all. you know, over the years that, hey, a little stronger ARR guide compared to maybe what happened last year would be helpful. And so we're halfway through the year. You know, you might remember at the start of the year, there was some sense that, hey, you know, after Q4, is technology spend going to thaw? Is it going to improve? We're halfway through the year right now. You're seeing the results with other big, big SaaS companies. We're saying, look, the picture out there is mixed. And given that the picture out there is mixed, that's applied good judgment and ultimately, you know, give you guys what you're looking for, which is just a better sense of what's going to happen in the back half of the year.
spk11: Fair enough. Okay. Thank you guys very much. I appreciate it.
spk01: Thanks, Rob. Your next question comes from the line of Jacob Steven with Lake Street. Please go ahead.
spk10: Yeah. Thanks for taking my questions. Um, maybe just touching on kind of the media vertical, obviously you guys have made some investments there acquired sub X. Um, uh, I'd just like to get kind of your comments on what you're seeing in that vertical, um, with new customers and just pipeline overall.
spk07: I'm really excited about the media vertical. Um, you know, in many ways, if you look at B2B business models, it's a technology vendors, right? The SAS companies that have led the way to teach the rest of the world, how these recurring revenue models work. In the B2C space, the media companies, especially the newspaper publishers, the transformations they've gone through, where they go, I really do think the rest of the industry will follow. I mean, what we're seeing in that sector is they've been successful setting up paywalls. They've been successful setting up these dynamic paywalls with these, what they call these propensity scores, right? How do we have a sense of, based on data, whether a subscriber is going to subscribe or not? We're seeing, you know, maybe you call these paywall 3.0 strategies that are, you know, not a surprise, AI-driven, right, that says we don't want static scores, right? We want something that's dynamic. We want something that's changing. We want something that can look at the data. Given where AI is and technology is, there's no reason they can't do that. And so we doubled down on our Zephyr investment with SubX, which really gives it an AI-driven decision tree, right, using, you know, an AI technique called reinforcement learning to figure out in real time hey, this subscriber coming to your, you know, your newspaper site, your app, what do you want to do? Do you want to let them look at the article? Do you want to put an offer in front of them? Do you want to cross sell them puzzles or recipes or whatnot? And so it's, and we believe, look, we're really focused on the media sector right now, but we believe that these techniques are certainly not specific to that sector. And every B2C company that has a recurring revenue model ultimately will have to adopt these types of capabilities.
spk12: Just adding further to that, you look at some of the, Customers, you know, we mentioned the Economist, New York Times. Like we have one of the largest, most probably media streaming companies that is absolutely growing significantly with that space. And it spreads that out even more significantly. So yeah, very excited about that particular vertical.
spk06: And they're taking advantage of Zora capabilities for doing like pay-per-view events in addition to your ongoing, you know, monthly streaming costs.
spk07: Yeah, great, great example of the total monetization.
spk10: Got it. That's helpful. Appreciate that. And then maybe just kind of wanted to touch on, you know, the new deal, new product deals, you know, being half billing plus revenue. I guess, what are you seeing as we, you know, come through Q3 here? Is that something similar that you're seeing?
spk07: Well, yeah, look, on a personal basis, like you've heard us talk about fast lands, fast expands, and you look at this quarter and a lot of customers came to us and said, no, no, no, we want both products. and we want them to start. So look, ultimately we're going to do where the customers take us. I like the fact that we can land with billing. We can land with just revenue. We can wait and cross out other products later, but you're seeing ultimately that, that the combination of these two really is where a lot of the magic is, right? That's what Canva found. That's what a bunch of other companies found. I can't just live with just billing. I need revenue recognition as well. And when it's appropriate, right, they're saying, look, we'd rather do it both at once. We're certainly going to support that decision.
spk09: Got it. Understood. Appreciate it.
spk01: Your next question comes from the line of Brent Thiel with Jefferies. Please go ahead.
spk02: Thank you. Hi. This is Love Soto on for Brent Thiel. Thank you, Tien, Robbie, and Todd for taking my questions. Maybe the first one for Tien and Robbie. I just wanted to unpack maybe the ARR weakness, I guess, this quarter. Obviously, it's a month-year low for you guys at 7%. It sounds like the install base was pretty strong. So, could you just unpack, I guess, what drove the weakness in ARR growth this quarter?
spk07: Well, I'd say if you compare the ARR growth this quarter with last quarter, I think the picture looks, you know, strong. And so, and I would say, look, in this environment, you're seeing all sorts of companies saying it is harder to close a new customer And, you know, and so we're certainly seeing that as well. And you're seeing good, solid growth in our install base. But Canva was a new logo. And we certainly continue to close new logos. And that feels, you know, that feels good given the current environment.
spk02: Got it. And one for Todd, if I may. Todd, you know, it seems like you've delivered a lot of profitability upside. You know, the possibility of this sustaining into the back half of the year, And into next year, just any additional investments that you have planned, any color would be helpful.
spk06: I think a couple things, Love. Thanks for the question. We've been really consistent on the fact that if we didn't think we could get a good return on investing in top line, we would put dollars to the bottom line. The cost structure that we have right now is absolutely sustainable, and we believe there is future, there's further leverage that we'll be able to gain. We are committed. We will exit the year at rule of 30, like we said. So I have, we're very confident about that. So I'm not concerned about that. And I do believe there are opportunities for additional leverage as we go out into next year. So we certainly don't feel like this is a, you know, one-time deal. I think this is, you know, a baseline where we have. The question becomes is when do we see an acceleration in top line and, you know, do we hold or do we expand margins further? But I would not see us backtracking on margins as we saw top line accelerate.
spk02: Got it. Thank you.
spk01: We have time for one more question. And that question comes from Joseph Vassi with Canaccord Genuity. Please go ahead.
spk00: Hey, guys. Good afternoon. Thanks for the opportunity to ask a question here. Just, you know, we have maybe a lot of questions have been asked. Just get an update on Togai. And I guess more broadly, you know, given kind of the surge in focus on AI, do you think kind of the product set at this point can, you know, is holistic enough to to capture the opportunity broadly around consumption-based pricing that's emerging with AI. And then I'll have a quick follow-up.
spk07: I feel really good about what's going on with Togai. We closed it this quarter, and so I think we're only two months in, to be fair. So it is early days. But look, we had a product in the marketplace. We call it advanced consumption billing. That product is we talked about it being the fastest selling, one of the fastest selling products in the last, you know, in Q2. And Togai is really part of that. And so you can imagine engineers are really saying, hey, the two products, you know, can be integrated, but there's something we can do now that it's one company to make the integration even stronger, even more seamless, and even more out of the box. And then what we get is, you know, we have an industry-leading billing solution that, you know, you've seen top right corner and all that from all the analysts. We're adding to that metering and rating. So what does that mean? That means, look, if you're an engineering organization and you want to do consumption-based billing, how do I take all this raw data, all these events that are going on in my application, capturing it, ingesting it, translating that, transforming it, and ultimately applying a price to it, right? That's what we mean by metering rating. And that's a capability that Togai really, you know, gave us a two-year head start in terms of what we can do just basically by ourselves. We're still selling advanced consumption billing like we did before, but I think the vision of where that product is going is now significantly stronger, multiple times better, and it's getting really positive traction when we talk to our customers and prospects about it.
spk12: Joe, this is a point to that. We had our subscribe live. We had great, great interest there from all around the consumption area. So now we're seeing real great interest in that from both customers and from our prospects and also from our partners.
spk07: And I know, like, AI is a big driver. We see that as well. But we try to highlight in the earnings call was that $80 billion logistics company, you know, logistics, transportation, you might not expect it, but we're seeing a lot of traction with usage-based, consumption-based models outside of the technology industry as well.
spk00: Sure. That's all great color. Thanks, Tina and Robbie. And then Maybe just finally, you know, on kind of RevShare coming from transaction processors, it's kind of something that, you know, we haven't heard you guys talk about that much at this point, so appreciate that caller. Just kind of getting a feel for, you know, is there, you know, I guess we could call it your take rate or something off payment volume here. Is there, you know, is there opportunity broadly to continue continue to increase, I guess, what you might call a take rate here off the gross dollar volumes that are running through your billing systems. Just any, you know, how you're looking at this over time. Thanks.
spk07: Yeah, Joseph, I know you've got deep experience in the payment space, and it's certainly something that you've talked to us about. But if I were to lift it up a level, right, we're at a size and scale now where we represent a significant business Over $100 billion flows through our system every single year. You know, close to $300 billion if you include revenue recognition. We've got some of the best brands and best companies in the world that, you know, many other companies would die to have a chance to work with. And the question right now is, you know, how can we translate that into a durable, you know, growth engine? Not that different than, say, you know, Apple has done, obviously, the much, much larger scale, right, with the App Store. Or, you know, with Salesforce, I was very involved in the early days of the AppExchange. I'd say it's early days for us, but certainly we're at a size and scale now where we can find other ways to monetize our customers through the building of an ecosystem.
spk06: And this is an area, Joe, we're putting a lot more attention on. And to your point, it's early days, but we do believe there's opportunity for us to get incremental revenue here. And this was something that is not part of our ARR, but it does hit the subscription line.
spk00: Right. And it does feel like this would be kind of super high profit revenue, right? That is the way to look at it. Yep. Okay. All right. Thanks a lot, guys.
spk01: That concludes our question and answer session. And I will now turn the conference over to Tin Zhou, Chief Executive Officer, for closing remarks.
spk07: I appreciate everyone for joining us in Q2. Look forward to seeing you. Hopefully I subscribe live in Europe in the coming months and or to talk to you next quarter. Thank you very much.
spk01: This concludes today's conference call. Thank you for your participation and you may now disconnect.
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