Zuora (ZUO) Q4 2022 Earnings Call Transcript

Zuora (ZUO -2.67%)
Q4 2022 Earnings Call
Mar 02, 2022, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good afternoon, and welcome to Zuora's fourth quarter of fiscal 2022 earnings conference call. [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 fourth 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. Robbie Traube, our president and chief revenue officer, will also be joining us for the Q&A session.

The purpose of today's call is to review our fourth quarter results and provide a financial outlook for the upcoming first quarter and full fiscal year 2023. Some of our discussions and responses today will include forward-looking statements. So as a reminder, our actual results could differ materially due to several factors. You can find information regarding those risk factors in the earnings release we issued today and our most recent filings with the SEC.

And finally, we'll be referring to several non-GAAP financial measures and reconciliations to GAAP measures are included in our earnings release. For a copy of our earnings release, links 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. Now, I'll turn the call over to you, Tien.

Tien Tzuo -- Founder and Chief Executive Officer

Thank you, Luana, and thank you, everyone, for joining us. Welcome to Zuora's fourth quarter fiscal 2022 earnings call. We had an outstanding quarter. We continue to innovate and deliver value to our customers.

In Q4, we beat guidance for subscription revenue and non-GAAP loss from operations. We saw continued momentum with a strong up-sell motion as well as a record-breaking quarter signing on new logos. Not only did we deliver top-line growth, but we also saw growth in our bottom line. Fiscal 2022 marked our first year that we were free cash flow positive.

This was a big year. We started the year with ambitious goals around ARR growth and dollar-based retention rate. And today, when I reflect on the quarter and the year, I am thrilled to share that we delivered. I'm also excited to share that Silver Lake, a global leader in technology, investing is partnering with us by way of a $400 million investment into the business.

The undeniable momentum of the subscription economy and the clear leadership we hold in this space was the catalyst to this relationship. This investment allows us to pursue new initiatives such as potential targeted acquisitions and other opportunities to broaden our product offerings and enable our customers to deliver exceptional subscriber experiences. I could not be more thrilled about the partnership. With that, let me share some additional details about our results for the quarter and the year.

At the start of the year, we said that the biggest opportunity in the subscription economy lies with large companies, both enterprise incumbents and the fastest-growing disruptors. And this year, we saw that this was absolutely the case. These companies are recognizing their recurring revenue business models, those that are focused on building ongoing relationships with their customers offer a faster path to growth. In fact, our latest subscription economy Index report, which analyzes anonymizing aggregated data of long-term Zuora Billing customers just launched, and this time has found that subscription businesses continue to outpace the S&P 500, growing 4.6 times faster over the entire past decade.

Now, while some have wondered whether the stay-at-home growth phenomenon was temporary, our data shows that, overall, subscription economy businesses are holding on to their pandemic subscribers and accelerating into the new year. All this continues to create a tailwind of opportunities for us as these companies turn to Zuora to help them on their subscription journey. For example, in fiscal '22, we brought on automotive leaders like Suzuki Motor Corporation, who's powering international connected car services, in fact, today, 12 of the top 15 largest auto manufacturers are now Zuora customers. Disruptors like Gusto, just one of many Zuora customers, who are scaling and preparing for future IPOs.

We've brought on established global technology leaders like Hitachi, global manufacturing companies like Luxottica. The company behind eyewear brands like Oakley, Gucci and Prada or Kyocera, a Japanese multinational ceramics and electronics manufacturer. And HMD Global, better known for making Nokia mobile phones, who chose Zuora this year to help them transform and embrace new customer-centric business models. In fact, in Q4, our continued focus on large companies resulted in eight deals over $500,000 in annualized contract value, or ACV, four of which were over $1 million.

And we added a net 27 customers this quarter with average contract value over $100,000, ending the year at 747. This year, we said we would accelerate our innovation and execute our multiproduct strategy, and we delivered. Our multiproduct strategy has become our critical differentiator. Why? Because more and more, as companies look to monetize their digital services, billing is only one key of the puzzle.

Ultimately, they need to manage the entire quote to revenue process to shape the broader subscriber experience. Now this is showing up in how companies are buying our software. In fact, in Q4, 18% of our first-time customers purchased our entire suite, including our market-leading Zuora revenue product. As a result of the successful integration between Zuora Billing and Zuora revenue, we really saw an acceleration in the demand this year for Zuora revenue.

As our second major product beachhead, bookings for Zuora revenue nearly doubled in fiscal 2022. This quarter, we launched real-time revenue, an enhancement to help our customers dramatically reduce their time to close the books. And we've already turned it on for 20% of Zuora revenue customers who are now processing transactions in real-time. I'm also incredibly pleased to share that independent research firm MGI Research ranked Zuora revenue as the No.

1 solution this year's Automated Revenue Management Report. And that's why we saw new customers like ADTRAN, provider of telecommunication and networking equipment, turn to Zuora revenue to automate their previously manual processes of revenue recognition. And we also had a financial and investing media company purchase Zuora Billing along with Zuora revenue to help them scale their subscription business. This all tops off a year of innovation that we are extremely proud of.

Fiscal '22 was a year of numerous launches, including Unified Monetization, CPQ X, Central Revenue, new API and new software development kits, a brand-new user interface in a universal custom payment gateway development kit, just to name a few. We invested heavily in engineering talent to support our fast pace of innovation, including nearly doubling our engineering capacity this year and we delivered. Now, shifting to our go-to-market strategy. This year, we said we would accelerate growth while increasing our dollar-based retention rates with a land-and-expand motion, and that is exactly what we did.

We said we would get to 17% ARR growth by the end of the year, and we surpassed this objective. Last quarter, we got to 19%. And this quarter, we reached 20% ARR growth. We are making great progress toward our fiscal 2025 target of achieving 25% to 30% ARR growth.

We said we saw a $450 million up-sell opportunity just within our installed base. And then by going after this opportunity, we would take our dollar-based retention rate to 105% by the end of the year. Well, we surpassed this, delivering 110% in Q4, a full 5 percentage points ahead of our goal for the year. In fact, in Q4, we handled $21 billion in usage volume, bringing us to $75 billion for the entire year.

In fact, that is more than the GDP of over half of the world's countries. Finally, as we laid out in our go-to-market strategy this year, we said that systems integration partners would become an important driver for the business, and that's exactly what happened. In Q4, we marked a record quarter for partner influence bookings growing over 20% year over year. These firms continue to build out Zuora practices and bring us into larger deals, helping us accelerate further into the enterprise space.

We also grew the number of globally certified consultants with their SI partners over threefold year over year. And more than one-third of our customer go-lives in the quarter involved a system integrator partner. All in, it has been a momentous year for Zuora, and it has us more excited than ever about the opportunity that lies ahead. We see the subscription economy continuing to expand into new industries and across new business processes where we can expand our footprint.

After a transformational year, we are now in a fantastic position. We've got what I believe is the best management team in the business, who along with our ZEOs are executing on our plan, and we are accelerating. And now we have the capital and the partnership with Silver Lake to be able to lean in to the opportunity even further. I'll turn the call now to Todd to review our financials, but let me give a shout out to all of our ZEOs around the world and everything we've accomplished this year.

We are now a very different company than how we started off. And with that, I'll turn it over to you, Todd.

Todd McElhatton -- Chief Financial Officer

Thank you, Tien, and good afternoon, everybody. Our discussion today includes non-GAAP financial measures. You can find details in today's press release, which includes a reconciliation table of selected GAAP to non-GAAP measures that reflect the adjustments made to both our current and prior-year results. As we close off a year of transformation at Zuora with strong results, I'm proud of what we've accomplished and excited to have Silver Lake as our partner on the journey ahead.

I'm happy to report that we finished the year by exceeding expectations for subscription revenue and beating guidance for non-GAAP operating loss. At the beginning of last year, we outlined our plan to increase our pace of innovation and accelerate our go-to-market efforts to better serve our customers. And today, as we close off fiscal 2022, Q4 gives us yet another proof point that our strategy is working. This quarter, we closed several multiproduct deals.

We delivered strong growth in the enterprise space with great go-to-market execution and meaningful contribution from our SI partners. We reached a new quarterly record for overall bookings and were free cash flow positive for fiscal 2022. Let's review our top-line performance for the quarter. Total revenue was $90.7 million in the fourth quarter, up 14% year over year.

Subscription revenue was $77.3 million, up 19% year over year, driven by overall improvement in our go-to-market execution. Subscription revenue represents 85% of total revenue, the highest level since our IPO. Professional services revenue was $13.4 million, a decline of 6% year over year. This is consistent with our strategy to drive more services work to our system integrator partners and supporting our plan to improve our mix toward more recurring subscription revenue.

As a result of our success in driving professional services to our SI partners, non-GAAP blended gross margin was 66%, an improvement of 120 basis points year over year. Non-GAAP subscription margin was 80%, a 20-basis-point improvement over the prior year. As a reminder, this includes the additional costs associated with our move to the public cloud. Non-GAAP professional services gross margin was negative 11%, driven by an intentional step-up in investments related to training our SI partners and the timing of projects due to year-end and holiday schedules.

We have significantly increased partner certified consultants this past year, which has fueled contribution for partner source and influence deals. Looking ahead, our objective is to run the services at or near breakeven. Non-GAAP operating loss was $0.6 million in Q4, compared with an operating loss of $1.8 million in the prior year. This was driven by top-line growth and improved gross margins.

This resulted in a non-GAAP operating margin of negative 1%, an improvement of 160 basis points from Q4 of last year. Our fully diluted share count at the end of the quarter was approximately 144 million shares using the treasury stock method. Moving on to some of the key metrics for the quarter. In Q4, we maintained our dollar-based retention rate of 110%, a strong improvement of 10 points year over year and ahead of our 105% that we guided at last year.

At the end of Q4, customers that spend at or above $100,000 in ACV reached 747, an increase of 27 sequentially. This continues to represent 94% of our business. Large enterprises continue to gravitate toward Zuora for our expertise and product portfolio. We closed eight deals with ACV of $500,000 or above, flat year over year.

Four of those deals had ACV greater than $1 million versus two a year ago. This is a testament to our strong go-to-market motion and success with our system integrator partners. The large multiyear new business activity also is evident in our total remaining performance obligations or RPO, which grew 30% year over year. Turning to billing transaction volume.

Our systems processed $21 billion of volume in the quarter, representing 25% growth year over year. Processed billing transaction volume is not indicative of our revenue growth rate because our customers gain efficiencies as they scale. Now, looking at ARR growth and free cash flow. In Q4, our ARR growth grew to 20% year over year, 3 points ahead of our 17% ARR growth objective for this fiscal year that we announced at our investor day last year.

This was driven by another strong quarter of up-sells and record new business. We continue to focus on our objective to reach 25% to 30% in ARR growth by fiscal 2025. I'm happy to report that free cash flow was $7.6 million for the quarter, allowing us to reach our goal to be free cash flow positive for the entire year. We continue to invest in the business to foster sustainable growth while tracking our progress toward the Rule of 40.

Total capex for the quarter was $2.7 million. As we assess our real estate needs, considering what the future of work is going to look like and our location strategy, we made the determination to reduce our Bay Area footprint by over 60%. As a result, we incurred a noncash impairment charge of $12.8 million. The space reduction will allow us to further reinvest in R&D and go-to-market initiatives, which generate more leverage and growth.

Turning to the balance sheet. We ended the quarter with $215 million in cash and cash equivalents, an increase of $12 million over the prior quarter. Fiscal 2022 was a transformational year for Zuora. As we close out the year, I want to acknowledge the amazing work of our ZEOs who made these results possible by keeping laser-focused on our strategy.

Now, let's turn to our financial outlook. As noted on prior calls, we continue to accelerate our investments in go-to-market and product development initiatives. Turning to guidance for Q1 and fiscal 2023. As a reminder, our first quarter ending April 30 has three fewer days compared to the prior quarter.

Our free cash flow and EPS guidance does not include the impact from the Silver Lake investment. We will update the free cash flow and EPS guidance after the Silver Lake investment closes. For Q1, we currently expect total revenue of $91 million to $93 million, subscription revenue of $77 million to $78 million, non-GAAP operating loss of $1 million to breakeven, non-GAAP net loss per share of $0.02 to $0.01 per share, assuming a weighted average shares outstanding of approximately 128.8 million. We expect to be free cash flow positive in Q1.

For the full year, we're raising our outlook. We currently expect total revenue of $402 million to $406 million, subscription revenue of $338 million to $340 million, non-GAAP operating loss of $2 million to breakeven, non-GAAP net loss per share of $0.07 to $0.03 per share, assuming a weighted average shares outstanding of approximately 132.8 million. For the full year, we expect ARR growth of 21% or higher. Our dollar-based retention rate of 112% or higher, and we expect to generate free cash flow in a range of $14 million to $17 million.

To close off, we are extremely excited about Zuora's future, our partnership with Silver Lake and what fiscal 2023 will bring. With that, Tien, Robbie and I are happy to take your questions and we'll turn it over to the operator.

Questions & Answers:

Operator

[Operator instructions] Your first question comes from the line of Andrew DeGasperi with Berenberg. Your line is open.

Unknown speaker

Hi. This is Ali on for Andrew. Thanks so much for taking our question. So I take a look at your subscription economy index report, which you mentioned earlier, and that definitely showed some positive data about subscriptions in 2022 and 2021 and continued momentum in the pandemic recovery.

Would you be able to elaborate on how that contributes to the way that you think about your growth targets going forward? And also, how does that impact how you think about your TAM and overall market growth?

Tien Tzuo -- Founder and Chief Executive Officer

It's Tien here. Thanks for that question. We're pretty excited. This is a report, as you know, that we publish twice a year and then we're doing it for five or six years in a row.

And the exciting thing is, if you look at over the last decade, subscription businesses as represented by what we see through our system grew at over a 4.6x, a rate than just traditional businesses. And so it really, really speaks to this is where the growth of the economy is. This is where companies are going. This is where the puck is going, if you will.

And it tells us that we have a really long runway. It also tells us and it's informed our go-to-market strategy. We believe that the exciting part of this marketplace is in large companies, both incumbents and disruptors. We think that every day, every quarter, every month, we look, there's another company and another industry that's shifting to the subscription economy.

And if you look at what we've done over the last year in terms of building a go-to-market organization, building an innovation machine that really satisfies and helps the best companies in the world win in the subscription economy, this is exactly what we've done. And so we feel good about our long-term trajectory, and we also feel good about the numbers that Todd laid out for this upcoming year.

Unknown speaker

That's great. Thanks a lot.

Operator

Your next question comes from the line of Joseph Vafi with Canaccord Genuity. Your line is open.

Joseph Vafi -- Canaccord Genuity -- Analyst

Hey, guys. Terrific end to the year here, and it's nice to see growing momentum in the business. Maybe you could just drill down a little bit in the thought process on Silver Lake investment. I mean, clearly, a premier investment shop, and they're probably seeing some attractive aspects to your business.

But what do you think you're going to do with some of those bonds? Is it going to be more on M&A or kind of more pedal to the metal on perhaps internal initiatives? And then just kind of the thought process in general about taking the investment in, in the first place. And then I'll have a follow-up.

Tien Tzuo -- Founder and Chief Executive Officer

Yeah. This is Tien here. I'm -- thanks, Joe, for the question. I'm incredibly excited.

I mean this is the preeminent technology investment firm, and they've been in the whole concept of technology investing. I think they were the only -- the first firm that just solely invested in technology companies back in the '90s. You see their name associated with Airbnb, with Dell, with Unity, with VMware, with Twitter. And here's a company that I would say believe in the subscription economy.

And these days, everybody has seen it, but they certainly big, big believe in the subscription economy. They like what they saw. They like the leadership position that we had. They did their due diligence.

They looked underneath the hood, and they're excited about our path ahead. And we're really excited about having their network, their expertise and their capital, if you will, on our side really to help us lean into the opportunity ahead. As you can imagine, M&A or acquisitions will certainly be a big focus of ours. We doubled our engineering team this last year.

We're innovating at a faster pace than ever. But I would say, when I talk to our customers, they have an insatiable appetite for more, right? More technologies, more solutions to help them build great subscriber experiences to help them build new business models, monetize their digital offerings. And we're excited about having Silver Lake on our side to really meet this growing demand.

Joseph Vafi -- Canaccord Genuity -- Analyst

That's great, Tien. And then, I mean, it sounds like you had like a -- I mean you had a great bookings quarter again this quarter. And I know you're more focused on the enterprise, and you had some large deals. How would you characterize the kind of breakdown of enterprise versus maybe pure subscription players in the quarter in terms of new logos?

Tien Tzuo -- Founder and Chief Executive Officer

We see pretty healthy distribution. I'd say if you look at what we do, it's certainly -- it's technology companies, it's media companies, it's manufacturing companies emerging verticals. I would say within the technology space, we continue to power disruptors. I think we talked about Gusto being one of the companies that we sign on.

If you look at the SaaS companies that have gone public over the last two, three, four years, we power just so many of them and that continues to be an important part of our business. But look, I think more and more, if you think about the phrase that I think Marc Andreessen used, software eats the world, every company is becoming a technology company. I think what we're seeing is a parallel path where, call it, Software as a Service, the business model, they're eating the world. And every company is waking up to become a subscription economy company.

Maybe Robbie, what would you say you saw in the quarter?

Robbie Traube -- Chief Revenue Officer

I mean. Tien, in terms of what we're seeing, looking at the call, the technology we have is totally differentiated in the way that customers need it and the way to get value out of it. And so the market is really attractive. It's growing.

We've got still the phasing, the CRM hires, you've got the ERP players and you've got the sort of more best-of-breed smaller companies below that. And I think what we're seeing is that they're just not enterprise-ready, right? We go in the CRM, they can't handle the complexity, the scale. I've said it before, Tien, the fact of the matter is buy cheap, buy twice in that essence of it, I think it's something that we've really seen we're replacing competitors and especially in Q4, definitely the top end, we've seen replacement where they could not scale, they could not meet the complexity and also the bottom end, same reasons, scale in particular. So we had good Q4 and that's what we're seeing as we go enterprise overall.

Joseph Vafi -- Canaccord Genuity -- Analyst

That's great color, Robbie. Thanks. And then maybe just one for Todd. I know your gross margin was up a bit year over year despite the kind of move to the public cloud.

It'd be kind of interesting to drill down in that additional public cloud cost a bit and perhaps kind of get more to what that investment means in public cloud and what perhaps a more apples-to-apples gross margin expansion might have been? And then maybe I'll just have one more follow-up.

Todd McElhatton -- Chief Financial Officer

OK. Hey. Thanks, Joe. So on the cost of goods sold for the subscription business, for the entire migration during the year, we ended up spending about $3 million and almost half of that was in the fourth quarter.

Next year, we kind of expect the overall margins to hold relatively constant. We've still got some other areas that Sri is going to invest in to give us greater efficiencies over time. So I would kind of expect to stay flat year over year, but then as we kind of go out between our 2025 guidance, we see ourselves going up maybe 100 basis points a year. And then as we also talked about, we would expect the overall services margins to be closer to breakeven next year.

And so that will give us a little bit of margin acceleration at the gross margin level for fiscal '23.

Joseph Vafi -- Canaccord Genuity -- Analyst

That's great. And then just one more. I know you mentioned that you're going to reduce your Bay Area real estate footprint by 60%. I just assume a lot of your team is going to work virtual.

And how are you feeling about that transition? And ultimately, what would that potentially mean in terms of reduced real estate costs? Thanks a lot guys.

Todd McElhatton -- Chief Financial Officer

So I think the primary place where we've really looked at where we were out of whack with where people were was in the Bay Area. The second thing that I would say is I think what we're seeing is -- what we're really talking about is we're giving people the ability to be flexible. And what we're seeing is people are coming into the office for specific things, and that's usually to collaborate. So if you're going to be in a Zoom meeting all day, there's no sense in coming and sitting in the office and going to traffic, an hour each way to commute, but hey, do that at home.

But for example, like my team, we're putting earnings together. Everybody has been here for the last couple of days. The engineering teams when they've got certain things going on. The sales teams here during their QBRs, during closes, doing certain things they're collaborating on.

And I think we're seeing more and more of that. But I think the last thing I would say is we've been very thoughtful this year and as we move forward about what does our location strategy look like. And I think you're going to see us a little bit more distributed. And Sri has done a really good job as we've increased our engineering capacity, doing that in more cost-effective countries.

And so you'll see us moving some of those roles or adding those roles -- not moving, but adding those roles in places where we can get a better return on our investment.

Joseph Vafi -- Canaccord Genuity -- Analyst

Thanks for that color. Great job, guys. Thank you.

Tien Tzuo -- Founder and Chief Executive Officer

Thanks, Joe.

Todd McElhatton -- Chief Financial Officer

Thanks, Joe.

Operator

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

Luv Sodha -- Jefferies -- Analyst

Hey, Tien, Todd and Robbie, this is Luv Sodha on for Brent. Thank you again for taking my question. Maybe first one for Tien and Robbie. Could you maybe comment on the overall demand environment.

And we've heard some commentary about the pull forward in demand within software. Are you seeing any of that? And what's the appetite like among your customers for continuing to buy software?

Robbie Traube -- Chief Revenue Officer

Yes, maybe I can take that. So I think we're seeing is the adds -- as you can see, a really great Q4. And it was as we predicted as we had looked at the business as a whole, really good spread across our focal areas. And so I'm seeing it as any way of a -- this is as we expected to do.

And when I look overall at pipeline and I look at that aspect, we feel very, very good, very good about where we are and also how we executed in Q4.

Todd McElhatton -- Chief Financial Officer

I mean the only other thing I'd add Luv is, we're continuing to see building of the pipeline. And when Robbie's talked about inbound demand from like RFPs, RFIs, that's also remained strong.

Luv Sodha -- Jefferies -- Analyst

Got it. And one quick follow-up for Todd, if I may. Dollar-based net retention maintained at 110%. How do you think about the pathway to 112% or higher over the course of the next year? And any comments on churn?

Todd McElhatton -- Chief Financial Officer

So maybe I'll start with your last question. We feel really good about our customer retention. As a matter of fact, our churn levels, as we talked about over the last year, have really been kind of hovering around their all-time lows. And we credit a lot of that to the infrastructure and investment that Robbie has put in place over the last quarters.

The customer success team, I think, has had a tremendous impact on helping us there, along with some of the improvements in product. So we feel really good about that standpoint. I would tell you, we feel good about being able to increase the dollar-based retention to that 112% plus DBRR that we talked about. What I would say is, going back to analyst day, we saw a $450 million opportunity for cross-sell and up-sell.

And if anything, as we've added new products and added new logos this year, we're seeing that expand. And we're seeing a very balanced add of people or very balanced adds again. I think this is maybe the third quarter in a row where we continue to see nice growth in usage. But just as important, it's very balanced with also getting really good take-up of the new products.

So I've talked about this in the past, it's kind of like the three legs of the stool. We're retaining our customers. We're selling them new product and they're usage, got more usage going through the platform. And all of those things are helping us drive dollar-based retention.

Luv Sodha -- Jefferies -- Analyst

Got it. Perfect. Thank you.

Tien Tzuo -- Founder and Chief Executive Officer

Thanks, Luv.

Operator

Your next question comes from the line of Chad Bennett with Craig-Hallum. Your line is open.

Chad Bennett -- Craig-Hallum Capital Group -- Analyst

Great. Thanks for taking my question. So a couple for me just drilling down on the last question on net expansion. And just maybe even qualitatively, Todd, I think kind of we're in a period where that pricing and volume would potentially be a tailwind for us going forward relative to how we changed, how we sold and all that stuff and got over the hump on the deals that were a headwind.

Was that the case this quarter in terms of pricing and volume uplift on renewals? And how did that play out relative to your expectations?

Todd McElhatton -- Chief Financial Officer

So I think, to your point, as we've seen during this last year, we didn't have some of the situation where customers had purchased more volume than needed. So that certainly helped us from a standpoint as what we're seeing the consistency of add-ons. But again, super balance between volume and you've seen the volume on the platform grew 25% of the transactions that went through. So we're seeing nice volume there, and that's continuing to give us a nice lift on the up-sell and, again, the new product take-up.

Chad Bennett -- Craig-Hallum Capital Group -- Analyst

OK. And just on the net expansion, the 110%, which clearly was above what you were targeting heading into the year. But I mean you effectively lopped off a bad quarter, right, a year ago on a trailing basis. And I assume you replaced it with a good quarter.

I mean, is there anything we're missing on the net expansion side that would -- why net expansion would not maybe even improved from last quarter?

Todd McElhatton -- Chief Financial Officer

No, I think the thing you probably need to keep in mind, if you go back to our Q4 last year, it was really one of the -- it was the first quarter where we really started to reaccelerate. And we had our Q4 at that time was the biggest quarter we've ever had for up-sells and still was a fantastic quarter when we look back at it historically. So it's a really tough compare so that 110% growth or that 110% expansion is leveraging off a really strong Q4 a year ago.

Chad Bennett -- Craig-Hallum Capital Group -- Analyst

Good. Fair point. Go ahead.

Tien Tzuo -- Founder and Chief Executive Officer

Yes. I think just -- we've taken the net dollar retention from a low point to 110%. And every quarter, it might be a little bumpy, but we're committed to continue to rise that, right, based on what Todd signaled for, for the upcoming year.

Chad Bennett -- Craig-Hallum Capital Group -- Analyst

OK. Then maybe last one on the guide, Todd. So subscription guide, effectively, if we look at kind of the midpoint, I guess, from a growth rate standpoint, I think you did 18%, close to 19%, this year subscription growth, the year that just ended. And I think the midpoint, we're kind of at the same kind of level of growth.

I do recall that you had some upfront things that hit subscription last year. Just kind of how we should think about that and maybe the impact of those one-time upfront deals in the quantification, if you could.

Todd McElhatton -- Chief Financial Officer

Yeah. So thanks, Chad. When I think about last year, I'd say a couple of things. First of all, one of the things we really wanted to do is get people focused on the ARR growth.

It's the best forward-looking metric in the subscription business. And that's one of the things that we always talk to our customers about -- the bookings happen now, and it takes two, three, four quarters until that starts showing up on the subscription revenue line. And so we feel really good. We exited 20% growth.

You did mention and rightfully so, as we look through the year, we talked about the migration that we've had of customers moving off of our on-prem product in Zuora on cloud revenue offering. And when we've done that, we've had some customers that have had some one-time -- we benefited from some one-time benefits as they've done their final renewal on their term license. And so those are some benefits that we won't get. And so that's maybe 1.5 points or so of impact that is headwind year over year.

And the other thing I would keep in mind is we probably got a little maybe 1 point, 1.5 point of headwinds of currency as we move into the year. But overall, we feel really good about exiting the year at that 21%-plus ARR growth.

Chad Bennett -- Craig-Hallum Capital Group -- Analyst

Got it. Thanks much.

Operator

Your next question comes from the line of Joshua Reilly with Needham. Your line is open.

Joshua Reilly -- Needham and Company -- Analyst

Hey, guys. Thanks for taking my questions. So congrats on the Silver Lake investment. I'm curious, how did the investment and relationship come about? And then you mentioned potential acquisitions.

Can you give us any color on whether that could be like a single larger transformational deal or should we expect potentially a series of smaller deals over a longer period of time?

Todd McElhatton -- Chief Financial Officer

Hey, Josh. It's Todd. So maybe I'll start with that. And if Tien wants to add any color, he can jump in.

I think the relationship really came about -- Tien and I have been talking about for quite some time as our growth started accelerating, what did our balance sheet need to look like, what do we need to do to really help accelerate the growth? We've talked about the strength that you're seeing in the subscription economy. And one of the things that we felt really strong about is we wanted to give ourselves. We wanted to strengthen the balance sheet. And as we started looking at different options, we were introduced to the folks at Silver Lake.

And we spent some time with them and we really like them. When we take a look at their industry knowledge, the capacity that they have to assist us, whether it be in M&A or analysis or product strategy and their partner ecosystem that they opened up, it really became compelling. And as we started talking about what the balance sheet needs to look like, one of the things that they offered us that was really compelling was the ability to get $400 million, but to take that down in tranches. So the first tranche we take down at $250 million.

And then we can take down the next $150 million over 18 months. That certainly gives us a lot of flexibility. And so we feel really good about the relationship. We feel like Silver Lake is going to be a great partner and really be able to help us accelerate our growth rates to get to those 25% to 30% rate.

From a standpoint of M&A, I think Tien mentioned it earlier. Our customers just are having an insatiable demand. There's lots of areas that are adjacent to us. And I think, at this point, I'm not wanting to kind of go through and go through what we're looking at.

But I think we see a lot of opportunities. And especially having a really strong balance sheet in this volatile period, we think, will turn out to be very helpful to us as we look to go through M&A.

Tien Tzuo -- Founder and Chief Executive Officer

Yes. I'll just wrap that. I mean that's it. I mean we obviously have a road map that we're excited about.

Look, I think the big picture is this -- I think the big picture is our business is growing really, really well. We have, what, in my biased view is the best management team in the industry with the best product. And we've got a customer base that I would say many of the companies are envious of. And they view us really as a strategic partner.

And they're hungry for us because of our expertise, because of our innovation, because of our leadership to give them more. And so our road map is really based on close dialogue with our customers. We think there's a lot of white space in what they need in order to build fantastic subscriber experiences and monetize business models. And we don't have anything to say right now about size of transactions or anything else, right? We're going to be led by our customers, with our new partner, Silver Lake, by our side.

Joshua Reilly -- Needham and Company -- Analyst

Got it. And then just a follow-up on that. Are there priorities for investment beyond acquisitions that could be used with the funds from the convert? And could that ultimately lead to accelerating growth investments here that are not currently factored into guidance? And when you adjust after the deal closes, could that make an adjustment beyond interest expense?

Todd McElhatton -- Chief Financial Officer

No. At this particular point, we feel really good about the operating margin. I think, on the bottom line, we expect it to be $10 million, $10.5 million of interest and amortization. And then we're still finalizing the accounting on what warrants will look like.

And so once the transaction closes, we'll give you the final guidance on the bottom line. But that's what I would expect any changes to be.

Joshua Reilly -- Needham and Company -- Analyst

Got it. That's super helpful. Thanks, guys.

Tien Tzuo -- Founder and Chief Executive Officer

Thanks, Josh.

Operator

There are no further questions. I'll turn the call back to CEO, Tien Tzuo, for closing remarks.

Tien Tzuo -- Founder and Chief Executive Officer

Well, thank you. Thank you today for joining us. I would like to say a big, big thank you to all our ZEOs across the globe as we close the chapter on a fantastic FY '22 and look ahead toward a strong FY '23. Our people are ultimately what makes Zuora an incredible place to be, and I am proud of what we've accomplished together, not just in Q4, but the entire fiscal year.

I really like the position we're in, and fiscal 2023 is shaping up to be another exciting year. Thank you very much.

Operator

[Operator signoff]

Duration: 43 minutes

Call participants:

Luana Wolk -- Head of Investor Relations

Tien Tzuo -- Founder and Chief Executive Officer

Todd McElhatton -- Chief Financial Officer

Unknown speaker

Joseph Vafi -- Canaccord Genuity -- Analyst

Robbie Traube -- Chief Revenue Officer

Luv Sodha -- Jefferies -- Analyst

Chad Bennett -- Craig-Hallum Capital Group -- Analyst

Joshua Reilly -- Needham and Company -- Analyst

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