Zuora CEO: M&A ‘top of mind’ as valuations come down

CEO Tien Tzuo says “tuck-in” acquisitions could make for either new features in existing products, or the development of a brand-new product offering.
Written by Tiernan Ray, Senior Contributing Writer

Subscription economy pioneer Zuora this afternoon reported fiscal Q4 revenue that slightly exceeded Wall Street's expectations, and profit that was in line, and an outlook for the current quarter that was roughly in line, and raised its year outlook.

Separately, the company announced private equity firm Silver Lake agreed to invest $400 million in Zuora. 

The report sent Zuora shares higher by 4% in late trading. 

In a conversation with ZDNet by phone following the report, CEO and founder Tien Tzuo said that the infusion from Silver Lake will make possible acquisitions that will boost growth for the company. 

"M&A is top of mind for us," said Tzuo. The cash infusion, $250 million of which becomes available immediately, will substantially boost the balance sheet. The company's cash and equivalents stood at $113 million at quarter's end.

Tzuo said the prices of companies are coming down and will continue to do so, making for a buyer's market.  

"Valuations in the private markets are absolutely declining, and that will spill over to the public markets as well," said Tzuo. "My personal sense was valuations were over inflated," he said.

Zuora will be focused on "tuck-in" acquisitions rather than very large deals that would require extra capital.

Tzuo said acquisitions could be used to add features to the company's four existing products, but "it could also definitely be a plus-one, it could be a fifth product." As far as what that fifth product might be, "We have a roadmap we have developed, talking with customers, but we're not not ready to talk about it just yet," he said.

Silver Lake, Tzuo noted, in addition to capital, also brings expertise, he noted. "They pioneered the tech fund," he said, "they have worked with the best of the best."

Regarding the quarter just ended, Tzuo emphasized the company's growth has accelerated, with annualized recurring revenue, or ARR, speeding up to 20% from just 12% a year earlier, with a forecast for ARR growth this year of 21%.

"I'm pretty proud that we delivered everything we said we would," Tzuo said. "I feel good about our future going forward." 

Asked if high inflation and rising rates might imperil spending, Tzuo said he saw no indication of it with his customers. 

"I would say, overall, the macro trend is moving to the subscription economy, and that creates multi-year tailwinds for us," said Tzuo. "Regardless of prices or supply chain, what we do supports the direction customers need to go." 

Supply chain issues may even help boost subscription-based offerings, dominated by services, Tzuo opined. "If I'm a company that's having a hard time getting physical products to market, well, in digital services, I can launch new offerings all day and all night," said Tzuo.

Revenue in the three months ended in January rose 14%, year over year, to $90.7 million, yielding a net loss of 2 cents a share, excluding some costs.

Analysts had been modeling $90.4 million and a 2-cent loss per share.

Among key operating metrics, Zuora said its subscription revenue rose 19% to $77.3 million. The company's dollar-based retention rate was 110%, up from 100%. 

For the current quarter, the company sees revenue of $91 million to $93 million, and EPS in a range of negative 1 penny to negative 2 cents. That compares to consensus for $92.4 million and a 1-cent loss per share.

For the full year, the company sees revenue in a range of $402 million to $406 million, up from a forecast offered back in October for $401 million to $405 million. The company reiterated a forecast for ARR growth of 21% "or higher" and retention of 112% "or higher."

The forecast for revenue compares to consensus of $402 million.

Regarding the Silver Lake investment, Zuora said,

Under the terms of the agreement, upon the initial closing on or about March 24, 2022, Silver Lake will purchase $250 million aggregate principal amount of convertible senior unsecured notes due 2029, with an initial conversion price of $20.00 per share, subject to customary closing conditions. The notes will bear interest at a rate 3.95% per annum, payable quarterly in cash, provided that Zuora may elect to pay interest in kind at 5.50% per annum payable quarterly. The remaining $150 million is expected to close at a later date within 18 months of the initial closing. Zuora has also agreed to issue Silver Lake warrants to purchase up to 7,500,000 shares of Class A Common Stock, exercisable for a period of seven years, and of which (i) 2,500,000 shares shall be exercisable at $20.00 per share, (ii) 2,500,000 shares shall be exercisable at $22.00 per share and (iii) 2,500,000 shares shall be exercisable at $24.00 per share. Additional information may be found in a Form 8-K that will be filed with the U.S. Securities and Exchange Commission.

In prepared remarks, Tzuo said, "After a transformational year at Zuora, we closed out Fiscal 2022 meeting or exceeding expectations across our operating results." 

Added Tzuo, "With our leadership position in a growing market, an amazing management team in place driving our growth plan, and a strong partnership with Silver Lake, we're incredibly bullish about the future opportunity."

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