Salesforce's multi-year renewal provides Zuora with a big Subscription Economy proof point

Zuora CEO Tien Tzuo has picked up a big validation for his firm’s platform with a multi-year renewal from his alma mater Salesforce to automate all of its global revenue recognition using Zuora Revenue. As well as a high-profile endorsement of the Zuora platform, it’s a personal win for the CEO:

I used to run the billing system at Salesforce. Salesforce really got to where [it is] from really having no constraints on their ability to innovate on their business models. So, when you look at the size, the scale, the global nature of what they have, I would say that this was a competitive process.

I would say that they did look at the marketplace and did a full scan of possible solutions with close advisers outside of the organization as well. They came to the conclusion that our product was really the only one that can handle their size, scale and needs…I think the Salesforce deal really, to me, is a proof point that we have the best product in the marketplace for running subscription businesses and that's something that I'm the most proud of.

The Salesforce announcement came as Zuora turned in Q3 numbers that topped Wall Street expectations. For the quarter, total revenue was $89.2 million, 16% up year-on-year. Subscription revenue was $73.8 million, up 19% year-on-year. Net loss was $22.9 million against a net loss of $16.8 million for the comparable period last year. Other stats from the quarter include:

• Customers with ACV at or above $100,000 increased by 26 last quarter. These customers now make up 94% of total business. 
• Ten deals signed in Q3 with ACV at or over $500,000, including two deals over $1 million.
• Over 200 globally certified consultants within Systems Integration (SI) partners versus 52 a year ago.
• Over 40% of customer go-lives in Q3 involved an SI partner.
• Bookings from SI-influenced deals in Q3 grew by over 130% year-on-year.
• Zuora processed $19 billion of volume in the quarter, representing 28% growth year-on-year.

Power 

Tzuo argues that companies woke up to the power of the Subscription Economy last year during the COVID crisis:

Businesses across more and more sectors recognize the need to shift to digital service models. We continue to believe that this shift is what is powering our momentum today. Zuora continues to be the go-to subscription management solution for both innovative disruptors and large enterprise incumbents alike. 

The Zuora platform is, he added, particularly appealing to disruptor companies, citing an unnamed online education platform as a case in point:

With over 2 million subscribers, this disrupter came to Zuora for a billing and revenue recognition platform that they are confident will support their continued scale for years to come.

Our existing disruptors, of course, are also continuing to scale. In fact, this quarter, a leading business communications platform used by millions of developers around the world expanded its work with Zuora to power an additional business unit after a recent acquisition. As they continue to grow, Zuora Billing and Collect will enable this new volume and scale.

Some of Zuora’s customer wins are what Tzuo calls "long term bets” moving forward:

We continue to sow the seeds that will power our growth for years to come. As an example, automotive. You've heard me say that we power 8 of the top 10 auto companies, including companies like General Motors, Ford and Toyota. In recent months, you've heard many of them announce growth target for these new digital services. In fact, these digital services are forecasted to generate $86 billion by 2025 from in-vehicle payments.

It is a long game that’s being played, he said:

There was really a significant change last year in terms of companies' appreciation of the subscription-based business model. But I would say that the translation of that intent and that direction into demand for us does take time. It's not that they're just taking compute power and shipping it to the cloud overnight. This requires companies to build new innovations, launch new capabilities, which they are doing on us.

And while deal sizes are getting larger, it’s a case of acorns and oak trees in some cases: 

A lot of times we do still grab disruptors and bring them on board when they're smaller companies, right? [We] talk about how we power Zoom, but we started working with them when they were $30 million. We started working with Box…when they were $3 million. So, those deals tend to start small and are going to grow as those companies have success.

That said, there’s still some work to be done pitching to prospects it seems. Tzuo noted:

Sometimes there's a misunderstanding of us [being] a replacement of legacy ERP. We're really attacking an entirely new business model that ERP systems don't really handle it. I see this as an enormous amount of whitespace that we can go attack from an innovation standpoint. And whether that's Revenue, whether that's Collect, whether that's the platform capabilities, that's what we're really excited about - that the subscription economy is growing, there's a new set of tools that sets up the whitespace.

We're really powering new business models that ERP systems are never built to power. So, a company like Caterpillar will keep their ERP systems for their core business, which is selling tractors and excavators, but their fast-growing digital businesses, subscription businesses, Cat Connect, that's the business that they're putting on us. Same with GM, right? We're not touching the car sales specifically, but we're powering the billions of dollars of connected car sales that they have today and they expect to grow in the coming years.

My take

The sharp increase in the number of SI partners catches the eye. As Tzuo observes:

The big picture here is that we've got to where we are today really by figuring out a brand new market and, in many ways, going it alone in that marketplace. What you’ve heard from us over the last 18 months, maybe 24 months, is a big change in tone, where we do believe that that to get to where we can in this marketplace, billion dollars or more, part of that is [about] really building and focusing on a healthy ecosystem.

That being so, a relationship with Microsoft signed in Q3, to integrate Zuora products into Microsoft Dynamics, is going to be very important. Tzuo explains:

We've chosen to really start with Microsoft as a place to start. That, being a technology vendor, does require stronger integration. And so what you're seeing is the first phase of that partnership focused on technology integration. If we do our part, we do believe that should open up the Microsoft install base and potentially their distribution channel. But I would say it's early days and, right now, we're focusing on step one, which is the technology integration.

Something to keep a close eye on in the coming quarters.