Zuora, Inc. (NYSE: ZUO) Q2 2023 earnings call dated Aug. 24, 2022
Corporate Participants:
Luana Wolk — Head of Investor Relations
Tien Tzuo — Founder & Chief Executive Officer
Todd McElhatton — Chief Finance Officer
Robbie Traube — President and Chief Revenue Officer
Analysts:
Chad Bennett — Craig-Hallum Capital — Analyst
Luv Sodha — Jefferies — Analyst
Joseph Vafi — Canaccord Genuity — Analyst
Joshua Reilly — Needham & Company — Analyst
Andrew DeGasperi — Berenberg Capital Markets — Analyst
Presentation:
Operator
Good afternoon, and welcome to Zuora’s Second Quarter of Fiscal 2023 Earnings Conference Call. [Operator Instructions]
I would like to turn the call over to Luana Wolk, Investor Relations for introductory remarks.
Luana Wolk — Head of Investor Relations
Thank you. Good afternoon and welcome to Zuora’s second quarter fiscal 2023 earnings conference call. On the call today, we have Tien Tzuo, Zuora’s Founder and Chief Executive Officer; and Todd McElhatton, Zuora’s Chief Financial Officer; Robbie Traube, our President and Chief Revenue Officer will also be joining us for the Q&A session.
During today’s call, we’ll make statements that represent our expectations and beliefs concerning future events that may be considered forward-looking under federal securities law. These statements reflect our views only as of today and should not be relied upon as representative of our views as of any subsequent date. We disclaim no obligation to update any forward-looking statements or outlook. These statements are subject to several risks and uncertainties that could cause actual results to differ materially from expectations.
For further discussions of the material risks and important factors that could affect our financial results. Please refer to our filings with the SEC. And finally our discussion today includes non-GAAP financial measures. You can find the details in today’s press release which includes a reconciliation table of selected GAAP to non-GAAP measures that reflects the adjustments made to both our current and prior year’s results. Our results press release and a replay of today’s call can be found on Zuora’s investor relations website at investor.zuora.com.
Now, I’ll turn the call over to you Tien.
Tien Tzuo — Founder & Chief Executive Officer
Thank you, Luana, and thank you everyone for joining us today. Welcome to Zuora’s second quarter fiscal 2023 earnings call. Q2 was another solid quarter for Zuora. We exceeded guidance across all of our key financial metrics, including subscription revenue, total revenue and non-GAAP loss from operations.
As we continued to execute against the long-term plan that we have laid out. There is a lot to cover this quarter. We’ve got an exciting acquisition that we just announced. The first step in adding acquisitions to our land and expand strategy side-by-side with the organic innovation machine that we have built. There is the impact of foreign exchange rates, especially on cash flow. And I know that there are general questions on how the macroeconomic environment is affecting us. Later in the call, Todd will walk through how we’re thinking of all this from a financials impact perspective, but let me start with the big picture.
The net-net is that we have built a very resilient business. And I feel confident in our ability to navigate the current macroeconomic climate, not only do we have a recurring revenue business, our customers do as well. Of the recurring revenues with a resilient business model, we actually have a double layer of recurring revenue protection. But more than that, what we do is mission critical for our current customers. Just so, it’s an area that they are continuing to invest in. And finally the shift the subscription economy continues on, and the strategic to the growth prospects of companies in a variety of different industries. And so the forces driving demand for what we do continued to be intact. Against that backdrops, the strategy that we laid out 18 months ago is proving to be the right strategy.
First, we said that we would focus on the best companies in the subscription economy. Enterprises north of $1 billion in revenue as well as the fastest growing companies who are on track to become billion dollar companies. Our experienced told us that this segment of the market has lower churn and the resources needed to invest in growing the subscription businesses which ultimately are scale businesses, and this has been the right choice. In Q2, we saw our lowest churn rate as a percentage of entering ARR, since going public in 2018.
In Q2, we saw our customers doing even more with us adding more products and driving more volume through our system. In fact, if you look at our cohort of customers, a year ago with annual contract value above $500,000, this cohort has grown by over 40% in ARR year-over-year. And so you see our biggest customers are going all-in with us. And today we have over 60 large enterprise names with annual contracts of $1 million or more. In Q2, we continued to land more of these companies and take them live including leaders like BNP Paribas with over $46 billion in revenue, Santander with over 200,000 employees and Sodexo with over 400,000 employees.
Exactly two years ago, we said that by fiscal 2025, we expect it to be driving our business to 25% plus ARR growth, with a 112% to 115% dollar-based retention rate, while bringing down professional services to 15% of our revenue mix. In the last few quarters, we’ve made great progress against those goals and we did so again in Q2.
Dollar-based retention rates ticked up to 1 percentage point from 110% in Q1 to 111% up from a 108% from Q2 of last year. ARR grew 20% on a reported basis that would have been about 21%, if not for the headwind due to the continued strength of the dollar. We’ve already hit our professional services revenue target mix of 15% as a percentage of total revenue ahead of plan. And as a result, we saw improvements in blended gross margins to 67%, an increase of over 3 percentage points year-over-year as our subscription gross margin also continued to improve by over a 100 basis points year-over-year.
Third, we said that we would focus on global system integration partners to give us relevance and scale. And in Q2, our partners continued to deliver. We saw our SI partners participate in over 70% of new business transactions and the size of these deals have been trending higher each quarter. In fact in Q2, deals that were sourced by our SI partners were more than twice as big as they were just one year ago. These partners are also helping drive go-lives, were SI is involved — were involved with over 60% of go-lives in Q2. Importantly, our partners are providing key leverage to our model. In fact, one of the big four, now have sales people dedicated to looking for opportunities to sell Zuora into their customer base showing their investment and commitment to us.
Finally, we said the key thing that underpins all of this is our multi-product land and expand strategy. With our focus on large companies, we wanted to have multiple paths to get in the door and then different path to expand as we delivered more value. Let’s take one of the world’s largest auto manufacturers, who, after being a customer for many years, came to us for their leasing division to power all payments through our Zuora Collect product and they substantially expanded their footprint with us in Q2.
[Indecipherable] is one of the world’s largest media publications, it shows Zuora in Q1 to manage payments with Zuora Collect and they came back in Q2 to add Zuora Billing as a second major product, when it was clear that their previous in-house solution could no longer support the scale they needed to monetize the millions of subscribers. Zuora Revenue also continues to be a differentiator for us, with leaders like Microsoft expanding their investment with Zuora Revenue on Azure just this past quarter. In fact in Q2, we more than doubled our Zuora Revenue bookings year-over-year and almost half of our new business deals included our Zuora Revenue products.
And we’re continuing to innovate, we’re building even more ways to drive value and growth with our customers. In Q2, we launched Zuora Secure Data Share for Snowflake, this extended Zuora’s data into Snowflake Data Cloud without any customer integration needed, making it easier for our customers to analyze their monetization and subscription data with leading data platform on the market. And this brings us to our big announcement for today. It’s our first acquisition since the investment from Silver Lake, back in March. Our internal innovation machine is cranking as you know. But we continue to see a strong appetite in our customer base that exceeds even what we can develop.
And so we’ve been building our inorganic innovation machine. And this quarter, we’re excited to announce our acquisition of Zephr, and is expected to close in early September. Zephyr is actually an existing partner, it’s a team we’ve gotten to know well over the years. We’ve always been impressed with our shared vision, there are people in the technology and the feedback from joint customers who are using our pre-integrated solutions. And what Zephr offers is a leading subscription experienced platform, and they work with some leading brands across industries. Particularly, they’ve had a lot of traction in the media and digital publishing industries, which has been one of our core focus areas as well. And their customers include companies like News Corp, McClatchy, and Bauer.
So what is happening in the media industry that has created this opportunity for Zephr, why is the focus on the subscriber experience so important? Well, if you look at the success that this industry is having, specifically companies like Disney, which has overtook Netflix in subscriber growth or the newer clients who exceeded 10 million subscribers this year and is ahead by the subscription growth plans. What you see is the winners in the media industry are the ones who’ve been able to consistently experiment with new services, new bundles, new offerings and they are figuring out new ways that connects these services to the right subscribers at the right time.
This is what it means to deliver an optimal subscriber experience. And this is exactly what Zephr calls companies do. They offer capabilities like identity management, intelligent trials, dynamic paywalls and entitlements in asset managements. But most importantly, all of these capabilities is backed by a decision engine that helps deliver experiences personalized for every subscriber. So for example, Zephr will know that this is an anonymous user and to throw a promotion for a free trial or that user is an existing subscriber, but is prime for an upsell offer.
And all this is already working at scale. This technology is already handling nearly 8 billion requests a month for some of the biggest publishers in the world. Now, imagine this decision engine, powered by data from Zuora’s Billing, Collect and Revenue products, 10’s of billions of transactions each quarter. Now you’ve got an incredible platform that can help companies understand our subscribers, formulate the right digital offerings, optimize the digital experience, which we believe will drive up for them, conversion, retention and growth.
And finally, here’s a rough, where the media industry goes, other industries will follow, from software to financial services to retail and more. Companies in the subscription economy are ultimately going to have the same need to nurture these subscriber experiences and monetize these relationships over time. In the near-term for Zuora this means, we will have additional path both land new customers and expand within our existing customers in the media and publishing space.
But we also see the potential of this platform to go beyond this vertical, with additional new products and platform enhancements that we expect to be able to monetize in the coming quarters. To wrap it up, we had a solid quarter. We are mindful of the macroeconomic conditions, but we continue to be confident in our ability to navigate those conditions because of the resiliency of the subscription model and because our technology is mission critical. We have the right customer base. We have the right product. We’re confident that our land and expand strategy is working. We continue to innovate organically and now through acquisitions with all of this, while making steady progress towards our financial goals. Thank you to our ZEOs for their continued focus for putting our customers at the center of everything we do, and for driving another quarter of strong results.
Now, I’ll turn it over to Todd. To review our financials.
Todd McElhatton — Chief Finance Officer
Thank you, Tien, and thanks to everyone for joining our call today. Our second quarter financial results were solid. We continued to see the largest companies in the subscription economy doubling down on Zuora. This reinforces the long-term opportunity we see, despite the macro environment and foreign exchange volatility. We once again exceeded expectations for the quarter across the board and are pleased with our results.
Let’s start with top-line. Subscription revenue ended at $83.8 million growing 19% year-over-year constant currency and 17% as reported, exceeding the high-end of our guidance. This was driven by continued go-to-market execution. Professional services revenue was $15 million, flat year-over-year. As you recall, our mid-term objective was for professional services to represent 15% of our total revenue mix. As Tien mentioned, we’re pleased we’ve reached this goal ahead of plan.
Going forward, PS revenue will be at or slightly below 15% of our total revenue. This will result in stronger overall gross margins. Total revenue ended above the high-end of guide at $98.8 million, up 17% in constant currency and 14% as reported year-over-year. Non-GAAP subscription gross margin was 80%, an improvement of more than 100 basis points year-over-year Non-GAAP professional services gross margin was negative 3% in line with our goal to run at or near breakeven. We continue to see SI partners increased capacity allowing us to move more implementation services to them.
This growing partnership with SI has also created additional margin leverage. Our non-GAAP blended gross margin saw an improvement of 345 basis points year-over-year, ending the quarter at 67%. We will maintain a disciplined approach when managing our expenses in the second half, while accelerating investments and product development and forth carrying sales capacity.
Non-GAAP operating loss was $0.2 million, compared to an operating loss of $3.9 million in the prior year. This was driven by continued top line growth and disciplined investment in the business. This resulted in a non-GAAP operating margin of negative 0.2%, a 440 basis point improvement over last year. Our fully diluted share count as of the end of the quarter was approximately 162 million shares using both the treasury stock and if converted methods.
Now let me walk you through some of the key metrics for [Technical Issues] in Q2, we increased our dollar-based retention rate to a 111%, despite FX headwinds. This was an improvement of 1 point sequentially and 3 points year-over-year. Our multi-product land and expand strategy has accelerated within our installed base. Customers are coming to us for a full monetization platform. At the end of Q2, we have 745 customers that spend at or above $100,000 in ACV, a decrease of 1% sequentially. In Q2 the $100,000 cohort represented 95% of our business. More importantly is a success we’re seeing from our strategy of moving upmarket and many expanding with our large customer cohort.
The number of customers with ACV at or higher than $500,000 grew over 25% year-over-year. And we closed seven deals within ACV of $500,000 or more up, from 2% [Phonetic] a year ago. In the past, we also talked about the investments we’ve made in customer success. And this has led to the lowest churn as a percent of entering ARR since we went public. The close off of this metric, we do expect the number of customers at or above $100,000 increase in future quarters.
Our strong product portfolio is also unlocking larger and longer duration deals. In fact, this quarter, the average contract term was the longest since our IPO. This grow our total remaining performance obligations to grow $32 million from prior quarter, and 41% year-over-year.
Turning to billing transaction volume. Our systems processed $21 billion of volume in the quarter, representing 18% growth in constant currency and 16% growth as reported year-over-year. As we’ve noted before, process building transaction volume is not indicative of our revenue growth, because our customers gain cost efficiencies as they scale. This metric is helpful as it highlights the level of scale we offer our customers, another key differentiator for our solutions in the enterprise space.
Now looking at ARR and free cash flow. At the end of Q2, ARR was $337.6 million and grew 20% as reported, with about 1 point of headwind due to FX. We continued to make progress towards the goals we’ve laid out by fiscal 2025 of reaching ARR growth of 25% to 30%. Free cash flow was negative $7.6 million for the quarter. As a reminder, free cash flow may fluctuate on a quarterly basis due to the timing of cash collections and seasonality. We made a best to assess our cash flow performance over longer-term, as I’ll discuss later during the month of July, we observed some collection finding pushing up by a few days on average. Total capex for the quarter was $2.8 million.
Turning to the balance sheet, we ended the quarter with $449 million in cash and cash equivalent, a sequential decrease of $4 million. Before I turn to outlook, let me give you some color on our pending acquisition of Zephr. As Tien noted, this acquisition adds some great customers and strengthens our position in media and publishing one of our key verticals. This addition to our product portfolio also gives us a holistic solution to establish, nurture and monetize subscriber relationships. Beyond media vertical, we believe this technology will bring value to our wider customer base. With other expand solutions that we will be able to bring to market in coming quarters.
Under the terms of definitive agreement, Zuora will acquire Zephr for $44 million in cash with a potential earn-out of an additional $6 million, if certain ARR growth objectives are achieved by the end of our fiscal year. This transaction is subject to customary closing conditions. Zephr’s current ARR is approximately $5 million. We expect Zephr to add approximately $2 million for our subscription revenue in the second half of fiscal 2023. When the transaction closes, we don’t expect a material impact on our consolidated non-GAAP operating loss. We’re committed to managing our bottom line and plan to absorb the incremental opex in the second half of this year.
Now let’s turn to our financial outlook. While we continue to see double-digit growth in our pipeline for our solutions, we believe it’s prudent to de-risk our second half given the current macro environment. We will continue to be nimble and discipline on how we invest for growth, while working towards our long-term financial target. Our revised full year outlook assumes an impact to subscription revenue due to FX and macro uncertainty and a $2 million benefit from Zephr. For professional services, we are accounting for both FX impact and our strategy of moving implementation services to our SI partners. Looking ahead, our professional services revenue mix will represent 15% or slightly less of our total revenue mix.
Turning to Q3. Our outlook is, we expect the following. Subscription revenue at $85.5 million to $86.5 million. Professional services revenue at $14 million to $15 million. Total revenue of $99.5 million to $101.5 million. And non-GAAP operating loss of $2.5 million to $1.5 million. We have yet to finalize the purchase price accounting including tax impact for Zephr. Excluding these impacts, we expect a non-GAAP net loss per share of $0.06 to $0.05, assuming a weighted average shares outstanding of approximately 132.7 million. Subsequent to the close of the acquisition we’ll provide any adjustments.
For the full year, we are revising our revenue outlook. We now expect subscription revenue of $337 million to $341 million. Professional services revenue of $57 million to $59 million. Total revenue of $394 million to $400 million, a non-GAAP operating loss of $2 million to breakeven. And excluding the potential purchase price accounting and tax impacts of Zephr, we expect non-GAAP net loss per share of $0.18 to $0.14 assuming a weighted average shares outstanding of approximately 131.6 million.
Next, let me review our free cash flow outlook for this year. We’re revising our outlook based upon two trends we’re currently seeing. First approximately 35% of our revenue mix is international, which is more heavily weighted versus other companies of our size. We believe this global footprint is an advantage, however, this year our FX mix exposes us through the strength of the dollar. We’re seeing the FX impact from our international customers at the time of renewal and to a lesser extent from net new booking. Based on current trends, we anticipate foreign exchange impact being approximately $16 million.
Second, the timing of collections is impacting our free cash flow. In the most recent quarter, we saw a few days increase on our average collection time. We believe it’s prudent to expect this trend will continue for the balance of the year. Now this appears to be simply a delay in payments as we have not seen an impact on overall collectability of our receivables. As a result, our free cash outlook assumes that $4 million will be pushed into next fiscal year. These are the primary two factors impacting the guidance. Our prior guidance for pre-cash flow was $6 million to $9 million. We now expect free cash flow for the year to be between negative $16 million to negative $13 million.
This does not include the impact of acquisition-related expenses associated with the Zephr transaction. We expect these expenses to be approximately $4 million. If it weren’t for the impact in FX and collection timing of $20 million, we would have been cash flow positive and within our guided range for the year. We’re managing the business based on the current trends we are seeing and are committed to running a disciplined business. We’re maintaining our goal to drive towards a Rule of 40 by fiscal year 2025. As a reminder, the Rule of 40 is defined as the sum of year-over-year subscription revenue growth rate plus free cash flow margin.
For the full year, we’re maintaining our previous targets of dollar-based retention rate of 112% and better, and ARR growth of 21% or better. To close off, Q2 demonstrates the strategy we laid out the focus on the enterprise is working. We continued to land and expand with our customers, offering them a differentiated monetization platform. Our mission critical technology is transforming business and allows us to be very safe. We believe it puts us in a position to deliver strong top line growth with an eye towards profitability, we are confident in the strength of the subscription economy. Before moving to Q&A, I’d like to send a big thank you to all of our employees around the world for their incredible dedication and commitment.
With that Tien, Robbie and I are happy to take your questions. And I’ll turn it over to the operator.
Questions and Answers:
Operator
[Operator Instructions] Your first question comes from the line of Chad Bennett with Craig-Hallum Capital. Your line is open.
Chad Bennett — Craig-Hallum Capital — Analyst
Great. Thanks for taking my questions. So just maybe a point of clarification first for Todd, just on the FX impact. You laid it out in the press release, the impact in the quarter both on subscription revenue and overall revenue is 2 points to subscription and 3 overall. And then you gave a $16 million free cash flow impact for the year. I guess just in your guide, because you didn’t give it in the release, what is the FX impact on your revenue guide subscription and overall for the second half?
Todd McElhatton — Chief Finance Officer
Hi, Chad. So thanks a lot for the question. So I think what you see on the overall guide, we took revenue on the subscription piece to $337 million to $341 million. And I think if you take a look at what we did as we said, there is $2 million that we went ahead and we added in for Zephr, and then the balance would be what we de-risk to get to that guide of $337 million to $341 million. So you’ve got a couple of million dollars worth of risk there, and then we didn’t flow through the extra $1 million that we beat on the top end for subscription revenue in Q2.
Chad Bennett — Craig-Hallum Capital — Analyst
But is that — when you talk about de-risk, is that FX impacted risk or is that actual business getting done risk in the second half? Because the FX is a pretty big headwind and I assume we didn’t think rates…
Todd McElhatton — Chief Finance Officer
I’m sorry. Go ahead.
Chad Bennett — Craig-Hallum Capital — Analyst
I assume you didn’t — rates are dramatically different from when you reported last quarter. So FX is a real headwind, so is it purely FX or you’re seeing a slowdown in the business?
Todd McElhatton — Chief Finance Officer
It’s almost all FX.
Chad Bennett — Craig-Hallum Capital — Analyst
Okay. And then just in terms of new logos. It sounds like the SI’s are certainly more impactful, more influential on deals. And obviously deal size is up significantly year-over-year. But from a new logo deal count standpoint, are we actually kind of volume-wise doing more new logo deals year-over-year? Or are we kind of replacing direct deals with outside deals in its net-net wash?
Todd McElhatton — Chief Finance Officer
Yes. So I think what I would go ahead and tell you is, I’m not overly concerned about the metrics, and let me just walk through why. We talked — I think you just hit on it, we talked about the transformation that we’ve gone through over the past few years. The biggest companies are companies that we are focused on. And if you take a look at what we’ve done over the past couple of years is, we’re focusing on these larger customers. You’ve seen year-over-year our ASPs doubled. Number of customers over $1 million, ARR is not 60 [Phonetic] and that SIs are doing more and more of the integration. And so we’re bringing in much larger companies.
At the same time, some of the companies that we had focused on in the past weren’t a great fit, and those are washing out, and those were companies that maybe haven’t had a successful business launch with subscription or they just put very minimal business through. So if these companies are kind of transitioning out, we’re replacing them with much larger companies in the platform, and these are the companies that we believe will grow a whole lot faster. And Tien referenced the fact that if you take a look at our customers that cohort of revenue over $500,000, you’ll notice that, that actually grew 40% year-over-year.
So look, as we go through this transformation, I think you’re just seeing the end of it on some of the customers that we have brought on a couple of years ago that aren’t a good fit, they’re going out. So I think in future quarters, we’re going to have a little bit of noise in this metric. But in general, the bottom line is, I think is to be a really natural evolution to our customer base and feel good about it.
Chad Bennett — Craig-Hallum Capital — Analyst
Got it. And then maybe one last one real quick on Zephr. Just in terms of — it seems to me more like kind of a B2C focused subscription experience offering maybe less so B2B, but I could be wrong. But just in terms of kind of how they price in nature of contracts there, in kind of the growth of the business. Obviously, it’s a small business, but do we expect that business or has that business kind of doubled year-over-year? Any kind of color there. Thank you.
Tien Tzuo — Founder & Chief Executive Officer
Sure. This is Tien. I’ll jump in there. The company has been around for three to four years, it’s going to call it $5 million of ARR with the vast majority of company in the media space. Look, it’s — as of many companies — start-up companies sub $10 million, they’re looking to get traction in the marketplace, but not necessarily optimizing their pricing or the revenue potential. But we’re really excited about it, because they are bringing to us 70 new logos. We now have the opportunity to sell our products into their base since media has always been a big focus to ours.
We have not been able to sell what they have into our base. The products are very, very complementary. Our data fed into their decision engine to drive that subscriber journey to subscriber experience, really a no-brainer for many of these companies. And so we’re pretty excited about it. And I think the big picture is, we’ve always talked about how our key part of our strategy is this land and expand strategy. We’re going to continued to sign on new logos, the key for us is to sign on the right logos, right type of companies that continued to invest in the subscription economy that could be worth, call it a $1 million or more, and then continue to expand our footprint within those companies by delivering more innovations, more value, you’ve seen us execute our strategy really, really well over the last call it two years.
And what we said at the start of the year, especially with the investments in Silver Lake is we wanted to add an acquisition vector, if you will, side-by-side with our organic innovation vector. And this is really the first step in that journey, we’re pretty excited about it. But we do see this as an opportunity for us to continue to drive the growth that we’ve been delivering over the last two years.
Todd McElhatton — Chief Finance Officer
[Speech Overlap] I’ll give you, Chad is, they do come to us about $5 million of ARR, and they have been growing a very healthy clip, you think about that over 60% annually.
Chad Bennett — Craig-Hallum Capital — Analyst
Got it. Thanks for the color. Seems like a good fit.
Tien Tzuo — Founder & Chief Executive Officer
We’re excited about it. Thanks.
Operator
Your next question comes from the line of Brent Thill with Jefferies. Your line is open.
Luv Sodha — Jefferies — Analyst
Hey, Tien, hey, Todd. This is Luv Sodha on for Brent Thill. Thank you again for taking my questions. Maybe just to clarify on the previous question around the guidance, Todd. So you are saying that no macro headwinds have been embedded into that guide?
Todd McElhatton — Chief Finance Officer
We de-risk the numbers, the vast majority of that was FX, but we’ve been prudent as we thought about what the second half looks like, and we’ve got pretty good visibility, what the pipeline looks like and how we’re putting our deals together. So we think we’ve got an appropriate guide for — have to based on the current environment.
Luv Sodha — Jefferies — Analyst
Got it. And that’s — you’re assuming that the current environment stays as it is or gets a little bit worse?
Todd McElhatton — Chief Finance Officer
We’re assuming it as is.
Tien Tzuo — Founder & Chief Executive Officer
Yes, I would say, look, what we’re seeing is the demand for what we do, continues to be strong, both in our customer base and in the broader market at large, all right. That being said, look, it was I do reading the press out there, people are talking about possible recession, and so on so forth. And so we’re going to be smart and prudent in this, but what you’re seeing is, FX definitely is a big impact for us with 35% of our customers being international. We’re taking that into account, we’re being cautious about the future and trying to make sure that we’re doing our best job guiding you all.
Luv Sodha — Jefferies — Analyst
Got it. In terms of the current pipeline, have you seen any deal pushouts, or is it taking longer to get deals done, given the current environment?
Tien Tzuo — Founder & Chief Executive Officer
Yes, we’re seeing a mix picture there, maybe Robbie could be a jump in here. But we’re seeing both deals go longer, but we’re also seeing a lot of deals actually the shorter sales cycles. So it really is a mixed picture for us. And I would say the root of that is, what we do is important. So our customers are continuing to invest in this area, as you’re seeing that in the numbers right in increase in dollar-based retention rate and the decrease in churn, but it’s also still relevant for all companies moving to the subscription economy.
Robbie Traube — President and Chief Revenue Officer
[Speech Overlap] I think the only other thing I’d say is, we continue with the multi-products right, it allows us of somewhat avenues that we can go into, like demand or the collect, as we talked about in terms of large also organization, we look at the large publisher that’s also come in the second quarter also with another products. So again I command in many different places around that. So absolutely, we can see good positive momentum then, for certain macro environment, we just going to be operationally lot more vigor and there we focus on that side, and we’ll continue to do so.
Tien Tzuo — Founder & Chief Executive Officer
Yes, that last point I would emphasize, right, Robbie runs a tight ship, he runs a tight operations and that discipline in the organization certainly is something that it’s incredibly important, when there is macro level of noise or macro level of uncertainty.
Robbie Traube — President and Chief Revenue Officer
Got it. And one last one, if I may on Zephr. Any lessons Tien from the ZEO deal back in the day that you’re bringing to bear here in terms of the integration plan? Thank you.
Tien Tzuo — Founder & Chief Executive Officer
Yes. So, absolutely, I mean look, this is a modern technology, the company was founded four years ago with ZEO they’re spending with on-premise software, single tenant software that we had a sort group, made the integration much more challenging. We’re not going to have a lot of those problems here, right? They’ve already built an integration, we’re going to deepen that integration now that’s under one umbrella. We do have joint customers. And so look, we’ve learned a lot, I would also say, it’s a brand new team here right with Todd, Robbie with Andy Cohen and our General Counsel side that drove a whole bunch of acquisitions by BMC.
So we’re feeling pretty good, not just above what we’ve learned. But our ability to do a good job bringing on this asset. And the last thing I would say is one of the reasons we picked Silver Lake as a partner who had joined the Board is they’ve got a deep bench of experience in this area as well. So look, you always going to be smart, you always want to be careful, you always want to make sure that you do a good job, but I’ve got a lot of confidence in our ability to execute.
Todd McElhatton — Chief Finance Officer
Maybe the other thing I would add, Luv is, we have built capacity to specifically work on integrations. I think we’ve got a very good plan that goes out literally all the way through every step that needs to happen over the next 18 months, we’ll have pretty good integration of the two organizations the beginning of next — our next fiscal year. But it’s been really well thought out put together and the team that’s running it has experience doing it in the past and successful experience.
Luv Sodha — Jefferies — Analyst
Perfect. Thank you.
Operator
Your next question comes from the line of Joseph Vafi with Canaccord. Your line is open.
Joseph Vafi — Canaccord Genuity — Analyst
Hey guys, good afternoon, nice to see the acquisition. Maybe just one more follow-up on Zephr here. I know you’re really focused on the land and expand, and I know you had a good media presence, these guys have a good media presence. Do you see kind of the forward playbook here early with Zephr more as a cross-sell or perhaps kind of a bigger sales effort on new logos? And then related to that, how well does your products fit into kind of a Zephr go-to-market? How do your products on a cross-sell basis fit with them? And then, I have a quick follow-up.
Tien Tzuo — Founder & Chief Executive Officer
Yes, I would say look, if you look at the big picture, the media’s space is certainly an explosive space. And absolutely with many ways is moving into a new phase, yes, if you just look at streaming for a long time, Netflix is a one horse race, if you will, but now competition is increasing and the companies that are winning the way Disney that caught up with Netflix and exceeded them it’s pricing, it’s offering, it’s bundling, it’s not having one size fits all strategy, they’re saying, look, we got to Hulu, we’ve got ESPN, we got various Disney plus bundle, we can bundle the whole thing together.
If you look what the New York Times has done, their ability to exceed 10 million subscribers when they started this journey they weren’t even sure they’re going to get to 1 million that the same thing, it’s pricing, it’s bundling, it’s the athletic, it’s riddle, it’s cooking, it’s all another offering that they have. And so, in order to execute those strategies which every media company is going to do — is going to need to do, is you have to have both things, you have to have a lot for the monetization engine, which is certainly what we do. And you have to have a lot for the experience engine, the customer journey engine, which is what Zephr brings to the table. And you have to have these two things working really closely together.
And so, we’re pretty excited that this is the offering that can help companies have the same type of success as you’re seeing through the space, and so cross-selling us into their customer base, cross-selling their product into our customer base, taking both products into brand new logos, those are all things that we’re going to be focused on. And the last thing I’ll say is, there is nothing specific here to the media industry, I think they’re just a little bit further ahead, but any B2C company and I think the previous caller had a question about B2B, this thing is also applicable to B2B as well, where we would like technology.
But sort of really any company and the subscription economy is going to have to do the same type of things. And so we’re pretty excited about this acquisition, we think it really broadens our footprint, it gives us an unique offering to continue to lead in the subscription economy, and I think this is going to be a big, big game changer.
Joseph Vafi — Canaccord Genuity — Analyst
All right. And then just to follow-up kind of a higher level picture, just kind of where the business is today versus a year ago or so? Things are kind of humming along pretty well these days. If you kind of look at new logo wins as kind of enterprise businesses versus kind of, I guess, maybe more subscription native businesses. If you look at the mix now versus a year ago, and then if you talk about points of growth on upsell, where you’re seeing that, is it in more in the kind of enterprise segment or maybe — or the mix between enterprise and kind of subscription-native businesses? Just trying to get a feel for where the faster current is for you these days? Thanks a lot.
Tien Tzuo — Founder & Chief Executive Officer
I would say the big changes you’ve seen us in — starting about two years ago is we really took our experience working with a whole set of customers and really figured out who are the best customers, right? And so we have a sense of which company is going to be the winners in the subscription economy that can build $1 billion subscription businesses because we believe that, that is where the growth is going to be. And so we’re doing a good job taking and choosing the right companies to land, and then our expand strategy will take over.
In terms of which companies to land, you’re going to see both. You’re certainly going to see — continue to see subscription native companies, the best SaaS companies, best media companies as an example. But look, with our unified monetization, we’ve been saying that while we want to be subscription first in terms of where the world is going, we don’t want to be subscription only. And so the unified monetization module, for example, already has upwards of 60 customers that are using us to go beyond subscriptions. And you’re going to see us really be able to broaden our focus and sign up companies that are committed to the subscription economy, but perhaps have a mixed business model that we can bring them along for the journey.
Joseph Vafi — Canaccord Genuity — Analyst
Thanks, Tien.
Operator
Your next question comes from the line of Joshua Reilly with Needham & Company. Your line is open.
Joshua Reilly — Needham & Company — Analyst
Hey, guys. Thanks for taking my questions, and nice execution here in the quarter. Maybe just starting off, what are you seeing in terms of demand in Europe? And how should investors think about your mix of pricing of international contracts in local currencies versus the U.S. dollar? And then do you ever move all of that pricing just to U.S. dollars? Does that make sense? Or would there be an issue with that?
Todd McElhatton — Chief Finance Officer
Yes. So let me take the first question here from a standpoint of the waiting of contracts that are outside. So we talked about 35% of the business is outside. A very high percent of that is contracted in local currency. We’re a global company. And frankly, what we’ve seen is the expectation of our customers is that they want to contract in their local currencies. And so that’s how we have done business because that gives them an advantage to playing in the market and acting more like a global type company. So that was your question there. I forgot what your first question was.
Tien Tzuo — Founder & Chief Executive Officer
I would say, look, overall, we see that as a strength, right? That a company of our size and scale typically is going to be almost U.S.-only, but we started focusing on international or global marketplace. The subscription economy is a global trend, certainly it’s not a U.S. trend. So overall, we see our geographical mix of our business as a strength. Now certainly, this year, with the strength of the dollar, the admirable strength in the dollar is making it a little bit more work on our side and assure we manage the business well.
And I think Todd is doing a good job with that. But we see that as a strength, and I don’t know that I want to over-index, right? Push customers to do anything unnatural and force them into a U.S. currency when currencies tend to go up one year, down another year, it’s not something that we want to — we want to manage the business in a smart, healthy way to do the right thing for the customers.
Todd McElhatton — Chief Finance Officer
And Josh, I guess going back to your first question on what we’re seeing in EMEA. I think Robbie hit it earlier, we’re continuing to see really good demand there is some noise out there. Europe is probably the place where we’re seeing the most noise, but we do feel really good about the demand generation that we’re seeing and the pipeline is up in nice double-digits year-over-year. So we’re still seeing that. We’re having good interactions with customers. And as we thought about the second half guidance, we took that into account.
Joshua Reilly — Needham & Company — Analyst
Got it. And then a couple of other quick ones. You mentioned the free cash flow is down on the extended collections times with some customers. Is there any particular vertical or customer size with the delayed payments? And then I got one other quick one.
Todd McElhatton — Chief Finance Officer
Sure. So let me take you through what we’re seeing on the free cash flow. So as I mentioned, we’re seeing about — we’ve got a $4 million worth of risk there. And I want to take you through what we’re seeing, and I would start first off is, this is not any concern that I have on collectability. We have a really good base of solid enterprise customers.
And in fact, if I take a look at my ARR that’s over 60 days, it’s less than 2%. So I don’t have any collectability issues. What we have seen is a couple of things. One is, we have a group of customers that have pretty consistently paid early, and we’ve seen a big slowdown in that. And the second thing is, we’ve seen from customers, especially some larger customers, seem to be pushing things out a few days at the end of the quarter, and that’s sliding for us. So those are the two primary things that we’re seeing.
I believe that it’s prudent to project that, that’s going to continue, and that $4 million will get pushed into next year. But again, no concerns about the overall health of the business or our ability to overall collect. And the last thing I’d say is, we’ve really got a fantastic collections team, and they’ve stayed on top of this. And so I feel good.
Tien Tzuo — Founder & Chief Executive Officer
Yes. If you simplify it down, Todd is basically saying the last few weeks of the fiscal year, as some of those collections get pushed out, right? We want to make sure we set expectations that we guide you guys to the right place. But operationally, it’s not — there’s no real impact on the business.
Joshua Reilly — Needham & Company — Analyst
Got it. And then last quick one. Is there anything to note on the calculated billings? I have it at about 14.5% in the quarter, any moving parts there that we should be aware of either this quarter or the rest of the year? Thanks guys.
Todd McElhatton — Chief Finance Officer
So a couple of things, Josh. One is, I hate going to the calculated billings because of all the noise in and out. We talked about ARR, which I think is probably the best way to look at the business. We had 20% growth there. If you take a look at headwinds with FX, that would have been closer to 21%. Now, on the calculated billings because you brought it up and you’ll see it when you see the contract assets, we’re having about 17% growth there. If you look at that in constant currency, it is 22%. And then I think if you look at the…
Tien Tzuo — Founder & Chief Executive Officer
Subscription calculated. bills.
Todd McElhatton — Chief Finance Officer
Yes, subscription calculated billing. And then if you take a look at the first half, we’re about 24% growth on the calculated billings. But again, a lot of noise on that. And the real thing that we’re really trying to get people focused on is that ARR.
Tien Tzuo — Founder & Chief Executive Officer
The other thing you might want to point to is RPO.
Todd McElhatton — Chief Finance Officer
Yes, I should have hit RPO, too. Look, we had a really fantastic quarter on the RPO, up 41% year-over-year.
Tien Tzuo — Founder & Chief Executive Officer
So what you can see is, look, FX is an impact on our business. We certainly are managing it. We’re simply — we’re going to adjust a lot of what we do based on it. We’re not going to do anything abnormal. We’re still in a mode where we want to invest in the business. We want to build technology, we want to hire more quota capacity in our sales organization. We see the demand there. But look, we’re going to be smart. We’re going to assume that the FX environment is going to continue, we’re going to build that into our plan, but we also want to be transparent to you all in terms of what the financial impact is of FX through the end of the year.
Joshua Reilly — Needham & Company — Analyst
Got it. Thanks guys.
Todd McElhatton — Chief Finance Officer
Thanks, Josh.
Operator
Your next question comes from the line of Andrew DeGasperi with Berenberg. Your line is open.
Andrew DeGasperi — Berenberg Capital Markets — Analyst
Hi everyone. Just wanted to ask a question on the M&A side, mostly big-picture strategy. I mean, now they acquired Zephr. Just wondering, given some like gave you a lot more dry powder behind that, do you still see potential for M&A activity in the near future? Or do you expect to focus a lot more on integration of this asset?
Tien Tzuo — Founder & Chief Executive Officer
I would say, as you know, we took $400 million from Silver Lake this transaction, call it $50 million. And so we still have a lot of dry powder. We’re not — we don’t have any specific time lines to do that. We’re seeing this as a long-term gain. But we spun up an M&A machine that is in gear right now. It’s certainly looking at other opportunities all the time. We’re going to make sure our priority is to make sure we do a good job integrating the Zephr folks. We’re already starting down that path. We want to make sure that we optimize this acquisition and the benefits that we see from it, we’re pretty excited about it. But we do have an M&A machine that is spun up that’s making sure we’ve got our ear on the ground looking for future opportunities as well.
Todd McElhatton — Chief Finance Officer
Yes. I think, as Tien said, this is the first one that we’ve done, and you’ll certainly see other things, and we’ll do it on the time line that makes sense. We find the right opportunity that can add value for our shareholders.
Tien Tzuo — Founder & Chief Executive Officer
Last thing is, you can see us being really thoughtful here, right? Zephr was a partner. It was certainly a company that we knew. Feel free to dig into it, but the idea for Zephr was actually at one of our subscribed events years ago where James and Chris, two founders, were talking to some of our customers in the media space. And so we’re looking to make sure we do everything to de-risk our first few transactions as we get more success under our belt with this new strategies.
Andrew DeGasperi — Berenberg Capital Markets — Analyst
That’s helpful. And then maybe on the — some of your peers have announced a slowdown in the pace of investment or at least I’m looking at it. Just wondering if given the current environment has changed since a few months ago, have you taken a look at your strategy? And do you see any changes on the horizon?
Todd McElhatton — Chief Finance Officer
Yes, I’ll take that, Andrew. We’ve absolutely taken a look at the second half of the plan. We’ve been thoughtful about how we’re going to invest, and we have made some adjustments to it. But that being said, we are going to continue to invest in quota-carrying assets and development. We’re still a growth business. And so we will continue to do that. And the other thing that you’ve also noted is, we’re going to absorb the operating expense from Zephr acquisition into our hiring plan.
Tien Tzuo — Founder & Chief Executive Officer
Yes. I mean I want to make sure that we don’t get lost. Look, we’re still a growth company. We’re still in a marketplace that we believe is growing, that we know is growing. That being said, right? You’ve seen how Todd has managed the business over the last two years. He’s certainly very prudent. We joked that prudence is his middle name. And so the decision, for example, to make sure that we absorb Zephr into our existing operating plan versus having it be additive to expenses was a smart decision, and you’re going to see us continue to be disciplined in our approach.
Andrew DeGasperi — Berenberg Capital Markets — Analyst
Great. Thank you.
Operator
There are no further questions. Now I’ll turn the call over to Tien Tzuo, CEO, for closing remarks.
Tien Tzuo — Founder & Chief Executive Officer
Well, thank you for joining us. Thank you for joining our Q3 call — Q2 call. We look forward to talking to you in 90 days. Thank you.
Operator
[Operator Closing Remarks]