Welcome to our next session. My name is Sheldon McMeans, and I help support Barclays, covering the U.S. enterprise software space. I'm really pleased to be here with Todd McElhatton. Todd, thanks for joining us. Good to be here, Sheldon. Thanks for the invitation. Yeah, great. Well, you know, a lot of the audience here are software investors, but may have a little less knowledge on, you know, some of the underlying technology that helps power them and monetization platforms like Zuora. You know, to kind of level set the group here, could you give a background on Zuora and the problem that you try to solve for customers? Sure. Zuora helps any type of company figure out how can they price, package, and monetize new services. What we're seeing a lot of that is, How do I go with a consumption type business? How do I have a recurring revenue business? We talk a lot of times about subscriptions. I think, though, at times, maybe subscriptions limits us because we do a much greater, a much greater impact than that. And what's really interesting is, a lot of times people are like: "Oh, you know, how tough can, you know, billing be?" And what we find is, actually, it's a huge inhibitor a lot of times for companies, especially as they're developing new products or especially as they're developing new services. The existing technology stack they have doesn't allow them to have the innovation that they need to get things out at the speed they want to. Mm. What you've seen is companies like Zoom, General Motors, New York Times, have all come to Zuora, and 1,000+ other large enterprise customers. We're help powering these new businesses, which are really driving growth. That's what Zuora does, and, you know, we've really differentiated ourselves and lead in that market space. Great. You know, I wanted to ask on how the market has been evolving. You were founded in 2007, and, you know, certainly a different time, and, I know you have good penetration in the software space, which has, you know, kind of seen a shift in revenue models to, you know, develop over time from, you know, the old perpetual sales into term licenses, into subscription, and now, you know, elements of consumption. I wanted to ask, you know, what is the appetite for subscription or consumption models, and how are you positioned to benefit from that? If we take a look at what's happened over the last decade or so, you're absolutely right. More and more customers, whether those be consumers or businesses, are looking to consume a service or, something as they use it. Maybe have a commitment to it, maybe not have a commitment to it, and that's really benefited Zuora because that's where we shine, and that's where we're able to deal with the complexity out-of-the-box, 50+ types of different models, whether that be, "Hey, I have a flat monthly fee, I want to ramp something up, I want to have a pay down, I want to just do pure consumption." Those are all models that we can support that other CRM or ERP systems can't. And so that's an area where we're really benefiting, and I think in the current market, one of the things that you're seeing is, it's tough out there. You're seeing that across software. That's about 50% of our overall business. But what you're seeing is more and more companies, Asana is a great example, they're one of our customers, where they're looking to say: "You can buy from us and make a large commitment, or we're also happy to sit there and let you sign up on the website. Start with us, use us as you get value, continue to buy more. If you don't see value, you turn off." And so they're giving people a way, try before you buy, or try, if you like it, then you, you continue to consume. At some point, what we see is, a lot of times businesses will start off as consumption. At some point, you know, the guy like me, who's a CFO or the CIO, says: "Wow, who's this company that, you know, we're spending $500,000 with? You know, why are we spending $500,000 with them?" And it's like, well, maybe we should, you know, have an agreement with them, and maybe we should have a set level of commitment to them, and then we get better pricing. And, you know, exactly what Amazon did, right? Mm. With their web services business. You saw, you know, initially you had developers going to the website, buying, and now we're a big consumer of AWS, but although we have a consumption element of what we buy, the vast majority of what we buy, and I think most companies buy, is committed. And so we're able to support those business models at Zuora. Great. It seems like, you know, since 2007, the velocity of change on business models and, pricing and packaging models, has kind of accelerated, and it seems like, you know, with the 50 kind of plus different, ways that you can, you know, do, do the billing, that you're kind of well positioned for that. Are you kind of seeing, you know, maybe more customers, you know, like Asana, trying to do a pricing strategy, maybe temporarily, and then kind of move to a different type model that you can help with? I think especially in today's economic backdrop, that is really relevant. Asana was a great example. Let me use New York Times, B2C business, where you can sit there... They now have 10 million subscribers. So think about this, a decade ago, people would have never thought of the New York Times, it was like, "Hey, is this company going to exist? Mm-hmm. And now what you see is, they're the leading platform for English-speaking news. They have 10+ million subscribers, and they've moved from a company that was really advertising dependent to now it's subscriber. And you've seen a lot of this happen in the media ecosystem space, for an example. And so this is a great example of, they've got multiple ways now that they can go and take their product to market. So you might sit there, and, you know, I'm a great example of this. I buy the whole thing. I get the cooking, I get the games, I get The Athletic. Me too. You get all of it. Yep. But there are some people that, "I'm only interested in The Athletic." And so they can sit there, and they can break that out into a module- Mm ... and if that's all you're interested in, they can sell you that. They might also sit there and allow you, hey, there's a current event. You're interested in the election, or you're interested in what's happening in the conflict in the Middle East. And so maybe they'll enable a little bit of that content, and they see you're starting to consume that. All right, let me come back to you, and maybe I'll offer you news. Mm. And so you bundle that. Zuora can help enable that, where if you're a product manager and you're maybe working on a homegrown system or something that's been put together on your ERP system, it's like, "Oh, yeah, we can do that, but it's gonna be an IT project- Right. - about $1 million and nine months to be ready. And you're like: But the election is what people wanna cover over the next- Mm You know, 12 months. I'm gonna miss all of that because I can't have a billing solution. That's really unfulfilling to a product manager or a business trying to do that. That's where Zuora comes in, and that's where we help companies. That makes a lot of sense, and you know, to further kind of level set the group here, I believe last week recently reported healthy Q3 results. What were the highlights for you? I think there's three highlights. The first is, even in a really challenging economic environment, we had nice double-digit growth. And what I said was, we would exit this year at about a 12% ARR growth. And that's been challenging. If you take a look at some of the headwinds we faced, tech is a big chunk of ours. And so even in that, we have- Mm a real durability to our customers. The second thing is, we highlighted some of the renewals that we had, and they weren't just renewals, but they were expansions. It goes back to why we feel good about the durability of our business. One of the world's largest automobile manufacturers recommitted to us for five years, our biggest renewal ever, almost $30 million, and they actually expanded what they're doing with us. Quite frankly, they're only buying one of our products, and they're only in one of our geographies. So that's an opportunity that we have, you know, well beyond that. One of the world's largest, or Google Fiber, we're gonna handle all of the billing for them. One of the world's largest software companies expanded their commitment on their revenue and extended the deal. And so that just goes to show, you know, we've chosen these companies that we've gone after that are some of the biggest and the best, or they're companies that are growing, and they're gonna be really large companies. Those are our customers, and I feel really good about being able to have those customers and being able to have that ability to grow with those. The other thing is, keep in mind, is Zuora's a platform. It's an enterprise mission-critical service. It drives a lot of SOX processes. So when someone makes a decision to come on the Zuora platform, that's a decision that you've made for a generation or two, and we see we have great customer retention. And so that's why I feel really good about the durability in the top line of the business. Now on the bottom line, what you saw is, for the first time, double-digit growth on profits, and, you know, we're, you know, 14% plus on the non-GAAP operating profit. What I've said is, that's a starting point. We're gonna exit next year at a rule of thirty, and, you know, that shouldn't be considered as a destination. That's just where we are for next year. So I think, you know, we have an ability to be a nice top-line and bottom-line company. Great, and, that kind of ties in well to my next question. So you have driven a sizable improvement in operating margin, year-over-year, and, you know, thinking about that, what were the main areas of efficiency gains and, you know, sources of leverage? And then, as we look forward, you know, how do you think about the inherent leverage of the model, for future margin gains? When we take a look at, you know, the retention that we have and the products we have, we have a lot of areas where we can build upon. And so if I go through what we've done over the last year, and I think we've just gotten started, so I feel like there's good runway ahead for us. So maybe I'll start with our subscription COGS. The biggest item that we spend for as a company is our hyperscaler spend. Mm. We've gotten really good at optimizing that spend. There's more room there. We'll continue to see that. The second biggest area of spend that we have on our delivery cost is the support to our customers. That's an area where we're spending a lot of time on getting automated, getting quicker, better customer responses. Quite frankly, AI is one of the things that's helping us there- Mm ... which will give us more improvements. So a year ago, we were at 78%-79% gross margin. Mm. What I've said is, you know, we'll exit this year 81%-82%. So really nice progression, and there's room to still take that up over the next couple of years. Now, let's go to the OpEx items. We've spent a ton of time working on our go-to-market. One of the things that we looked at last year is, what's the most effective way for us to generate pipe and really improve the conversion? And as we've learned from that, there's a lot of things we said, "Hey, we're not gonna do these. We're gonna trim back on these, and we're gonna focus on areas that are most effective." Partners have been a great way for us to gain traction. Our upsell business model has given us an awful lot of traction. So you've seen us get really efficient or get much more efficient, and I've got a ways to go on that. So, you know, we're nowhere near done on go-to-market. So there's great opportunity there. On the product side, again, staying focused on what products and innovation are driving top-line growth, and where we see areas that aren't giving us a return, trimming back on those. We've also done a really nice job of being focused on where's the right place to put employees, and so we're optimizing our location strategy, again, to give us more leverage to the model, and I feel like there's, you know, a lot of runway there. And the last area is G&A. We'll be a $400 million plus ARR growth, or a $400 million ARR cloud business as we move forward. So we absolutely have the ability for scale. So we made some investments in technology. You're starting to see those allow us to automate more processes, need less people. And so, you know, what I would expect to see is actually to see the absolute dollars in G&A spend go down year-over-year. Mm. So I feel really good about the progress we've made, but quite frankly, rule of 30 is where we are for next year, and that's not our destination. It's just where we are for next year. Got it. I would touch on the gross margin, you know, around that 80% at $400 million, and scale is impressive if you have more room to go there. So I wanted to ask on the healthy NRR, you know, 108% in the quarter. You have, you know, a strong customer base with some tech giants, like you called out Google already. I think, LinkedIn is another customer- Yep ... of yours. And, you know, how are you thinking about penetration within these accounts? And, you know, when you think about it, are you kind of in one of the business units, and then you have opportunity to expand into more business units? What do you see there? ... We have a fantastic opportunity in front of us with our install base. I've talked about for some time, we're adding new logos, but if I don't add another new logo and have one new product that comes out, I have a $500 million opportunity to upsell into my base. You're absolutely right, that's as they expand, as they grow more volume, that's another area that I have to increase my monetization. Just on the products, as we offer new innovation, as we go to different business units and take those on, those are all nice opportunities for us to grow. Our revenue product is, you know, less than 20% penetrated, so great opportunity there. Billing, payments, as we continue to offer more integrations, and we continue to offer areas to make that easier for companies to integrate, we will certainly have the ability to grow that. And then last but not least, we did an acquisition last year with Zephr. So think about Zephr on the subscription experience, helping customers as they have visitors come to their website, identify who those visitors are, help monetize them. They also had a paywall piece of technology- Mm. That worked very well and very complementary to our media business, and what we've seen is the ability to cross-sell both customers, each other's products. We're now seeing that we're going to market more and more with Zephr and Zuora. One of the biggest deals that we did was with a giant media company, matter of fact, we did one in Q2 and in Q3, and the Zephr product was, you know, part of that in there. Mm. But the other thing that we found is that Zephr product just isn't extensible for media. We're seeing that as an area we can take that to our B2C customers. So we've got a lot of room- Mm ... within that base to continue to grow, and I think that's one of the things that, again, will help give us leverage on the CAC. Got it. Got it. And, you know, similar to what we're hearing from other companies, you've called out elongated sales cycles. You know, what are we seeing here in of what you can control? How are you positioning yourself in the business through this, you know, and from a CFO's perspective, is that adding, you know, higher levels of pipeline coverage ratios, you know, when you think about guidance and, you know, having a little more comfort there, and you know, are you maybe looking to lean more into existing customers, as we often hear that, we see elongated sales cycles more on the new side as opposed to the existing side? We have done a couple things, and we talked about this when we started the year. We have focused on the enterprise space. We're absolutely focused on that. One of the things that we said this year was, we wanted to give our sellers the ability to have the agility to land lighter. When we talked about landing lighter, that didn't mean going down market. That meant maybe not selling an entire transformation on order to revenue, maybe focusing on one business unit, maybe going on with one product. Mm. And we've seen really nice success, where we've had good growth on the number of new logos coming in. Now, the ASPs on those have been a bit lower, but that doesn't bother me because when you pick the right customers, over time, it's what's the runway they have to grow. And if I think about, you know, some of our largest, you know, multimillion-dollar ARR deals per year, a lot of those started at $100, $150, $100, $150K ARR deals. Mm. It's picking the right deals and having the ability to grow in those. So we've given ourselves the ability to do that, and that's been really helpful. We continue to work with our partners. We've certainly seen our partners, you know, be willing to maybe take some smaller type deals, and they continue to be a really good source for bringing on new deals. But you're right, sales cycles have been elongated. We've seen that throughout the full year, and we've been able to adjust and adapt to it. Got it. And then, you know, is there kind of a sweet spot for you? Because, you know, when you talk about the kind of extensibility, 50 different models that you support there, you know, it certainly doesn't seem like a lemonade stand with a—you know, a monthly subscription would be kind of your target. Is there kind of like a natural level of complexity where you do well in versus the competition, and is there kind of a natural limit then, like therefore, on how low kind of in the mid-market that you can go? I think our focus has been, let's focus on companies that can be a sizable customer for us. So we really try to stay out of the low end of the market, and I think the competitors that have stayed in that area, what they see is, and my history has been, when you start getting into the low end of the market, you see a tremendous amount of churn. Zuora is a product that it does take a bit of investment to bring it live. So what we wanna do is, we wanna focus on these companies that are gonna be high growers, that are gonna have a lot of complexity, that are gonna look to be able to figure out how to evolve and change their business model very quickly, and how can we offer the entire suite to them? How can we help them if they have a CPQ need, do that. We can do the billing, and like I said, you know, there's 50 different out-of-the-box ways that we can help companies monetize. Today, consumption is a great example of people saying, "In a challenging economic environment, let me let people try something. Not have a commitment, but let's go in that way, and then over time, we'll figure out how to make that into a commitment." Again, what happens a lot of times is, oh, I've got this consumption model, but I've got other products going in. Now I have a revenue recognition problem. Mm. We can solve that. We can solve the payments. So it really becomes companies starting to get to a certain scale, where this becomes a material part of their business, or that's the only thing that is doing, driving their business. Those are the companies that are really sweet spots for Zuora. And we've really kind of hit that, if you take a look at it, where our focus areas are. You've first of all seen us, you know, SaaS, 50% of our technology has been 50% or so of our business, so that's an area where we started at. We do super well there. Media has been a great area, New York Times, Zoom, companies that are super innovative and growing quickly, where we're able to help them. And then the last area I think that's been a really nice sweet spot for us has been. Think about manufacturing companies that are making this evolution to sell services to their customers, a new area of growth for them. And I'd really highlight connected cars. 12 of the 15 largest automobile manufacturers are on the Zuora platform, and we are helping them with everything from, like, the OnStar business to GM, to people adding adaptive cruise, to adding EV charging. So those are all businesses that we are helping power those growth. Got it. I wanted to ask more on Zephr and what you're seeing there regarding, you know, the demand for personalizing the customer experience. You know, what's kind of the value proposition, you know, of that solution? And then what inning, I guess, are we in, and customers really kind of understanding that value? So we're really early in that. Zephr, as we talked about, think about it as a subscriber experience offering, where you understand who that subscriber is, you identify them as soon as they come to your site, and then you sit there and say, "What am I going to allow this person to do?" And you may be willing to let anybody and become totally unknown and, you know, have access to all of your content, or you may sit there and say, "All right, I know Sheldon's been to the site three times. He no longer gets to it unless I get his email address and I register him. Mm. And then it may be like, "All right, we're gonna let him see sports content, and that's all he gets. But maybe we're gonna allow him ten articles." And after he gets to that point, it's like, "If you want more, now we're gonna serve you up an offer." And then we have a way to monetize it. If you're maybe looking, you come and you are a subscriber, and you're looking to downsell, maybe you bought all the newspaper, what we notice is, you only look at sports scores. So we sit there and say, "Hey, we'll offer you sports instead of $9.99 a month, $3.99 a month. Mm. And so we have all that technology where we understand, first of all, identifying who that person is coming to the website, being able to understand what they might be interested in, and being able to make that decision in a millisecond. Mm. So you think about the number of people that are coming through. So that's been really good, and that's been a great area for media. But think about all the opportunities in different B2C sites where people are coming. And so that's where that's extensible, and you'll continue to see us evolve that Zephr product to give us more areas where we can land with customers. And quite frankly, a lot of times, working with somebody to land on the Zephr product is something that they're really easy to consume. It doesn't require a huge implementation, so it's a way to get ourselves in the door. And then 6-9 months later, they have a payments challenge. Let's help you with payments. Maybe your billing system, you're at a point where you've gotten to the size where your current solution doesn't work, so we're positioned to take care of that. You have a revenue recognition challenge. So that's what really excites us about Zuora. It's been a fantastic acquisition for us. Has definitely exceeded where we thought it would be when we did it, and it was a really good value for us. Right. Great. And, CFO question for you. So you have nearly $500 million in cash, I think about $90 million in net cash position. You know, how are you thinking about target capital structure and M&A, and, you know, would that be kind of smaller tuck-ins for, you know, an advanced kind of functionality, or would it be kind of more large scale, potentially? So I think we maybe touched on earlier, Silver Lake, we did a $400 million transaction in two tranches. We took the last tranche of that investment in our third quarter, which was, you know, what, September of this last year. When we did that transaction, we specifically did it to say, "Let's have the dry powder available for M&A. Mm. Zephr was the first thing that we did. Feel really good about that. Has been very successful for us, growing faster than the Zuora business, giving us opportunity to cross-sell, up-sell. Certainly same customers, same selling motion, so we get really good leverage for that. Those are the types of things that you'll see us focus on. Where are they adjacent to our product areas? Where can we up-sell, cross-sell to our current customers, similar buyers, similar sales motions? We could certainly go and could go bigger than what we did with Zephr. That was a $50 million transaction. I wouldn't expect that we would spend everything that we raised with one transaction, so you'd see several things. Maybe some are tuck-in, maybe some are a bit larger. But with Zephr, we were super disciplined, and we're gonna do that. There's a lot of interesting assets out there. We've had a lot of really great conversations. I like to say there's nothing that we're gonna fall in love with. You know, it's gotta make sense for the technology, it's gotta make sure it's the right cultural fit that we can bring the people on, and it's gotta make economic sense. We've made a lot of progress on the bottom line, and I'm not gonna give that up on an acquisition. Got it. Got it. And, you know, I wanna touch back on consumption models, and, you know, earlier this year, you released Zuora for Consumption. And one, it seems like this would be a challenge for some of the legacy players in the space, you know, especially if you're thinking kind of more on-prem ERP that might have, you know, some functionality. And do you see this as a competitive advantage? And then, you know, how do you think about that as a growth driver as more companies consider consumption models? I absolutely think it's an advantage for us. We have seen really nice take on being able to take our existing customers, and several new deals I can think that we've won in the last quarter or two, have been driven by our consumption capabilities. And so in an environment like this, we talked about it a little earlier, as people are looking at different ways to bring on new customers, consumption without something, without a commitment, is a great way to go or allow people to not have a committed volume, but let's use and only buy what they consume, is something that more and more companies, businesses, and consumers are looking for. And so being able to offer that out-of-the-box capability is a differentiator for us. And the other thing that I think I really like about the consumption is, consumption causes revenue recognition challenges. Right. And so that is what differentiates Zuora from anybody else. The billing and revenue recognition, that we can put that together, because you can't do one without the other. It's great that you can bill something, and you can keep track of it and make sure you get it billed to a customer accurately every month, quarter, day, whatever you need to do.... but it's just as important for me as a CFO and the peers that I talk to, to be able to say, "Oh, I need to make sure I'm recognizing this revenue correctly, and I understand all the other arrangements that I have with the customer, because if I can't recognize it right and report it right, it doesn't do me any good." And so I feel really good about putting those capabilities together, puts us in a very enviable position. Hmm. And a little more on the competition. You know, when you win a new client, are you- is this typically a competitive takeaway or, you know, or is it kind of more greenfield opportunities of a company doing kind of a different business line? And, you know, how do you think about your differentiation versus the peers? So we certainly do see takeaways. I mean, I've seen us take away things in the last quarter from some of the CRM players out there. We've seen ourselves take away things from, especially on the low end, when people get to a scale. But a lot of what we probably see is greenfield- Mm. where people have gone to market, and frankly, they've built something themselves, or they've kludged something together with some existing systems they have, and it's just to the point where it doesn't allow them to operate the business the way—the way they want to. And that's probably our sweet spot, is when we win and have the most success. Got it. And I alluded to it earlier, but, you know, Zuora has a healthy exposure to software companies and, technology companies. But, you know, I was a little surprised to see, you know, other industries, Ford, Honeywell, and NBC Universal. You know, how do you think about the addressable market and customer base for your solution? That's a really interesting question, and one of the ways I think about it is, in some ways, the addressable market is almost unlimited. Mm. But what it is limited by is, when are those companies out there and willing to make that change and adopt the billing solution because they've got to a certain size? So in the long run, I think we have a huge TAM. In the short run, it's what customers are coming to us. And so in the current environment, we feel good about the growth that we've talked about, but I certainly think as economic headwinds change and as companies more and more are looking to take products and move those to services and are looking for new avenues to growth, and like we talked in the manufacturing sector, as we talked about media companies becoming more and more, consumer-driven rather than advertising-driven, those are all great opportunities for us. Just as SaaS did, you know, to software 10 or 15 years ago, you're seeing these other companies have the same dynamics happening in their business, and we're going to be really well positioned to capture that TAM when it, when it's available. Got it. And, you know, I wanted to touch a little bit on volume and kind of the role of volume in terms of your own monetization strategy and, that as, as a growth driver. What are you generally seeing in terms of volume trends? Is that something that's kind of a continual tailwind, for you, or should we think about it as, you know, if some of these, you know, maybe technology is probably the area we'd see this most, you know, if a company's going from 30% growth to 10% growth, then that would be a headwind on, volumes. So maybe break that up into a couple pieces. So first of all, volume is a great way for us to monetize. You know, it's probably, you know, we've talked about it being, you know, a little more than a third or so of our overall revenue stream. So let's talk about it. Technology. Certainly, it's a little bit of a headwind for us now, but let's keep that in context. Going back, you know, 18-24 months ago, you saw a lot of SaaS companies growing 30%+, and now it's like, oh, my goodness, you know, we're—the SaaS business is growing, let's call it 12%-14%. Most companies would give an arm and a leg for that. Right. We're still seeing growth from our SaaS companies. I don't see anywhere in technology, you know, it would be an outlier that somebody's shrinking. And, you know, we're not seeing anybody. It's very rarely that I see someone that says, "Hey, I'm going to take my volume commitments down." It's just they're not growing as fast as they did. And so that has certainly been a bit of a headwind for us this year. They're still growing, but not as growing as fast. And when the economic cycle changes, I expect that will become a good tailwind. But now let's take a look at. We've talked about media and, like, in the car business. Those are areas that, although some of those companies may only be growing single digits, you're talking about in the connected cars, some of these- Mm ... CEOs are saying, "Hey, this is, you know, a nascent business for me today, but this is going to be a $20 billion-$30 billion run rate business in the next decade." And as we're powering those platforms going forward, I feel really good about our growth opportunities. So I think having that mix of different industries is going to be really beneficial to us. Then I think I have time for one more question. So, you know, ex macro, how should we think about the mix between land and expand for you? So, you know, I think NRR of about 108 right now, low to mid double-digit growth on the top line. Is that kind of a consistent profile and maybe, you know, see once the macro improves, that could accelerate, or how do you think about that? The way I like to really think about the dollar-based retention, where our sweet spot is, and I'll just use—I like to kind of use, like, rules of thumbs or a model. So let's just say we're growing 20%. If we're growing 20%, I would like to say, I want to have 50%-60% of that in my that growth coming from my install base. Mm. So, you know, think that is 110-112% DBRR. Because that's really the sweet spot, because that sits there and says, "We're keeping our customers, they're happy, they're growing with us," but it's also giving me 25-30% of my bookings coming in, are new customers. That gives me future runway to grow them. So I like having that mix. I think it helps us, gets to the right customer acquisition cost, but it also gives us the opportunity to continue to have that long-term dollar-based retention rate. So, you know, you never want to be 120%, NDRR- Mm-hmm ... at 20% growth, because at some point you're going to run out of runway. And at the flip side, you know, I don't want to have a very low rate because it says, you know, my customers aren't happy, or I don't have the ability to grow, and I don't get the leverage on the CAC. Got it. And, I see we're out of time. So, All right. Thank you very much. Thanks much, Sheldon. Yep. Bye.