Zuora, Inc. (ZUO) Q4 2021 Earnings Call Transcript

Zuora, Inc.  (NYSE: ZUO) Q4 2021 earnings call dated Mar. 11, 2021

Corporate Participants:

Carolyn Bass — Investor Relations

Tien Tzuo — Founder and Chief Executive Officer

Todd McElhatton — Chief Finance Officer

Analysts:

Joe Vafi — Canaccord — Analyst

Scott Berg — Needham — Analyst

Luv Sodha — Jefferies — Analyst

Chris Merwin — Goldman Sachs — Analyst

Stan Zlotsky — Morgan Stanley — Analyst

Presentation:

Operator

Good afternoon and welcome to Zuora’s Fourth Quarter and Fiscal Year 2021 Earnings Conference Call. Joining us for today’s call are Zuora’s Founder and CEO, Tien Tzuo and CFO, Todd McElhatton. At this time, all participants are in a listen-only mode.[Operator Instructions]

With that, I would like to turn the call over to Carolyn Bass, Investor Relations, for introductory remarks.

Carolyn Bass — Investor Relations

Thank you. Good afternoon and welcome to Zuora’s fourth quarter and fiscal 2021 year-end earnings conference call. Joining me today are Tien Tzuo, Zuora’s Founder and Chief Executive Officer and Todd McElhatton, Zuora’s Chief Financial Officer.

The purpose of today’s call is for us to review our fourth quarter results as well as provide our financial outlook for the upcoming first quarter and fiscal 2022-year. 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 in our most recent filings with the SEC.

Finally, we’ll be referring to several non-GAAP financial measures today and reconciliations to related GAAP measures are included in our earnings press release. Please note that in Q2 of fiscal 2021, we began to exclude litigation charges and the benefits outside of the ordinary course of business from our non-GAAP financial measures. For a copy of our earnings release, links to our SEC filings and 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.

Tien Tzuo — Founder and Chief Executive Officer

Thanks, Carolyn. I’d like to welcome everyone to our call. Thank you for joining us today on Zuora’s earnings call covering our fourth quarter and our fiscal year 2021. Overall we executed well in this quarter. We exceeded expectations across our operating results, including total revenue, subscription revenue, non-GAAP gross margin and non-GAAP operating income. We posted our first full quarter of positive free cash flow and we had a record upsell quarter, reflecting good momentum with our land and expand go-to-market strategy.

During the past year we solidified our leadership team, improved our go-to-market with alliances and partnerships and invested in our product road map, including our platform. In short, Q4 was a strong cap-off to a year of transformation. We coined the term Subscription Economy and we intend to grow at the rate of the Subscription Economy to be an index, if you will, of one of the biggest trends of our time. This requires us to continue to make progress in solidifying our position as an indispensable solution provider to the best subscription businesses.

For example, in previous quarters we said our market opportunity resonated with bigger companies. Customer preferences are changing. A new survey from the Harris Poll found that 78% of international adults currently have subscription services, up from 71% just two years ago. This is forcing big brands to rethink how they continue to drive growth in their revenues and turn their customers into subscribers. To meet the growing demand from these bigger companies, we realigned our go-to-market efforts last year and our Q4 results reflect those efforts. We continue to see our messaging resonate with larger brands. I’ve been having meaningful conversations with C-level executives at some of the biggest companies in the world. They are coming to us for our expertise and staying with us for our technology.

We continue to close larger deals. In Q4, we closed a record eight deals with an annualized contract value, or ACV, with $500,000 or more continuing the trend of Q3 where we closed the biggest deal in the Company’s history. Our services team has adapted to this change.

During the quarter, we helped over 40 customers go live and many — many of these were large enterprises like Acer computers, Bridgestone Tyres, Radio-Canada and Riverbed and one of the biggest Italian clothing brands. And all the while doing this, while we continue to bring down time to go live and delivering our customer value faster. We continue to invest in customer success. This year we saw upsells with some of our largest customers in automotive, software and the media industries and all this is happening around the world. Geographies outside of the US continue to be a growth opportunity for us as we are seeing increased uplift in Asia-Pacific and in Europe.

Let me share two quick customer stories which help illustrate the value we bring to our customers. Using this top [Phonetic] and previous quarters about our work in technology, media, manufacturing and utilities industries. In Q4 we welcomed a new customer from the financial services industry. If you read the press, you may think that this is an industry under attack and being picked apart by high flying fintech startups. But the fact is veteran financial services institutions have the customers, the brand and they have enormous resources at their disposal. What they need is agility and that’s where we come in. Today we are helping one of the world’s largest and oldest banks to take the offensive by launching competitive new consumer and corporate services offerings, where they get then [Phonetic] the ability to launch new products and services in weeks instead of months or even years. Zuora has given them the digital agility and insights of a start-up.

Similarly, one of the most dramatic shifts we are witnessing are manufacturers moving from one-time product sales to selling recurring services to their customers. Last year, for example, revenues of companies in our Subscription Economy Index — from 12% while revenues in the S&P 500 declined by 2%.

A great example of this shift is Grundfos, the world’s largest water pump manufacturer. The Grundfos story is a great, great example digital transformation. This is a 75-year old company shifting from selling water pumps in boxes to delivering water as a service and they are using Zuora to monetize the usage data coming from the sensors on the pumps. With new as-a-service offerings companies like Grundfos are doubling down on a recurring subscription approach to cater to their customer demand for access over ownership. You can hear more stories like this at our annual subscription experience event taking place virtually from March 23rd to the 25th where we’re going to have leaders from Philips, IBM, Microsoft, Xerox and others that will showcase how they are using Zuora to help launch and scale their customer-centric business models and grow their recurring revenue.

In previous quarters we shared our enthusiasm for Zuora Revenue. Revenue recognition in a subscription world is very complex and solving for this complexity is challenging. Zuora Revenue enables our customers achieve a faster quarter close, minimized compliance risk and more precisely forecast of any impact of their business decisions.

Well in Q4 we saw the combination of Billing and Revenue was turning out to be a powerful one. Approximately one-quarter of our new customer wins in Q4 included both the Zuora Billing and Zuora Revenue. A good example is Sophos, a world leader in the next generation cyber security who in Q4 turned to Zuora to help with its quote-to-cash transformation. By selecting the combined power of Zuora Billing and Zuora Revenue, Sophos can go to market faster with new pricing models and improved their operational efficiency. This is why we continue to power many of the SaaS IPOs this year.

For one of these SaaS customers, we decreased their close time from two weeks to two days. The combined Zuora Revenue and Zuora Billing solution is eliminating manual processes and automating reconciliation, data gathering, accounting validation and revenue recognition. And in fact our NPS and customer satisfaction surveys clearly show that our most satisfied customers are the ones using both Billing and Revenue.

In Q4 we also continued to add to our leadership team. In January, I was incredibly pleased to welcome Sri Srinivasan as our Chief Product and Engineering Officer. Sri joined Zuora with more than 25 years of engineering and product development experience, having played a key role in the SaaS transformations of multi-billion dollar companies including Cisco and Microsoft. Sri has a perfect background for Zuora. He is [Indecipherable] ERP having worked on running Microsoft Dynamics’ product line for over a decade. He has tremendous experience in scaling engineering teams worldwide. He has a general manager’s mindset. For example at Cisco he ran $6 billion business unit with multiple GMs reporting to him. And most importantly Sri has hands-on experience of working with the biggest and best companies in the world. We are thrilled Sri has joined our leadership team.

In previous quarters, we shared that system integration partners are a key component in our go-to-market strategy. In Q4, we saw more of our SIs actively indulging in sourcing new deal activity for Zuora. As you know, at the onset of last year we realigned our alliances team to deepen our relationships with our SIs. As a result in Q4 SIs brought us more deals with prominent marquee customers. But eight deals at over $500,000 that I mentioned previously three-quarters of those large deals were either influenced or sourced by our system integration partners. SIs are driving successful deployments. Over 40% of our customer go-live in Q4 involve a system integration partner. And we’re encouraged to see large SIs such as PwC, Accenture and Deloitte building what we call primed practices where they invest in strengthening their Zuora practices. In these cases our salespeople are selling alongside our SI partners and in fact during fiscal 2021 these primed SI deals more than doubled over the prior year. These are all proof points that our strategy to move upmarket and leverage our SI channel is working.

We said before that our long-term strategy is to work with the biggest and best companies in the world, both disruptors and incumbents and we continue to execute against that plan. I also believe that last year was a truly pivotal year for Zuora and marked a yield inflection point for digital acceleration. You’ve all been reading it in the headlines and you’re seeing it in the market.

According to KPMG for a majority of US CEOs the pandemic has meant an acceleration in digital transformation by months or even years. The move to digitization has accelerated and the benefits will be permanent. There is no going back, says the report. And according to McKinsey businesses that once mapped digital strategy in once-in-three-year basis must now scale their initiatives in a matter of days or weeks. And we are certainly seeing this market shift in terms of in-bound [Phonetic] request and RFPs.

In summary we are pleased with our execution this quarter, capping off an unprecedented year with a strong finish. We continue to make steady progress on the operational improvements we’ve outlined in previous quarters, we continue to innovate and we’ve laid out a solid foundation that has us entering fiscal 2022 with positive momentum. While we have plenty of work ahead, I believe that we are headed in the right direction and we are really pleased with our continued steady progress.

I cut my comments purposely short today as we are planning on holding an Analyst Day on April 12th where we will be showcasing our new senior management team, letting you hear from some of our customers and partners and update you on our recent progress and plans as we look ahead. We’ll issue a press release with more details in the coming week but for now please mark your calendars for April 12th.

And now I’ll turn the call over to Todd to review our financials. Todd?

Todd McElhatton — Chief Finance Officer

Thanks, Tien. And thanks to everyone for joining the call. As Tien noted, our team executed well during the fourth quarter as demonstrated by our financial results, exceeding expectations across all our key financial metrics. In FY’21 we laid the foundation for long-term growth. I’m pleased to see the incremental progress we made in Q4. As we look ahead, we plan to continue to focus on growth, predictability, improving net dollar retention and driving efficiency. Let me first review our key metrics.

As Tien noted earlier, Q4 was highlighted by traction in the large enterprise segment. Looking at our customers at or over $100,000 in ACV we ended with 676 customers. This customer group continues to represent 90% of our business.

During Q4, the size of customer deals we added was larger than our historical levels, primarily as a result of our continued success in moving up market to serve larger enterprises. We closed eight deals with ACV of $500,000 or above, a record for deals of this size and notably three quarters of these large deals were influenced or sourced by an SI partner.

Net dollar retention improved to 100%. As a reminder, we track net dollar retention on a trailing 12-month basis. As a result of this, it is a lagging indicator. The higher churn level we experienced in Q2 of fiscal ’21 will weigh in on this metric until we lapse it in that quarter.

Turning to transaction volume. Our systems processed $17 billion worth of volume in the quarter. This represents a 30% year-over-year growth. As a reminder process transaction volume is helpful in understanding how much of our customers’ business is running through our platform. However, it does not track linearly with quarterly revenue as customers gain efficiencies as they scale.

Next, let me review our financial results. Subscription revenue grew 19% year-over-year to $65.1 million. Note that Q4 subscription revenue included a one-time non-nonrecurring benefit of $1.2 million, which was not reflected in our Q4 guidance. This was primarily due to legacy customers that elected to extend their on-premise license and professional services revenue decreased 10% year-over-year to $14.2 million. We view this is a positive trend given our success in shifting more of our services work to our system integrator partners. This is with in line of our strategy to improve our mix towards more recurring subscription revenue.

In Q4, subscription revenue represented 82% of total revenue, the highest level since our IPO. This resulted in total revenue growing to $79.3 million for the quarter.

Looking at our margins we continued to make strides. We have been successful at driving the mix of subscription revenue as a higher percent of total revenue. As we drive more and more professional services to the SI channel, our overall gross margin improves. As a result of the success our blended gross margin reached another high. Non-GAAP blended gross margins increased to 66%, a meaningful improvement of 840 basis points from the prior year. Non-GAAP subscription gross margin reached 80.5% which also was the highest in our Company history as a public company.

Non-GAAP services gross margin was a negative 1%, consistent with what we shared in past calls. We will continue to run services on a breakeven basis as we engage more with our trusted SI partners. Non-GAAP operating loss was $1.8 million in the quarter, reflecting an improvement of $9 million from the prior year. This was driven by reduced spend on T&E events, office spend as well as some one-time top line benefits and our improving gross margins. This resulted in a non-GAAP operating margin of negative 2% ahead of expectations.

Now let’s turn to billings and free cash flow. Calculated subscriptions billings was $86.4 million, reflecting a growth of 16% year-over-year, an improvement from the prior quarter. We had expected this to be in the high single digits, but it was higher, primarily due to our upmarket enterprise wins. However, approximately three points of this growth was due to a mix shift in payment terms and early renewals.

Looking ahead due to some of the early renewal activity we saw in Q4, this will impact our subscription billing growth in Q1. As a result of this impact, and our traditional seasonality in Q1, we expect calculated subscription billings to grow approximately 10% year-over-year. For fiscal 2022 we expect calculated subscriptions billings to grow in the mid teens year-over-year.

Free cash flow was $2.1 million, driven by prudent spend management and strong collections activity during the quarter. This was our first quarter with positive free cash flow. Capex for the quarter was $1.1 million.

For Q1 we expect to be free cash flow positive driven by seasonality. As I’ve mentioned in the past, it’s important that we continue to improve our operating leverage and create efficiencies in the business. I’m pleased that we’re making good progress in this area, which is showing up in our free cash flow.

Turning to cash. We ended the quarter with $186.6 million in cash and cash equivalents, an increase of $7.8 million over the prior quarter. We continue to be prudent with respect to spending levels and are pleased that we maintained a healthy cash position to manage the business. Our fully diluted share count at the end of the quarter was approximately 134.6 million shares, using the treasury stock method. In Q4, we continued to execute and drive improved performance. Our quarter-over-quarter pipeline is growing. We’re continuing to be very disciplined in our investments and going after larger customers and working with our SI partners.

Now let’s turn to our financial outlook. Our subscription business model continues to be resilient and given the visibility of our model we will guide for both Q1 and full year fiscal 2022. During fiscal ’22 we will accelerate our investments in go-to-market and product development, while absorbing costs that were not in run rate last year. We also expect to be cash flow positive for the full year.

For Q1, we currently expect total revenue of $78 million to $80 million. Subscription revenue of $63 million to $65 million. Non-GAAP operating loss of negative $5 million to negative $4.5 million, non-GAAP net loss per share minus $0.04 to minus $0.03 assuming weighted average share outstanding of approximately 121.6 million.

As we look ahead to fiscal 2022, we will remain agile to quickly respond to changes in the macro environment. For fiscal 2022, we expect total revenue of we expect total revenue of $335 million to $337 million, subscription revenue of $272 million to $276 million, non-GAAP operating loss of negative $12 million to negative $8 million. Non-GAAP net loss per share of minus $0.10 to minus $0.06 assuming a weighted average shares outstanding of approximately 123.9 million.

In closing, we’re very excited about Zuora’s long-term opportunity. As Tien noted, we’ll discuss our forward plans in more detail at our Analyst Day set for April 12.

Now Tien and I will open the call for question. Operator?

Questions and Answers:

Operator

[Operator Instructions] Your first question comes from the line of Joseph Vafi with Canaccord. Your line is open.

Joe Vafi — Canaccord — Analyst

Hey, guys. Great results. Excuse me. Great results here. Nice to see the accelerating pace and cadence in the business. Todd, maybe — we kind of maybe drill down a little bit into your commenting on record upsell quarter. I know you said that a lot of initial deals had revenue as part of the mix. I was wondering what was in that upsell and the composition of it.

And obviously with net retention trickling up, there must be an implication with record upsell this quarter combined with the trail-off a little bit in a couple of quarters of the headwinds last year and what that may mean to net retention in a couple of quarters. And then I have a quick follow-up. Thanks.

Tien Tzuo — Founder and Chief Executive Officer

Sure. I’ll go ahead and field that and Todd feel free to jump in with some of the numbers. I think there was two different things. The first thing was, we definitely saw strength in the Zuora Billing and Zuora Revenue combination. And a lot of those are going to be new deals, new companies coming on board, saying I want both products at once. I see the combined strength of the product really being a big advantage. And so that certainly felt really, really good.

We also saw, separate from that, just a strong upsell quarter. I would say that really is a reflection of our investment in customer success. You heard us say in previous quarters we restructured the sales team [Indecipherable] old hunter farmer thing but really say if you call the [Phonetic] customer you really own that customer for a long period of time. It helps build strong customer relationships. And so the systems and tools that we’ve been putting in place over the last year are really starting to kick in. And you are absolutely right, the strong upsell quarter did help us ticking that dollar retention and back up a point from 99% to 100%.

Todd anything you add to that?

Todd McElhatton — Chief Finance Officer

Yeah, I would hit — Joe, thanks for the comments, that we also did much better from a standpoint of improving the upsells coming from areas like add-ons. So we have less volume-dependence this quarter and we’re selling some of the other products coming out of the R&D group.

Joe Vafi — Canaccord — Analyst

Great, thanks. And then just maybe a couple of quick follow-on. Any color on the large wins this quarter? I know there was eight greater than $500 K maybe industry breakdown among those eight.

And then secondly, as you kind of move through the noise on the net retention number this fiscal year, I’m just wondering if you see there being a more close correlation between net retention and payment volume growth over time. Thanks a lot.

Tien Tzuo — Founder and Chief Executive Officer

Yeah. When I look at the eight deals, I would say — I will tell you the fact we called out there is one global bank that we worked with. It is probably our strongest forte to date into the financial service industry, something we haven’t talked about in the past before. So we continue to see the expansion of the Subscription Economy to industry after industry. That’s a really important part of the overall investment thesis, if you will, on us. And so, we’re glad to see that happen.

The other ones, I would say, distinct mix, technology, manufacturing, really across the board, nothing specific to — no specific changes.

Joe Vafi — Canaccord — Analyst

Great.

Operator

Your next question comes from the line of Scott Berg with Needham. Your lines is open.

Scott Berg — Needham — Analyst

Hi, Tien and Todd. Thanks for taking my questions here. I guess, Todd, I wanted to start on the Q1 guidance, especially the subscription revenues. Even if I back out the $1.2 million one-time benefit in the fourth quarter there, Q1 guidance effectively flat from that Q4 adjusted. Is there something else going on in the subscription revenues for the quarter so in fact that number might be a little bit better given what the billings number was in Q4?

Todd McElhatton — Chief Finance Officer

Yeah. So, Scott, thanks for the question. So two things. You’re right. We certainly had the $1.2 million of one-time. The other thing I direct you to is, there’s only 89 days in Q1. So those three days that we lose do hit us with several million dollars.

Scott Berg — Needham — Analyst

Got it. Helpful and then Tien from an upsell component you sound pretty positive obviously. But outside the commentary on Zuora revenue, were there any other modules that had kind of good upsell in the quarter or was it really kind of focused on the commentary with RevPro on the upsells wells in the deals [Phonetic].

Todd McElhatton — Chief Finance Officer

Yeah, Scott. That’s a great question. It was not just Zuora revenue, it was really across the board. If you think of us think about us as a multi-product company, right. Every day the passes were increasingly becoming, now we have Billing, certainly we have Revenue. We have a collect product and we have a platform product and all those products, we’re able to monetize. And so, when I look at the mix, it was a good set of customers in many different industries, may different sizes. It wasn’t concentrated on the new customers. And so I feel really good about the overall upsell engine kicking in.

And one of the things too is we announced that we are going to have this Analyst Day on April 12 and so our goal is to give you a lot more detail about the four key products that we have and break it down a little bit better.

Scott Berg — Needham — Analyst

Great. Looking forward to it. And then I guess one last question for me. Tien, you had mentioned that you expect the Company to grow at the rate of the subscription economy. Now that we’re through the pandemic, or at least hopefully through the pandemic, what is the growth rate of the subscription economy over the next maybe three to five-year time horizon that you’re striving the Company to grow at?

Tien Tzuo — Founder and Chief Executive Officer

Sure. That’s a great question. When we look at the Subscription Economy, you can certainly pick sectors of the Subscription Economy that are on fire, right, so collaborative software is a great one. I’ll kind of point you back to our SCI index and it’s something that we’ve been publishing over the last, three, four, five years. And it shows a good steady pace of growth of between 25% and 30% where last year certainly there was quota hit where it only grew about I think the low teens, about 10% to 15%. But we also said that in Q3 and Q4, we’re starting to see that trend back up to the pre-COVID rates, if you will.

And so when you look at the sector overall and you look at all the industries that are shifting, we would say that it’s growing in that 20%, 25% range on a year-over-year basis and as a leader in that space I wouldn’t fault you for expecting us to really grow with that same pace.

Todd McElhatton — Chief Finance Officer

Hey, Scott. I would also — Scott, I’d also add to Tien’s point, I think we gave some color that we expected for the year, the acceleration of the calculated subscriptions billing to the mid-teens. And when we get together in April, we’ll give you some more color on how we see the next few years rolling out.

Scott Berg — Needham — Analyst

Got it. Super helpful. Thanks for the color, guys.

Operator

[Operator Instructions] Your next question comes from the line of Brent Thill with Jefferies. Your line is open.

Luv Sodha — Jefferies — Analyst

Hey Todd and Tien, this is Luv Sodha on for Brent Thill. Congrats on a nice quarter and thank you again for taking my questions. The first question really this is for Tien. Now that you have Sri on board and it seems like an impressive hire, could you maybe talk about the trajectory of the platform you already have Zuora Analytics that was launched say two quarters ago and you announced some improvements in billings. So what can we expect in the future in terms of the platform and the product really?

Tien Tzuo — Founder and Chief Executive Officer

We definitely continue to see good uptake on the platform and good contribution from the platform into the revenues on, for example, the upsell revenues that we saw, really credits to [Phonetic] Sri. I mean he comes to us with over 10 years of ERP experience, he understands the shift from ERP systems that are based on products and orders to this new generation of ERP systems that are — they built around the subscription where the subscription object, and this is Sri’s words, is a fulcrum across the entire business. I would say, Luv, look forward to seeing you on April 12th. I think Sri will be a big part of that day, Robbie will be a big part of that day, and we look forward to really unveiling some of the thoughts that we’ve been putting together with Sri and the entire organization, the entire product organization that we’re really excited about.

Luv Sodha — Jefferies — Analyst

Got it. And a quick follow-up for Todd, if I may. Todd, if I look at the margin guidance it implies a healthy leveraging for the first quarter, but for the full year some of that leverages is not as big as the first quarter that we see. Is there some investments that you’re planning in the back half of the year, be it in sales and marketing and R&D that we might not be — that we might be missing?

Todd McElhatton — Chief Finance Officer

Hey. Thanks, Luv. So as I said, we expect to be free cash flow positive for the full year. And 2020 was really an odd year. We had a lot of expenses that didn’t occur and we’re also really prudent with our spend. We’re committed this year again to being free cash flow positive while absorbing those costs as we open offices. But we’re also accelerating investments in go-to-market initiatives and product development, while absorbing the same cost. And so I think that’s why you’re seeing example on margin.

Luv Sodha — Jefferies — Analyst

Got it. Perfect. Thank you again.

Operator

Your next question comes from the line of Chris Merwin with Goldman Sachs. Your line is open.

Chris Merwin — Goldman Sachs — Analyst

Thanks very much for taking my question. I wanted to come back to those eight large deals of $500,000 or more. Can you talk a bit about the land dynamics with those? Were those kind of the fuller suite of your products and is that something that we should expect more going forward? Thanks.

Tien Tzuo — Founder and Chief Executive Officer

Yeah, I like the fact that we have that flexibility, right. We want to really meet customers where they are, so we can land with the launch of just the billing system, we can launch with just revenue recognition, help them bring down the time to close. But the combined product really, really shows its strength.

If you look at those eight deals they’re going to be less of a deal where you’re launching something and more where we’ve already gotten existing business. We’ve got $100 million of revenue. We got $1 billion of revenue. The way we’re doing it, whether it’s through a homegrown system, right, a commercial system or maybe we scaled out off of or through manual processes, right, the combined system is really what gives us the agility that we need to to take advantage of this market discontinuity with digital acceleration and win in the marketplace. And so I would say it really shows the strategic aspect of what we do.

And when I look at 2020 there’s one takeaway that I would say looking — working with our customer base is in — especially in the period of deep uncertainty that’s where the agility that our products provide really, really shines.

Chris Merwin — Goldman Sachs — Analyst

Okay. Great. Thanks very much. In terms of one of the questions I had was on verticals. I know that — I think from a go-to-market perspective, there was an effort to focus on some of your core verticals where you’ve got a lot of success, but then obviously you’re hearing about it now, big deal in the financial services sector. And yeah, which is historically been as big a sector for you also. Can you just talk a bit about your vertical focus and the go-to-market perspective and how that’s playing out [Indecipherable] expectations?

Tien Tzuo — Founder and Chief Executive Officer

Yeah, just to be clear, we never said we’re going to limit ourselves to these three verticals. I would say if you look at the explosion in the Subscription Economy, there are so many companies and so many industries that are saying what do I do about this, right. And what we want to do is we want to make sure that we continue to have good productivity in our sales organization. And so rather than saying, hey, let’s give the sales rep the phone book and have him call every single company — any company they want. Let’s be smart about where we are seeing the strongest traction and this isn’t just a vertical, sometimes they are sub verticals inside of these, right. It might be industrial manufacturing inside the entire manufacturing sector as an example.

And so let’s be smart about that. If we can focus our demand gen efforts in vertical that we believe are growing the fastest and are the most ready to move, that’s going to make us that much more productive. Now that being said, look, a leader in the financial services industry has committed a Subscription Economy and looking to transform, right. We’re more than happy to engage with them. And so, think of the vertical strategy not as way of limiting our focus, but to really focus our go-to-market organization where we see the most opportunity.

Todd McElhatton — Chief Finance Officer

Hey, Chris. Todd. I think I would add to what Tien said, look, the pipeline generation and the overall deals have been highly concentrated in that which gives us good economies of scale. But I think you need to watch three quarters. We’ve had significant wins that are outside of those verticals. So the verticals are certainly helping us to be much more efficient on our go-to-market, but it doesn’t limit us.

Chris Merwin — Goldman Sachs — Analyst

Understood. Thank you.

Operator

We have time for one more question. This question comes from the line of Stan Zlotsky with Morgan Stanley. Your line is open.

Stan Zlotsky — Morgan Stanley — Analyst

Perfect. Thank you so much, guys. So the question that I have is really just bigger picture right. The Subscription Economy growth of 20%, 25%. You guys are one of the leaders in this space. First question is how do you estimate that the subscription economy is growing really 20%, 25%? And when you think about the growth that you guys are expecting for 2021, when do you think we can start to see you guys start to approach the growth that we’re seeing across the rest of the Subscription Economy just more broadly?

Tien Tzuo — Founder and Chief Executive Officer

Yeah. So we look at a bunch of key sources to answer your question, how do we estimate it. We obviously have something we call the Subscription Economy Index and the benefit is we actually see some of, a lot of revenues flow through our service and we cut across industries, geographies with the Subscription Economy Index report. Our report told us the Subscription Economy Index last year grew at about 15%, right. It had COVID impact, not as bad as nonsubscription businesses that you’re seeing, continue to see that dichotomy, but that’s certainly what we saw.

Look we also said that in order to continue to grow, there are some changes we had to make, right, and you’ve certainly been a part of listening to what we’ve been talking about over the last three, four, five quarters. The move upmarket, the focus on SI, the reliance on the platform, to last mile customization, I would say, when I look at Q4 and before that when I look at Q3, right, those changes that we were making are really starting to take hold. And it feels good, it feels good and it makes me see that we are going into FY ’22 with a really, really solid foundation.

And so our goal is to continue to show incremental benefits on a quarter-to-quarter basis and continue the trend that we’re seeing in Q3 and Q4. And that’s really what’s behind the guide that we’re giving.

Stan Zlotsky — Morgan Stanley — Analyst

Got it. And just looking up for in fiscal ’21 — 2020, right there is not a whole lot of appetite from prospects or even customers for that matter, right, to undertake big transformational projects such as really ripping up the business model the way they have it right now and bring in a subscription business model that would be powered by Zuora.

When you look at your pipelines into fiscal ’22 and calendar ’21, what are you hearing from prospects as far as just the appetite to do that kind of transformational change within their organizations heading into the New Year?

Tien Tzuo — Founder and Chief Executive Officer

Yeah. Hey, Stan. That’s not what we’re seeing. We’re seeing that the appetite for these new business models is stronger than ever, right. And 2020 was a wakeup call to say if I had a business model that relied on selling product through physical distribution channels to get to my customer, I’m incredibly vulnerable. The flip side of it is if I had a business model that was depending on usage, consumption, direct to consumer relationships, and digital relationships, I’m actually doing really, really well.

And inside of these incumbent company where they have a mix, they have a traditional product-centric business model and they have a new digital subscription-based business model. They’re seeing where the growth rates are. And so we’re actually seeing many companies lean in.

Now a lot of times they’re new to this, right, they need to be guided by this. This is why one of the things that’s important part of our strategy to calendar 2020 was the creation of what I call the subscribed strategy group that’s really guiding these companies on what to do, right.

Here’s how you set up an innovation arm, value that you can create that goes beyond what you’ve traditionally done with your physical products, right, now that your products are connected to the Internet, now that they have a digital aspect. And so we guide them on how to do — how to find our product market fit and how to find the right business models to monetize these new value areas that they can go into. That is the story of Caterpillar, that is the story of vendor. [Phonetic] In many ways that’s also the story of Zoom, right. I have seen companies like Zoom just going by and they are saying this is where the future is lying.

And so whether I look at my pipeline, whether I look at my request for proposals, I’m having conversations direct at the CEO level with CEOs around the world in multi-billion dollar companies. Again, they are really waking up to the power of this business model and they are beating in.

Stan Zlotsky — Morgan Stanley — Analyst

Perfect. That’s — I think that’s a great recap of what you’re seeing into the year and thank you so much for giving it to us.

Tien Tzuo — Founder and Chief Executive Officer

Absolutely.

Todd McElhatton — Chief Finance Officer

Thanks, Stan.

Operator

There are no further questions at this time. I will turn the call back over to Tien Tzuo, CEO.

Tien Tzuo — Founder and Chief Executive Officer

Thank you, everyone for joining us today. And this is a great call and I hope and expect that you will all join us on Analyst Day on April 12th. You’ll get a chance to hear from additional senior executives as we dig deeper into our products, into our plans for the future. Thank you very much.

Operator

[Operator Closing Remarks]