Subscription management platform Zuora (NYSE:ZUO) reported results in line with analyst expectations in Q1 FY2024 quarter, with revenue up 10.6% year on year to $103.1 million. Guidance for next quarter's revenue was $108.8 million at the midpoint, which is 1.91% above the analyst consensus. Zuora made a GAAP loss of $19.3 million, improving on its loss of $23.2 million, in the same quarter last year.
Zuora (ZUO) Q1 FY2024 Highlights:
- Revenue: $103.1 million vs analyst estimates of $102.1 million (0.98% beat)
- EPS (non-GAAP): $0.05 vs analyst estimates of $0 ($0.05 beat)
- Revenue guidance for Q2 2024 is $108.8 million at the midpoint, above analyst estimates of $106.7 million
- The company reconfirmed revenue guidance for the full year, at $435.5 million at the midpoint
- Free cash flow of $13 million, up from negative free cash flow of $20.1 million in previous quarter
- Net Revenue Retention Rate: 110%, in line with previous quarter
- Customers: 782 customers paying more than $100,000 annually
- Gross Margin (GAAP): 63.8%, up from 61.1% 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.
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).
As you can see below, Zuora's revenue growth has been mediocre over the last two years, growing from quarterly revenue of $80.3 million in Q1 FY2022, to $103.1 million.
This quarter, Zuora's quarterly revenue was once again up 10.6% year on year. But the growth did slow down compared to last quarter, as the revenue increased by just $54 thousand in Q1, compared to $1.97 million in Q4 2023. We'd like to see revenue increase by a greater amount each quarter, but a one-off fluctuation is usually not concerning.
Guidance for the next quarter indicates Zuora is expecting revenue to grow 10.1% year on year to $108.8 million, slowing down from the 14.2% year-over-year increase in revenue the company had recorded in the same quarter last year. Ahead of the earnings results the analysts covering the company were estimating sales to grow 9.57% over the next twelve months.
Large Customers Growth
You can see below that at the end of the quarter Zuora reported 782 enterprise customers paying more than $100,000 annually, an increase of 9 on last quarter. That is quite a bit more contract wins than last quarter but also quite a bit below what we have typically seen over the last year, suggesting that the company may be reinvigorating growth.
One of the best things about software as a service businesses (and a reason why they trade at such high multiples) is that customers tend to spend more with the company over time.
Zuora's net revenue retention rate, an important measure of how much customers from a year ago were spending at the end of the quarter, was at 110% in Q1. That means even if they didn't win any new customers, Zuora would have grown its revenue 10% year on year. Significantly up from the last quarter, this a decent retention rate and it shows us that not only Zuora's customers stick around but at least some of them get increasing value from its software over time.
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 is left after paying for servers, licenses, technical support and other necessary running expenses was at 63.8% in Q1.
That means that for every $1 in revenue the company had $0.64 left to spend on developing new products, marketing & sales and the general administrative overhead. This would be considered a low gross margin for a SaaS company and we would like to see it start improving.
Cash Is King
If you have followed StockStory for a while, you know that we put an emphasis on cash flow. Why, you ask? We believe that in the end cash is king, as you can't use accounting profits to pay the bills. Zuora's free cash flow came in at $13 million in Q1, up 249% year on year.
Zuora has burned through $22 million in cash over the last twelve months, resulting in a negative 5.42% free cash flow margin. This below average FCF margin is a result of Zuora's need to invest in the business to continue penetrating its market.
Key Takeaways from Zuora's Q1 Results
Since it has still been burning cash over the last twelve months it is worth keeping an eye on Zuora’s balance sheet, but we note that with a market capitalization of $1.16 billion and more than $396.9 million in cash, the company has the capacity to continue to prioritise growth over profitability.
This was a nice beat and raise quarter for Zuora. We were very impressed how strongly Zuora accelerated the rate of new contract wins this quarter in addition to beating revenue expectations slightly. And we were also glad that the revenue guidance for the next quarter exceeded analysts' expectations. Full year guidance for revenue, adjusted operating profit, and adjusted EPS were raised from previous quarter's outlook, and these metrics are above current Consensus. Overall, we think this was still a really good quarter, that should leave shareholders feeling very positive. The company is up 6.17% on the results and currently trades at $9.04 per share.
Is Now The Time?
When considering Zuora, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. We cheer for everyone who is making the lives of others easier through technology, but in case of Zuora we will be cheering from the sidelines. Its revenue growth has been weak, and analysts expect growth rates to deteriorate from there. And while its customers spend noticeably more each year, which is great to see, the downside is that its customer acquisition is less efficient than many comparable companies and 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 twelve months is 2.6x, 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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