Zuora Earnings: 2 Things to Watch, and 1 to Ignore

Zuora (NYSE: ZUO) is a tiny, young company that's had an up-and-down tenure on the public market. When it reports earnings tomorrow after the close, most investors will be focused on whether or not it hit its revenue and earnings estimates.

Not me. As a shareholder intending to hold for the long haul, there are two metrics I'm far more interested in. If you're a shareholder, they should be on the top of your list too.

Why revenue growth doesn't tell the whole story

For those who are unfamiliar, Zuora is a software-as-a-service (SaaS) company with the goal of helping companies everywhere transition to the subscription economy. It turns out that revenue recognition is a lot more difficult when it comes to subscriptions, and many need help with this.

For now, that's Zuora's big focus -- though it will likely release new tools every year. And it's the recurring revenue from subscriptions to the company's cloud-based software that are the real story.

But because the company is so young, revenue associated with on-boarding customers -- sending representatives to your site to make sure everything is up and running -- can also be a major contributor to the top line.

For long-term investors, however, this is just noise: The service revenue is largely one-off, and it actually has negative margins. That's right -- after paying for this service, Zuora actually loses money..

That's OK -- it gets customers into Zuora's ecosystem for the long-haul (more on that below). But you might miss how the company is doing if all you pay attention to is top-line growth.

Here's what I mean.

If all you did was look at total revenue, you'd think the company had experienced a marked slowdown since going public. "What started as 60% growth has been cut all the way down to 33% -- panic!"

But service revenue is noise -- it's lumpy and meaningless. If you look at subscription revenue growth, you'll see that it's been very stable.

How many big fish have been hooked?

But I don't necessarily think subscription revenue growth is the best metric to watch either. Instead, I have two other favorites.

The first is the total count of customers that have annual subscription contracts of $100,000 or more. Zuora takes great pains to make their conference calls entertaining, showing that it's not just tech companies that can use subscriptions. Thus far, they've highlighted porta potty vendors and lawn mowers.

The bigger point, however, is this: If Zuora's software is successful in helping its clients grow, those clients will pay more year after year. And if word gets out about the effectiveness of streamlining accounting with the program, it should be able to catch bigger fish.

That trend is already clear.

Those 2018 figures are actually valid as of September 30, 2018. If the company can report that it ended last year with 519 customers, it would be 25% growth over the past year.

Staying around and spending more

Finally, we have what I consider the most important metric: the dollar-based retention rate. That's a long name for a number that tells us two simple things:

  • Are customers staying around? 100% retention means that on average they are.
  • Are customers adding more solutions, and paying more, over time? This would be signified by anything above 100%.

It does this by taking all of the subscription revenue the company gets from its base customers at the end of Year One, and compares it to how much subscription revenue those same customers bring in in Year Two. By filtering out the effect of new customers, we get a better look at whether or not Zuora is deepening its relationships over time. That's crucial for building out a moat via high switching costs.

Most customers start with Zuora by using Zuora Billing, but there are lots of other tools the company offers. There are high hopes for Zuora RevPro, a tool that larger clients tend to choose. But the company also has Zuora Collect and Zuora CPQ. I have little doubt there will be new offerings in the not-so-distant future.

In its first year as a publicly traded company, Zuora has shown strength here.

I will generally be happy with anything above 110%, but I always hope to see this number growing -- if even by a percent here or there -- over the course of a year.

So there you have it. While Wall Street will be focusing on revenue and earnings (notice: we didn't even talk about earnings here), you know the two most important numbers to watch when Zuora reports fourth-quarter results this week.

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Brian Stoffel owns shares of Zuora. The Motley Fool owns shares of and recommends Zuora. The Motley Fool has a disclosure policy.