Zuora, Inc. (NYSE:ZUO) Q4 2023 Earnings Call Transcript

Zuora, Inc. (NYSE:ZUO) Q4 2023 Earnings Call Transcript March 1, 2023

Operator: Ladies and gentlemen, good afternoon. My name is Abby, and I will be your conference operator today. At this time, I would like to welcome everyone to the Zuora’s Fiscal Year 2023 Fourth Quarter Earnings Call. Today’s conference is being recorded and all lines have been placed on mute to prevent any background noise. Thank you. And I will now turn the conference over to Luana Wolk, Vice President of Investor Relations. You may begin.

Luana Wolk: Thank you. Good afternoon, and welcome to Zuora’s fourth quarter fiscal 2023 earnings conference call. On the call today, we have Tien Tzuo, Zuora’s Founder and Chief Executive Officer; and Todd McElhatton, Zuora’s Chief Financial Officer. Robbie Traube, our President and Chief Revenue Officer, will also be joining us for the Q&A session. During today’s call, we will make statements that represent our expectations and beliefs concerning future events that may be considered forward-looking under federal securities laws. These statements reflect our views only as of today and should not be relied upon as representative of our views as of any subsequent date. We disclaim any obligation to update any forward-looking statements or outlook.

These statements are subject to several risks and uncertainties that could cause actual results to differ materially from expectations. For further discussions of the material risks and other important factors that could affect our financial results, please refer to our filings with the SEC. And finally, unless otherwise noted, all numbers except revenue mentioned today are non-GAAP. You can find a reconciliation from GAAP to non-GAAP results in today’s press release. Our results, press release, and a replay of today’s call can be found on Zuora’s Investor Relations page at investor.zuora.com. Now, I’ll turn the call over to you, Tien.

Tien Tzuo: Thank you, Luana, and thank you everyone, for joining us. Welcome to Zuora’s fourth quarter fiscal 2023 earnings call. I want to start by thanking our for delivering another solid quarter. It’s another quarter where we came in ahead of guidance across our operating metrics, including revenue, net dollar retention, free cash flow, and non-GAAP operating income. In the fourth quarter, subscription revenue grew by 20% in constant currency and 16% as reported. ARR grew 16% as reported and net dollar retention ended the year at 108%. We remain bullish on our long-term vision and growth potential. Companies continue to come to Zuora because they see the need for our mission critical solutions. And we continue to execute against strategy that we laid out at Investor Day back in April 2021, a strategy anchored on moving up-market landing and expanding within our accounts and leveraging our ecosystem of system integrators.

Now, while we remain sharply focused on our growth, as we highlighted last quarter, we’re also putting more weight on profitability and free cash flow given the current macroeconomic environment. In the year ahead, we are committing a strong improvement of free cash flow year-over-year and we will closely manage our stock-based compensation. Todd will discuss this in more detail later in the call, but first, let me start with what we’re seeing in the macro environment. Over the past quarter, we started seeing buyer behavior stabilize, especially in our installed base. While the uncertainty we saw in buyer behavior at the end of Q3 has not disappeared, it certainly has lessened. Even as companies settle into this extended period of higher interest rates and lower macroeconomic growth, they continue to prioritize digital transformation.

They continue to launch and scale recurring revenue businesses and they continue to pursue growth and new revenue streams through these new digital services. As an example, the majority of deals that were pushed at the end of our third quarter ultimately closed in Q4. In addition, we saw our win rates also improve quarter-over-quarter. Let me give you some examples. In Q4, AVEVA, a global leader in industrial software and one of the largest software companies in the UK with more than $1 billion in annual revenue, they selected Zuora to help accelerate its AVEVA Flex subscription service with the goal of having more than 80% of its business coming through recurring revenue in just three years. Four, Donnelley Financial Solutions, otherwise known as DFIN, a leader in risk and compliance solutions came to us last quarter after outgrowing their homegrown system.

After a comprehensive review, they chose Zuora’s full order to revenue suite of products. Following the implementation of billing, revenue, and the Zuora platform, DFIN will be able to better manage multiple complex revenue streams from one-time transactions to recurring subscriptions and advanced consumption models. And finally, Scout24, who operates ImmoScout24 in Germany and Austria. This is a residential and commercial real estate online marketplace powering more than 20 million monthly users. And they came to Zuora because we were the best option available to handle the fast growth and scale they needed. For these companies and more, we believe that our singular focus here is what gives us a competitive advantage. Now, in the past, we’ve seen large ERP and CRM vendors take multiple runs at copying what we do only to ultimately retreat.

And there are signs that this is happening yet again. When uncertainly looms, big players need to focus on their core competencies. In fact, this quarter, we saw a major SaaS company who declared Zuora to be their solution of choice after throwing in the towel on a large multi-year deployments from using a billing system from a large CRM vendor. No matter the macroeconomic climate, companies still need to manage their quote to revenue processes at scale. And in fact, during fiscal 2023, our cohort of customers paying us over $1 million a year grew by over 33%, compared to the prior year. And so, against this macroeconomic backdrop, there continues to be clear demand for our technology. Let’s talk next about our land and expand strategy. You may recall this strategy laid out at our Investor Day back in 2021 is based on the fact that billing and revenue recognition are very sticky products.

If we keep our customers happy, if we give them a mission critical service that they can rely on, they stay with us. In fact, last year, we had the lowest churn rates in our company history as a percentage of entering ARR. Now, all this gives us an opportunity to deliver more value to our customers, enabling us to up-sell and cross-sell then as we roll-out new innovations. And this strategy is working. Let me give you some examples. Less than six years ago, we acquired the technology that is now Zuora revenue. And this continues to be the leading technology for the revenue recognition space and it is now an important part of our product portfolio. Zuora revenue product is growing at a deep double-digit rate. We now have over 170 customers live on Zuora revenue, including with companies like Salesforce and Ford.

At the last quarter by combining the scale of Azure in Zuora. Microsoft is now using Zuora’s cloud SSP analyzer, an important component of our Zuora revenue product. In Stellantis, the world’s fifth largest automaker of brands like Fiat, Chrysler, Jeep, Maserati, they are using Zuora billing and revenue to monetize their connected services offerings. We are an integral part of our customers’ businesses, and that’s especially true for Zuora revenue in today’s climate. If companies are not compliant, if their revenue recognition does not work properly, they cannot close their books. Or as another example, our latest acquisition, Zephr, is also supporting our land and expand strategy. It’s another opportunity for our customers to grow with us.

In less than six months, since Zephr joins Zuora, integrated with us, they have beat their targets and now their ARR is 35% larger than when we signed a deal. In fact, in Q4, a global media leader with leaders in more than 80 countries selected Zephr to drive their personalized subscriber experiences such as enhancing their paywall and newsletter capabilities. Finally, this land and expand strategy is not solely predicated on acquired technologies. We also continue to consistently launch organic innovations that our customers want and this past year was no different. In fact, products released in the last 18 months contributed to over 20% of our deals. And here are just some examples of those innovations. Unified monetization, we are taking our customers beyond simple pay as you go models.

In Q4, we added new advanced consumption models to this capability. With our consumption billing and revenue recognition products, our customers can handle the complexity that comes with these more sophisticated pricing and packaging models. For managed services, this is something we’re seeing greater adoption for given the current environment. Last quarter, we doubled the number of managed services customers because it saves our customers time and money, plus owning everything end-to-end means we can set the bar even higher to create the right customer experience. And finally, another innovation we rolled-out with Zuora secured data share for Snowflake, which extends Zuora’s data into Snowflake’s data cloud without any custom integration. The solution is quickly gaining traction since launching just last July.

After years and years of focused product development and continued investment in our innovation engine, it’s clear there is no shortcut to achieve what we have achieved today. Finally, systems integrators partnership are a big part of our land and expand strategy. In the last fiscal year, our partners consistently brought us into bigger deals. In the last fiscal year, as an example, partner sourced new business deals were 3x larger than those deals that came without a partner. And those partner sourced deals have 3x better post rates. In Q4, almost 80% of all new business deals were partner influenced with the highest average selling price to date. And finally, I’m proud to say we now have over 900 certified consultants helping to bring us into these larger deals.

Lastly, as you may have seen in today’s announcements, we do have an update to share about our leadership team. Sri Srinivasan, our Chief Product and Engineering Officer, has made a difficult decision to leave Zuora at the end of this month. Sri has been at the helm ramping up the incredible innovation engine that you heard about earlier on this call. Sri’s decision aligns with his personal goals, which I fully support. He will be transitioning away from an operator role to a different type of leadership role at a private equity firm. While we’ve already started the search for a permanent replacement, I am incredibly confident in the team that Sri is leaving behind, as well as the customer first culture that now permeates the organization in the innovation machine that continues to evolve our technology and launch new offerings at a rapid, rapid pace.

Our Chief Customer Officer, Tom Krackeler will take over as Chief Product Officer in the interim. Tom is an experienced product development leader who’s been with us for almost eight years. Thank you, Sri, for your transformative contributions to Zuora over the past two years. To close out, I want to thank our for their dedication as we wrap up another fiscal year. We continue to feel good about our position in the market. Higher behavior is starting to normalize as customers settle into this new environment. Companies are still coming to us because our technology gives them the agility and capabilities they need. Looking to the new fiscal year, we remain committed to our strategy with an increased focus on balancing growth and profitability.

Now, I’ll turn the call over to Todd to review our financials. Todd?

Todd McElhatton: Thank you, Tien. We closed off the year with a solid Q4. As I discussed, going forward, we will focus on a balance of growth and profitability. While we adjusted for the buyer behavior we experienced in Q3, I’m pleased that we accomplished what we said, we were going to do. We exceeded our outlook for subscription revenue, , and non-GAAP operating margin for the quarter. We were also above guidance for both DBRR and ARR growth. While the macro has not improved materially from Q3, customers are adjusting to the new reality. In fact, we saw the level of uncertainty start to normalize in Q4 with several projects that were on-hold from the prior quarter reaching completion. We expect there may be some delays in decision making, however, Zuora’s products are critical for companies to launch and grow new revenue streams.

They are also bringing additional efficiencies, which are especially relevant in the current environment. Let me give you some more color on our Q4 performance. Subscription revenue was $89.5 million, growing 20% year-over-year in constant currency and 16% as reported, exceeding the high-end of our guidance. We continue to experience FX headwinds during the quarter based on the strength of the U.S. Dollar. For the full-year, subscription revenue ended at $338.4 million, up 20% year-over-year in constant currency, and 18% as reported. Professional services revenue was $13.5 million, an increase of 1% year-over-year. This represented 13% of our total revenue. We expect professional services revenue to be around 13% of total revenue going forward as we further strengthened our relationship with system integrators.

For the full-year, services revenue ended at $57.7 million, down 2% year-over-year, aligned with our strategy to leverage our SI partners or implementation services. For Q4, total revenue ended above the high-end of the guide at $103 million, up 17% in constant currency and 14% as reported. Over a third of our revenue is international, which created FX headwinds of approximately $4 million for the quarter. For the full-year, total revenue ended $396.1 million, up 17% in constant currency, and 14% as reported. For Q4, non-GAAP subscription gross margin was 80%, remaining flat year-over-year. This was driven by our continued investments in our infrastructure to drive future margin expansion. Non-GAAP professional services gross margin was negative 8%, a 270 basis point improvement year-over-year.

This was driven by fewer billable days in the quarter, due to the holiday season. Our non-GAAP blended gross margin saw an improvement of 180 basis points year-over-year ending the quarter at 68%. This illustrates the incremental leverage we’ve experienced in our model as we benefit from working with our partner channel. Q4 non-GAAP operating income was $2.2 million, compared to a non-GAAP operating loss of $0.6 million in the prior year. This resulted in a Q4 non-GAAP operating margin of 2.1%, a 275 basis point improvement over last year. Fiscal 2023 marks our first full-year of generating non-GAAP profitability with non-GAAP operating income of $2.5 million. This was driven by continued top line growth and disciplined investment in the business.

We expect to continue generating non-GAAP operating income on a quarterly basis going forward. Our fully diluted share count at the end of the quarter was approximately 162.3 million shares using both the treasury stock and if converted methods. Now, let’s dive into some of the key metrics. We ended the year with a dollar based retention or DBRR of 108%, which includes 2 points of FX headwind. The DBRR was 1 point reduction sequentially, and a 2 point reduction year-over-year as reported. While the current buying trends and overall market uncertainty had an impact on our DBRR, we continue to see strong retention rates. In Q4, we again improved our retention rate and for the full-year we had the lowest churn as a percentage of entering ARR in the company’s history.

This illustrates how mission critical and sticky our solutions are. At the end of Q4, we had 773 customers that spend at or above $100,000 in average contract value, up 3 sequentially and up 26 year-over-year. In Q4, the $100,000 cohort continued to represent 95% of our business. This metric is less indicative of our overall execution as the cohort has grown since our IPO to become the vast majority of our business. We plan to provide investors with additional customer metrics on our next earnings call. We continue to close a number of large deals, which illustrates our continued success in the enterprise space. This quarter, we closed six deals with ACV of $500,000 or more, including two deals over $1 million. And these customers are growing with us.

Our systems processed over $23.8 billion of billing transaction volume in the fourth quarter, representing 13% growth in constant currency, and 12% growth as reported year-over-year. We have noted before that billing transaction volume processed alone is not indicative of our revenue growth for two reasons. First, our customers gain cost efficiencies as a scale. Second, given the success of our multi-product portfolio, building a loan only accounts for a part of our overall revenue growth. Zuora Revenue and Zuora Collect generate significant volume growth year-over-year, both of which are not reflected in the billing transaction metric. As a result, it’s our intention to revisit our metrics and provide you additional visibility into other products during our next call.

Now, looking at ARR and free cash flow. At the end of Q4, ARR was $365 million and grew 16% as reported with about 2 points of headwinds due to FX. Free cash flow was negative $20.1 million for the quarter, which included non-recurring severance payments associated with the workforce reduction and acquisition-related costs with Zephr. As a reminder, free cash flow can fluctuate on a quarterly basis, due to the timing of cash collections and seasonality. We believe it’s best to assess our cash flow performance over a longer-term. Total CapEx for the quarter was $2.2 million. Turning to the balance sheet. We ended the quarter with $386 million in cash in cash equivalents, a sequential decrease of $14 million. Now, let’s turn to our financial outlook.

With a reminder that our Q1 has three fewer days in comparison to the prior quarter, this creates a headwind of approximately $3 million of subscription revenue, compared to the prior quarter. Starting with our Q1 guidance, while the demand for our products continues to grow, we remain prudent on our outlook given the buying behavior we’ve experienced over the past two quarters. That said, we also expect to realize some benefits to our bottom line as a result of our December workforce reduction, as well as some other cost cutting measures. For Q1, we currently expect subscription revenue of $88 million to $89.5 million, representing year-over-year growth of 13% at the midpoint. Professional services revenue of $13.0 million to $13.5 million.

Total revenue of $101 million to $103 million, representing year-over-year growth of 9% at the mid-point. Non-GAAP operating income of $4 million to $5 million and non-GAAP net income per share of breakeven to $0.01 per share, assuming a weighted average shares outstanding of approximately 136.2 million. For the full-year, we currently expect subscription revenue of $374 million to $384 million, representing year-over-year growth of 12% at the midpoint. Professional services revenue of $54 million to $56 million. Total revenue of $428 million to $440 million, representing year-over-year growth of 10% at the mid-point. Non-GAAP operating income of $26 million to $31 million, and a non-GAAP net income per share of $0.07 to $0.11, assuming a weighted average shares outstanding of approximately 140 million.

Turning to our free cash flow. We are committed to operating in a disciplined manner and for the full-year we currently expect free cash flow to be at least $24 million, a significant improvement of over $55 million from fiscal year 2023. We are committed to delivering a minimum of 6% non-GAAP operating margin for the year regardless of the macro environment. Turning to dollar-based retention rate and AR growth. We expect DBRR of 107% to 109% and ARR growth of 12% to 15% for the year. Finally, I would like to provide visibility into stock based compensation. For fiscal year 2024, we expect to be under 5% in annual share dilution with a mid-term target of 4% per year. For this purpose, dilution is calculated as a number of equity awards granted net of during the fiscal year divided by the total shares outstanding at the end of the fiscal year.

To close off, while the current macro environment remains challenging, we continue to see benefits from the areas we are focused on. This includes our Billing, Revenue, Collect, and Zephr products. We will continue to be disciplined and focused in fiscal 2024. Our plan is to balance growth, and profitability, while significantly improving free cash flow and delivering the most innovative products to our customers. With that, Tien, Robbie, and I will take your questions and I’ll turn it over to the operator.

Q&A Session

Operator: Thank you. And we will take our first question from Adam Hotchkiss with Goldman Sachs. Your line is open.

Adam Hotchkiss: Great. Thanks for taking my questions. It would be great to start by digging in on a bit more on the customer behavior piece you mentioned with the existing base versus Q3. Todd, I remember you’ve talked quite a bit about volume commitments being the driver of slowing growth on the Q3 call. When you talk about the business stabilizing, are you referring to this volume commitment dynamic or are there other areas of relative stability that we should be aware of when we think about that?

Todd McElhatton: Adam, thanks a lot for the question. So, we across the board on upsells did see a stabilization. Companies got a little more comfortable with how they thought the year was progressing. And we saw folks have a more normal behavior from a standpoint of not only making commitments on volume, but other additional products. That being said, it certainly is muted and I wouldn’t say, we were where we were 12 months ago.

Adam Hotchkiss: Okay, great. That’s super helpful. Thanks. And then on the profitability guidance, I know on the last call you had mentioned sort of the 6% plus on operating margins. When you think about the guidance that you put out today, what are some of the levers that you think you’re still able to pull over the next 6 months to 12 months and your willingness to do so to outperform there?

Todd McElhatton: Again, I think we’ve been very prudent on how we’ve been spending and how we’re thinking about dollars that we’re holding back and that we might put in investments if we see things move forward or if we see the economy continue to be in a challenged way, we’ll put those dollars to the bottom line. But we’ve also got opportunities to make further reductions. I think you probably saw this last quarter that we closed down our Atlanta office. We’ve shrunk the Boston office. There’s other opportunities within the sales and marketing areas to do better. And you’re also seeing the €“ on the COGS side, on the subscription piece, we’re certainly rationalizing what our spend looks like. There’s opportunities there. We’re getting more efficient on the support. And last, but not least, we’ve also committed to be profitable on a non-GAAP basis on the professional services. So, I think we’ve still got several levers that we have that we can use during the year.

Tien Tzuo: This is Tien here. I’ll just add. One of the things I want to make sure doesn’t get lost is because of what we do, because of the product that we have, because of the customer base that we have, we have the fortune of having a solid customer base in a very sticky product. And I think that gives us a level of certainty even in these unpredictable times of being able to manage the business, which is fortunate for us.

Adam Hotchkiss: Okay. Really helpful. Thanks, Tien. Thanks, Todd.

Operator: We will take our next question from Chad Bennett with Craig-Hallum. Your line is open.

Chad Bennett: Great. Thanks for taking my questions. So, just trying to, kind of reconcile and get a sense for the stableness, I guess, you would call it in the fourth quarter. You talked about the majority of deals that pushed from Q3 into Q4 closed, win rates improved, and I think I heard record low churn for the year, which I assume means Q4. And then just, kind of reconciling with the net new add number over 100,000 of three deals. Just kind of how relative to whether you look at a year-over-year basis or what not, so how should we view that net new number in the quarter?

Tien Tzuo: What we’re trying to say is, you all see the data out there. You talked to lots of companies. There’s certainly a macro level slowdown in tech. What we’re trying to highlight is, if you look at what happened for us in Q3 and specifically in the month of October, which is end of Q3, it just felt like when we sensed on our buyers that there was a lot more uncertainty in Q3 in October. Right. And they weren’t sure whether the economies would slow down, they weren’t sure what the Feds were going to do. And while €“ I wouldn’t say that that the tech industry is back to a growth mode, right, at least the level of uncertainty of what the Fed is going to do and other factors are, seem to be lower. And so, the uncertainty we saw in the pipe has lessened. I think that’s what we’re trying to communicate because I know you all have a lot of questions about what’s going on at the macro.

Todd McElhatton: Chad, I’d like to maybe emphasize a couple other things. So, one is, remember we have a land and an expand strategy. And on the expand strategy, I think it’s really important, Tien talked earlier in the call, we saw an increase of customers spending over $1 million number of customers increased by 33% this year. That’s been a huge component. And remember, going back a couple of years ago, I think we absolutely made the right decision to focus on enterprise customers. And we’ve talked about those customers that we’re landing are landing much larger and with a much larger ASP. And so, that’s one of the things that’s also driving growth. We’re certainly focused on new business and I would say, the environment still remains cautious and people are being very thoughtful before they make incremental purchasing decisions, but we have a two-pronged strategy here.

We’re certainly bringing on new customers and you saw this quarter, we had 6 deals that were over $0.5 million. Two of those deals were over $1 million. So, the land that we’re getting especially with the has moved to larger deals.

Chad Bennett: Okay. And then maybe a follow-up just on the dollar based net expansion expectation or range for the year. I think it’s , you know effectively stable with where you ended this year. Todd, how are you thinking about this year as it relates from the past year in terms of volume growth versus cross-sell, upsell? Any material mix change there in terms of how you’re thinking about net expansion?

Todd McElhatton: Yes. So, thanks a lot, Chad. So, yes, I think you are certainly looking at that range being stable. And I think that also hits the back that we want to have balance. We want to be bringing on new business along with expanding our installed base. From that being said, we’re certainly being, I would say very prudent on how we’re thinking about the volume. A big chunk of our business does come from technology. We’ve seen that slowing down. So, we plan for that accordingly. The other thing I would point you out too is, another comment that we made earlier in the call is 20% of our incremental billings last year came from products that had been developed in the last 18 months. So, I’m going to expect to see things that have come out of the innovation engine this year and things that will be coming out next year also driving that dollar based retention.

And then maybe the last thing I would just say is, as I think about that for the year, remember especially I think in Q1 of last year, we’ve got a pretty strong compare that we’re . So, I think that’s why I’m giving the range of 107 to 109 for the full-year.

Chad Bennett: Got it. Maybe one last one if I could. Sorry. Just in terms of the partner traction you’re seeing and it seems like it’s been very strong even in a challenging environment and deal sizes are enormous and win rates are higher, which is all good stuff. Do we have enough time or duration in those deals, those partner led deals to see, kind of what net expansion is of those deals when they annualize and how that looks relative to the current net expansion rate? Then I’ll hop off. Thanks.

Todd McElhatton: Yes. I think the only color that I would give you is, when we take a look at some of our cohorts that we’ve landed over the last couple of years, they’ve actually had a better rate of dollar based DBRR than what we’ve seen on maybe some of the older cohorts going back several years.

Chad Bennett: Got it. Good to hear. Thank you.

Todd McElhatton: Thanks Chad.

Operator: And we will take our next question from Brent Thill with Jefferies. Your line is open.

Luv Sodha: Hi. This is Luv Sodha on for Brent Thill. Thank you, Tien, and Todd for taking my questions. And Robbie too. Maybe, you know, one on, you know, I guess unearned revenue was a little bit lighter than expected. Did you see €“ I know you mentioned stabilization in the base, but did you see any new deals push from Q4 into future quarters?

Tien Tzuo: Thanks for the question. We absolutely €“ as we’ve talked about it, it is a slower environment out there. People are being very thoughtful and delivered as they’re making decisions. So, we felt good about some of the things that had slipped into Q3. We closed a majority of those. We closed deals that were in the pipeline for Q4. But as we had planned and I think we landed right about where we said we were going to, it was a slower quarter for things coming through the pipeline. We expected that and we put that into our guidance as we move forward for next year. I don’t expect it to be a material change in that dynamic as we go through the next several quarters.

Luv Sodha: Got it. And then you know, Todd, for you, I guess, how would you position this guidance? Is it incorporating macro getting stabilizing or improving? And then any color on dollar based net retention? When should it bottom during the year? Thank you.

Todd McElhatton: So, Luv, I’d say this about the guidance. We exited the year with $365 million worth of ARR that’s in the bank. The low end of the guidance is 374. So that means we’ve got $9 million of net incremental revenue that we’ve got to add. And if you take a look at what we’ve added over the last 6 quarters to 8 quarters, I feel that is a very achievable goal to get even if things worsen to get at the low-end. So, I feel that we’ve got a very reasonable guidance that we’ve given. From a dollar-based retention rate, the things I would say is, going back several years. We invested really big in our customer success programs. We’ve invested in innovation, making sure that our customers are getting the most out of the platform, and our revenue and billing products, and that’s absolutely showing results.

And I think that shows up in the fact that every quarter I believe this year, we improved our retention. We had the lowest level of churn since we’ve been a public company. And hit you. We talked about one of the big SaaS companies that had made a decision several years ago should they consolidate on a big CRM platform and move over. And after going through this for multiple years, they took a $5 million write-off and said, we’re all in on Zuora. They had been using Zuora. It’s the right solution. This other solution can’t do what we’re going to do. And I think that’s been consistent with what we’ve seen. So, remember, we have got the €“ our installed base is these large enterprise customers. They’re getting bigger and bigger, more and more all-in on Zuora, and they’re dependent on us for recognizing their revenue, for doing their billings, and their collections.

And those are mission critical type things. And they’re SOX compliant. So, those are things that you don’t make changes lightly on and we feel really good about our position from a retention standpoint.

Tien Tzuo: Hello, this is Tien. I’ll just add, I know you’ve been following us for some time. We’re a very different company than a few years ago where the vast majority of our upsells were based on volume. Today, we have a much more balanced ability to grow within our accounts and that’s why we share the data about 20% of our deals, right, in the past 12 months were based on products that were only recently developed in the last 18 months. And so, you see we have a much more balanced approach now to growth within our installed base.

Luv Sodha: Got it. Perfect. Thank you.

Operator: And we’ll take our next question from Jacob Stephan with Lake Street Capital Markets. Your line is open.

Jacob Stephan: Hey, thanks for taking my questions. Maybe just focusing on the European market. I know you said 33% of your revenue comes from the European market, but I mean what trends are you seeing over there that, kind of similar to the U.S.?

Todd McElhatton: So, I’ll let Robbie take that. But real quick, Jacob. About a third of our business is international. So, that’s not all Europe. We’ve got other presence in Japan and Asia Pacific, but Robbie, maybe if you want to give some color on what we’re seeing in Europe.

Robbie Traube: Yes. I mean has been, as you’ve seen in other places, now peers, there’s been some softness in EMEA, due to macro, look, we had good execution actually in our Q4 in that region. And bottom line, we’ve seen that impact overall, but we’re still seeing continued interest in the product. We’re still selling products that really provide true value base. Tien mentioned Scout24 as an example in a particular space too. So, again, some of that softness has been there, but we continue to see growth there.

Jacob Stephan: Okay. Maybe just focusing on gross margin. What €“ so you mentioned there’d be some levers that you could pull to increase the subscription revenue margin, but could you give any more color on what some of those levers might be?

Todd McElhatton: Yes. I would give you maybe three things that we’re thinking about. First of all, we are now multi-cloud. So, we’ve got our revenue products spun up on Azure. We then are also using AWS. I believe that gives us opportunity for further leverage. The team has spent €“ our engineering team has done a fantastic job of working from a standpoint of how to get much better optimization out of the usage, and we’re seeing those spend dollars get more controlled. And then the last thing is, I think there’s opportunities as we’ve spent investments on our support area to again get more efficient there, not only provide better customer satisfaction, but also to bring down costs in that area.

Jacob Stephan: Okay. Got it. Thank you.

Operator: And we will take our next question from Andrew DeGasperi with Berenberg. Your line is open.

Andrew DeGasperi: Thanks for taking my question. I guess just as a follow-up to that, kind of competitive win with nameless, I guess, large implementation that was canceled, can you maybe explain a little more like €“ yes. Sorry. Can you hear me?

Tien Tzuo: Yes. Yes, I can hear you now.

Andrew DeGasperi: I was going to just say, like, can you maybe elaborate a little more like what, I mean, it seems pretty drastic to take a, kind of charge of that size after so many years investing into a platform. Can you maybe explain like did you get any feedback as to what made him do that?

Todd McElhatton: Yes. So Andrew, that was a customer actually, I knew, and we’ve had an ongoing dialogue, and basically, we had a situation where the CIO would come in, it was no longer at that organization came in and said, hey, I think it makes sense to centralize all on 1 platform. And what they realized the complexities of their business from not only their CPQ product, but the difference from a complexity of the different types of billing that they were going to have could not just get it to work. And it was something they had worked on for multiple years. It was truly a case of, hey, here was a product that had very basic functionality that was not matched at all with what that company needed. And so, after trying for several years and putting a lot into it, they finally, came back to us and said, hey, we’re going to go upgrade to your most recent CPQ.

We work with them doing that through our Q3 and Q4. They went live on it. And at that point, then made the decision that they weren’t going to continue this to try to move to a platform that didn’t meet their business needs.

Tien Tzuo: Yes. I mean, Andrew, this is Tien. I think people just continue to underestimate how complicated billing can be, and we’ve seen a company like NetSuite before they were acquired by Oracle take three runs at trying to build suite billing. Customers aren’t happy. And so, we think really in this environment where, you kind of have to focus on your core. The good news for us is our core is subscription management. It is billing. It is revenue recognition. It is supporting all these different types of charge models and taxes and rev rec rules. And so, we feel really good about our position, and we feel really good that there’s any complexity in your business and if you’re growing, there certainly will be that ultimately, our technology is very differentiated and people eventually figure that out, and it puts us in a really good position.

Todd McElhatton: I mean, Andrew, I’d just use the analogy. I think anybody can go out and play basketball and shoot the hoops, not anybody €“ not everybody can play like a world championship team. And when you start looking at some of the companies that we’re working with, they need that world championship team. We have spent 14 years and approaching $1 billion of R&D and delivery to optimize our products for billing and revenue. And that’s just really where we’re differentiated and why we are the best of breed and why we are the leader in this space.

Andrew DeGasperi: Thanks. That’s a good analogy. I guess as a follow-up on the Sri’s departure, just wondering what that means for integrating, for example, Zephr, within the platform, do you foresee any challenges on that front or on the, kind of incubation of the new products for 2024?

Tien Tzuo: Yes. I would say €“ this is Tien here. I would say, we don’t anticipate any challenges. When Sri came in, he’s been fantastic. He came in for a mission. He accomplished that mission. He got our innovation machine going. He created a world-class team with fantastic modern processes. And he leaves behind a great infrastructure, great technology platform, a great team. I have every confidence in the team and fully support his decision. I’ll miss him, but I think we’re €“ he leaves us in a really good place.

Todd McElhatton: Hey Andrew, one more thing on Zephr is, we’re really pleased with how that’s done. That has overperformed on the top line. We’ve kept over 90% of the employee, product road map is absolutely on target. And if you take a look at our bottom line from a standpoint of the non-GAAP operating margin, we’ve absolutely overachieved in Q3 and Q4. So, I think we’re showing that here was a great tuck-in type of acquisition, that fit really well, and it supports our expand strategy, and we did it in a very disciplined way.

Andrew DeGasperi: That’s helpful. Thank you.

Operator: We will take our next question from Joshua Reilly with Needham. Your line is open.

Joshua Reilly: Hi, there. If you look at customers that are more willing to buy, would you say that they’re in more of the media and manufacturing verticals? Or would you also say that like tech is dying out a bit as well?

Robbie Traube: Maybe one thing I’d say, Joshua, thanks for the question. It’s the mix, right? It’s the mix across all of these. We have great wins reading about it from a manufacturing standpoint. There’s some large pharma, top-tier automotive like Stellantis, but also in tech, right, some great wins there as well. And then even in going into transportation and in information services. So, it’s the mix across all of these, and we’re just proving that out and seeing that more and more.

Todd McElhatton: And I think it’s only the mix. We’ve got a good geographic mix, Josh, along with the fact that we’re working with enterprise companies and many of these companies, regardless of where they are, they’re needing to make transformation. So, even though there’s a tough environment there are still companies that are looking forward to what do I need to do to grow my business? What do I need to do to support in the year, next year and the year after? And so, just that whole base of customers and where we’re focused gives us a lot of opportunity even in a challenging environment.

Joshua Reilly: Got it. That’s helpful. And then can you just give us a sense of, maybe how much are RFPs or deals that you see in the market down year-over-year entering this year versus last year, even just qualitatively, not quantitatively. And how would you characterize your market share position at this point in the year versus a year ago as well? Do you believe that you’ve gained market share relative to the broader market?

Robbie Traube: I’ll take that one. And I think the €“ look, overall, our pipeline is up, right? And we’re looking at it in terms of good buy run as we go forward into as we progress in Q1. I think overall, we’re seeing more traction. And also from a partner perspective, the amount of momentum that we’re seeing there and the increase in the source pipeline and influence pipeline we get there is also proving out that momentum too.

Joshua Reilly: Okay. Got it. And then maybe just one last quick one for Todd. If you look at the guidance for 2024, I didn’t see a comment in there about how much of the FX headwind assumed in subscription revenue and ARR.

Todd McElhatton: Yes. So, I think what we’ve done is, we put it in an as-reported basis, and we’re going to assume that the rates are relatively constant from where they are today from a planning perspective.

Joshua Reilly: Got it. Thanks guys.

Todd McElhatton: Thanks, Josh.

Operator: And we have time for one final question, and that will come from Joseph Vafi with Canaccord. Your line is open.

Joseph Vafi: Hey, guys. Nice execution here this quarter. A lot of questions already. Just wanted follow up, I think, Tien, on your comment relative to Microsoft and Azure. I mean, obviously, they’re a partner, but it also sounds like they’re moving to be a customer. Any extra color you can add there on that?

Tien Tzuo: Yes. So, we’re pretty excited about that. Microsoft is a customer in several cases, but we have committed and delivered on our revenue product on Azure, and that’s what Microsoft is using. And so, we are now a multi-cloud environment. We’re going to continue to move in that direction. And we’re pretty happy to have Microsoft under the customer and as a first customer of our Azure stack.

Joseph Vafi: That’s great. Is that, I mean any more color you can add there on, I mean, obviously, Azure is a huge platform and the ability to €“ for them to be a customer and to integrate that solution is pretty wide. Is it still small kind of pilot size or what does that road map look like in that opportunity to the extent you can talk about it?

Tien Tzuo: Yes. So, Microsoft, obviously, a large company, we’re talking to them in multiple places. Maybe with the more exciting €“ the question really is, hey, what is it being on Azure open-up? And it does open-up for us the entire Microsoft retailer base. If you’re a Microsoft customer and you have an Azure contract and you buy Zuora revenue on Azure, you can actually use your Azure credits as part of that transaction. And so, it’s pretty exciting for us now to be in the position where we can actually talk to Microsoft reseller channel and co-sell with them into those accounts, perhaps into the Microsoft Dynamics space as an example.

Joseph Vafi: Sure. That’s great. And then just one other question. It sounds like the Zephr deal is going really nicely. To what extent are, kind of some of your systems integration partners aware of Zephr at this point? Is it ready for them to be included in, kind of their sale of your products? Thanks a lot guys.

Robbie Traube: Yes, Joe. I mean there’s definitely interest. I mean, we’ve been very, very focused around the media publishing area, specifically there, but that interest is definitely growing across . We had actually a large number from across Deloitte, PwC, EY, RSM, right way, Accenture actually had ourselves and actually came on in-person for two days, and they were extremely interested in what the has to offer.

Joseph Vafi: Great. Sounds like we will hear more about that. Thanks guys.

Operator: And ladies and gentlemen, this concludes today’s conference call, and we thank you for your participation. You may now disconnect.