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Zuora, Inc. (ZUO 0.01%)
Q2 2021 Earnings Call
Sep 02, 2020, 5:00 p.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Ladies and gentlemen, thank you for standing by, and welcome to Zuora's second-quarter fiscal 2021 earnings conference call. [Operator instructions] Please be advised that today's conference is being recorded. [Operator instructions] I'd now like to hand the conference over to your speaker today, Mr. Joon Huh, vice president of investor relations.

Please go ahead.

Joon Huh -- Vice President of Investor Relations

Thank you. Good afternoon, and welcome to Zuora's second-quarter fiscal 2021 earnings conference call. Joining me today are Tien Tzuo, Zuora's chief executive officer; and Todd McElhatton, Zuora's chief financial officer. The purpose of today's call is for us to provide some color on our second-quarter results, as well as provide our financial outlook for the upcoming quarter.

Some of our discussions and responses today will include forward-looking statements, so as a reminder, our actual results could differ materially as a result of a variety of factors. You can find information regarding those factors in the earnings release we issued today in our most recent filings with the SEC. Finally, we'll be referring to several non-GAAP financial measures today, and reconciliations to related GAAP measures are included in our earnings release. Please note that in Q2, we began to exclude litigation charges and benefits outside of the ordinary course of business from our non-GAAP financial measures.

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For a copy of our earnings release, links to our SEC filings, a replay of today's call or to learn more about Zuora, please visit our Investor Relations website at investor.zuora.com. And with that, let me turn it over to Tien.

Tien Tzuo -- Chief Executive Officer

Thanks, Joon, and thank you, everyone, for joining us today on Zuora's second-quarter earnings call for fiscal 2021. Let me start the call by saying that we hope you are staying safe and healthy. The current pandemic is creating a challenging environment for lots of people trying to manage jobs and families from home. Here in California, we are also very grateful to all the first responders on the front lines of the fires in the Bay Area.

As a company, Zuora remains committed to supporting our customers, partners, employees, and other stakeholders through these times. So against this backdrop, I am pleased with our second-quarter results. We performed well compared to our expectations from a quarter ago. We came in at the high end of our revenue guidance and well ahead on profitability.

We effectively managed our cash spend, driven partially by strong collections activity. We helped 41 of our customers to go live in the quarter, indicating that our customers have continued to adopt our platform during the COVID crisis. We added new customers in our core markets of high tech, media, and manufacturing while also seeing interest from industries such as education in the public sector as the Subscription Economy continues to expand. And we strengthened our leadership team with the addition of Todd McElhatton as our CFO.

I'm personally incredibly excited to have him onboard and joining me on this call. Going beyond the immediate results. When I look at Q2, I would offer up four observations. First, it's clear that the subscription business model is thriving during this time of COVID.

Companies are increasingly waking up to the power of this model. Second, the power of our technology has never been more apparent in giving companies the agility, insights, and automation that they need to adapt and grow in this new environment. Third, given the market, I believe our growth can be better. We continue to make good progress to set the foundation for Zuora to lead in this market for years to come.

As we'll go through later on this call, we've taken definitive actions across product, go to market, and administration through new hires and enhanced processes. And fourth, while it does seem like shelter in place will continue for some time, albeit uneasily throughout the world, we are optimistic that the worst of the COVID impact is behind us. As a last point, increasingly, we are finding that the data we have is one of our unique differentiators. We know what it takes for companies to win in the Subscription Economy, and you're going to start to see us leverage that data more and more as we continue to improve our solutions.

Let me drill in on what we're seeing in the market overall and the role of our technology in particular. Six months into the COVID crisis, more companies are waking up to the power of the subscription business model. Many subscription companies aren't just proving to be resilient. They're actually thriving.

In fact, our next Subscription Economy Index Report to be released shortly will show that while the S&P 500 companies saw revenue contract at an annual rate of 10% last quarter, Zuora customers included in the report actually expanded at a rate of 12%. We have clearly moved into a whole new world. The current environment has completely rewired our expectations as customers. Everyone wants an Instacart-like experience.

We expect things to happen instantly from anywhere. Companies that have a direct relationship with their customers have been able to adapt, and companies that are still lost in an old product-centric retail store model are hurting. This is why the subscription business model is clearly the future. Second, the power of our technology has never been more apparent.

We're helping some of the most successful companies in the Subscription Economy, and over the last six months, it's been a very inspiring experience to enable these companies to adapt and thrive. But this is where it gets interesting. We now have over a dozen years of experience with subscription businesses and vast amounts of data, which we've been mining over the last few years, including in our Subscription Economy Index Report and more recently, our COVID impact report. This data shows us what the winners are doing to separate themselves from the rest of the pack, and it gives us a unique advantage in our helping customers grow their subscription businesses.

Subscription Economy all-stars like Zoom, Wix, DocuSign, Honeywell, they're all leveraging our platform to do three things: to deliver agility, to gain insights, and to drive automation. Let me give you some examples. If there's one word that captures why subscription companies have thrived over the past six months, it's agility. With our solutions, our customers are able to quickly spin up new services, capture new demand, and react to the market in days, not months.

On our last earnings call, we talked about how companies like Fender, Zoom, and Foresight were able to react quickly and creatively to COVID. Foresight, for example, gave away free courses for the entire month of April. Since shelter in place only happened mid-March, that shows you the kind of speed that they were able to operate at. Here's a few examples this quarter of that kind of agility.

The Seattle Times was able to grow its subscriber base by 35% in just three months this spring by executing new subscriber acquisition campaigns to capitalize on its excellent free local coverage of the COVID-19 crisis. Despite the work-from-home restrictions, Honeywell, one of the largest industrial manufacturers in the world, was able to grow its software business substantially last quarter and is on track to achieve its stated goal of growing its software business by 20% a year for the foreseeable future. In Australia, Foxtel's sports streaming service, Kayo Sports, was faced with a lack of sporting events due to COVID. While Foxtel quickly responded by moving up their launch of their Netflix competitor streaming service called Binge, they've launched it in May, and they already have 185,000 subscribers.

In the meantime, as sporting events return in Australia, Kayo has come back significantly, adding more than 200,000 subscribers as the hunger for sports during shelter in place has not subsided. And finally, when electric vehicle sales started to soar during COVID, one Big 3 auto manufacturer moved fast when it was able to include prepaid EV charging plans along with their upcoming fleet of electrical vehicles. And what is delivering all this agility, to put it simply, it's Zuora Billing and Zuora Revenue. Instead of adopting legacy left-to-right architectures, we're hard-coding a bunch of business logic into homegrown systems.

We're creating a brill connection directly between their CRM and ERP systems. Some of the most successful companies in the Subscription Economy have chosen a different approach. They're using Zuora as a central system that orchestrates all their customer events: pricing, orders, upgrade, provisioning. It's this architecture that gives them the agility.

This is the same architecture that the telecom industry used for decades. And it helps separate the winners and losers in that space, and we believe the same thing is happening now. So that's agility. What about insights? Well, it's fantastic to be able to move fast.

But how do you know what to do? Where we now have robust data with 13 years of history that help us identify benchmarks and best practices in all sorts of areas, pricing and packaging, subscription changes, usage-based billing, invoice payment rates, e-payment success, and we're pushing all these insights to our customers through our launch last month of Zuora Analytics, which comes with prebuilt metrics so that it's more of a brain trust than a dashboard. Let me give you a couple of examples. The COFO of CallRail, a marketing analytics company, checks Zuora Analytics every morning to track his top KPIs. He can now slice and dice the subscription data in all sorts of ways, product line, vertical, region, rate plans, all things that will be really difficult to calculate with a generic BI solution.

And speaking of benchmark and best practices, we had another customer that was calculating all their subscription metrics manually. They thought that they had a pretty healthy net retention rate of well above 100%. But when they ran those net retention numbers in Zuora Analytics, they calculated a rate closer to 80%. Zuora Analytics helped them uncover a problem they didn't know they had, enabling them to make better business decisions.

When our customers use our analytic capabilities, they're taking advantage of the collective intelligence of our entire user base. It gives them a foundation of data that they can feed into all their operations. Finally, let's talk about automation, which is important for two reasons. First, the obvious reason is scale.

Our customers like Zoom and Fender have been able to take advantage of this unprecedented time without having to worry about their billing system scaling to that demand. But more suddenly, without automation, it turns out you can't deliver that immediate experience that customers are demanding these days. Whether you are a consumer looking for some shows to watch or a professional conducting business for your company, you want what you want when you want it, and you don't want to have to go through layers of people, phone, contracts. Here are some other examples of how our customers have used our products to automate.

We're helping two leading online education companies respond to the significant new demand for subscription services for digital textbooks. They're able to close their books faster without adding additional headcount and resources and deliver a better experience for their customers. Last quarter, Extreme Networks launched on Zuora Billing, complementing its existing use of Zuora Revenue, an implementation that was primed by our services partner, TCS. As hardware providers shift to a subscription software model for future growth, they're recognizing the need for a very different order to cash architecture.

Over the last few months, we've also helped companies like Telegraph Media, Yellow Pages, and Sage software reduce their billed time runs substantially, sometimes from hours to minutes so that they can focus on strategy and not process. In fact, while many of our customers have grown their subscriber base in response to demand, the time it takes for them to get bills out has actually declined by 40% to 95%. As just one example, Zoom is actually getting all their bills up faster today than 6 months ago despite this growth that they've experienced, which I think is pretty amazing. Because of our history in our data, we can now actually apply AI techniques to continuously optimize performance and throughput.

So to wrap up, our mission at Zuora is pretty simple, we help companies win in the Subscription Economy. And in doing so, the unique power of our technology has never been more apparent. We provide agility, insights, automation. These are the competitive advantages of our platform, and we're going to continue to invest in these areas.

Given that our market is expanding, I do believe our growth can be better. The leadership we've added to the company and the improvements we've made to our internal processes over the past year have helped us make good progress on building the foundation to scale for years to come. While it's increasingly apparent that COVID will be with us for some time, we are optimistic about the future for the following reasons. We've made some great new hires and completed our management team.

We're seeing good overall demand with double-digit pipeline growth quarter-over-quarter. Our sales productivity per rep continues to improve as we get more comfortable in the go-to-market motion. We're retooling our pricing and deal structures to rightsize our initial lands and enable us to grow with our customers. And we see our near-term business improving and expect better billings growth next quarter.

Now let me welcome Todd and have him go through the financial details.

Todd McElhatton -- Chief Financial Officer

Thanks, Tien, and thank you, everyone, for joining the call. I look forward to the day when I can meet everyone in person. I'm excited to be part of the Zuora team to drive our vision for the Subscription Economy. I'm here because I can see a huge opportunity in front of us and that we have work to do to capitalize on that.

So let me go over some initial thoughts and actions that we're taking to improve performance. First, we are absolutely focused on growth. We have a huge opportunity in helping companies transform to a subscription-based model. The shift is happening today and will continue for many years to come.

We will invest in the right areas to drive long-term growth. Going forward, we'll be focused on customers primarily in three verticals: high tech, media, and manufacturing. We know from experience and our internal data that these companies are growing much faster pace than our other verticals. We started this transition at the beginning of the fiscal year and the results are beginning to show.

However, this is a multi-quarter journey. Second, we'll be focused on product innovation. We have the leading product in the market, as cited by IDC, Forrester, and others. It's important that we continue to innovate and invest in this point of strength through new products, add-ons, and enhancements.

Third, we'll be disciplined in our investments and focused on creating leverage in our operating model. We've made some improvements over the past few quarters, and we will look to drive additional margin improvements and build a more efficient company. So with that said, let's run through our Q2 business performance. Total revenue came in ahead of expectations at $75 million, consisting of subscription revenue of $58.3 million and professional services revenue of $16.7 million.

Non-GAAP operating loss came in well ahead as we continue to realize savings in T&E and cost benefits from virtual events. The lower-than-expected costs combined with strong collections activity in the quarter led to outperformance on free cash flow to negative $0.7 million for Q2. We knew that this would be a tough economic environment for companies coming into the quarter, and this challenging environment had an impact on our Q2 operating metrics. Looking at customers over $100,000 ACV, we ended with 645 customers, reflecting 14% year-over-year growth.

This customer group continues to represent 90% of our business. While we added a total of 35 new customers in the quarter, we saw a number of customers leave our platform due to business failure, bankruptcy, and M&A. As a result, dollar-based retention decreased to 99%, compared to 103% in Q1. This was our highest level of churn, more than twice our historical average.

So let me give you some additional color. Full customer churn contributed two percentage points of this decline, with the leading causes including M&A and product fit. Down sales were nearly three times higher quarter over quarter and contributed another one percentage point of this decline as we provided relief to customers related to COVID. Let me be specific on the changes we are making to improve this metric.

First, we recognize we were too reliant on upfront volume sales historically, so we are unable to capture the natural expansion opportunities for volume in later quarters. We've changed the incentives for our sales team to rightsize our initial deals with customers. Second, as I mentioned earlier, we've adjusted our targeting to capture the key high-growth verticals of technology, media, and manufacturing. We've been successful in helping these companies grow and win on our platform.

Third, we've introduced new features and capabilities in our Central Platform, including Audit Trail, Sandbox, and more recently, Analytics. This gives us more products and tools for upsell activity. We believe this was our toughest quarter for churn, and we expect Q3 to return to normal levels with additional improvements over time. But dollar-based retention is a trailing 12-month metric, so it will take a few quarters to lap the negative impact from Q2.

As a result, we expect dollar-based retention will not change significantly in the near term. Turning to transaction volume. Our system processed $12.7 billion of volume in the quarter, which represents 26% year-over-year growth and also on a trailing 12-month basis. Processed transaction volume is helpful in understanding how much of a customer's business is running through our platform.

But as a reminder, it does not track linearly with quarterly revenue as customers gain efficiencies as they scale. Now digging deeper into our financial details for the quarter. Subscription revenue grew 15% to $58.3 million. Professional services revenue decreased 13% to $16.7 million, partially driven by shifting of the services work to our GSI partners.

This is in line with our strategy to improve our mix toward the higher-margin subscription revenue, which ticked up to 78% revenue contribution in the quarter. This resulted in total revenue growing to $75 million for the quarter and at the high end of our guidance. Looking at our margins, we continue to make improvements. Non-GAAP gross margins increased another three points to 63% quarter over quarter as we maintained healthy non-GAAP subscription gross margins at 79% while improving non-GAAP services gross margin to 7%.

We're pleased with the improvement to the non-GAAP services gross margin over the last two quarters and plan to operate this on a breakeven basis going forward. Non-GAAP operating loss was $1.6 million in the quarter, reflecting an $8.5 million improvement over the previous year. We continue to realize benefits from limited T&E, events, and office spend. We also had some investments shift in the second half of the year and identified other cost savings.

The combination of effective cost management, coupled with our improving gross margins, led to a non-GAAP operating profit margin of negative 2%, well ahead of expectations. Now let's turn to billing and free cash flow. Calculated subscriptions billing growth was 3%, resulting in $49.7 million in Q2. The COVID crisis had an impact on our quarterly billings.

In addition to contract changes to support our long-term customers, we saw extended sales cycles in some areas. Given these headwinds in Q2, this was an especially tough quarter for billings growth. Moving forward, we're planning for modest improvements to billing growth next quarter. Moving to our cash flow numbers, Q2 free cash flow was negative $0.7 million, driven by lower-than-expected cost and strong collection activity in the quarter.

With the current economic environment, our collections team was very effective in following up on payment schedules and closing out receivables. As a result, our accounts receivable balance decreased by nearly $10 million. Total CAPEX for the quarter was $4.6 million. For Q3, we expect cash flow to be approximately negative $5 million with most of the quarter-over-quarter differences driven by business seasonality and capital spending delays.

We also expect collections activities to track closer to historical averages in Q3. For the full year, we expect free cash flow to be approximately negative $8 million. As I mentioned before, it's important we improve our operating leverage and create efficiencies in the business. We're making good progress on our cash flow metric and expect to be cash flow breakeven by Q4 of this year.

In terms of cash balance, we ended the quarter with $179 million in cash and cash equivalents. I'm pleased we have actively managed our spend and have maintained healthy cash position for the business. Our fully diluted share count as of the end of quarter was approximately 131 million shares using the treasury stock method. Overall, we're pleased with the progress we're making.

We've completed our second quarter of our new go-to-market initiatives, and we feel good about the traction we're seeing in the market. Our quarter-over-quarter pipeline is growing. We're becoming very disciplined in our investments and going after customers in the high-growth verticals, and we expect billing growth to improve this quarter. Our subscription business model continues to be resilient, but we continue to see economic uncertainty in the market.

We are making a number of changes to the business and working to shift more services to our partners. Given the number of unknowns, we believe it's prudent to provide guidance one quarter at a time. So for Q3, we currently expect total revenue of $73 million to $75 million; subscription revenue of $59 million to $60 million; non-GAAP operating loss of $5.5 million to $4.5 million; non-GAAP net loss per share of $0.05 to $0.04, assuming a weighted average share outstanding of approximately 119.3 million. As I said at the beginning, I'm excited to be here based on the huge opportunity I see ahead of us in driving the Subscription Economy.

Over the upcoming quarters, we'll be working to implement the changes required to reach our long-term growth objectives. And with that, we're happy to take questions. Operator?

Questions & Answers:


Thank you. [Operator instructions] Your first question will come from the line of Joseph Vafi of Canaccord. Please go ahead.

Joseph Vafi -- Canaccord Genuity -- Analyst

Hey, guys, and good afternoon. And Todd, welcome, I think, to your first earnings call here. Just wanted to kind of circle back on the churn in the quarter. I think it sounded like you said maybe this is the trough on churn.

I was wondering if you could kind of give us some highlights if churn was kind of more focused in kind of some of the more affected verticals from the pandemic and maybe if there's any kind of update you could give us here for the month of August on churn. And then maybe I have a quick follow-up.

Tien Tzuo -- Chief Executive Officer

All right. Well, thanks, Joe. Go ahead, Todd.

Todd McElhatton -- Chief Financial Officer

OK. So, look, I think on churn, we absolutely do think this was going to be the toughest quarter for us when we take a look at what we had. So two points of the churn that we had came from bankruptcies, M&A activity, and product fit. And then we had another about one point -- sorry about that.

We had another about one point of churn that came from down sells. And we've really been working with customers to make sure we do the right thing and keep them in the long run as a customer. So when you put those two things, those were the main drivers that we saw. We're definitely expecting churn to go back to our historical levels.

But as we mentioned in the script, the net dollar retention is kind of a lagging metric, so I don't expect to see significant change in that in the near term.

Tien Tzuo -- Chief Executive Officer

Joe, this is Tien. I would say -- yes, I would just add that your intuition is right, so that's what I would say.

Joseph Vafi -- Canaccord Genuity -- Analyst

OK. Fair enough. And then just kind of would be interested in the Analytics stuff that you mentioned relative to -- if you kind of looked around at your customer base, some of them are more sophisticated than others. How sophisticated are customers in being able to calculate some of their metrics on their subscription products at this point relative to their internal tools versus what you're starting to sell right now?

Tien Tzuo -- Chief Executive Officer

Yes. I would say when you look at the analytics, there's the data and then there's the tool. Right? And we have an excellent set of analytics tools, but we also know that customers sometimes need to have their own tools, whether it's quick or anything else and to be able to integrate. But access to the data is really important.

We're the system of record for so much of their information, right, subscribers, churns, bill invoices, payments, and so on and so forth. And more than that, we have over a decade's worth of history now, where it's not just the data itself but the interpretation of the data. And so we're starting to tell customers that says, "Look, when we go ahead and segment our customers in the high growers, medium growers, slower growers, what are the key steps?" So for example, companies that do some level of usage-based billing actually grow faster. Customers that -- companies that have a higher degree of customer engagement, where they're coming back every year making modifications to their subscriptions and contracts, they tend to grow faster.

And so I would say our goal isn't just to be a tool. We really not just want to have the access to the data that gives them the ability to understand what to do, but we also want to go a step further and actually translate that data into actionable insights for them.

Joseph Vafi -- Canaccord Genuity -- Analyst

OK. Fair enough. And may I just sneak one quick one in on the payment side? I saw the relationship with GoCardless a couple of weeks ago. Just wondering kind of from a payments angle how you're looking at the opportunity there, Tien, and how that could evolve over time into maybe potentially theoretically a new revenue stream for you?

Tien Tzuo -- Chief Executive Officer

Yes. I would say that the starting point is really our customers. Our mission is to make customers successful. And that is why we support, I think, over 35 different payment gateways around the world.

We want companies to be able to choose and support any type of payment method that their customers want to use to settle their invoices. But more than that, we're starting to get much deeper into how to help them maximize collections, whether it's percent of electronic payment success or the fees that they pay on each one of these transactions. GoCardless is one of our great partners that has a specialty in, I'd say, non-credit card type of electronic payment methods, right, things like ACH, things like direct debit. And there's just huge benefits to be had to move some percentage of your credit card customers over to an ACH, direct debit environment, both for a cost per transaction and recognizing that these numbers don't change as much.

Right? And so the payment success rates tend to be higher. And so we've partnered with them really to have better joint success with our joint customers. You talked about the financial relationship. The financial relationship with them is pretty typical.

There's some sort of standard revenue share involved, but our primary focus is delivering customer success to our joint customers.

Joseph Vafi -- Canaccord Genuity -- Analyst

Great. Thanks very much, guys.


Your next question will come from the line of Scott Berg of Needham. Please go ahead.

Joon Huh -- Vice President of Investor Relations



Scott Berg?

Scott Berg -- Needham and Company -- Analyst

Sorry. I was on mute. Hi, everyone. Thanks for taking my questions.

I guess we got a couple here. Tien, let's talk about kind of the refocus around sales in those three core verticals. How should we think about the impact on maybe your TAM going forward, what that does maybe in the far to intermediate term, how you think about maybe growth over the next three to five years as we come out of the low point of the economic cycle with the retail sales force? And then maybe the follow-up to that would be the impact of the operating model may be around sales and marketing as you become more focused in those three areas.

Tien Tzuo -- Chief Executive Officer

That's -- those are great, great questions. So these three areas are the same three areas we've been talking about for some time. Right? It's the high-tech sector. It's the media sector, and it's the manufacturing sector.

I mean, Scott, we have data. Right? And we're trying to make these decisions based on data. And so we can see, and you see this in our SEI studies, which of the industries are actually faster growing. And so we're trying to say, "Hey.

If our aspiration is to be an index for the Subscription Economy and we have data to help us choose which are the best companies and which are the best industries to focus on and we have the insights and the consulting to help companies become the best companies in their space, that ultimately is going to give us a portfolio that is highly valuable." And so you're seeing us really doing that. So you're absolutely right. We think that there will be natural improvements to the operating model with the ability to focus on a set of companies and with the ability to pick and choose, if you will, the winners from the losers and making sure that we work with them. Now that's not to say we're going to ignore the other sectors.

Right? We mentioned offhand that we're seeing expansion in the subscription economy into spaces like education, into spaces like public sector. And so we're always going to have a foot in some of these other areas, but we want to make sure that we're doing the right thing. We're being the most efficient in our sales and marketing and staying focused and really being the pick of the industries and the companies that are growing the fastest is, I think, a key part of our strategy.

Todd McElhatton -- Chief Financial Officer

So maybe I'd just give maybe a little more color, Scott. On the go-to market, on the changes, I think we feel like we're really making good progress, and so when I look, the things I would want to see is how's pipeline developing. We've seen double-digit increase quarter over quarter. I would take a look at sales velocity.

That's improving. How is our sales rep productivity? That's also improving. And we're also getting that pipeline in those areas where we know we can be successful and grow and retain customers. So look, we're just two quarters into it.

We're seeing the right leading indicators of where we want to go. And I also expect as we're able to do this, this will help us gain more operating leverage out of our model.

Scott Berg -- Needham and Company -- Analyst

Great. Helpful. And then I just wanted to touch on pricing, some of the changes you're making there trying to rightsize some of these contracts moving forward. Tien, I believe this is something we probably spoke about in the past.

It's always kind of been a little bit of a challenge trying to find the balance between what customers think they need and what they really need. How do we think about that process going forward to kind of ensure, I guess, that some of these initial deals don't get out too far ahead of themselves?

Tien Tzuo -- Chief Executive Officer

Yes. I think the lesson given what we do, we work a lot with our customers on pricing strategies. And we do that ourselves. We do that through our partners with companies like Simon-Kucher, companies ProfitWell.

And the lesson, if you wanted to bring it down to a single thing, is customers want to pay for value. Customers don't want to be on the clock, all right, so a pure metered model that might not make any sense. But customers want to pay for value, and the best way to do that is to tie your pricing model to the value that they're experiencing, and that's something that we certainly believe in. It is a balancing act, right, that customers also want predictability.

But you're seeing us really say, "Well, how do we do a lot more of that?" And you're seeing some companies in our customer base, and there's been some high-profile pricing model changes really follow the same. This is the future. Right? This is what AWS is teaching us. This is what Netflix is teaching us but more and more, the world is moving toward consumption-based business models, which, of course, benefits us because that creates an incredibly strong need for a sophisticated billing system.

Scott Berg -- Needham and Company -- Analyst

Great. Thanks for taking my questions.


Your next question will come from the line of Stan Zlotsky of Morgan Stanley. Please go ahead.

Stan Zlotsky -- Morgan Stanley -- Analyst

Perfect. Thank you so much, guys, and my apologies if some of my questions have already been asked and answered. Just jumping between calls here. Just on the churn, when -- if somebody turns off, I mean, the M&A and the bankruptcy makes a ton of sense.

But on product fit, where do customers go? What do they do when they -- if they do turn off Zuora and especially considering the environment where we are now? And then I have a quick follow-up.

Tien Tzuo -- Chief Executive Officer

Yeah. I think if you look at what we do, our sweet spot is really companies that have some level of volume and some level of complexity into their business. And we do believe that as businesses grow, they're ultimately going to go in that area. Right? They're going to have more volume because they're going to do more usage-based billing models.

They're going to pursue a wider market, maybe go down market and whatnot. Well, there are some companies that are saying, "Look, our growth is not what we expected to be. We only have a few hundred customers. Does it make sense for us simply to do this stuff by hand?" And given their business situation, they might choose to adopt a path like that.

And so that's why, again, with all the data that we have, we can predict some of these things. We can predict which companies and which industries are going to be the fast growers, have a chance to be the next Zoom, where the idea of doing it by hand or doing it manually just wouldn't make any sense. And so historically, we might have signed up a few customers at aspirations, but just for whatever reason, it didn't work out for them. Those are the ones that you're going to see really, really move toward a more manual-based model.

Stan Zlotsky -- Morgan Stanley -- Analyst

Got it. That makes sense. And as far as just sales productivity, you guys mentioned you've seen improvements in sales productivity. But how are you thinking about the actual sales hiring for the remainder of this year? And potentially, anything that you're thinking about as far as maybe changes or tweaks to your sales organization as you head into fiscal '22?

Todd McElhatton -- Chief Financial Officer

So, look, I'll take that. I think we pretty much have the model where we want it to be. We're taking a look at from a standpoint of what the capacity of that current team is and where we want to get to from a growth perspective. So I will say we do have headcount that we will be hiring during the second half of this year, and I would certainly expect that we would have growth next year in the quota-carrying headcount.

Stan Zlotsky -- Morgan Stanley -- Analyst

OK. Perfect. Thank you so much.


[Operator instructions] Your next question will come from the line of Brent Thill with Jefferies. Please go ahead.

Luv Sodha -- Jefferies -- Analyst

Hey, guys. This is Luv Sodha on for Brent Thill. Thank you for taking my questions, and welcome to Todd. I had a couple of questions.

One was I wanted to dig into the pipeline improvement that you guys cited. In terms of this pipeline improvement, could you give us some color around sort of where the pipeline is improving? Is it small deals? Is it large deals, or is it like add-on sales from the initial sale? That would be helpful. And then I have a follow-up as well.

Tien Tzuo -- Chief Executive Officer

Yes. I would say the simple answer to the pipeline is interest level to the subscription business has never been higher. And when you hear these stories, when you hear these stories of Zoom, when you hear these stories of the SaaS companies thriving, when you hear these stories of these media companies thriving and you're hearing that companies that have a direct relationship with their customers and you forget sometimes that most companies do not have a direct relationship with customers. Right? CPG companies don't.

Auto manufacturers traditionally don't. Right? You sell through distributors. You sell through retailers. You sell through wholesalers.

You sell through dealers. And those companies have not been able to adapt as quickly in the last six months. And so companies are saying, "Look, we need to have a direct relationship with our customers. And we need to pivot our business model so that it's based on our direct relationships with our customers." And that is what we call a subscription-based business model.

And so it's not a surprise that RFPs are up year over year. Demand is up year over year. We're trying to make sure, though, that we're focused on generating this pipe in the three core verticals that we know are where the growth is going to be in the short term, even as we pursue, right, the leaders in other industries that want to basically be the first movers in their industries into the Subscription Economy.

Todd McElhatton -- Chief Financial Officer

I guess the other thing I would maybe add, Luv, is in addition to just what Tien said, we're growing in the areas that we want to grow. The quality is better from a standpoint of seeing how pipeline is progressing through the system. So we're really pleased with that. And again, the customers that we are seeing are in that core mid-size to large companies that are the backbone of our revenue.

Luv Sodha -- Jefferies -- Analyst

Perfect. And maybe one more on -- just a follow-up on the Zuora Billings and Zuora Revenue integration. I'm guessing that that is behind you. So could we expect the cross-sell to resume? And will that have an uplift on the retention rates that you're seeing out there? Thank you.

Tien Tzuo -- Chief Executive Officer

Yeah. Yeah. So the integration is absolutely behind us. It's now been in the marketplace, gosh, now for, what, six months and the product continues to be evolved.

The product continues to get better and better, but we're really happy. It's helping our customers shrink time it takes to close the books. It's helping them really reduce all the manual effort required to do revenue recognition, and we feel really good. And the cross-sell motion is absolutely -- is happening, not just the cross-sell motion but -- well, the cross-sell motion on both sides, right, selling, billing to revenue customers and vice versa but also pursuing new customers with an integrated joint solution for a full order to revenue solution, and those things are all happening right now.

Luv Sodha -- Jefferies -- Analyst

Perfect. Thank you, Tien. I'll pass it on.


And we have no further questions at this time. I will now turn the call back over to the presenters for closing remarks.

Joon Huh -- Vice President of Investor Relations

Great. Thank you so much for joining the call with us today. And we look forward to catching up with you throughout the quarter, and we'll talk to you next time. Thank you.


[Operator signoff]

Duration: 42 minutes

Call participants:

Joon Huh -- Vice President of Investor Relations

Tien Tzuo -- Chief Executive Officer

Todd McElhatton -- Chief Financial Officer

Joseph Vafi -- Canaccord Genuity -- Analyst

Scott Berg -- Needham and Company -- Analyst

Stan Zlotsky -- Morgan Stanley -- Analyst

Luv Sodha -- Jefferies -- Analyst

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