Joon Huh - VP, IR Tien Tzuo - CEO Tyler Sloat - CFO.

Jesse Hulsing - Goldman Sachs Richard Davis - Canaccord John DiFucci - Jefferies Stan Zlotsky - Morgan Stanley.

Good afternoon. My name is Jay and I will be your conference operator today. At this time, I would like to welcome everyone to the Zuora Fiscal Q2 2019 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session.

[Operator instructions] Joon Huh, VP of Investor Relations, you may begin..

Thanks, Jay. Good afternoon and welcome to Zuora’s second quarter fiscal 2019 earnings conference call. Joining me today are Tien Tzuo, Zuora’s Chief Executive Officer; and Tyler Sloat, Zuora’s Chief Financial Officer. You’ll see that we have a more conversational format to our call today and hopefully you like it.

But before we get to that, let me cover some of the legal language. As you know, we finished our second quarter in July and the purpose of today’s call is for us to provide some color on the quarter. We’re also going to provide financial outlook for the third quarter and for the full fiscal year.

Some of our discussion and responses today will include forward-looking statements. So as a reminder, our actual results could differ materially as a result of a variety of factors. You can find information regarding those factors in our most recent Form 10-Q filed with the SEC.

Finally, we will be referring to several non-GAAP financial measures today and reconciliations to the related GAAP measures are included in our earnings release. For a copy of today's earnings release, links to our SEC filings, a replay of today's call or to learn more about Zuora, check out our Investor Relations website at investor.zuora.com.

And now, without further ado, let me turn it over to Tien and Tyler..

Thank you, Joon and good afternoon, everyone. This is Tien..

Yeah. Tyler is here as well..

Thank you for joining our Q2 earnings call. Tyler, can you believe that this is our second earnings call as a public company that’s already been five months since the roadshow and IPO..

I know, Tien. I can’t believe it. It feels just like yesterday. Some mornings, I still wake up and I call [ph], wondering what city I’m in. I know everyone made fun of me, but thank goodness, I had enough grapefruits [ph] to stay healthy and keep the energy up..

Ah, the grapefruits. Yes. It brings back memories. Hey, speaking of the road show, I know there is quite a few folks in the call that we had a chance to meet on the road show and to you all, it’s been a pleasure keeping in touch and for those of you who became public investors in Zuora, a big thank you for being part of our family.

And for the folks in the call brand new to Zuora, a big welcome for all from all the Zers [ph] around the world. Welcome to our journey of building the subscription economy. So for today, we're going to try something just a bit different. We know these earnings calls can often be very dry, very boring.

And we know many of you listeners out there have to sit through a ton of these calls, so we’re just going to try something a little bit different. We're going to make it more of a dialog.

For the first half of the call, Tyler is going to interview me about the state of the business, what we're seeing in the marketplace and then I’m going to turn the tables and I’m going to ask him a few questions about our Q2 numbers and our guidance going forward.

What do you think, Tyler?.

I am ready, Tien. Let’s do this.

So why don’t you kick it off? Are you going to talk about porta potties [ph] again?.

No porta potties for this call sadly. So, we may take a trip to Wauwatosa, Wisconsin..

I can't wait. Let’s do it. So Tien, if you think back five months ago, at our road show, you basically laid out our vision for Zuora and it really boiled down to three things. First, that the shift to subscription economy is a global trend and it’s happening across all industries and all geographies.

Second, Zuora has built the only complete subscription management solution focused 100% on helping companies of all sizes launch, scale and transform into a subscription business. And finally, as a result, we are the portfolio play across the entire subscription economy.

And as a result of that, we have a unique opportunity to deliver sustainable long-term growth and build a great business.

So the question is, if we're doing a road show presentation today, would you be saying the same exact things?.

Well, Tyler, I would say that after two quarters since our IPO, our conviction has only increased. It’s clear that the subscription economy continues to grow and we continue to find new business opportunities across the diverse number of industries all around the world.

And I know, we’ll talk more about the numbers later, but you can see that this macro trend really helped us to deliver another strong quarter of results..

Yeah.

Props, I'm definitely going to go over the results, but before that, can you give us some examples of the growth in the subscription economy?.

Well, the book is a great example..

That’s right. I know you love to talk about the book. Now for the listeners that don't have the background, Tien wrote a book called Subscribed. Why the subscription model be your company's future and what to do about it..

That’s right. Well, we’ve been working on this book for about a year and we finally launched it in June. Now, this is our first book. You hope it does well, but you never know, you have nightmares of all these one star ratings on Amazon, but it turns out that it quickly became a big hit.

As soon as well [ph], they made the national bestseller list on Amazon, LA Times and USA Today..

No. That's awesome and that's actually really, really cool. I walk by a store in New York like a month ago and it’s in the front window, which was really nice to see. So congrats. But explain to me, Tien, how you think the success of the book points to a growing subscription economy..

Well, if you look at how the book has done, it’s really reaching outside beyond Silicon Valley. In many ways, we wrote the book for the rest of the world. Now, you guys all know, we have a whole bunch of SaaS customers. Right? Many of them are seeing tremendous growth as we went public this year.

Big, big congrats to [indiscernible] Pivotal joining our long time success stories like Boston HubSpot. And I know there is quite a few more of our SaaS customers waiting in the wings to go public later this year. But what we've always said is that the subscription business model wasn’t just related to software.

They can really work with any business and the book lays out how it’s transforming a diverse set of industries from retail to media to manufacturing and we really saw from examples from all around the world, Europe, Japan, Australia and of course, here in North America..

Yeah. When I read it, one of the things I loved about the book was all of those examples, from like Husqvarna to Fender, which we talked about those companies.

Is there one story in particular that you'd like to highlight right now?.

Well, I mean, it’s not in the book, but this quarter, we saw another really interesting story. It’s a story around lawn mowers..

Lawn mower subscription. This one should be good..

That’s right. And this is where our story takes us to Wauwatosa, Wisconsin. Now, in Wauwatosa is a company, you’ve probably heard this before, it’s called Briggs & Stratton and they are the world's largest producer of lawn mower engines. They were founded in 1908.

Like a lot of other -- a lot of other industrial manufacturers that we work with, Briggs & Stratton has spent the last few years investing heavily in outbidding older products, in this case, lawn mowers with sensors and connectivity. Now, you might ask, well, so what.

Well, it turns out that Briggs & Stratton sells a lot of commercial landscapers, [indiscernible] large fleets of these lawn mowers. And so what we did is we just helped them launch new IoT platforms. It’s called InfoHub for Commercial Turf. And so now for these commercial landscapers, InfoHub helps these teams track their equipment usage in real time.

Now, visualize all these new data services and help these turf companies do things like slight potential maintenance issues, maximize productivity, reduce costs and increase their profitability.

So when we talk to Briggs and & Stratton today, they talked about going beyond just products, delivering outcomes for their customers and we're helping them transform and embrace this new emerging business model..

Yeah. That's what we've been talking about, right, customer centric business models. So I can see through the Briggs and Stratton smart lawn mower store and others, how far reaching this can be, Tien. And in the future, I think us, our kids, we are going to be able to subscribe to nearly anything..

That's right. And in many ways, we didn’t just write the book for companies that are already subscription, Netflix, Spotify, Salesforce. We wrote the book for the Briggs and Strattons of the world..

Yeah. And it seems to be working..

Absolutely. Look, maybe the uptake of the book, it really points to the huge amount of interest in the market in this new business model. In fact, you know the CEO of a giant consumer goods company who read the book and immediately recommended it to its Chief Digital Officer.

We’re being asked by Fortune 50 companies to present at their internal management meetings. The success of the book really shows that this is growing acceptance of the future business model is not simply about selling duties of your product, but delivering a service, a service that your customers can subscribe to.

On top of that, the book is actually being translated into Chinese, German, Japanese, Korean, Spanish and Viennese and even Turkish..

Tien, you must be crazy. That’s a lot of languages. I didn’t know you spoke some of these languages..

You could try it, Tyler. The book has even been translated into Commonwealth English for the UK and Australia..

Wait. So all the Zs, all became assets..

That’s right. Well, except for Zuora, they look to Z and Zuora alone. By the way, hey, if anybody on the call wants to read the book, Subscribed, email me. Now, Tyler said that he’ll send you a link to the Amazon page, but I might be able to sneak you..

No. We are going to definitely send out Amazon links..

So taking it back to the signs of a growing subscription economy, I do think this is what’s behind some of the numbers that you see in our quarter..

Okay. You can explain that.

So what do you mean?.

Well, I’m talking about the growth numbers. Now, I know you’re going to talk a little bit about the results later, but the growth of the subscription economy, I see this is as what’s behind our 44% year-over-year growth in subscription revenues..

I agree, Tien. The growth was really solid, but you know I need to say that we had some unique factors in the quarter that may not repeat in future quarters..

I know, I know. And we’ll dig into that later. Because it’s not just that, the subscription economy is also behind our 47% year-over-year growth in total revenue or the 28% growth in customers spending over $100,000 with us annually.

And of course, you can also see in the growth of the transaction volume, I know, this is one of your favorite metrics, right, that our customers are putting through our system, processed invoice volume for Zuora billing grew 41% year over year to over $7.5 billion this quarter.

Now, all these numbers really point to a steady remarkable growth of a subscription economy..

Yeah. So, I get the broad secular shift that is happening and we're actually hitting the marketplace, I feel, right at exactly the right time. Subscription models or customer centric business models as we’d like to call them, seem to be on the mind of every CEO, CFO and CIO out there.

But you know Tien, you've also been known to say that in this new world, legacy systems from companies like Oracle and SAP, they just don't work anymore..

I know, I know. I have been quoted as saying that ERP is dead. A bit controversial, I know, but what I mean by that is ERP systems, I mean, they were accretive for building and shipping and selling products to all business models.

And this is why we saw an opportunity to be the provider of software that enables any company in any industry to successfully launch, manage and transform into a subscription business..

Okay.

Well, why don’t you give us an example there?.

Well, when it comes to how we help companies, we don't just have one flagship product. We actually have two, Zuora billing and Zuora retro. So why don’t I start with an example around billing.

Our flagship billing product powers a pricing and packaging strategy that drive company’s growth, automating the recurring ordering invoice and collections processes. Now, for today, since we’re mainly talking to investors and asset managers on this call, so let me tell a story of Fidelity.

Now, you guys all know them as one of the largest asset managers in the world. Now, this story takes us to Radnor, Pennsylvania where this quarter, we deployed Zuora billing at e-money advisor. It’s a company that’s owned by Fidelity Investments. And to give you a little background here, e-money serves the top financial advisors in the country.

They have a suite of solutions around financial planning and wealth management, enabled with 50,000 B2B customers and they are growing like crazy. Now, given what they do, these aren’t one-time sales. These are long term contracts.

And as your customers grow, these contracts are constantly changing and it’s these contract changes and amendments where they encounter significant problems. I mean, every time they needed to change, they record a cancellation of the existing contracts and accretion of a new contract because of the limitations in their system.

This is causing billing delay, customer computing, invoicing errors, bad metrics and ultimately it really limited their ability to scale. So in our Zuora billings, today, we’re handling all their subscription management needs, pricing, rating, billing, invoicing, truly enabling their growth.

Direct digital services, that’s something you generally associate with big financial services firms, but this is all changing..

Yeah. I think it is all changing. That story really exemplifies what we're seeing from a ton of our customers, as they go through these business transformation changes, right and that leads to a need for Zuora billing, which is great. So that’s example of Zuora billing, what about Zuora retro.

What’s going on there?.

Well, since you asked, why don’t we move from financial services to hardware and let’s come back to the Fayette area and let’s talk about Hitachi Vantara. Now, a lot of these big hardware companies, like a lot of them, Hitachi is really trying to diversify their revenue with software and digital services. And this is where Hitachi Vantara comes in.

These guys provide data center solutions, IoT, big data solutions. And as they go through this digital transformation moving towards these consumption based business models, they're facing a lot of the same complexities and challenges. But in this case, it was around billing, it was around revenue recognition.

All the work around revenue recognition was being done manually, offline, sales reps and thinking of just way too many resources. In fact, Vantara had over 50 to 60 revenue accountants around the world, just to keep up with all these contract changes and amendments.

Now, you throw in statutory compliance, different international regulations, IFRS 15, ASC 606, it was just too much.

And so, Hitachi Vantara returned to Zuora retro because they realized that we were the only provider with both the knowledge and a proven track record and a technology that can scale with their business, all while letting them hit their aggressive time lines..

Got it. So now I guess, a business model complexity that leads to a need for a kind of new quote to cash subscription management systems as well as revenue automation systems and that's really why we have these two products and why we think they're so synergistic. And this complexity is happening across a wide variety of verticals.

So since it's so broad, Tien, I know, investors are curious about how we find these customers like Briggs & Stratton, e-money, and Hitachi Vantara. They're so different. It might make sense for you to explain our sales model a little..

It’s another good point, Tyler. I mean when you think back on the road show, most of you remember that we’re a SaaS company, we have a classic SaaS company model, where we sell primarily direct sales model. But these days, what all these folks are starting to see, we’re also starting to see best partners bring us into deals.

I mean, it’s still early days, but these relationships are growing as more of the clients are going through the digital transformations. In fact, let me give you a good example from this quarter. And for this, let’s travel back to Pennsylvania. This time to Philadelphia.

So Clarivate Analytics is $1 billion B2B company and they recently spun out of Thomson Reuters’ IP and Science Division. They focused on the entire innovation lifecycle and they provide trusted insights and analytics for all things ranging from scientific and academic research to intellectual property services to plan protection.

Now, the key here is because Clarivate is spinning out of Thomson Reuters, this gave Clarivate this unique greenfield opportunity to start fresh with a whole new set of systems. And as they looked at their architectures, they thought, well, why would we tie ourselves to the same ERP systems that we were stuck with at Thomson Reuters.

Why would we spend millions of dollars of hardcore of all customizations needed to make SAP work, especially since we're a subscription business, not a part business. And so in this case, they turned to Deloitte Digital as the leader in four of their, as a transformation partner and that’s when we came in.

Because as an alternative to these premise based ERP systems, Deloitte provided Clarivate a new architecture, 100% cloud designed specifically for subscription businesses and it had Zuora billing included as part of the platform, which also included things like Salesforce.com and the cloud based General Electric.

Now, we think that this is where the world is going to a modern three cloud architecture that enables companies to driving new dynamic business models and gives them a chance to get out of their SAP, Oracle traps..

That’s a great story, Tien. Thank you. And I know there's a lot of positive energy around our GSI partnerships as well as the smaller partners that we have. So hopefully, this is the start of many more opportunities to come. What I like about these stories is how diverse they all are..

That’s right. Well, for diverse companies, a lot of initiatives..

I mean, if I look at the customers that you talked about this quarter and last quarter, I mean, we have consumer equipment companies, financial services companies, hardware OEMs, business services, utilities, energy and I mean, even porta potties, right and there's even more stories in the book.

They all underscore how diverse our customer base is, how universal and broad based the whole subscription economy really is..

Well, I know that you like to point out that half our business is coming from non-technology customers..

That's right. I mean, the tech sector continues to grow and it’s a really strong, strong book of business for us, but our non-tech customers are half of our business and we see that trend continuing line of sight for a very long time. So Tien, we talk about billing, we talked about RevPro. Let’s switch gears a little bit.

Now, a key part of our growth form is how we expand with our customers. Right? We do this in a couple of different ways, but primarily through cross sells and up sells of add-on products and transaction volume as you know. This expansion is reflected in our dollar base retention, which stayed flat at 112% in Q2, which we think is really helping.

I should remind folks that on the last earnings call in Q1, remember this Tien, we said our business would naturally land between 108% to 112% and we still think that’s the range where our business will settle long term, but given where we are right now and trending in the first half of the year, we may end up closer to the higher end of the range for fiscal year ’19.

So what's driving all this? In Q2, we continued to improve retention rates and had strong upsell activity, especially from transaction volumes who represented more than half of the upsell revenue?.

No. I love the transaction volume growth aspect of our business. Now, I think we may have some new books on the call. I want to spend just a little time describing what that is..

Yeah. I think that’s a good idea. So our Zuora billing customers purchase annual blocks of transaction volume on top of a platform fee. And the transaction volume is technically measured as a posted invoice volume processed by our customers that run through Zuora billing.

So because we think this shows the extent that customers are really using us to run their businesses and if the totals continue to grow, it is an indicator that we will grow with our customers. It’s a core usage metric for us.

And as you said earlier, we had another solid quarter of transaction volume growth of 41% year over year to 7.5 billion in the quarter.

Now on upsell, we may start with a small division or a business unit for some of our strategic clients, but because our product is so mission critical and core to their strategic initiatives, we can eventually demonstrate value in other divisions once we prove success there and this allows us to expand into a larger customer footprint.

We are also really patient, understand that for some of our customers, as you know, these business model shifts, they’re going to take years to take hold. The time frame is completely open ended as we want to work with these companies for decades..

Very true, very true. When I think about it, this last quarter, I think Continuum is actually a great example of this. Now, Continuum is not a security and backup solutions company. They focus on managed service providers. And they’re based in Boston, the home of [indiscernible].

They started working with us first with Zuora billing in just one of their divisions, R1Soft, which at the time, represented 5% of continuing revenues. This I think was a couple of years ago and the rest of Continuum’s revenues continue to run through home grown billing system.

Now, recently, Continuum, as a company, they’ve been out here and this is when they realized that this home grown system, it just couldn’t handle their 35% annual growth rate.

And so, we already had Zuora running for a small part of their business, it was upto us to convince their management team that’s putting all the revenues of Zuora to help them scale through the significant growth they expected over the next few years.

So today, the company is set up to run 100% of its business in Zuora, which allows us to grow within that..

I think that’s a great story. It totally epitomizes how we can grow with our customers and then we actually have multiple paths for expansion, this highlights one of them.

So Tien, if I pause right here, how would you sum up the quarter?.

Well, I would say sitting here, for Q2, looking back to the last 90 days, obviously, we continue to see stories like the ones we just shared, across industries and across geographies and I’ve said earlier, the common threat here is that all these companies are finding new growth opportunities in these new business models. And this is what we enabled.

And for our investors, this is why we believe that Zuora is truly a portfolio play across the entire subscription economy. Now on that, let’s switch roles a bit. And let me ask you some questions about our Q2 financial results..

All right. Well, I’ll get in the hot seat. Go for it, Tien..

All right. Why don’t we start with our – let me start with our key metrics? Now, we already touched on dollar based net retention. It was 112% this quarter. Anything else you want to say about that..

No. We’re pleased with that number and there's nothing really else to add, except that we feel really good about how it’s trending and I just want to remind folks that we may end up of course to the high end of that 108 to 112 range for the year..

Okay. And how about our second key metric, customers spending over $100,000 ACV or annual contract volume.

Can you talk about that?.

Yeah. Of course, so we told customers that we think this metric is a good proxy for our long term growth. And since this customer base represents over 80% of our ACV, it represents a majority of our business.

So, Tien, as you mentioned earlier, we saw a 28% growth year over year and we ended the quarter with 474 customers in this segment, for Q2, which we think is a really healthy growth rate for us..

Okay. So strong retention, good growth in customers, alliance of the story we talked about earlier. But I'm sure the folks are also interested in digging into the core financial metrics. Why don’t we start with revenue? Subscription revenue growth last year was 44% year-over-year, last quarter was 44% year over year.

How about more color on that?.

Yeah. So we're obviously very happy with the year-over-year growth in subscription revenue. Subscription revenue growth is a lagging indicator of overall ARR growth, which we are happy with as well.

But when you look at the sequential trend for subscription revenue from Q1 to Q2, I mentioned there are some things that we should talk about and there are a few non-recurring factors that impacted the numbers that I shall explain. So, first, our fiscal Q2 had three more days than Q1.

So we pick up additional revenue, which makes the quarter over quarter compare look stronger. For example, if subscription revenue was exactly the same, we would have shown about 4% quarter-to-quarter growth due to those extra days. .

Three extra days makes that big a difference and that was a surprise..

I know. But it’s right. It makes that difference. Now, both Q3 and Q4 have a same number of days as Q2. So this will not repeat throughout the year. Second, so I just talked about the days. Second, you may remember, we closed our acquisition of Leeyo last year. This quarter, we benefited from the increased recognition of deferred revenue related to RevPro.

As a part of M&A accounting, most of the RevPro deferred revenue was eliminated at transaction close and has been building back up as we start to build these customers. This had a positive impact in Q2 and in fact, we’ll continue to see this impacting our year over year growth for the next few quarters. And then third, so third thing, timing of deals.

As we often see in Q2, business tends to get done earlier in the summer before people leave on holidays. So we saw a few more deals close earlier in the quarter as compared to other quarters. So, our Q2 deals contributed slightly more to revenue than in a normal quarter..

Got it. So operationally, we had a strong quarter, albeit with some unique factors contributing to our strong subscription revenue..

That’s right..

Okay. Let’s talk about revenue from professional services. I saw that it grew 53% year over year. Now, that’s pretty good. But the year over year growth in Q1 was over 100%.

So what’s going on there?.

Yeah. Sure. Part of this goes back to the Leeyo acquisition again, because with that acquisition, our professional services revenues jump. And so for the last four quarters, we've seen big year over year numbers, because that Leeyo professional services number was not in the prior year compare.

But as we hit the one year anniversary of the acquisition, we're going to see the growth come back in the line. In addition, we've been having a lot of professional services revenue relating to helping customers move from ASC 605 to ASC 606.

These are existing customers upgrading and that’s unrelated to us bringing on new customers and that – we’re pretty much done with that now. That's really starting to dissipate. This is why, as we said on our last call, that quarterly professional services revenue remained relatively flat through this year and start to grow again early next year..

Okay. So that’s the revenue side. The transition, let’s talk about how we did on the expense side..

Yeah. Sure. Thanks. So we're obviously continuing to invest in the business. It's really important. We have a huge opportunity ahead of us as company shifts to a subscription economy. Our number one goal is to position the company for staying long term growth.

At the same time, we also said we will be disciplined and continue to become more and more efficient with a constant focus on moving towards profitability..

That’s right. This is one of our key messages on the road show..

Yeah. And it's really important and our Q2 numbers really reflect this. So let me take a minute to touch on a few of the expense highlights I think are important.

But before I do that, Tien, before I do that, let me remind everyone that most of the commentary will focus on non-GAAP numbers, which exclude the impact of stock based compensation, amortization of acquired intangible and capitalization and amortization of internal used software and also final reminder on the financial impact of the Leeyo acquisition, we closed the transaction on May 31, 2017 and as such, only two months of Leeyo financials were included in Q2 last year..

That’s a lot of reminder..

I know it’s a lot of reminders, but I wanted to make sure I got that out. So let me go on. Here are the highlights.

In general, expenses came in as we had planned with the exception that we did have some spend that was shipped to the back half of the year and we spent over the last, and that’s something that’s going to shift into the back half, including a few systems implementations. Internal systems implementations.

So non-GAAP subscription gross margins improved slightly to 78% in Q2, as we had expected, driven by higher subscription revenue and ongoing efficiencies in our data center spend.

Now, in regard to subscription gross margin, we're really happy with this, but I think the average subscription margin for the first half of the year is more in line with where we will end up for the full year.

For professional services, our non-GAAP gross margins for the first half of the year were more or less breakeven, which is in line with our plan and expectation on how we run that business. And then, on our overall non-GAAP operating margin, we improved by 5 percentage points..

So again, investing for growth and becoming more efficient..

That’s exactly right. Now, let me give you another example, Tien. If you look at our sales and marketing efficiency ratio, which as you know, we call our growth efficiency index, this continued to improve as we reduced it to 2.1 in Q2, down from 2.2 in Q1.

This is measured by comparing our trailing 12 months non-GAAP sales and marketing expense versus the year over year increase in trailing 12 months subscription revenue. The lower the ratio, the better. We hold ourselves accountable through this efficiency metric and manage the business for ongoing improvement..

That is really good. So what about cash? Our free cash flow, I saw, improved compared to the prior quarter.

Now, what do you see for the coming quarters?.

Yeah. Free cash flow improved by over 2 million versus Q1 with negative 7.3 million for Q2. So a lot of this improvement was driven by stronger collections. We did a great job and the team worked really hard there. There is some delays in the number of expenses, which I just talked about.

They’re going to get pushed out to the second half of the year and then there's some timing of some employee cash disbursements that are in our accrued liabilities, that are in our balance sheet.

But as you mentioned, we will continue to invest through the remainder of the year and we expect free cash flow for all of fiscal year ’19 to be around negative 42 million..

I was thinking. This is another metric that we sometimes talk about billings and I know this is controversial. I mean, we want investors to focus on the trailing 12 month billing number. The quarterly number seems to still get a lot of attention.

Why don’t you talk to how we think of billings?.

You put a lot of the quarterly number. But first, let me back up. First, I should say, historically, calculated billings and actual billings track pretty closely. Now, the calculated billings computed as in period revenue plus a change in deferred revenue. So, it’s a standard example.

When it comes to billings, because of quarterly number can fluctuate, we taught everyone to focus on the trailing 12 months billings. We believe that will give investors a better sense of how the business is trending over time. So in Q2, trailing 12 months calculated billings is 228.4 million, was 57% growth year over year.

And if you use professional services revenue, as a proxy for professional services billings, which actually lines up pretty closely, this implies calculated trailing 12 month subscription billings of 165.8 million or 42% growth. So, do know that the year on year growth numbers are impacted by the inclusion of RevPro, starting in Q2 of last year..

Okay.

So focused on our trailing 12-month billing?.

That's right..

And then given the impact of the Leeyo acquisition on a year-over-year growth of billings and anything you want to say about go forward expectations?.

Yeah. Sure. So we're not planning to regularly talk about going through the expectations, but given the acquisition impact, I think it's important to provide some color. So for fiscal ’19, this year, we expect calculated billings for the trailing 12 months to grow in the low 30s percentile.

And in general, we think trailing 12 months subscription billing will settle over time and kind of align with our long term growth rates of 25% to 30%..

Good. Now, we started touching on some forward looking numbers.

Why don’t we summarize our guidance for the rest of the year? What do you think?.

Yeah. Let’s do it. So we are two quarters into the year and we've executed well. As I mentioned earlier, we do have some expenses that are being pushed into the second half of the year, but based on all the information we see, here's how the rest of the year looks. As we're taking up our projections. Yeah. So let’s start with Q3.

For Q3, we're currently expecting total revenue of 58.3 million to 59.3 million, subscription revenue of 42 million to 42.5 million, non-GAAP operating loss of 13.5 million to 12.5 million and non-GAAP net loss per share of $0.14 to $0.13 and that assumes weighted shares outstanding of approximately 106 million..

Now, Tyler, you are really putting this out there. Are you sure with these projections? I mean, don’t forget I am out here on the limb with you too..

You’re on the limb. I’m on the limb, our employees are on the limb. But based on everything we see and certainly anything can happen, but the overall economy can get worse and start like, we feel really good and this is what we are seeing today. Now how about for the year. Well, obviously, the change in Q3 is going to ripple through the whole year.

So for the whole year, fiscal ’19, we're currently expecting total revenue of 227 million to 230 million. Subscription revenue of 163 million to 164.5 million, non-GAAP operating loss of 52 million to 50 million and non-GAAP net loss per share of $0.61 to $0.59 and that assumes weighted shares outstanding of approximately 91.2 million.

So I got through guidance, got through most of it. Now, Tien, I’m going to switch it back to you and I have a question, as we get this question a lot from our investors..

All right. Fire it..

So, Tien, when you think about it, and you digest all this stuff and you think about the business that we build and the market that we are playing, what do you think Zuora’s sustainable growth rate is or more probably what are your thoughts on sustainable growth for beyond this year and long term?.

Well, as I said in the beginning, we really see that we have not [indiscernible] long term sustainable company. Right. And the reason for that is we are the portfolio play on the entire subscription economy. We bought the business. So the companies involve industries around the world, succeed in a subscription company.

But what we believe is that we are still in the very early innings of the digital transformation. It’s going to play out not just over the next few years, but really over the next few decades. So, we expect our long term growth to grow as the market grows. And so we see the market is growing at 25% to 30% annual growth over a long period of time..

Great. Thanks, Tien. I think that pretty much wraps it up.

Joon, do you think we should open up the phone lines so that others might ask questions now?.

I think so. Let’s do it. All right. Jay, I think we’re ready for questions..

[Operator Instructions] Your first question comes from Jesse Hulsing with Goldman Sachs..

Yeah. Thank you. I actually don't have anything guys. You did a really good job in answering every questions.

So Tien, one thing that you meant -- one thing that’s interesting about your model is you help a lot of newer businesses take off, whether they’re divisions of large non-tech corporates or perpetual license companies transitioning to subscriptions.

I’m curious, or a smaller SaaS company, I’m curious if you’re starting to have conversations with either larger SaaS companies or larger consumer subscription companies or cable companies or Netflix or someone like that about replacing their homegrown subscription billing solutions?.

Yeah. Absolutely. We really play in both environments, right, what you’ll call a [indiscernible] sometimes, these are homegrown solutions, sometimes, these are legacy telco billing solutions. And we’re also playing in greenfield environment where maybe it’s a launch of a new product or they have a whole bunch of manual processes.

If you think back about the story, the Continuum story, it was really interesting and where we started off in one group. Again, it was small, 5% of the revenues, that was more of the greenfield opportunity.

But then we had to go back in and talk to the parent company if you will, and to replacing an existing homegrown system that’s been in place for a long time with the new one. And obviously, when I look back in the quarter, there's a healthy mix of both activities..

And on the inorganic contribution from anniversarying Leeyo, roughly, how much did that help out subscriptions and how much do you think it will help out subscriptions in the second half? Thank you..

On the anniversarying, so as you know Jesse, that builds back up, right and the deferred revenue goes away and we've been building it back up. We haven't called out exactly how much that's going to add in, but we're getting through it and we'll get through the compares over the next couple of quarters..

Your next question comes from Richard Davis with Canaccord..

I think you guys have some sort of mind reading e-mail system, because literally as I was working up a question on California bills 313, I get an inbound e-mail from you guys. So that's a little bit spooky, but anyway, could you at least? It is like epic. I don't know. I guess those eyes on the wall are moving around.

Anyways, but now, but seriously, it is probably a topic that people want to know, is it a headwind to kind of the subscription economy? I mean, you can -- if you can flush it out, that would be super helpful? Thanks..

Yeah. So the new California legislation is as, you got a lot of customers cancel their subscriptions, right in an online interface. Look, if you think about it, people say, subscription has been along forever. But it’s not exactly true.

I mean, it seems about 20, 30 years ago, yes, there are at least like Book of the Month Club, Columbia House, right, 13 CDs we’re paying. But we actually have a whole section of the book dedicated to this, but these were relying on lazy customers, right, so called negative option. We’re making it really, really hard for them to cancel.

And that’s not what the moderate subscription economy is about. Right. The moderate subscription economy is getting customers new freedom, new capabilities, new power to do things that they just couldn’t do before.

And I think what you’re seeing, whether it’s built 313 California, whether it’s changing accounting rules of ASC 606 is that that’s the subscription economy as these new business models ripple through, right, the fabric of our society, you’re going to see that new regulations, new rules, new etiquettes, new policies, new ways of doing business that will ripple through it.

And so, we really just saw this as a positive sign that of the importance of this new business model. And we think the new business models is the focus on the customers first. Then, these are the things that companies were always doing anyway..

Our next question comes from Scott Berg with Needham & Company..

Hi. This is Ryan for Scott Berg. Loved the new format of the call here.

But I guess, if you can provide -- what are some of the main observations I guess you had coming out of the user conference in June, and have you started to see additional demand for some of the modules beyond the core billing and RevPro, any sort of color on that would be great? Thanks..

Yeah. I would say if you look at our four core lines of revenue if you will, right, we have billing, we have RevPro, we have the upsells and that’s broken up, as we said in the roadshow into volume increases and add-on products. I mean, we’re probably most excited about, but it’s the most nascent part of the add-on product.

And so we got a lot of people express interest in our new collect products and a lot of apps that we have in the connect marketplace, all right. But, our focus is really saying there's so much greenfield opportunity there in the subscription economy.

Let’s make sure we continue to focus on new business logos and so that's why we’re going to continue to show right the growth in our customer base as represented by the key metric, customers over 100K, because there is a big, big opportunity out there and we need to make sure that we’re there.

But the user conference obviously was, it is always just incredibly motivating, incredibly energized and new experience with our customers. And I know, they're pretty pumped up about the things that we're doing..

Got it. And then just maybe one quick follow up, I guess, it's great and I know you’re working more with some of the SIs. Do you think this helped accelerate business in some of those more non-core tech verticals as well, I know it’s about a 50-50 mix right now..

Yeah. So, you guys know, right, it’s hard to point to a successful multibillion dollar software company that’s as long as that size. And so we do see this as incredibly strategic. I do think it's early days, right. We're not a like to like rip and replace, take this client server version out and put the SaaS version in.

So, there's a little bit of vandalism. There's a bit of education that has to happen. And so, that takes time to do with the partners. We kind of point to digital information as one of the big areas where the collaboration can be really, really strong, right.

Digital transformation, eventually, these are the business model transformation and that leads to customer centric business models, that lead to a new stack that needs to be in place.

And the storage of Deloitte that we wanted to share was, when they realized that a whole new stack has to go into place to drive these new business models, we have the opportunity to be embedded in these solution if they recommend and that's really, really exciting. .

The next question comes from John DiFucci with Jefferies..

Thank you. I got a question. I think it's probably best for Tyler. And it has to do with RevPro. Listen, we understand the catalysts of ASC 606, but Tyler, you and Tien had both talked about a longer term opportunity.

Can you talk a little bit more about that, because this is something that comes up a lot in my conversations and maybe even in the context of that, talk about it in regards to your current traction with RevPro and the pipeline for the future..

Yeah. No, I can definitely take down, John. I think we're seeing two things. One, ASC 606 and IFRS 15 is a good driver for customers kind of last year and we talk about 605, and 606 upgrade.

But what we're seeing is that, companies had a timeline, they had to get compliant and a lot of them chose to do that through kind of some manual Band-Aid process what we call.

So, we're seeing those guys now, they've got through their first iteration, but they know it's not sustainable and they're going to need their revenue automation solution for 606 going forward. So those customers are still out there.

But on top of that, it's all about the reason we did the acquisition was not 606, it was about business model complexity that hits both your quote to cash solution as well as your revenue automation and that's really what we're seeing right now, while the Hitachi example that Tien touched on, that's all about just complexity and manual processes and they wake up, the customer wakes up and they realize they've outsourced all of revenue to some other place and they've got tens and tens of bodies doing this all manually and that's not sustainable.

And so that's where I think that the long kind of like tailwinds are going to be for success, for RevPro..

Yeah. I would point to, thinking back about the Hitachi Vantara story, I really point back to the, if you visualize, in order to track revenue, which is necessary to close the books, it is necessary to forecast, right 50, 60 bodies around the world, doing spreadsheets.

I mean, that is just saying, I'm encouraging guys when you talk to the CFOs, the companies you cover asking, ask them how big is their revenue department. And I think you'd be surprised on how would revenue is being done manually and it’s not getting better. I mean, with these new rules, it’s only going to get worse and worse.

And the reason we did John, we see all the layering that comes in through subscription models, layering of all these transaction sets.

One of the biggest downstream impact is to revenue because you have to put all the stuff together and you have to look at it as one continuous order and I know we've talked about this and that just makes it really, really hard and that’s the reason we have the product..

And if I could and that's helpful and that's, because I think a lot of people, including myself at one point just felt, well, geez, ERP must be doing this, but they haven’t done.

But I guess, does that come to that question? What about SAP and Oracle and other NetSuite, others, are they trying to do this at this point, because now you have a standard ASC 606 that’s supposed to be across all business models and across all geographies and I mean, I know there is always a lot of caveats, but just curious are you seeing anything on the competitive front from the traditional ERP guys?.

Yeah. I think maybe, 606 was definitely a catalyst. But what, just to reemphasize what Tyler said, it’s not really about 606. It’s about the dynamic business models. And if you listen to the stories and both stories are on billing and RevPro. There was a scenario, debooking contracts and recreating contracts.

Cancelling contracts, it’s not really a contract cancellation. And so ERP systems weren’t built for these long term right high inbound, high unchanged, the cost unchanged contracts. And so you can try to get away with it by signaling, well, look, the contract change on the discrete of the contract, but it is not that simple.

And with 606, now I’m just going to look at these five contracts that these four canceled ones and the current ones and try to [indiscernible] revenue implications are. And sometimes, what the building implications are.

And so, you can continue to tack on more band-aids, more patches, more custom code, more people on top of the SAP work, but they fundamentally just were not built, they can’t model these new businesses. All right.

And you experienced in the downstream billing, experience in the downstream revenue recognition, but the core of it is the inability to model how these new business models work..

Yeah. John, you’re right. They have revenue modules, right, SAP or they have revenue models, but the reality is those models have been pretty inefficient or insufficient since 972 came out, which requires in allocation.

And ironically, it’s like Oracle is the one who caused that standard to come out and that’s what’s led to allow these manual processes out of system, but now what we’re seeing.

So even they have revenue models, those revenue models need to be fed with data and that data needs to come from a system that captures the order and as we see customers come to us who already have Oracle and SAP to use us for quote to cash solution, which is where billing, right, that's the system that's creating the data and they would have done it already on their current install, but they can't.

So it's going to feed off of itself over time..

That's all really helpful.

And I'm sorry, I'm going to ask one more, because so with RevPro, now that you've had it for a year, can you talk a little bit about the pipeline, if that's in fact validating what you're saying, which is pretty much that this has legs beyond just 606?.

Well, we actually know it has legs. But what we like is the fact that we have two flagship products. All right. And in any given point in time, right, you'll see one product surge ahead of the other.

And sometimes, it's a marketplace catalyst like 606, sometimes, they're more internal breakpoints, right, growth, skillsets, training processes and so on and so forth, but having two really allows us to put the right debt and right growth bets in the right areas.

And so, we don't need to predict next year what the mix is going to be, right, but we've got a few horses to ride on, we’ve got two horses that we can add sales people. We can enter into new territories. I mean, if you look at RevPro, Leeyo, before we acquired them was entirely focused on the US.

And while we haven’t even exploited the International RevPro opportunity yet. And so we're really, really excited about both businesses.

What we like the most is the fact that we have two flagship products that we can enter the market with, we can land new logos with and that allows us to add two options to continue to maintain growth rate in the subscription economy..

Your next question comes from Stan Zlotsky with Morgan Stanley..

A couple of questions from my end. First one, on the 112% revenue retention number. Can you give us a sense for the breakdown of that between just volume growth that was in your customer base versus upsell of added functionality, whether it be new modules or customers moving up to a higher priced platform skew..

Yeah. So Stan, it’s Tyler. So, we’re not breaking it down. I can't say that is a good mix of all the transaction volume growth. It’s still really, really strong for us. But it is coupled also with really strong retention numbers right, which we don't break out our gross retention, but we feel really good about it..

And then just as far as, kind of just taking back on John’s question just now, how are you thinking about the momentum within RevPro and Leeyo, as we get into the back half of this year?.

Again, we feel good. I mean, so when we look at this, here is a company that’s grown significantly as an independent company and they never raised a vent around. And so have limited ability to invest and we've been able to invest in that business. And so, look, when we pulled back and you see, which company out there really has the most 606 experience.

And I would bet that it’s this team, they’ve done, I mean, dozens or scores of 606 and limitations for all the tech companies that you guys cover, chances are, they're using RevPro for revenue recognition. And so that expertise is an asset, especially when we can apply more distribution capability against that product..

If I may just ask, just on that one, on this last question, a quick follow up, how are you still thinking about RevPro as far as selling it into brand new logos versus upselling it into your existing Zuora customers and that’s it for me. Thank you..

Yeah, no, it’s a great question. And I kind of take it back to, we have a big, big cross sell opportunity, right. Less than 10% of our customers actually have both products. That being said, we do see both groups as flagship products to land new logos. Right.

Our philosophy is, we should be aiming our distribution capability to bringing new companies on board right and the cross sales will happen as, we're already talking to companies on one side and from a timing catalyst rate perspective, they have needs on the other side..

Your next question comes from Kevin Kumar with Goldman Sachs. Mr. Kumar, your line is open..

All right, Jay. I think it must be a bad connection..

My apologies. And there are no further questions at this time, sir..

Great. Thank you very much for joining us today. If you have any other questions, please feel free to call or email and we'll see you next time. Thank you..

Thank you..

This concludes today's conference. You may now disconnect..