Zuora Inc (ZUO) 2019 Q2 法說會逐字稿

Good afternoon. My name is Jay, and I will be your conference operator today. At this time, I would like to welcome everyone to the Zuora Fiscal Q2 2019 Earnings Call. (Operator Instructions) Joon Huh, VP of Investor Relations, you may begin.

Thanks, Jay. Good afternoon, and welcome to Zuora's Second Quarter Fiscal 2019 Earnings Conference Call. Joining me today are Tien Tzuo, Zuora's Chief Executive Officer; and Tyler Sloat, Zuora's Chief Financial Officer.

You'll see that we have a more conversational format to our call today, and hopefully you like it. But before we get to that, let me cover some of the legal language. As you know, we finished our second quarter in July, and the purpose of today's call is for us to provide some color on the quarter. We're also going to provide financial outlook for the third quarter and for the full fiscal year. Some of our discussions and responses today will include forward-looking statements, so as a reminder, our actual results could differ materially as a result of a variety of factors. You can find information regarding those factors in our most recent Form 10-Q filed with the SEC.

Finally, we'll be referring to several non-GAAP financial measures today and reconciliations to the related GAAP measures that are included in our earnings release. For a copy of today's earnings release, links to our SEC filings, a replay of today's call or to learn more about Zuora, check out our Investor Relations website at investor.zuora.com.

And now without further ado, let me turn it over to Tien and Tyler.

Thank you, Joon, and good afternoon, everyone. This is Tien.

Yes. Tyler's here as well.

Thank you for joining our Q2 earnings call. So Tyler, can you believe that this is our second earnings call as a public company, that it's already been 5 months since the road show and IPO?

I know, Tien. I can't believe it. It feels just like yesterday. Some mornings, I still wake up in a cold sweat wondering what city I'm in. I know everyone made fun of me, but thank goodness, I had enough grapefruit to stay healthy and keep the energy up.

Ha, ha, the grapefruit, yes, it brings back memories. Hey, and speaking of the road show, I noticed quite a few folks on the call that we had a chance to meet on the road show. And to you all, it's been a pleasure keeping in touch. And for those of you who became public investors of Zuora, big thank you for being part of our family. And to the folks in the call brand new to Zuora, a big welcome for all -- from all our ZEOs around the world. Welcome to our journey building the Subscription Economy.

So for today, we're going to try something just a bit different. We know these earnings calls can often be very dry, very boring, and we know many of you listeners out there have to sit through a ton of these calls, so we're going to try something a little bit different. We're going to make it more of a dialogue.

For the first half of the call, Tyler is going to interview me about state of the business, what we're seeing in the marketplace. And then I'm going to turn the tables, and I'm going to ask him a few questions about our Q2 numbers and our guidance going forward. What do you think, Tyler?

I'm ready, Tien. Let's do this. So why don't you kick it off? You're going to talk about porta potties again?

No, no, no. No porta potties for this call sadly, but we may take a trip to Wauwatosa, Wisconsin.

Oh, I can't wait. Let's do it. So Tien.

Yes, Tyler?

If you think back 5 months ago, and you're at our road show, you basically laid out our vision for Zuora. And it really boiled down to 3 things: first, that the shift to Subscription Economy is a global trend and it's happening across all industries and all geographies; second, Zuora has built the only complete subscription management solution focused 100% on helping companies of all sizes, launch, scale and transform into a subscription business; and finally, as a result, we are the portfolio at play across the entire Subscription Economy. And as a result of that, we have a unique opportunity to deliver sustainable long-term growth and build a great business. So question, if we were doing a road show presentation today, would you be saying the same exact things?

Well, Tyler, I would say that after 2 quarters since our IPO, our conviction has only increased. It's clear that the Subscription Economy continues to grow and we -- that we continue to find new business opportunities across the diverse number of industries all around the world. And I know we'll talk more about the numbers later, but you can see that this macro trend really helped us to deliver another strong quarter of results.

Yes, I promise. I'm definitely going to go over the results. But before that, can you give us some examples of growth in Subscription Economy?

Well, the book is a great example. That's right.

I know you love to talk about the book. Now for the listeners that don't have the background, Tien wrote a book called, Subscribed: Why the Subscription Model Will Be Your Company's Future - and What to Do About It.

That's right. Gabe and I, well, we've been working on this book for probably a year, and we finally launched it in June. Now this is our first book. You hope it does well but you never know. You got nightmares of all these 1-star ratings on Amazon, but it turns out that it quickly became a big hit, zoomed up. It made the National Bestseller List on Amazon, L.A. Times and USA TODAY.

No, it's -- that's awesome. And it's actually really, really cool. I walked by a store in New York like a month ago. It's in the front window, which was really neat to see, so congrats. But explain to me, Tien, how you think the success of the book points to a growing Subscription Economy.

Well, if you look at how the book has done, it's really reaching outside beyond Silicon Valley. In many ways, we wrote the book for the rest of the world. Now you guys all know we have a whole bunch of SaaS customers, right? Many of them are seeing tremendous growth and went public this year. Big, big congrats to DocuSign, Pluralsight, Avalara and Pivotal, joining our long-time success stories like Box and HubSpot. And I know there's quite a few more of our SaaS customers waiting in the wings to go public later this year. But what we've always said is that the subscription business model wasn't just limited to software. It can really work with any business. And the book laid out how it's transforming a diverse set of industries from retail to media, manufacturing, and you really draw from examples from all around the world: Europe, Japan, Australia and of course, here in North America.

Yes. When I read it, one of the things I loved about the book was all of those examples from like Husqvarna to Fender and -- which we talked about those companies. Is there one story in particular that you'd like to highlight right now?

Well, it's not in the book, but this quarter, we saw another really interesting story. It's a story around lawn mowers.

Lawn mowers, lawn mower subscription, this one should be good.

That's right. And this is where our story takes us to Wauwatosa, Wisconsin. Now in Wauwatosa is a company you probably heard of before, it's called Briggs & Stratton, and they are the world's largest producer of lawn mower engines. They were founded in 1908. Like a lot of other -- a lot of our other industrial manufacturers that we work with, Briggs & Stratton has spent the last few years investing heavily in outfitting all their products, in this case, lawn mowers, with sensors and connectivity. So you might ask, "Well, so what?" Well, it turns out that Briggs & Stratton sells a lot of commercial landscapers, who manage these large fleets of these lawnmowers. And so what we did is we just helped them launch a new IoT platform. It's called InfoHub for Commercial Turf. And so now for these commercial landscapers, InfoHub helps these teams track their equipment usage in realtime. Now visualize all these new data services that help these turf companies do things like flag potential maintenance issues, maximize productivity, reduce costs and increase their profitability. So when we talk to Briggs & Stratton today, they talk about going beyond just products, delivering outcomes for their customers, and we're helping them transform, embrace this new emerging business model.

Yes, that's what we've been talking about, right, customer-centric business models. I -- so I can see through the Briggs & Stratton smart lawn mower story and others how far reaching this can be, Tien. And in the future, I think us, our kids, we're going to be able to subscribe to nearly anything.

That's right. And in many ways, we didn't just write the book for companies that are already in subscription, Netflix followed by Salesforce. We wrote the book for the Briggs & Strattons of the world.

Yes, that seems to be working.

Absolutely. But when you just think of the book -- uptake of the book, it really points to the huge amount of interest in the market in this new business model. In fact, we know of a CEO of a giant consumer goods company who read the book and immediately recommended it to his Chief Digital Officer. We're being asked by Fortune 50 companies to prevent -- present at their internal management meetings. The success of the book really shows that there's this growing acceptance of the future business model and not simply about selling units of your product but delivering a service, a service that your customers can subscribe to. Look, on top of that, the book is actually being translated into Chinese, German, Japanese, Korean, Spanish, Vietnamese and even Turkish.

Tien, you must be crazy. That's a lot of languages. I didn't know you spoke so many languages.

Secret, Tyler -- talents, Tyler, secret talents. Now the book's even been translated into Commonwealth English for the U.K. and Australia.

Wait, so all the Zs all became Ss?

That's right. Well, except for Zuora. They left the Z in Zuora alone.

That's good. We do like our Z.

By the way, hey, if anybody on the call wants to read the book Subscribed, e-mail me. Now Tyler says I should send you a link to the Amazon page, but I might be able to sneak you a copy.

That's going to be a good thing. No, we are going to definitely send out Amazon links.

So pivoting back to the signs of the growing Subscription Economy, I do think this is what's behind some of the numbers that you see in our quarter.

Okay, you got to explain that. So what do you mean?

Well, I'm talking about the growth numbers. Now I know you're going to talk a little bit about the results later, but the growth of the Subscription Economy, I see this as what's behind our 44% year-over-year growth in subscription revenues.

I agree, Tien. The growth was really solid, but I need to say that we had some unique factors in the quarter that may not repeat in future quarters.

I know. I know. And we'll dig into that later. But because of that stat, the Subscription Economy is also behind our 47% year-over-year growth in total revenue or the 28% growth in customers spending over $100,000 with us annually. And of course, you can also see even the growth of the transaction volume. I know this is one of your favorite metrics, right, that our customers are putting through our system. Processed invoice volume for Zuora billing grew 41% year-over-year to over $7.5 billion this quarter. Now all these numbers really point to a steady, remarkable growth of the Subscription Economy.

Yes. So I get the broad secular shift that is happening. And we're actually hitting the marketplace, I feel, right at exactly the right time. Subscription models or the customer-centric business models, as we like to call them, seem to be on the mind of every CEO, CFO and CIO out there. But Tien, you've also been known to say that in this new world legacy systems from companies like Oracle and SAP, they just don't work anymore.

I know, I know. I mean, I've been quoted as saying that ERP is dead. A bit controversial, I know. But what I mean by that is ERP systems, I mean, they were created for building and shipping and selling products, those old business models. And this is why we saw an opportunity to be the provider of software that enables any company in any industry to successfully launch, manage and transform into a subscription business.

Okay. Well, why don't you give us an example then?

Well, I mean, as you know, when it comes to how we help companies, we don't just have one flagship product. We actually have 2: Zuora Billing and Zuora RevPro. So why don't I start with an example around billing? Our flagship billing product powers the pricing and packaging strategies that drive companies' growth while automating the recurring ordering invoice and collections processes. Now for today, because we're mainly talking to investors and asset managers on this call, well, let me tell a story of Fidelity. Now you guys all know them as one of the largest asset managers in the world. And this story takes us to Radnor, Pennsylvania, where this quarter, we deployed Zuora Billings at eMoney Advisor. It's a company that's owned by Fidelity Investments. And maybe a little background here. eMoney is sort of the top financial advisers in the country. They have a suite of solutions around financial planning and wealth management. And they have over 50,000 B2B customers, and they are growing like crazy. Now given what they do, these aren't onetime sales. These are long-term contracts. And as their customers grow, these contracts are constantly changing, and it's in contract changes and amendments where they encounter significant costs. I mean, in fact, every time they needed to change, it required a cancellation of the existing contract, an accretion of a new contract because of limitation to their system. This is causing delay, customer confusion, invoicing errors, bad metrics and ultimately, limiting their ability to scale. So enter Zuora Billing. Today, we're handling all their subscription management needs, pricing, rating, billing, invoicing, truly enabling their growth. Direct digital services, probably not something you generally associate with big financial services firms, but this is all changing.

Yes, I think it is all changing. That story really exemplifies what we're seeing from a ton of our customers as they go through these business transformation changes, right? And that leads to a need for Zuora Billing, which is great. So that's an example of Zuora Billing. What about Zuora RevPro, what's going on there?

Well, since you asked, why don't we go move from financial services to hardware. And let's come back to the Bay Area and let's talk about Hitachi Vantara. Now a lot of these big hardware companies, right, like a lot of them, Hitachi is really trying to diversify their revenue with software and digital services. And this is where Hitachi Vantara comes in. These guys provide data center solutions, IoT, IoT, big data solutions. I mean, as they go through this digital transformation, moving towards this consumption-based business model, they're facing a lot of the same complexities and challenges. But in this case, it wasn't around billing. It was around revenue recognition. All the work on revenue recognition was being done manually, offline, Excel spreadsheets, and taking just way too many resources. In fact, Vantara had over 50 to 60 revenue accountants around the world just to keep up with all these contract changes and amendments. Now you throw in statutory compliance, different international regulations, IFRS 15 and ASC 606. It was just too much. And so Hitachi Vantara, they turned to Zuora RevPro because they realized that we were the only provider with both the knowledge and a proven track record and a technology that could scale with their business, all while letting them hit their aggressive time lines.

Got it. Now I get it. The business model complexity leads to a need for kind of new "cash subscription management system" as well as revenue automation systems. And that's really why we have these 2 products and why we think they're so synergistic. And this complexity is happening across a wide variety of verticals. Since -- so since it's so broad, Tien, I know investors are curious about how we find these customers like Briggs & Stratton, eMoney and Hitachi Vantara. They're so different. It might make sense for you to explain our sales model, though.

Well, it's another good point, Tyler. I mean, when you think back on the road show, most of you remember that we're a SaaS company. We have a classic SaaS company model, where we sell primarily a direct sales model. But these days, we're also starting to see SI partners bring us into deals. I mean, it's still early days, but these relationships are growing as more of their clients are going through these digital transformations. In fact, let me give you a good example from this quarter. And for this, let's travel back to Pennsylvania, this time to Philadelphia. So Clarivate Analytics is $1 billion beauty company. They basically spun out of Thomson Reuters' IP and science division. They focus on the entire innovation life cycle, and they provide trusted insights from analytics for all things ranging from scientific and academic research to intellectual property services to brand protection. Now the key here is because Clarivate was spinning out of Thomson Reuters, this gave Clarivate this unique greenfield opportunity to start fresh with a whole new set of systems. And as they looked to their architectures, they thought, "Well, why would we tie ourselves to the same ERP systems that we were stuck with at Thomson Reuters? Why would we spend millions of dollars to hard code all our customizations needed to make SAP work, especially since we're a subscription business, not a product business?" And so in this case, they turned to Deloitte Digital as the leader in -- for their -- that's a transformation partner. And that's when we came in. Because as an alternative to these premise-based ERP systems, Deloitte provided Clarivate a new architecture, 100% cloud designed specifically for subscription businesses and had Zuora Billing included as part of the platform, which also included things like Salesforce.com and a cloud-based general ledger. Now we think that this is where the world is going, to a modern 3-cloud architecture that enables companies to drive these new dynamic business models and gives them a chance to get out of their SAP and Oracle traps.

That's a great story, Tien. Thank you. And I know there's a lot of positive energy around our GSI partnerships as well as the smaller partners that we have. So hopefully, this is the start of many more opportunities to come. What I like about these stories is how diverse they all are.

That's right. It's a lot of diverse companies and a lot of initiatives.

I mean, I look at the customers that you talked about this quarter and last quarter. I mean, we have consumer equipment companies, financial services companies, hardware OEMs, business services, utilities, energy, and I mean, even porta potties, right? And there's even more stories in the book. They all underscore how diverse our customer base is, how universal and broad based the whole Subscription Economy really is.

Well, I know you like to point out that half our business is coming from non-technology customers.

That's right. I mean, the tech sector continues to grow. It's a really strong, strong book of business for us. But our non-tech customers are half of our business, and we see that trend continuing line of sight for a very long time.

So Tien, we talked about Billing. We talked about RevPro. Let's switch gears a little bit. Now a key part of our growth formula is how we expanded our customers, right? We do this in a couple of different ways but primarily through cross-sells and upsells of add-on products and transaction volume, as you know. This expansion is reflected in our dollar-based retention rate, which stayed flat at 112% in Q2, which we think is really healthy. I should remind folks that on the last earnings call in Q1, remember this, Tien, we said our business would naturally land between 108% to 112%, and we still think that's the range where our business will settle long term. But given where we are right now and trending in the first half of the year, we may end up closer to the higher end of that range for fiscal year '19. So what's driving all this? In Q2, we continued to improve retention rates and had strong upsell activity, especially from transaction volumes, which represented more than half of the upsell revenue.

Now I love the transaction volume growth aspect of our business. Now I think we may have some new folks on the call. Want to spend just a little time describing what that is?

Yes. No, I think it's a good idea. So our Zuora Billing customers purchase annual blocks of transaction volume on top of their platform fee. The transaction volume is technically measured as the posted invoice volume processed by our customers that run through Zuora Billing. So because we think this shows the extent that customers are really using us to run their businesses and as their totals continue to grow, it is an indicator that we will grow with our customers. It's a core usage metric for us. And as you said earlier, we had another solid quarter of transaction volume growth of 41% year-over-year to $7.5 billion in the quarter. Now on upsell activity, we may start with a small division or a business unit for some of our strategic clients, but because our product is so mission critical and core to their strategic initiatives, we can eventually demonstrate value in other divisions once we prove success there. And this allows us to expand into a larger customer footprint. We are also really patient and understand that for some of our customers, as you know, these business model shifts, they're going to take years to take hold. The time frame is completely open ended as we want to work with these companies for decades.

Very true, very true. When I think about it, this last quarter I think Continuum is actually a great example of this. Now Continuum is an IT security and back-up solutions company. They focus on managed service providers, and they're based in Boston, the home of click and collect.

Love those guys.

They started working with us first with Zuora Billing, just one of their divisions, R1Soft, which at the time represented 5% of Continuum's revenues. This was, I think, a couple of years ago, and the rest of Continuum's revenues continue to run through a homegrown billing system. Now reason, Continuum, as a company, they've been on a tear, and this is when they realized that this homegrown system, it just couldn't handle their 35% annual growth rate. And so they already had Zuora running for a small part of their business, it was up to us to convince their management team that putting all their revenues in Zuora can help them scale through the significant growth they expected over the next few years. So today, the company is set up to run 100% of its billings in Zuora, which allows us to grow within that account.

I think that's a great story. It totally epitomizes how we can grow with our customers, and then we actually have multiple paths for expansion. This highlights one of them. So Tien, if I pause right here, how would you sum up the quarter?

Well, I would say sitting here, for 2Q, looking back in the last 90 days, I would say that we continue to see stories like the ones we just shared, playing out across industries and across geographies. And I said earlier, the common thread here is that all these companies are finding new growth opportunities in these new business models, and this is what we enable. And for our investors, this is why we believe that Zuora is truly a portfolio play across the entire Subscription Economy. Now on that note, let's switch roles a bit, and let me ask you some questions about our Q2 financial results.

All right. Let's -- I'll get in the hot seat. Go for it, Tien.

All right. All right. Why don't we start with -- let me start with our key metrics. Now we already touched on dollar-based net retention. It was 112% this quarter. Anything else you want to state about that?

No, we're pleased with that number, and there's nothing really else to add except that we feel really good about how it's trending. And I just want to remind folks that we may end up closer to the high end of that 108% to 112% range for the year.

Okay. And how about our second metric, customer spending over $100,000 ACV or annual contract volume. Can you talk about that?

Yes, of course. So we told customers that we think this metric is a good proxy for our long-term growth. And since this customer base represents over 80% of our ACV, it represents a majority of our business. So Tien, as you mentioned earlier, we saw 28% growth year-over-year. We ended the quarter with 474 customers in this segment for Q2, which we think is a really healthy growth rate for us.

Okay. So strong retention, good growth in customers, aligns to the story we talked about earlier. But I'm sure the folks are also interested in digging into the core financial metrics. Why don't we start with revenue? Subscription revenue growth last year was 44% year-over-year -- last quarter was 44% year-over-year. How about more color on that?

Yes. So we're obviously very happy with the year-over-year growth in subscription revenue. Subscription revenue growth is a lagging indicator of overall ARR growth, which we are happy with as well. But when you look at the sequential trend for subscription revenue from Q1 to Q2, I mentioned there are some things that we should talk about. There are a few nonrecurring factors that impacted the numbers last 6 months. So first, our fiscal Q2 had 3 more days than Q1, so we pick up additional revenue, which makes the quarter-over-quarter compare look stronger. For example, if subscription revenue is exactly the same, we would have shown about 4% quarter-to-quarter growth due to those extra days.

Three extra days makes that big a difference, not a surprise.

I know. I know. But it's right. It makes that difference. Now both Q3 and Q4 have the same number of days as Q2, so this will not repeat throughout the year. Second -- so I just talked about the days. Second, you may remember, we closed our acquisition earlier last year. This quarter, we benefited from the increased recognition of deferred revenue related to rev growth. As a part of M&A accounting, most of the incurred revenue was eliminated at transaction close, and it has been building back up as we start to bill these customers. This had a positive impact in Q2, and in fact, we'll continue to see this impact in our year-over-year growth for the next few quarters. And then third, so third thing, timing of deals. As we often see in Q2, business tends to get done earlier in the summer before people leave on holiday. So we saw a few more deals close earlier in the quarter as compared to other quarters. So our Q2 deals contributed slightly more to revenue than in a normal quarter.

Got it. Got it. So operationally, we had a strong quarter. We have some unique factors contributing to our strong subscription revenue.

That's right.

Okay. Let's talk about revenue from professional services. I saw that it grew 53% year-over-year. That's pretty good. But the year-over-year growth in Q1 was over 100%. So what's going on there?

Yes. So sure, part of this goes back to the Leeyo acquisition, Tien, because with that acquisition, our professional services revenues jumped. And so for the last 4 quarters, we've seen big year-over-year growth numbers because that Leeyo professional services number was not in the prior year compare. But as we hit the 1-year anniversary acquisition, we're going to see the growth come back and align. In addition, we've been having a lot of professional services revenue relating to helping customers move from ASC 605 to ASC 606. These are existing customers upgrading, and that's unrelated to us bringing on new customers. And that -- we're pretty much done with that now. That's really starting to dissipate. This is why, as we said on the last call, that quarterly professional services revenue remained relatively flat through this year and started to grow again early next year.

Okay. So that's the revenue side. The transition -- let's talk about how we did on the expense side.

Yes, sure, sure thing. So we're obviously continuing to invest in the business. This is really important. We have a huge opportunity ahead of us as companies shift to a Subscription Economy. Our #1 goal is to position the company for sustained long-term growth. At the same time, we also said we will be disciplined and continue to become more and more efficient with a constant focus on moving towards profitability.

That's right. This is one of our key messages on the road show.

Yes. And it's very important. And our Q2 numbers really reflect this, so let me take a minute to touch on a few of the expense highlights I think are important. But before I do that, Tien, before I do that, let me remind everyone that most of the commentary will focus around non-GAAP numbers, which exclude the impact of stock-based compensation, amortization of acquired intangibles and capitalization, amortization of internal new software. And also, final reminder on the financial impact of the Leeyo acquisition, we closed the transaction on May 31, 2017, and as such, only 2 months of Leeyo financials were included in Q2 last year.

That's a lot of reminders.

I know. I know it's a lot of reminders, but I wanted to make sure I got it all out before I continue. So let me go on. Here are the highlights. In general, expenses came in as we had planned with the exception that we did have some spend that will shift to the back half of the year. We spent a little bit less than we -- and that stuff is going to shift into the back half, including a few systems implementations.

These are internal systems.

Internal systems implementations. So non-GAAP subscription gross margins improved slightly to 78% in Q2 as we had expected, driven by higher subscription revenue and ongoing efficiencies in our data center spend. Now in regards to subscription gross margin, we're really happy with those, but I think the average subscription margin for the first half of the year is more in line with where we will end up for the full year. For professional services, our non-GAAP gross margins for the first half of the year were more or less breakeven, which is in line with our plan and expectation how we run that business. And then on an overall non-GAAP operating margin, we improved by 5 percentage points sequentially.

So again, investing for growth and becoming more efficient.

That's exactly right. Now let me give you another example. If you look at our sales and marketing efficiency ratio, which as you know, we call our growth efficiency index, this continued to improve as we reduced it to 2.1 in Q2, down from 2.2 in Q1. So this is measured by comparing our trailing 12 months non-GAAP sales and marketing expenses versus the year-over-year increasing trailing 12-month subscription revenue. The lower the ratio, the better. We hold ourselves accountable to this efficiency metric and manage the business for ongoing improvements.

That is really good. That's really good. So what about cash? Our free cash flow, I saw, improved compared to the prior quarter. Now what do you see for the coming quarters?

Yes, free cash flow improved by over $2 million versus Q1 with negative $7.3 million for Q2. So a lot of this improvement was driven by stronger collections. We did a great job, and the team worked really, really hard there. We had some delays in the number of expenses, which I just talked about. They're going to get pushed out to the second half of the year. And then there are some timing of some employee cash disbursements that are in our accrued liabilities. They're on our balance sheet. But as you mentioned, we'll continue to invest for the remainder of the year, and we expect free cash flow for all of fiscal year '19 to be around negative $42 million.

Got it. Okay.

Go ahead, Tien.

Well, how about -- I was thinking, there's another metric that we sometimes talk about billings, and I know this is controversial. I mean, we want investors to focus on the trailing 12-month billing number. The quarterly numbers usually still get a lot of attention. Why don't you talk to how we think of billings?

People love the quarterly number. But first, let me back up. First, I should say, historically, calculated billings and actual billings track pretty closely. Well, the calculated billing is computed as in-period revenue plus the change in deferred revenue, so the standard example. When it comes to billing, because the quarterly number can fluctuate, Tien, we tell everyone to focus on the trailing 12-month billings number. We believe this will give investors a better sense of how the business is trending over time. So in Q2, trailing 12 months calculated billings is $228.4 million or 57% growth year-over-year. If you use professional services revenue as a proxy for professional services billings, which it actually lines up pretty closely, this implies calculated trailing 12-month subscription billings of $165.8 million or 42% growth. So do know that the year-over-year growth numbers are impacted by the inclusion of RevPro starting in Q2 of last year.

Okay. So focus on our trailing 12-month billing, that's right. And then given the impact of the Leeyo acquisition on the year-over-year growth of billings, anything you want to say about go-forward expectations?

Yes, sure. So we're not trying to regularly talk about billings expectations, but given the acquisition impact, I think it's important to provide some color. So for fiscal '19 this year, we expect calculated billings for the trailing 12 months to grow in the low 30s percentile. And in general, we think trailing 12-month subscription billings will settle over time and kind of align with our long-term growth rates of 25% to 30%.

Good. Now we started touching on some forward-looking numbers. Why don't we summarize our guidance for the rest of the year? What do you think?

Yes, that's good. So we are 2 quarters into the year, and we executed well. As I mentioned earlier, we do have some expenses that are being pushed into the second half of the year. But based on all the information we see, here's how the rest of the year looks as we're taking up our projection slightly.

Right. Time to take out your pencils.

Yes. So let's start with Q3. For Q3, we're currently expecting total revenue of $58.3 million to $59.3 million, subscription revenue of $42 million to $42.5 million, non-GAAP operating loss of $13.5 million to $12.5 million, non-GAAP net loss per share of $0.14 to $0.13, and that assumes weighted shares outstanding of approximately 106 million.

All right. Now Tyler, you're really putting us out there. Are you sure with these projections? I mean, don't forget I'm out here on the limb with you too.

You're on a limb. I'm on a limb. Our employees are on a limb. But based on everything we see and certainly anything can happen, but the overall economy can get worse and stuff. But we feel really good, and this is what we are seeing today.

Now how about for the year?

Well, obviously, the change in Q3 is going to ripple through the whole year. So for the whole year, fiscal '19, we're currently expecting total revenue of $227 million to $230 million, subscription revenue of $163 million to $164.5 million, non-GAAP operating loss of $52 million to $50 million and non-GAAP net loss per share of $0.61 to $0.59, and that assumes weighted shares outstanding of approximately 91.2 million.

So I got through guidance, got through most of it. Now Tien, I'm going to switch it back to you, and I have a question as we get this question a lot from our investors.

All right, fire away.

So Tien, when you think about it and you digest all this stuff and you think about the business that we built and the market that we're playing in, what do you think Zuora's sustainable growth rate is? Or one more thing, what are your thoughts on sustainable growth for beyond this year and long term?

Well, as I said in the beginning, we really see that we have an opportunity to build a long-term sustainable company, right? And the reason for that is we are the portfolio at play on the entire Subscription Economy. We built the business to help companies in all industries around the world succeed in the Subscription Economy. But what we believe is that we're still in the very early innings of a digital transformation. It's going to play out not just over the next few years but really over the next few decades. So we expect a long-term growth to grow as the market grows. And we see the market as growing at 25% to 30% annual growth over a long period of time.

Great. Thanks, Tien. I think that pretty much wraps it up. Joon, do you think we should open up the phone lines and let others ask questions now?

I think so. Let's do it. All right. Jay, I think we're ready for questions.

(Operator Instructions) Your first question comes from Jesse Hulsing with Goldman Sachs.

I actually don't have anything. You guys did a good job in answering every question. No, I'm kidding. So Tien, one thing that you -- one thing that's interesting about your model is you helped a lot of newer businesses take off, whether they're divisions of large non-tech corporates or perpetual license companies transitioning to subscriptions. I'm curious -- or smaller SaaS companies. I'm curious if you're starting to have conversations with either larger SaaS companies or larger consumer subscription companies or the cable companies or Netflix or someone like that about replacing their homegrown subscription billings solutions.

Yes, absolutely. I mean, we really play in both environments, right, what you call a rip and replace. We're going in. They have a billing solution. Sometimes these are homegrown solutions. Sometimes these are legacy telco billing solutions. And we're also playing in a greenfield environment where maybe it's a launch of a new product or they have a whole bunch of manual processes. You think back about the story, the Continuum story is really interesting and when we started off in one group and again, it was a small 5% of the revenues, that was more of a greenfield opportunity. But then we got to go back in and saw the parent company, if you will, and so replacing the existing homegrown systems that have been in place for a long time with the new one. And I would say when I look back in the quarter, there's a healthy mix of both activities.

It's helpful. And on the inorganic contribution from anniversarying Leeyo, roughly how much of that helped out subscriptions? And how much do you think it'll help out subscriptions in the second half?

On the anniversary, so as you know Jesse, that builds back up, right? And the deferred revenue goes away, and we've been building it back up. We haven't called out exactly how much that's going to add in. But we're getting through it, and we'll get through the compares over the next couple of quarters.

Your next question comes from Richard Davis with Canaccord.

I think you guys have some sort of mind-reading e-mail system because, literally, as I was working up a question on California Bills 313, I get an inbound e-mail from you guys. So that's a little bit spooky. But anyway, could you at least maybe [flesh it out]...

That's the largest topic.

It is like epic, I don't know -- I guess, those eyes on the wall are moving around. Anyways -- But no -- but seriously, the -- it is probably a topic that people want to know. Is it a headwind to kind of the Subscription Economy? I mean, you can -- if you could flesh it out, that would be super helpful.

Yes. So the new California legislation that says you've got a lot of customers canceling their subscriptions, right, in an online interface. Look, if you think about it, people say subscription has been along forever, but it's not exactly true. When we think about 20, 30 years ago, yes, there are things like Book-of-the-Month Club, Columbia House, right, 13 CDs for $0.01, but we actually have a whole section of the book dedicated to this. But these were relying on lazy customers, right, so-called negative option or making it really, really hard for them to cancel. And that's not what the modern Subscription Economy is about, right? The modern Subscription Economy is getting customers new freedom, new capabilities, new power to do things that they just couldn't do before. And I think what you're seeing, whether it's this Bill 313 of California, whether it's the change in accounting rules of ASC 606, is that as the Subscription Economy, as these new business models ripple through, right, the fabric of our society, you're going to see that new revelations, new rules, new etiquettes, new policies, new ways of doing business that will ripple through it. And so we really just saw this as a positive sign that -- of the importance of this new business model. And we think if the new business model is to focus on the customers first, then these are things that companies were always doing anyway.

Your next question comes from Scott Berg with Needham & Company.

This is Ryan MacDonald on for Scott Berg. Love the new format of the call here. But I guess, if you could provide a -- what are some of the main observations, I guess, you've had coming out of the user conference in June? And have you started to see additional demand for some of the modules beyond the core Billing and RevPro? Any sort of color on that would be great.

Yes. I would say, if you look at our 4 core lines of revenue, if you will, right, we have Billing, we have RevPro. We have the upsell, and that's broken up, as we said on the road show, into volume increases and add-on products. What we're probably most excited about but is the most nascent, probably the add-on products. And so we got a lot of people expressing interest in our new Connect products, in a lot of apps that we have in the Connect Marketplace, right? But our focus is really saying there's so much greenfield opportunity there in the Subscription Economy, let's make sure we continue to focus on new business logos. And so that's why we're going to continue to show the growth in our customer base as represented by the key metric customers over $100k because there's a big, big opportunity out there and continue to make sure that we're there. But the usual comment obviously was -- is always just incredibly motivating, incredibly energizing experience to be with our customers, and I know they're pretty pumped up about the things that we're doing.

Got it. And then just maybe one quick follow-up, I guess. As you're integrating or working more with some of the SIs, do you think this helps accelerate the business in terms of those more non-core tech verticals as well? I know it's about a 50-50 mix right now.

Yes. So you guys know, right, it's hard to point to a successful multi-billion-dollar software company that doesn't have a strong relationships with SIs, and so we do see this as incredibly strategic. I do think it's early days, right? We're not a like-for-like rip and replace, take this client server version out and put this SaaS version in. So there's a little bit of evangelism. There's a bit of education that has to happen. And so that takes time to do with the partners. We kind of pointed to digital transformation as one of the big areas where the collaboration can be really, really strong, right? Business model -- digital transmission eventually leads to business model transformation, and that leads to customer-centric business models. That leads to a new stack that needs to be in place. And the story of Deloitte that we wanted to share was when -- as SIs realize that a whole new stack has to go into place to drive these new business models, we have the opportunity to be embedded in these solutions that they recommend, and that's really, really exciting.

The next question comes from John DiFucci with Jefferies.

I got a question, I think it's probably best for Tyler. It has to do with RevPro. Listen, we understand the catalyst of ASC 606, but Tyler, you and Tien have both talked about a longer-term opportunity. Can you talk a little bit more about that? Because this is something that comes up a lot in my conversations. And maybe even in the context of that, talk about it in regards to your current traction with RevPro and the pipeline for the future.

Yes. No, I can definitely take that one, John. There -- I think we're seeing 2 things. One, ASC 606 and IFRS 15 is a good driver for customers kind of last year when we talk about 605, 606 upgrade, but what we're seeing is that companies had a time line. They had to get compliant and a lot of them chose to do that through kind of some manual band aid process, what we call. So we're seeing those guys now. They've gone through their first integration. But they know it's not sustainable, and they're going to need the revenue automation solution for 606 going forward. So those customers are still out there. But on top of that, it's all about -- the reason we did the acquisition was not 606. It is about business model complexity that hits both your quote-to-cash solution as well as your revenue automation. And that's really what we're seeing right now or the Hitachi example of that Tien touched on that, that's all about just complexity and manual processes. And they wake up -- a customer wakes up, and they realize they've outsourced all revenue to some other place, and they've got tens and tens of bodies doing this all manually. And that's not sustainable. And so that's where I think that the long kind of like tailwinds are going to be for 606 -- for RevPro.

Yes. I would point, thinking about the Hitachi Vantara story, I would point back to the -- if you visualize, in order to track revenue, which is necessary to close the books, necessary to forecast, right, 50, 60 bodies around the world doing spreadsheets, I mean, that's just insane. I mean, I encourage you guys when you talk to the CFOs of the companies you cover, ask them how big is their revenue department. And I think you'd be surprised how much revenue is being done manually, and it's not getting better. I mean, with these new rules, it's only going to get worse and worse.

I mean, the reason we did, John, we see all the layering that comes in through subscription models, layering of all these transaction sets. One of the biggest downstream impacts is to revenue because you have to put all the stuff together and you have to look at it as one continuous order. And I know we've talked about this. That just makes it really, really hard, and that's the reason we have the product.

And if I could -- and that's helpful, and that's -- because I think a lot of people, including myself at one point, just thought, well, geez, ERP must be doing this, but they haven't been. But I guess, that comes to that question. What about SAP and Oracle and other -- and NetSuite, others? Are they trying to do this at this point? Because now you have a standard ASC 606 that's supposed to be across all business models and across all geographies and I mean, I know there's always a lot of caveats. But just curious, are you seeing anything on the competitive front from the traditional ERP guys?

Yes. I think maybe -- look, 606 is definitely a catalyst. But look, just to reemphasize what Tyler said, it's not really about 606. It's about these dynamic business models. And if you listen to the story, both stories around Billing and RevPro, there was a scenario of de-booking contracts and recreating contracts. Cancel any contracts, it's not really a contract cancellation. And so ERP systems weren't built for these long term, right, time-bound time change, right, constant change contracts. And so you can try to get away with it by simply, well, look, the contract change, I'll just create another contract, but it's not that simple. With 606, now you got to look at these 5 contracts that -- these 4 "canceled 1 and a current 1" and try to figure out what the heck the revenue implications are and sometimes what the billing implications are. And so you can continue to tack on more band aids, more patches, more custom code, more people on top of the SAP, Oracle interfaces, but they fundamentally just were not billed. You can't model these new businesses, right? And you experience it in the downstream billing, you experience it in the downstream revenue recognition, but the core of it is the inability to model how these new business models work.

Yes, John, you're right. I mean, they have revenue modules, right? SAP, Oracle, they have revenue modules. But the reality is those modules have been pretty inefficient or insufficient since VSOE -- 97-2 came out, which requires VSOE and allocations. And ironically, it's like Oracle is the one who caused that standard to come out, and that's what's led to a lot of these manual processes out of system. But now what we are seeing, so even if they have revenue modules, those revenue modules need to be fed with data, and that data needs to come from a system that captures the order. And as we see customers come to us who already have Oracle and SAP to use us for quote-to-cash solution, which is order billing, right, that's the system that's creating the data. And they would have done it already on their current install, but they can't. So it's going to feed off of itself over time.

That's all really helpful. I'm sorry, I'm going to ask one more because -- so with RevPro, now that you've had it for a year, are -- can you talk a little bit about the pipeline, if that's, in fact validating what you're saying, which is pretty much that this has legs beyond just 606?

Well, we obviously know it has legs, but what we like the fact is that we have 2 flagship products, right? And in any given point in time, right, you'll see one product surge ahead of the other. And sometimes it's the marketplace catalyst like 606. Sometimes, there are more internal breakpoints, right, growth, skill sets, training processes and so on, so forth. But having 2 really allows us to put the right bet in the right growth bets in the right areas. And so we don't need to predict next year what the mix is going to be, right? But we've got 2 horses to ride on. We've got 2 horses that we can add salespeople. We can enter into new territories. I mean, if you look at RevPro, Leeyo, before we acquired it, was entirely focused on the U.S. and we haven't even exploited the international RevPro opportunity yet. And so we're really, really excited about both businesses, but what we like the most is the fact that we have 2 flagship products that we can enter the market with, we can land these logos with. And that allows us to have 2 options to continue to maintain growth rate in the Subscription Economy.

Your next question comes from Stan Zlotsky with Morgan Stanley.

A couple of questions from my end. First one on the 112% revenue retention number, can you give us a sense for the breakdown of that between just volume growth within your customer base versus upsell of additional functionality, whether it be new modules or customers moving up to a higher priced platform SKU?

Yes. So Stan, this is Tyler. So we're not breaking it down. I can say that is -- a good mix of all of the transaction volume growth is still really, really strong for us. But it is coupled also with really strong retention numbers, right, which we don't break out our gross retention, but we feel really good about it.

Got it. And then just as far as you kind of just piggyback on John's question just now, how are you thinking about the momentum within RevPro and Leeyo as we get into the back half of this year?

Again, we feel good. I mean -- so when we look at this year, the company has grown significantly as an independent company, and they have never raised a venture amount and so have limited ability to invest, and we've been able to invest in that business. And so -- look, when we pull back and you ask yourselves which company out there really has the most 606 experience, and I would bet that it's this team. They've done, I mean, dozens or scores of 606 implementations. Ask around for all the tech companies that you guys cover. Chances are they're using RevPro for revenue recognition. And so that expertise is an asset, especially when we can apply more distribution capability against their products.

Got it. And if I may just ask you just on that one, on this last question, a quick follow-up, how are you still thinking about RevPro as far as selling it into brand-new logos versus upselling it into your existing Zuora customers? And that's it for me.

Yes. No, it's a great question. And I kind of take it back to we have a big, big cross-sell opportunity, right? Less than 10% of our customers actually have both products. That being said, we do see both groups as flagship products to land new logos, right? Our philosophy is we should be aiming our distribution capabilities to bring in new companies onboard, right, and the cross sells will happen as -- we're already talking of companies on one side and from a timing, catalyst, rate perspective, they have these on the other side.

Your next question comes from Kevin Kumar with Goldman Sachs. There are no further questions at this time, sir.

Great. Thank you very much for joining us today. If you have any other questions, please feel free to call or e-mail, and we'll see you next time. Thank you.

Thank you.

This concludes today's conference. You may now disconnect.