Zuora CEO Tien Tzuo

Following another sales and earnings beat, Zuora (ZUO) CEO Tien Tzuo and CFO Tyler Sloat assert their company's deal momentum remains strong as the adoption of subscription-based business models continues.

They also insist that Zuora's reiteration of its near-term cash-flow guidance, which was left unchanged in spite of better-than-expected top-line numbers, is simply due to a payment timing issue and has no bearing on its long-term cash-flow expectations.

Results and Guidance

On Thursday afternoon, Zuora, a leading provider of cloud software used by businesses to manage their subscription-based offerings, reported October quarter (fiscal third quarter) revenue of $61.6 million (up 33% annually) and non-GAAP EPS of negative $0.10, topping consensus analyst estimates of $59 million and negative $0.13. Billings (closely watched) came in at $68.9 million, above a $63.1 million consensus.

Zuora also guided for January quarter revenue of $62.3 million to $63.3 million and non-GAAP EPS of negative $0.11 to negative $0.12. That compares with a pre-earnings consensus of $60.5 million and negative $0.12.

Nonetheless, Zuora's shares, which were already down over 45% from their June post-IPO peak going into earnings, fell 7.4% in Friday trading to $19.03.

Following Zuora's report, TheStreet had a chance to talk with Tzuo (also interviewed following Zuora's July quarter) and Sloat about Zuora's results, and where the company sees things going from here. Here's a look at some of the topics discussed.

Long-Term Growth

One possible culprit behind Zuora's sell-off: In spite of its strong October quarter billings, Zuora only slightly raised its outlook for fiscal 2019 (ends in Jan. 2019) billings growth: The company now expects billings to be up about 35% on a trailing 12 month (TTM) basis at the end of the fiscal year, after having previously forecast a low-30s percentage increase. It also maintained a prior outlook for billings growth to eventually "settle and grow in line with our long-term revenue growth rate of 25% to 30%."

However, Tzuo sounds as optimistic as ever about Zuora's ability to grow its footprint as companies -- including ones that have been relying on ERP software to manage subscriptions rather than solutions optimized for the task -- keep rolling out subscription-based offerings.

"The fundamental premise we have is every company needs to have what we call an active relationship with their customers...customers are simply going to expect these things," he said. On the call, Tzuo noted Zuora's products now handle the connected car initiatives of 6 of the world's top 10 automakers, and that its subscription revenue growth among media/publishing companies (now 13% of subscription revenue) has averaged 35% over the last seven years.

When asked about which business verticals Zuora would like to see its penetration rates significantly improve in, Tzuo indicated utilities and "membership organizations" (for example, gyms) are two areas where Zuora "would love to see more traction" within as business models evolve. "Those are a little bit early," he said.

For the time being, about half of Zuora's revenue still comes from tech companies. Its tech client list includes quite a few major cloud/SaaS software firms -- for example, Salesforce.com (CRM - Get Report) , Veeva Software (VEEV - Get Report) , DocuSign  (DOCU) and New Relic (NEWR - Get Report) .

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Cross-Selling Opportunities

Zuora's "pay as you go" business model results in the amount of revenue it generates from a client's usage of its products increasing as its transaction volume grows. The company is also banking on its ability to cross-sell users of one of its two "flagship" products -- Zuora Billing and an accounting/revenue management solution known as RevPro that was acquired last year -- on the other product, as well on products that do things such as manage revenue collections, assists sales reps who are selling subscriptions and provide an analytics dashboard to understand how a company's subscription offerings are performing.

When asked about Billing and RevPro cross-selling, Tzuo indicated that the percentage of clients using both solutions (said to be below 10% three months ago) is still low. But he added that the company did successfully cross-sell RevPro to some major clients last quarter, such as Pivotal Software (PVTL) and Carbonite (CARB - Get Report) , and argued that the challenges involved financially managing subscription businesses will drive additional traction.

"I think the broader message is, companies are realizing [that] these new business models...are just wreaking havoc in their financial operations," he said. "And the two key areas that [they're] wreaking havoc on is billing and revenue recognition."

Together with transaction volume growth, Zuora's cross-selling efforts helped its dollar-based retention rate, which covers the amount of revenue produced from businesses that were clients a year ago (whether or not they remain clients today), hit a level of 115% last quarter. That's up from the July quarter's 112% and fiscal 2018's 110%.

Expected Cash-Flow Improvement

Though Zuora's top-line numbers were better than expected, the company kept its fiscal 2019 free cash flow (FCF) guidance unchanged at negative $42 million. However, Sloat insists that this is simply due to the "pulling in" of some spending from early fiscal 2020, such as a deposit related to new office space, into the end of fiscal 2019.

And without sharing any numbers, Sloat and Tzuo suggested Zuora will be able to improve its cash-flow profile in fiscal 2020, as revenue continues rising and the company's spending becomes more efficient.

Zuora, which had $175 million in cash at the end of October, is maintaining a goal (outlined during its spring 2018 IPO roadshow) of becoming cash-flow positive within three years.