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

John DiFucci - Jefferies Stan Zlotsky - Morgan Stanley Scott Berg - Needham & Company.

Good afternoon. My name is Mike, and I will be your conference operator today. At this time, I would like to welcome everyone to the Zuora Fiscal Q3 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] I will now turn the call over to Joon Huh, VP of Investor Relations. You may begin your conference..

Thanks, Mike. Good afternoon and welcome to Zuora's third 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.

The purpose of today's call is for us to provide some color on our third quarter results, as well as provide our financial outlook for the fourth quarter and the remainder of the 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 the earnings release we issued today, and our most recent Form 10-Q filed with the SEC.

Finally, we'll 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 our earnings release, links to our SEC filings, a replay of today's call, or to learn more about Zuora, please visit our Investor Relations Web site at investor.zuora.com.

And with that, let me turn it over to Tien and Tyler..

Thank you, Joon. This is Tien. Welcome to our third earnings call as a public company..

And good afternoon everyone. This is Tyler. Thank you for joining us today..

I am very excited today to talk about our third quarter. Let me start by saying that it was a great quarter. In Q3, we continued to deliver very strong financial results. We came in ahead of expectations across all our metrics, subscription revenue, total revenue, operating income, and EPS. Growth continues to be strong.

In Q3, we continued to see expansion in our total addressable market. Our market is predicated on not just more and more companies launching subscription services, but entire industries shifting. Over the last few months, we signed on Toyota, as well as Kia Motors, along with our existing customers, GM, Ford, Peugeot, and Renault.

We are now behind the connected car initiatives of six of the world's top 10 auto manufacturers. This is an entire new vertical for us that didn't even exist five years ago, and it's a great, great example of how our strategy of landing and expanding within entire industries can lead to long-term durable growth.

In this quarter, we continue to see strong demand for our products, Billing and RevPro, both recognized as the leading solutions in their space. Regarding RevPro, now with the deadline for ASC 606 compliance has passed for many companies, you might think that demand for this product has significantly slowed.

That is not what we're seeing, and we'll give some examples from the quarter demonstrating that revenue automation continues to be a big, big growth opportunity. Finally, in this quarter, we continue to see growing momentum with our system integration partners, especially Deloitte and PwC, and I'll touch a bit on that as well.

But before I continue, Tyler, why don't we open with the high-level results for the quarter..

Sure, Tien. As you mentioned, when we look at Q3 we had another really good quarter. Later in the call, I'll go deeper into our key metrics and our operational and financial details. I'll also provide some financial outlook and guidance for the future, but now though, let me provide the highlights.

In Q3, we grew subscription revenue by 43% year-over-year, to $44.5 million. We grew total revenue by 33%, to $61.6 million.

As a quick reminder, which we highlighted previously, the reason that total revenue grew slower than subscription revenue is that we had a big one-time uptick in professional services revenue last year related to our RevPro business. We'll have this year-over-year anomaly in Q4 as well, but we believe it should normalize in Q1.

We were able to accomplish this revenue growth while brining our non-GAAP operating loss down to $10.6 million, an improvement of $1.7 million versus the prior quarter. As we scale we continue to gain more leverage in our business model. All this led to outperformance on non-GAAP EPS, resulting in negative $0.10.

We delivered results above our guidance range across all of these metrics..

Thanks, Tyler; really, really proud of our quarter. Now, let me give you some color on what we're seeing in the quarter, which continues to give us confidence that we can sustain this level of growth over an extended period of time, years if not decades.

The fundamental bet that this company is built on is the continued wide spread of the subscription economy that we're all seeing will lead to continued strong demand for the unique technology solutions that only we have delivered. The strategy behind this bet is what we call our Land and Expand strategy.

Now, where other SaaS companies talk about landing and expanding within a single company, we focus our land and expand on entire industries. Let's look at the technology sector, namely software and hardware, which is our first core vertical. Still represents about half of our business. The shift to subscriptions here is well known.

It's led by the adoption of SaaS, cloud, and the preferences companies now have for these pay-as-you-go models. Today, we're behind both the SaaS companies, so Zendesk, [indiscernible], DocuSign, Avalara, Salesforce, as well as the more established players, like Symantec, PTC, and NetApp. Now, you all know how fast these guys are growing.

The key here is, now that we are behind these leading companies in the sector, as the entire industry continues to shift to subscriptions this is automatically powering our growth. Now, the same thing has played out with the media industry, starting with newspapers.

Now, after going through years of hurt, newspapers today are finding growth again through the digital subscriptions. Now, we saw the shift early and began to focus on this industry years ago. We started working first with News Corp UK in 2011, and they publish the Times of London and The Sun. That helped us land the Financial Times later that year.

Then Fairfax Group of Australia, in 2012; The Guardian, in 2014; The Wall Street Journal and The Telegraph in 2015; and then the Seattle Times, The Boston Globe; The Straits Times, of Singapore; The Bonnier Group, which publishes the biggest newspapers in the Nordics.

We also landed magazine publishers, like Time UK, which is now TI Media; Bloomberg; and Penske Media, who owns Rolling Stone and Variety Magazine. So you're seeing the network effect really starting to take hold. And we also expanded to other media companies like HBO, Perform Group, and also B2B publishing companies like S&P Global.

Today, we're working with about 20 major newspaper publishing groups. We help them launch new digital offerings, experiment with new bundles, scale their businesses, and handle different payment methods around the world, like Amazon, PayPal, or direct debit.

Now, how do we know this sector is growing? Well, we can actually see it in our servers; transaction volumes for this segment, through the Zuora Billing system, have grown over 30% on average over the last five years. The perception that people won't pay for news turned out to be wrong. In fact, millennials are now the fastest-growing demographic.

A 2018 Routers report showed that the majority of new subscriptions over the past couple of years is coming from people under the age of 35. And this signals long-term structural growth for the industry. So what does that all mean for us? It means that our early bet on newspapers has turned into one of our major growth engine.

The growth engine -- the growth rate that we've seen in subscription revenue from media and publishing companies has averaged about 35% a year over the last seven years, has become one of our largest verticals, representing approximately 13% of our overall subscription revenue.

So you can see we're helping industries unlock growth through subscription business models which then powers our growth over an extended period of time..

So, newspapers and publishing is a great example of our land and expand strategy within an industry. We line a few key accounts and enable them to execute against their growth initiatives. Then we close the other industry participants as they see the inevitable business model changes becoming pervasive amongst their competitors.

But some would say that a vertical like publishing, which is a traditional subscription industry, naturally aligns itself to a digital subscription-based business model. What we've seen in recent quarters, and this is playing out in other vertical.

One vertical team or highlight which most people don't think of when they think subscriptions or consumption-based models is automobiles..

That's right. As I mentioned on the top of the call, we now have six of the top 10 auto manufacturers, with Toyota and Kia Motors onboard. But what's going on here? Probably obviously to anyone who's used Uber or Lyft that we are all very likely going to buy fewer and fewer cars over the next years and decades.

Self-driving cars, when they come, will only celebrate this trend. So the major manufacturers, they all know this. And they're all turning to services for growth, content services, navigation services, diagnostics, analytics. A 2016 McKinsey report says that services could actually expand auto revenue pools by 30%.

And if you've ever been down in the mall below the World Trade Center, Ford has a whole exhibit that showcases their vision from morphing from a car company to a mobility services company.

Now, we started seeing this a few years ago and began to execute the same land and expand playbook, picking up early leaders and then becoming the overall leader for the vertical.

Today, in addition to the six of the top 10 OEMs, we also have Daimler Trucks, as well as connected services like Volkswagen's Wheel Service in Europe, OnStar, and Sirius XM. I think it's fair to say, we are now the leading provider of subscription solutions for the entire automobile industry.

So what you're seeing is the same dynamics that play in autos as we did in newspapers, just staggered by about five years. And industry facing disruption looks to subscription revenues for growth, and they come to us, not only to handle the revenue complexity, but also to help them spin up new service and get to market faster.

We then become the system of record for a portfolio of well-known customers and we're set to grow with them, with the verticals -- with that entire vertical for decades to come. Now, I just highlighted two verticals, we hope to highlight further industries in future calls to come.

Quick example, it's still early days, but we're seeing that we're starting to land Billing customers in utilities and financial services. They're all experimenting with these new services and subscription options.

We've also got other membership-based organizations, like the YMCA that are in the midst of reinventing themselves with a wide range of new service models..

So, to reemphasize, this is our core strategy, identify industries that are in the early stages of transitioning to a subscription business model, lock in the leaders for that industry, and as their subscription revenues grow we get to grow with them. And others in the industry follow suit.

All this is in line with our intent do delivering consistent 25% to 30% growth rates over a very long period of time..

The strategy is working. Now, what makes the strategy work, of course, is our technology. And we have not one, but two flagship products that we can use to land these customers, Billing and RevPro. They're both based on a simple concept to automate the financial complexities generated by subscription models.

They're highly, highly differentiated, and they're mission-critical for our customers. Now, most people know that our billing product is widely recognized as the best in market, but let's talk about RevPro. It's also recognized as the best product in the market.

So for example, according to MGI Research, RevPro is the top ranked solution for revenue recognition software. For the last 90 days, we've heard a number of you ask for an update on the market demand for RevPro, especially now that many companies seem to be passed this ASC 606 deadline.

So what we're finding is that many public companies rush to get compliance, but a lot of them just manually with Spreadsheets, and they found this to be a short-term band-aid solution.

These companies are realizing that the real problem was never ASC 606, the bigger more systemic trend is that these companies were struggling to scale their revenue operations because of all these new flexible consumption recurring models that their companies were launching, and they couldn't do it with a manual Excel-based approach.

ASC 606 is the thing that only highlighted the problem. Let's give an example, a great example from this past quarter was Viva; most of you know Viva, they're a leader in the life sciences space, fantastic SaaS success story, and I suspect it's in many of your portfolios.

Now Viva it's been public for a while, they're now talking about hitting the $1 billion of revenue next year, and what ASC 606 really put a spotlight on was how complicated revenue recognition has become for them.

They spent a lot of effort to become ASC 606 compliant last year, but using manual operations, and then this year they came back to putting in an automation solution, and they selected RevPro this quarter to help them to efficiently scale this part of the business.

So you can see that the underlying demand hasn't gone away, but our value proposition is now more centered around automation and efficiencies, versus simply compliance.

Not to see this quarter we also signed on other public companies like Carbonite and Pivotal, who both chose RevPro all because we've got the best revenue automation platform on the market, and there's a big, big difference between being compliant and being competitive. And that was the reason to bring on the RevPro product in the first place.

The need for revenue automation is not just driven by ASC 606 compliant. It's a larger issue with many of these companies as the complexity of revenue recognition limits their ability to efficiently scale and meet their business goals. That's why we continue to see good demand for our RevPro product.

One last thing we cover about we saw in the business in Q3, and that's with our system integrators. I mentioned in the last call how Deloitte Digital helped bring a significant enterprise deal with Clarivate, which is a spin-out of Thomson Reuters.

You may have seen this announcement earlier, but Deloitte Tohmatsu Consulting in Japan recently announced collaboration with Zuora to help companies in Japan shift to a subscription-based business. This announcement is a great next step in our growing partnership with the Global Deloitte Network.

Second, we're building stronger ties with audit firms, strategic partners for our RevPro solutions. That's a closer deal acquisition actually about a quarter of our new RevPro customers have actually come through these partner channels.

For example, P2VC and Zuora have a joint business relationship focused on addressing the growing demand for revenue automation software. In fact, P2VC has established a center of excellence to help customers succeed and using RevPro.

Now honestly, we're still in the early innings of building leveraging these relationships, but we've got some great, great partnerships with system integrators around the world, and we really believe that over time this can turn into a healthy channel for our business.

So in summary, what we're seeing this quarter is good momentum in the market, continued expansion of the subscription economy across industries, which leads to an expansion of our TAM, continued traction for our solutions, and a growing ecosystem.

At this point, let me turn it over to Tyler to show how that's reflected in our financial results for the quarter..

Thanks, Tien. I'll start with our key operating metrics and then I'll move on to our financial results and then guidance. We saw really healthy growth in both of our key operating metrics in Q3. Customers over 100K ACV maintained a solid growth rate of 30% year-over-year, improving on our Q2 growth rate of 28%.

We added 30 more of these customers in the quarter and ended with a total of 504. This metric is important as this customer base continues to represent over 80% of our total ACV. In addition, we are continuing to grow with this set of customers as they grow as 28% of them had a transaction volume upsell in Q3.

Our second key metric is dollar-based retention. In Q3, dollar-based retention increased 115%. This is driven by incremental improvement to grow churn coupled with robust upsell activity.

Last quarter, we talked about our long-term dollar-based retention settling near the high-end of the 108% to 112% range given our recent outperformance of metric, dollar-based retention may end up at the high end of this range or slightly better for fiscal year '19.

In addition to our two key metrics, we also saw transaction volume continue to expand through the Zuora Billing platform. In Q3, we processed approximately 8.6 billion in transaction volume, representing 37% growth year-over-year, and nearly 1.2 billion above Q2.

This is important because our pricing model is designed to allow us to grow as our customers processed more transaction volume to our system. So, now let's talk about how this translates for our financial results. Total revenue grew 33%, led by robust subscription revenue growth of 43%.

Professional services grew at 12% for the quarter to $17.2 million. We mentioned previously that professional services growth was moderate this year as the ASC 605 to ASC 606 upgrade activity dissipates over time. In Q3, this upgrade amount was 600K, and we expect it to be even less in Q4.

Turning to margins, non-GAAP subscription gross margin was 78% for the quarter, in line with Q2; and non-GAAP professional services margin was negative 2% in Q3. We expect Q4 non-GAAP subscription gross margin to be similar to Q3.

We improved our non-GAAP operating margin by another 4% sequentially as we've been creating operating leverage in our cost structure as we grow the business. An example of this operating leverage is the continued improvement in our growth efficiency index, which measures the efficiency of our sales and marketing spend.

We measure our GEI by comparing our trailing 12 months non-GAAP sales and marketing expense of $89.1 million versus year-over-year increase in trailing 12 months subscription revenue of $45.9 million; for the GEI, the lower the number the better. In Q3, GEI continue to improve to 1.9, compared to 2.1 in Q2.

As we've said all along, our goal is to maintain or improve the GEI while achieving our long-term growth rates..

Thanks, Tyler. So what you're seeing in our numbers is a balance between investing for future growth while continuing to drive overall efficiencies around business. So it's probably worth spending some time talking about cash flow and billings as investors often have questions about these numbers..

Sure, let me start with cash flow. In our prior earnings call, we mentioned that we pushed some of our expenditures at the second-half of the year. In Q3, we saw some of this spend come through resulting in free cash flow of negative $10.3 million. We will see some more of late spend in Q4. In addition, we're applying a call in some spend from Q1.

For example, we may have significant deposit related to new office space, and that will hit free cash flow. As a result, we continue to expect free cash flow of negative $42 million for fiscal year '19 in line with what we said last quarter.

Now turning to Billings, we've been consistent in our view, because of fluctuations from one quarter to another, in the long run, we believe focusing on the trailing 12-month subscription billings growth is a more accurate reflection on the overall business, and we expect this growth rates to settle and grow in line with our long-term revenue growth rate of 25% to 30%.

As of October 31, trailing 12-month calculated billings was $245.1 million, representing 51% year-over-year growth. Professional service revenue as a proxy for professional services billing, calculated trailing 12-month subscription billings was $180.7 million, or 46% year-over-year growth.

One thing to note, part of our strong billings in Q3 is that we saw higher mix of annual billing terms and some Q4 billings were pulled into this quarter based on customer-driven timelines. On the Q2 call, we provided a 12-month billings growth number of low 30s percentage for fiscal year '19.

Given our outperformance in Q3, we're increasing our expectation for trailing 12 months calculated billings growth to 45% for fiscal year '19. Now let me finish the numbers with our current views on guidance and future expectations.

For Q4, we're currently expecting total revenue of $62.3 million to $63.3 million, subscription revenue of $45 million to $45.5 million, non-GAAP operating loss of negative $12.5 million to $11.5 million, and non-GAAP net loss per share of $0.12 to $0.11, assuming weighted shares outstanding of approximately $107.3 million.

This translates to full-year fiscal year '19 expectations of total revenue to $233.4 million to $234.4 million, subscription revenue of $167.1 million to $167.6 million, non-GAAP operating loss of $49.1 million to $48.1 million, and non-GAAP net loss per share of $0.56 to $0.55, assuming weighted shares outstanding of approximately 91.2 million.

Tien, those are the numbers..

Thanks, Tyler. As I mentioned at the top of the call, we consider Zuora to be a portfolio play for the entire subscription economy. This as a secularship that started 20 years ago in software, it took over digital media, and today it's in the midst of completely transforming manufacturing transportation, retail, and so many other industries.

And I'm not just saying it because of the headlines that we read every day. I'm saying it because we can see it in the rapidly expanding and diversified nature of our customer based. We talked a little bit about newspapers and the auto industry on this call, and we'll continue to highlight key verticals as we see them continuing to build momentum.

I'm proud of the fact that we called it early, and we've got a 10-year head start on the competition, we've got the best solutions in the market in billing and revenue automation with a growing ecosystem of system integrators and other partners.

We're in the early stages of a major shift towards recurring revenue in digital transformation that's going to take decades to fully realize, a vision that we call, The World Subscribed, and this is what's fueling our ability to build a long-term durable growth story. It's been 10 years, but in many ways it feels like we're just getting started.

We're happy to take your questions now. I'll turn it over to you, operator..

[Operator Instructions] Your first question comes from John DiFucci from Jefferies..

Hey, John..

John DiFucci, your line is open. And the next question comes from the line of Richard Davis from Canaccord. Your line is open..

Hey, thanks very much. A few quick questions, one, I think you've talked about this in some of the conferences and stuff like that. But how do you feel like -- if I'm using Zuora, what kind of tools am I going to get that are going to give me heads-up that someone is going to turn off.

And then related to that, when I think about myself or anyone, when you subscribe to something there's moment in time when you're kind of like, well, should I renew or not, and that can be true for Netflix or Amazon Prime.

Talk about a little bit your customer success teams and how you make sure you kind of people right at that moment of transition, because once you're in I think it's pretty sticky, but you've seen this cycle before, so. Thanks very much..

Yes, so one of the key things about the subscription economy. I was just on the phone on a conference call this morning with a major Fortune 500, Global 500 company launch new subscriptions, really transitioning.

They're a product company today, but they're customers, both their B2B customers and their B2C customers are all starting to demand for these subscription services. And that was their question, is how do know -- what does success look like, right.

You've got a chance to work with thousands of companies around the world, and one of the things we talked about is the swing factor, and the business model winds up being the churn relationship with the customers. These are active relationships. And you can tell based on the level of activity how strong they are.

So the key thing to all these things is really to put together a view of history of which customers are churning, which customers have an up-sell capability, and marry that with the internal measurements that you have. And I would say most, if not all, of our customers are using information from our system in order to do that.

It's really part of being successful in this new business model..

Yes, and Richard, I would just say also that the up-sell is as important as the churn right, and being able to identify through usage patterns and things like that from data that you can get out of Zuora on which customers you should be engaging with, and based on how they assign utility to your product.

And you learn over time and then you can change your pricing and packaging to kind of optimize for that..

And I'll give you a quick example of that. We talked about this in our Subscribed conference earlier, but our data that we could see across our customer shows, for example, two lessons, and you can go to the Web site for more information, but companies that do a usage-based model versus a fixed model grow faster.

But there's actually a balancing act of how much of your business model is based on fixed and how much of it is based on consumption. And then companies where their customers come back and modify their subscriptions, right, they're actively involved in their subscriptions, if you will, grow faster.

And on average, if one out of 10 customers actually come back and modify their subscriptions, those customers seem to grow twice as fast. And the companies where on average every customer does a modification to their subscriptions every year, those companies grow three times faster.

And so we can actually see this in our server as we publish all this information to our customer base, but that's why people come to us, right. People come to us because they see subscription business models as a big, big growth driver for their business. And they're looking to us to help them optimize how to capture that growth..

That's super helpful. Thanks so much..

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

Hey guys. This is Stan Zlotsky. Hey, apologies, we're handing a couple of different calls today. So from my end, and pardon if that already has been asked, the Q4 billings, how should we be thinking about as we start to lap the Q4 billings and the inorganic contribution from a year ago as well as just a big shift to prepayments.

And then maybe just a higher level question, the partner ecosystem, right, is a very important aspect of your overall go-to-market, right.

How are you guys thinking about continuing to build out that partner ecosystem? What does it take to continue to get more certified professionals involved? And where do you see the contribution from the partner ecosystem really heading as we go forward? Thank you..

Yes, I'll do the partner one, and then I'll turn it over to Tyler to talk about billings. We chose to really highlight the partner ecosystems because we can definitely see that it's growing in importance.

And whether it's on the revenue recognition side, right, these are projects deep into the CFO department, the VP of revenue department, and the auditing companies are very much involved in these. And so we highlight that 25% of the business is actually coming through that channel. On the Billing side, it's a little more complicated.

These are digital transformation projects. You're going to see Accenture there, you're going to Deloitte, you're going to see a bunch of these other companies, right. And so what I would say is we're working with a lot of these companies. We have certification programs in place. And you're going to see us talking more about that in the future.

But it's something that we're pretty excited about..

Hey, Stan, this is Tyler. Let me just touch on your billings question, I think you asked about Q3 and Q4 billings, and what to expect there. So, look, Q3 was a really good billings quarter. We called out two things that also contributed to that, which was kind of a pull-in a little bit of Q4 billings into Q3, which we do see some of that every quarter.

And we saw a decent amount in Q3. But also, there was a change in our billing terms that we normally see. And there's just some quirky things and fluctuations from quarter-to-quarter that we'll see over time. In general though, we're very pleased with the billings growth. We actually raised the guidance to 35% for the year, the trailing 12 months.

And we want everybody to focus on that trailing 12 months, but that's also the reason we raised..

Got it. Thank you..

Your next question comes from the line of Scott Berg from Needham..

Hi, gentlemen. Thanks for taking my questions. I guess a couple here. Tien, you guys called out net dollar retention being better for a couple of reasons, but one of them was around gross retention being better.

You guys put anything, any systems or anything in place to actively manage that to be a little bit better or is there something that's maybe being more over the next quarters to next couple of years?.

Well, you obviously understand that companies have subscription model churn is going to have a big swing effect here. So it's something that I wouldn't say there's anything new that we've put in place in the last 90 days. But it's obviously a huge focus of ours, and we hope to continue to show continuous improvements year-over-year on these numbers.

And so we feel really good. I think we're benefited from the fact that we have a very sticky product. And when you look at our product, once it goes in, whether it's on billing on the revenue recognition side, right, it's sticky. It's running the company's core operations; it's the heart of the businesses.

And so the two factors for us that influence churn are, one, how well are we doing brining customers live, and that's where we continue to show improvements year-over-year. The second, probably more subtle is -- are these businesses surviving.

And I'd say every year that passes the importance of subscription revenue streams to the companies that are launching them increases. And so I'd say, five, six, years ago these might've been science projects where they tried something; they shut it down after a year or two. We're not really seeing that happen anymore, right.

These are strategic initiatives; they're part of a company's digital transformation initiative. And so that really points to the fact that as the subscription economy continues to mature, and we want to emphasize that it's still early innings, right, then that gives us an enormous amount of tailwinds on our business..

Got it, helpful. And then from a follow-up perspective with the partner question that was just answered is, I've seen that the last couple of years' partners are becoming a bigger influence into your business.

One of the things that I think have picked up over the last six months is these deals that partners are wrapping around your solution are getting larger, and you're a significant component of it, which is, I think, talks a lot about the value of what the Zuora platform holds for these customers.

But sometimes they get worried that as these deal sizes get significantly larger it could actually slow down sales cycles because they just take longer to get approval and whatnot.

Is that something you're seeing or worried about or is the momentum in these larger deals just all-around goodness for the business today?.

Yes, so you're absolutely right. These are big digital transformation initiatives. And which requires a set of systems that go in. If you looked recently at Dreamforce, Salesforce's conference, Deloitte actually announced a manufacturing stack, if you will, manufacturing digital transformation stack, and we're embedded in that stack.

And I think there was an announcement from Deloitte during the time of Dreamforce around that. And so that's a lot of positive news for us. The second part is does that mean these deal cycles are growing longer. I think what happens is we manage our sales organization, our pipeline very carefully.

And so only when there is a budgeted project that we know is going to happen do we actually then call that a deal. And when that happens, that's how you keep your deal cycles short, right. Because it's a known project, the company is going to do something, there's a known decision timeframe.

And if there's a broader interest but they're not ready to move, we put that in our marketing bucket, if you will. We continue to engage with our customers, we invite them to our events.

But you have to build a sales process that allows you to have conversations with customers before they're ready, but really measure them as true deal cycles when they're ready. And that's how we keep our deal cycles pretty consistent regardless of the size of the projects or whether a system integrator is involved..

Got it, super helpful. Thanks for taking my questions..

Your next question comes from the line of John DiFucci from Jefferies. Your line is open..

Yes, thanks guys. And sorry about the technical difficulties, I am a technology analyst but I can't work a phone. Sorry about that..

Good morning, John..

So, I want to go in back to Scott's first question, on the net retention, which is pretty -- that's a lot better than we've talked about over the years, and since even last quarter.

So can you tell us, Tyler, like how much of that - like, agreeing we know the net retention like all of last year was -- it was 110%, and I'm just curious, like so now this is 115%, the delta there, like how much of that is from the gross improvement? And then on top of that, the up-sell part of it, is that more from existing customers coming back and, let's say, a Billings customer comes back and buys RevPro or even CPQ, or Collect or something, another product.

Or are they primarily buying more capacity in what they started with, whether that's Billing or RevPro?.

Yes, that's a good question, John. I think there's two questions embedded in there. So how are we doing kind of our gross churn there, and then where on the up-sell side there's a contribution to net retention, where is it coming from? So, we've said in the past, we're really happy about what we've been able to do on the gross churn side.

And we keep getting better at it. And Tien mentioned earlier because Scott asked, what have you done, it's nothing in the last 90 days. But it's all about - these are more serious projects for customer so they end up true initiatives for them. Second, we're getting really good at and implementing customers.

And then kind of lastly, they're growing with us. And so that gets to the second piece, which is where is the up-sell coming from. We mentioned we got up-sells from cross-sales of products, and that is RevPro and Billing. We highlighted a few customers for RevPro that are also Billing customers.

Nothing has changed there in terms of the less than 10% overlap still, which we think in the long run all of our customers are going to need both of these products; they're very, very synergistic. And we've been very open about focusing, not necessarily on the cross-sale of that, but of closing new deals.

The continual majority of our up-sell still comes from transaction volume, which is one of the reasons we highlight that number, at over $8 billion, that it's just a really good number.

And that it just is a testament to that customers are using the system, but that we're going to continue to be able to grow with them as they continue that transaction volume..

Great. And could you just tell us, it is one percentage point, is it two from the gross improvement, like even year-over-year, the delta in those -- I know I'm pushing, but you know it's an important to me anyway..

Yes, your gross churn rate, I mean, John, you and I have talked a lot about this. And I think, again we're not going to give the exact percentage, but we just keep getting better and better at churn, and we're really happy with it..

Yes, okay..

Yes, I think the key this is it's -- that it's not going to be other. It's a combination of both together that really drive the benefit, right, the reduction in churn, and also the ability to grow with our customers as they put in transaction volume.

I think that's why we chose to highlight that we call that the land and expand strategy, right, and most companies think land and expand is starting inside of a company growing larger, you know, and that's why I mentioned we tend to have a larger land, but across the industry that's the way we like to look at it, where we go into newspapers, we go into auto, we have a fair deal that gets them in, and help them launch their services faster, how can it iterate, how can be successful, and then we can grow as the industry grows.

And so, that's how we're building multiple growth engines inside of the company. We've got a growth engine in tech. We've got a growth engine in media.

We've got a growth engine that's emerging in auto, and we're going to continue to see that, and you're going to see us really top like that, and the net dollar retention is really, you know, you can see as a number that's really part of that strategy..

Great. Well, thanks. Nice job guys, thank you..

Thanks, John..

There are no further questions at this time. I will turn the call back over to the presenters..

Great. Thank you very much for joining us, and we look forward to hearing from you and talking to you throughout the quarter. Thank you..

Thank you..

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