Subscription Economy champion Zuora took a bit of a beating on Wall Street yesterday after turning in a Q1 loss of $20.6 million - against a loss of $17.8 million a year ago - on revenues that were up 22% year-on-year to $64.1 million.
One pain point was cited as new revenue recognition rules that change when sales are recorded. These kicked in on 1 February and have led to Zuora management striking a more cautious note when looking ahead for the rest of the year. CEO Tien Tzuo told analysts:
We continue to be excited by the healthy demand for subscription business models, but we are making changes to our sales approach to scale the business to the next level, which tempers our expectations for the remainder of the year.
But such transparency wasn’t taken well by investors with the Zuora share price dropping at one point to its lowest level since the firm went public last year.
Tzuo spoke about “execution headwinds” that are impacting the firm, beginning with a stark comment that:
We need to improve our sales execution….Global 2000 companies have been an important source of our recent growth. Companies like Caterpillar, Ford and Schneider Electric. And so, we've been expanding our strategic sales teams and have hired a number of talented sales people over the past year.
So, that’s good, yes? Well, yes, but there’s one hurdle still to jump that impacted on Q1:
The newer reps were less than half as productive than our more experienced reps. We're finding that we need to improve the support of our new reps with training and experienced oversight to help them ramp and close new businesses.
That’s something that should be ironed out relatively quickly. There’s already been a shake-up in the sales organization to get newer recruits alongside more experienced managers so that training and mentoring can be ramped up.
There’s also going to be change in the nature of the sales process towards a more focused approach and away from what Tzuo called the “evangelical sales motion”. The latter is deemed have worked in the earlier days of the company, when pitching the very idea of a Subscription Economy was the primary challenge, but a different tack is needed today:
We're an enterprise software company. Our deal sizes, we sell to the upper end of the market. And I would say there [was] a certain amount of thinking that we could power our way through our quarters through sheer brute force. What we just saw is, is that eventually catches up to you. For us, we have a incredible opportunity here with a Subscription Economy to build a billion dollar or a multi-billion dollar company and you don't just do that through brute force. And so, we've got to move towards a more predictable sales model.
More concerning perhaps have been delays in delivering on the product plan that have led to the need for what Tzuo called a “course correction”. He explained:
Part of our ability to grow within our installed base has been predicated on our ability to cross-sell our two flagship products, Billing and RevPro. However, the product integration for these two products is taking longer than expected. What we're seeing strong demand from our billing customers to implement RevPro, the technical work to complete the integration is taking time as these are complex mission critical systems…We’ve slowed down the RevPro representations this past quarter given the product integration delay. We're continuing to acquire and deploy new customers for each product on a standalone basis, but naturally this delay has slowed down our cross-sell motion. This resulted in lower professional services and subscription revenue in the quarter as well as tempered expectations going forward.
But despite the negative top line story, there were highlights during the quarter, said Tzuo, citing some more major customer wins:
In the automobile industry, we recently signed one of the largest auto distributors in Chile. We recently signed a second of the Big Four SIs, making them both a customer and a partner. We signed one of the world's largest producers of wind and solar energy and now count more than 10 utility companies around the world. We signed the largest financial publisher in Belgium as media continues to be a big growth driver for us globally.
And the shift to a subscription-based operating model is unstoppable across industry boundaries, he argued, repeating his oft-made statement that these are still just the early days for the transformation. There’s much, much more ahead - and it clear that the evangelism isn’t done just yet:
Sooner or later, we believe that every company will have to contend with a shift to subscriptions. Why? Because this is a shift that's very much driven by consumers. In a recent survey conducted by the Harris Poll, they found the consumers around the world prefer access to services over owning products. Consumers have more subscriptions today than ever and think they'll add even more in the future. The survey shows that over 70% of adults across 12 countries have subscription services and 74% can see subscribing to even more in the future.
And so, industry after industry what we are starting to see is a pattern where unit sales are declining. The consumption is bulk. Strong sales are declining, but hours listened to music is up. Game sales are down but hours played is up and even cars, even autos. Car sales are down worldwide including in China but miles driven continues to go up. This is what we see as ownership is on its way out and more and more companies are looking for ways to tie their businesses to this growth in subscriptions…Companies are looking to establish direct relationships with their customers and then turn them into subscribers.
Every enfant terrible hits puberty at some point and as we all know, puberty’s seldom fun. Tzuo has been commendably frank about the challenges that Zuora’s run into over the past few months, but he’s also laid out very clearly what he and his team intend to do about these. How the management team executes on this over the rest of the year will clearly be tracked very closely, but there’s a plan in place that makes sense in theory.
The shift from the “evangelical sales motion” is an interesting one. It’s necessary from a growth PoV to have a focused sales approach. But as a veteran of Salesforce, Tzuo will be conscious no doubt that even today, two decades after being founded, Marc Benioff and his team still talk audiences through the rise of cloud computing, albeit with less emphasis perhaps today.
Tzuo is selling a revolution, just as Benioff and Co were, and that means selling a big idea. Zuora has done an excellent job of owning the Subscription Economy agenda and setting the pace. As Tzuo notes, it’s still early days and there’s going to be a lot more evangelical tub-thumping to come.
Q1 hit some bumps in the road, but it’s a very long road and there’s no reason to assume that Zuora won’t pick up speed down it.