Zuora Inc (ZUO) 2019 Q4 法說會逐字稿

Good afternoon. My name is Chantel, and I will be your conference operator today. At this time, I would like to welcome everyone to the Zuora Fourth Quarter and Full Year Fiscal 2019 Earnings Conference Call. (Operator Instructions)

I will now turn the call over to Joon Huh, VP of Investor Relations. You may begin your conference.

Thanks, Chantel. Good afternoon, and welcome to Zuora's Fourth Quarter and Full Year Fiscal 2019 Earnings Conference Call. Joining me today are Tien Tzuo, Zuora's Chief Executive Officer; and Tyler Sloat, Zuora's Chief Financial Officer. The purpose of today's call is for us to provide some color on our fourth quarter and full year results as well as provide our financial outlook for the upcoming quarter and fiscal year 2020. Some of our discussion 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 the earnings release we issued today and the most recent 10-Q filed with the SEC.

Now I do want to call out one item for this quarter, and that's ASC 606. As of February 1, 2019, we adopted the new revenue recognition standard, ASC 606. And we're adopting it using the full retrospective method, and we're using our own RevPro product to do so. To make sure you can do the year-over-year comparisons, I want to highlight a few points on the full retrospective method. First, we're providing the historical numbers under ASC 605 today. Second, we're giving our forward-looking guidance under both ASS 606 and ASC 605. And third, starting next quarter, there'll be no more ASC 605. We'll only present numbers under ASC 606. We'll also provide all the retrospective numbers under ASC 606. This approach will minimize the time where you have to deal with 2 sets of numbers. Finally, we'll be referring to several non-GAAP financial measures today, and reconciliations to the related GAAP measures are included in our earnings release. For a copy of our earnings release, links to our SEC filings, a replay of today's call or to learn more about Zuora, please visit our Investor Relations website at investor.zuora.com.

And with that, let me turn the call over to Tien.

Thank you, Joon. Welcome. Welcome to our fourth quarter and our fiscal '19 earnings call. Q4 was another strong quarter and a fantastic finish to the year. We grew our subscription revenues by over 35% year-over-year as we continue to execute against our business model, and our total revenue now puts us at an annual run rate of over $0.25 billion.

This is also our fourth call as a public company. Yes, it's now been almost a full year since we went public, and what a difference a year makes. Most of you know our vision. It's a vision of the future that we call the Subscription Economy, and our claim that the limitations of today's ERP systems in this new world has created an opportunity for us to build a long-term, durable, multi-decade growth company.

Today, I can say unequivocally that we are more confident than even just 12 months ago, that the Subscription Economy will become the business model for all companies, that we have only extended our leadership in delivering the technologies required for success in this new world and strengthen our competitive moat against the entrenched ERP players. I'm excited to share with you today my reflections over the past year to put what we've seen this quarter, including our financial performance, in that context and to share with you some thoughts on fiscal 2020, our upcoming year.

But before I start, let me first hand it over to Tyler to cover the high level financial results. Tyler?

Thanks, Tien. As Tien mentioned we had another solid quarter. We now have 4 consecutive quarters of consistently delivering strong financial results as a public company. I'll go into further detail later in the call and also provide our initial outlook for the upcoming year, but for now let me provide some quick highlights from Q4.

We grew subscription revenue by 35% year-over-year to $46.7 million. We grew total revenue by 29% year-over-year to $64.1 million. Non-GAAP operating loss is $11.6 million, coming in ahead of our guidance and expectations. And all this led to non-GAAP net loss per share of $0.11. We delivered another quarter of solid results above or at the end of our guidance range across all of these metrics.

A couple notable items that we are seeing. First, our deal sizes are getting bigger. We signed more than 30 new deals over $250,000 in the past year, up nearly 50% from the prior year. Second, customers are putting more of their business on our platform. In Q4, transaction volume through our billing system grew 56% to $10.8 billion, meaning our customers now rely on us to process over $40 billion of annual subscription billings. All this indicates that subscriptions are becoming more strategic to our customers' growth strategies. One thing we've always said is as the system of record for subscription management and revenue automation, our performance is essentially a portfolio of the entire Subscription Economy. We expect to continue to benefit from the shift to subscriptions as we become more central to our customers' business models and long-term growth.

Now let me turn it back over to Tien to talk about what we've been seeing over the past year.

Thanks, Tyler. I've said it before, and I'll say it again, what a difference a year makes. When we first went on our roadshow 12 months ago, many investors hadn't yet given much thought to the idea of subscriptions. Subscriptions, they thought, were only limited to just SaaS companies, companies like Pluralsight, DocuSign, or HubSpot or Zoom with maybe a few streaming media companies thrown in. But today, everywhere you look, the topic of subscription seems to be popping up all over the place. Jim Cramer talks about it on CNBC. Jim Hackett at Ford is talking about it. In the last quarter, IKEA announced they were letting you subscribe to furniture. Philips announced you can now subscribe to toothbrushes. Heck, just last week, even Burger King announced a subscription program.

On our last call, you heard us say that we are behind the connected car initiatives of 6 of the top 10 auto manufacturers around the world. Well, this quarter, we added yet another. So now we're powering 7 of the top 10 connected car initiatives. On our last call, you heard us talk about the media sector of how we landed in this industry 8 years ago. We called the shift early. And since then, our growth from this sector has averaged 35% a year for the past 7 years and now represents approximately 13% of our revenues.

Well, you may have noticed that we recently announced that we're working with a new sports streaming service from Fox Sports in Australia called Kayo, dubbed locally as the Netflix of sports, and there's many more to come. In the last 12 months, we've seen the subscription market expand internationally. In Q4, we had fantastic subscriber conferences in Milan, in Tokyo and even in Munich with companies like Volkswagen and sonnenBatterie.

Now I know you guys love to make fun of me when I talk about my book, Subscribed. But in Japan, the book is actually on its eighth printing. Now this all just speaks to the fact that there is a real global appetite for the best companies in the world on how to learn and how to build successful subscription businesses. Now I do believe, however, that it's still early days. Some companies have gotten it, some are getting it and some have yet to join the revolution. Not every subscription service is going to be successful. For every Spotify or Kayo, there will be subscription ideas that don't quite stick. But when subscriptions work, boy, do they work.

You may know that we publish twice a year a Subscription Economy Index. And the latest one from the fall shows that over the past 7 years, subscription businesses grew their revenues 5x faster than the S&P 500, with Europe actually growing slightly faster than North America and IoT exploding as a new emerging vertical. I encourage you to go ahead and download the full report for all the details.

And here's the thing, the secret to that growth, well, it turns out the best description businesses are built around dynamic customer relationships, tying your pricing model to usage or users and driving greater and greater engagement from your subscribers. This is what leads to growth. And how do we know? Well, it's in our data. Well, it's in the $10 billion of quarterly transaction volume that we see. In last fall, we reported that our data science team sifted through this information and has found that subscription companies that employ usage-based billing models actually grow 50% faster than companies without usage-based billing. And a subscription company that averages one subscriber change per subscriber per year, think about renewal and add-on product, more users, a change of plans, these companies actually grow 3x faster than companies that see no changes at all.

Now it turns out you guys actually know this. It's actually -- this is what you love about SaaS companies. SaaS companies are able to grow with their customers. This is how they deliver positive net dollar retention rates. And this is why ERP systems simply do not work. Yes, maybe in the short term, you can hack an ERP system designed for shipping product and make it work if you simplify your business, but then you sacrifice growth. ERP systems simply cannot keep up with the business model that depends on dynamic customer relationships that are constantly active and constantly changing. And this is why we've seen company after company coming to Zuora because we have built a unique set of technologies: Wego, Kayo Sports, eMoney at Fidelity, WorthPoint. We are the only game in town if you're looking for a complete end-to-end subscription platform, including billing and revenue recognition. In Q4, we're pleased to say we added Shutterstock, Fiat Chrysler, Canon, Harley-Davidson and Neustar amongst our customers. And our lead on the competition continues to grow.

In this past year, we've launched new billing and revenue capabilities. We've launched an entire orders module and advanced invoice settlement capabilities, workflow and much, much more. We've even launched a new product that we've called Collect. It's targeted as an add-on product into our installed base, which helps B2C companies recover lost revenue from credit card declines. Today, we already have over 50 customers on Collect. We had one customer recover over $700,000 in just 3 months, and so you can see the ROI on this product means that it pays for itself multiple times over.

And the market has recognized our leadership. In the past year, we continue to come out on top in every third-party evaluation: Forrester's Wave for recurring customer billing management, IDC's MarketScape for subscription relationship management or MGI's most recent report on agile monetization solutions. We are on top every single time, and our lead is only growing wider.

And this continues to translate into the growth of the company. A year ago, we just had over 900 ZEOs. Today, we have over 1,200, and we put a lot of new feet on the street, opening brand-new offices in Stockholm, Milan and Melbourne. In the past year, we were also recognized twice as one of the best places to work by both Glassdoor and the research firm, Great Place to Work. Our ZEOs are awesome. We're involved in our communities, with ZEOs working for veterans' causes, for the disabled, for climate change and for LGBTQ rights. We've also funded a foundation to support charitable causes, which we will be talking more about in the coming months.

Finally, I want to share with you a story that I really think cements why I'm so bullish on the opportunity ahead. It's a story about a company that was founded well over 100 years ago. It's a story about a multibillion-dollar hardware manufacturing company that sells point-of-sale terminals, among other things. But what's exciting is that this could be a story of just about any company.

Back in 2011, like a lot of other manufacturing companies, they were facing shrinking margins, commodification as well as competition from new start-ups. The product-based business model simply wasn't working. But here was the silver lining. When they spoke to their customers, they realized their customers wanted something different. "You sell us a product," the customer said, "But you also sell us a service contract, and you take care of the equipment. Why can't we just subscribe to the whole thing?" And so they launched essentially a hardware-driven SaaS service, which grew pretty quickly. And that's, of course, when they started working with us, putting us in between Salesforce as a CRM and Oracle as their general ledger. And starting off, it's an account worth probably between $200,000 and $300,000 to us.

Now fast forward 7 years, today, that business has now grown to 10% of their overall revenues. And given our business model, they are now easily a multimillion-dollar ACV account. But more importantly, what they're telling us is, "Hey, we're running 10% of our revenues on you. But that's the part that's growing the fastest, and we need the other 90% of our revenues to work just like that 10%."

So why am I excited about this? I mean here is a manufacturer that's been around since the 1800s, and subscriptions are now absolutely central to their growth strategy. And I think this story could easily apply to any company that is yet to make the leap to be a truly customer-focused business model. Just think of all the thousands of big manufacturers out there that are still selling products off the shelves to strangers. The stakes are very high for these companies. They're seeing a lot of digital disruption in the marketplace.

So when I look past on a year and I think about the story, what does this all mean? We are seeing the long-term opportunity for Zuora is absolutely enormous. We may be in the early stages. The vast majority of business models have to eventually transition to subscriptions, become faster and more effectively than others, but we believe this will happen. And for the ones who get it, they're achieving growth rates that are changing the game against their competition. And in the end, they choose us because they see our knowledge, they see our customer base and the over $40 billion of annual transaction volumes that we're already processing, and they see the competitive advantage that our technology brings and how we can help them extend their lead into the future. This is why I could not be more excited about the year and the opportunity ahead.

Now let me turn it back over to Tyler to talk about our business progress and our product momentum as reflected in our operating and financial metrics.

Thanks, Tien. It's clear we're making good progress on a huge opportunity ahead of us. I'll start by reviewing our key operating metrics then our financial results, and I'll finish outlook for Q1 and fiscal year '20.

For our key metrics, we saw healthy growth of 27% year-over-year in our key customer metric of customers with $100,000 of ACV or more. During Q4, we ended with 526 customers with over $100,000 of ACV, increasing by 22 over Q3. This customer base continues to drive the vast majority of our business as it now represents over 85% of our annual recurring revenue.

Turning to dollar-based retention. As expected, this key metric ended at 112%. This is at the high end of the range we mentioned on our prior calls. We've clearly made good progress on dollar-based retention over the past several years, and we're pleased with where we ended up for fiscal year '19. Given the seasonality of our business, we may see quarterly fluctuations on -- in dollar-based retention, but we continue to believe that 108% to 112% is the appropriate long-term range for our business, given the nature of how we land with our products and the expansion that we see with our customers.

Let's talk about where our ACV growth came from this past year. During the roadshow, we said that in fiscal year '18, roughly half of our ACV bookings came from new logos, while half came from upsell. We also said that roughly 40% of bookings or 80% of the upsell was from transaction volume. In fiscal year '19, we saw very similar 50-50 bookings mix between new logos and existing customers, which we think is healthy. For the existing customer bookings, we did see a shift towards product add-on sales, which we view positively as well, since this shows our add-on strategy is working.

Now turning to transaction volume. Our business model is designed to allow us to land with a meaningful recurring revenue from the beginning but also grow as our customers experience growth. As we have mentioned, we have a mix of customers who are just starting their Subscription Economy journeys, like the auto industry, and those that have been built from the start think about subscriptions like SaaS. Regardless, for all of our customers, our software becomes a mission-critical system of record for their customer transactions.

We talk about transaction volume because it demonstrates that our customers are using us to run their businesses as well as an indicator of our capability to continue to experience growth through that usage. As I mentioned earlier, we processed over $10.8 billion in transaction volume through our billing platform in Q4, which was $2 billion above prior quarter levels and represented 56% growth compared to the prior quarter. Much of this increase was driven by a few large customers that were deployed in Q3 but have really started moving meaningful transaction volume through our systems in Q4. And on a full year basis, transaction volume showed a steady increase of 45% growth compared to 42% growth from the prior year.

Now let's talk about how all these operating metrics translate to our financial results. As Joon mentioned at the beginning of the call, we ended fiscal year 2019 on the historical revenue accounting standard ASC 605. As of February 1, 2019, we've adopted the new revenue standard, ASC 606, and we'll report our fiscal '20 figures under ASC 606. I will talk about our Q4 and full year 2019 results on this call according to ASC 605, but we'll provide forward-looking guidance according to the new standard. For comparative purposes, in our earnings release we also provided Q1 of fiscal year '20 figures as if we were still under ASC 605 as well as a reconciliation between the 2. Next quarter, we will also publish a full retrospective under ASC 606 for comparative purposes.

Now for Q4, total revenues grew 29% to $64.1 million, driven by strong subscription revenue growth of 35%. Professional services revenue grew 13%. You may recall from previous earnings calls that in the second half of our fiscal year '18, we saw demand for our professional services related to helping our ASC 605 customers adopt ASC 606. But since this does not relate to new business implementations, our professional services revenue in those periods were higher than what we would consider our normal run rate. This demand was highest in Q3 and Q4 of our fiscal year '18 and has resulted in lower year-over-year compares with professional services growth rates.

In Q4 of fiscal year '18, we recognized $2.3 million of professional services revenue related to this activity. But the professional services related to these migrations was only $500,000 this past Q4. This amount has continued to dissipate each quarter, and we expect it to have minimal impact going forward.

Looking at the full year. Total revenue grew 40% to $235.2 million, with both subscription revenue and professional services revenue also growing at 40%. Over the past year, we have been asked what the organic growth rates were for our business, excluding the impact of the Leeyo acquisition or RevPro product. Although we're not planning to provide a lot of detail, our annual organic growth, excluding RevPro, was healthy and over 30%.

Turning to margins. Non-GAAP subscription gross margin maintained a consistent rate of 78% for both Q4 and the full year. We are happy with this number. And although we expect to realize more improvements over time, there may be slight fluctuations in Q1 as gross margins are impacted by the lower number of revenue days in the first quarter.

In Q4, non-GAAP operating margin was negative 18%. For the full year, non-GAAP operating margin was negative 20% as this was a big investment year for the company across all functions, including G&A, as we need to build the operating infrastructure to support being a publicly traded company. We're focused on growing and scaling the business. And as we scale, we expect to gain leverage in our operating model.

Compared to Q3, we maintained our efficiency in sales and marketing spend as measured by our GEI, or Growth Efficiency Index, of 1.9 in Q4. As a reminder, our goal is to maintain or improve the GEI over time while achieving our long-term growth rates. We've made meaningful progress in our GEI over the past several years, and we are pleased with where we are today. Going forward, we may see quarterly movements to this metric, given the seasonality of our business.

Now let's move to billings. For billings, we generally focus on the trailing 12-month billings growth because it's a better reflection of the business as quarterly billings can fluctuate. In fact, that's what we saw in Q3 and Q4, as we highlighted in our last earnings call. We also understand that 12-month trailing numbers is still impacted by the Leeyo acquisition made in May 2017. So for right now, the trailing 6 months growth more accurately approximates our normalized billings growth.

As of January 31, trailing 6 months calculated billings was $146.8 million or 27% year-over-year growth. Using professional service revenue as a proxy for professional services billings, this results in calculated trailing 6 months subscription billings of $112.4 million or 33% year-over-year growth. Going forward to fiscal year '20, we expect subscription billings growth to track similarly to our subscription revenue growth, with Q1 billings growth approaching 30%. Over time, we expect 12-month trailing subscription billings to grow in line with our long-term revenue growth rates of 25% to 30%.

In regards to cash flow, Q4 free cash flow is negative $9.8 million, similar to the prior quarter. And for the year, we did much better than our original expectations. For Q4, free cash flow came in better than we anticipated as the facility spend for our headquarters expansion was pushed into this fiscal year.

Speaking of which, we entered into a lease agreement for our new headquarters. This space will allow us to consolidate 2 of our Bay Area offices and expand our operations to better handle our future growth and help us lower our real estate cost per employee over time. However, this year, we expect that this will increase operating expenses by $4.5 million and increase the use of cash by approximately $10 million, which includes CapEx. These impacts will mainly be in the second half the year. Including the facilities we are ready to spend for the year, we expect our free cash flow to be negative $42 million in fiscal year '20. If you exclude the facility spend, our normalized free cash flow will be negative $32 million. That represents a $5 million improvement from last year.

We entered fiscal year '20 with approximately $180 million in cash and investments. And as a reminder, during our roadshow, we said we were 3 years to cash flow breakeven. We're still on track to reach that goal with 2 years remaining and are wholly funded against our current operating model. One other item to note for your models, our fully diluted share count as of January 31, 2019, was approximately 124 million shares using the treasury stock method.

So to net it down, we feel really good about the past year. We're scaling our business and getting more efficient while we're doing it. But of course, don't assume that we'll have the same improvements every quarter. There'll be some movements from quarter-to-quarter.

Tyler, should we turn now to guidance and future expectations?

Yes, sounds good. As a reminder, we are now reporting our results under ASC 606. In our earnings press release, we provided a comparative table that shows the differences between ASC 606 and ASC 605. But before we get into guidance, let's talk about those differences. Our expectations are based on the preliminary estimates as we have not yet completed the historical ASC 606 prior year audit process. KPMG, our external auditor, is working on this as we speak. And this will be completed prior to our Q1 earnings release.

So what's the impact? The headline is we do not view the differences to be material. We also expect the year-over-year subscription revenue growth rates to be similar under ASC 605 and ASC 606. Under ASC 605, our fiscal '20 guidance forecast subscription and total revenue growth rates of 28% and 26%, respectively. And of course, this adoption has no impact on cash flow.

The revenue differences we outlined in the press release are primarily caused by: first, historical business practices from the Leeyo acquisition, which included term license conversions and pricing amortizations; and second, reallocations of subscription revenue into prior periods on professional services revenue. The operating loss differences are smaller or negligible as the change to commission expense amortization under ASC 606 largely offsets the revenue impact.

For Q1, we're estimating $1.5 million of impact to subscription and total revenues, with approximately half of the impact coming from historical business practices of Leeyo and half from reallocations of subscription revenues. For operating loss, we expect a smaller impact of $500,000. For fiscal year '20, the impact is small -- similar, sorry. We're estimating a $5 million impact to subscription revenues, with half of the impact coming from historical business practices of Leeyo and half from reallocations of subscription revenue. We expect a $4 million impact to total revenue and very little impact to operating loss.

Now for guidance under ASC 606. For Q1, we are currently expecting total revenue of $63.5 million to $64.5 million, subscription revenue of $46 million to $46.5 million, non-GAAP operating loss of $15 million to $14 million and non-GAAP net loss per share of $0.14 to $0.13, assuming weighted shares outstanding of approximately 108.5 million.

For the full year fiscal '20, we are currently expecting total revenue of $289 million to $293.5 million, subscription revenue of $209 million to $211.5 million, non-GAAP operating loss of $49 million to $45 million and non-GAAP net loss per share of $0.44 to $0.40, assuming weighted shares outstanding of approximately 110.1 million. Factoring in the seasonality in our business and the timing of spend throughout the year, we expect to see similar levels of operating loss in the first 2 quarters with improvements in the second half of the year.

All right. Now let me turn it back over to Tien to talk about our focus areas for the upcoming year.

Thanks, Tyler. So in terms of what we have in store for the future, the first thing I'd say is I would love to invite everyone of you to our flagship user conference, Subscribed, in San Francisco on June 4 and June 5. Now you know we run these Subscribed conferences around the world and throughout the year, but San Francisco is the big annual one.

On the second day of the conference, we'll also be holding our very first Investor Day for analysts and investors. We're looking forward to it, and hope to see you there. This is where we will give an update on our strategy, both on the product side and the go-to-market side.

But for now let me give you a quick preview. First, we plan to continue to land -- to execute our land-and-expand strategy in our core verticals like technology, media, auto, manufacturing while keeping an eye out on emerging industries shifting to the Subscription Economy. Second, we'll also continue to expand our SI partner network. We saw steady progress in partner-led deals throughout the year, and we expect that to grow this year. Third, of course, we're not resting on our laurels. We have a big vision, and we will continue to invest in extending our technology leadership.

To get a hint as to where we want to go, don't look at Oracle or SAP or other ERP systems. Now those of you that know the telecom space know that the telcos run on what they call a BSS/OSS stack. These systems are at the center of their business operations from the moment a service is ordered, through the billing, in the revenue recognition and out into the general ledger. The Subscription Economy essentially means that every company is becoming a service provider, which means that they all will need the modern equivalent of a BSS/OSS stack, one designed for dynamic, customer-centric business models. We built a subscription management platform that can apply to any company in any industry around the world, and we are just at the very beginning of this journey.

And finally, we will continue to invest for growth. You can see from our office expansions and our headcount that we're making investments, particularly in our field organization. We're adding sales and marketing talent in order to put feet on the street and talk to all the companies that are making the shift to subscriptions. And as Tyler can attest, we're also being very disciplined and thoughtful on how we're managing these investments as we scale and grow the business.

And with that, we're happy to take your questions. Joon?

Chantel, I think we're ready to take questions from our callers.

(Operator Instructions) Your first question comes from Scott Berg with Needham.

I guess 2 questions here, don't know who wants to take it. Maybe, Tien, one of the metrics that Tyler talked about was new deals, especially over 250k that were up more than 50% year-over-year, this new land. Can you help us understand maybe what's driving that growth because that's significantly faster than your -- than the company's subscription revenue growth?

Yes. I mean, if you look at that stat and you couple it with just the amount of transaction volume that is going through our system, I think what it really signals and what we see is the maturity of the Subscription Economy. Yes, it's early days. There's so many more companies that still have to shift. But the ones that are doing so are seeing that this shift drives growth. It drives competitive advantage, and they're treating these projects seriously compared to, say, maybe 5, 6 years ago where it was more of a science experiment. Now they're absolutely committed to it. They see that this is the future, and then they're putting a lot more investment dollars behind these types of projects.

Sure. Great. And then I guess from a follow-up perspective, one of your initiatives this year is to expand your partnerships with the system integrators out there. In our work, we've seen that they've been an integral part of your business to date. I guess what more can they help you with going forward? And from a historical context, any color in terms of what they've impacted your new bookings historically? And then how should we think about that opportunity maybe going forward?

Yes, I think this is one of the areas that we hope to drill into a lot more in June in Investors Day. But there's no doubt, right, that these are digital transformation projects, and we're a really, really important component to it. But there's a whole host of other things, right. There's change management. There's go-to-market strategies, right, rethinking your sales force, rethinking your back office set of processes. And so these SIs are already talking to the best companies in the world about their digital transformations. And so we're already working with them. And so obviously, if they're going in there and we're embedded into their stack, very much like Deloitte embedded us into their manufacturing stack that they announced in Dreamforce a few months ago, that is going to be a much easier sales cycle. And so regardless, we do see system integrators becoming increasingly important to us, right. We see them as core partners in helping companies shift to the Subscription Economy, and you should see us talking a lot more about this going forward.

Your next question comes from Richard Davis with Canaccord.

Two quick questions. One, in your customers, I remember you guys were talking about helping your clients kind of anticipate and proactively reduce churn. And churn, if you can reduce churn, that's like really good incremental margin. So a, how is that going? And b, Tyler, can you remind us again kind of the cohort analysis for you guys because one of the questions we get sometimes is, all right, well, what happens in kind of years 2 and 3 in terms of profitability of your various cohorts and things?

Yes. Well, we have 10 years of data now with some of the best companies in the world, right. This is the $40 billion-plus that we're doing on an annualized basis of building volume. And so we're sitting on a gold mine of information insights and data. And you're starting to see us really mine this information. And so some of the stats that I referred to on this call was really to hark back to that. We have a team of data scientists who are looking into it. And not just looking at what's driving down churn but what's driving growth, right, those are 2 sides of the same coin, and applying lessons, right. We call these our SEI benchmarks, if you will. But this is what customers are hungry for, right, seeing what type of pricing models work, should I do usage-based pricing models or not and why do I want to drive customer interactions back versus the old set-it-and-forget-it models, right, and be able to show that, look, this type of customer grow -- a company grows 2x faster, this type of company grows 3x faster, this type of company grows 50% faster. And it's been an amazing source of data that our customer base really values. And we're going to continue to publish these types of things and then obviously, eventually, turn into automated tools that they can run for themselves.

I'll take the second question there, Richard. So from a cohort analysis, clearly, on a net retention perspective at 108% to 112% range, our entire customer base is growing, and we talked about that. And we've also talked about how this is really an efficient growth for us because we've designed our pricing model that allows us to grow as they grow, and transaction volume has been historically one of the biggest drivers of that. We did mention that we have a little higher mix now of our add-on products, and that strategy is also working, which we're really excited about. Now within that whole mix of customers, we have set the customers that we can land pretty heavy on, but their Subscription Economy businesses might actually take a little while to grow. We mentioned today, like auto might be an example of that, right. So we get to grow with them, maybe through add-on products and some slight transaction volume, but we're really in this for the long game. Where we have other customers that are growing really, really fast, and then that transaction volume upsell comes in a lot earlier. And so we have this whole portfolio that we get to go enjoy and actually be a part of across all these different industries.

Your next question comes from John DiFucci with Jefferies.

I have a questions for Tien and then a follow-up for Tyler. So Tien, these results look good. Metrics were strong across everything: deal size, momentum, transaction volume. Your subscription revenue did decelerate a little bit against -- but this is the most difficult comp of the year. I guess, was there anything in the quarter that hasn't been mentioned regarding the business momentum that we should be thinking about? And the reason I ask -- I mean listen, the stock market moves in all different ways, and I can't predict it. But your stock is down like 11%, and I just wonder what people are thinking about. And I'm just wondering if there's something missing.

Yes. So when I look at the last quarter, I see nothing but enthusiasm and excitement. And when I look at the past year, everything that we've really talked about in since the roadshow over the last 4 quarters with you and our other investors, it's all coming to fruition, right. I think the governing factor for us is going to be the growth of the Subscription Economy itself, right. And -- but the important thing for us is we're becoming increasingly strategic to the Subscription Economy. We're seeing more and more interesting companies enter the Subscription Economy. We are really the only choice when it comes to putting the platform to drive that growth. And companies are increasingly realizing why we're so important, right. Why ERP systems are simply not sufficient to deliver on these growth strategies. Everything we talked about, the usage-based billing models, the number of customer engagements, right, these are the things that all break ERP systems. And everything we've seen in this past quarter is a reinforcement of everything we've said. And so we're really excited. We thought it was a great quarter, and we're incredibly excited about the future.

Okay. Great. And then, Tyler, for the guidance, sort of the difference between 605 and 606, especially with the -- in the subscription number, and you mentioned sort of Leeyo's subscription reallocated under 606 versus 605, can you explain that a little bit more? Because it was my understanding, anyway, that any true like SaaS revenue, SaaS subscription wouldn't really be affected by 606. Although I think RevPro is probably better at it than I am. Can you just expand on that a little bit as to why that's different?

Sure. So what we said about half of the differences were coming from historical selling practices from the Leeyo business before we bought them and then half was through allocations -- or reallocations, the historical business practices were really term license deals that were sold before and then kind of ramped deals that had no real difference in the price -- in the value per year but differences in the durations. And those term licenses, they're just like any other kind of perpetual software, which we don't sell anymore, right, these are long go, all the revenue gets pulled forward.

Yes. We were capturing a company that was bootstrapped and in the middle of an on-premise to cloud transition. And so the immediate thing we did was stop the on-premise sales, right? But being a small company, unfunded, they still have customers that said, "Look, we'll take it on-premise just in case something happens to your company." And all that disappeared when we acquired them. And so these are just sort of legacy contracts. We're converting as many of these guys over to cloud contracts. We obviously don't do that in our core business. And so that's why Tyler called out that we don't really see this as material. These are onetime reallocations that affect all years. And they don't change the outlook of the company in any material way.

Yes. And obviously, there's no change to cash flow either. And economically, we see that there's no change. The other thing, John, is that we obviously take 606 really seriously. We use our own product. And we're doing it down to the dealer level, which is the technical requirement. And when you do that, you have these SSP reallocations from subscription to services. And so we can see that from the dealer to dealer level. Now what we said is we think the growth rates are going to be similar because when we publish our kind of full retrospective, last year's numbers, you'll see a little bit of difference in last year's numbers, too. So we don't think it's going to impact the growth rates overall either.

Okay, that's really clear. And I forgot about ramped deals.

Yes. Thanks, John.

Your next question comes from Stan Zlotsky with Morgan Stanley.

This is Hamza Fodderwala in for Stan Zlotsky. Just a couple of quick ones for me. It sounds like there's a really big opportunity out there with the Subscription Economy. Tien, where do you feel you are in terms of from a sales execution standpoint? What's left as far as sales hiring? Where are you hiring? And particularly, around aligning the existing RevPro sales force and the Zuora billing sales force, where are you there as well?

We feel really good. I mean we have a whole team in place now that's taking our learnings of how to make this business model work. And we have 2 big competitive moats. One is obviously the technology, and the other one, we believe that's just as important is our go-to-market expertise of how to engage with companies and how to help them understand what are the elements. You've got to remember that a lot of these companies are brand new to the Subscription Economy. What we need to do is to temper it, right. On the other hand -- on the one hand, there's an enormous amount of signals, right. You hear Burger King announcing subscriptions, and you say, gosh, like how far can this thing go? And a lot of these companies are kicking the tires and in the new stages. And so we've got a fairly disciplined process where we need enough people, feet on the street to talk to these companies. But how do we make sure that we're engaging with companies that they are ready to launch something and have a good probability of success in their offerings, right. Because ultimately, our revenue grows when these big strategic projects, companies put their energies behind it and are committing to building a growing business. And that's why I shared the story of that manufacturing company because I think it's such a perfect story for us. But we think we got knowledge. We've got a whole team that knows how to find the right folks, bring them onboard. We're doing a good job of hiring. We're doing a good job at enablement. We scaled this worldwide already. It was important for us to break through the international learnings actually before we went public, and so you're seeing our international business growing really, really well. But we feel good about where it is. The question is just how do we continue to add feet to the street but to do that in a disciplined way.

Got it. And then you mentioned international. That was actually my follow-up question. On the top of the call, you mentioned you're seeing faster growth in Europe. Where do you think -- what do you think is driving that? Do you think you've reached an inflection point in Europe in terms of subscription adoption because I think that's historically lagged the U.S.? So any color there will be really helpful.

Yes. I'll give you the color. Maybe Tyler can give -- share some numbers. But there's nothing about the Subscription Economy that's a U.S.-centric thing, all right. The Subscription Economy, whether you're a start-up and you're looking to disrupt an industry and steal the customers or you incumbent with the customers, saying I can do this transformation and build a different relationship for my customers, there's nothing about that that's specific to U.S. companies. And so we're seeing fantastic traction internationally. We saw this early. And the other thing is if you look at the macro thing that's going on where every company is becoming a tech company, certainly, U.S. tech or tech companies have been dominated by the U.S. But if every company is becoming a tech company, then all companies around the world are going through that same transformation. And so I know we've said that international is 25% of revenues on the roadshow.

Yes. Hamza, so now we did say international is about 25% of our business. Now it's actually approaching 30%, and it's growing really well. What's interesting is a lot of our international customers are making sizable bets, but they're not -- those bets aren't just for their local geographies, right. They are selling internationally themselves. And so we're increasingly seeing that we're enabling companies, no matter where we close them geographically, to go sell around the globe.

(Operator Instructions) Your next question comes from Chris Merwin with Goldman Sachs.

Okay. Great. So just in terms of transaction volume, I think we saw some really strong growth there, up 56% year-on-year and then actually accelerated from 37% last quarter. If you look at net expansion, it's still the top of your range that you talked about longer term, but it was down a little bit on a sequential basis. So I know you monetize volume-based upsell, so maybe can you just help us understand some of those moving pieces there with the acceleration and volume and the step-down in net expansion? Then I have a follow-up.

Yes, Chris, this is Tyler. I'll take that one. So when we talked about the transaction volume not as a corollary to in-period upsell but really talk about it because of 2 things. One, it's an indicator that our customers are running their businesses on us. And once that volume is there, it's incredibly sticky, right. We are that mission-critical system of record. Secondarily, as it continues to grow, it's an indicator that we will have the opportunity to continue to grow with those customers. Now customers will typically buy transaction volume and subscribe to it before they use it, right. Because if it's the inverse, they'd be going into an over situation. So it's not necessarily a correlator of like in-period bookings. Oftentimes, like we said, some of it was driven by customers who deployed in Q3 and actually started putting meaningful transaction volume in Q4. So you could see that, that could be a transaction that predates the actual volume being -- going through our system.

Yes, that's right. I mean. The essence of this company, to boil it down, is this is a long-term bet, right. This is the long-term bet that subscriptions will take over the world. And John talked about stock price, right. We're focused on what the stock price will be 3 years from now, right. And so we like to show the transaction volume because it is a proof point to the bet, right. The bet is that subscriptions are important. The bet is that the best companies in the world are going to shift to this business model and that this business model is working for them. And so the combination of showing the transaction volumes, showing what we call the SEI, the Subscription Economy Index, that shows that these companies are growing really gives us confidence and, hopefully, you all confidence that the shift is happening for real. And we are a big, big part of that shift.

Okay, great. Just as a quick follow-up also on net expansion. I think one of the things you mentioned in the prepared remarks that one of the drivers there was you're seeing actually an increased shift toward product add-ons. So maybe can you talk a bit more about that, what products are seeing increased uptake and then maybe comment specifically on RevPro just in terms of what you saw there in the 4Q from a sales perspective?

Yes, so the way we want you to visualize it, right, we acquire a new logo and, because of what we do, the cost of sale of acquiring a new logo tends to be higher, right. And so we've complemented that. And that's why you get the 50-50 bookings with the team that engages with our installed base, and we want to give them multiple avenues to grow our customers, to grow our footprint within our customers. Part of that is volume. Part of that is cross-sell. Part of that is add-on. One thing we did highlight this quarter was the Collect product. And I know this is a product we've talked about in previous quarter and we decided that, look, it's time to share some information. And so we talked about how that product is already in the hands of over 50 customers. The current version of that product is primarily focused on our B2C customer base, right. As a reminder, we're probably the only company billing system that can focus on both B2C and B2B. But we sort of start with B2C customers, it's already got over 50 customers and delivering enormous amount of value. And so a combination of that, a combination of the cross-sell strategy, right, RevPro to billing and vice versa, is really what's driving that shift.

There are no further questions at this time. I will now turn the call back over to the presenters.

Great. Thank you so much for joining us. We hope to see you next quarter and at our Subscribed conference in June. Thank you.

Thank you.

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