- Subscription Revenue: $99 million, up 10% year-over-year.
- Non-GAAP Operating Income: $18.6 million, representing a 17% operating margin.
- Adjusted Free Cash Flow: $31.4 million, a significant increase from $13 million in Q1 of last year.
- Professional Services Revenue: $10.8 million, a decrease of 19% year-over-year.
- Non-GAAP Subscription Gross Margin: 81%, up nearly 100 basis points year-over-year.
- Non-GAAP Professional Services Gross Margin: Negative 14%, down from negative 3% in Q1 of last year.
- Non-GAAP Blended Gross Margin: 72%, an increase of over 230 basis points year-over-year.
- Dollar-Based Retention Rate (DBRR): 104%, down 2 percentage points quarter-over-quarter and 4 percentage points year-over-year.
- Total Remaining Performance Obligations (RPO): $581 million, growing 15% year-over-year.
- Annual Contract Value (ACV) Customers: 451 customers with ACV at or above $250,000, up 15 customers year-over-year but down 10 sequentially.
- Annual Recurring Revenue (ARR): $404.4 million, growing 8% year-over-year.
- Cash and Cash Equivalents: $547 million, a sequential increase of $33 million.
- Q2 Subscription Revenue Guidance: $101 million to $102 million.
- Q2 Total Revenue Guidance: $111.5 million to $113.5 million.
- Q2 Non-GAAP Operating Income Guidance: $17.5 million to $19.5 million.
- Full Fiscal Year 2025 Subscription Revenue Guidance: $410 million to $414 million.
- Full Fiscal Year 2025 Total Revenue Guidance: $451 million to $459 million.
- Full Fiscal Year 2025 Non-GAAP Operating Income Guidance: $80 million to $82 million.
- Full Fiscal Year 2025 Free Cash Flow Guidance: $80 million or greater.
Release Date: May 22, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Zuora Inc (ZUO, Financial) reported a 10% year-over-year increase in subscription revenue, reaching $99 million.
- The company achieved a record non-GAAP operating income of $18.6 million, representing a 17% operating margin.
- Adjusted free cash flow hit an all-time high of $31.4 million, a significant increase from $13 million in the same quarter last year.
- Zuora Inc (ZUO) is on track to exit the fiscal year at a Rule of 40 framework of 30%, up from 26% last year.
- The acquisition of Togai is expected to bolster Zuora Inc (ZUO)'s capabilities in usage-based pricing, particularly in the SaaS market.
Negative Points
- New logo business continues to be affected by macroeconomic headwinds, with companies delaying large multi-million dollar projects.
- The number of customers with an annual contract value of $250,000 or more decreased by 10 sequentially.
- Dollar-based retention rate (DBRR) decreased to 104%, down 2 percentage points quarter-over-quarter and 4 percentage points year-over-year.
- Professional services revenue decreased by 19% year-over-year, representing a decline in this segment.
- The company experienced longer sales cycles and fewer transformational deals, impacting ARR growth and DBRR.
Q & A Highlights
Q: Can you help us understand the level of visibility you have into demand and has that changed over the last couple of quarters? Also, has there been any change in your overall visibility into deal flow through partners?
A: We still have good visibility into the pipeline and feel confident about it. However, companies are cautious about large deals, especially those in the seven-digit range. These deals are not disappearing but are being delayed. We have also brought partners more into our installed base, which has shown good success in driving short-term growth. (Tien Tzuo, CEO; Robert Traube, CRO)
Q: On the sequential change in customers above $250,000 being down by 10 quarter-over-quarter, should we expect this to continue to decrease throughout the year? How important is this metric relative to historical data?
A: We had a small group of customers that faced challenges, leading to the decrease. We might see a few more next quarter. However, the ACV growth of our cohort of customers over $250,000 year-over-year is growing by more than 10%. Our goal is to hold onto customers for the long term and grow the account. (Todd McElhatton, CFO; Tien Tzuo, CEO)
Q: Can you provide an update on the business churn and multiyear renewals? What gives you confidence in maintaining DBRR and other retention metrics?
A: The expected churn we discussed last quarter occurred as anticipated. Our gross retention remains consistent, and we are comfortable with the 104% to 106% range for the full year. The stickiness and quality of our installed base give us confidence. (Todd McElhatton, CFO; Tien Tzuo, CEO)
Q: How ready for prime time is the Togai solution set, given that they didn't have much revenue yet? Is it ready to sell and become part of your cross-sell efforts now?
A: Togai's technology is ready for prime time. We will take a couple of weeks for integration, but we have already shown it to our customer base and received positive responses. (Tien Tzuo, CEO)
Q: On ARR growth, the sequential change declined meaningfully this quarter. Can you help us parse out the impact from churn versus macro factors, and what gives you confidence in a rebound in the second half of the year?
A: Our expansion did well, as expected, and our new logo pipeline is accelerating. The churn was a one-time event as discussed last quarter. The quality of our install base and the pipeline development give us confidence in reaching the 8% to 10% ARR growth range for the year. (Todd McElhatton, CFO)
Q: What stage are we in terms of driving efficiency initiatives, and is there more room to push the inbound motion for further profitability?
A: We have made significant progress on cost structure and have the capacity to deliver more revenue without adding much incremental cost. We are constantly looking for incremental improvements and have optimized our go-to-market spend. We are generating more pipeline with fewer people than two quarters ago. (Todd McElhatton, CFO; Tien Tzuo, CEO)
Q: Can you provide more color on the new lead generation strategy?
A: We are shifting more towards a classic inbound model using digital technologies and AI tools, which is proving to be more efficient. This is an evolution rather than an entire change. (Tien Tzuo, CEO)
Q: What are the capital allocation plans given the strong free cash flow and sizable balance sheet?
A: We expect normalized trends for the rest of the year and are comfortable with the $80 million-plus free cash flow guidance. We will continue to use our balance sheet for acquisitions that accelerate growth and our product roadmap. (Todd McElhatton, CFO)
Q: Can you clarify the ARR growth guidance and what gives you confidence in the ramp-up in Q4?
A: We expect to exit the year at 8% to 10% ARR growth. The strong install base, pipeline development, and the addition of new products like Togai give us confidence in achieving this target. (Todd McElhatton, CFO; Tien Tzuo, CEO)
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
