Zuora (NYSE:ZUO) Beats Q1 Sales Targets

Full Report / July 01, 2022
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Subscription management platform Zuora (NYSE:ZUO) reported Q1 FY2023 results topping analyst expectations, with revenue up 16% year on year to $93.1 million. Guidance for the full year also exceeded estimates, however the guidance for the next quarter was less impressive, coming in at $97.5 million, 1.96% below analyst estimates. Zuora made a GAAP loss of $23.1 million, down on its loss of $17.6 million, in the same quarter last year.

Zuora (ZUO) Q1 FY2023 Highlights:

  • Revenue: $93.1 million (1.03% beat)
  • EPS (non-GAAP): -$0.03 vs analyst estimates of -$0.01
  • Revenue guidance for Q2 2023 is $97.5 million at the midpoint, below analyst estimates of $99.4 million
  • The company reconfirmed revenue guidance for the full year, at $404 million at the midpoint
  • Free cash flow of $3.72 million, down 51.2% from previous quarter
  • Net Revenue Retention Rate: 110%, in line with previous quarter
  • Gross Margin (GAAP): 61.1%, up from 59.2% 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 year, growing from quarterly revenue of $80.3 million, to $93.1 million.

Zuora Total Revenue

This quarter, Zuora's quarterly revenue was once again up 16% year on year. We can see that the company increased revenue by $2.5 million quarter on quarter. That's a solid improvement on the $1.46 million increase in Q4 2022, so shareholders should appreciate the acceleration of growth.

Guidance for the next quarter indicates Zuora is expecting revenue to grow 12.7% year on year to $97.5 million, slowing down from the 15.3% 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 16% over the next twelve months.

Large Customers Growth

You can see below that at the end of the quarter Zuora reported 746 enterprise customers paying more than $100,000 annually, a decrease of one on last quarter. We have no doubt shareholders would like to see the company regain its sales momentum.

Zuora customers paying more than $100,000 annually

Product Success

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 Net Revenue Retention Rate

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. Trending up over the last year, this is 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 61.1% in Q1.

Zuora Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.61 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 follow 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 $3.72 million in Q1, down 56.8% year on year.

Zuora Free Cash Flow

Zuora has generated $5.34 million in free cash flow over the last twelve months, 1.48% of revenues. This FCF margin is a result of Zuora asset lite business model, and provides it with at least some cash to invest in the business without depending on capital markets.

Key Takeaways from Zuora's Q1 Results

With a market capitalization of $1.17 billion Zuora is among smaller companies, but its more than $452.5 million in cash and positive free cash flow over the last twelve months give us confidence that Zuora has the resources it needs to pursue a high growth business strategy.

Zuora topped analysts’ revenue expectations this quarter, even if just narrowly. That feature of these results really stood out as a positive. On the other hand, it was unfortunate to see that the revenue guidance for the next quarter missed analysts' expectations and there was a slowdown in new contract wins. Overall, it seems to us that this was a mixed quarter for Zuora. The company is up 1.04% on the results and currently trades at $8.69 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 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, but at least that growth rate is expected to increase in the short term. And while its customers spend noticeably more each year, which is great to see, unfortunately 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 2.9x, 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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