Zuora axes 11% of its workforce as macro-economic uncertainties spook potential customers

The announcement of an 11% reduction in headcount resulted in a rough ride for Zuora on Wall Street yesterday, even as the subscription management firm beat Q3 expectations.

For the quarter, Zuora turned in a net loss of $37.0 million, compared to a net loss of $22.9 million for the third quarter of fiscal 2022. Total revenue was up 13% year-on-year to $101.1 million, while subscription revenue was up 17% to $86.6 million. Other stats of note:

• Customers with Annual Contract Value of more than $100,000 hit 770, up 50 on last year.
• Annual Recurring Revenue of $350.7 million was up 19% on last year’s $295.0 million.
• $21.5 billion of transactions went through the Zuora billing platform in Q3, up 15% year-on-year.
• New customer logos and go-lives included Michelin, Enercare, Canon and Suzuki Motor C

But it was the news of a “workforce reduction plan”, along with a weaker outlook, that caught Wall Street’s attention. The firm expects to take a hit of $9.5 million in charges related to the layoffs.  It’s a tough course of action, said CEO Tien Tzuo, but a necessary one:

The world certainly has changed in the last 90 days. Given the macro level of certainty, we are accelerating our focus on profitability and are committed to delivering a non-GAAP operating margin of at least 6% for fiscal year 2024. What this means is today, we announced the difficult decision to reduce our workforce by 11%.

We've been thoughtful, and how we've approached this making sure that we preserve quota capacity and continue to invest in innovation. As the founder and CEO of the company, I have not taken this decision lightly. But this was the right thing to do for our customers and our shareholders. And we're doing everything we can as a company to help with the transition for those affected.

Trends

As for that wider changed world, Tzuo said he’s spoken to more customers across more geographies of late than ever before and can see some patterns:

Digital customer experiences and subscription business models continue to be a priority. I was with the CIO of a $9 billion Information Services Company. He said that any project that streamlines the customer experience is still being funded. Companies continue to see subscriptions as the future, and we see this in our metrics. For example, our total pipeline continues to grow year-over-year. This is not a surprise, in times like these companies that have well established subscriber relationships are going to continue to outperform those that do not.

But there’s a but coming:

All this being said, this is absolutely a different world than just 90 days ago. The level of uncertainty that companies are facing has risen significantly and this is certainly affecting parts of our business. Sales cycles are being extended in certain cases, due to increased scrutiny on new software purchases. In other cases, some companies are simply putting larger scale transformation projects on hold, as a way to get a better picture of what resources they will have. In our installed base, some of our customers are finding it difficult to make longer term predictions about their own business, which may impact the level of volume commitments that they've historically made to our platform.

The scale of the impact varies across vertical markets, he added, and there are still sweet spots out there:

We are not seeing these trends impact all industries equally. For example, we continue to see good traction in the media industry. Advertising revenue is on the decline, and it is driving these companies to double down on their subscription business. Last quarter, we talked about how the New York Times is a prime example of what the playbook now looks like to build a modern digital media company on a foundation of a strong subscriber base.

This quarter, we added to that list a leading publisher with 250 newspapers and 2 million subscribers. They kicked us off with a goal of tripling their subscriber base in the next three years. They started with Zuora Billing to give them the pricing and packaging flexibility they needed to continue their subscriber growth and in Q3, they added more revenue to help them automate their revenue recognition process so they can scale their entire order-to-revenue process to support their ambitious growth goals.

The auto-manufacturing sector is another growth area, he said:

This quarter, we added another auto manufacturing company to our roster. This is one of the largest Japanese car manufacturers in the world with $75 billion in annual revenue. And they chose Zuora's to enhance what they call the driver experience. They are launching new in-car services and helping to make billing effortless for offerings like parking, roadside assistance, maintenance, insurance, entertainment, and more. This marks now 13 of the largest 15 auto companies who have bet on Zuora to take them into the next decade of growth.

Overall, Tzuo concluded, there’s what he called “a bifurcation in the business” going on:

A bifurcation of the deal, the bifurcation of the pipeline. And you can see that really by some ways, by industry, but really by how important it is to the company. So, the media sector continues to buy, the manufacturing sector is saying we invested all this effort in IoT, we see vast pools of new revenue streams that we can go tap after.

But the reality is that some potential customers are frozen by macro-uncertainties:

The parts of our pipeline where to simplify down [is] a large investment now, over a long period of time, where the benefit doesn't accrue till 12 months out, those are going to be put on hold, or more likely to be put on hold. We still have a few of those deals that are coming through because they're so important. But…these companies are saying, ‘Look, I don't know where the economy is going to be in six months. Is the Fed going to continue to raise interest rates? Am I going to see recession or not? I need clarity of that picture before I'm able to make a large investment like this’.

Directly speaking, this is still something they want to do. They still need to get to a target percent of subscriptions [for] their business model in two, three, five years, but just the uncertainty that we're seeing, in terms of where's inflation going to be, where’s employment going to be, where is the Fed going to go, is is causing them to say, ‘Look, give us another 90 days before we are able to decide.’

My take

Today is a difficult day for Zuora.

Not much more to add than that…