Zuora(ZUO) - 2021 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Financial Statements (unaudited) This section presents Zuora's unaudited condensed consolidated financial statements for the period ended October 31, 2020 It includes the balance sheets, statements of comprehensive loss, statements of stockholders' equity, and statements of cash flows Key highlights include an increase in cash and cash equivalents, revenue growth driven by subscriptions, and a shift to positive cash flow from operations compared to the prior year Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | Oct 31, 2020 | Jan 31, 2020 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $104,047 | $54,275 | | Total current assets | $266,486 | $266,784 | | Total assets | $395,334 | $402,227 | | Liabilities & Equity | | | | Total current liabilities | $161,973 | $165,620 | | Total liabilities | $227,043 | $237,568 | | Total stockholders' equity | $168,291 | $164,659 | Condensed Consolidated Statements of Comprehensive Loss Highlights (in thousands, except per share data) | Metric | Three Months Ended Oct 31, 2020 | Three Months Ended Oct 31, 2019 | Nine Months Ended Oct 31, 2020 | Nine Months Ended Oct 31, 2019 | | :--- | :--- | :--- | :--- | :--- | | Subscription Revenue | $62,020 | $54,038 | $177,228 | $151,996 | | Total Revenue | $77,246 | $71,822 | $226,133 | $205,664 | | Gross Profit | $43,980 | $37,521 | $127,495 | $105,630 | | Loss from Operations | $(16,009) | $(19,006) | $(55,216) | $(61,216) | | Net Loss | $(16,773) | $(18,237) | $(54,383) | $(59,642) | | Net Loss Per Share | $(0.14) | $(0.16) | $(0.47) | $(0.54) | Condensed Consolidated Statements of Cash Flows Highlights (in thousands) | Cash Flow Activity | Nine Months Ended Oct 31, 2020 | Nine Months Ended Oct 31, 2019 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $8,151 | $(7,599) | | Net cash provided by (used in) investing activities | $31,947 | $(9,518) | | Net cash provided by financing activities | $9,745 | $12,130 | | Net increase (decrease) in cash and cash equivalents | $49,772 | $(5,403) | - As of October 31, 2020, the company had total remaining non-cancellable performance obligations of approximately $275.5 million, with an expected 66% to be recognized as revenue over the next 12 months[51] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's performance, highlighting the ongoing shift to the 'Subscription Economy' as a key driver The report notes that while the COVID-19 pandemic has caused some business disruption, its financial impact has not been material to date Key operational successes include an 11% YoY increase in customers with ACV over $100,000 and a stable 99% dollar-based retention rate Financial results show an 8% YoY revenue increase for the quarter, driven by a 15% rise in subscription revenue, while professional services revenue declined as part of a strategic shift to partners The company also reported improved gross margins and a narrower operating loss - The company is focused on the 'Subscription Economy,' providing a cloud-based platform for businesses to manage subscription-based models, automating the order-to-revenue process[85][86] - The COVID-19 pandemic has caused some disruptions, such as longer sales cycles and customer requests for payment concessions However, the company believes these disruptions have not had a material impact on overall financial results for the quarter[92][93] Key Operational Metrics as of October 31, 2020 | Metric | Value | YoY Change | | :--- | :--- | :--- | | Customers with ACV > $100,000 | 653 | +11% | | Dollar-Based Retention Rate | 99% | N/A (stable QoQ) | | Customer Transaction Volume | $14.6 billion | +31% | Results of Operations For the third quarter of fiscal 2021, total revenue increased 8% year-over-year to $77.2 million, driven by a 15% increase in subscription revenue to $62.0 million This was partially offset by a 14% decrease in professional services revenue, reflecting a strategic shift towards system integrator partners Gross margin improved to 57% from 52% in the prior year Operating expenses remained relatively flat as a percentage of revenue, leading to a reduced operating loss of $16.0 million compared to $19.0 million in the prior-year quarter Similar trends were observed for the nine-month period, with total revenue up 10% and operating loss narrowing Revenue Comparison - Q3 2020 vs Q3 2019 (in thousands) | Revenue Type | Q3 2020 | Q3 2019 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Subscription | $62,020 | $54,038 | $7,982 | 15% | | Professional services | $15,226 | $17,784 | $(2,558) | (14)% | | Total revenue | $77,246 | $71,822 | $5,424 | 8% | Gross Margin Comparison - Q3 2020 vs Q3 2019 | Margin Type | Q3 2020 | Q3 2019 | | :--- | :--- | :--- | | Subscription Gross Margin | 75% | 74% | | Professional Services Gross Margin | (16)% | (15)% | | Total Gross Margin | 57% | 52% | - For the nine months ended October 31, 2020, subscription revenue grew 17% to $177.2 million, while professional services revenue decreased 9% to $48.9 million, resulting in a total revenue increase of 10% to $226.1 million[130][131] - General and administrative expenses increased by 23% for the quarter and 29% for the nine-month period, primarily due to increased employee compensation and shareholder litigation expenses[126][138] Liquidity and Capital Resources As of October 31, 2020, Zuora held $178.8 million in cash, cash equivalents, and short-term investments The company generated $8.2 million in cash from operating activities for the first nine months of the fiscal year, a significant improvement from the $7.6 million used in the same period last year Management believes its current liquidity is sufficient to meet working capital and capital expenditure needs for at least the next 12 months The company's principal commitments total $109.2 million, primarily consisting of operating leases - The company had cash, cash equivalents, and short-term investments of $178.8 million as of October 31, 2020[142] - For the nine months ended October 31, 2020, net cash provided by operating activities was $8.2 million, a turnaround from the $7.6 million used in the prior-year period This was primarily due to a lower net loss and favorable changes in non-cash charges[145][147] Contractual Obligations as of October 31, 2020 (in thousands) | Obligation Type | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | | :--- | :--- | :--- | :--- | :--- | :--- | | Operating lease obligations | $82,702 | $13,192 | $24,326 | $13,703 | $31,481 | | Debt principal and interest | $7,396 | $4,558 | $2,838 | $— | $— | | Other contractual obligations | $19,141 | $19,141 | $— | $— | $— | | Total | $109,239 | $36,891 | $27,164 | $13,703 | $31,481 | Quantitative and Qualitative Disclosures About Market Risk The company identifies its primary market risks as foreign currency exchange risk and interest rate risk The majority of sales are denominated in U.S dollars, limiting foreign currency revenue risk, though operating expenses in foreign currencies create some exposure The company does not currently use hedging instruments Interest rate risk pertains to its investment portfolio and variable-rate debt Management states that a hypothetical 10% change in either foreign exchange or interest rates would not materially impact its financial statements - The company's primary market risks are from fluctuations in foreign currency exchange rates and interest rates[171] - Foreign currency risk is limited as the majority of sales are in U.S dollars, but operating expenses in Europe, China, India, Japan, and Australia create exposure The company does not currently hedge this risk[172] - Interest rate risk affects the value of cash equivalents and short-term investments ($178.8 million) and the cost of variable-rate debt A hypothetical 10% change in rates is not expected to have a material impact[173][175][176] Controls and Procedures As of October 31, 2020, the company's management, including the CEO and CFO, evaluated its disclosure controls and procedures and concluded they were effective The report also states that there were no changes during the quarter that materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting - The CEO and CFO concluded that as of October 31, 2020, the company's disclosure controls and procedures were effective[177] - There were no material changes in the company's internal control over financial reporting during the quarter[178] PART II. OTHER INFORMATION Legal Proceedings This section refers to Note 13 of the financial statements, which details ongoing legal matters The company is involved in putative securities class action lawsuits and related stockholder derivative actions Management states it is unable to estimate the reasonably possible loss or range of loss from these matters - The company is party to a putative securities class action lawsuit filed in June 2019 and two others filed in April and May 2020, alleging violations of the Securities Exchange Act and Securities Act, respectively[59][60] - Several stockholder derivative lawsuits have also been filed, based on similar events as the class actions These actions are currently stayed pending discovery in the federal securities class action[62][63] - For all ongoing litigation, the company is currently unable to estimate the reasonably possible loss or range of loss[61][64] Risk Factors The company outlines significant risks to its business Key risks include the potential adverse impact of the COVID-19 pandemic on operations and customer spending, a history of net losses with no guarantee of future profitability, and intense competition in the subscription management market Other major risks involve cybersecurity threats, the ability to attract and retain customers, reliance on third-party data centers, international expansion challenges, and potential intellectual property infringement claims The dual-class stock structure, which concentrates voting power, is also highlighted as a risk - The ongoing COVID-19 pandemic could adversely affect business through delayed sales cycles, reduced customer spending, and other operational challenges[187] - The company has a history of net losses (accumulated deficit of $445.2 million as of Oct 31, 2020) and may not achieve or sustain profitability[193] - The market for subscription management is highly competitive, and the company faces threats from competitors with greater resources and from companies choosing to build in-house solutions[208][211] - Security breaches or cyber-attacks could harm the company's reputation, disrupt service, and result in significant liability[214] - The dual-class common stock structure concentrates voting control with holders of Class B stock, limiting the ability of Class A stockholders to influence corporate matters[299] Unregistered Sales of Equity Securities and Use of Proceeds The company reported no unregistered sales of equity securities and no use of proceeds from such sales during the reporting period - There were no unregistered sales of equity securities in the period[341] Exhibits This section lists the exhibits filed with the Form 10-Q These include the certifications by the Chief Executive Officer and Chief Financial Officer as required by the Sarbanes-Oxley Act, and the Inline XBRL documents for financial reporting - The exhibits filed with this report include CEO and CFO certifications pursuant to Rule 13a-14(a)/15d-14(a) and Section 906 of the Sarbanes-Oxley Act of 2002[344] - The filing also includes Inline XBRL documents (Instance, Schema, Calculation, Definition, Label, and Presentation)[344] Signatures