Tien Tzuo’s Leadership Propels Zuora’s 14% Growth In Subscription Economy

Just because a company pioneers a great idea, it does not make its stock a good investment.

This comes to mind in considering Redwood City, Calif.-based Zuora — a 1,549-employee enterprise software company founded in 2007 that helps companies to launch and manage their subscription-based services.

Sadly for investors, Zuora stock has lost 55% of its value since going public in April 2018 — now sporting a market capitalization of $1.2 billion.

Could a turnaround be in the offing? Its stock has risen 11% since March 1 when it reported better than expected results for its fourth quarter. Here are three reasons Zuora’s stock could rise:

• Deeper market penetration
• Bullish growth forecast
• More growth-friendly management style

Expectations-Beating Q4 Financial Results

Zuora exceeded investor expectations in the most recent quarter ending January 2023, according to SiliconAngle.

Here are the highlights:

• Revenue rose 14% to $103 million — 4% more than analysts expected
• Adjusted loss of four cents a share — two cents better than the analyst consensus
• Subscription revenue up 16% to $89.5 million
• Negative free cash flow of $20.1 million
• Cash and equivalents of $386.2 million

Zuora was bullish about the results. “Q4 was another solid quarter where we came in ahead of guidance across our operating metrics, including revenue, free cash flow, net dollar retention and non-GAAP operating income,” CEO Tien Tzuo said in a statement.

These results are better than the way I saw things at Zuora five years ago. In 2018, had most recently reported a loss of $1.78 per share — 10 cents a share more than it lost the year before.

Zuora expected to boost spending after its IPO to expand relationships with existing customers, enter new vertical markets, go global, and build the systems needed to administer a public company.

Yet Zuora’s growth has slowed down considerably since 2017 — the year before its IPO. Back then. its sales increased 49% to $168 million as it aimed at a market that was anticipated to reach $9.1 billion by 2022, according to MarketWatch.

Deeper Market Penetration

While it is still losing money and burning through cash, its investments in getting and keeping customers seem to be paying off. Evidence of that progress includes:

• Customers with contracts worth at least $100,000 increased 3% to 773
• Its dollar-based retention rate — which measures how much more customers bought since the previous year — was 108%
• Customers transacted 12% more volume — $23.8 billion worth — using Zuora’s platform
• New customers included AVEVA Group, Donnelley Financial Solutions, Microsoft, Scout24, SimpliSafe and Stellantis.

Bullish Growth Forecast

Investors reacted positively to Zuora’s guidance.

For the quarter ending April 2023, Zuora expected revenue of $101 million to $103 million — the midpoint of which is 12% more than the year before.

For fiscal 2024, Zuora forecast revenue in the range of $428 million to $440 million — the midpoint of which is 10% more than fiscal 2023.

Moreover, Zuora expects to make a profit — adjusted earnings per share for fiscal 2024 between “seven and 10 cents a share,” according to Silicon Angle, compared to a loss the year before.

Zuora was happy about its forecast. “We continue to successfully execute our land and expand strategy based on the clear demand for billing, revenue and subscription management solutions. Looking ahead, we’re committed to balancing growth and profitability in the upcoming fiscal year,” said Tzuo.

Zuora shares rose about 4% after it announced results on March 1 — closing up another 18% on March 2.

Zuora’s Growth-Friendly Management Style

Zuora has achieved market leadership in many industries by supplying products that customers prefer to those of rivals. Zuora added new services that its customers demanded and has helped businesses survive the Covid-19 pandemic. Finally, Tzuo has become a more effective leader.

A compelling customer value proposition

Zuora helped companies build subscription-based business models. As Tzuo explained in a March 17 interview, “When I was at Salesforce, there was customer pain with the traditional model of licensing software. Subscription was a better ‘pay as you go’ business model that was well-aligned with the customer. I saw that every company and industry would go through what worked for software as a service companies like Zoom, Zendesk
ZEN
, and HubSpot
HUBS
.”

Zuora has won over leading media and automobile companies. “Our customers include media and newspapers like the Seattle Times and the New York Times
NYT
; streaming company and 12 of the 15 top car companies including Fiat-Chrysler, Toyota, and General Motors
GM
. They use it to establish digital relationships with their customers. We enabled them to measure outcomes. We invested in building subscription reporting — billings, payments, and revenue recognition,” Tzuo told me.

Helping customers adapt to change

Zuora wins over customers by tailoring its offerings to each organization. As he said, “We touch all departments — we sell to sales and marketing, finance, and engineering departments. We are the only one that brings it all together. We modularize so a customer can use just the finance module. We land in different parts of the company and can bring other departments in. We can integrate with Oracle revenue recognition and a company’s existing billing systems.”

Zuora is not just a tech company — it also advises on business strategy. “Our value proposition is that this is a whole new business model. Based on our book, people ask us to present to their leadership team to help them build a subscription-based business model,” Tzuo pointed out.

Zuora helped companies survive the Covid-19 crunch. As he explained, “Even after airport traffic fell 90% at the beginning of the pandemic, customers were loyal. We worked with a Scandinavian eyeglasses as a service company that mailed their product to customers for $99 to $200 per year as physical stores shut down. They sailed through the pandemic.”

How Zuora grows with its customers

Zuora keep its core service growing over time. “I disagree with the Boston Consulting Group Growth/Share matrix. I do not like the idea of milking a cash cow and chasing the next growth opportunity. In the subscription economy, you go deep with the customer. The customer will lead you to build new, value-added services,” he said.

Unlike some companies that depend on customers who subscribe and then fail to use the product, Zuora aims to give customers value for which they are glad to pay. “Don’t offer a book of the month club where you pay because you are too lazy to cancel and you get books that are not valuable to you. Think about it as a service where you give them more and more over time. You have a dialogue with the customer and prototype ideas. We have a Zuora Advisory Group where we get feedback on our new product ideas,” Tzuo told me.

In March 2022. Zuora received outside capital to fuel innovation — since then, its stock has fallen 31%. “We took $400 million from Silver Lake to spend on R&D. We want to accelerate the pace of innovation and use the money to find good technologies that our customers will value. We made our first acquisition — an expense platform called Zephyr,” he said.

Becoming a more effective CEO

Tzuo has become a more effective CEO over his long tenure. “I have been CEO for 15 years. There are very few founder/CEOs like Benioff and Zuckerberg who can keep their companies growing rapidly over time. Many founder/CEOs are good for a few years and then blow up. I am working with an executive coach who says CEOS are ticking time bombs,” he said.

He has learned how to lead his team to execute Zuora’s vision. “Many founders are vision oriented and they forget that you have to execute and bring people along. You have to have respect for people. We are all CEOs all have the same power, we are leaders in our areas. We all have the same drive. We need collaboration, clarity, and systems for executing,” Tzuo noted.

His insights into “why leaders blow up” has caused him to change his behavior. “Leaders are overconfident in their own judgement. They are wrong but they get no feedback. Instead of listening to what their leadership team says, they want their team to echo what the CEO wants to hear.”

Here’s how he changed: “I used to grandstand in meetings with my leadership team. That behavior encouraged all the team members to do the same. I had to change. I had to force myself only to ask questions and listen,” concluded Tzuo.

Zuora — with a price/sales ratio of 2.6 — is valued way below Salesforce’s 5.3. At 14%, Zuora’s revenue grew more slowly than Salesforce’s 18% in 2022. Something is out of whack. It seems to me that Zuora’s valuation is either too low or Salesforce’s is too high.

Does that mean its shares could rise? Seven analysts who cover Zuora set an average price target of $11 — meaning that it shares trade some 20% below their price target.