• Subscription Revenue: $104 million, up 9% year-over-year.
• Non-GAAP Operating Income: $25.6 million, representing a 22% operating margin.
• Adjusted Free Cash Flow: $12.2 million.
• Rule of 40: Achieved a score of 31.
• Professional Services Revenue: $11.3 million, a 10% decrease year-over-year.
• Non-GAAP Subscription Gross Margin: 82%, up over 125 basis points year-over-year.
• Non-GAAP Blended Gross Margin: 73%, an increase of over 260 basis points year-over-year.
• Dollar-Based Retention Rate (DBRR): 104%, flat quarter-over-quarter, down three points year-over-year.
• Total Remaining Performance Obligations (RPO): $577 million, growing 14% year-over-year.
• Annual Contract Value (ACV) Customers: 445 customers with ACV at or above $250,000.
• ARR: $412.3 million, growing 7% in Q2.
• Cash and Cash Equivalents: $543 million at the end of the quarter.
• Guidance for Q3: Subscription revenue of $104.5 million to $105.5 million; Total revenue of $115 million to $117 million.
• Full Fiscal Year 2025 Guidance: Subscription revenue of $414.5 million to $416.5 million; Total revenue of $455.5 million to $461.5 million.
• Adjusted Free Cash Flow Guidance: $82 million or greater for the full year.

• Warning! GuruFocus has detected 4 Warning Signs with ZUO.

Release Date: August 21, 2024

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

Positive Points

• Zuora Inc (NYSE:ZUO) reported a 9% year-over-year increase in subscription revenue, reaching $104 million.
• The company exceeded its guidance for non-GAAP operating income, achieving a record operating margin of 22%.
• Zuora Inc (NYSE:ZUO) generated an adjusted free cash flow of $12.2 million during the quarter.
• The company successfully onboarded Canva as a new customer, highlighting its ability to meet complex billing and revenue needs.
• Zuora Inc (NYSE:ZUO) was recognized as a leader in the Magic Quadrant for recurring billing applications by Gartner, affirming its market leadership.

Negative Points

• Professional services revenue decreased by 10% year-over-year, indicating potential challenges in this segment.
• The dollar-based retention rate (DBRR) decreased by three points year-over-year, primarily due to churn.
• The company revised its ARR growth guidance to approximately 6%, reflecting a cautious outlook amid challenging macroeconomic conditions.
• Zuora Inc (NYSE:ZUO) faced high levels of deal scrutiny and elongated sales cycles, impacting new business growth.
• The number of customers with an annual contract value at or above $250,000 decreased sequentially, suggesting potential consolidation or churn.

Q & A Highlights

Q: Tien, on the total monetization point, you noted business model changes, particularly around consumption billing. What's the plan to take advantage of that from a monetization perspective? A: Tien Tzuo, Founder and CEO: Total monetization allows us to continue our journey, almost as an act two. Initially, we offered billing for pure subscription businesses. Now, as recurring revenue models become more prevalent, companies are blending different business models. It's not just about subscriptions but also consumption, one-time fees, and outcome-based fees. This opportunity allows us to go beyond billing and subscription revenue, resonating well with our customer base and analysts.

Q: Todd, regarding the revisions lower on ARR and NRR for the year, how much of that is added conservatism versus anything specific you saw in the quarter? A: Todd McElhatton, CFO: We want to be prudent with our forecast. We have some significant deals in our install base, and timing can be challenging to predict. We aim to provide guidance that we are confident in achieving. Despite the environment, we raised our revenue and non-GAAP operating margin guidance, indicating other ways we are monetizing our business.

Q: Jeff, regarding Canva, what was the competitive landscape there, and what was the internal environment? A: Tien Tzuo, Founder and CEO: Canva had a homegrown system that worked when they were smaller. As they grew, their needs became more complex. They evaluated the market and chose us due to our differentiating technologies, ensuring they wouldn't need another system implementation in a few years.

Q: Joshua, regarding the ARR guidance update, are you pulling back more on new customer activity expectations or cross-sell? A: Todd McElhatton, CFO: It's balanced between both new customer activity and cross-sell, reflected in our DBRR guidance of 103% to 104%. We see headwinds in both areas.

Q: Joseph, can you provide an update on Togai and the product set's ability to capture the opportunity around consumption-based pricing with AI? A: Tien Tzuo, Founder and CEO: Togai is integrated into our Advanced Consumption Billing, one of our fastest-growing products. It enhances our metering and rating capabilities, crucial for consumption-based billing. The integration strengthens our product vision, gaining positive traction with customers and prospects.

For the complete transcript of the earnings call, please refer to the full earnings call transcript.