Zuora ends FY2022 on a high, welcomes $400m Silver Lake funding - CEO interview

We delivered.

An ebullient Tien Tzuo, CEO of Zuora, gave his verdict on the company's impressive Q4 earnings last night, at the same time as announcing $400 million in funding from noted private equity tech investor Silver Lake. Subscription revenue posted 19% growth for the year, while net dollar-based retention rate, an important measure of expansion within existing customers less churn, rose an impressive 10% to 110%. The company raised guidance for the current year, projecting full year revenue in the $402-$406 million range and profitability close to breakeven, while targeting ARR growth to reach at least 21% and improve the dollar-based retention rate to 112% or higher.

We spoke to Tzuo shortly after he'd finished the earnings call with Wall Street analysts last night. He told us the strong numbers reflect the outcome of strategic decisions the company took two years ago to capitalize on the market opportunity ahead:

Two years ago, we said ... there's a few things that we want to do to build that sustainable growth. You've seen us do that. That's really the multi-product strategy, the ecosystem, a go-to-market team that's not just about closing deals, but really about building long-term relationships and helping companies win, and bringing the resources in the company to bear on our customers' behalf. By putting those things into place, we're now on the path really to where we want to be, which is to continue to accelerate growth.

That period of adjustment two years ago coincided with the onset of the pandemic and Zuora didn't see the same spike that some of its customers saw, most notably video chat platform Zoom — although of course switching on its products is a lot more complex than loading up a Zoom meeting. But in the wake of the pandemic, enterprises are looking to cement their digital connections with customers and a switch to a subscription model is often a part of that. Earlier last year, Zuora laid out a four-year plan to target 25-30% ARR growth and a dollar-based retention rate of 115% or more, and the latest guidance is in line with that. Tzuo says the Q4 numbers reflect that long-term trend:

People ask, 'Okay, is this a spike and you're just going to regress back, some regression to the mean?' And I say, 'No, we're on a journey.' We're still committed to that journey. We've made good progress and we intend to continue to make good progress this year ...

We have to figure out how to go get that potential and help companies transform and all that. But you know, there's no limits to how many more companies will shift to this Subscription Economy.

Silver Lake buys in

That's a vision that Silver Lake has bought into. The $400 million in convertible debt is split into two tranches, with $250 million issued now at a conversion price of $20 per share, and the balance to be purchased within the next 18 months. On closing the initial transaction, Joe Osnoss, Managing Partner at Silver Lake, will join the Zuora board.

Zuora felt the timing was right to strengthen the balance sheet and have the capacity to invest in product development and make acquisitions as the opportunity and need arises. The decision to go with Silver Lake rather than some other route was down to a meeting of minds, says Tzuo:

This wasn't a bake-off. We didn't, you know, take five firms and pick them off. We just got to know the Silver Lake folks. They were leaning in on the opportunity. And we really liked their thinking, we really liked their passion for what we do ...

I characterize it more as, two companies saying, 'Hey, it'd be exciting to work together.'

I also asked Tzuo about some of the trends in the subscription economy. But first, the numbers in brief:

• Q4 revenue was $90.7 million, up 14% on a year ago, while subscription revenue rose 19% to $77.3 million.
• Q4 net loss was $35.2 million on a GAAP basis and $1.5 million on non-GAAP measures.
• FY2022 full year revenue was $346.7 million, up 14% on the previous year, with subscription revenue rising 19% to $287.7 million.
• GAAP net loss for the year was $99.4 million, or 29% of revenue, while the non-GAAP figure was $11.3 million, compared to $7.9 million a year ago.
• Zuora ended the year with a $215.4 million warchest of cash and short-term investments. This figure doesn't include the Silver Lake funding. Free cash flow was $10.3 million, the first year this has been positive.
• Zuora had 747 customers with ACV of $100k and above at year end, up from 676 a year ago.
• ARR growth was 20%, compared to 12% the year before, while dollar-based retention rate increased to 110%, up from 100% a year ago.
• Transaction volume going through the Zuora billing platform was up 25% year-over-year during the fourth quarter at $21.3 billion.
• New customer logos and go-lives included Gusto, Luxottica Group, HMD, Oura Health and Carta.

Customer success in the Subscription Economy

One important part of Zuora's evolution in the past few years has been to build out its customer success function. The transition to a subscription model is much more than simply a change to the billing mechanism. Many of an organization's processes have to change to accommodate a new relationship with customers — one that switches the focus away from what the vendor is selling and engages more with what the customer is trying to achieve.

At this point in our conversation, Tzuo gets up and fetches a pile of copies of his book, Subscribed, which spells out this message in detail, and is now translated into multiple languages — that's the Korean translation he's holding up in the picture above. Since the book came out, Zuora has established a think tank, called The Subscribed Institute, chaired by former IDC analyst Amy Konary. She has led the creation of Zuora's blueprint for succeeding in the Subscription Economy. Tzuo says:

If there was a second book, we would call it 'The Journey to Usership'. That's a blueprint that Amy [Konary]'s team has put together to help companies in all different industries.

You have to break it up into phases and say, 'Okay, look, we're going to do it in phases with you, and we're going to build the competencies, we're going to help you deliver a roadmap.' That framework is the blueprint that our customer success team uses with companies. Because you know how it is, right? 'We're a product company and our customer success team typically is trying to talk about how to use our product.' Yeah, it's certainly important, but you've got to start with, 'Okay, well, what's the customer strategy?'

Closing the books faster

As a case in point, Tzuo cites Zuora's own Real-Time Revenue offering, which was introduced in Q4, and which allows customers to put their revenue recognition processes on a continuous close basis. The decision to develop this had come out of monitoring how customers were using Zuora's revenue recognition capabilities. Tzuo explains:

Ultimately, what the customer really wants is, they want to close the books faster. They want to get a forecast or a view of their revenue as early as possible.

Zuora started measuring how long customers were taking to close their books and discovered the average was 13 days. Tzuo elaborates:

It turns out that a lot of it has nothing to do with the technology, it has to do with their processes. The traditional process, you wait for the quarter to finish, and then you crunch through all the revenue transactions. It could be 50,000 of these, which is why you automate it. And then you realize it takes two weeks.

So the way to do it faster, is actually to spread out all the work, to do their processing in real time, if you will. As soon as the invoice gets generated, as soon as the order gets booked, whatever happens, we're calculating revenue behind the scenes on a continuous basis. Then when you come to the end of the quarter, most of the stuff is done.

That's how we can shrink it down to three days. Ultimately, can we even get it down to one day, can we get it down to zero days?

My take

Something that Tzuo said on the earnings call with analysts really resonated for me:

If you think about the phrase, that I think Marc Andreessen used, software eats the world, companies becoming technology companies. I think what we're seeing is a parallel path, call it Software-as-a-Service, the business model, is eating the world and every company is waking up to become a Subscription Economy company.

SaaS is eating the world. Exactly. Our thinking's fully aligned here, as this is something I've been writing about for some time, called the XaaS Effect, where XaaS (pronounced 'x-ass') stands for Everything-as-a-Service. From my perspective, the transformative aspect of XaaS is the continuous digital connection with customer, through which the provider engages with the customer, monitors their usage, and uses that data to improve their offering. The example of how Zuora's Real-Time Revenue came into being is a good illustration of this in action, where engaging with customers and monitoring their usage resulted in the decision to add new capabilities that would help them achieve better outcomes.

From our perspective, therefore, Zuora seems perfectly aligned with a trend that we agree is coming to all industries. The opportunity here is one that demands long-term thinking. It's good therefore to see the adjustments to its offerings and its go-to-market from two years ago now starting to kick in with some impressive growth numbers, and the promise of more to come.