Zuora(ZUO) - 2023 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION This section presents Zuora's comprehensive financial data, including unaudited statements, management's analysis, market risk disclosures, and internal controls Item 1. Financial Statements (unaudited) This section presents Zuora's unaudited condensed consolidated financial statements, including balance sheets, comprehensive loss, stockholders' equity, and cash flows, with detailed notes Condensed Consolidated Balance Sheets This statement provides a snapshot of Zuora's financial position, detailing assets, liabilities, and stockholders' equity at specific points in time Balance Sheet Data | Metric | April 30, 2022 (in thousands) | January 31, 2022 (in thousands) | | :----- | :---------------------------- | :------------------------------ | | Cash and cash equivalents | $350,626 | $113,507 | | Total current assets | $558,373 | $328,335 | | Total assets | $669,319 | $441,252 | | Total current liabilities | $226,824 | $219,297 | | Debt, net of current portion | $204,500 | — | | Total liabilities | $480,463 | $270,645 | | Total stockholders' equity | $188,856 | $170,607 | Condensed Consolidated Statements of Comprehensive Loss This statement outlines Zuora's financial performance over a period, showing total revenue, gross profit, operating loss, and net loss Comprehensive Loss Data | Metric | Three Months Ended April 30, 2022 (in thousands) | Three Months Ended April 30, 2021 (in thousands) | YoY Change (in thousands) | YoY Growth | | :----- | :----------------------------------------------- | :----------------------------------------------- | :------------------------ | :--------- | | Subscription Revenue | $78,500 | $65,142 | $13,358 | 20.5% | | Professional Services Revenue | $14,699 | $15,187 | $(488) | -3.2% | | Total Revenue | $93,199 | $80,329 | $12,870 | 16.0% | | Gross Profit | $56,964 | $47,608 | $9,356 | 19.6% | | Loss from Operations | $(23,655) | $(17,409) | $(6,246) | 35.9% | | Net Loss | $(23,168) | $(17,661) | $(5,507) | 31.2% | | Net Loss per Share (Basic & Diluted) | $(0.18) | $(0.15) | $(0.03) | 20.0% | Condensed Consolidated Statements of Stockholders' Equity This statement details changes in Zuora's equity accounts, including additional paid-in capital and accumulated deficit, over a period Stockholders' Equity Data | Metric | January 31, 2022 (in thousands) | April 30, 2022 (in thousands) | | :----- | :------------------------------ | :---------------------------- | | Total Stockholders' Equity | $170,607 | $188,856 | | Additional Paid-in Capital | $734,149 | $776,323 | | Accumulated Deficit | $(563,447) | $(586,615) | - Key drivers for the change in stockholders' equity include $22.8 million in stock-based compensation and $18.4 million from the issuance of warrants, partially offset by a net loss of $23.2 million[18] Condensed Consolidated Statements of Cash Flows This statement summarizes Zuora's cash inflows and outflows from operating, investing, and financing activities over a period Cash Flow Data | Cash Flow Activity | Three Months Ended April 30, 2022 (in thousands) | Three Months Ended April 30, 2021 (in thousands) | YoY Change (in thousands) | | :----------------- | :----------------------------------------------- | :----------------------------------------------- | :------------------------ | | Net cash provided by operating activities | $6,983 | $10,251 | $(3,268) | | Net cash used in investing activities | $(3,887) | $(5,616) | $1,729 | | Net cash provided by financing activities | $234,382 | $2,456 | $231,926 | | Net increase in cash and cash equivalents | $237,119 | $7,006 | $230,113 | | Cash and cash equivalents, end of period | $350,626 | $101,116 | $249,510 | Notes to Unaudited Condensed Consolidated Financial Statements This section provides detailed explanations and additional information supporting the unaudited condensed consolidated financial statements Note 1. Overview and Basis of Presentation This note describes Zuora's business, its cloud-based subscription management platform, and the significant accounting estimates and assumptions used in financial reporting - Zuora provides a cloud-based subscription management platform to help companies monetize new services and operate dynamic, recurring revenue business models, automating the entire quote-to-cash and revenue recognition process[24][95] - Significant estimates and assumptions are related to revenue recognition (standalone selling prices), amortization period for deferred commissions, valuation of stock-based awards and warrants, allowance for credit losses, goodwill and long-lived asset impairment, and deferred income tax assets[30] Note 2. Summary of Significant Accounting Policies and Recent Accounting Pronouncements This note outlines Zuora's key accounting policies and the impact of recently adopted accounting pronouncements, particularly regarding convertible instruments - Significant accounting policies remain consistent with the Annual Report, with updates for the issuance of Initial Notes and Warrants in March 2022[31] - Adopted ASU 2020-06 (simplifying convertible instrument accounting) effective February 1, 2022, with no impact on retained earnings or EPS for the adoption period[35] - Deferred debt issuance costs are amortized using the effective interest rate method over the expected term of the related debt agreement, with approximately $0.8 million recognized for the three months ended April 30, 2022[33] Note 3. Investments This note details Zuora's short-term investments, including U.S. government securities, corporate bonds, and commercial paper, and their fair values Investment Portfolio | Investment Type | Amortized Cost (April 30, 2022, in thousands) | Fair Value (April 30, 2022, in thousands) | Gross Unrealized Losses (April 30, 2022, in thousands) | | :-------------- | :------------------------------------------ | :--------------------------------------- | :----------------------------------------------------- | | U.S. government securities | $24,091 | $23,708 | $(383) | | Corporate bonds | $28,232 | $28,050 | $(182) | | Commercial paper | $46,173 | $46,173 | — | | Foreign government securities | $4,054 | $3,995 | $(59) | | Total short-term investments | $102,550 | $101,926 | $(624) | - All short-term investments had stated effective maturities of less than two years as of April 30, 2022[36] Note 4. Fair Value Measurements This note provides a breakdown of Zuora's financial instruments measured at fair value, categorized by valuation input levels, including money market funds and warrant liabilities Fair Value Measurement Data | Financial Instrument | Level 1 (April 30, 2022, in thousands) | Level 2 (April 30, 2022, in thousands) | Level 3 (April 30, 2022, in thousands) | Total (April 30, 2022, in thousands) | | :----------------- | :------------------------------------- | :------------------------------------- | :------------------------------------- | :----------------------------------- | | Money market funds | $332,916 | — | — | $332,916 | | Short-term investments | — | $101,926 | — | $101,926 | | Warrant liability | — | — | $7,670 | $7,670 | - The warrant liability, classified as Level 3, was revalued to $7.7 million as of April 30, 2022, resulting in a $4.4 million gain on the revaluation included in interest and other income, net[38][91] Note 5. Prepaid Expenses and Other Current Assets This note itemizes Zuora's prepaid expenses and other current assets, such as prepaid software subscriptions, insurance, and contract assets Prepaid Expenses and Other Current Assets Data | Category | April 30, 2022 (in thousands) | January 31, 2022 (in thousands) | | :------- | :---------------------------- | :------------------------------ | | Prepaid software subscriptions | $7,000 | $6,854 | | Prepaid insurance | $1,979 | $3,220 | | Taxes | $1,490 | $1,270 | | Contract assets | $1,170 | $1,289 | | Prepaid hosting costs | $1,016 | $767 | | Other | $3,605 | $2,203 | | Total | $16,260 | $15,603 | Note 6. Property and Equipment, Net This note details Zuora's property and equipment, net of accumulated depreciation, including software, leasehold improvements, and computer equipment Property and Equipment Data | Category | April 30, 2022 (in thousands) | January 31, 2022 (in thousands) | | :------- | :---------------------------- | :------------------------------ | | Software | $28,125 | $25,495 | | Leasehold improvements | $17,140 | $17,277 | | Computer equipment | $15,173 | $14,746 | | Furniture and fixtures | $4,369 | $4,424 | | Less accumulated depreciation and amortization | $(36,178) | $(34,266) | | Total | $28,629 | $27,676 | - Internal-use software costs capitalized during the three months ended April 30, 2022, were $1.9 million, an increase from $0.9 million in the prior year[40] - Total depreciation and amortization expense for property and equipment was $2.2 million for the three months ended April 30, 2022, down from $2.8 million in the prior year[40] Note 7. Purchased Intangible Assets This note provides information on Zuora's purchased intangible assets, including their net carrying amount and amortization expense Purchased Intangible Assets Data | Metric | January 31, 2022 (in thousands) | April 30, 2022 (in thousands) | | :----- | :------------------------------ | :---------------------------- | | Net Carrying Amount | $3,452 | $2,898 | - Amortization expense for purchased intangible assets was $0.6 million for the three months ended April 30, 2022, compared to $0.4 million in the prior year[41] Note 8. Accrued Expenses and Other Current Liabilities This note lists Zuora's accrued expenses and other current liabilities, such as warrant liability, accrued outside services, and accrued taxes Accrued Expenses and Other Current Liabilities Data | Category | April 30, 2022 (in thousands) | January 31, 2022 (in thousands) | | :------- | :---------------------------- | :------------------------------ | | Warrant liability | $7,670 | — | | Accrued outside services and consulting | $5,081 | $3,712 | | Accrued hosting and third-party licenses | $3,848 | $3,865 | | Accrued taxes | $2,215 | $2,422 | | Accrued interest | $1,015 | — | | Other accrued expenses | $4,366 | $4,226 | | Total | $24,195 | $14,225 | Note 9. Debt This note details Zuora's debt obligations, including the issuance of convertible senior notes and related interest expense and discounts - Issued $250.0 million in convertible senior notes (Initial Notes) to Silver Lake on March 24, 2022, with an agreement for an additional $150.0 million within 18 months[43][105] - The 2029 Notes bear interest at 3.95% (cash) or 5.50% (PIK) and are convertible at $20.00 per share (50.0 shares per $1,000 principal amount)[45] Debt Summary | Metric | April 30, 2022 (in thousands) | | :----- | :---------------------------- | | Initial Notes principal | $250,000 | | Unamortized discount | $(45,500) | | Carrying value | $204,500 | - Incurred approximately $8.1 million in debt issuance costs, with $7.1 million allocated as a discount on the 2029 Notes[50] - Recognized $1.8 million in interest expense related to the Initial Notes for the three months ended April 30, 2022, including $0.8 million from debt discount amortization[51][52] Note 10. Deferred Revenue and Performance Obligations This note explains Zuora's deferred revenue and remaining performance obligations under subscription contracts, indicating future revenue recognition Deferred Revenue Data | Metric | Three Months Ended April 30, 2022 (in thousands) | Three Months Ended April 30, 2021 (in thousands) | | :----- | :----------------------------------------------- | :----------------------------------------------- | | Revenue recognized from deferred revenue | $73,567 | $62,919 | - Total remaining non-cancellable performance obligations under subscription contracts were approximately $425.4 million as of April 30, 2022, with 58% expected to be recognized over the next 12 months[55] Note 11. Geographical Information This note provides a geographical breakdown of Zuora's revenue, highlighting the contribution from the United States and other regions Geographical Revenue Breakdown | Region | Three Months Ended April 30, 2022 (in thousands) | Percentage of Total Revenue (2022) | Three Months Ended April 30, 2021 (in thousands) | Percentage of Total Revenue (2021) | | :----- | :----------------------------------------------- | :--------------------------------- | :----------------------------------------------- | :--------------------------------- | | United States | $59,419 | 64% | $49,707 | 62% | | Others | $33,780 | 36% | $30,622 | 38% | | Total | $93,199 | 100% | $80,329 | 100% | - No individual country other than the United States exceeded 10% of total revenue or total long-lived assets for the periods presented[56][57] Note 12. Leases This note details Zuora's operating lease assets and liabilities, including cash paid for leases and weighted-average lease terms Lease Information | Metric | April 30, 2022 (in thousands) | January 31, 2022 (in thousands) | | :----- | :---------------------------- | :------------------------------ | | Operating lease right-of-use assets | $30,482 | $32,643 | | Total operating lease liabilities | $54,056 | $57,095 | - Cash paid for operating leases was $3.4 million for the three months ended April 30, 2022[61] - Weighted-average remaining operating lease term was 6.9 years with a weighted-average discount rate of 4.6% as of April 30, 2022[61] Note 13. Commitments and Contingencies This note outlines Zuora's commitments and potential liabilities, including letters of credit, ongoing lawsuits, and contractual obligations for cloud services - Zuora has $4.5 million in bank-issued irrevocable letters of credit as of April 30, 2022[62] - The company is currently involved in multiple securities class action and stockholder derivative lawsuits, with discovery ongoing, and is unable to estimate the reasonably possible loss or range of loss[64][65][66][67][68][69][70][71] - Contractual obligation of $52.1 million for cloud computing services by September 30, 2024[72] Note 14. Income Taxes This note presents Zuora's income tax provision and effective tax rate, explaining the impact of pretax losses and valuation allowances on deferred tax assets Income Tax Data | Metric | Three Months Ended April 30, 2022 (in thousands) | Three Months Ended April 30, 2021 (in thousands) | | :----- | :----------------------------------------------- | :----------------------------------------------- | | Loss before income taxes | $(22,860) | $(17,288) | | Income tax provision | $308 | $373 | | Effective tax rate | (1.3)% | (2.2)% | - The effective tax rate differs from the statutory rate primarily because no benefit is provided on pretax losses incurred in the United States, as a full valuation allowance is maintained on federal and state deferred tax assets[73][151] Note 15. Stockholders' Equity This note provides details on Zuora's stockholders' equity, including outstanding common stock classes and components of accumulated other comprehensive loss Stockholders' Equity Details | Stock Class | Shares Outstanding (April 30, 2022, in millions) | | :---------- | :----------------------------------------------- | | Class A common stock | 121.1 | | Class B common stock | 8.0 | Stockholders' Equity Details | Component of OCI | January 31, 2022 (in thousands) | April 30, 2022 (in thousands) | | :--------------- | :------------------------------ | :---------------------------- | | Foreign currency translation adjustment | $118 | $(241) | | Unrealized loss on available-for-sale securities | $(226) | $(624) | | Total Accumulated Other Comprehensive Loss | $(108) | $(865) | Note 16. Employee Stock Plans This note details Zuora's employee stock plans, including outstanding stock options, RSUs, and PSUs, along with stock-based compensation expense Employee Equity Award Summary | Equity Award Type | Shares Outstanding (April 30, 2022, in thousands) | Weighted-Average Grant Date Fair Value (April 30, 2022) | | :---------------- | :------------------------------------------------ | :------------------------------------------------------ | | Stock Options | 8,361 | $9.22 (exercise price) | | RSUs | 12,180 | $15.49 | | PSUs | 2,905 | $15.21 | Employee Equity Award Summary | Stock-Based Compensation Expense | Three Months Ended April 30, 2022 (in thousands) | Three Months Ended April 30, 2021 (in thousands) | YoY Change (in thousands) | YoY Growth | | :------------------------------- | :----------------------------------------------- | :----------------------------------------------- | :------------------------ | :--------- | | Total stock-based compensation expense | $22,825 | $13,797 | $9,028 | 65.4% | - Unrecognized compensation costs for unvested equity awards totaled $192.9 million as of April 30, 2022, with a weighted-average remaining recognition period of 0.7 to 2.5 years across different award types[87] Note 17. Warrants to Purchase Shares of Common Stock This note describes warrants issued to Silver Lake, their exercise prices, classification as liabilities, and the gain recognized on their revaluation - Issued warrants to Silver Lake to acquire up to 7.5 million Class A common shares, exercisable at $20.00, $22.00, and $24.00 per share over seven years[88] - Approximately 2.8 million warrants were classified as a current liability due to certain settlement provisions, valued at $7.7 million as of April 30, 2022[89][91] - A $4.4 million gain on the revaluation of liability-classified warrants was recognized for the three months ended April 30, 2022[91] Note 18. Net Loss Per Share This note presents Zuora's net loss per share, including the calculation of weighted-average common shares and the impact of anti-dilutive securities Net Loss Per Share Data | Metric | Three Months Ended April 30, 2022 | Three Months Ended April 30, 2021 | | :----- | :-------------------------------- | :-------------------------------- | | Net loss | $(23,168) | $(17,661) | | Weighted-average common shares outstanding, basic and diluted | 128,457 | 121,354 | | Net loss per share, basic and diluted | $(0.18) | $(0.15) | - Potentially dilutive securities totaling 43.8 million (including Initial Notes conversion, unvested RSUs, stock options, and warrants) were excluded from diluted EPS calculations as their effect would have been anti-dilutive due to the net loss position[92] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes Zuora's financial condition and operating results, covering business overview, performance, metrics, liquidity, and critical accounting policies Overview This section provides an overview of Zuora's core cloud-based subscription management platform and its vision for recurring revenue models - Zuora's core business is a cloud-based subscription management platform that automates the entire quote-to-cash and revenue recognition process for recurring revenue models[95] - The company's vision is "The World Subscribed," aiming to provide technology for customer-centric, recurring revenue businesses across industries like technology, manufacturing, media, and telecommunications[98][100] - Zuora's solution includes Zuora Central Platform, Zuora Billing, Zuora Revenue, and Zuora Collect, which help businesses analyze data, optimize offerings, and implement changes[99] COVID-19 Pandemic Impact This section assesses the impact of the COVID-19 pandemic on Zuora's financial results, noting no material impact for the current fiscal quarter - Financial results for the fiscal quarter ended April 30, 2022, were not materially impacted by the COVID-19 pandemic[101] - The full impact of the pandemic on subscription-based revenue may not be reflected until future periods due to revenue recognition over time[101] Fiscal First Quarter Business Highlights and Recent Developments This section highlights key business achievements and recent developments for the fiscal first quarter, including customer growth, ARR, and financing activities - Customers with Annual Contract Value (ACV) exceeding $100,000 increased by 10% year-over-year to 746 as of April 30, 2022[103] - Annual Recurring Revenue (ARR) grew 20% year-over-year to $326.3 million as of April 30, 2022[103] - Transaction volume through Zuora's billing platform increased 21% year-over-year to $20.6 billion for the three months ended April 30, 2022[104] - Dollar-based retention rate improved to 110% compared to 103% as of April 30, 2021[108] - Issued $250.0 million of convertible senior unsecured notes to Silver Lake on March 24, 2022, with an additional $150.0 million to be issued within 18 months[105] Fiscal First Quarter Financial Performance Summary This section summarizes Zuora's financial performance for the fiscal first quarter, detailing revenue, gross profit, and operating loss metrics Financial Performance Summary | Metric | Three Months Ended April 30, 2022 (in millions) | Three Months Ended April 30, 2021 (in millions) | YoY Growth | | :----- | :---------------------------------------------- | :---------------------------------------------- | :--------- | | Subscription Revenue | $78.5 | $65.1 | 21% | | Total Revenue | $93.2 | $80.3 | 16% | | Gross Profit | $57.0 | $47.6 | 19.7% | | Gross Profit Margin | 61% | 59% | +2 ppts | | Loss from Operations | $(23.7) | $(17.4) | 36.2% | | Operating Margin | (25)% | (22)% | -3 ppts | Key Operational and Financial Metrics This section presents key operational and financial metrics used to evaluate Zuora's business performance, including customer growth and retention rates Customers with Annual Contract Value (ACV) Equal to or Greater than $100,000 This metric tracks the growth in Zuora's customer base with significant annual contract values, indicating market penetration and expansion - Number of customers with ACV ≥ $100,000 increased to 746 as of April 30, 2022, from 677 as of April 30, 2021, indicating a 10.2% year-over-year increase[103][110] - This metric is expected to increase for the fiscal year, reflecting broader adoption and expansion within the customer base[110] Dollar-Based Retention Rate This metric measures Zuora's ability to retain and expand revenue from existing customers, reflecting customer satisfaction and product adoption - Dollar-based retention rate increased to 110% as of April 30, 2022, compared to 103% as of April 30, 2021[108][111] - The company expects this rate to increase slightly over the remainder of the fiscal year[111] Annual Recurring Revenue (ARR) This metric represents the annualized value of Zuora's recurring subscription contracts, indicating the predictable revenue stream from its customer base Annual Recurring Revenue Data | Metric | April 30, 2022 (in millions) | April 30, 2021 (in millions) | YoY Growth | | :----- | :--------------------------- | :--------------------------- | :--------- | | ARR | $326.3 | $271.8 | 20% | - ARR growth rate increased to 20% year-over-year as of April 30, 2022, compared to 14% for the comparable prior period[112] - The company expects its ARR growth rate to increase slightly over the remainder of the fiscal year[112] Components of Our Results of Operations This section breaks down the various components contributing to Zuora's financial results, including revenue streams, cost structures, and operating expenses Revenue This section describes Zuora's revenue sources, primarily subscription fees and professional services, and their recognition methods - Subscription revenue comes from fees for platform access and support, recognized ratably over non-cancelable terms (typically 1-3 years)[114] - Professional services revenue is for deployment, configuration, and optimization, recognized as performed, and is expected to decrease as a percentage of total revenue due to transitioning work to strategic partners[115] Deferred Revenue This section explains deferred revenue, representing customer billings received in advance of services rendered, and its recognition over time - Deferred revenue consists of customer billings in advance of revenue recognition for subscription and professional services[116] - Customers are primarily invoiced annually or quarterly in advance for subscription services[117] Overhead Allocation and Employee Compensation Costs This section details how Zuora allocates shared costs and accounts for employee compensation, including salaries, bonuses, and stock-based compensation - Shared costs (facilities, IT, administrative personnel) are allocated to all departments based on headcount and location[118] - Employee compensation costs include salaries, bonuses, commissions, benefits, and stock-based compensation[119] Cost of Revenue, Gross Profit and Gross Margin This section outlines the costs associated with generating revenue, leading to the calculation of gross profit and gross margin, and factors influencing them - Cost of subscription revenue includes hosting, support, and amortization of capitalized internal-use software and purchased technology[120] - Cost of professional services revenue includes employee compensation and outside services, with a strategic shift to system integrator partners expected to improve total margin over time[121] - Gross profit and gross margin may fluctuate due to revenue changes and investments in hosting capacity, infrastructure, and support teams[122] Operating Expenses This section describes Zuora's operating expenses, including research and development, sales and marketing, and general and administrative costs Research and development This expense category covers costs associated with developing new products and enhancing the platform, including employee compensation and capitalized software - Research and development expense primarily comprises employee compensation, allocated overhead, and travel costs[123] - Costs associated with internal-use software development are capitalized and amortized over three years into cost of subscription revenue[123] - Expects continued investment in the platform, leading to an increase in absolute R&D expense, though it may vary as a percentage of total revenue[123] Sales and marketing This expense category includes costs for customer acquisition and retention, such as employee compensation, deferred commissions, and promotional activities - Sales and marketing expense includes employee compensation, amortization of deferred commissions (over five years), allocated overhead, and promotional activities[124] - Expects significant investments in customer acquisition and retention, leading to an increase in absolute sales and marketing expense, which may vary as a percentage of total revenue[124] General and administrative This expense category covers corporate overhead costs for finance, legal, HR, and other administrative functions, including employee compensation and public company expenses - General and administrative expense includes employee compensation, allocated overhead, and non-personnel costs for finance, legal, HR, and other corporate functions[125] - Expects ongoing costs as a public company to increase in absolute dollars but decline as a percentage of total revenue long-term due to economies of scale[126] Interest and Other Income, net This section details non-operating income and expenses, including interest from investments, debt-related costs, warrant revaluation gains, and foreign exchange impacts - Comprises interest income from investments, amortization of discount and debt issuance costs on 2029 Notes, interest expense from Debt Agreement, gain/loss on warrant liability revaluation, and foreign exchange fluctuations[127] Income Tax Provision This section explains Zuora's income tax provision, primarily from foreign and state jurisdictions, and the impact of valuation allowances on deferred tax assets - Income tax provision primarily relates to foreign and state jurisdictions[128] - A full valuation allowance is maintained on federal and state deferred tax assets, as the benefit of losses is not more likely than not to be realized[128] Results of Operations This section provides a detailed comparison of Zuora's financial performance for the three months ended April 30, 2022, versus the prior year Comparison of the Three Months Ended April 30, 2022 and 2021 This section offers a detailed comparative analysis of Zuora's revenue, costs, and operating expenses for the specified fiscal quarters Comparative Results of Operations | Metric | Three Months Ended April 30, 2022 (in thousands) | Three Months Ended April 30, 2021 (in thousands) | $ Change | % Change | | :----- | :----------------------------------------------- | :----------------------------------------------- | :------- | :------- | | Subscription Revenue | $78,500 | $65,142 | $13,358 | 21% | | Professional Services Revenue | $14,699 | $15,187 | $(488) | (3)% | | Total Revenue | $93,199 | $80,329 | $12,870 | 16% | | Cost of Subscription Revenue | $18,725 | $15,643 | $3,082 | 20% | | Cost of Professional Services Revenue | $17,510 | $17,078 | $432 | 3% | | Total Cost of Revenue | $36,235 | $32,721 | $3,514 | 11% | | Gross Profit | $56,964 | $47,608 | $9,356 | 20% | | Research and Development | $22,872 | $18,967 | $3,905 | 21% | | Sales and Marketing | $40,457 | $31,865 | $8,592 | 27% | | General and Administrative | $17,290 | $14,185 | $3,105 | 22% | | Loss from Operations | $(23,655) | $(17,409) | $(6,246) | 36% | | Net Loss | $(23,168) | $(17,661) | $(5,507) | 31% | - Subscription revenue growth was driven by new customers (approx. $5.9 million) and increased transaction volume/additional product sales to existing customers[142] - Professional services revenue decreased due to a strategic shift towards system integration partners[143] - Sales and marketing expense increased to 43% of total revenue (from 40%) reflecting investment in go-to-market organization[148] Non-GAAP Financial Measures This section presents Zuora's non-GAAP financial measures, providing alternative views of performance by excluding certain non-cash or non-recurring items - Non-GAAP financial measures are used to supplement GAAP results, providing consistency and comparability by excluding certain items[132][133] - Excluded items include stock-based compensation, amortization of acquired intangible assets, charitable donations, certain litigation expenses, asset impairment, and changes in fair value of warrant liabilities[134][136] Non-GAAP Reconciliation | Metric | GAAP (3 Months Ended April 30, 2022, in thousands) | Non-GAAP Adjustments (in thousands) | Non-GAAP (3 Months Ended April 30, 2022, in thousands) | | :----- | :----------------------------------------------- | :---------------------------------- | :----------------------------------------------------- | | Cost of subscription revenue | $18,725 | $(1,799) (SBC), $(554) (Amort.) | $16,372 | | Cost of professional services revenue | $17,510 | $(3,017) (SBC) | $14,493 | | Gross profit | $56,964 | $4,816 (SBC), $554 (Amort.) | $62,334 | | Research and development | $22,872 | $(5,966) (SBC) | $16,906 | | Sales and marketing | $40,457 | $(7,456) (SBC) | $33,001 | | General and administrative | $17,290 | $(4,587) (SBC), $(120) (Litigation) | $12,583 | | Loss from operations | $(23,655) | $22,825 (SBC), $554 (Amort.), $120 (Litigation) | $(156) | | Net loss | $(23,168) | $22,825 (SBC), $554 (Amort.), $120 (Litigation), $(4,373) (Warrant FV) | $(4,042) | | Gross margin | 61% | | 67% | | Operating margin | (25)% | | (0)% | Free Cash Flow This section defines and presents Zuora's free cash flow, a non-GAAP measure indicating cash generated after accounting for capital expenditures - Free cash flow is defined as net cash provided by operating activities, less cash used for purchases of property and equipment, net of insurance recoveries[139] Free Cash Flow Calculation | Metric | Three Months Ended April 30, 2022 (in thousands) | Three Months Ended April 30, 2021 (in thousands) | | :----- | :----------------------------------------------- | :----------------------------------------------- | | Net cash provided by operating activities | $6,983 | $10,251 | | Purchases of property and equipment, net of insurance recoveries | $(3,263) | $(1,621) | | Free cash flow | $3,720 | $8,630 | Liquidity and Capital Resources This section analyzes Zuora's ability to meet its short-term and long-term financial obligations, detailing cash, investments, and financing activities - As of April 30, 2022, cash, cash equivalents, and short-term investments totaled $452.6 million[153] - Primarily finances operations through customer sales (billed in advance) and proceeds from employee stock plans, debt agreements, and the recent issuance of $250.0 million in Initial Notes[154][155] - Existing cash and investments are expected to be sufficient for at least the next 12 months, but future growth may require additional equity or debt financing, which could result in stockholder dilution[156][158] Cash Flows This section provides a detailed breakdown of Zuora's cash flows from operating, investing, and financing activities, highlighting significant changes Cash Flow Activities | Cash Flow Activity | Three Months Ended April 30, 2022 (in thousands) | Three Months Ended April 30, 2021 (in thousands) | YoY Change (in thousands) | | :----------------- | :----------------------------------------------- | :----------------------------------------------- | :------------------------ | | Net cash provided by operating activities | $6,983 | $10,251 | $(3,268) | | Net cash used in investing activities | $(3,887) | $(5,616) | $1,729 | | Net cash provided by financing activities | $234,382 | $2,456 | $231,926 | - Operating cash flow decreased by $3.3 million due to timing of cash collections[161] - Investing cash flow decreased by $1.7 million, primarily due to lower net purchases of short-term investments, partially offset by higher property and equipment purchases[163] - Financing cash flow increased significantly by $231.9 million, primarily from $234.6 million in net proceeds from the Initial Notes issuance[164][165] Obligations and Other Commitments This section outlines Zuora's contractual obligations and other commitments, including operating leases, debt, and cloud computing service agreements - Total contractual commitments as of April 30, 2022, were $416.0 million, with $26.8 million due within the next twelve months[166] - Key obligations include operating leases, the 2029 Notes, the Debt Agreement, and a $52.1 million commitment for cloud computing services[166] Critical Accounting Policies and Estimates This section discusses Zuora's most significant accounting policies and estimates that require management judgment and could materially affect financial results - Financial statements are prepared using management's estimates and assumptions, which are continuously evaluated[168] - Most significant estimates relate to revenue recognition, deferred commissions, valuation of stock-based awards and warrants, credit losses, goodwill and long-lived asset impairment, and deferred income tax assets[30][168] Recent Accounting Pronouncements - Not Yet Adopted This section addresses recent accounting pronouncements that Zuora has not yet adopted and their expected impact on future financial statements - ASU 2021-08 (Business Combinations: Accounting for Contract Assets and Liabilities from Contracts with Customers), effective after December 15, 2022, is not expected to have a significant impact on consolidated financial statements[170] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section assesses Zuora's exposure to market risks, primarily from foreign currency exchange rates and interest rates, and their potential financial impact Foreign Currency Exchange Risk This section discusses Zuora's exposure to foreign currency fluctuations, particularly concerning sales contracts and operating expenses in various currencies - Sales contracts are predominantly in USD, EUR, GBP, and JPY; operating expenses are in foreign currencies, mainly CNY and GBP[172] - A hypothetical 10% change in foreign currency exchange rates would not have a material impact on financial statements for the three months ended April 30, 2022[172] - The company does not currently hedge foreign exchange exposure but may do so as international operations grow[172][197] Interest Rate Risk This section analyzes Zuora's exposure to interest rate fluctuations, affecting its cash, investments, and variable-rate debt obligations - Held $452.6 million in cash, cash equivalents, and short-term investments as of April 30, 2022[173] - Debt Agreement has variable interest rates, while 2029 Notes have fixed interest rates[173] - A hypothetical 10% change in interest rates would not have a material impact on the value of cash equivalents and short-term investments or interest owed on outstanding debt for the three months ended April 30, 2022[175] Item 4. Controls and Procedures This section details Zuora's evaluation of disclosure controls and procedures, confirming their effectiveness and reporting on changes in internal control over financial reporting Evaluation of Disclosure Controls and Procedures This section confirms management's conclusion on the effectiveness of Zuora's disclosure controls and procedures for timely and accurate financial reporting - Management, with CEO and CFO participation, concluded that disclosure controls and procedures were effective as of April 30, 2022[176] - Controls provide reasonable assurance that required information is recorded, processed, summarized, and reported timely[176] Changes in Internal Control Over Financial Reporting This section reports on any material changes in Zuora's internal control over financial reporting during the period - No material changes in internal control over financial reporting occurred during the period covered by this report[177] Inherent Limitations on Effectiveness of Controls This section acknowledges the inherent limitations of control systems, providing reasonable rather than absolute assurance of effectiveness - Management acknowledges that control systems, no matter how well designed, can only provide reasonable, not absolute, assurance due to inherent limitations and resource constraints[178] PART II. OTHER INFORMATION This section provides additional information beyond financial statements, covering legal proceedings, risk factors, equity sales, and exhibits Item 1. Legal Proceedings This section refers to Note 13 for details on Zuora's legal proceedings, including ongoing securities class action and stockholder derivative lawsuits - Refers to Note 13 for details on legal proceedings, including ongoing securities class actions and stockholder derivative lawsuits[181] - The company is unable to estimate the reasonably possible loss or range of loss from these matters but intends to vigorously defend against them[66][71] Item 1A. Risk Factors This section outlines risks of investing in Zuora's common stock, covering business, IT, legal, regulatory, and ownership challenges Risks Related to Our Business and Industry This section details risks inherent to Zuora's business and the broader industry, including revenue growth dependency, market competition, and debt obligations - Revenue growth is dependent on attracting new customers and retaining/expanding sales to existing ones; macroeconomic factors (recession, inflation) and business disruptions (COVID-19) could adversely affect these efforts[188][189][190] - Failure to manage growth effectively, slower-than-expected shift to subscription business models, and currency exchange rate fluctuations could adversely affect operating results[184][192][193][194][196][197] - Dependence on a limited number of products, challenges in integrating acquisitions, and debt obligations (2029 Notes) pose significant financial risks[184][201][203][204][205][206] - Incurred net losses since inception and anticipates continued losses due to significant future expenditures for business development and expansion[212] - Ability to achieve profitability depends on expanding and increasing the productivity of its direct sales force, which faces intense competition for talent and long sales cycles[213][214][215] - Operates in a highly competitive, rapidly evolving market for quote-to-cash and revenue recognition solutions, facing competitors with greater resources and established relationships[216][217][218][219] - Quarterly operating results are subject to numerous unpredictable factors, making future results difficult to predict and potentially leading to stock price volatility[220][221][222] - Failure to develop and release new products/enhancements, or successfully implement a multi-product strategy, could adversely affect the business due to rapid technological change and evolving customer demands[223][224] - Customer dissatisfaction and negative business impact can arise from failure to deploy solutions correctly or in a timely manner, especially with increasing focus on large enterprise customers[225][226][227][228] - International operations expose the company to risks such as compliance with diverse laws, longer sales cycles, currency fluctuations, and political instability[229][230] - Reliance on strategic partners (system integrators, consulting firms) for sales and implementations is increasing, but challenges in maintaining these relationships or partner underperformance could harm growth[231][232][233] - Inability to offer high-quality support and training to customers and partners could damage business and reputation[235] - Future changes in market conditions or customer demand may necessitate changes to pricing or pricing models, potentially affecting revenue and gross margin[236][238] - Failure to integrate with various operating systems, software applications, and hardware platforms developed by others could render the solution less marketable or obsolete[239][240] - Inability to cost-effectively develop, maintain, and enhance its brand and reputation could adversely affect business and financial condition[241][243] - Reliance on third-party licensed software means inability to maintain licenses or errors in the software could increase costs or reduce service levels[244] - Seasonality in sales cycles, particularly in the third month of each quarter and strongest in Q4, makes future operating results and financial metrics more difficult to forecast[245] - Debt Agreement with Silicon Valley Bank provides a first-priority lien against non-IP assets and contains financial covenants and restrictions that could limit operational flexibility[246][247] Risks Related to Information Technology, Intellectual Property, and Data Security and Privacy This section addresses risks concerning Zuora's technology, intellectual property, and data handling, including security breaches and compliance with privacy laws - Security breaches, unauthorized access to data, or perceived insecurity of the solution could lead to customer reduction, litigation, and significant liabilities[248][249][250][251][253][254] - Compliance with evolving global privacy and security laws (e.g., GDPR, CCPA, CPRA) is critical; non-compliance could reduce demand, increase costs, and lead to penalties[255][256][257][258][259] - Failure to protect intellectual property (patents, copyrights, trademarks, trade secrets) could adversely affect the business and competitive position, potentially requiring costly litigation[260][261][262][264][265][266][267] - Errors, defects, or disruptions in the solution, or failures of third-party software/infrastructure (like AWS/Azure), could diminish demand, harm financial results, and subject the company to liability[268][269][270][271][272] - Vulnerable to intellectual property infringement claims from others, which could result in monetary liability, business disruption, or costly litigation[273][274][275] - Use of open source software components carries risks, including potential license non-compliance that could restrict the ability to sell the solution or require source code disclosure[276][277][278] Risks Related to Legal, Regulatory, Accounting, and Tax Matters This section covers risks arising from legal, regulatory, accounting, and tax compliance, including litigation, tax liabilities, and changes in accounting principles - Failure to satisfy data protection, security, privacy, and industry-specific requirements could harm growth and lead to significant liability[280][282] - Due to subscription revenue recognition over contract terms, a decline in new or renewed subscriptions may not be immediately reflected in operating results[283] - Failure to meet service level commitments could lead to credits, refunds, contract terminations, or legal claims, adversely affecting operating results[284][285] - Customer failure to pay in accordance with agreements could result in uncollected amounts and enforcement costs[286][287] - Adverse litigation judgments or settlements could expose the company to monetary damages or limit business operations[288] - Ability to use net operating losses (NOLs) to offset future taxable income may be limited by ownership change rules (Section 382/383) and other legislative changes, potentially increasing tax liability[289] - Need to raise additional capital for growth, which may not be available on favorable terms and could dilute existing stockholders[290] - Failure to comply with anti-corruption (FCPA, UK Bribery Act) and anti-money laundering laws could lead to penalties, investigations, and reputational harm[291][293][294] - Non-compliance with governmental export control laws and regulations could result in substantial penalties, loss of export privileges, and reputational harm[295][296][297] - Uncertainty regarding sales, use, and other tax laws, or adverse changes in accounting principles (GAAP), could subject the company to additional tax liability or negatively affect reported financial results[298][299][300] Risks Related to Ownership of Our Class A Common Stock This section outlines risks specific to owning Zuora's Class A common stock, such as market price volatility, potential dilution, and the dual-class voting structure - The market price of Class A common stock has been and may continue to be volatile due to various factors, including financial performance, market conditions, and analyst coverage[302][303][304][305] - Substantial issuance or sale of Class A common stock (e.g., from convertible notes, warrants, equity awards) could result in significant dilution and a decline in market price[306][307][308] - The dual-class common stock structure concentrates voting control with Class B holders (directors, executive officers, affiliates), limiting other stockholders' ability to influence corporate matters[314] - The dual-class structure may adversely affect the trading market for Class A common stock, potentially leading to exclusion from certain stock indices and negative commentary from shareholder advisory firms[316] - The company does not intend to pay dividends for the foreseeable future, requiring investors to rely on stock price appreciation for gains[317] General Risk Factors This section covers broad risk factors that could impact Zuora, including economic uncertainty, public company compliance costs, and catastrophic events - Political developments, economic uncertainty (e.g., COVID-19, Ukraine conflict, inflation), and cyclical downturns could adversely affect demand for products and financial results[326][327][328][329] - Being a public company strains resources, diverts management attention, and increases legal and financial compliance costs[330][331][332][333][334] - Failure to maintain effective disclosure controls and internal control over financial reporting could impair timely and accurate financial statements, leading to loss of investor confidence and potential regulatory action[335][336][337][338] - Natural disasters, pandemics, and other catastrophic events could disrupt business operations, and existing business continuity plans may not adequately protect against serious disasters[339][340] - Investor expectations regarding environmental, social, and governance (ESG) factors may expose the company to new risks and require additional costs, potentially impacting reputation and investment[341][342] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section states that it is "Not Applicable," indicating no unregistered sales of equity securities or use of proceeds to report for the period - This section is "Not Applicable," indicating no unregistered sales of equity securities or use of proceeds for the period[343] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including the Indenture for convertible notes, Form of Warrant, Investment Agreement, and certifications Exhibits List | Exhibit Number | Exhibit Description | Form | File No. | Exhibit | Date | | :------------- | :------------------ | :--- | :------- | :------ | :--- | | 4.1 | Indenture (including form of 3.95% / 5.50% Convertible Senior PIK Notes Due 2029) | 8-K | 001-38451 | 10.2 | 3/25/2022 | | 4.3 | Form of Warrant | 8-K | 001-38451 | 10.3 | 3/25/2022 | | 10.1 | Investment Agreement with Silver Lake Alpine II, L.P. | 8-K | 001-38451 | 10.1 | 3/25/2022 | | 31.1 | Certification of Chief Executive Officer | | | | | | 31.2 | Certification of Chief Financial Officer | | | | | | 32.1* | Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350 | | | | | | 32.2* | Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350 | | | | | | 101.INS | Inline XBRL Instance Document | | | | | | 104 | Cover Page Interactive Data File | | | | | Signatures This section confirms the due signing of the report on June 3, 2022, by Todd McElhatton, Chief Financial Officer of Zuora, Inc - The report was signed on June 3, 2022, by Todd McElhatton, Chief Financial Officer (Principal Accounting and Financial Officer) of Zuora, Inc[348]