Subscription management platform Zuora (NYSE:ZUO) reported results in line with analysts' expectations in Q4 FY2024, with revenue up 7.4% year on year to $110.7 million. On the other hand, next quarter's revenue guidance of $108.8 million was less impressive, coming in 2.8% below analysts' estimates. It made a non-GAAP profit of $0.12 per share, improving from its loss of $0.04 per share in the same quarter last year.
Zuora (ZUO) Q4 FY2024 Highlights:
- Revenue: $110.7 million vs analyst estimates of $110.8 million (small miss)
- EPS (non-GAAP): $0.12 vs analyst estimates of $0.05 ($0.07 beat)
- Revenue Guidance for Q1 2025 is $108.8 million at the midpoint, below analyst estimates of $111.9 million
- Management's revenue guidance for the upcoming financial year 2025 is $455 million at the midpoint, missing analyst estimates by 3.6% and implying 5.4% growth (vs 9% in FY2024)
- Free Cash Flow of $14.62 million is up from -$58.73 million in the previous quarter
- Net Revenue Retention Rate: 106%, in line with the previous quarter
- Gross Margin (GAAP): 66.7%, up from 63.7% in the same quarter last year
- Market Capitalization: $1.22 billion
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 unremarkable over the last two years, growing from $90.69 million in Q4 FY2022 to $110.7 million this quarter.
Zuora's quarterly revenue was only up 7.4% 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 $820,000 in Q4 compared to $1.80 million in Q3 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's guidance suggests that Zuora is expecting revenue to grow 5.5% year on year to $108.8 million, slowing down from the 10.6% year-on-year increase it recorded in the same quarter last year. For the upcoming financial year, management expects revenue to be $455 million at the midpoint, growing 5.4% year on year compared to the 9% increase in FY2024.
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 106% in Q4. This means that even if Zuora didn't win any new customers over the last 12 months, it would've grown its revenue by 6%.
Despite its recent drop, 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.
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 66.7% in Q4.
That means that for every $1 in revenue the company had $0.67 left to spend on developing new products, sales and marketing, and general administrative overhead. Zuora's gross margin is poor for a SaaS business and it's dropped significantly since the previous quarter. This is probably the exact opposite of what shareholders would like to see.
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 $14.62 million in Q4, turning positive over the last year.
Zuora has burned through $27.97 million of cash over the last 12 months, resulting in a negative 6.5% free cash flow margin. This low FCF margin stems from Zuora's constant need to reinvest in its business to stay competitive.
Key Takeaways from Zuora's Q4 Results
Zuora focused on profitablity and turned free cash flow positive year on year, which is is a positive sign. On the other hand, its full-year revenue guidance was below expectations and suggests a slowdown in already sluggish sales growth. Overall, this was a mediocre quarter for Zuora. The stock is up 5.4% after reporting and currently trades at $9.05 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 , and analysts expect growth to deteriorate from here. And while its customers spend noticeably more each year, which is great to see, the downside is its customer acquisition is less efficient than many comparable companies. On top of that, its growth is coming at a cost of significant cash burn.
Zuora's price-to-sales ratio based on the next 12 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, we think there might be better opportunities in the market and at the moment don't see many reasons to get involved.
Wall Street analysts covering the company had a one-year price target of $12.50 per share right before these results (compared to the current share price of $9.05).
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