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Zuora’s stock surges on solid outlook and Q2 earnings beat

Zuora (NYSE: ZUO) stock surged above 7% after the bell as the Q2 results surpassed estimates. In addition, the earnings outlook for the fiscal period was better-than-expected aiding in the spike of the stock price. The software firm’s share price has decreased by 24% this year and has lost 57% in the last 12 months.

Positive Outlook

For the third quarter, Zuora projected revenue of $69-71 million and adjusted loss of 9-10 cents per share. On the flip side, analysts are expecting sales of $70 million and non-GAAP loss of 9 cents per share, which is in line with the company’s outlook.

For the fiscal 2020 period, the cloud-based software firm lifted the lower-end of the sales guidance. It now expects top line to be between $273.5-278 million compared to prior guidance of $268-278 million.

Looking ahead into the adjusted loss metrics, the company anticipates reduction in loss over last quarter’s guidance. It now expects loss of 38-40 cents per share compared to prior outlook loss of 40-44 cents. The street is estimating revenue of $274.5 million and non-GAAP loss of 43 cents per share.

Q2 Performance

The cloud-based software platform reported 21% jump in revenues to $69.7 million, surpassing estimates of $66.9 million. Adjusted loss came in at 9 cents per share compared to 14 cent loss anticipated by the street. Last quarter, the company had guided revenue of $66-68 million and adjusted loss in the range of 13-15 cents per share.

Operating expenses surged 24% over prior year as Zuora continues to invest in new product offerings and expanding the sales team. Sales and marketing spend was 54% of revenue in the Q2 period. 

Research and development expenses rose above 40% while sales and marketing costs increased 12% in the second quarter. General and administrative expenses witnessed a 33% jump over prior year period. 

Key Metrics Update

It’s worth noting that subscription revenues contribute more than 70% to the Zuora’s top line. In Q2, revenue from subscriptions grew 24%, up 3% over last year. However, the worrying factor for investors is the sequential decline in the growth trend over the last four quarters.

In the last four quarters, the cloud-based platform has recorded subscription revenue growth of 32% (1Q20), 35% (4Q19), 43% (3Q19) and 44% (2Q19).

High-value customers with annual contract value above $100,000 rose 19% to 566 over prior year period. However, last quarter Zuora recorded 24% growth in the customer additions. This denotes weakness in adding new clients to the platform.

Also read: Okta tops Q2 2020 estimates; stock drops on weak Q3 outlook

Dollar-based retention rate shows the ability of the software firm to retain clients and sell more services to the clients. For the second quarter, it stood at 107%, down 3% over first quarter.

The primary reason for muted performance on the key business metrics could be attributed to the ongoing integration issue relating to RevPro implementation on Billings clients. Zuora expects the issue to be fixed only in the latter half of 2019. Investors need to track this closely to see whether the key metrics performance picks up in the late 2019 or early 2020 period.

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