One software-as-a-service company with a large addressable market that's seeing strong growth is Zuora (ZUO +0.00%). It provides software that enables companies across all industries to monetize and manage subscription services.
Better yet, shares are trading much lower today than they were at the beginning of the year, making this a good time for investors to look into the tech company. Though Zuora's stock jumped following a better-than-expected second-quarter update late last month, it's down 40% year to date.
To glean some insights about this fast-growing small-cap company, here are some key quotes from management during Zuora's second-quarter earnings call.
Image source: Zuora.
Benefitting from a secular tailwind
Zuora management believes the company is benefiting from a strong secular tailwind as a growing number of customers are looking to pare back ownership in favor of services and experiences that can improve over time. Zuora CEO Tien Tzuo asserts that this tailwind is alive and well.
In Q2, we continue to see signs that support our central thesis. That our core market remains strong, and that we are in the early stages of a broad shift to subscription business models, a shift that we believe will ripple through every industry.
To this end, Tzuo said the company is seeing the obvious demand from companies within the technology vertical, but also from companies outside of this vertical.
For example, this quarter we signed one of the largest electronic manufacturers in Japan. We signed a major manufacturer of ball bearings in Europe. Yet another automotive services provider, one of the largest global consulting firms and one of the top three educational publishers in the United States. So the shift to subscriptions remains strong.
Winning larger customers
Much of Zuora's growth has been fueled by large customers, or customers with annual contract values (ACVs) in excess of $100,000. These customers reached 566 in Zuora's second quarter, representing 19% year-over-year growth. Further, these customers increased by 20 sequentially.
It's difficult to overstate the importance of these large customers to Zuora's business, as they now account for 88% of the company's total annual recurring revenue.
Fortunately, Zuora CFO Tyler Sloat indicated that momentum is strong with these customers.
The good news is that we continue to see a steady trend of increasing average ACV within this customer base, which means our customers are growing on our platform and placing more value on our products.
Signs of operating leverage
While Zuora isn't profitable yet, the company is importantly showing signs of operating leverage. Management said its negative non-GAAP operating margin of 14% during its second quarter was "well ahead" of its expectations. While some of this better-than-expected margin was from revenue outperformance and the shifting of some expenses to the second half of the year, management said there were also operational factors contributing to this figure.
"Most of the savings in a quarter came from improved productivity efficiency," explained Sloat. This better-than-expected non-GAAP operating margin reflects the company's approach to invest in growth opportunities, but to do it prudently -- and in a "scalable manner."
