Zuora(US:ZUO)2022-12-07 16:00PART I. FINANCIAL INFORMATION Financial Statements (unaudited) Zuora's unaudited Q3 2022 financial statements, including balance sheets, income, and cash flows, detail the Zephr acquisition, debt, and workforce reduction Condensed Consolidated Balance Sheets Total assets increased to $666.2 million from $441.3 million, driven by cash and goodwill, while liabilities rose to $482.3 million due to new debt Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | Oct 31, 2022 | Jan 31, 2022 | | :--- | :--- | :--- | | Total Current Assets | $511,709 | $328,335 | | Goodwill | $52,618 | $17,632 | | Total Assets | $666,193 | $441,252 | | Total Current Liabilities | $228,398 | $219,297 | | Debt, net of current portion | $208,393 | $— | | Total Liabilities | $482,289 | $270,645 | | Total Stockholders' Equity | $183,904 | $170,607 | Condensed Consolidated Statements of Comprehensive Loss Total revenue grew to $101.1 million with 17% subscription growth, but net loss widened to $37.0 million due to higher operating expenses Financial Performance (Three Months Ended Oct 31, in thousands) | Metric | 2022 | 2021 | | :--- | :--- | :--- | | Subscription Revenue | $86,567 | $73,775 | | Total Revenue | $101,072 | $89,230 | | Gross Profit | $60,792 | $53,535 | | Loss from Operations | $(33,921) | $(21,577) | | Net Loss | $(37,034) | $(22,889) | | Net Loss Per Share | $(0.28) | $(0.18) | Condensed Consolidated Statements of Cash Flows Net cash used in operations was $2.7 million, investing used $165.9 million for Zephr, and financing provided $239.0 million from convertible notes Cash Flow Summary (Nine Months Ended Oct 31, in thousands) | Cash Flow Activity | 2022 | 2021 | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | $(2,679) | $8,320 | | Net cash used in investing activities | $(165,922) | $(1,843) | | Net cash provided by financing activities | $239,003 | $16,364 | | Net increase in cash and cash equivalents | $68,754 | $22,455 | Notes to Unaudited Condensed Consolidated Financial Statements Notes detail the $47.9 million Zephr acquisition, $250 million convertible notes issuance, and an 11% workforce reduction plan - On September 2, 2022, Zuora acquired Zephr, a subscription experience platform, for purchase consideration of $47.9 million, including $43.1 million in cash and $4.8 million in contingent consideration. The acquisition resulted in $35.0 million of goodwill102103106 - On March 24, 2022, the company issued $250.0 million in convertible senior notes to Silver Lake, with an additional $150.0 million to be issued within 18 months. The notes bear 3.95% cash interest or 5.50% paid-in-kind interest and mature in 202950 - On November 30, 2022, after the quarter ended, Zuora approved a workforce reduction plan impacting 11% of its workforce to improve operational efficiencies. The company expects to recognize approximately $9.5 million in charges related to this plan112 Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q3 performance, including 17% subscription revenue growth and 19% ARR growth, Zephr acquisition, macroeconomic impacts, and liquidity Key Operational and Financial Metrics Key metrics show 770 customers with ACV over $100k, a 109% dollar-based retention rate, and $350.7 million in ARR Key Metrics as of October 31, 2022 | Metric | Value | YoY Change | | :--- | :--- | :--- | | Customers with ACV ≥ $100k | 770 | +7% | | Dollar-Based Retention Rate | 109% | -1 ppt | | Annual Recurring Revenue (ARR) | $350.7M | +19% | Results of Operations Q3 2022 total revenue grew 13% to $101.1 million, but operating loss widened to $33.9 million due to increased expenses Q3 2022 vs Q3 2021 Revenue (in thousands) | Revenue Type | Q3 2022 | Q3 2021 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Subscription | $86,567 | $73,775 | $12,792 | 17% | | Professional services | $14,505 | $15,455 | $(950) | (6)% | | Total revenue | $101,072 | $89,230 | $11,842 | 13% | - Operating expenses increased significantly in Q3 2022 compared to Q3 2021: - Research and development expense increased by $6.7 million (31%) - Sales and marketing expense increased by $10.0 million (27%) - General and administrative expense increased by $3.0 million (18%) These increases were primarily due to higher employee compensation, acquisition-related costs, and charges associated with the workforce reduction plan180181183 Liquidity and Capital Resources Zuora held $400.6 million in cash and investments, boosted by $233.9 million from convertible notes, ensuring sufficient liquidity for 12 months - The company's primary sources of liquidity are customer sales, proceeds from employee stock plans, and debt financing. A major financing event was the issuance of $250.0 million in convertible senior notes in March 2022200201 Cash Flow Summary (Nine Months Ended Oct 31, in thousands) | Cash Flow Activity | 2022 | 2021 | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | $(2,679) | $8,320 | | Net cash used in investing activities | $(165,922) | $(1,843) | | Net cash provided by financing activities | $239,003 | $16,364 | Quantitative and Qualitative Disclosures About Market Risk Primary market risks include foreign currency fluctuations and interest rate changes, with no material impact from a hypothetical 10% rate shift - The company is exposed to foreign currency risk as sales contracts are denominated in USD, EUR, GBP, and JPY, and some operating expenses are in foreign currencies like GBP and CNY217 - Interest rate risk pertains to the company's $400.6 million in cash and short-term investments. The 2029 Notes have a fixed interest rate and are not subject to this risk218 Controls and Procedures Management concluded disclosure controls were effective as of October 31, 2022, with no material changes to internal financial reporting controls - Management concluded that as of October 31, 2022, the company's disclosure controls and procedures were effective221 - No material changes to the company's internal control over financial reporting occurred during the quarter222 PART II. OTHER INFORMATION Legal Proceedings The company faces ongoing securities class action and derivative lawsuits alleging false statements, which it disputes without estimating potential loss - The company is defending against a putative securities class action lawsuit filed in June 2019, alleging violations of the Exchange Act between April 2018 and May 201968 - Multiple stockholder derivative lawsuits have been filed since September 2019 in various district courts, alleging claims similar to the securities class actions, including breach of fiduciary duty. These cases are either ongoing or currently stayed717375 Risk Factors Significant risks include business and industry challenges, technology and data vulnerabilities, legal and regulatory matters, and stock ownership concerns Risks Related to Our Business and Industry Business risks include attracting customers, macroeconomic uncertainty, workforce reduction, market shift to subscriptions, competition, and integrating acquisitions - The company's ability to attract new customers and expand sales is at risk due to macroeconomic factors, a recent workforce reduction, and business disruptions, which could slow revenue growth233235236 - The company's debt obligations, particularly the $400 million in convertible notes issued or to be issued to Silver Lake, could adversely affect its financial condition by requiring substantial cash flow for debt service and restricting operational flexibility248249 - The company's success depends on the continued shift to subscription business models; if this market develops slower than expected, growth may stall240 Risks Related to Information Technology, Intellectual Property, and Data Security and Privacy Technology risks include security breaches, compliance with evolving privacy laws like GDPR/CCPA, reliance on third-party cloud providers, and IP infringement claims - Security breaches, unauthorized access to customer data, or perceptions of insecurity could lead to loss of customers, litigation, and significant liabilities301 - The company must comply with complex and evolving privacy laws such as GDPR and CCPA, which could increase costs, reduce the effectiveness of its solution, and lead to penalties for non-compliance308309310 - The business depends on third-party cloud providers like AWS and Microsoft Azure; any service disruption could interrupt service delivery and harm financial results323 Risks Related to Ownership of Our Class A Common Stock Class A stock risks include price volatility, potential dilution from new share issuance, and limited influence due to a dual-class voting structure - The market price of the Class A common stock has been and may continue to be volatile due to factors like financial results, market conditions, and analyst reports354355 - The dual-class stock structure concentrates voting control with holders of Class B common stock, including directors and executive officers, limiting the ability of Class A stockholders to influence corporate matters364 - A substantial number of shares could be issued upon conversion of outstanding convertible notes and exercise of warrants, potentially causing significant dilution and a decline in the stock price356 Unregistered Sales of Equity Securities and Use of Proceeds The company reported no unregistered sales of equity securities during the period covered by the report - The company reported that there were no unregistered sales of equity securities during the period covered by the report393 Exhibits This section lists Form 10-Q exhibits, including the Silicon Valley Bank loan amendment and CEO/CFO Sarbanes-Oxley certifications - A key exhibit filed is the Third Amendment to the Loan and Security Agreement with Silicon Valley Bank, dated October 11, 2022394 - Certifications by the Chief Executive Officer and Chief Financial Officer pursuant to the Exchange Act and Sarbanes-Oxley Act of 2002 are included as exhibits394 Signatures - The Form 10-Q report was duly signed on behalf of Zuora, Inc. on December 8, 2022, by Todd McElhatton, the Chief Financial Officer396398