Zuora makes money
In its first financial reporting since becoming a public company, Zuora posted some impressive numbers including,
The subscription billing company’s year-over-year subscription revenues grew 39 percent and total revenue grew an amazing 60 percent.
Customers with greater than $100,000 annual contract value (ACV) grew to 441.
Total quarterly revenue was $51.7 million, giving it a run rate that should exceed $200 million in its first year as a public company.
Also, non-GAAP loss from operations was $18.6 million which is a lot of money as a percentage of revenues.
Reading further you discover the company has over $200 million in the bank, mostly from the IPO. Net/net this young company is growing well and it has cash on hand to lift it to profitability. Spending on operations if it includes selling and marketing would seem tolerable since it’s going into growth and the results indicate the strategy is working.
If you’re an optimist and you own the stock it’s likely that you bought on the promise of the As-A-Service economy aka the “Subscription Economy” that the company touts. If memory serves, Salesforce went public with similar numbers and word is that they’re doing okay, so there’s a case for being optimistic.
The key question is whether the company in question represents a new category with great growth prospects or if it’s a me-too. Today a me-too might be an analytics company or a new CRM company, we already have too many of them. But subscription billing, while still a crowded market, has a lot of potential. More traditional companies are launching products as services and finding they need help with the books.
What these numbers might also show, in my opinion, is how difficult it is to launch a company into the financial space. It’s rather conservative after all as shown by the slower growth of cloud ERP companies compared to cloud front office companies.
So from my seat it looks like Zuora is growing nicely, they’ve got cash and if they ensure their spending drives activities that drive further growth, it’s all good.
Next week, Zuora hosts its customers at its annual Subscribed conference. I will be reporting from the scene and it will be interesting to see what they have to say.
Zuora files for IPO
After the markets closed on Friday, Zuora announced it had filed paperwork for an initial public offering (IPO) with the Securities and Exchange Commission (SEC). Although the quantity and price of the class A common shares has not been set, the company intends to trade on the New York Stock Exchange with the symbol ZUO. According to a press release from the company,
Goldman Sachs & Co. LLC and Morgan Stanley & Co. LLC are acting as the joint lead bookrunners for the proposed offering. Allen & Company LLC and Jefferies LLC are acting as bookrunners. Canaccord Genuity LLC and Needham & Company, LLC are acting as co-managers.
Zuora is one of many companies to spin out of Salesforce.com. Although the product, a billing and financial system tailored to the needs of businesses that sell subscriptions instead of conventional products and services, is home grown, CEO Tien Tzuo is a former CMO at Salesforce. Tzuo was one of the earliest employees at Salesforce and in one of his many jobs there oversaw development of an in-house billing system for subscriptions. In the early 2000s, subscription businesses were gaining a foothold and scoring their first successes, but the problem of billing dogged the whole industry.
Briefly, in the early days just as today, subscribers paid a monthly fee for each user and the headcount could fluctuate each month along with other variables. So, unlike product companies, the billing for subscription vendors could vary from month to month, a condition that conventional billing systems could not accommodate, at least not easily. A lot of manual effort went into monthly billing.
Zuora made its reputation as a vendor that could turn an end-of-month billing problem into a routine process. That enabled emerging subscription companies to focus their resources on building products and serving customers. It also made revenues more predictable, something that CEOs and their boards valued.
For more than a decade Zuora has grown as a private company raising well over $100 million from investors. The company has been valued at over one billion dollars making it one of a select group of companies known as Unicorns in Silicon Valley and the investment world. Unicorns get their name because they are start-ups having valuations over one billion dollars and because such companies are as rare as, well, unicorns.
Zuora’s valuation was helped by its understanding of subscription business tactics such as identifying and aggressively addressing potential customer churn and managing billings for future services. Customers might sign long term contracts and pay up front with an understanding that the payment would be drawn down over the term of a contract.
Having this unrecognized money in the bank or at least on the books made Zuora and other subscription companies’ future revenues easier to evaluate and predict and thus establish them as unicorns.
The market for subscriptions has grown with Zuora. Subscriptions are essentially a way to commoditize products enabling vendors to sell them in more bite-sized quantities. This in turn enables vendors to enlarge their markets without slashing core pricing. For example, earth moving equipment producers have started subscription businesses by providing a service of earth moving without requiring the purchase of heavy equipment. Depending on the job they might bill for cubic yards of material moved per day or tonnage. Regardless, the customer signs up for moved earth not bulldozers and the cost difference is considerable.
The subscription business model has been the wind in Zuora’s sails and there is little sign that the breeze is slacking. In fact, it is just beginning in many industries. Many vendors now find they have multiple channels to market that include traditional sales as well as subscription services. At the same time, they learn that the way that subscription billing, collections, and fiscal management occur differ. Zuora has become one of a few companies that can do the subscription billing work up front and then contribute financial information to the company’s traditional financial systems in ways that are intelligible to legacy accounting systems. It can thus function as the business’ system of record for subscriptions making it indispensable for many of them.
Look for the IPO to occur in the second quarter, most likely. There will be a quiet period before the event which is standard procedure. We’ll have to wait for the underwriters and the market to set the market value to understand how this unicorn’s billion-dollar valuation fares.
Congratulations, It’s Over, What’s Next?
Forbes has an interesting post by Tien Tzuo, CEO of Zuora and one of the leaders of the subscription revolution in which he discusses the coming of age of the subscription economy. Coming of age might sound like a contradiction to say the least—where has everyone been for the last couple of decades? Subscriptions are down and in a curious way, this is the point.
You ought to read the post almost as an echo of Mark Twain’s “Innocents Abroad” because it discusses Tzuo’s first encounter with international governmental organizations through his recent participation in the G20 meeting. To be very brief, the G20 is the group of the largest countries by economic output and its finance and political leaders gather annually to discuss where this planet and its economy are going. You might have also heard of the G7 or G8 (depending on whether or not Russia is misbehaving), which is an even more exclusive group.
So Tzuo was invited to participate in some sub-group meetings for business and technology in Antalya, Turkey, site of the recent confab. Now you have context. Tzuo is happy to report that the word “Internet” broke into the collective consciousness in the form of a communiqué from the recent meeting with an assist from him. That’s how long it can take for an idea that we have regarded as foundational for over two decades to become so mainstream that it gets included in the thinking of the G20.
This should surprise no one. When you are dealing with the planet’s economy and the 20 largest players in it, then it’s reasonable that only the biggest ideas bubble up and the Internet (specifically subscriptions) is finally breaking the surface. But the fact of this emergence suggests that the Internet and even subscriptions are no longer the disruptive innovation we’ve nurtured for much of our working lives.
The technology revolution ushered in a world of data driven business processes, information sharing, social media, big data, analytics, tiny computers now called devices, and use of the word “online” as a prefix as in online shopping. It is now so integral to what we do that it is its own paradigm, rapidly replacing older structures and business models like face-to-face commerce, print media, and (gulp!) customer loyalty. Online everything is having enormous impacts on how we live and travel and it is now safe to say that the revolution is over.
To be clear, we will not retreat into some dark age and technology will continue to drive the global economy for quite some time. But when you think of the power that you can hold in your hand in the form of a device today, you can see that it’s getting rather hard to make a technology product at a profit and there is an important lesson. Technology and information are commoditizing the way that everything else from textiles, to cars, to TV did. They are all important parts of the global economy today but none drives it.
We shouldn’t mourn information technology’s passing and as I said, technology is with us now for better or worse. Interestingly another disruption that’s been on the horizon for decades got a major boost over the weekend when the global community ratified an agreement summarizing individual nations’ efforts to stem carbon pollution and save the planet from overheating.
From here on the technologies that will have venture capitalists’ greatest attention will be those that reduce emissions, generate clean electricity, and even take carbon out of the atmosphere. This new paradigm will be the work of a generation and people in the job market today will increasingly feel the gravitational pull of energy and environment in information, finance, product development, sales and marketing, and much, much more.
The new paradigm will be heavily dependent on the information management structures and tools that the current generation—all of us—have wrought. It is a worthy legacy.
There is no better company to look at to get a sense of the future of technology in business and society than Zuora. This might surprise many people because companies like Oracle, Microsoft, and Salesforce might come to mind more readily. To one degree or another those companies feature their products and services, which are very important but Zuora talks about business models, and today that’s even more important.
It’s the business model that will determine the products and services companies will be able to provide and its behaviors around them. It is the frame for everything else the company does and what it considers important. Consider the dominant business model of the last century: manufacture millions of identical products and sell them through mass advertising.
We took pride in the standardization and uniformity of so many products able to provide the identical user experience. That was a good thing too because it made interchangeable parts a reality. If you manufacture anything that’s a big deal, but it also leads to thinking that all customers are interchangeable too and that’s not so good.
The old model was simple and direct but utterly without any meaning to the customer. Indeed we came to think of the customer as a mere consumer, one that takes from a huge but not unlimited supply and gives nothing back. A business model with consumers is unsustainable for the simple reason that sustainability demands that my spending is your revenue and vice versa. It is a round trip and it is what keeps economies strong. It is also the basis of Keynesian macro economic theory, which neo-conservatives often pooh-pooh but never seem to refute.
But Zuora’s messaging at Subscribed 2015, its user meeting held in San Francisco last week, is that business models are changing. We knew this but perhaps we had a less clear understanding of its implications. If you take personalization and customer experience, add to it my idea of Customer Science, and think of what the world’s business models might look like if you move from mass production to personalized subscription, you get a sense of the vision Tien Tzuo, Zuora’s CEO, was offering.
Tzuo’s keynote was smooth and well organized but relatively quotidian for its first half winding through nearly a decade’s worth of increasing progress in the subscription market. In the second half he wound up and delivered his big news, a 100 mile an hour fastball down the middle of the plate, a new product, Z-Insights. To simply call Z-Insights a new product though is to miss its importance. It extends the company’s idea of Relationship Business Management (RBM), brings more definition to the subscription economy, and extends the future of ERP squarely into the front office. Let me briefly unpack this.
The idea behind RBM is that to successfully transition from making millions of identical products to personalizing vendor-customer interactions, it helps a lot if you can provide your wares through subscriptions. Subscriptions provide the framework for capturing customer use and uptake data so that you can act authentically when involved in moments of truth with your customer. Prior to Subscribed 2015, I felt that RBM was more aspirational because it depended on vendors understanding (often guessing) what data to collect in order to act on its information content. There was a quality of dealing with known unknowns to borrow a Rumsfeld phrase. With Z-Insights there’s now a framework for all this and the software will do a good deal of the heavy lifting when it debuts later this year.
Much as I believe we’re in a subscription economy, I also know that the economy has successfully spawned a culture. Customers behave in the market and act towards vendors like subscribers—not because all vendors offer subscriptions but because nearly all customers have been exposed to subscriptions, to the ways that are superior to traditional relationships and they prefer the new culture for its greater intimacy and empowerment.
Z-Insights aims to provide vendors with the information they need to understand customers better so that the two can meet in moments of truth. By collecting and managing customer use and uptake data vendors will have solid understandings of what drives demand. Understanding demand is the first step to providing adequate supply in a world that now requires greater personalization. It’s not enough to know that a customer might have a need for a solution unless one also knows how that solution will affect the user.
Much has been written (by me and many others) about the demise of ERP but the context is important. I don’t see how to get away from ERP since it supports so many vital back office functions. But the ERP we inherited from the last century is evaporating in the sense that pieces that were once thought to be foundational are being supported in best of breed situations and connecting with front office systems. Take, for example, Xactly, which also had a user meeting this week at the other end of Market Street. Xactly focuses on incentive compensation, which was once thought to be a part of ERP through HR or HCM, but all of these functions are breaking off and aligning with the front office.
In a similar way, Zuora as a part of ERP that handles subscription billing, payments, and finance, is connecting more directly with front office CRM when it begins offering insights into customer behavior from essentially ERP data, which can drive alignment of the sales, marketing, and even support groups in the front office.
So, who owns the customer?
Many good questions on the minds at Subscribe could be reduced to who owns the customer in such a situation? We seem to default to existing answers like sales or marketing or possibly customer service in these circumstances. But really, it’s a jump ball, if we’re changing the vendor-customer paradigm is it necessarily true that the old structures will support the new framework? I suggest they won’t.
I believe Z-Insights is possibly the opening salvo in a process that may evolve a new department at least in larger enterprises. I am calling it the customer science department because it will be the place where all customer data consolidates and vendors identify customer needs. In essence it will be the place where the business practices sociology on its customers, understanding the structures that keep them engaged with the group (and the business or brand) and looking out for the indicators of disenchantment that lead to attrition as well as opportunities for cross-sells and up-sells. This will drive specific directions for sales, marketing and service groups.
This framework will enable everyone to take responsibility for coordinating aspects of the customer journey while a specific and neutral group has responsibility for customer knowledge. Note that ownership devolves into responsibility; its synonyms include bond, duty, accountability. As it should be.
Get a Horse
I was literally gobsmacked and I had to re-read the post several times. Gartner analyst Robert Desisto—who I don’t know at all—wrote a short post last week saying that today’s SaaS vendors, “will resist the move to ‘pay as you go’ because it will have a very big impact on their business model predictability” and become “legacy dinosaurs” as his headline said.
But, but, but! I stammered to myself. How can that be? I have been researching and writing about this space for fourteen years. I was the first analyst to cover Salesforce and a bunch of other early entrants, and one of the first people to have a practice dedicated to SaaS. They all had pay as you go models, at least back then. Did I miss something?
One of the real challenges of running a subscription business, and this includes SaaS companies as well as the Dollar Shave Club, ZipCar, and all the other companies that jumped on the bandwagon, is that you have very different revenue flows that must be accounted for. Companies like Zuora have built big businesses and attracted hundreds of millions of dollars in venture funding to build billing, payment, finance and accounting systems that cater to this massive industry. Now along comes Gartner with the clear implication that the pay as you go model is not in fact alive and well? I didn’t get it. Still don’t.
As a sanity check I contacted Tien Tzuo, CEO of Zuora, a subscription billing, payments and finance provider. In his previous life Tzuo was CMO of Salesforce and at one point had the job of inventing a billing system for Salesforce that operated the way subscriptions run. Here are some points from Tien.
- Just because some SaaS companies do three-year contracts that doesn’t make them enterprise software dinosaurs. Every successful SaaS company realizes that keeping churn low is a core part of the model, and every successful SaaS company realizes that long term contracts do not equate to low churn—the only thing that truly reduces churn is to have strong adoption and customer success. That’s why SaaS vendors invest in customer success while on premise software companies do not
- Many SaaS companies actually don’t offer three-year contracts. At Zuora, we see lots of companies with month-to-month models. CDNs, cloud companies, API companies, point-of-sale systems—these industries all skew towards month-to-month. Radian6 also had a month-to-month model. The post also says doing three-year contracts makes SaaS companies vulnerable to other startups who choose to offer month-to-month … but there’s nothing to stop the SaaS vendor from changing their billing policy whenever they want. (my note: provided they have a product like Zuora that makes this easy to do the billing and accounting).
- Customers don’t have to accept three-year contracts. It’s naive to say that it’s the SaaS vendor that forces it on them—many companies actually prefer long term contracts once they are committed to the SaaS vendor, as this gets them the best price as well as longer-term price protection. This can be a win-win scenario.
- This does create havoc on revenue recognition. Monthly billing makes billing messy but revenue recognition easier. Annual or multi-year billing makes billing easy but revenue recognition very hard. There’s no free lunch.
It was such an odd thing to read. It reminds me of some other chestnuts like, “If god wanted man to fly he would have given us wings,” or “We will never need telephones in England because we have such an abundant supply of messenger boys,” or “Someday every town will have a computer,” or my favorite, “640 KB is all the memory your computer will ever need.” These are all such Luddite comments you just knew upon hearing them that they won’t stand the test of time. Heck, this one didn’t survive a day before people started scratching their heads.
Perhaps the last word on this comes from the most authoritative source—the marketplace. On December 10, BrainSell, a Boston-based technology company announced it would offer an integrated solution of Intuit’s QuickBooks with bi-directional synch to Salesforce. According to the press release, “What’s really great is that customers can get a Salesforce subscription from BrainSell with no contract, and the ability to pay month to month!”