Zuora CEO flushed as even porta potties move to the Subscription Economy
- All the world is moving to a Subscription Economy model. Sound potty? It is - literally!
No-one can accuse Tien Tzuo of not managing to grab attention:
At some point we’re going to have to talk a little bit about porta potties.
It’s not the sort of line that you’d automatically expect to hear in a post-results announcement discussion, but for the CEO of Zuora it’s just part of an enthusiastic pitch around the Subscription Economy at the end of the firm’s very first quarter as a public company.
The idea of this new economy is one that Tzuo has been evangelising for many years of course, but it’s one that he argues is demonstrably gaining traction as every business becomes subscription-focused:
In the last 90 days, we witnessed the unstoppable march of the shift to subscriptions across multiple industries. As a reminder, today, more than 50% of our customers are in non-technology industries including transportation, consumer services, business services, manufacturing, media and telecom. Existing solutions within ERP systems or homegrown systems, they simply cannot handle the needs of these new business models.
He adds that customer expectations of their systems are different:
Customers want more control of their subscriptions, they want more options, they want to be able to draw things up, draw things down [which] is really driving our overall market. And whether you’re looking at ERP systems, like Oracle or SAP, whether you’re looking at legacy billing systems, utility billing systems, telecom billing systems or whether you’re looking at homegrown systems, they’re simply not going to be able to keep up the pace, change that new business models demands.
That means a “big, big secular shift” to the point where “one day every company, every industry around the world will all be part of this new Subscription Economy”, he argues:
Everywhere you look, businesses are moving to subscriptions. They’re turning to customers and to subscribers and they’re building long-term mutually beneficial relationships that are the foundation of these new business models. Think about all the things that you now subscribe to. You can see it on your credit card statements. Subscription is not just for music or movies but also home security, doorbell systems, exercise, content paywalls and more. Maybe you need to subscribe to Katz’s Deli’s new subscription service to its world-famous pastrami sandwiches. The list just continues to grow...Think about the Fortune 500 digital transformation projects that you continue to read about. Even traditional industries like travel and leisure, construction, real estate and apparel, they’re all turning to subscriptions for new growth opportunities.
And that means opportunities for Zuora. For its first public quarter, the company saw total revenues grow by 60% year-on-year to $51.7 million with non-GAAP operating loss of $13.6 million, largely driven by investment and expansion costs. Subscription revenues grew by 39% year-on-year to $36.1 million, 78% of total revenues.
Tzuo says that Zuora customers processed $7.2 billion in transaction volumes in the core billings platform over the quarter. Legacy ERP, as he calls it, isn’t built to handle the “dynamic requirements” of subscription business models. He cites the example of an unnamed energy company in Europe as a case in point:
This company could have used SAP, which is already heavily-entrenched as their core ERP systems. But this company sees future growth coming from its new innovations, new platforms that provide things like smart lighting solutions, electric mobility services, having new sectors such as smart homes, smart cities, smart mobility services. So, rather than seeing these new initiatives held back by their existing ERP infrastructure, they chose Zuora for the agility and flexibility to support the new dynamic business models.
It’s not just the ERP systems are inadequate, existing homegrown systems also cannot keep up with this constantly changing demand that comes with growth. We saw a large utility company turn to Zuora to replace an outdated homegrown system that could no longer handle their business needs. They were tired of these legacy systems continuing to incur significant costs, create operational risks, with issues around outages, downtime, security, and also limit their business development efforts as it took nearly two years to bring new products to market. This simply was not sustainable. But through Zuora’s solution, they can now measure time to launch initiatives in months versus years.
Such exemplars indicate a shift in perception around Zuora, contends Tzuo, to more than a billing system:
All this means that increasingly we are the system of record for the customer, specifically the transactional data around the customer. SendGrid joined the Zuora platform eight years ago as a start-up and scaled with our systems to become a publicly-traded software company today. Now, Zuora operates as a single source of truth for tracking all revenue-related transactions, with the ability to access revenue and customer data, of course, in real time.
Not that the core business of billing is any less vital - and this is where the porta pottie comes in as Tzuo admits:
I never knew how dynamic the porta potties business could be...It turns out that this industry is driven by long-term dynamic contracts.
Imagine, you signed a contract to provide a construction company or a mining company with porta potties. The number of units continues to fluctuate up and down. There’s actually a usage-based model, based on how many pounds or tons of waste that has to be processed. There’s always add-on products like fences, generators, or even showers. It turns out you can see this business as an example. It’d be generalized corporate services market.
This is a real world use case, explains Tzuo:
It turns out that the company’s existing systems were filled with manual order-to-cash processes, often including hand edits for changes in terms. This led to constant errors in the invoices and contracts, and the problem is just getting worse and worse with all the acquisitions they have planned. They initially tried to address these needs through Oracle solutions, but after a failed attempt with NetSuite, they turned to Zuora Billing because of our proven ability to integrate acquisitions quickly and scale in these highly dynamic and customized environments.
Revenue management is another area of growth for Zuora in the shape of its RevPro offering. Compliance standards and requirements are becoming more rigorous as business models become more complex, argues Tzuo, pointing to the example of an electronic testing and measuring equipment firm:
For decades, this company sold products, equipments. When we talked to them, this company just completed a huge upgrade to the latest version of Oracle ERP. But what’s going on now? Now, they want to move to a subscription model for testing and calibration as a service. They found thecomplexity of these new business models, coupled with all these new accounting standards, drove all these new complexities around revenue recognition. How do I track performance obligations? How do I handle allocations for bundle offerings of hardware, software, and service contracts? How do I process data, not only from Oracle, but also Siebel and Salesforce into a single environment. All the while, I need to do this while incorporating a sizable acquisition that I made last year. Oracle simply could not handle their needs.
Given Tzuo’s premise that one day everyone will be a subscription business, he’s reluctant to put time scales on this:
Which industries move faster in the Subscription Economy is going to fluctuate year-to-year, but right now we are pleased with the signs that we’re seeing from companies, not just in our three core verticals - our technology vertical, our media and telecom vertical, and our manufacturing vertical.
That being said, we’ve always wanted to counsel being conservative. The Subscription Economy is not something that just grows overnight. If you look at the software sector, Salesforce was created in 1999, and we’re sitting here 20 years later. And still a lot software continues to be sold as a licensed product, even when we know that the future of the software industry is going to be all subscriptions. And so, that’s why we’re thinking on a long-term basis that 25% to 30% growth is the right way to think about our business.
A good start to life as a public company. I’ve been tracking Zuora since Salesforce CEO Marc Benioff first pointed me in its direction in its formative years. It’s had the great advantage of spotting a business model shift and subsequent market opportunity, based in no small part on Tzuo’s own experiences at Salesforce, where he was Chief Marketing Officer.
He’s been evangelical about the Subscription Economy concept and that shows no sign of diminishing. The use case exemplars he produces are strong (although sadly anonymised for now it seems). But this week’s Subscribed conference in San Francisco should throw up a lot more names-as-proof-points to be going along with.