Inside Zuora's Proposed IPO

Alex Wilhelm alex

Morning Report: Let’s take a quick look at Zuora’s funding history and its IPO filings. I promise we’ll be brief.

Last Friday, Zuora filed to go public, sending financial reporters scrambling as their week was supposed to close. Given that you have a life and therefore likely missed this S-1, let’s explore the company’s IPO document. To get an accurate picture, let’s first take a look at how Zuora got this far.

The Past

Zuora was early to the SaaS game (indeed, if I recall correctly, I first saw Zuora mentioned in regards to subscription billing in a print magazine). How early is somewhat notable.

Founded in 2007, here are two Zuora press release headlines that I dug up for context

Those dates put Zuora early on the software-as-a-service train. Not first, mind, but early enough to make Zuora one of the more venerable companies in the subscription space.

Indeed, if you look at the United States’ search activity, queries for “SaaS” started to pick up in middle-late 2006. Zuora the caught the wave and a bundle of cash at the same time. According to Crunchbase, Zuora has raised $242.5 million.

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The company’s last known round, at $115 million, saw participation from a who’s who of investors including Shasta, Greylock, Index, Benchmark, BlackRock, and Marc Benioff. And that money was put to work.

Expensive Growth, And Other Potential Sins

Zuora’s S-1 indicates a $100 million offering. That figure is a placeholder that will be replaced later when the company files an update to its S-1 with pricing information. For now, we’re in the dark.

As a reference point, Zuora’s last round (that $115 million investment) valued the firm at around $1.1 billion post-money, according to Crunchbase, making it a unicorn.

Before we can look at the hard numbers, let’s talk calendars. Like many SaaS companies, Zuora operates on a slightly amended fiscal calendar. Its fiscal years close on January 31 of the next calendar year. So Zuora wrapped its fiscal 2018 as January 2018 ended.

Here are the key details performance details from its last three full fiscal calendars:

Instead of reciting that to you, you can see the raw figures yourself. But let’s talk about them together.

First, Zuora’s fiscal 2017 saw a decline in the firm’s net loss and an increase in its top line. That’s a great bump in operating margin for a company looking to go public. But the trend slowed in Zuora’s fiscal 2018 as the company’s net loss grew to $47.2 million from $39.2 million.

The firm’s 48.6 percent growth from its fiscal 2017 to its fiscal 2018 could be the ticket for Zuora to get itself public. But there is something inside of Zuora’s revenue mix that is notable: it’s professional services make up more than a fourth of its revenue and lose money.

So when we consider Zuora’s revenue, we know that only 72 percent is recurring. (That’s low for a SaaS company.) That revenue mix means that 44 percent of Zuora’s new revenue in its fiscal 2018 came from services, a portion of its top line that was gross margin negative in the year.

That fact, incidentally, helps explain why Zuora’s revenue rose nearly 50 percent in the year but its gross profit only grew around 36 percent. What that means is the firm had less margin to use to fund operations than its revenue growth might imply at first look.

And it wasn’t enough to cover Zuora’s growing operating costs, so the firm lost more money in fiscal 2018 than in its fiscal 2017.

Finally, why is Zuora going public? The firm has $48.2 million in cash on hand; however, it consumed around $24.4 million in cash during its fiscal 2018. That was offset by $15 million in cash provided from “financing activities.” In short, Zuora needs cash to keep growing and operating.

More when it prices.

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And the IPO news for companies with ‘Z’ names continues. Zuora, a provider of enterprise subscription billing and management software, has filed to go public in an offering that would raise up to $100 million. The Silicon Valley company previously raised over $240 million in venture and growth funding. Meanwhile, in other IPO news, iQiyi, the Netflix of China, is seeking to raise up to $2.4 billion in an offering on Nasdaq.

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