Zuora (NYSE:ZUO) Posts Better-Than-Expected Sales In Q3, Next Quarter Sales Guidance Is Optimistic

Full Report / December 01, 2021
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Subscription management platform Zuora (NYSE:ZUO) announced better-than-expected results in the Q3 FY2022 quarter, with revenue up 15.5% year on year to $89.2 million. Guidance for next quarter's revenue was $90.5 million at the midpoint, 2.88% above the average of analyst estimates. Zuora made a GAAP loss of $22.8 million, down on its loss of $16.7 million, in the same quarter last year.

Zuora (ZUO) Q3 FY2022 Highlights:

  • Revenue: $89.2 million vs analyst estimates of $86.5 million (3.1% beat)
  • EPS (non-GAAP): -$0.02 vs analyst estimates of -$0.03
  • Revenue guidance for Q4 2022 is $90.5 million at the midpoint, above analyst estimates of $87.9 million
  • Free cash flow was negative $1.65 million, compared to negative free cash flow of $4.35 million in previous quarter
  • Net Revenue Retention Rate: 110%, in line with previous quarter
  • Customers: 720 customers paying more than $100,000 annually
  • Gross Margin (GAAP): 59.9%, up from 56.9% 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.

The subscription revenue model benefits both customers and the companies, making products available for low upfront investment and generating predictable revenue stream. Subscription products are on the rise, and so is the demand for billing and payment platforms to manage them.

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 measured over the last year, growing from quarterly revenue of $77.2 million, to $89.2 million.

Zuora Total Revenue

This quarter, Zuora's quarterly revenue was once again up 15.5% year on year. But the growth did slow down compared to last quarter, as the revenue increased by just $2.74 million in Q3, compared to $6.15 million in Q2 2022. We'd like to see revenue increase by a greater amount each quarter, but a one-off fluctuation is usually not concerning.

Analysts covering the company are expecting the revenues to grow 11.9% over the next twelve months, although estimates are likely to change post earnings.

Large Customers Growth

You can see below that at the end of the quarter Zuora reported 720 enterprise customers paying more than $100,000 annually, an increase of 26 on last quarter. That is quite a bit more contract wins than last quarter and quite a bit above what we have typically seen lately, demonstrating that the business itself has good sales momentum. We've no doubt shareholders will take this as an indication that the company's go-to-market strategy is working very well.

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 Q3. 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 59.9% in Q3.

Zuora Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.59 left to spend on developing new products, marketing & sales and the general administrative overhead. While it improved significantly from the previous quarter this would still be considered a low gross margin for a SaaS company and we would like to see the improvements continue.

Key Takeaways from Zuora's Q3 Results

With a market capitalization of $2.46 billion Zuora is among smaller companies, but its more than $203.3 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.

We were very impressed how strongly Zuora accelerated the rate of new contract wins this quarter. And we were also glad that the revenue guidance for the next quarter exceeded analysts' expectations. On the other hand, revenue growth is overall still a bit slower these days. Overall, we think this was a really good quarter, that should leave shareholders feeling very positive. The company is up 3.03% on the results and currently trades at $19 per share.

Is Now The Time?

Zuora may have had a good 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. 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 6.1x, 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.

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