Zuora(ZUO) - 2020 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements (unaudited) This section presents the company's unaudited condensed consolidated financial statements and accompanying notes Condensed Consolidated Balance Sheets | Metric | October 31, 2019 (in thousands) | January 31, 2019 (in thousands, As Adjusted¹) | | :--- | :--- | :--- | | Assets | | | | Total current assets | $255,609 | $257,754 | | Total assets | $331,289 | $326,047 | | Liabilities & Stockholders' Equity | | | | Total current liabilities | $144,561 | $128,072 | | Total liabilities | $163,546 | $144,233 | | Total stockholders' equity | $167,743 | $181,814 | | Total liabilities and stockholders' equity | $331,289 | $326,047 | Condensed Consolidated Statements of Comprehensive Loss | Metric | Three Months Ended Oct 31, 2019 (in thousands) | Three Months Ended Oct 31, 2018 (in thousands, As Adjusted¹) | Nine Months Ended Oct 31, 2019 (in thousands) | Nine Months Ended Oct 31, 2018 (in thousands, As Adjusted¹) | | :--- | :--- | :--- | :--- | :--- | | Total revenue | $71,822 | $61,356 | $205,664 | $171,651 | | Gross profit | $37,521 | $31,179 | $105,630 | $86,809 | | Loss from operations | $(19,006) | $(17,531) | $(61,216) | $(51,419) | | Net loss | $(18,237) | $(17,224) | $(59,642) | $(53,558) | | Net loss per share, basic and diluted | $(0.16) | $(0.16) | $(0.54) | $(0.62) | Condensed Consolidated Statements of Stockholders' Equity | Metric | Balance, January 31, 2019 (in thousands) | Balance, October 31, 2019 (in thousands) | | :--- | :--- | :--- | | Additional Paid-in Capital | $488,776 | $534,642 | | Accumulated Deficit | $(307,454) | $(367,096) | | Total Stockholders' Equity | $181,814 | $167,743 | - Net loss for the nine months ended October 31, 2019, was $59,642 thousand, contributing to an increased accumulated deficit[17] Condensed Consolidated Statements of Cash Flows | Cash Flow Activity | Nine Months Ended Oct 31, 2019 (in thousands) | Nine Months Ended Oct 31, 2018 (in thousands, As Adjusted¹) | | :--- | :--- | :--- | | Net cash used in operating activities | $(7,599) | $(16,592) | | Net cash used in investing activities | $(9,518) | $(107,986) | | Net cash provided by financing activities | $12,130 | $155,873 | | Net (decrease) increase in cash and cash equivalents and restricted cash | $(5,403) | $30,954 | | Cash and cash equivalents and restricted cash, end of period | $64,621 | $84,317 | Notes to Unaudited Condensed Consolidated Financial Statements Note 1. Overview and Basis of Presentation This note details the company's business, basis of presentation, and the retrospective adoption of Topic 606 - Zuora, Inc was incorporated in Delaware in 2006 and provides cloud-based software for subscription business models, automating the order-to-revenue process[28][29] - The company completed an Initial Public Offering (IPO) in April 2018, issuing 12.7 million shares of Class A common stock and receiving $159.7 million in net proceeds[31] - Effective February 1, 2019, Zuora adopted Topic 606 (Revenue from Contracts with Customers) using the full retrospective method, adjusting all historical amounts and disclosures[33] Note 2. Summary of Significant Accounting Policies and Recent Accounting Pronouncements This note details significant accounting policies, focusing on the impact of adopting Topic 606 on revenue and deferred commissions - Topic 606 adoption (effective Feb 1, 2019) modified revenue recognition by removing contingent revenue limitations, allocating discounts over the contract period, recognizing on-premise license revenue upon delivery, and changing allocation between subscription and professional services[39][40] - Subscription services revenue is recognized ratably over the contract term, while professional services revenue is recognized as services are rendered or on a proportional performance basis[43][46] - Sales commission expenses are capitalized and amortized over an estimated benefit period of five years, included in Sales and marketing expense[53] - The adoption of Topic 606 resulted in a cumulative effect adjustment to Accumulated Deficit and Total Stockholders' Equity of a $24.0 million credit as of January 31, 2018, primarily related to deferred commissions[21] Impact of Topic 606 on Balance Sheet (January 31, 2019, in thousands) | Line Item | As Reported Under ASC 605 | Topic 606 Adjustment | As Adjusted Under Topic 606 | | :--- | :--- | :--- | :--- | | Deferred commissions, current portion | $0 | $8,616 | $8,616 | | Prepaid expenses and other current assets | $10,414 | $4,218 | $14,632 | | Deferred commissions, net of current portion | $0 | $18,664 | $18,664 | | Purchased intangibles, net | $9,042 | $(1,646) | $7,396 | | Goodwill | $20,861 | $(3,229) | $17,632 | | Deferred revenue, current portion | $90,565 | $(3,781) | $86,784 | | Deferred revenue, net of current portion | $406 | $(294) | $112 | | Deferred tax liabilities | $0 | $1,877 | $1,877 | | Accumulated deficit | $(336,275) | $28,821 | $(307,454) | Impact of Topic 606 on Comprehensive Loss (Three Months Ended October 31, 2018, in thousands) | Line Item | As Reported Under ASC 605 | Topic 606 Adjustment | As Adjusted Under Topic 606 | | :--- | :--- | :--- | :--- | | Subscription Revenue | $44,485 | $(1,402) | $43,083 | | Professional Services Revenue | $17,152 | $1,121 | $18,273 | | Total Revenues | $61,637 | $(281) | $61,356 | | Net Loss | $(17,889) | $665 | $(17,224) | | Net Loss Per Share (basic and diluted) | $(0.17) | $0.01 | $(0.16) | Impact of Topic 606 on Comprehensive Loss (Nine Months Ended October 31, 2018, in thousands) | Line Item | As Reported Under ASC 605 | Topic 606 Adjustment | As Adjusted Under Topic 606 | | :--- | :--- | :--- | :--- | | Subscription Revenue | $122,069 | $(2,220) | $119,849 | | Professional Services Revenue | $49,066 | $2,736 | $51,802 | | Total Revenues | $171,135 | $516 | $171,651 | | Net Loss | $(56,923) | $3,365 | $(53,558) | | Net Loss Per Share (basic and diluted) | $(0.66) | $0.04 | $(0.62) | Note 3. Investments This note summarizes the company's short-term investments, including their amortized cost, unrealized gains, and fair values | Investment Type | Amortized Cost (Oct 31, 2019, in thousands) | Fair Value (Oct 31, 2019, in thousands) | | :--- | :--- | :--- | | U.S. government securities | $27,930 | $28,002 | | Corporate bonds | $36,908 | $36,964 | | Commercial paper | $40,811 | $40,811 | | Total short-term investments | $105,649 | $105,777 | | Investment Type | Amortized Cost (Jan 31, 2019, in thousands) | Fair Value (Jan 31, 2019, in thousands) | | :--- | :--- | :--- | | U.S. government securities | $17,950 | $17,951 | | Corporate bonds | $34,296 | $34,302 | | Commercial paper | $55,655 | $55,655 | | Total short-term investments | $107,901 | $107,908 | - All securities had stated effective maturities of two years or less as of October 31, 2019[73] Note 4. Fair Value Measurements This note outlines the company's fair value hierarchy for financial assets and summarizes measurements for cash and investments | Asset Type | Level 1 (Oct 31, 2019, in thousands) | Level 2 (Oct 31, 2019, in thousands) | Level 3 (Oct 31, 2019, in thousands) | Total (Oct 31, 2019, in thousands) | | :--- | :--- | :--- | :--- | :--- | | Money market funds | $53,274 | $0 | $0 | $53,274 | | U.S. government securities | $0 | $28,002 | $0 | $28,002 | | Corporate bonds | $0 | $36,964 | $0 | $36,964 | | Commercial paper | $0 | $40,811 | $0 | $40,811 | | Total short-term investments | $0 | $105,777 | $0 | $105,777 | | Asset Type | Level 1 (Jan 31, 2019, in thousands) | Level 2 (Jan 31, 2019, in thousands) | Level 3 (Jan 31, 2019, in thousands) | Total (Jan 31, 2019, in thousands) | | :--- | :--- | :--- | :--- | :--- | | Money market funds | $61,201 | $0 | $0 | $61,201 | | U.S. government securities | $0 | $17,951 | $0 | $17,951 | | Corporate bonds | $0 | $34,302 | $0 | $34,302 | | Commercial paper | $0 | $55,655 | $0 | $55,655 | | Total short-term investments | $0 | $107,908 | $0 | $107,908 | | Restricted cash: Money market funds | $2,084 | $0 | $0 | $2,084 | Note 5. Deferred Commissions This note details the company's deferred commissions and their amortization expense for the reported periods | Metric | October 31, 2019 (in thousands) | January 31, 2019 (in thousands, As Adjusted) | | :--- | :--- | :--- | | Deferred commissions | $27,000 | $27,300 | | Metric | Three Months Ended Oct 31, 2019 (in thousands) | Three Months Ended Oct 31, 2018 (in thousands, As Adjusted) | Nine Months Ended Oct 31, 2019 (in thousands) | Nine Months Ended Oct 31, 2018 (in thousands, As Adjusted) | | :--- | :--- | :--- | :--- | :--- | | Amortization expense | $2,400 | $2,000 | $7,000 | $5,800 | Note 6. Prepaid Expenses and Other Current Assets This note provides a breakdown of the company's prepaid expenses and other current assets as of the reporting dates | Category | October 31, 2019 (in thousands) | January 31, 2019 (in thousands, As Adjusted¹) | | :--- | :--- | :--- | | Contract assets | $4,152 | $4,218 | | Prepaid software subscriptions | $4,037 | $4,797 | | Prepaid hosting costs | $1,556 | $1,251 | | Prepaid insurance | $1,342 | $790 | | Prepaid rent | $1,045 | $991 | | Taxes | $440 | $579 | | Other | $3,585 | $2,006 | | Total | $16,157 | $14,632 | Note 7. Property and Equipment, Net This note details the company's property and equipment, net of accumulated depreciation and amortization | Category | October 31, 2019 (in thousands) | January 31, 2019 (in thousands) | | :--- | :--- | :--- | | Servers | $16,873 | $14,972 | | Software | $13,967 | $10,770 | | Leasehold improvements | $12,785 | $5,010 | | Computer equipment | $11,123 | $10,109 | | Furniture and fixtures | $3,945 | $2,523 | | Vehicles | $109 | $109 | | Less accumulated depreciation and amortization | $(30,410) | $(23,868) | | Total | $28,392 | $19,625 | | Metric | Three Months Ended Oct 31, 2019 (in thousands) | Three Months Ended Oct 31, 2018 (in thousands) | Nine Months Ended Oct 31, 2019 (in thousands) | Nine Months Ended Oct 31, 2018 (in thousands) | | :--- | :--- | :--- | :--- | :--- | | Depreciation and amortization expense | $2,800 | $1,800 | $7,000 | $4,900 | | Internal-use software amortization to cost of subscription revenue | $1,000 | $400 | $1,800 | $1,000 | Note 8. Purchased Intangible Assets This note summarizes the company's purchased intangible assets, detailing their carrying amounts and amortization | Intangible Asset | Gross Carrying Amount (Oct 31, 2019, in thousands) | Accumulated Amortization (Oct 31, 2019, in thousands) | Net Carrying Amount (Oct 31, 2019, in thousands) | | :--- | :--- | :--- | :--- | | Developed technology | $7,697 | $(4,879) | $2,818 | | Customer relationships | $4,287 | $(1,657) | $2,630 | | Trade names | $909 | $(314) | $595 | | Total | $12,893 | $(6,850) | $6,043 | | Intangible Asset | Gross Carrying Amount (Jan 31, 2019, in thousands) | Accumulated Amortization (Jan 31, 2019, in thousands) | Net Carrying Amount (Jan 31, 2019, in thousands) | | :--- | :--- | :--- | :--- | | Developed technology | $7,697 | $(4,045) | $3,652 | | Customer relationships | $4,287 | $(1,236) | $3,051 | | Trade names | $909 | $(216) | $693 | | Total | $12,893 | $(5,497) | $7,396 | | Metric | Three Months Ended Oct 31, 2019 (in thousands) | Three Months Ended Oct 31, 2018 (in thousands) | Nine Months Ended Oct 31, 2019 (in thousands) | Nine Months Ended Oct 31, 2018 (in thousands) | | :--- | :--- | :--- | :--- | :--- | | Amortization expense | $400 | $500 | $1,400 | $1,700 | Note 9. Accrued Expenses and Other Current Liabilities This note provides a detailed breakdown of the company's accrued expenses and other current liabilities | Category | October 31, 2019 (in thousands) | January 31, 2019 (in thousands) | | :--- | :--- | :--- | | Accrued outside services and consulting | $3,443 | $2,089 | | Accrued goods and services taxes | $2,980 | $3,098 | | Accrued taxes | $1,941 | $1,651 | | Accrued hosting and third party license fees | $1,919 | $1,073 | | Employee early exercised stock options | $143 | $436 | | Other accrued expenses | $6,732 | $5,863 | | Total | $17,158 | $14,210 | Note 10. Deferred Revenue and Performance Obligations This note details the company's deferred revenue and remaining non-cancellable performance obligations | Metric | Three Months Ended Oct 31, 2019 (in thousands) | Three Months Ended Oct 31, 2018 (in thousands, As Adjusted) | Nine Months Ended Oct 31, 2019 (in thousands) | Nine Months Ended Oct 31, 2018 (in thousands, As Adjusted) | | :--- | :--- | :--- | :--- | :--- | | Subscription revenue recognized from deferred balances | $42,500 | $29,200 | $73,700 | $50,100 | - As of October 31, 2019, total remaining non-cancellable performance obligations under subscription contracts were approximately $261.6 million, with 61% expected to be recognized over the next 12 months[85] Note 11. Geographical Information This note disaggregates the company's revenue by geographical region based on the customer's address | Region | Three Months Ended Oct 31, 2019 (in thousands) | Three Months Ended Oct 31, 2018 (in thousands, As Adjusted¹) | Nine Months Ended Oct 31, 2019 (in thousands) | Nine Months Ended Oct 31, 2018 (in thousands, As Adjusted¹) | | :--- | :--- | :--- | :--- | :--- | | United States | $49,437 | $43,630 | $142,039 | $123,267 | | Others | $22,385 | $17,726 | $63,625 | $48,384 | | Total | $71,822 | $61,356 | $205,664 | $171,651 | | Region | Three Months Ended Oct 31, 2019 (%) | Three Months Ended Oct 31, 2018 (%) | Nine Months Ended Oct 31, 2019 (%) | Nine Months Ended Oct 31, 2018 (%) | | :--- | :--- | :--- | :--- | :--- | | United States | 69 % | 71 % | 69 % | 72 % | | Other | 31 % | 29 % | 31 % | 28 % | Note 12. Debt This note describes the company's loan and security agreement, including loan facilities, interest rates, and financial covenants - In October 2018, the Debt Agreement was amended to increase revolving loan availability to $30.0 million and lower borrowing costs to WSJ Prime Rate minus 1.00%[88] - As of October 31, 2019, the Company had $11.6 million outstanding under the term loan, with an interest rate of 3.75%[90] - The Company was in compliance with all financial covenants, including maintaining an adjusted quick ratio of no less than 1.10:1.00, as of October 31, 2019[91] Note 13. Income Taxes This note presents the company's income tax provision, pretax loss, and effective tax rate for the reported periods | Metric | Three Months Ended Oct 31, 2019 (in thousands) | Three Months Ended Oct 31, 2018 (in thousands, As Adjusted¹) | Nine Months Ended Oct 31, 2019 (in thousands) | Nine Months Ended Oct 31, 2018 (in thousands, As Adjusted¹) | | :--- | :--- | :--- | :--- | :--- | | Loss before income taxes | $17,816 | $16,898 | $58,922 | $52,637 | | Income tax provision | $421 | $326 | $720 | $921 | | Effective tax rate | (2.4)% | (1.9)% | (1.2)% | (1.7)% | - The effective tax rates differ from statutory rates primarily due to no benefit on pretax losses incurred in the United States, as the Company maintains a full valuation allowance against deferred tax assets[94] Note 14. Stockholders' Equity This note details the company's preferred stock, common stock classes, and accumulated other comprehensive income - As of October 31, 2019, the Company had 93.6 million shares of Class A common stock and 19.5 million shares of Class B common stock outstanding[97] - Class A common stock holders are entitled to one vote per share, while Class B common stock holders receive ten votes per share[98] | Component | Balance, January 31, 2019 (in thousands) | Balance, October 31, 2019 (in thousands) | | :--- | :--- | :--- | | Foreign currency translation adjustment | $474 | $58 | | Unrealized gain on available-for-sale securities | $7 | $128 | | Total Accumulated Other Comprehensive Income | $481 | $186 | Note 15. Employee Stock Plans This note provides information on the company's equity incentive plans, including activity and unrecognized compensation costs | Stock Option Metric | October 31, 2019 (in thousands, except per share data) | | :--- | :--- | | Balance as of January 31, 2019 (Shares) | 14,784 | | Granted (Shares) | 2,646 | | Exercised (Shares) | (2,217) | | Forfeited (Shares) | (1,115) | | Balance as of October 31, 2019 (Shares) | 14,098 | | Weighted-average exercise price (Oct 31, 2019) | $7.21 | | Aggregate intrinsic value (Oct 31, 2019) | $109,839 | | Unrecognized compensation cost (Oct 31, 2019) | $28,900 | | Weighted average recognition period | 2.6 years | | RSU/Restricted Stock Metric | October 31, 2019 (in thousands, except per share data) | | :--- | :--- | | Balance as of January 31, 2019 (Shares) | 3,063 | | Granted (Shares) | 3,117 | | Vested (Shares) | (1,450) | | Forfeited (Shares) | (524) | | Balance as of October 31, 2019 (Shares) | 4,206 | | Weighted-average grant date fair value (Oct 31, 2019) | $18.17 | | Unrecognized compensation cost (Oct 31, 2019) | $64,000 | | Weighted average recognition period | 2.8 years | | Stock-Based Compensation Expense (in thousands) | Three Months Ended Oct 31, 2019 | Three Months Ended Oct 31, 2018 | Nine Months Ended Oct 31, 2019 | Nine Months Ended Oct 31, 2018 | | :--- | :--- | :--- | :--- | :--- | | Cost of subscription revenue | $683 | $555 | $1,987 | $1,311 | | Cost of professional services revenue | $1,814 | $1,685 | $5,157 | $4,115 | | Research and development | $4,015 | $1,902 | $11,690 | $4,366 | | Sales and marketing | $3,728 | $2,205 | $8,071 | $5,317 | | General and administrative | $1,598 | $1,112 | $4,508 | $2,613 | | Total stock-based compensation expense | $11,838 | $7,459 | $31,413 | $17,722 | Note 16. Commitments and Contingencies This note outlines the company's operating lease obligations, ongoing legal proceedings, and other contractual commitments - In March 2019, the Company entered into a new operating lease for approximately 100,000 square feet of office space in Redwood Shores, California, with an initial term of 127 months[110] | Fiscal Year | Operating Leases (in thousands) | | :--- | :--- | | Remainder of 2020 | $2,920 | | 2021 | $9,768 | | 2022 | $12,722 | | 2023 | $12,730 | | 2024 | $10,049 | | Thereafter | $42,525 | | Total future lease commitments | $90,714 | - The Company is a defendant in a securities class action lawsuit filed in June 2019 and two shareholder derivative lawsuits filed in September 2019, alleging false and misleading statements and breach of fiduciary duty[115][116] - As of October 31, 2019, the Company had a contractual obligation of $14.6 million for cloud computing services to be purchased by September 30, 2020[117] Note 17. Net Loss Per Share Attributable to Common Stockholders This note presents the calculation of net loss per share and lists potentially dilutive securities excluded from the calculation | Metric | Three Months Ended Oct 31, 2019 | Three Months Ended Oct 31, 2018 (As Adjusted¹) | Nine Months Ended Oct 31, 2019 | Nine Months Ended Oct 31, 2018 (As Adjusted¹) | | :--- | :--- | :--- | :--- | :--- | | Net loss (in thousands) | $(18,237) | $(17,224) | $(59,642) | $(53,558) | | Weighted-average common shares outstanding (in thousands) | 111,835 | 106,049 | 110,436 | 85,820 | | Net loss per share, basic and diluted | $(0.16) | $(0.16) | $(0.54) | $(0.62) | | Potentially Dilutive Securities (in thousands) | October 31, 2019 | October 31, 2018 | | :--- | :--- | :--- | | Issued and outstanding stock options | 14,098 | 15,645 | | Unvested restricted stock issued and outstanding | 551 | 1,495 | | Unvested RSUs issued and outstanding | 3,655 | 1,566 | | Shares committed under ESPP | 313 | 398 | | Total | 18,617 | 19,104 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Provides management's perspective on financial condition, operational results, key metrics, and non-GAAP measures Overview Zuora is a leading cloud-based subscription management platform enabling companies to manage subscription business models - Zuora provides cloud-based software that automates and orchestrates the entire subscription order-to-revenue process, including billing and revenue recognition[123][124] - The company operates in the 'Subscription Economy,' a multi-decade global shift from product-based to recurring subscription-based business models[125] Fiscal Third Quarter Business Highlights The company focused on addressing sales execution and product integration challenges while expanding its sales leadership team - Expanded sales leadership with Robert Traube as Chief Revenue Officer and James Huang as Senior Vice President of Global Alliances to scale the business and deepen partner relationships[129] - Resumed paused customer implementations for the integrated Zuora Billing and Zuora RevPro products, aiming to improve cross-sell activity[130] - Customers with Annual Contract Value (ACV) exceeding $100,000 increased by 16% to 586[132] - Dollar-based retention rate was 106% as of October 31, 2019, a decline primarily due to lower cross-sell activity and some customers renewing with lower transaction volume[133] - Customer transaction volume through Zuora's billing platform increased by 29% to $11.2 billion[133] Fiscal Third Quarter Financial Performance Summary Financial performance showed increased revenues and a slight improvement in gross profit margin while operating at a loss | Metric | Three Months Ended Oct 31, 2019 (in millions) | Three Months Ended Oct 31, 2018 (in millions) | | :--- | :--- | :--- | | Subscription revenues | $54.0 | $43.0 (25% increase) | | Total revenues | $71.8 | $61.3 (17% increase) | | Gross profit | $37.5 (52% of total revenue) | $31.2 (51% of total revenue) | | Loss from operations | $(19.0) (26% of total revenue) | $(17.5) (29% of total revenue) | Key Operational and Financial Metrics The number of large ACV customers increased, while the dollar-based retention rate saw a slight decline | Metric | October 31, 2019 | October 31, 2018 | | :--- | :--- | :--- | | Customers with ACV ≥ $100,000 | 586 | 504 | | Dollar-based retention rate | 106% | N/A (107% as of July 31, 2019) | - The dollar-based retention rate declined primarily due to lower cross-sell activity of Zuora RevPro into existing Zuora Billing customers and some customers renewing with lower transaction volume[133] Components of Our Results of Operations This section describes the components of revenue, cost of revenue, gross profit, and operating expenses - Subscription revenue is primarily from fees for access to cloud-based products and customer support, recognized ratably over the contract term (typically 1-3 years)[139] - Professional services revenue comes from consultation, configuration, data migration, and training, recognized as services are rendered or on a proportional performance basis[140] - Cost of subscription revenue includes hosting, data center, third-party cloud fees, and employee compensation for infrastructure and support[143] - Operating expenses include research and development (capitalized internal-use software, expensed other R&D), sales and marketing (commissions amortized over five years), and general and administrative (finance, legal, HR, corporate expenses)[146][147][148] Results of Operations This section provides a detailed comparison of consolidated results for the three and nine months ended October 31, 2019 and 2018 | Metric (in thousands) | Three Months Ended Oct 31, 2019 | Three Months Ended Oct 31, 2018 (As Adjusted²) | Nine Months Ended Oct 31, 2019 | Nine Months Ended Oct 31, 2018 (As Adjusted²) | | :--- | :--- | :--- | :--- | :--- | | Subscription Revenue | $54,038 | $43,083 | $151,996 | $119,849 | | Professional Services Revenue | $17,784 | $18,273 | $53,668 | $51,802 | | Total Revenue | $71,822 | $61,356 | $205,664 | $171,651 | | Total Cost of Revenue | $34,301 | $30,177 | $100,034 | $84,842 | | Gross Profit | $37,521 | $31,179 | $105,630 | $86,809 | | Research and Development | $17,903 | $14,282 | $53,662 | $39,667 | | Sales and Marketing | $28,027 | $24,849 | $80,818 | $71,008 | | General and Administrative | $10,597 | $9,579 | $32,366 | $27,553 | | Loss from Operations | $(19,006) | $(17,531) | $(61,216) | $(51,419) | | Net Loss | $(18,237) | $(17,224) | $(59,642) | $(53,558) | Comparison of the Three Months Ended October 31, 2019 and 2018 Subscription revenue increased by 25%, while operating expenses rose due to increased headcount and investments Revenue | Revenue Type | 3 Months Ended Oct 31, 2019 (in thousands) | 3 Months Ended Oct 31, 2018 (in thousands) | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Subscription | $54,038 | $43,083 | $10,955 | 25 % | | Professional services | $17,784 | $18,273 | $(489) | (3)% | | Total revenue | $71,822 | $61,356 | $10,466 | 17 % | - Subscription revenue increase includes a one-time recognition of $1.3 million from a contract resolution[155] - New customers contributed approximately $5.6 million to the subscription revenue increase (excluding the one-time recognition)[155] - Professional services revenue decreased primarily due to previously disclosed sales execution challenges[157] Cost of Revenue and Gross Margin | Cost of Revenue Type | 3 Months Ended Oct 31, 2019 (in thousands) | 3 Months Ended Oct 31, 2018 (in thousands) | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Subscription | $13,858 | $10,987 | $2,871 | 26 % | | Professional services | $20,443 | $19,190 | $1,253 | 7 % | | Total cost of revenue | $34,301 | $30,177 | $4,124 | 14 % | | Gross Margin | 3 Months Ended Oct 31, 2019 (%) | 3 Months Ended Oct 31, 2018 (%) | | :--- | :--- | :--- | | Subscription | 74 % | 74 % | | Professional services | (15)% | (5)% | | Total gross margin | 52 % | 51 % | - Increase in cost of subscription revenue driven by $2.1 million in data center costs (third-party cloud hosting) and $0.7 million in internal-use software amortization[158] - Professional services gross margin decreased to (15)% from (5)% due to sales execution and product integration challenges negatively impacting utilization[161] Operating Expenses Research and Development | Metric | 3 Months Ended Oct 31, 2019 (in thousands) | 3 Months Ended Oct 31, 2018 (in thousands) | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Research and development | $17,903 | $14,282 | $3,621 | 25 % | | Percentage of total revenue | 25 % | 23 % | | | - Increase primarily due to $3.7 million in employee compensation costs (increased headcount) and $0.7 million in allocated overhead[162] Sales and Marketing | Metric | 3 Months Ended Oct 31, 2019 (in thousands) | 3 Months Ended Oct 31, 2018 (in thousands) | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Sales and marketing | $28,027 | $24,849 | $3,178 | 13 % | | Percentage of total revenue | 39 % | 40 % | | | - Increase primarily due to $4.3 million in employee compensation costs (increased headcount and executive hires)[164] General and Administrative | Metric | 3 Months Ended Oct 31, 2019 (in thousands) | 3 Months Ended Oct 31, 2018 (in thousands) | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | General and administrative | $10,597 | $9,579 | $1,018 | 11 % | | Percentage of total revenue | 15 % | 16 % | | | - Increase primarily due to $0.8 million in employee compensation costs (increased headcount) and $0.5 million in allocated overhead[165] Interest and Other Income (Expense), Net | Metric | 3 Months Ended Oct 31, 2019 (in thousands) | 3 Months Ended Oct 31, 2018 (in thousands) | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Interest and other income (expense), net | $1,190 | $633 | $557 | 88 % | - Increase primarily due to $0.5 million in net gains from foreign currency revaluation[166] Income Tax Provision | Metric | 3 Months Ended Oct 31, 2019 (in thousands) | 3 Months Ended Oct 31, 2018 (in thousands) | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Income tax provision | $(421) | $(326) | $(95) | 29 % | | Effective tax rate | (2.4)% | (1.9)% | | | - Effective tax rate differs from statutory rate due to no benefit on pretax losses in the U.S., with a full valuation allowance on deferred tax assets[167] Comparison of the Nine Months Ended October 31, 2019 and 2018 Subscription revenue increased by 27%, while operating expenses grew across all categories, reflecting continued investment Revenue | Revenue Type | 9 Months Ended Oct 31, 2019 (in thousands) | 9 Months Ended Oct 31, 2018 (in thousands) | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Subscription | $151,996 | $119,849 | $32,147 | 27 % | | Professional services | $53,668 | $51,802 | $1,866 | 4 % | | Total revenue | $205,664 | $171,651 | $34,013 | 20 % | - Subscription revenue increase includes a one-time recognition of $1.3 million from a contract resolution[168] - New customers contributed approximately $15.6 million to the subscription revenue increase (excluding the one-time recognition)[168] - Professional services revenue growth was partially offset by previously disclosed sales execution challenges[169] Cost of Revenue and Gross Margin | Cost of Revenue Type | 9 Months Ended Oct 31, 2019 (in thousands) | 9 Months Ended Oct 31, 2018 (in thousands) | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Subscription | $38,589 | $31,273 | $7,316 | 23 % | | Professional services | $61,445 | $53,569 | $7,876 | 15 % | | Total cost of revenue | $100,034 | $84,842 | $15,192 | 18 % | | Gross Margin | 9 Months Ended Oct 31, 2019 (%) | 9 Months Ended Oct 31, 2018 (%) | | :--- | :--- | :--- | | Subscription | 75 % | 74 % | | Professional services | (14)% | (3)% | | Total gross margin | 51 % | 51 % | - Increase in cost of subscription revenue driven by $4.9 million in data center costs (third-party cloud hosting) and $1.6 million in employee compensation[170] - Professional services gross margin decreased to (14)% from (3)% due to sales execution and product integration challenges negatively impacting utilization[173] Operating Expenses Research and Development | Metric | 9 Months Ended Oct 31, 2019 (in thousands) | 9 Months Ended Oct 31, 2018 (in thousands) | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Research and development | $53,662 | $39,667 | $13,995 | 35 % | | Percentage of total revenue | 26 % | 23 % | | | - Increase primarily due to $13.5 million in employee compensation costs (increased headcount) and $1.2 million in allocated overhead[174] Sales and Marketing | Metric | 9 Months Ended Oct 31, 2019 (in thousands) | 9 Months Ended Oct 31, 2018 (in thousands) | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Sales and marketing | $80,818 | $71,008 | $9,810 | 14 % | | Percentage of total revenue | 39 % | 41 % | | | - Increase primarily due to $11.1 million in employee compensation costs (increased headcount and executive hires)[176] General and Administrative | Metric | 9 Months Ended Oct 31, 2019 (in thousands) | 9 Months Ended Oct 31, 2018 (in thousands) | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | General and administrative | $32,366 | $27,553 | $4,813 | 17 % | | Percentage of total revenue | 16 % | 16 % | | | - Increase primarily due to $4.9 million in employee compensation costs (increased headcount) and $0.8 million in allocated overhead[177] Interest and Other Income (Expense), Net | Metric | 9 Months Ended Oct 31, 2019 (in thousands) | 9 Months Ended Oct 31, 2018 (in thousands) | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Interest and other income (expense), net | $2,294 | $(1,218) | $3,512 | 288 % | - Increase primarily due to $1.3 million in income from invested cash balances and a $1.7 million reduction in foreign currency revaluation losses[178] Income Tax Provision | Metric | 9 Months Ended Oct 31, 2019 (in thousands) | 9 Months Ended Oct 31, 2018 (in thousands) | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Income tax provision | $(720) | $(921) | $201 | 22 % | | Effective tax rate | (1.2)% | (1.7)% | | | - Effective tax rate differs from statutory rate due to no benefit on pretax losses in the U.S., with a full valuation allowance on deferred tax assets[179] Liquidity and Capital Resources This section discusses liquidity, capital resources, cash flows, contractual obligations, and critical accounting policies - As of October 31, 2019, Zuora had $170.4 million in cash and cash equivalents and short-term investments[180] - The company believes existing cash, investments, Debt Agreement funds, and cash from subscriptions will be sufficient for working capital and capital expenditure needs for at least the next 12 months[181] Debt Agreement - Refer to Note 12 for detailed information on the Debt Agreement[182] Cash Flows | Cash Flow Activity | Nine Months Ended Oct 31, 2019 (in thousands) | Nine Months Ended Oct 31, 2018 (in thousands) | | :--- | :--- | :--- | | Net cash used in operating activities | $(7,599) | $(16,592) | | Net cash used in investing activities | $(9,518) | $(107,986) | | Net cash provided by financing activities | $12,130 | $155,873 | | Net (decrease) increase in cash and cash equivalents and restricted cash | $(5,403) | $30,954 | Operating Activities - Net cash used in operating activities was $7.6 million for the nine months ended October 31, 2019, primarily due to a net loss of $59.6 million, partially offset by $48.8 million in non-cash charges[186] - Non-cash charges increased due to business growth, including stock-based compensation, depreciation, amortization of property/intangibles, and deferred commissions[186] Investing Activities - Net cash used in investing activities was $9.5 million for the nine months ended October 31, 2019, mainly from $12.9 million in purchases of property and equipment and capitalized internal-use software[188] Financing Activities - Cash provided by financing activities was $12.1 million for the nine months ended October 31, 2019, primarily from $9.0 million in stock option exercise proceeds and $5.1 million from ESPP, partially offset by $1.9 million in debt principal payments[190] Off-Balance Sheet Arrangements - As of October 31, 2019, the Company did not have any relationships with unconsolidated organizations or financial partnerships for off-balance sheet arrangements[192] Obligations and Other Commitments | Obligation Type | Total (in thousands) | Less than 1 year (in thousands) | 1-3 years (in thousands) | 3-5 years (in thousands) | More than 5 years (in thousands) | | :--- | :--- | :--- | :--- | :--- | :--- | | Operating lease obligations | $90,714 | $9,866 | $25,914 | $17,257 | $37,677 | | Debt principal and interest | $12,244 | $4,785 | $7,459 | $0 | $0 | | Other contractual obligations | $14,588 | $14,588 | $0 | $0 | $0 | | Total | $117,546 | $29,239 | $33,373 | $17,257 | $37,677 | - Other contractual obligations primarily relate to cloud computing services from a vendor by September 30, 2020[195] Critical Accounting Policies and Estimates - The Company's significant accounting policies are discussed in Note 2 of the Annual Report on Form 10-K, with no significant changes during the nine months ended October 31, 2019, except for those described in Note 2 of the condensed consolidated financial statements[200][201] Non-GAAP Financial Measures Zuora uses non-GAAP measures to supplement GAAP statements and provide additional insights into operational performance - Non-GAAP measures are used for evaluating operating performance, budget preparation, and communication with the board of directors[202] Non-GAAP Loss from Operations - Non-GAAP loss from operations excludes stock-based compensation expense, amortization of acquired intangibles, and capitalization and amortization of internal-use software[204] | Metric (in thousands) | Three Months Ended Oct 31, 2019 | Three Months Ended Oct 31, 2018 | Nine Months Ended Oct 31, 2019 | Nine Months Ended Oct 31, 2018 | | :--- | :--- | :--- | :--- | :--- | | GAAP loss from operations | $(19,006) | $(17,531) | $(61,216) | $(51,419) | | Stock-based compensation expense | $11,838 | $7,459 | $31,413 | $17,722 | | Amortization of acquired intangibles | $423 | $503 | $1,353 | $1,747 | | Internal-use software | $(529) | $(273) | $(1,376) | $(969) | | Non-GAAP loss from operations | $(7,274) | $(9,842) | $(29,826) | $(32,919) | Free Cash Flow - Free cash flow is defined as net cash used in operating activities less cash used for purchases of property and equipment[206] | Metric (in thousands) | Three Months Ended Oct 31, 2019 | Three Months Ended Oct 31, 2018 | Nine Months Ended Oct 31, 2019 | Nine Months Ended Oct 31, 2018 | | :--- | :--- | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $3,509 | $(6,370) | $(7,599) | $(16,592) | | Purchases of property and equipment | $(8,636) | $(3,931) | $(12,878) | $(10,621) | | Free cash flow | $(5,127) | $(10,301) | $(20,477) | $(27,213) | Growth Efficiency Index - Growth Efficiency Index (GEI) is the trailing 12-months sales and marketing expense (excluding stock-based compensation) divided by the year-over-year increase in trailing 12-month subscription revenue[208] - GEI was 2.2 as of October 31, 2019, indicating the sales and marketing expense incurred to acquire incremental revenue[208][209] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section discusses the company's exposure to market risks from fluctuations in foreign currency exchange rates and interest rates Foreign Currency Exchange Risk - The majority of Zuora's sales are denominated in U.S. dollars, limiting significant foreign currency risk for revenue[211] - Operating expenses are incurred in local currencies across various countries, subjecting results to foreign currency fluctuations[211] - A hypothetical 10% change in foreign currency exchange rates would not have had a material impact on financial statements for the nine months ended October 31, 2019[211] Interest Rate Risk - Zuora held $170.4 million in cash and cash equivalents and short-term investments as of October 31, 2019, primarily for working capital[212] - Fixed-rate securities are subject to market value changes from interest rate fluctuations, but unrealized gains/losses are recorded in other comprehensive income[213] - Debt Agreement interest payments are based on a variable market rate, exposing operating results to changes in interest rates[214] - A hypothetical 10% relative change in interest rates would not have had a material impact on the value of cash equivalents and short-term investments or operating results for the nine months ended October 31, 2019[215] Item 4. Controls and Procedures This section details management's evaluation of disclosure controls and internal control over financial reporting Evaluation of Disclosure Controls and Procedures - Management, with CEO and CFO participation, concluded that disclosure controls and procedures were effective as of October 31, 2019[216] - Controls provide reasonable assurance that required information is recorded, processed, summarized, and reported timely[216] Changes in Internal Control Over Financial Reporting - No change in internal control over financial reporting occurred during the period that materially affected, or is reasonably likely to materially affect, internal control over financial reporting[217] Inherent Limitations on Effectiveness of Controls - Management acknowledges that control systems provide only reasonable, not absolute, assurance and have inherent limitations[218] PART II. OTHER INFORMATION Item 1. Legal Proceedings The company is not currently party to any material legal proceedings other than those disclosed in Note 16 - No material legal proceedings or claims are currently pending, other than those disclosed in Note 16[221] - Outcomes of legal proceedings are unpredictable and could materially affect operating results and cash flows[221] Item 1A. Risk Factors This section outlines various risks that could adversely affect the company's business, operating results, and growth prospects History of Net Losses and Future Profitability - Zuora has incurred net losses since inception, including $77.6 million in fiscal 2019, and expects to continue incurring losses for the foreseeable future[223] - Future profitability depends on increasing revenue sufficiently to offset significant expenditures for business development and expansion[223] Dependence on Subscription Business Model Adoption - Zuora's success relies on companies shifting to subscription business models and consumer adoption of subscription-based products and services[224] - Market acceptance is affected by factors like security, reliability, deployment time, customer satisfaction, and competitive offerings[226] Failure to Manage Growth Effectively - Rapid growth has strained management, operations, financial infrastructure, and corporate culture[227] - Failure to manage growth could lead to deployment delays, declines in quality, increased costs, and loss of customers[228] Dependence on Sales Force Expansion and Productivity - Revenue growth and profitability depend on expanding the direct sales force and increasing its productivity, both domestically and internationally[229] - New sales personnel require significant training and time to become fully productive, and attrition rates may increase[231] Inability to Attract New Customers and Expand Sales to Existing Customers - Future revenue growth depends on attracting new customers and expanding sales and renewals with existing customers[234][235] - Delays in product integration (e.g., Zuora RevPro and Zuora Billing) have temporarily slowed implementations and impacted revenue projections[235] - Customer renewals may decline due to various factors, including satisfaction, pricing, or economic conditions, impacting future revenue[238] Security Breaches and Perceived Insecurity - Security breaches or unauthorized access to data could lead to loss of information, service disruption, litigation, and reputational damage[239] - The company experienced an increase in credit card authorization attempts by third parties in late November 2019 and is implementing remediation measures[240] - Existing insurance coverage may not be sufficient to cover large claims related to security incidents[242] Reliance on Limited Products - Zuora derives substantially all revenue from its Zuora Central platform, Zuora Billing, and Zuora RevPro products[244] - Continued market demand for these products is critical, and failure to meet customer demands or technological advances could adversely affect the business[244] Fluctuating Quarterly Operating Results - Quarterly operating results have fluctuated and are difficult to predict due to numerous unpredictable factors[245] - Factors include customer base growth, new product introductions, sales force productivity, and economic conditions[246][249] Customer Deployment Failures or Improper Use - Failure to successfully deploy the solution, or improper use, could lead to customer dissatisfaction, reduced revenue, and reputational harm[251] - Customers may seek refunds or choose not to renew if deployment is unsuccessful or delayed[251] Inability to Develop New Products/Enhancements - Failure to develop and release new products, enhancements, or modifications in a timely and cost-effective manner could adversely affect the business[252] - Changes in accounting standards or laws could impact product usefulness and necessitate costly modifications[252] Dependence on Talented Employees and Senior Management - Future success depends on attracting, training, and retaining highly skilled personnel, especially in competitive markets like the San Francisco Bay Area[255] - The company is highly dependent on its founder, Chairman, and CEO, Tien Tzuo, and other key personnel[256] Competitive Market - The market for subscription management products is highly competitive, rapidly evolving, and fragmented[258] - Competitors include traditional ERP software providers (Oracle, SAP), order-to-cash solutions, telecommunications billing systems, and in-house custom systems[259] - Many competitors have greater financial, technical, and marketing resources, and established customer relationships[259] Errors, Defects, or Disruptions in Solution - Errors, defects, or disruptions in Zuora's solution or third-party infrastructure could harm its brand, reputation, and financial results[263] - Failure to continuously modify and enhance products to interoperate with changing software technologies could reduce demand[264] Delayed Impact of Subscription Changes on Operating Results - Subscription revenue is recognized ratably over contract terms (1-3 years), meaning declines in new or renewed subscriptions have a minor immediate impact but negatively affect future revenue[265][266] Challenges with Large Enterprise Customers - Targeting large enterprise customers leads to longer, more expensive sales cycles, greater pricing pressure, and complex deployment challenges[267] - Sales opportunities with large enterprises may require more resources, increasing costs and diverting sales personnel[267] Inaccurate Growth Forecasts - Growth forecasts are subject to significant uncertainty and may not be accurate, and Zuora's business may not grow at similar rates to market forecasts[268] Evolving Market for Zuora RevPro - The market for Zuora RevPro is rapidly evolving due to Topic 606, making adoption rates and demand difficult to forecast[269] - Temporary slowdowns in Zuora RevPro and Zuora Billing integrations have impacted total revenues and financial projections[270] International Expansion Risks - International expansion exposes Zuora to risks such as recruiting challenges, compliance with diverse laws, longer sales cycles, and currency exchange rate fluctuations[271][272] - During the nine months ended October 31, 2019, approximately 31% of total revenue came from outside the United States[271] Failure to Offer High-Quality Customer Support - Inadequate customer support could harm Zuora's reputation and ability to upsell additional products to existing customers[273] Failure to Meet Service Level Commitments - Failure to meet service level commitments could result in service credits, refunds, contract terminations, and legal claims[274] Inability to Grow Sales Channels and Strategic Partners - Future growth depends on identifying, establishing, and retaining successful strategic partner relationships (GSIs, consulting firms, resellers)[276] - Strategic partners may also market competing products, and their failure to prioritize Zuora's solution could adversely affect sales[277] Disruption at Third-Party Data Centers or AWS - Disruption of service at third-party data centers or Amazon Web Services (AWS) could interrupt or delay service delivery to customers[278] - Facilities are vulnerable to natural disasters, cyber-attacks, and other events, potentially leading to lengthy interruptions and reputational harm[278][279] Improper Deployment/Use or Inadequate Training - Incorrect or improper deployment/use of the solution, or inadequate customer training, could lead to customer dissatisfaction, reduced usage, negative publicity, or legal claims[281] Changes to Prices or Pricing Model - Future changes in market conditions or customer demand may require adjustments to pricing or the pricing model, potentially impacting revenue and profitability[282] - Pressure to reduce prices or defer fees, especially from larger organizations, could adversely affect financial performance[282] Failure to Integrate with Other Systems - Failure to integrate with various operating systems, software applications, and hardware platforms developed by others could make Zuora's solution less marketable or obsolete[283] - Reliance on third-party APIs (e.g., Salesforce) means any changes or limitations by platform providers could adversely impact business[283][285][286] Failure to Maintain Brand and Reputation - Failure to develop, maintain, and enhance brand and reputation cost-effectively could adversely affect business and financial condition[287] - Negative publicity or failure to maintain customer loyalty could reduce demand and market share[287] Customer Payment Failures - Customers' failure to pay in accordance with agreement terms could adversely affect operating results and cash flow, especially with longer contract terms[288][289] Adverse Litigation Judgments - Adverse litigation judgments or settlements could expose Zuora to monetary damages or limit its ability to operate[290] - Current shareholder litigation is inherently unpredictable and could be costly[290] Failure to Protect Intellectual Property - Failure to protect and enforce intellectual property rights (patents, copyrights, trademarks, trade secrets) could harm Zuora's competitive position and operating results[291] - International expansion increases exposure to unauthorized copying and use of solutions[293] Intellectual Property Infringement Claims Against Us - Zuora is vulnerable to intellectual property infringement claims, which could result in monetary liability, business disruption, or costly litigation[298] - Lack of a significant patent portfolio could hinder deterrence of patent infringement claims[298] Reliance on Third-Party Licensed Software - Inability to maintain licenses for third-party software or errors in licensed software could increase costs or reduce service levels[300] Open Source Software Compliance - Failure to comply with open source software license terms could restrict Zuora's ability to sell its solution or require making proprietary technology source code available[302] - Open source software may contain security vulnerabilities and lacks warranties, posing greater risks[304] Inability to Integrate Acquired Businesses/Technologies - Zuora may be unable to successfully integrate acquired businesses and technologies, such as Leeyo, or achieve expected benefits[305] - Acquisitions can disrupt business, divert resources, and lead to unforeseen operating difficulties and expenditures[306] Data Protection, Security, Privacy, and Other Requirements - Failure to satisfy data protection, security, privacy, and industry-specific requirements could harm growth and incur significant liability[309] Privacy Concerns and Laws - Stricter privacy laws (e.g., GDPR, CCPA) could reduce the effectiveness of Zuora's solution and adversely affect its business[310][312] - Compliance costs and penalties for non-compliance are significant and may limit data collection, use, and transfer[310][312] Failure to Comply with Anti-Corruption and Anti-Money Laundering Laws - Failure to comply with anti-corruption laws (FCPA, UK Bribery Act) and anti-money laundering laws could lead to penalties, investigations, and reputational harm[315][318] - Zuora can be held liable for illegal activities of third-party intermediaries, employees, and agents[317] Governmental Export Control Laws and Regulations - Failure to comply with export control laws (U.S., EU) and sanctions regulations could result in substantial civil and criminal penalties and reputational harm[319] - Regulations on encryption technology and import/export controls could limit product distribution and international sales[320] Limitations on Net Operating Losses - The Tax Cuts and Jobs Act limits the utilization of tax losses generated after December 31, 2017, to 80% of taxable income, potentially increasing future federal income taxes[323] Uncertainty of Sales, Use, and Other Tax Laws - Evolving tax laws and varying interpretations of sales, use, and other taxes could subject Zuora to additional tax liability, interest, and penalties[324][325] - A U.S. Supreme Court ruling in June 2018 could lead to more states requiring