Zuora, Inc. (ZUO) Q2 2025 Earnings Call Transcript
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Overview
The earnings call presents a mix of positive and negative elements. Financial performance shows growth in subscription revenue and improved margins, but competitive pressures and a drop in DBRR raise concerns. While guidance for free cash flow is raised, ARR growth guidance is conservative. The Q&A session indicates cautious optimism with some challenges in new customer acquisition. Given the company's mid-sized market cap, the stock is likely to experience a neutral movement, reflecting a balance of growth potential and risks.
Key Financial Performance
Subscription Revenue $104 million, up 9% year-over-year, primarily due to higher revenue share from payment processor.
Professional Services Revenue $11.3 million, down 10% year-over-year, expected to decrease over time as partnerships with system integrators expand.
Non-GAAP Subscription Gross Margin 82%, up over 125 basis points year-over-year, driven by continued efficiency optimization with hyperscaler.
Non-GAAP Blended Gross Margin 73%, an increase of over 260 basis points year-over-year.
Non-GAAP Operating Income $25.6 million, representing a record non-GAAP operating margin of 22.2%, exceeding guidance by $6.1 million.
Dollar-Based Retention Rate (DBRR) 104%, down three points year-over-year, primarily driven by the impact of churn.
Total Remaining Performance Obligations (RPO) $577 million, growing 14% year-over-year.
Non-Current RPO $258 million, up 21% year-over-year.
Annual Recurring Revenue (ARR) $412.3 million, growing 7% year-over-year.
Adjusted Free Cash Flow $12.2 million, up from $4 million year-over-year.
Cash and Cash Equivalents $543 million, a sequential decrease of $3.7 million.
Total Capital Expenditures (CapEx) $3.3 million for the quarter.
Operating Highlights
New Product Acquisition: Zuora welcomed Canva as a new customer, leveraging Zuora Billing and Zuora Revenue for their quote-to-revenue process.
Product Enhancements: Zuora announced the acquisition of Sub(x) to enhance AI capabilities in their Zephr products, providing advanced paywall solutions for media companies.
Advanced Consumption Billing: Advanced Consumption Billing was one of the fastest growing products, enhanced by the Togai acquisition.
Smart Retry Capabilities: Zuora Payments enhanced Smart Retry capabilities, recovering over $120 million in lost revenue.
Market Positioning: Zuora was recognized as a leader in the Magic Quadrant for Recurring Billing Applications by Gartner.
Market Recognition: ISG Research named Zuora a leader in all four Subscription Management Buyers Guides.
Operational Efficiency: Non-GAAP operating income reached $25.6 million, a record operating margin of 22.2%.
Cash Flow Improvement: Adjusted free cash flow increased to $12.2 million, up from $4 million year-over-year.
Strategic Acquisitions: Zuora's strategy includes ongoing organic innovations and targeted acquisitions to fuel growth.
Land and Expand Strategy: Zuora's land and expand strategy is proving effective, with significant expansion opportunities from existing customers.
Risk or Challenges
Competitive Pressures: The company is facing high levels of deal scrutiny, especially in new business, which may impact growth and sales cycles.
Regulatory Issues: There are no specific regulatory issues mentioned, but the company acknowledges risks related to forward-looking statements and uncertainties that could affect financial results.
Supply Chain Challenges: No specific supply chain challenges were discussed in the call.
Economic Factors: The current macro environment is challenging, which may lead to elongated sales cycles and cautious buying behavior from customers.
Customer Retention: The dollar-based retention rate (DBRR) decreased year-over-year, primarily due to churn, indicating potential risks in customer retention.
Acquisition Costs: The company is absorbing expenses from recent acquisitions, which could impact financial performance.
Guidance & Outlook
Land and Expand Strategy: Zuora continues to execute its land and expand strategy, leveraging its existing customer base for growth opportunities. Notable new customers include Canva, which adopted both Zuora Billing and Zuora Revenue.
Total Monetization Strategy: Zuora is focused on building a complete monetization stack, allowing customers to utilize various monetization strategies, including usage-based billing and hybrid models.
Acquisitions: Zuora announced the acquisition of Togai to enhance its Advanced Consumption Billing capabilities and Sub(x) to strengthen its AI-powered paywall solutions.
ESG Initiatives: Zuora released its Global Impact Report, committing to the Science Based Targets Initiative and aiming for net-zero greenhouse gas emissions.
Q3 2025 Guidance: Zuora expects Subscription revenue of $104.5 million to $105.5 million and total revenue of $115 million to $117 million.
Full Year 2025 Guidance: Zuora raised its revenue outlook to $455.5 million to $461.5 million and non-GAAP operating income to $90 million to $93 million.
Adjusted Free Cash Flow Guidance: Zuora increased its adjusted free cash flow guidance to $82 million or greater for the full year.
DBRR and ARR Growth: Zuora expects DBRR to be between 103% and 104% and ARR growth of approximately 6% for the fiscal year.
Shareholder Return Plan
Adjusted Free Cash Flow: Adjusted free cash flow was $12.2 million in Q2, up from $4 million last year.
Guidance for Adjusted Free Cash Flow: For the full fiscal year '25, we are increasing our guidance for adjusted free cash flow to be $82 million or greater.
Key Q&A
Earnings Word Cloud
ZUO Transcript
The earnings call presents a mix of positive and negative elements. Financial performance shows growth in subscription revenue and improved margins, but competitive pressures and a drop in DBRR raise concerns. While guidance for free cash flow is raised, ARR growth guidance is conservative. The Q&A session indicates cautious optimism with some challenges in new customer acquisition. Given the company's mid-sized market cap, the stock is likely to experience a neutral movement, reflecting a balance of growth potential and risks.
The earnings call summary and Q&A indicate positive sentiment overall. Financial performance shows improved margins and cash flow, despite some churn and macroeconomic challenges. Product development is strong, with new consumption billing capabilities and integration of the Togai acquisition. Market strategy highlights focus on customer expansion and partnerships, showing resilience despite slower large deal activity. Financial health is stable, with good cash flow and cost optimization. Shareholder returns were not explicitly addressed, but the positive growth outlook and strategic initiatives suggest a positive stock price reaction, especially for a small-cap company.
The earnings call presents mixed signals. Basic Financial Performance shows revenue growth and improved margins, rated 4. However, the decline in Professional Services Revenue and ARR growth deceleration, rated 2, offset this. Market Strategy and Expenses receive a 3 due to efficiency measures and workforce reduction. Q&A highlights concerns about customer churn and elongated sales cycles, slightly lowering sentiment. With a market cap of $1.4 billion, the stock is expected to react moderately, resulting in a neutral overall sentiment.
The earnings call highlights strong financial performance with 20% YoY RPO growth and strategic wins in telecom. Management's optimism, despite market uncertainties, and consistent ARR growth support a positive outlook. The Q&A reveals confidence in achieving a 12% ARR target, driven by strong pipelines and customer commitments. While some concerns exist about deferred revenue and macro environment, the overall sentiment remains positive due to significant renewals, expansions, and strategic focus on growth opportunities. Given the company's market cap, the stock is likely to see a positive movement of 2% to 8%.
ZUO Report
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