Subscription fatigue? Not for Zuora as revenue rises and losses are slashed

Stuart Lauchlan Profile picture for user slauchlan December 1, 2023
Summary:
It is a tougher macro-economic climate out there, but there are strategies for growth around subscription models, says CEO Tien Tzuo.

Tien Tzuo
Tien Tzuo

Zuora pleased Wall Street earlier in the week with some strong Q3 numbers. Total revenue was up nine percent year-on-year to $109.8 million, with a subscription revenue making up $98.0 million, up 13%. Net loss was was $5.5 million, substantially down on the loss of $37.0 million recorded for the comparable year ago quarter. 

That’s all heading in the right direction. So why then is there a perception in some quarters that there might be an issue surrounding the Subscription Economy? According to CEO Tien Tzuo, what’s happening is a shift into a new phase here: 

The past 15 years have been a great period of growth for subscription businesses. But today you have all heard of the phrase ‘subscription fatigue’, the idea that we all have too many streaming services subscriptions or our companies have too many SaaS applications.

So does that mean the subscription era is over? Well, of course not. What it means, however, is that a shakeout is now happening. And what we are seeing is the winners of the shakeout are using our technology to deliver not just recurring relationships or recurring revenue. They are using our technology to create recurring growth.

There are two dominant strategies for creating such growth, he added: 

The first is around consumption. In fact, our new research with BCG found an almost 3x increase in adoption of hybrid consumption models over the last three years. And so in Q3, we expanded Zuora for Consumption to help companies take their unpredictable raw usage data, better understand exactly how their customers use their offerings and translate that to the right pricing model. Companies like AVEVA, a global leader in industrial software in Europe, are adding Zuora for Consumption to give their customers visibility into consumption habits and with that new transparency, deliver new value to customers.

The second dominant strategy we're seeing emerge is what I'll call strategic bundling and unbundling. In this digital era, companies like New York Times, as an example, they no longer ask you to buy their entire newspaper. Instead, they have unbundled their offerings, allowing people to subscribe to just games or news or sports or cooking and more. And this is how they have grown to now more than 10 million subscribers.

Pressure

But there is pressure in the subscription space, he admitted: 

When markets slow down, competition certainly increases. People are chasing the same pie versus a growing pie. And we do see when you look at the entire market space, our customers and other companies, that there could be a shakeout.  There could be a shakeout where, hey, you know, which streaming services are you going to drop? Which newspaper subscription are you going to drop? Which SaaS company are you going to drop? And so what we're busy working with our customers on is, [to say] ‘Look, the best companies that are the ones that can hold on to their customers, give their customers choice’.

Despite tough macro-economic conditions in the market, Tzuo attributed Zuora’s continued growth to several factors, including its enterprise business focus: 

We chose to focus on the world's largest and fastest-growing companies across industries and all around the world. This gives us a customer base that many would be envious of. And in Q3, many of these companies recommitted to Zuora. We saw several expansions with multi-year commitments that drove a 20% year-over-year increase in our total RPO or Remaining Performance Obligations.

As an example, he cited a couple of industry sectors:

We power 12 of the top 15 automobile companies around the world. Well, in Q3, one of them, which is also one of our top five customers, renewed their commitment to Zuora for another five years. Not only that, in one of the world's largest telecommunications and entertainment companies, we expanded to yet another business unit, signing a five-year, seven-digit deal, which also was a competitive replacement.

Q3 saw an uptick in larger customer deals with contract value north of $250,000, bringing the total of such clients to 453, representing 83% of Zuora’s business. Meanwhile the quarter also saw seven new deals above $500,000, with two of these being over £1 million. 

One company that went live in Q3 was LinkedIn, which is using Zuora for its subscription revenue stream. This is within its LinkedIn Talent Solutions business, said Tzuo: 

After an in-depth search for the right partner, LinkedIn selected Zuora to minimize the need for manual intervention in their revenue recognition processes and expedite their time to market. 

My take

Overall, the direction of travel remains positive, but the macro-economic picture means that Tzuo is sensibly  cautious in his predictions: 

We're probably experiencing the same thing that every other company is experiencing, but we want to be certainly very conservative. You know, we do see a lot more optimism in our customer base. That certainly led to these longer-term contracts…But, you know, I think there's still enough unknowns out there in the marketplace that we would want to be muted in our optimism.

That said, a solid end to calendar 2023. 

Onwards!

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