Zuora – ZUO ($24.50)
SHORT THESIS
Zuora is a first mover in providing services to the rapidly developing subscription economy. The
company has in fact trademarked the phrase “Subscription Economy”. ZUO’s annual customer
conference is called “Subscribed”. Management has done a good job capitalizing on the founder’s
insight and the resulting running start in the space.
The simple short thesis is that competition is coming and at 14X recurring revs, ZUO is priced as if the
current advantage will persist long term. Based on feedback from the channel, I think it is more likely
than not, that CRM will introduce (and bundle?) a competing product by the end of the year. CRM’s own
annual conference in Sept (Dreamforce) would be an interesting time for a debut. There are other
smaller players in the space, however they have had nominal impact on ZUO to date. Other ERP players
are likely eyeing this space, however, while logical, I have no specific knowledge of a particular
competitive threat from that direction.
In addition, ZUO filed an 8-k on July 10 serving notice that as of that date the “early release conditions”
had been met and as such 25% of the 180 day lockup shares would be released early. These share can
now be sold beginning one day after the company reports the July quarter, likely in late Aug/early Sept.
Just a hunch, but I’d look for some serious insider selling.
I THINK that CRM (or others) buying ZUO is less likely, but cannot be ruled out. So, the biggest risks to
the short are that CRM does not show up in the marketplace, or that it does, in the boardroom.
Company Summary:
ZUO CEO Tien Tzuo likes to compare the platform to a new and improved plumbing system. The
company provides tools to manage billing and revenue recognition for subscription based businesses.
The ZUO elevator pitch: We provide cloud-based software on a subscription basis that enables any
company in any industry to successfully launch, manage, and transform into a subscription business.
The idea is appealing. From the prospectus: why buy a DVD, CD, Movie or song when you can subscribe
to streaming video and music services. Why buy software or hardware when you can subscribe to
software as a service or cloud computing service. Why buy a car when you can subscribe to ride-sharing
services. Why get married when you can subscribe to Match, Tinder, Bumble or Farmers Only. Okay,
okay, that last one is not in the prospectus, just wanted to seeing who was actually reading this. But you
get the idea.
ASC 606 - Revenue from Contracts with Customers has been a catalyst for adoption. Channel feedback
indicates that the product is sticky once sold but an extended sale given the need to replace existing
customized or homegrown solutions. The shift from old economy transaction based models to
