Why Zuora's Stock Crashed Hard on Friday

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What happened

Shares of Zuora (NYSE: ZUO) plunged through the floor on Friday morning, following the release of solid first-quarter results with a side of disappointing financial guidance. As of 10:50 a.m., EDT, the stock traded 29.6% lower.

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So what

The provider of cloud-based services that help other companies run subscription-based sales models saw first-quarter sales increase by 22% year over year, landing at $64 million. Adjusted net losses stopped at $0.11 per diluted share, up from a $0.29 loss per share in the year-ago period. Your average analyst would have settled for a $0.13 loss per share on revenue in the neighborhood of $64.2 million.

Looking ahead, Zuora's management issued second-quarter revenue guidance of roughly $67 million with adjusted losses targeted at approximately $0.14 per share. Here, the Street had been looking for a $0.11 loss per share on sales near $71 million. Beyond that, Zuora held its bottom-line guidance for the full fiscal year 2020 at a loss of $0.42 per share but the full-year revenue target was lowered from $295 million to $273 million. Analysts had been aiming slightly below the midpoint of official guidance, settling for $291 million.

Now what

In the earnings call, Zuora CEO Tien Tzuo reassured analysts that he's excited about the company's long-term prospects but that two serious headwinds will slow down revenue growth in the next couple of quarters.

First, Zuora's sales execution could be improved by giving new sales reps a better training program. In the first quarter, new hires were "less than half as productive" as the company's more experienced salespeople. So the training efforts are getting an overhaul, and newer names will be mentored and supported by their longer-tenured peers.

Second, the expected cross-selling between Zuora's two flagship products isn't working out as planned. There's plenty of demand for the RevPro revenue collection tool from existing users of the Billing platform, but technical complexity and the business-critical importance of these functions are slowing things down. There's technical work going on, aimed at simplifying the two-product installation process. Tzuo hopes to have a significantly improved process ready by the end of the third quarter.

These growing pains are typical of fast-growing start-ups, but it's too early to tell whether Mr. Tzuo will deliver on his promised improvements. The stock is now trading at a costly 14 times book value, and that's after dropping 63% below Zuora's 52-week highs. I'll gladly watch this sputtering growth engine from the sidelines until Zuora can prove that management's betterment plans are working.

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Anders Bylund has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Zuora. The Motley Fool has a disclosure policy.