ZUORA INC ZUO S
July 27, 2018 - 12:15pm EST by
goob392
2018 2019
Price: 26.00 EPS 0 0
Shares Out. (in M): 110 P/E 0 0
Market Cap (in $M): 2,860 P/FCF 0 0
Net Debt (in $M): -100 EBIT 0 0
TEV ($): 2,750 TEV/EBIT 0 0
Borrow Cost: General Collateral

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Description

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
subscription based models has created an opportunity for a niche, fast mover. The market for
subscription oriented SaaS is developing in between existing ERP and CRM providers.
 
As ZUO is a relatively recent IPO (4/12/18 at $14), the IPO prospectus gives a current detailed
description of the business and there are naturally a number of research reports initiating coverage so I
will not restate all that information here. Happy to continue the dialogue through messages.
 
To be clear ZUO is built around an excellent focused idea from the founder and has rapidly capitalized
on its first mover advantage. While we can all debate the “invest to grow” strategy and some investors’
willingness to pay up for that strategy, ZUO has indeed grown rapidly.
 
My concern is that ZUO is not close to profitability and unlikely to even approach profitability for a few
years, even in the absence of meaningful competition. The large total available market WILL attract
competition from the bottom and the top and I believe ZUO’s investment requirements will go up not
down.
 
Management is targeting a LT subscription rev growth rate of 25-30%. I have no way of really knowing if
this is the right growth rate but it sets a high bar and will likely require more, not lees investment.
 
 
$26 * 110M shares = $2.86B Mkt Cap - $100M cash = $2.75B TEV
Revs: $92M/$113M/$168M/$220E/$275E/$325E for 15-17A/18E/19E/20E
EBITDA: -$29A/-$48E/-$35E/-$27E for 17A/18E/19E/20E
Net losses $48M in 2015, $39M in 2016 and $$47M in 2017
 
What looks like 10X 2019E revs is really 14X subscription-only revs. Professional (integration) services
account for over 25% of revs but are (and will continue to be) breakeven or worse structurally. The
company is trying to move away from internal integration services. This may expand their market
presence with third-party integrators but will also slow reported revenue growth.
 
While continued rapid growth in subscription revenue is eventually expected to deliver scale and
profitability, even the company indicates that achievement is well into the future. And again, that
outlook does not incorporate REAL competition.
 
Note: January FY so the 2018 in the writeup is 1/19.
 
 
Catalysts:
 
CRM enters the market with a competing (and bundled?) offering.
 
Early expiration (based on stock appreciation) following July quarter report.
 
Rev growth slows as the company ties to move away from professional services.
 
Growth investors get tired of paying for growth with no profits…..hey…it could happen.
 
 

 

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

CRM enters the market with a competing (and bundled?) offering.

Early expiration (based on stock appreciation) following July quarter report.

Rev growth slows as the company ties to move away from professional services.

Growth investors get tired of paying for growth with no profits…..hey…it could happen.

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