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Zuora (NYSE:ZUO) Beats Q3 Sales Targets, Raises Full Year Guidance for Certain Key Lines


Full Report / November 29, 2023

Subscription management platform Zuora (NYSE:ZUO) reported results ahead of analysts' expectations in Q3 FY2024, with revenue up 8.7% year on year to $109.8 million. Revenue guidance for the full year also exceeded analysts' estimates but next quarter's guidance of $110.8 million was less impressive, coming in 0.2% below expectations. It made a GAAP loss of $0.04 per share, down from its loss of $0.02 per share in the same quarter last year.

Zuora (ZUO) Q3 FY2024 Highlights:

  • Revenue: $109.8 million vs analyst estimates of $108.7 million (1.1% beat)
  • Calculated Billings of $104.2 million (miss vs. expectations of ~$115 million)
  • EPS (non-GAAP): $0.09 vs analyst estimates of $0.06 ($0.03 beat)
  • Revenue Guidance for Q4 2024 is $110.8 million at the midpoint, roughly in line with what analysts were expecting (although non-GAAP operating profit guidance was ahead)
  • Full year guidance raised for revenue, non-GAAP operating profit, non-GAAP EPS, and adjusted free cash flow
  • Free Cash Flow of $12.67 million, up from $4.02 million in the previous quarter (beat)
  • Net Revenue Retention Rate: 108%, in line with the previous quarter (beat vs. expectations of 17%)
  • Gross Margin (GAAP): 68.1%, up from 60.7% in the same quarter last year

Founded in 2007, Zuora (NYSE:ZUO) offers software as a service platform that allows companies to bill and accept payments for recurring subscription products.

For a traditional product-based business, billing is simple, a product is sold and a customer is billed. However, for an enterprise subscription product, it is a lot more complex, as the price is constantly changing in real-time based on the number of seats, features and other factors. Managing that for hundreds of customers can mean a large administrative overhead.

Zuora’s software platform automatically handles all the pricing adjustments in real-time, plugs into the customer’s accounting software and provides them with analytics. The company is focused on serving the enterprise market, offering a complex product that takes a significant amount of time to implement, but once adopted, is difficult to leave.

Payments Software

Consumers want the ability to make payments whenever and wherever they prefer – and to do so without having to worry about fraud or other security threats. However, building payments infrastructure from scratch is extremely resource-intensive for engineering teams. That drives demand for payments platforms that are easy to integrate into consumer applications and websites.

Zuora is competing in this space with products like Stripe or Salesforce Billing (NYSE:CRM).

Sales Growth

As you can see below, Zuora's revenue growth has been unremarkable over the last two years, growing from $89.23 million in Q3 FY2022 to $109.8 million this quarter.

Zuora Total Revenue

Zuora's quarterly revenue was only up 8.7% year on year, which might disappoint some shareholders. Additionally, its growth did slow down compared to last quarter as the company's revenue increased by just $1.80 million in Q3 compared to $4.95 million in Q2 2024. While we'd like to see revenue increase by a greater amount each quarter, a one-off fluctuation is usually not concerning.

Next quarter, Zuora is guiding for a 7% year-on-year revenue decline to $110.8 million, a further deceleration from the 13.6% year-on-year decrease it recorded in the same quarter last year. Looking ahead, analysts covering the company were expecting sales to grow 9.4% over the next 12 months before the earnings results announcement.

Product Success

One of the best parts about the software-as-a-service business model (and a reason why SaaS companies trade at such high valuation multiples) is that customers typically spend more on a company's products and services over time.

Zuora Net Revenue Retention Rate

Zuora's net revenue retention rate, a key performance metric measuring how much money existing customers from a year ago are spending today, was 108% in Q3. This means that even if Zuora didn't win any new customers over the last 12 months, it would've grown its revenue by 8%.

Zuora has a decent net retention rate, showing us that its customers not only tend to stick around but also get increasing value from its software over time.

Profitability

What makes the software as a service business so attractive is that once the software is developed, it typically shouldn't cost much to provide it as an ongoing service to customers. Zuora's gross profit margin, an important metric measuring how much money there's left after paying for servers, licenses, technical support, and other necessary running expenses, was 68.1% in Q3.

Zuora Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.68 left to spend on developing new products, sales and marketing, and general administrative overhead. While its gross margin has improved significantly since the previous quarter, Zuora's gross margin is still poor for a SaaS business. It's vital that the company continues to improve this key metric.

Cash Is King

If you've followed StockStory for a while, you know that we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills. Zuora's free cash flow came in at $12.67 million in Q3, turning positive over the last year.

Zuora Free Cash Flow

Zuora has generated $9.55 million in free cash flow over the last 12 months, or 2.1% of revenue. This FCF margin stems from its asset-lite business model and enables it to reinvest in its business without depending on the capital markets.

Key Takeaways from Zuora's Q3 Results

With a market capitalization of $1.16 billion, Zuora is among smaller companies, but its $493.7 million cash balance and positive free cash flow over the last 12 months give us confidence that it has the resources needed to pursue a high-growth business strategy.

We were glad that revenue outperformed despite a calculated billings miss. We were also impressed at how non-GAAP operating profit and free cash flow exceeded expectations. While revenue guidance for next quarter narrowly missed analysts' expectations, full year guidance was raised for key line items like revenue, non-GAAP operating profit, and free cash flow. Zooming out, we think this was still a decent, albeit mixed, quarter, showing that the company is staying on track. The stock is up 4.9% after reporting and currently trades at $8.75 per share.

Is Now The Time?

When considering an investment in Zuora, investors should take into account its valuation and business qualities as well as what's happened in the latest quarter.

We cheer for everyone who's making the lives of others easier through technology, but in case of Zuora, we'll be cheering from the sidelines. Its revenue growth has been weak over the last two years, and analysts expect growth to deteriorate from here. And while its customers spend noticeably more each year, which is great to see, unfortunately its gross margins show its business model is much less lucrative than the best software businesses.

Zuora's price to sales ratio based on the next 12 months is 2.5x, suggesting that the market does have lower expectations of the business, relative to the high growth tech stocks. While we have no doubt one can find things to like about the company, and the price is not completely unreasonable, we think that at the moment there might be better opportunities in the market.

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