Zuora (NYSE:ZUO) is an enterprise software company that provides tools to help other companies manage subscription businesses. A subscription that helps you manage your subscriptions is a bit meta when you think about it, but Zuora's product makes sense when viewed within the context of a world where more products and services are being offered as recurring payment subscriptions.
The "Subscription Economy"
At the heart of Zuora's business is the belief that in the not-so-distant future, a majority of products and services will be purchased as a subscription. The company refers to this new paradigm as the "Subscription Economy."
Several industries have already made the transition to a subscription model. For example, MoviePass demonstrated that people would be interested in a subscription movie theater service. Ride-hailing company Lyft is pioneering a monthly membership program. Even Nike, a physical product company, launched a subscription product for kids' shoes.
Why are companies motivated to transition toward subscription-based selling models? Subscriptions create predictable, recurring revenue streams for businesses that increase the lifetime value of a customer. As the recipient of a more stable stream of income, a business can focus more of its attention on improving its product experience versus sales and marketing because customers are locked in.
Furthermore, companies with subscription-model businesses get higher valuations from investors. Expect more companies to introduce subscription-based products as long as Wall Street continues to reward companies that do so.
The idea behind Zuora is that the process of launching and managing a subscription model business is difficult, but the company provides a turnkey solution for managing customers, managing revenue, and providing useful analytics. This helps companies bring subscription business to market faster while freeing them to focus on delivering the product, not on the back-office operational details.
Zuora Central Platform is the company's flagship software platform that serves as a subscription management hub. From the central platform, customers can add applications for a variety of use cases. The company's key apps are its billing and accounting software, but it also sells software for collecting late payments from customers and configuring complex customer relationships (complex pricing or large-scale contracts).
Zuora's software also serves as a marketplace for third-party applications. The company has over 50 partner companies with dozens of integrated applications, such as salesforce.com's CRM software. Enabling third-party integrations makes Zuora's platform more useful because it can port in data from other sources, which can help streamline client information and provide more robust analytics and functionality.
Long-term growth potential
As subscription business models continue to proliferate, Zuora is able to capture much of that growth by providing a better way to manage these burgeoning products. The alternative to Zuora is to use a clunky enterprise resource management software, such as the ones provided by Oracle or SAP. These legacy software solutions weren't designed with subscription models in mind and generally require some reconfiguration to suit the operational and accounting needs of a modern subscription business.
Zuora has seen its business soar in recent years. In 2018, the company reported sales of $235 million, a 40% increase over the prior year. There is likely plenty more growth where that came from; the company estimates its total addressable market reaching over $9 billion by 2022. What's more, Zuora's products are cited as a leader in its category, according to Forrester Research.
Despite Zuora's success in finding a market niche, the company is still unprofitable. Perhaps investors are able to shrug off unprofitability today for growth and future profitability, but at some point, the company will need to show earnings to justify its $1.7 billion market capitalization. Regardless, the company has interesting products and is tackling a promising market. This bodes well for long-term investors if the company can continue to grow and build its brand.