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Zuora (NYSE:ZUO) Surprises With Q2 Sales, Stock Soars


Full Report / August 25, 2021
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Subscription management platform Zuora (NYSE:ZUO) reported Q2 FY2022 results beating Wall St's expectations, with revenue up 15.3% year on year to $86.4 million. Zuora made a GAAP loss of $23.6 million, down on its loss of $20.1 million, in the same quarter last year.

Zuora (ZUO) Q2 FY2022 Highlights:

  • Revenue: $86.4 million vs analyst estimates of $83.4 million (3.69% beat)
  • EPS (non-GAAP): -$0.04 vs analyst estimates of -$0.04
  • Revenue guidance for Q3 2022 is $86.5 million at the midpoint, above analyst estimates of $85.4 million
  • The company reconfirmed revenue guidance for the full year, at $341 million at the midpoint
  • Free cash flow was negative -$4.36 million, down from positive free cash flow of $8.63 million in previous quarter
  • Net Revenue Retention Rate: 108%, up from 103% previous quarter
  • Customers: 694 customers paying more than $100,000 annually
  • Gross Margin (GAAP): 58.3%, down from 59.2% previous quarter

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 solid over the last year, growing from quarterly revenue of $74.9 million, to $86.4 million.

Zuora Total Revenue

This quarter, Zuora's quarterly revenue was once again up 15.3% year on year. We can see that the company increased revenue by $6.15 million quarter on quarter. That's a solid improvement on the $1.04 million increase in Q1 2022, so shareholders should appreciate the acceleration of growth.

Analysts covering the company are expecting the revenues to grow 10.3% over the next twelve months, although we would expect them to review their estimates once they get to read these results.

Large Customers Growth

You can see below that at the end of the quarter Zuora reported 694 enterprise customers paying more than $100,000 annually, an increase of 17 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.

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 108% in Q2. That means even if they didn't win any new customers, Zuora would have grown its revenue 8% 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.

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 is left after paying for servers, licences, technical support and other necessary running expenses was at 58.3% in Q2.

Zuora Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.58 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 it has dropped significantly from the previous quarter, which is probably the opposite of what shareholders would like it to do.

Key Takeaways from Zuora's Q2 Results

With a market capitalization of $2 billion Zuora is among smaller companies, but its more than $200.9 million in cash and positive free cash flow over the last twelve months put it in a very strong position to invest in growth.

We were very impressed how strongly Zuora accelerated the rate of new contract wins this quarter. And we were also glad to see the improvement in net revenue retention rate. On the other hand, revenue growth is overall a bit slower these days and gross margin deteriorated a little. Overall, we think this was still a really good quarter, that should leave shareholders feeling very positive. The company is up 7.2% on the results and currently trades at $17.55 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 on top of that, unfortunately 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 5.7, 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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