Zuora, Inc. (ZUO) Q1 2022 Earnings Call Transcript

Zuora, Inc. (ZUO 0.62%)
Q1 2022 Earnings Call
May 26, 2021, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good afternoon, and welcome to Zuora's first quarter of fiscal 2022 earnings conference call. After the speakers' remarks, there will be a question-and-answer session. [Operator instructions] With that, I would like to turn the call over to Luana Wolk, head of investor relations, for introductory remarks.

Luana Wolk -- Head of Investor Relations

Thank you. Good afternoon, and welcome to Zuora's first-quarter fiscal 2022 earnings conference call. Joining me today are Tien Tzuo, Zuora's founder and chief executive officer; and Todd McElhatton, Zuora's chief financial officer. We will also have Robbie Traube, our chief revenue officer, joining the Q&A session today.

The purpose of today's call is for us to review our first-quarter results, as well as provide our financial outlook for the upcoming second quarter and fiscal 2022 year. Some of our discussion and responses today will include forward-looking statements. So as a reminder, our actual results could differ materially as a result of several factors. You can find information regarding those factors in the earnings release we issued today in our most recent filings with the SEC.

And lastly, we'll be referring to several non-GAAP financial measures today, and reconciliations to related GAAP measures are included in our earnings release. For a copy of our earnings release linked to the 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 -- Founder and Chief Executive Officer

Thank you, Luana, and thank you, everyone, for joining us today on Zuora's first-quarter earnings call for fiscal 2022. Overall, we get a strong start to the new fiscal year. We exceeded our guidance across our operating metrics, including total revenue, subscription revenue, non-GAAP gross margin, non-GAAP operating income, and we also posted another quarter of positive free cash flow. Our execution is also improving.

Our pipeline grew significantly, highlighting the strength of our market. System integration partners were involved in two-thirds of our Q1 new business deals, showing the strength of our partner strategy. We had a strong upsell quarter, which helped us reach 103% net dollar retention, up 3 points from the 100% we posted last quarter. I'd like to give a huge thanks to our ZEOs for their focus and dedication in Q1.

They are the reason we delivered this quarter. Today, we also announced the purchase of the intellectual property assets from Live Objects, a company that specializes in AI-driven process optimization. I'll discuss later what this means, but let me first give some color on the quarter. Now, I know many of you attended our recent 2021 Investor Day just last month.

So I'll keep my comments today brief. For those of you who didn't get a chance to attend, I encourage you to watch the recording at investor.zuora.com. The headline for the Q1 is we executed well on the corporate strategy that we laid out at our Investor Day. At Investor Day, we talked about how we now consider ourselves a multi-product company, giving us multiple vectors for growth.

With our four current products anchored on our central platform, we have the ability to upsell and cross-sell to our installed base while signing on new customers. In Q1, this strategy worked. We continue to land new logos in our new verticals. In manufacturing, new wins included auto manufacturer Suzuki.

In Publishing, we welcomed Mainichi Newspapers. And in technology, we added companies like Gainsight, now part of the Vista Equity group. In Q1, we continue to make great progress upselling our existing products. For example, the central sandbox, a key capability really helped drive platform upsells.

It's actually our fastest solution to reach $1 million in sales and we doubled that in Q1. In Q1, we continue to make great progress cross-selling new products. For example, the world's largest data center infrastructure provider with Zuora is a Zuora Billing customer. And in Q1, they added Zuora revenue to automate the entire order to revenue-recognition process.

We're also seeing early cross-sell traction with Zuora Collect AI, our intelligent payment retry module following its March launch. In short, our land and expand go-to-market strategy is paying off. We're seeing new products and capabilities becoming a greater proportion of the overall ACV book in the quarter. We saw triple-digit growth in installed base bookings year over year, and as mentioned, net dollar retention ticked up from 100% last quarter to 103% in Q1.

As we said at Investor Day, we believe that our installed base opportunity alone is a $250 million-plus ARR opportunity, and we are laser-focused on capturing this. At Investor Day, we also talked about the importance of our Zuora Central Platform. It is the anchor, helping us transform from a two-product company, Billing plus Revenue, to a complete subscription experience cloud that manages our customers' end-to-end subscriber experiences. The Central Platform provides customers with meaningful insights.

It supports and automates end-to-end business processes, and it offers the agility and scalability that is required to succeed in the subscription economy. And in Q1, adoption of our platform continues to grow, making it even more sticky as we become central to all subscription business processes for our customers. Over half our customers are automating and simplifying their IT processes with our platform workflows. We process over 8 million invoices on the peak day this quarter, atop our platform, and last quarter, approximately 500 million workflow tasks were executed, saving our customers time and money.

And this is where the acquisition of Live Objects' intellectual property assets come in. At our Investor Day, we said we'd be opportunistic in looking at tuck-in acquisitions as a tool to accelerate our innovation and road map. I am super, super excited about this technology and how it will help us accelerate this central platform road map. What the Live Objects team have built is an AI-driven process engine that we believe will allow our customers in the Central Platform to visualize the processes that are behind the awesome subscriber experiences that they are designing.

To discover and map new hidden processes, including the ones that span multiple systems like CRM, ERP, or other fulfillment and provisioning systems. And allow them to detect anomalies in these processes that may lead to customer dissatisfaction or inefficiencies. We all know that customer expectations continue to rise, call it the Amazon or Instacart effect. And those companies that offer the best subscriber experiences are the ones who will win.

The Central Platform, including the new capabilities that the Live Objects acquisition gives us, is what enables our customers to deliver those differentiated subscriber experiences. At Investor Day, we also laid out our Enterprise alliance strategy as part of our growth upmarket. And in Q1, we saw positive results of this strategy. Partnered prime deals were up, including our first partner prime deal in Japan with Suzuki.

Partner-influenced bookings were up 70% year over year and represented just approximately two-thirds of our new bookings in Q1. We also saw triple-digit year-over-year growth in new partner-driven pipeline and a considerable increase in Zuora certified consultants quarter over quarter, a great, great illustration of our partners' commitment to Zuora's industry-leading solutions. The big one from the quarter was $1 billion audiovisual technology company. Not only was one of the big four global SIs involved in the deal with Zuora, but it also highlights our multi-product strategy at work.

The company chose Billing, Collect, and a Central Platform to enable its multichannel audio licensing business. In short, working with our global systems integrator partners gives us more scale and helps to accelerate our growth. And finally, at Investor Day, we explained why companies are not coming to us just for our technology, but also for our unique expertise on all things subscriptions. We've translated our 13 years of experience into a proprietary blueprint that we call the journey to usership.

This blueprint is what we use to accelerate our customers on the path to building successful subscription businesses. And we gave you some examples of this during Investor Day. But let me give you three others from Q1. In Q1 a global CPG company partnered with our subscribed strategy group to completely revamp their company's subscription offering, including its overall subscriber experience.

We also had a consumer robotics company partnering with SSG to educate their executives on the implications of recurring revenue on their financial metrics. And finally, you know we work with eight of the top 10 automobile manufacturers. One of them actually first came to Zuora for our expertise to optimize their telematics business in Europe. And based on that success, they are now leaning on our knowledge of agile enterprise architectures to help them build a modern platform that can launch new offerings into the market faster than ever before.

In Q1, our subscribe strategy group engaged with over 20 companies while also partnering with firms like the Boston Consulting Group to publish original research based on this data. And so in summary, we had a solid start to the year. The strategy we laid out at last month's Investor Day is delivering results. We continue to see our multiproduct sales motion.

Our SI alliances partnership continues to deliver, and our unique expertise continues to differentiate us with our customers. With our clear strategy and focus, we are well-positioned to continue capturing the opportunity of the subscription economy. Now, I'll turn the call over to Todd to review our financials. Todd?

Todd McElhatton -- Chief Financial Officer

Thanks, Tien, and thanks for joining the call. Our team executed well during the first quarter, as demonstrated by our financial results, having exceeded expectations across our key financial metrics. Last year, we laid the foundation for long-term growth. It's great to see the incremental progress we made in Q1.

As we look ahead, we will continue to focus on improving net dollar retention, meeting a target of ARR growth of 17% this fiscal year, and managing top-line growth and free cash flow margin by applying a Rule of 40 framework that we outlined on Investor Day. Let me first review our key metrics. Q1 was highlighted by success with multiproduct deals and solid contribution from our SI partners. Looking at our customers at or over $100,000 in ACV, we ended with 677 customers.

This customer group continues to represent 90% of our business. We closed five deals with ACV $0.5 million or above compared to just one in the same quarter a year ago. In Q1, net dollar retention was 103%, a significant improvement from 100% in the prior quarter. We made meaningful progress to our net dollar retention target we set for fiscal 2022.

Net dollar retention is a lagging metric and tracked on a trailing 12-month basis. The higher churn levels we experienced in Q2 last year will weigh in on this metric until we lap it in this next quarter. Turning to transaction volume. Our systems processed $17 billion in the quarter, representing 38% growth year over year.

Process transaction volume is helpful in understanding how much of our customers' business is running through our platform but does not track linearly with our quarterly revenue as customer gains efficiencies as they scale. Now let me review our Q1 financial results. Subscription revenue grew 14% year over year to $65.1 million and represented 81% of total revenue. As expected, subscription revenue was essentially flat from the prior quarter.

Due to the daily revenue recognition, our Q1 has three fewer days versus Q4, which impacted our subscription revenue by approximately $2.1 million. As you may recall, our Q4 FY '21 subscription revenue included a one-time nonrecurring benefit of $1.2 million. Professional services revenue decreased 11% year over year to $15.2 million. As we've discussed previously, our strategy in shifting more services to our system integrator partners continues to gain traction, and we view the decline in service revenue as a positive trend.

This is in line with our strategy to improve our overall mix toward recurring subscription revenue. Total revenue eclipsed the $80 million mark in Q1 and grew 9% year over year. Again, our overall revenue growth was impacted by our strategy to reduce the mix of our direct professional services toward our SI partners. This not only enhances our go-to-market opportunity but also benefits overall margins.

As we drive more professional services to SIs, our overall gross margin improved. As a result of this success, non-GAAP blended gross margin was 65%, a meaningful improvement of 400 basis points from Q1 in the prior year. Non-GAAP subscription gross margin reached 79.4%, compared to 78.6% in Q1 of the prior year, reflecting scale efficiencies. Non-GAAP services gross margin was breakeven, consistent with what we shared with you on past calls.

We'll continue to run services on a breakeven basis as we engage more with our SI partners. Non-GAAP operating loss was $2.5 million for the quarter, reflecting an improvement of $5.1 million from the prior year. This was driven by top-line growth and our improving gross margins. This resulted in non-GAAP operating margin of negative 3.2%, a dramatic improvement from minus 10.4% in Q1 of last year.

As I shared with you on the last earnings call, operating margins will be flat this fiscal year as we absorb expenses which weren't incurred last year and accelerated investments in go-to-market and product. Now, let's turn to ARR and free cash flow. In Q1, ARR growth was 14% year over year. ARR growth represents the annualized value of all subscription contracts at the end of a given quarter compared to the ARR in the prior year.

We continue to be focused on our target of ARR growth of 17% for fiscal year 2022. Free cash flow was $8.6 million, driven by record cash collections during the quarter. For Q2, we expect cash flow to be slightly negative due to the seasonality of Q1 billings and the employee stock purchase plan. Capex for the quarter was $1.6 million.

Looking ahead, as we outlined during our Investor Day, we're focused on accelerating top-line growth while prudently managing the bottom line. As such, we introduced a Rule of 40 framework as defined by the sum of the annual subscription revenue plus free cash flow. Free cash flow margin is calculated as free cash flow divided by total revenue. Based on this Rule of 40 framework, our objective is to be 15% plus this fiscal year and 40% or higher by the end of fiscal 2025.

We managed to exceed this objective during Q1 due to significant cash collections and our typical seasonality of free cash flow. Turning to the balance sheet. We ended the quarter with $197.4 million in cash and cash equivalents, an increase of $10.8 million from the prior year, primarily driven by strong cash collections. We continue to be prudent with our spending levels, and we've maintained a healthy cash position to manage the business.

Our fully diluted share count at the end of the quarter was approximately 136.1 million shares using the treasury stock method. In Q1, we executed well and drove improved performance. We maintained discipline in our investments, targeting larger prospects and working with our SI partners. Now, let's turn to our financial outlook.

During FY '22, we'll accelerate investments in go-to-market and product development initiatives while absorbing costs that were not in our run rate last year. We continue to expect free cash flow positive for the full year. For Q2, we currently expect total revenue of $82.5 million to $84.5 million. Subscription revenue of $67.5 million to $69.5 million.

Non-GAAP operating loss of minus $5 million to minus $4.5 million. Non-GAAP net loss per share of minus $0.04 to minus $0.03, assuming a weighted average shares outstanding of approximately 123.1 million. As we look ahead to the full-year fiscal 2022, we are raising our outlook, and we expect total revenue of $337 million to $339 million, subscription revenue of $274 million to $278 million. Non-GAAP operating loss of minus $12 million to minus $8 million.

Non-GAAP net loss per share of minus $0.10 to minus $0.06, assuming a weighted average shares outstanding of approximately 124.1 million. In closing, we're pleased with our execution in Q1 and feel we've laid a solid foundation for Zuora's long-term growth. Next, we'll open the call for your questions. As Luana indicated earlier, Robbie Traube, our chief revenue officer, will be joining Tien and me for the Q&A session.

Operator, please open up the call for questions.

Questions & Answers:

Operator

[Operator instructions] Your first question is from the line of Joe Vafi with Canaccord.

Joe Vafi -- Canaccord Genuity -- Analyst

Hey, guys, good afternoon, and nice to see the steadily accelerating results here out of Zuora this quarter. Thought we'd start kind of thinking a little bit more short-term here. And next quarter, I know you mentioned in your remarks, Todd, that there's a big lapping of a headwind in net retention in Q2. And I know Tien talked about some really good growth coming out of the installed base as well.

It sounds like the setup is pretty good for a bump-up in net retention next quarter. I know you're not providing that guidance now, but any color there would be appreciated. And then I have a quick follow-up.

Todd McElhatton -- Chief Financial Officer

Joe --

Tien Tzuo -- Founder and Chief Executive Officer

Yes, Joe. I'll just -- Go ahead, Todd.

Todd McElhatton -- Chief Financial Officer

Hi, Joe. So we're really pleased with the 3-point improvement that we had this most recent quarter. I think it absolutely shows the strategy is working. Look, we expect to have steadily improving performance over time.

And at this point, we feel that we are on track to hit our 105%-plus net dollar retention for the year.

Joe Vafi -- Canaccord Genuity -- Analyst

That's great. That's good color. Secondly, I thought maybe -- may we talk about your acquisition here a little bit? Live Objects, I think, it's called. And when -- how you see that product integrating, what the timeline might be.

And it sounds really great, and I would assume that would be an add-on purchase for customers and when potentially that may be added to the suite. Although I know it's early.

Tien Tzuo -- Founder and Chief Executive Officer

Sure. I'll go and fill that. It's something that we're really excited about. I would kind of point you back to what we said at Investor Day, we have four core products.

Think of it as three applications: Billing, Revenue, Collect. In each of these also, they are built on the platform, which we call the Central Platform. And so we laid out a vision for the Central Platform with some core capabilities, the subscriber graph, the process orchestration engine. This is a tuck-in technology that will help us make those capabilities inside the Central Platform stronger and accelerate some of the things that we wanted to do in the central platform itself in those areas.

And so the monetization of that is still going to be the same way we monetize the Central Platform. But we think this will make the product even stronger, making our product even stickier and accelerate the growth of the -- our ability to deliver on the road map that we showed back In Investor Day. That's the way to think about it.

Joe Vafi -- Canaccord Genuity -- Analyst

OK. That's great. Thanks, Tien. And then maybe I'll just throw one more in since Robbie is on the line.

I know it sounds like from the commentary that the partners and systems integrators are really starting to embrace the Zuora platform more. Just wondering if you could provide some color on how your sales effort is kind of shifting or morphing relative to more uptake from the partners? Thanks a lot, guys.

Robbie Traube -- Chief Revenue Officer

Yes. Thank you for that. So overall, very, very pleased with our progress here. Overall, when we first joined, right, there was very little progress at all.

What we've seen though is the ground that we've covered around three-quarters of our current lines overall influence or sourced by SIs. And also, we have massive growth in terms of the certified consultants. And they're really investing in their customers' digital transformations. So as we look across all of our GSI partners, we've got really broad traction with those.

And I think longer term, the opportunity to grow and penetrate to our new business overall.

Operator

Your next question is from the line of Andrew DeGasperi with Berenberg.

Andrew DeGasperi -- Berenberg Capital Markets -- Analyst

Thanks for taking my question. I guess the one I wanted to ask, first, on net retention rate, I know Joe already asked it. But in terms of the 103%, would it be fair to say that if you exclude the churn from Q2 of last year, you're already at 105% and over?

Todd McElhatton -- Chief Financial Officer

Andrew, we're not giving any specific guidance on that. But like I said, we should expect to have consistent improvement over the quarters as we go through the year, and we're very confident that we'll be at the 105%-plus as we exit the fiscal year.

Andrew DeGasperi -- Berenberg Capital Markets -- Analyst

Got it. And then secondly, you mentioned that ACV customers -- the customer you closed five deals with that are worth $500,000 and above. Just curious, are you seeing overall penetration of your Revenue, Collect, and Central Platform that it is meaningfully higher in your pipeline right now than what you highlighted is currently the state on the Investor Day?

Todd McElhatton -- Chief Financial Officer

So, Andrew, I think how I -- go ahead, Tien.

Tien Tzuo -- Founder and Chief Executive Officer

Yes. All the products are in motion. And you're absolutely right. I mean, what we love about our multi-product strategy is we don't have to sell the whole suite on Investor Day.

John, the CTO of Chegg said, look, what I really like about your product and your platform is I don't have to take the whole thing at one trade. I could bite off the part that makes sense for me. Then I've got a growth path. So every company is going to be in a different situation and be internally self-billing.

I think the example that we highlighted in the call just now and then come back and upsell revenue. But there are other customers, there's another one that we highlight that says, you know what, I want Billing and Collect upfront, other customers might say, as long as I'm doing this, I want to do the Billing and the Revenue together once upfront. And so we can really meet the customers where they are. But all the products are really, really in motion.

Todd McElhatton -- Chief Financial Officer

Andrew, the other color that I might add is we really are seeing very nice cross-sell with the multiproduct strategy and in the past, we've had probably a heavier weighting on volume, and we saw a much better balance of other products being sold this quarter in that upsell number. And so I'm really happy about that because as it shows, customers are really embracing the entire Zuora platform, and I believe it's going to make the platform more stickier and help us in future net dollar retention.

Andrew DeGasperi -- Berenberg Capital Markets -- Analyst

Thanks for that. And maybe lastly, in terms of end-market strength, I know you mentioned manufacturing and several others. Was there anything surprising in terms of the pipeline?

Tien Tzuo -- Founder and Chief Executive Officer

No. I think what we just outlined at Investor Day, just -- it was only -- gosh, it was only about 45, six weeks ago -- 45 days, six weeks ago. No change there. We see ourselves as having three core verticals.

We believe, based on our data, that these are the fastest-growing verticals in the subscription economy, the fastest adoption of subscription business models. It's technology. It's media. It's manufacturing, really driven by IoT.

But that being said, we continue to see other industries starting to move, but no change in our focus, right? Those are our three verticals, and we continue to work with and monitor what we'll call emerging verticals.

Andrew DeGasperi -- Berenberg Capital Markets -- Analyst

Great. Thank you.

Operator

Your next question is from the line of Chris Merwin with Goldman Sachs.

Chris Merwin -- Goldman Sachs -- Analyst

Hey, thanks so much for taking my question. I just wanted to ask about the large customers. I mean, you mentioned, obviously -- I think it was $0.5 million-plus, a huge increase year on year, evidence of the cross-sell motion. $100,000 plus, and like it slowed down a little bit.

But again, you've got stronger momentum with your very largest customers. How do we think about the kind of directional trends of each of those metrics? And anything else you can share, just about like forward expectations for those metrics would be helpful, too. Thank you.

Todd McElhatton -- Chief Financial Officer

Hi, Chris. Todd. I'll maybe take that, and if anyone else wants to weigh in, we can go ahead and do that. But look, I think we always see a little bit of seasonality in Q1 and Q4 tends to end out or wipe out a lot of the pipeline.

And so we plan for that, and we had quite a bit of upsell in the quarter, and we were really pleased with that. And I think it really shows that our strategy of moving upmarket in the enterprise is absolutely working. And you're right, five deals over $0.5 million, we're really pleased about that. We're seeing excellent traction in the installed base.

And I think we talked about that at Investor Day, the huge opportunity that we see there. And again, net dollar retention significantly improved, we were up 3 points. I guess maybe the only other thing I would say is we also saw really nice growth on the pipeline. And Robbie, I don't know if there's anything you want to comment about the growth that we saw in the pipeline in Q1.

Robbie Traube -- Chief Revenue Officer

Yes. I think overall, I mean, pipeline, it continues to feel good and it's growing really as expected. Again, the focus is definitely the area in terms of focus on verticals, on going on to the enterprise. I think overall, the pipeline process on account-based marketing, all of that is working.

All of that is really kicking in, and also alliances, right? They continue to provide that source and that influenced the deal flow. So overall, I think pipeline thought is really working well, really pleased with the direction there. I think the vertical focus, all of that is really helping us to support the -- going up market.

Chris Merwin -- Goldman Sachs -- Analyst

Perfect. And maybe one follow-up would be on gross retention. It seems like as you get bigger and bigger customers, you're selling more products, I imagine, and yes, that metric is probably improving. I know you don't disclose it, but anything you can say about the directional trend of it, order of magnitude improvement, from the trough of COVID last year.

I mean, I know it's a two-part story with more cross-sells, but it seems like the gross retention, I would think, is improving as well.

Tien Tzuo -- Founder and Chief Executive Officer

Yes. I'll jump in, and Robbie, maybe you can give the color. But last year was definitely an odd year because of COVID, because of just the uncertainty in those two months in Q2. But I would say this.

I would say the customer success focus that Robbie has put in, that we've talked about in the past and we talked about in Investor Day, like the pod structure, has really, really paid off. And so you're seeing that not just in our ability to manage churn, but also keep our customers engaged, improving NPS and then strengthens our ability to continue to upsell them additional products, additional modules, and so on and so forth. So I think, ultimately, it's really the focus on customer success that you're seeing flow through the numbers.

Todd McElhatton -- Chief Financial Officer

Hey, Tien, I'd maybe just add a little bit -- I just add a little bit of color here for Chris. The churn level was actually below where our historical average has been, and we improved on a year-over-year basis. So we're making really good progress and those investments are absolutely paying off.

Chris Merwin -- Goldman Sachs -- Analyst

Great. Thanks so much.

Tien Tzuo -- Founder and Chief Executive Officer

And just to emphasize here what Todd said, that's the raw dollar amount. So on a percent basis, it looks even better.

Operator

Your next question is from the line of Stan Zlotsky with Morgan Stanley.

Stan Zlotsky -- Morgan Stanley -- Analyst

Perfect. Thank you so much, guys. I actually just wanted to get back to Chris's question for just one second. Maybe just walk us through the dynamics of, if you signed five new deals with $500,000 ACV and your net new customer count, greater than $100,000 and could increase by one.

Does that mean that there was churn? Or is there some kind of dynamics in the way that the metric is calculated that's obscuring that?

Todd McElhatton -- Chief Financial Officer

Stan, I would answer it as the following. We had a few customers that actually had some down sells, and they didn't drop out as customers, but they moved into lower. The customers that we did have churn were low dollar churns. And as we said, we had a much higher focus this quarter on upsells.

But I don't have any concern about that as I look forward to the next quarters. We have a really healthy pipeline, and we expect to continue to be adding new names. And in fact, we also talked in the Investor Day about the really large opportunity that we have in our installed base to continue to grow and drive top line with.

Stan Zlotsky -- Morgan Stanley -- Analyst

Got it.

Tien Tzuo -- Founder and Chief Executive Officer

Not all cloud-based deals were new logos. I think at the exact count, but some of those were actually existing customers that purchased more than $500,000 upsell from us. And so it's a complicated thing. The big picture is, is I think that number is just ebbs and flows of the business quarter to quarter, a little bit of seasonality.

And it's not something that we're concerned with.

Stan Zlotsky -- Morgan Stanley -- Analyst

Got it. And just mechanically, isn't upsell included in that? So if somebody is up sold wouldn't and they pushed above the $100,000 threshold, it would --

Tien Tzuo -- Founder and Chief Executive Officer

Yes. But I think there were more than $100,000 already, right? And then the dollar value, the upsell was more than $500,000. So it was a $500,000-plus ACV deal to an existing customer that was already over $100,000.

Stan Zlotsky -- Morgan Stanley -- Analyst

Got it. And just wanted to dig in a little bit on the full-year guidance. So revenue moving up a little bit more than the beat in the quarter, which is great. The profitability guide, staying within the parameters that you outlined in Q4, where are the incremental investments going? Is it R&D, sales, and marketing? Is there maybe, there's some of it going into the acquisition you guys just announced.

Just kind of walk us through it.

Todd McElhatton -- Chief Financial Officer

So, Stan, what we're doing, as we talked about is, we've got incremental investments in product, and we are going to absorb the incremental cost from the Live Objects acquisition into our cost basis. We're investing in go to market. And then we had a couple of expenses, as everyone knows, last year was a funny year, and there were some expenses that we didn't have that we'll be seeing this year, but we feel good about where we should land on the bottom line.

Stan Zlotsky -- Morgan Stanley -- Analyst

Got it. Perfect. Thank you so much, guys.

Operator

Your next question is from the line of Brent Thill with Jefferies.

Luv Sodha -- Jefferies -- Analyst

Hi. This is Luv Sodha on for Brent Thill. Congrats guys on a great quarter. Wanted to start out by asking, I guess, you mentioned the large deal traction that you're getting.

I guess as you move further up market and into the enterprise space, on the competitive front, are you seeing anyone in that space? Are you replacing existing solutions? Or is it more greenfield in terms of the wins there?

Tien Tzuo -- Founder and Chief Executive Officer

Yes. I'd say this. I'd say as we continue to go up market and we continue to take over mission-critical parts of the system, right, that are behind these subscriber experiences, you're definitely going to see us start to collide with existing systems that are in place, right? We're not looking to replace ERP systems or replace CRM systems, right?  But there are functionality that might exist in those systems that they might shift over to us. Now, it is both, and so you're going to see us going to essentially a greenfield opportunity in a large company, right? There are existing product business that could be a $10 billion, $15 billion, $30 billion business that are launching their first subscription offering.

Or sometimes as subscriptions have already become strategic. It's going to be a replacement, often of many different systems consolidated into one so that you can deliver that differentiated subscriber experience.

Luv Sodha -- Jefferies -- Analyst

Got it. And a quick follow-up for Todd. I guess how do we think about profitability, maybe, say, a year out? Or so is that something you're headed toward? I know you said free cash flow break positive for this year, but more like into the out years, I guess.

Todd McElhatton -- Chief Financial Officer

So I would really refer you back to the Investor Day, Luv, where we talked about where we saw us getting to in the Rule of 40 framework out to 2025. So I would tell you that's what we're seeing. We'll kind of see a consistent buildup to there, but that's the guidance that we've given right there for how we expect to see profitability evolve.

Luv Sodha -- Jefferies -- Analyst

Got it. Thank you.

Tien Tzuo -- Founder and Chief Executive Officer

Yes. Given how recent that guidance was, there's definitely -- there's no deviation from that. And this is a small tuck-in acquisition, too. So you're not going to see any deviation from the acquisition either.

Operator

And we have time for one last question from the line of Scott Berg with Needham.

Scott Berg -- Needham & Company -- Analyst

Hi. Congrats on a good quarter, and thanks for sliding me in here. I guess first question, Todd, is on the guidance. Your second-quarter subscription revenue shows a nice little acceleration after the improved subscription billings last two quarters, which I guess is to be expected given the sales levels.

But your guidance for the second half implies that that growth rate drops by about 5 points, which I'm a little bit surprised about, not that it's not going to be conservative, but that magnitude seems to be a little bit big. Is there something going on with those numbers, maybe around a renewal perspective or maybe something else that we could consider in the back half of the year when looking at those numbers?

Todd McElhatton -- Chief Financial Officer

So a few things, Scott. First, as I'd refer to the ARR guidance, and we said, we exited last year at 12% growth. We bumped up this quarter, we are at a 14% growth. At the end of the year, we expect to be at 17%.

So we're happy with that. We're on track for that, confident that we will hit that. The other thing that I would remind you is last year, in the second half, both in the third and fourth quarter, we had some nonrecurring impacts to the revenue. And if you look at that, it's probably about 220 basis points in Q3 and about 180 basis points in Q4.

That impacted our -- that will impact what the growth rate looks like. So again, I look back to the ARR. We'll continue to see consistent improvement through the year, and there isn't any deceleration.

Scott Berg -- Needham & Company -- Analyst

That's quite helpful. Thank you. And then from a follow-up perspective, I guess, maybe for Robbie or Tien. As you look at the deal composition today, which seems to be good and healthy, are customers buying more at the initial purchase? Or are you seeing that more really be, I guess, a better upsell opportunity today versus not necessarily a year ago but maybe right before the pandemic?

Tien Tzuo -- Founder and Chief Executive Officer

Robbie, I'll go ahead and let you get that.

Robbie Traube -- Chief Revenue Officer

Yes. Thanks, Tien. I mean, overall, we're seeing that this land and expand motion really is working very well for us. So it is that we're coming in, I'm seeing that composition very much in terms of not necessarily we're getting the initial products in, but then we're seeing that when a revenue, for example, follows a billing.

And I think the overall, what we're seeing is that people are coming in and then not going so much even toward the volume but actually looking at the outsource of added products as well.

Scott Berg -- Needham & Company -- Analyst

Great. That's helpful. Thanks for taking my questions.

Operator

And there are no further questions. I'd like to turn it back over to management for any closing remarks.

Tien Tzuo -- Founder and Chief Executive Officer

I want to thank everybody for joining our call. Just to kind of summarize, Q1 was a solid start to the year. We're doing what we said just shortly -- recently announced from Investor Day. I feel really, really good about the business, feel really good about the magnitude of the opportunity.

We hope to see you in 90 days. Thank you.

Operator

[Operator signoff]

Duration: 41 minutes

Call participants:

Luana Wolk -- Head of Investor Relations

Tien Tzuo -- Founder and Chief Executive Officer

Todd McElhatton -- Chief Financial Officer

Joe Vafi -- Canaccord Genuity -- Analyst

Robbie Traube -- Chief Revenue Officer

Andrew DeGasperi -- Berenberg Capital Markets -- Analyst

Chris Merwin -- Goldman Sachs -- Analyst

Stan Zlotsky -- Morgan Stanley -- Analyst

Luv Sodha -- Jefferies -- Analyst

Scott Berg -- Needham & Company -- Analyst

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