Zuora CEO: We're Seeing More Interest in Subscription Business Models

The COVID-19 pandemic has led more businesses to appreciate the value of subscription-based revenue streams, Zuora's CEO said after his company's latest earnings report.
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With an assist from a relatively low valuation, Zuora  (ZUO) - Get Report is up about 3% following the posting of its April quarter earnings report.

Zuora, a major provider of billing and revenue automation software for subscription businesses, topped April quarter (fiscal first quarter) estimates while reporting 15% revenue growth and 10% subscription billings growth. Transactions conducted on Zuora’s platform rose 27% to $12.3 billion, an acceleration from the January quarter’s 21% growth.

Zuora guided for July quarter revenue of $72.5 million to $75 million, which was in-line with analyst estimates and implies 6% growth at its midpoint, while cautioning that subscription billings growth will slow during the quarter. The fiscal 2021 (ends in Jan. 2021) sales and earnings guidance that Zuora issued in its January quarter report was withdrawn, although the company did reiterate that it expects to achieve breakeven free cash flow by the end of fiscal Q4.

Following Zuora’s earnings report and call, I had another chance to talk with founder and CEO Tien Tzuo. Here’s a look at some notable comments he made, slightly edited for clarity.

How subscription activity has been trending among Zuora clients in different verticals over the last few months.

“The headline message is that half the companies are actually unaffected by COVID. About 20% to 25% are actually accelerating. And the categories that are accelerating are things like e-learning, video streaming at home...and collaboration software, including things like Zoom  (ZM) - Get Report.

On the other end of the spectrum, the 15% or so that are actually seeing contraction in their subscriber bases, [where] subscriber churn has been outpacing subscriber acquisition, and those have been primarily in the transportation space, and in the sports-related spaces.”

Whether Zuora has been seeing changes in its clients’ long-term thinking about subscription businesses,

"Absolutely. And that’s what really excites us. Companies are...saying, ‘Thank god we’re a subscription business. Thank god we have the resiliency. We can’t imagine managing through this current situation not as a subscription business. We’re not seeing 50, 60, 70%, overnight drops in revenue, that’s just not happening.'

And even [among] the companies that are being adversely impacted by the current environment, they’re shrinking, but they’re shrinking slowly. They’re doing a good job of hanging onto their subscriber bases.

And on the flip side, the companies that have a mixed subscription model, [for example] in the media space, advertising revenues are plummeting, but subscription revenues are growing, and so they’re shifting more of their focus into those parts of the business.

And finally, there are companies that have no subscription business whatsoever, and they’re realizing that they don’t want to be caught short-changed again [during] the next economic shock. And so we’re seeing an increased interest...in subscription-based business models.”

Whether Zuora saw improved deal trends in May, given that the company said on its earnings call that 75% of the deals that had slipped during its April quarter had closed in May.

“I think every company is different, and I think companies are starting to normalize. And so we talked about [how] we’re seeing continued month-over-month improvements in the quality of our pipeline.

What we wanted to talk about those slipped deals was, those deals aren’t slipping [because] those companies are cancelling their projects. They’re slipping because sometimes [the] decision-making is more complicated. There’s additional scrutiny that’s being placed on budgets, so there’s another hurdle that they didn’t realize they’d have to go through. Or even, with everybody at home, how exactly do you route things for approval?

We just saw some of that, which just added...an extra one or two or three weeks to the decision cycles…[the deals] wound up being pushed out of April but they wound up closing in May.”

Whether COVID has affected the revenue mix between Zuora’s billings software (known as Zuora Billing) and its revenue-automation software (previously known as RevPro and recently renamed Zuora Revenue in tandem with a product refresh).

“Demand for [Zuora Revenue] continues to be strong...Less than 10% of our customers have both, and that statistic still holds. But we’re seeing demand for both products be strong, but there’s no change in that mix.”

How international sales are trending.

“We’re not seeing any material changes...I think one thing about this current pandemic is that it knows no borders. And so our international business I would say continues to go well. I think in [fiscal] Q1 it might have been a low 30s percentage [of revenue], and that was comparable to what it was in Q4.”

How the competitive environment currently looks relative to a year ago, and whether Zuora is still frequently competing against SAP and Oracle for deals.

“I think what happens is, now that there’s more realization that subscription business models are the future, now that there’s more demand, [there are] so many other companies that will try to claim that they do what we do.

But we still find that we’re pretty unique. Whether you talk to IDC or Forrester or Gartner, any of these companies that evaluate products and view their charts, our products [are] always by far farthest to the right and farthest to the top, and so we still believe we have a multi-year, kind of decade lead [against] these companies.”

"We continue to see a lot of SAP  (SAP) - Get Report and Oracle  (ORCL) - Get Report, especially since we’re pushing up-market to multi-billion dollar companies...We’ve got a CFO joining in two or three weeks from SAP, he was the CFO of the whole cloud division at SAP, which included Concur, SuccessFactors, Qualtrics, a bunch of [other cloud businesses]...SAP continues to be a direction that we’re going to push in.”

How the Zuora Central Platform, which was launched a year ago and lets developers build custom integrations with Zuora’s apps, has been used so far.

“We just had a big launch of [the latest version of] our platform last week...All these new capabilities around sandboxes and custom objects and custom queries and audit trail functionality. So the platform continues to be a critical, critical part of what we do. The primary focus of the platform today is to make it much simpler for our customers and our partners to customize, integrate and extend their core billing and revenue solutions.

I think we’re starting to see more [independent software vendor] interest. But I think the first wave that we’re seeing is still companies doing their own internal customizations and extensions.

Car companies are tracking the capabilities that each car has, so you feed it a VIN number and it knows this car is capable of this, this car has [the ability to offer] these types of services. So you’re seeing those types of extensions built around our workflow and our custom object capabilities. Industry-specific solutions that are specific to those companies.”