Subscription management platform Zuora (NYSE:ZUO) missed analysts' expectations in Q2 FY2024, with revenue up 9.39% year on year to $108 million. Next quarter's outlook also missed expectations with revenue guided to $108.5 million at the midpoint, or 2.06% below analysts' estimates. Zuora made a GAAP loss of $22.6 million, improving from its loss of $29.9 million in the same quarter last year.
Zuora (ZUO) Q2 FY2024 Highlights:
- Revenue: $108 million vs analyst estimates of $108.8 million (0.69% miss)
- EPS (non-GAAP): $0.07 vs analyst estimates of $0.04 ($0.04 beat)
- Revenue Guidance for Q3 2024 is $108.5 million at the midpoint, below analyst estimates of $110.8 million
- The company dropped revenue guidance for the full year from $435.5 million to $430.5 million at the midpoint, a 1.15% decrease
- Free Cash Flow of $4.02 million, down 69% from the previous quarter
- Net Revenue Retention Rate: 107%, in line with the previous quarter
- Gross Margin (GAAP): 65%, up from 60.9% 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.
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 mediocre over the last two years, growing from $86.5 million in Q2 FY2022 to $108 million this quarter.
Zuora's quarterly revenue was only up 9.39% year on year, which might disappoint some shareholders. However, we can see that the company's revenue grew by $4.95 million quarter on quarter, accelerating from $54 thousand in Q1 2024.
Next quarter's guidance suggests that Zuora is expecting revenue to grow 7.35% year on year to $108.5 million, slowing down from the 13.3% year-on-year increase it recorded in the same quarter last year. Looking ahead, analysts covering the company were expecting sales to grow 10.6% 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's net revenue retention rate, a key performance metric measuring how much money existing customers from a year ago are spending today, was 107% in Q2. This means that even if Zuora didn't win any new customers over the last 12 months, it would've grown its revenue by 7%.
Despite falling over the last year, Zuora still 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 65% in Q2.
That means that for every $1 in revenue the company had $0.65 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 $4.02 million in Q2, turning positive over the last year.
Zuora has burned through $10.4 million of cash over the last 12 months, resulting in a negative 2.6% free cash flow margin. This below-average FCF margin stems from Zuora's poor unit economics or a continuous need to reinvest in its business to penetrate the market.
Key Takeaways from Zuora's Q2 Results
With a market capitalization of $1.37 billion, Zuora is among smaller companies, but its more than $323.3 million in cash on hand and near break-even free cash flow margins put it in a stable financial position.
It was great to see Zuora improve its gross margin this quarter. That really stood out as a positive in these results. On the other hand, its full-year revenue guidance was below expectations and its revenue guidance for next quarter missed Wall Street's estimates. However, investors should note that this drop stems from lower-than-expected professional services revenue, which is lower margin than the company's subscription revenue. Thus, Zuora is still raising its adjusted operating income and EPS guidance. Despite this, the market was likely looking for stronger top-line growth and company is down 4.44% on the results. It currently trades at $9.25 per share.
Is Now The Time?
Zuora may have had a bad quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity. 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, 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 12 months is 2.9x, 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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