Ladies and gentlemen, thank you for standing by, and welcome to Zuora's Second Quarter Fiscal 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded.

[Operator Instructions] I would now like to hand the conference over to your speaker today, Mr. Joon Huh, Vice President of Investor Relations. Please, go ahead..

Thank you. Good afternoon and welcome to Zuora's second quarter fiscal 2021 earnings conference call. Joining me today are Tien Tzuo, Zuora's Chief Executive Officer; and Todd McElhatton, Zuora's Chief Financial Officer.

The purpose of today's call is for us to provide some color on our second quarter results, as well as provide our financial outlook for the upcoming quarter. 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 in our most recent filings with the SEC. Finally, we'll be referring to several non-GAAP financial measures today, and reconciliations to related GAAP measures are included in our earnings release.

Please note that in Q2, we began to exclude litigation charges and benefits outside of the ordinary course of business from our non-GAAP financial measures. 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 website at investor.zuora.com.

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

first, the obvious reason is scale. Our customers like Zoom and Fender have been able to take advantage of this unprecedented time without having to worry about their billing system scaling to that demand. But more suddenly, without automation, it turns out you can't deliver that immediate experience that customers are demanding these days.

Whether you or a consumer, looking for some shows to watch or a professional conducting business for your company, you want what you want when you want it and you don't want to have to go through layers of people, phone, contracts. Here are some other examples of what our customers have used our products to automate.

We're helping two leading online education companies, responsibly significant new demand for subscription services for digital textbooks. They're able to close their books faster without adding additional headcount and resources and deliver a better experience for their customers.

Last quarter, Extreme Networks launched on Zuora Billing, complementing its existing use of Zuora Revenue, an implementation that was primed by our services partner, TCS. As hardware providers shift to a subscription software model for future growth, they're recognizing the need for a very different order to cash architecture.

Over the last few months, we've also helped companies like Telegraph Media, Yellow Pages and State Software reduce their build time runs substantially, sometimes from hours to minutes, so that they can focus on strategy and not process.

In fact, while many of our customers have grown their subscriber in response to demand, the time it takes for them to get bills out have actually declined by 40% to 95%. As just one example, Zoom is actually getting all their bills up faster today than six months ago, despite the growth that they've experienced, which I think is pretty amazing.

Because of our history in our data, we can now actually apply AI techniques to continuously optimize performance and throughput. So to wrap up, our mission at Zuora is pretty simple, we help companies win in the subscription economy. And in doing so, the unique power of our technology has never been more apparent.

We provide agility, insights, automation, these are the competitive advantages of our platform, and we're going to continue to invest in these areas. Given that our market is expanding, I do believe our growth can be better.

The leadership we've added to the company and the improvements we've made to our internal processes over the past year have helped us make good progress on building the foundation to scale for years to come. While it's increasingly apparent that COVID will be with us for some time, we are optimistic about the future for the following reasons.

We've made some great new hires and completed our management team. We're seeing good overall demand with double-digit pipeline growth quarter-over-quarter. Our sales productivity per rep continues to improve as we get more comfortable in the go-to-market motion.

We're retooling our pricing and deal structures to right-size our initial wins and enable us to grow with our customers. And we see our near-term business improving and expect better billings growth next quarter. Now, let me welcome Todd and have him go through the financial details..

total revenue of $73 million to $75 million; subscription revenue of $59 million to $60 million; non-GAAP operating loss of $5.5 million to $4.5 million; non-GAAP net loss per share of $0.05 to $0.04, assuming a weighted average share outstanding of approximately 119.3 million.

As I said at the beginning, I'm excited to be here based on the huge opportunity I see ahead of us in driving the Subscription Economy. Over the upcoming quarters, we'll be working to implement the changes required to reach our long-term growth objectives. And with that, we're happy to take questions.

Operator?.

Thank you. [Operator Instructions] Your first question will come from the line of Joseph Vafi of Canaccord. Please, go ahead..

Hey, guys. Good afternoon and, Todd, welcome, I think, to your first earnings call here. Just wanted to kind of circle back on the churn in the quarter. I think, it sounded like you said maybe this is the trough on churn.

I was wondering if you could, kind of, give us some highlights if churn was kind of more focused in kind of some of the more affected verticals from the pandemic, and maybe if there's any kind of update you could give us here for the month of August on churn. And then maybe I have a quick follow-up..

All right. Well, thanks Joe..

Go ahead, Todd..

Okay. So, look, I think on churn, we absolutely do think this was going to be the toughest quarter for us. When we take a look at what we had. So 2 points of the churn that we had came from bankruptcies, M&A activity and product fit. And then we had another about 1 point -- sorry about that. We had another about 1 point of churn that came from downsells.

And we've really been working with customers to make sure we do the right thing and keep them in the long run as a customer. So when you put those two things, those were the main drivers that we saw. We're definitely expecting churn to go back to our historical levels.

But as we mentioned in the script, the net dollar retention is kind of a lagging metric, so I don't expect to see significant change in that in the near term..

Yes. So, Joe, I would say -- yes, I would just add that your intuition is right, so that's what I will say..

Okay. Fair enough. And then just kind of would be interested in the analytics stuff that you mentioned relative to -- if you kind of looked around at your customer base, some of them are more sophisticated than others.

How sophisticated are customers in being able to calculate some of their metrics on their subscription products at this point, relative to their internal tools versus what you're starting to sell right now?.

Yes. I would say when you look at the analytics, there's the data and then there's the tool, right? And we have an excellent set of analytics tools, but we also know that customers sometimes need to have their own tools, whether it's quick or anything else and to be able to integrate. But access to the data is really important.

We're the system of record for so much of their information, right, subscribers, churns, bill invoices, payments and so on and so forth. And more than that, we have over a decade's worth of history now, where it's not just the data itself, but the interpretation of the data.

And so we're starting to tell customers that says, look, when we go ahead and segment our customers in the high growers, medium growers, slower growers. What are the key steps? So, for example, companies that do some level of usage-based billing actually grow faster.

So customers that -- companies that have a higher degree of customer engagement, where they're coming back every year, making modifications to their subscriptions and contracts, they tend to grow faster. And so I would say, our goal isn't just to be a tool.

We really not just want to have the access to the data that gives them the ability to understand what to do, but we also want to go a step further and actually translate that data into actionable insights for them..

Okay, fair enough. And may I just sneak one quick one in on the payment side? I saw the relationship with GoCardless a couple of weeks ago. Just, kind of, from a payments angle, how you're looking at the opportunity there, Tien, and how that could evolve over time into maybe potentially theoretically a new revenue stream for you? Thanks a lot..

Yes. I would say that the starting point is really our customers. Our mission is to make customers successful. And that is why we support, I think, over 35 different payment gateways around the world. We want our companies to be able to choose and support any type of payment method that their customers want to use to settle their invoices.

But more than that, we're starting to get much deeper into how to help them maximize collections, whether it's percent of electronic payment success or the fees that they pay on each one of these transactions.

GoCardless is one of our great partners that has a specialty and I'd say, non-credit card type of electronic payment methods, right, things like ACH, things like Direct Debit.

And there's just huge benefit to be had to move some percentage of your credit card customers over to an ACH, Direct Debit environment, both for cost per transaction and recognizing that these numbers don't change as much, right? And so the payment success rates tend to be higher.

And so we've partnered with them really to have better joint success with our joint customers. You talked about the financial relationship. The financial relationship with them is pretty typical. There's some sort of standard revenue share involved, but our primary focus is delivering customer success to our joint customers..

Great. Thanks very much guys..

Your next question will come from the line of Scott Berg of Needham. Please go ahead..

Scott?.

Sorry, I was on mute. Hi, everyone. Thanks for taking my questions. I guess, we got a couple here. Tien, let's talk about the refocus around sales in those three core verticals.

How should we think about the impact on maybe your TAM going forward? What that does maybe in the -- to intermediate term, how you think about maybe growth over the next three to five years as we come out of the low point of the economic cycle with the retail sales force? And then maybe the follow-up to that would be the impact of the operating model, and maybe around sales and marketing as you become more focused in those three areas..

Those are great, great questions. So these three areas are the same three areas we've been talking about for some time, right. It's the high-tech sector, it's the media sector, and it's the manufacturing sector. And Scott, we have data, right. And we're trying to make these decisions based on data.

And so we can see, and you see this in our SEI studies, which of the industries are actually faster growing.

And so we're trying to say, hey, if our aspiration is to be an index of the Subscription Economy, and we have data to help us choose, which are the best companies, and which are the best industries to focus on, and we have the insights and the consulting to help companies become the best companies in their space, that ultimately is going to give us a portfolio that is highly valuable.

And so you're seeing us really doing that. So you're absolutely right. We think that there will be natural improvements to the operating model with the ability to focus on a set of companies and with the ability to pick and choose, if you will, the winners from the losers and making sure that we work with them.

Now that's not to say we're going to ignore the other sectors, right? We mentioned offhand that we're seeing expansion in the Subscription Economy into spaces like education, into spaces like public sector. And so we're always going to have a foot in some of these other areas. But we want to make sure that we're doing the right thing.

We're being the most efficient in our sales and marketing and staying focused and really being the pick, the industries and the companies that are growing the fastest is, I think, a key part of our strategy..

So maybe I'd just give maybe a little more color, Scott. On the go-to-market, on the changes, I think we feel like we're really making good progress. And so when I look the things I would want to see is how is pipeline developing, we've seen double-digit increase quarter-over-quarter. I would take a look at sales velocity, that's improving.

How is our sales rep productivity? That's also improving. And we're also getting that pipeline in those areas where we know we can be successful and grow and retain customers. So look, we're just two quarters into it. We're seeing the right leading indicators of where we want to go.

And I also expect as we're able to do this, this will help us gain more operating leverage out of our model..

Great. Helpful. And then I just wanted to touch on pricing, some of the changes you're making there, trying to right-size some of these contracts moving forward. Tien, I believe this is something we probably spoke about in the past.

It's always kind of been a little bit of a challenge, trying to find the balance between what customers think they need and what they really need.

How do we think about that process going forward to kind of ensure, I guess, that some of these initial deals don't get out too far ahead of themselves?.

Yes. I think the lesson that, given what we do, we work a lot with our customers on pricing strategies. And we do that ourselves. We do that through our partners with companies like Simon-Kucher, companies like Profitwell. And the lesson, if you wanted to bring it down to a single thing is customers want to pay for value.

Customers don't want to be on the on the clock, all right, so a pure metered model that might not make any sense.But customers want to pay for value and the best way to do that is to tie your pricing model to the value that they're experiencing. And that's something that we certainly believe in.

It is a balancing act, right, that customers also want predictability. But you're seeing us really say, 'Well, how do we do a lot more of that?' And you're seeing some companies in our customer base, and there's been some high-profile pricing model changes really follow the same. This is the future, right? This is what AWS is teaching us.

This is what Netflix is teaching us. But more and more, the world is moving towards consumption-based business models, which of course, benefits us because that creates an incredibly strong need for a sophisticated billing system..

Great. Thanks for taking my questions..

Your next question will come from the line of Stan Zlotsky of Morgan Stanley. Please go ahead..

Perfect. Thank you so much guys. And my apologies if some of my questions have already been asked and answered, just jumping between calls here.

Just on the churn, when churn, when -- if somebody churns off, I mean, the M&A and the bankruptcy makes a ton of sense, but on product fit, where do customers go? What do they do when they -- if they do turn off Zuora and especially considering the environment where we are now? And then I have a quick follow-up..

Yes. I think if you look at what we do, our sweet spot is really companies that have some level of volume and some level of complexity into their business. And we do believe that as businesses grow, they're ultimately going to go in that area, right? They're going to have more volume, because they're going to do more usage-based billing models.

They're going to pursue a wider market, maybe go down market and whatnot. Well, there are some companies that are saying, look, our growth is not what we expected to be. We only have a few hundred customers. Does it make sense for us simply to do this stuff by hand? And given their business situation, they might choose to adopt a path like that.

And so that's why, again, with all the data that we have, we can predict some of these things. We can predict which companies and which industries are going to be the fast growers are -- have a chance to be the next Zoom, where though the idea of doing it by hand or doing it manually just wouldn't make any sense.

And so historically, we might have signed up a few customers at aspirations, but just for whatever reason, it didn't work out for them. Those are the ones that you're going to see really move towards a more manual-based model..

Got it. That makes sense. And as far as just sales productivity, you guys mentioned you've seen improvements in sales productivity.

How are you thinking about the actual sales hiring for the remainder of this year? And, potentially, anything that you're thinking about as far as maybe changes or tweaks to your sales organization as you head into fiscal 2022..

So look, I'll take that. I think we pretty much have the model where we want it to be. We're taking a look at from a standpoint of what the capacity of that current team is and where we want to get to from a growth perspective. So I will say we do have head count that we will be hiring during the second half of this year.

And I would certainly expect that we would have growth next year in the quota-crying headcount..

Okay. Perfect. Thank you so much..

[Operator Instructions] Your next question will come from the line of Brent Thill with Jefferies. Please go ahead..

Hey, guys. This is Luv Sodha on for Brent Thill. Thank you for taking my questions. And welcome to Todd. I had a couple of questions. One was, I wanted to dig into the pipeline improvement that you guys cited.

In terms of this pipeline improvement, could you give us some color around sort of where the pipeline is improving? Is it small deals? Is it large deals? Or is it like add-on sales from the initial sale? That would be helpful. And then, I have a follow-up as well..

Yes. I would say, the simple answer to the pipeline is, interest level in the subscription business has never been higher.

And when you hear these stories, when you hear these stories of Zoom, when you hear these stories of the SaaS companies thriving, when you hear these stories of these media companies thriving and you're hearing the companies that have a direct relationship with their customers and you forget sometimes that most companies do not have a direct relationship with customers, right? CPG companies don't, auto manufacturers traditionally don't, right? You sell through distributors, you sell through retailers, you sell through wholesalers, you sell through dealers, and those companies have not been able to adapt as quickly in the last six months.

And so companies are saying, look, we need to have a direct relationship with our customers. And we need to pivot our business model so that it's based on our direct relationships with our customers, and that is what we call a subscription-based business model.

And so, it's not a surprise that RFPs are up year-over-year, demand is up over year-over-year.

We're trying to make sure, though, that we're focused on generating this pipe into three core verticals that we know are where the growth is going to be in the short term, even as we pursue, right, the leaders in other industries that want to basically be the first movers in their industries into the subscription economy..

I guess the other thing I would maybe add, Luv, is in addition to what Tien said, we're growing in the areas that we want to grow. The quality is better from a standpoint of seeing how pipeline is progressing through the system. So we're really pleased with that.

And again, the customers that we are seeing are in that core mid-size to large companies that are the backbone of our revenue..

Perfect. And maybe one more on -- just a follow-up on the Zuora Billings and Zuora Revenue integration. I'm guessing that that is behind you is -- so could we expect the cross-sell to resume? And will that have an uplift on the retention rates that you're seeing out there? Thank you..

Yes, yes. So we're -- the integration is absolutely behind us. It's now been in the marketplace, gosh, now for what six months, and the product continues to be evolved. The product continues to get better and better, but we're really happy. It's helping our customers shrink time to close the books.

It's helping them really reduce all the manual effort required to do revenue recognition, and we feel really good.

And the cross-sell motion is absolutely -- is happening, not just the cross-sell motion, but -- well, the cross-sell motion on both sides, right, selling, billing to revenue customers and vice versa, but also pursuing new customers with an integrated joint solution for a full order to revenue solution. And those things are all happening right now..

Perfect. Thank you, Tien. I’ll pass it on..

And we have no further questions at this time. I will now turn the call back over to the presenters for closing remarks..

Great. Thank you so much for joining the call with us today. And we look forward to catching up with you throughout the quarter, and we'll talk to you next time. Thank you..

And this concludes today's conference call. You may now disconnect..