Zuora(ZUO) - 2024 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements (unaudited) Presents Zuora's unaudited condensed consolidated financial statements, covering balance sheets, comprehensive loss, equity, cash flows, and related notes Condensed Consolidated Balance Sheets Summarizes Zuora's financial position, detailing assets, liabilities, and stockholders' equity at specific dates | Assets (in thousands) | July 31, 2023 | January 31, 2023 | | :-------------------- | :------------ | :--------------- | | Cash and cash equivalents | $323,281 | $203,239 | | Short-term investments | $82,953 | $183,006 | | Total current assets | $528,913 | $518,552 | | Total assets | $681,852 | $668,598 | | Total current liabilities | $302,600 | $311,619 | | Total liabilities | $569,125 | $571,438 | | Total stockholders' equity | $112,727 | $97,160 | - Cash and cash equivalents increased by $120.0 million from January 31, 2023, to July 31, 2023, while short-term investments decreased by $100.0 million[15] - Total stockholders' equity increased by $15.6 million, from $97.2 million to $112.7 million, primarily due to an increase in additional paid-in capital[15] Condensed Consolidated Statements of Comprehensive Loss Details Zuora's financial performance, including total revenue, gross profit, and net loss for specified periods | Metric (in thousands) | Three Months Ended July 31, 2023 | Three Months Ended July 31, 2022 | Six Months Ended July 31, 2023 | Six Months Ended July 31, 2022 | | :-------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Total revenue | $108,048 | $98,775 | $211,143 | $191,974 | | Gross profit | $70,267 | $60,126 | $136,016 | $117,090 | | Loss from operations | $(18,239) | $(30,190) | $(38,418) | $(53,845) | | Net loss | $(22,562) | $(29,910) | $(41,857) | $(53,078) | | Net loss per share, basic and diluted | $(0.16) | $(0.23) | $(0.30) | $(0.41) | - Total revenue increased by 9% for the three months ended July 31, 2023, and by 10% for the six months ended July 31, 2023, compared to the respective prior-year periods[17] - Net loss decreased for both the three-month and six-month periods, indicating improved operational performance, with net loss per share improving from $(0.23) to $(0.16) for the quarter and from $(0.41) to $(0.30) for the six months[17] Condensed Consolidated Statements of Stockholders' Equity Outlines changes in stockholders' equity, including additional paid-in capital and accumulated deficit, over specified periods | Stockholders' Equity (in thousands) | Balance, January 31, 2023 | Balance, July 31, 2023 | | :---------------------------------- | :------------------------ | :--------------------- | | Additional paid-in capital | $859,482 | $917,081 | | Accumulated deficit | $(761,417) | $(803,274) | | Total stockholders' equity | $97,160 | $112,727 | - Additional paid-in capital increased by $57.6 million during the six months ended July 31, 2023, primarily due to stock-based compensation and ESPP issuances[19] - The accumulated deficit increased by $41.9 million, reflecting the net loss incurred during the six months ended July 31, 2023[19] Condensed Consolidated Statements of Cash Flows Presents cash inflows and outflows from operating, investing, and financing activities for specified periods | Cash Flow Activity (in thousands) | Six Months Ended July 31, 2023 | Six Months Ended July 31, 2022 | | :-------------------------------- | :----------------------------- | :----------------------------- | | Net cash provided by operating activities | $19,981 | $2,182 | | Net cash provided by (used in) investing activities | $95,021 | $(146,506) | | Net cash provided by financing activities | $5,727 | $238,428 | | Net increase in cash and cash equivalents | $120,042 | $93,429 | - Net cash provided by operating activities significantly increased to $19.98 million for the six months ended July 31, 2023, from $2.18 million in the prior year, driven by increased customer collections and timing of payments[24][177] - Investing activities shifted from a net cash outflow of $146.5 million in 2022 to a net cash inflow of $95.0 million in 2023, primarily due to net maturities of short-term investments[24][179] - Financing activities decreased substantially from $238.4 million in 2022 to $5.7 million in 2023, mainly due to the issuance of convertible senior notes in the prior year[24][181] Note 1. Overview and Basis of Presentation Provides an overview of Zuora's business, its cloud-based platform, and the basis for preparing interim financial statements - Zuora, Inc. provides a cloud-based subscription management platform to help companies monetize new services and operate recurring revenue business models, automating quote-to-cash and revenue recognition processes[28] - On September 2, 2022, Zuora acquired Zephr, a subscription experience platform for digital publishing and media companies[29] - The unaudited condensed consolidated financial statements are prepared in conformity with GAAP and SEC rules for interim reporting, reflecting all normal recurring adjustments[31][32] Note 2. Summary of Significant Accounting Policies and Recent Accounting Pronouncements Highlights Zuora's significant accounting policies and confirms no material changes or new pronouncements impacting statements - There have been no significant changes to Zuora's accounting policies during the six months ended July 31, 2023[37] Note 3. Investments Details Zuora's short-term investments, including U.S. government securities, corporate bonds, and commercial paper | Short-term Investments (in thousands) | July 31, 2023 Fair Value | January 31, 2023 Fair Value | | :------------------------------------ | :----------------------- | :-------------------------- | | U.S. government securities | $18,571 | $34,488 | | Corporate bonds | $7,977 | $41,785 | | Commercial paper | $56,405 | $102,720 | | Foreign government securities | — | $4,013 | | Total short-term investments | $82,953 | $183,006 | - Total short-term investments decreased from $183.0 million as of January 31, 2023, to $82.95 million as of July 31, 2023[38] Note 4. Fair Value Measurements Presents fair value measurements for financial instruments, including cash equivalents, short-term investments, and warrant liabilities | Financial Instruments (in thousands) | July 31, 2023 Total | January 31, 2023 Total | | :--------------------------------- | :------------------ | :--------------------- | | Money market funds | $247,500 | $184,580 | | Treasury bills | $24,864 | — | | Total cash equivalents | $272,364 | $184,580 | | Total short-term investments | $82,953 | $183,006 | | Warrant liability (Level 3) | $7,585 | $2,829 | - The warrant liability, classified as a Level 3 measurement, increased from $2.8 million to $7.6 million during the six months ended July 31, 2023, reflecting a change in fair value[40][41] Note 5. Prepaid Expenses and Other Current Assets Details the composition and changes in Zuora's prepaid expenses and other current assets | Prepaid Expenses (in thousands) | July 31, 2023 | January 31, 2023 | | :------------------------------ | :------------ | :--------------- | | Prepaid software subscriptions | $7,651 | $7,533 | | Taxes | $4,234 | $3,860 | | Prepaid insurance | $2,907 | $3,225 | | Total | $26,124 | $24,285 | - Total prepaid expenses and other current assets increased slightly from $24.3 million to $26.1 million[44] Note 6. Property and Equipment, Net Summarizes Zuora's property and equipment, net of accumulated depreciation, including software and leasehold improvements | Property and Equipment (in thousands) | July 31, 2023 | January 31, 2023 | | :------------------------------------ | :------------ | :--------------- | | Software | $35,520 | $32,778 | | Leasehold improvements | $15,267 | $15,254 | | Computer equipment | $11,787 | $11,780 | | Total, net | $25,915 | $27,159 | - Total property and equipment, net, decreased by $1.2 million, primarily due to accumulated depreciation and amortization[45] - Total depreciation and amortization expense for property and equipment was $4.98 million for the six months ended July 31, 2023, up from $4.37 million in the prior year[45] Note 7. Purchased Intangible Assets and Goodwill Details Zuora's purchased intangible assets and goodwill, including amortization and foreign currency translation effects | Intangible Assets (in thousands) | July 31, 2023 Net Carrying Amount | January 31, 2023 Net Carrying Amount | | :------------------------------- | :-------------------------------- | :----------------------------------- | | Developed technology | $9,379 | $10,377 | | Customer relationships | $1,681 | $1,962 | | Trade name | $664 | $862 | | Total | $11,724 | $13,201 | - Purchased intangible assets, net, decreased by $1.48 million, primarily due to amortization[46] - Goodwill increased from $53.99 million to $57.15 million, with effects of foreign currency translation contributing $2.65 million to the increase[46] Note 8. Accrued Expenses and Other Current Liabilities Outlines Zuora's accrued expenses and other current liabilities, including litigation settlements and warrant liabilities | Accrued Liabilities (in thousands) | July 31, 2023 | January 31, 2023 | | :--------------------------------- | :------------ | :--------------- | | Litigation settlement | $75,500 | $75,000 | | Warrant liability | $7,585 | $2,829 | | Accrued contingent consideration | — | $4,420 | | Total | $98,770 | $103,678 | - The litigation settlement accrual increased to $75.5 million, representing the combined settlement of federal and state securities class action matters, pending final court approval[47] - Accrued contingent consideration decreased to zero, indicating the payment of $4.42 million during the period[47] Note 9. Debt Describes Zuora's debt obligations, including convertible senior notes, their terms, and related interest expenses - Zuora issued $250.0 million in convertible senior notes (Initial Notes) in March 2022 and agreed to issue an additional $150.0 million (Additional Notes) in September 2023[48] - The 2029 Notes bear interest at 3.95% per annum (cash) or 5.50% per annum (in kind) and are convertible into Class A common stock at $20.00 per share[50] | Debt (in thousands) | July 31, 2023 | January 31, 2023 | | :------------------ | :------------ | :--------------- | | Initial Notes principal | $250,000 | $250,000 | | Unamortized debt discount | $(35,599) | $(39,597) | | Carrying value | $214,401 | $210,403 | - Interest expense related to the Initial Notes was $8.94 million for the six months ended July 31, 2023, up from $6.15 million in the prior year[55] - Zuora has an undrawn $30.0 million revolving credit facility maturing in October 2025[56] Note 10. Deferred Revenue and Performance Obligations Details revenue recognized from deferred revenue and the total remaining non-cancellable performance obligations | Revenue Recognized from Deferred Revenue (in thousands) | Six Months Ended July 31, 2023 | Six Months Ended July 31, 2022 | | :------------------------------------------------------ | :----------------------------- | :----------------------------- | | Revenue recognized from deferred revenue | $126,548 | $115,461 | - Total remaining non-cancellable performance obligations were approximately $507.9 million as of July 31, 2023, with 58% expected to be recognized over the next 12 months[57] Note 11. Geographical Information Provides a breakdown of Zuora's revenue by geographical region, highlighting the contribution of the United States | Revenue by Country (in thousands) | Six Months Ended July 31, 2023 | Six Months Ended July 31, 2022 | | :-------------------------------- | :----------------------------- | :----------------------------- | | United States | $134,755 | $124,227 | | Others | $76,388 | $67,747 | | Total | $211,143 | $191,974 | - The United States accounted for 64% of total revenue for the six months ended July 31, 2023, with no other individual country exceeding 10%[58] Note 12. Leases Summarizes Zuora's lease liabilities and right-of-use assets, including operating lease costs and future maturities | Lease Liabilities (in thousands) | July 31, 2023 | January 31, 2023 | | :------------------------------- | :------------ | :--------------- | | Operating lease right-of-use assets | $26,628 | $22,768 | | Total operating lease liabilities | $47,760 | $47,164 | - Operating lease cost for the six months ended July 31, 2023, was $4.41 million, a decrease from $5.25 million in the prior year[61] - Future maturities of operating lease liabilities total $55.9 million, with $5.53 million due in the remainder of fiscal year 2024[62] Note 13. Commitments and Contingencies Details Zuora's commitments and contingencies, including legal proceedings, settlement agreements, and contractual obligations - Zuora has bank-issued irrevocable letters of credit for $4.5 million as of July 31, 2023[63] - Zuora agreed to settle the Federal Class Action for $75.0 million and the State Class Action for an additional $0.5 million, with $6.6 million expected to be funded by insurance; preliminary court approval was received in August 2023[68] - Derivative litigation matters were settled for $2.0 million in plaintiffs' attorney fees, paid by insurance carriers in August 2023, with preliminary court approval in July 2023[73] - A contractual obligation of $17.1 million exists for cloud computing services purchases by September 2024[74] Note 14. Income Taxes Presents Zuora's income tax provision, loss before income taxes, and effective tax rates for specified periods | Income Tax (in thousands, except percentages) | Three Months Ended July 31, 2023 | Three Months Ended July 31, 2022 | Six Months Ended July 31, 2023 | Six Months Ended July 31, 2022 | | :-------------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Loss before income taxes | $(21,975) | $(29,381) | $(40,801) | $(52,241) | | Income tax provision | $587 | $529 | $1,056 | $837 | | Effective tax rate | (2.7)% | (1.8)% | (2.6)% | (1.6)% | - The effective tax rates for both periods were negative, primarily due to no benefit being provided on pretax losses incurred in the United States, as a full valuation allowance is maintained on federal and state deferred tax assets[75] Note 15. Stockholders' Equity Details Zuora's common stock structure, voting rights, and accumulated other comprehensive loss components - As of July 31, 2023, Zuora had 132.4 million shares of Class A common stock and 8.1 million shares of Class B common stock outstanding[79] - Class A common stock holders have one vote per share, while Class B common stock holders have ten votes per share[78] | Accumulated Other Comprehensive Loss (in thousands) | January 31, 2023 | July 31, 2023 | | :-------------------------------------------------- | :--------------- | :------------ | | Foreign currency translation adjustment | $(343) | $(1,030) | | Unrealized loss on available-for-sale securities | $(576) | $(64) | | Total | $(919) | $(1,094) | Note 16. Employee Stock Plans Outlines Zuora's employee stock plans, including shares reserved, stock option, and RSU activity, and compensation expense - As of July 31, 2023, approximately 29.3 million shares of Class A common stock were reserved for issuance under the 2018 Equity Incentive Plan[81] | Stock Option Activity (in thousands) | Balance, January 31, 2023 | Balance, July 31, 2023 | | :----------------------------------- | :------------------------ | :--------------------- | | Shares Subject To Outstanding Stock Options | 7,761 | 6,637 | | Weighted Average Exercise Price | $9.28 | $8.87 | | RSU Activity (in thousands) | Balance, January 31, 2023 | Balance, July 31, 2023 | | :-------------------------- | :------------------------ | :--------------------- | | Number of RSUs Outstanding | 12,504 | 14,951 | | Weighted-Average Grant Date Fair Value | $12.98 | $10.64 | - Stock-based compensation expense totaled $51.87 million for the six months ended July 31, 2023, an increase from $51.04 million in the prior year[89] Note 17. Warrants to Purchase Shares of Common Stock Describes warrants issued to Silver Lake, their exercise terms, and the revaluation of liability-classified warrants - Zuora issued warrants to Silver Lake to acquire up to 7.5 million shares of Class A common stock, exercisable at prices ranging from $20.00 to $24.00 per share[90] - A portion of the warrants is classified as a current liability due to certain settlement provisions, with a fair value of $7.585 million as of July 31, 2023[91][40] | Revaluation of Liability-Classified Warrants (in thousands) | Three Months Ended July 31, 2023 | Three Months Ended July 31, 2022 | Six Months Ended July 31, 2023 | Six Months Ended July 31, 2022 | | :---------------------------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | (Loss) gain on revaluation | $(4,786) | $4,524 | $(4,756) | $8,896 | Note 18. Net Loss Per Share Presents Zuora's net loss per share calculations, including weighted-average shares outstanding and potentially dilutive securities | Net Loss Per Share (in thousands, except per share data) | Three Months Ended July 31, 2023 | Three Months Ended July 31, 2022 | Six Months Ended July 31, 2023 | Six Months Ended July 31, 2022 | | :------------------------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net loss | $(22,562) | $(29,910) | $(41,857) | $(53,078) | | Weighted-average common shares outstanding, basic and diluted | 138,605 | 130,280 | 137,417 | 129,384 | | Net loss per share, basic and diluted | $(0.16) | $(0.23) | $(0.30) | $(0.41) | - Basic and diluted net loss per share are the same due to the company being in a net loss position, making all potentially dilutive securities anti-dilutive[95] | Potentially Dilutive Securities (in thousands) | July 31, 2023 | July 31, 2022 | | :--------------------------------------------- | :------------ | :------------ | | Unvested RSUs | 14,951 | 14,591 | | Initial Notes conversion | 12,500 | 12,500 | | Warrants | 7,500 | 7,500 | | Issued and outstanding stock options | 6,637 | 8,098 | | Unvested PSUs | 2,855 | 2,905 | | Shares committed under ESPP | 290 | 208 | | Total | 44,733 | 45,802 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Provides management's perspective on Zuora's financial condition, operational results, key metrics, liquidity, and critical accounting estimates Overview Introduces Zuora's cloud-based subscription management platform, its capabilities, and the company's vision for recurring revenue businesses - Zuora offers a leading monetization suite that serves as an intelligent hub for businesses to manage and orchestrate the complete quote-to-cash and revenue recognition process for subscription and consumption-based models[100] - The solution helps companies launch, manage, and scale subscription businesses, automating quoting, billing, collections, and revenue recognition, and improving subscriber experience[100] - Zuora's vision is 'The World Subscribed,' focusing on providing technology for customer-centric, recurring revenue businesses[103] Fiscal Second Quarter Business Highlights and Recent Developments Summarizes key business achievements and developments during the fiscal second quarter, including customer growth and ARR - Customers with Annual Contract Value (ACV) ≥ $250,000: 444 as of July 31, 2023, up from 407 as of July 31, 2022 - Seven deals closed in Q2 FY2024 had ACV ≥ $500,000, with one exceeding $1.0 million - Dollar-based retention rate: 107% as of July 31, 2023, down from 111% as of July 31, 2022 - Annual Recurring Revenue (ARR): $384.2 million as of July 31, 2023, up 14% YoY from $337.6 million as of July 31, 2022[106] Fiscal Second Quarter Financial Performance Summary Presents a concise overview of Zuora's financial performance for the fiscal second quarter, including revenue, gross profit, and operating loss - Subscription revenue: $95.5 million, an increase of 14% YoY (16% on a constant currency basis) - Total revenue: $108.0 million, an increase of 9% YoY (11% on a constant currency basis) - Gross profit: $70.3 million, or 65% of total revenue, compared to $60.1 million, or 61% of total revenue in the prior year - Loss from operations: $18.2 million, or 17% of total revenue, compared to a loss of $30.2 million, or 31% of total revenue in the prior year[107] Key Operational and Financial Metrics Details key operational and financial metrics, such as customer growth, dollar-based retention rate, and annual recurring revenue | Metric | July 31, 2023 | July 31, 2022 | | :------------------------------------ | :------------ | :------------ | | Customers with ACV ≥ $250,000 | 444 | 407 | | Dollar-based retention rate | 107 % | 111 % | | Annual recurring revenue growth | 14 % | 20 % | - The number of customers with ACV equal to or greater than $250,000 increased, indicating broader adoption by larger organizations and expansion within the existing customer base[110] - The dollar-based retention rate decreased to 107%, reflecting the ability to retain and expand revenue from existing customers, though at a slower pace than the prior year[111] - Annual Recurring Revenue (ARR) grew by 14% year-over-year to $384.2 million, indicating continued growth in the annualized recurring value of active subscription contracts[112] Components of Our Results of Operations Explains the various components of Zuora's revenue and operating expenses, and their expected trends - Subscription revenue is derived from fees for platform access, use, and customer support, typically recognized ratably over one-to-three-year non-cancelable agreements[114] - Professional services revenue comes from implementation, configuration, and optimization services, recognized as performed, with a strategic shift towards system integration partners expected to decrease its percentage of total revenue[115] - Cost of subscription revenue includes data center, third-party hosting, employee compensation, and amortization of capitalized software, with continued investment expected[119] - Operating expenses, including R&D, Sales & Marketing, and G&A, are expected to remain relatively consistent or decrease as a percentage of total revenue for the remainder of the fiscal year[122][123][124] Results of Operations Provides a detailed comparison of Zuora's financial results for the three and six months ended July 31, 2023, versus 2022 | Metric (in thousands) | Three Months Ended July 31, 2023 | Three Months Ended July 31, 2022 | Six Months Ended July 31, 2023 | Six Months Ended July 31, 2022 | | :-------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Subscription revenue | $95,473 | $83,811 | $185,184 | $162,311 | | Professional services revenue | $12,575 | $14,964 | $25,959 | $29,663 | | Total revenue | $108,048 | $98,775 | $211,143 | $191,974 | | Gross profit | $70,267 | $60,126 | $136,016 | $117,090 | | Loss from operations | $(18,239) | $(30,190) | $(38,418) | $(53,845) | | Net loss | $(22,562) | $(29,910) | $(41,857) | $(53,078) | - Subscription revenue increased by 14% for both the three and six months ended July 31, 2023, driven by customer base growth and increased transaction volume[144][158] - Professional services revenue decreased by 16% for the three months and 12% for the six months, reflecting the strategy to shift work to system integration partners[145][159] - Gross profit increased, with subscription gross margin improving to 78% (3 months) and 77% (6 months), while professional services gross margin decreased to (31)% (3 months) and (28)% (6 months)[147][149][150][160][161][162] - Loss from operations significantly improved, decreasing from $(30.19) million to $(18.24) million for the three months and from $(53.85) million to $(38.42) million for the six months[128] Non-GAAP Financial Measures Explains Zuora's use of non-GAAP financial measures, their exclusions, and reconciliation to GAAP results - Zuora uses non-GAAP financial measures to supplement GAAP, providing consistency and comparability for evaluating performance, budgeting, and strategic decisions[131] - Exclusions from non-GAAP measures include: stock-based compensation, amortization of acquired intangible assets, charitable contributions, shareholder litigation expenses, asset impairment, change in fair value of warrant liabilities, acquisition-related transactions, and workforce reduction charges[133] | Non-GAAP Metric (in thousands) | Three Months Ended July 31, 2023 | Three Months Ended July 31, 2022 | Six Months Ended July 31, 2023 | Six Months Ended July 31, 2022 | | :------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Non-GAAP gross profit | $76,460 | $66,469 | $148,365 | $128,803 | | Non-GAAP income (loss) from operations | $9,559 | $(151) | $15,630 | $(307) | | Non-GAAP net income (loss) | $10,022 | $(4,394) | $16,947 | $(8,436) | | Non-GAAP net income (loss) per share, basic and diluted | $0.07 | $(0.03) | $0.12 | $(0.07) | | Adjusted Free Cash Flow (in thousands) | Three Months Ended July 31, 2023 | Three Months Ended July 31, 2022 | Six Months Ended July 31, 2023 | Six Months Ended July 31, 2022 | | :------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Adjusted free cash flow (non-GAAP) | $4,024 | $(7,461) | $17,003 | $(3,719) | | Constant Currency Revenue (in thousands) | Three Months Ended July 31, 2023 | Three Months Ended July 31, 2022 | Six Months Ended July 31, 2023 | Six Months Ended July 31, 2022 | | :--------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Subscription revenue on a constant currency basis | $97,505 | $83,811 | $189,957 | $162,311 | | Total revenue on a constant currency basis | $110,051 | $98,775 | $216,024 | $191,974 | Liquidity and Capital Resources Discusses Zuora's cash position, financing activities, and management's assessment of liquidity to meet future obligations - As of July 31, 2023, Zuora had $406.2 million in cash, cash equivalents, and short-term investments[170] - Operations are financed through customer sales, proceeds from 2029 Notes ($250.0 million raised, $150.0 million expected), warrants, and a $30.0 million undrawn revolving credit facility[171] - Management believes existing liquidity will be sufficient for at least the next 12 months, covering working capital, capital expenditures, debt servicing, and litigation settlements[172] | Cash Flows (in thousands) | Six Months Ended July 31, 2023 | Six Months Ended July 31, 2022 | | :------------------------ | :----------------------------- | :----------------------------- | | Net cash provided by operating activities | $19,981 | $2,182 | | Net cash provided by (used in) investing activities | $95,021 | $(146,506) | | Net cash provided by financing activities | $5,727 | $238,428 | | Net increase in cash and cash equivalents | $120,042 | $93,429 | - Total contractual obligations as of July 31, 2023, were $435.7 million, with $95.9 million committed within the next twelve months[182] Critical Accounting Policies and Estimates Identifies key accounting policies and estimates requiring significant management judgment in financial statement preparation - The preparation of financial statements requires management to make estimates and assumptions, particularly regarding revenue recognition, deferred commissions, valuation of stock-based awards, convertible senior notes and warrants, allowance for credit losses, goodwill, long-lived assets, and deferred income tax assets[35][36][185] - No recently issued accounting pronouncements not yet adopted are expected to have a material impact on the financial statements[189] Item 3. Quantitative and Qualitative Disclosures About Market Risk Outlines Zuora's exposure to market risks, primarily foreign currency exchange rates and interest rates, and their potential financial impact - Zuora is exposed to foreign currency exchange risk, particularly from GBP, Chinese Yuan, and Indian Rupee fluctuations, as a portion of operating expenses are incurred in foreign currencies[191] - A hypothetical 10% change in foreign currency exchange rates would not have a material impact on financial statements for the six months ended July 31, 2023 and 2022[191] - Zuora is exposed to interest rate risk on its cash, cash equivalents, and short-term investments, but its 2029 Notes have a fixed interest rate[192] - A hypothetical 10% relative 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 six months ended July 31, 2023[194] Item 4. Controls and Procedures Details management's evaluation of Zuora's disclosure controls and internal control over financial reporting, concluding on their effectiveness - Management, with CEO and CFO participation, concluded that disclosure controls and procedures were effective as of July 31, 2023, providing reasonable assurance for timely and accurate reporting[195] - There were no material changes in internal control over financial reporting during the period covered by the report[196] - Control systems, by their inherent limitations, can only provide reasonable, not absolute, assurance that objectives are met[197] PART II. OTHER INFORMATION Item 1. Legal Proceedings Refers to Note 13 for detailed information on Zuora's legal proceedings, including class action and derivative litigation settlements - Information regarding legal proceedings is incorporated by reference from Note 13. Commitments and Contingencies[200] Item 1A. Risk Factors Outlines significant risks that could adversely affect Zuora's business, operating results, and financial condition across various categories Risks Related to Our Business and Industry Identifies risks associated with customer acquisition, growth management, market development, competition, and debt obligations - Inability to attract new customers and retain/expand sales to existing customers could slow revenue growth, exacerbated by longer sales cycles and reduced discretionary spending due to macroeconomic conditions[203][206] - Failure to effectively manage growth and profitability plans, impacted by macroeconomic conditions, could adversely affect business, operating results, and financial condition[212] - Slow market development for monetization platform software and related solutions, or slow consumer adoption of subscription products, could hinder growth[213] - Inability to successfully execute strategic initiatives, such as increasing sales to large enterprises and strengthening partner relationships, could adversely affect the business[215] - Failure to recruit or retain senior management and key personnel, or maintain corporate culture, could impede business strategy execution[218] - Currency exchange rate fluctuations, particularly a stronger U.S. Dollar, may adversely affect reported results[220] - Intense competition in the monetization solutions market could harm operating results if Zuora fails to compete effectively[224] - History of net losses and anticipated increased operating expenses mean Zuora may not achieve or sustain profitability[226] - Revenue growth and profitability depend on increasing sales force productivity, which faces challenges in hiring, training, and retention[231] - Reliance on a limited number of products means failure to gain or maintain market acceptance could harm the business[236] - Debt obligations, including convertible senior unsecured notes and warrants, could adversely impact cash flow and financial condition[238] - Operating results may fluctuate quarterly due to numerous unpredictable factors, making future results difficult to predict[241][242] Risks Related to Information Technology, Intellectual Property, and Data Security and Privacy Highlights risks concerning security breaches, data protection laws, intellectual property, solution defects, and reliance on third-party infrastructure - Security breaches or unauthorized access to data could lead to customer loss, reputational damage, regulatory investigations, and significant liabilities[204][267] - Privacy and security concerns, along with evolving global data protection laws (e.g., GDPR, CCPA), increase compliance costs and may reduce solution effectiveness[275] - Failure to protect intellectual property (patents, copyrights, trademarks, trade secrets) could weaken competitive position and adversely affect operating results[281] - Errors, defects, or disruptions in Zuora's solution, or reliance on third-party software/infrastructure, could diminish demand, harm financial results, and lead to liability[289] - Any disruption of service from public cloud providers (AWS, Azure) could interrupt service delivery, harm business, and financial results[292] - Vulnerability to intellectual property infringement claims from others could result in monetary liability or business disruption[295] - Failure to comply with open source software license terms could restrict ability to sell solutions or require costly re-engineering[298] Risks Related to Legal, Regulatory, Accounting, and Tax Matters Covers risks from litigation, regulatory compliance, revenue recognition, customer payments, tax laws, and the need for additional capital - Adverse litigation judgments or settlements, including ongoing class action and derivative lawsuits, could expose Zuora to significant monetary damages or operational limitations[205][303] - Failure to satisfy data protection, security, privacy, and other government/industry-specific requirements could harm growth and incur significant liability[304] - A lack of subscription renewals or new agreements may not be immediately reflected in operating results due to revenue recognition over contract terms[305] - Failure to meet service level commitments in customer contracts could lead to credits, refunds, contract terminations, and adverse operating results[306] - Customers failing to pay in accordance with agreements could adversely affect operating results and financial position[308] - Ability to use net operating losses (NOLs) to offset future taxable income may be limited, potentially increasing tax liability[309] - Need to raise additional capital for growth, which may not be available on favorable terms or at all, potentially diluting stockholders[310] - Failure to comply with anti-corruption and anti-money laundering laws (e.g., FCPA, UK Bribery Act) could result in penalties and adverse consequences[312] - Non-compliance with governmental export control laws and regulations could adversely affect business and operating results[314] - Uncertainty regarding sales, use, and other tax laws, or adverse changes/applications of existing laws, could subject Zuora to additional tax liability and increase service costs[318] - Changes in GAAP principles or interpretations could adversely affect reported financial results[320] Risks Related to Ownership of Our Class A Common Stock Addresses risks concerning stock price volatility, dilution, analyst coverage, dual-class structure, dividend policy, and anti-takeover provisions - The market price of Class A common stock has been and may continue to be volatile, leading to potential loss of investment[205][322] - Substantial issuance or sale of Class A common stock (e.g., from convertible notes, warrants, equity awards) could dilute existing stockholders and depress stock price[325] - If securities or industry analysts do not publish research, or publish inaccurate/unfavorable research, the stock price and trading volume could decline[328] - The dual-class common stock structure concentrates voting control with Class B holders (including the CEO), limiting influence of Class A holders on corporate matters[332] - The dual-class structure may adversely affect the trading market for Class A common stock by limiting inclusion in certain stock indices[334] - Zuora does not intend to pay dividends for the foreseeable future, requiring investors to rely on stock price appreciation for gains[336] - Provisions in charter documents and Delaware law could make company acquisition more difficult and limit stockholder influence[337] General Risk Factors Discusses broader risks such as political developments, economic uncertainty, public company requirements, and catastrophic events - Political developments, economic uncertainty, or downturns (e.g., armed conflict, inflation, rising interest rates, banking system instability) could adversely affect business and operating results[344] - Requirements of being a public company may strain resources, divert management attention, and affect ability to attract/retain executive management and board members[349] - Failure to maintain an effective system of disclosure controls and internal control over financial reporting could impair ability to produce timely/accurate financial statements or comply with regulations[354] - Adverse effects from natural disasters, pandemics, catastrophic events, or man-made problems (e.g., terrorism) could disrupt business operations, and business continuity plans may be inadequate[358] - Investor expectations regarding environmental, social, and governance (ESG) factors may expose Zuora to new risks and additional costs[360] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds States that this section is not applicable for the reporting period, indicating no unregistered equity sales or use of proceeds - This section is not applicable for the reporting period[363] Item 5. Other Information Details Rule 10b5-1 trading arrangements adopted by Zuora's directors and executive officers for stock sales - Directors and officers generally trade Zuora stock under Rule 10b5-1 trading arrangements, subject to compliance with regulations and company policies[364] - Robert J.E. Traube (President and Chief Revenue Officer) adopted a 10b5-1 plan on May 31, 2023, for the sale of up to 31,024 Class A shares and net shares from 453,444 RSUs and 150,000 PSUs, expiring August 30, 2024[365] - Andrew Cohen (Chief Legal Officer) adopted a 10b5-1 plan on June 21, 2023, for up to 53,893 Class A shares and net shares from 154,167 RSUs and 75,000 PSUs, expiring August 30, 2024[366] - Todd McElhatton (Chief Financial Officer) adopted a 10b5-1 plan on June 21, 2023, for up to 80,000 Class A shares, 50,000 RSU shares, and net shares from 350,000 PSUs, expiring September 20, 2024[367] - Tien Tzuo (CEO and Chairman) adopted a 10b5-1 plan on June 22, 2023, primarily to exercise up to 250,000 Class B stock options quarterly and sell net shares from 341,665 RSUs and 350,000 PSUs, expiring September 6, 2024[368] Item 6. Exhibits Lists all exhibits filed as part of the Form 10-Q, including offer letters, certifications from the CEO and CFO, and Inline XBRL documents - Exhibit 10.1*: Offer Letter, dated May 18, 2023, between Peter Hirsch and the Registrant - Exhibit 31.1: Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Exchange Act - Exhibit 31.2: Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Exchange Act - Exhibit 32.1**: Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - Exhibit 32.2**: Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - Exhibits 101.INS, 101.SCH, 101.CAL, 101.DEF, 101.LAB, 101.PRE: Inline XBRL Taxonomy Extension Documents - Exhibit 104: Cover Page Interactive Data File[369] Signatures Contains the required signatures for the Form 10-Q, certifying its submission on behalf of Zuora, Inc - The report was signed by Todd McElhatton, Chief Financial Officer (Principal Accounting and Financial Officer), on September 6, 2023[374]