Smaller, faster deals boost Zuora's win rates, but two customer churns come as a surprise

Stuart Lauchlan Profile picture for user slauchlan March 1, 2024
Summary:
Zuora's shifted its strategy in response to macro-economic uncertainties to focus more on quicker, smaller deals alongside its enterprise push. It's working, says CEO Tien Tzuo.

zuora
Tien Tzuo

A solid year end for Subscription Economy specialist Zuora, albeit one marred by two unexpected customer churns. 

Q4 revenue was $100.7 million, up seven percent year-on-year, while a net loss of $20.8 million was far lower than a loss of $107.9 million for the year ago quarter. Meanwhile subscription revenue was up 12% year-on-year to hit $100.2 million. 

For full fiscal 2024, revenue was $431.7 million, up nine percent year-on-year, with a net loss of $68.2 million, down from a loss of $198 million for fiscal 2023. Subscription revenue was $383.4 million, an increase of 13% year-on-year.

One downside - Q4 ARR (Annual Recurring Revenue) fell short of target. Despite that, CEO Tien Tzuo felt able to state: 

The bottom line is this - in an uncertain year, we strengthened our position in the marketplace by focusing on what was in our control, namely accelerating new logo acquisition, continuing to innovate our market-leading multi-product portfolio, investing in the success of our customers and delivering balanced growth and profitability.

He added: 

In Q4, we also saw the biggest year-over-year increase in new logos that we've seen in eight quarters. And in the quarter, nearly 60% of our customers who renewed in Q4 actually increased their spend with us.

That’s attributable to a shift in strategy in response to wider macro-economic factors, according to Tzuo: 

Like many other companies, one year ago we were seeing signs of a general slowdown in IT spending. Many expressed [the view] that the Office of the CFO was an area that could be affected. There was a general consensus that there was going to be a slowdown in the digital transformation projects that have driven technology spending over the previous few years.

And so we adjusted. Specifically, we said we would do two things. First, we shifted to doing faster lands at a lower ACV (Actual Cash Value), still focused on what we believe is the sweet spot of the market, large enterprises and fast-growing disruptors, in other words, the leaders of today and of tomorrow.

Second, we said we would strike a good balance between growth and profitability, and we committed to making progress towards the Rule of 40 framework. As it turns out, this was the right approach. As the year progressed, we did indeed see a pause in digital transformation projects. In FY '24, we saw fewer 7-digit ACV new logo deals. And in Q4, we did see these deals continue to push [back].

More wins, faster 

But the strategy of pursuing smaller, faster lands led to Zuora signing close to 30% more new logos in fiscal 2024 as compared to the previous year, he added, while in Q4, over 40% new logos were signed compared to Q4 of last year. Speed counts, he said: 

We saw sales cycles shorten. In fact, when I look at new logo deals between $100k and $500k ACV, these deals closed 25% faster as compared to FY '23.

Enterprise wins continue. New logos include Sony Network Communications, which will be bringing on approximately 1.5 million subscribers, Infor, and “one of Europe's largest airlines” which selected Zuora to scale their exclusive travel program with new strategic offerings.

And Zuora is also benefitting from ongoing ‘land and expand’ activity among customers, with Tzuo citing two examples: 

The first one is Toast, a leading restaurant technology management software company used by approximately 106,000 restaurant locations with over $3.9 billion in annual revenue. Now Toast was a Zuora revenue customer. But in Q4, I'm proud to say that they added Zuora Billing. Toast needed an enterprise-grade monetization platform that can keep up with their rapid growth and a flexible solution capable of managing their dynamic business models.

The second example is the Globe and Mail, Canada's leading national news brand with over six million monthly users. After going live with Zuora Billing in Q4, they added Zephr [paywall tech] to help them accelerate the growth of their digital new subscriptions through greater pricing and bundling flexibility.

But…

All that said, there are two large instances of churn that have had to be factored into Zuora’s thinking, although Tzuo was keen to emphasize that he does not see these as indicative of a wider industry trend. The first has already taken place in Q4 and was not expected: 

[This] was a large customer that had experienced macro-headwinds in their industry, and they faced digital transformation and budget cuts. It's important to note that this customer was not yet live. That being said, as we reflect on what we could have done better, we do believe that faster go-lives will continue to reduce the likelihood of these events, and so you will see us continue to focus on this area.

The second is coming up in Q1 of fiscal 2025: 

This is a company that signed on a number of years ago, and they had a digital transformation vision that unfortunately has not yet become a reality and their processes are still very much traditional one-off transactions. Now these anomalies do not change the strategy we have in place, but they do highlight the continued need for us not only to close the right type of customer, but also continue to focus on reducing time to go live.

My take

I'm certainly optimistic that eventually we'll have another shot to work with them and make them successful.

Those two big customer churns and the knock-on impact on ARR are unfortunate and clearly came as a surprise. But overall, Zuora CFO Todd McElhatton is keen not to characterize these as lost deals and notes that win rates are at record levels: 

I think another interesting thing is, during the year we actually took 17 deals away from our competitors, both high-end and low-end, where they said they really needed an enterprise solution at scale, and they came to Zuora because what they had wasn't doing what they needed.

It’s a point picked up by Tzuo when he says of customers he cited during the post-results analyst call: 

I can think of at least three or four or five of those that are competitive win backs, where maybe they picked a competitor two-to-three years ago, realized it doesn't have the functionality they need and they [are] coming back to us.

Overall, with around 60% of companies that renewed in fiscal 2024 having increased their spend, the plan is to stick to the plan. Tzuo argued: 

I think in this uncertain environment, it's good to be prudent. And that's why I like our strategy, right? I like our strategy of saying, ‘Look, regardless of what's going on in the macro, we can continue to sign on new logos'. We might be doing a smaller ACV, a smaller land, but at least faster sales cycles lead to more customers. We've got a proven engine that once we get the customers and we get them live, we can grow with them. 

Onwards!

 

 

 

 

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