Zuora, Powering the Subscription Economy, IPO Jumps 43% Based on Strong Operating Metrics

April 17, 2018

Subscription revenue management SaaS vendor Zuora’s IPO on Thursday, priced at $14, closed at $20 and valued the company at $2B.  2018 is shaping up to be a banner year for B-2-B SaaS IPOs:  Dropbox and Zuora already have listed, Docusign, Pluralsight, Smartsheet have filed and Qualtrics, Apttus, Github, SurveyMonkey and Slack are expected to file this year as well. It’s worth taking a look at Zuora’s operating metrics over the 3 years leading up to last week’s IPO as an example of a successful enterprise SaaS company.  Their S-1 describes their business, from how they define retention to how they expand and upsell customers, and what goes into their non-GAAP recurring profit margins of between 28-30%.

Operating Metrics

Let’s look Zuora’s Sales and Marketing strategy to get to a $2B valuation.  Three years ago, the subscription management SaaS company spent almost as much Sales and Marketing as they earned in recurring revenues.


Source: Zuora’s S-1, 2018

Sales and Marketing expense was reduced by $2.1M in 2017, primarily through reductions in travel expense ($1.5M), as well as spending on programs and events, and some headcount reduction.  In the year prior to Zuora’s IPO, Sales and Marketing expense increased over 17%, contributing to total revenue growth of almost 50%.

Zuora describes their sales and marketing expense as consisting primarily of:

  • employee compensation costs, including commissions,
  • allocated overhead,
  • costs of general marketing and promotional activities, and
  • travel costs

Sales commissions are expensed in the period of sale. Once adopted, under ASC 606, commissions will be amortized in sales and marketing expense over the period of benefit.

Zuora says they sell subscriptions to a range of company sizes, from small companies to large enterprises, including 15 of the Fortune 100.  Current customer count is over 950 customers, which equates to an average contract value of $177k per customer.

Their sales model is to maximize the lifetime value of customer relationships over time, as do most enterprise B-2-B SaaS companies.  Customers initially subscribe to one of two flagship core products and the sales cycle is “lengthy and complex.”

Pricing, ACV and Retention

Zuora charges an annual fixed platform fee ranging from $25,000 to $500,000 or more.  In addition to the base platform fee, they charge annual committed volume fees based on anticipated usage of the products, which is validated through the invoice amounts processed through the platform.

Zuora justifies a high customer acquisition and implementation investment by showing how over time, their customers become increasingly valuable.

Cohorts of customers from fiscal 2016, 2017, and 2018, that had greater than or equal to $100,000 in ACV, combined together, have grown their ACV, on a dollar-weighted average basis, by 4% by the end of the first year, 27% by the end of the second year, and 39% by the end of the third year.

Zuora outlines their dollar-based retention rate performance (not customer retention, which isn’t mentioned).  They calculatedollar-based retention rate as of a period end by starting with the sum of the ACV from all customers as of twelve months prior to such period end, or prior period ACV. Then calculate the sum of the ACV from these same customers as of the current period end, or current period ACV. Current period ACV includes any upsells and also reflects contraction or attrition over the trailing twelve months but excludes revenue from new customers added in the current period.  

Zuora increased dollar-based retention rate from 100% as of January 31, 2016, to 104% as of January 31, 2017, and to 110% as of January 31, 2018.

Zuora does a good job painting a strong picture of growth and a sales and marketing machine tied to the expansion of the subscription economy. The more companies that switch over to a subscription-based model, the more customer expansion for Zuora.  They cite the continued strong growth of the subscription marketplace, expansion and further penetration of the customer base, growth internationally, continued and expanded investment in Sales and Marketing as well as expansion of partner relationships as keys to their future.

Key Take-Aways

  1. The 2018 IPO market is hot for enterprise B-2-B SaaS vendors.Revenue multiples aren’t as high as the peak, but very good for companies showing strong growth and subscription retention, sales and marketing investment and high customer lifetime values.
  2. It takes significant sales and marketing investment to rise to the level of a Zuora or any of the other enterprise B-2-B SaaS players, and continued investment to maintain the rapid levels of growth.
  3. At the same time, it requires careful management of operational efficiency, and the ability to prune out inefficiencies, in order to find the most efficient allocation of resources. Benchmarking is a critical tool to identify inefficient operations and operational productivity.  Companies use benchmarks to see how successful companies and peers have allocated their resources for optimal growth, and to help the management team get on the same page on these targets.