What happened

Shares of cloud-based software specialist Zuora (ZUO 0.91%) dropped this week, declining 14% through Thursday trading. That's as compared to a flat market, according to data provided by S&P Global Market Intelligence. The drop didn't put much of a dent in shareholders' returns, though. Zuora remains up over 35% so far in 2023, while the S&P 500 has gained 14% in that time.

This week's slump came as the company revealed its second-quarter results while updating its outlook for the full fiscal 2024 period.

So what

Zuora, which markets software that helps companies transition to subscription-based selling models, achieved $108 million in sales for the period that ended in late July. That result met the low end of the guidance management issued back in May and translated to an 11% sales increase year over year.

Other key metrics reflected mostly strong demand for its products. Zuora had 444 large customers on its books in Q2, up from 407 a year earlier. Its clients continue to renew contracts at higher rates, too, but that rate slipped to 107% from 111%.

Zuora continued to post significant operating losses, yet the company broke into positive territory on cash flow. "The second quarter was another solid quarter," CEO Tien Tzuo said in a statement. "We executed on our strategy and delivered on our guidance."

Now what

Investors weren't thrilled with Zuora's new short-term outlook. Management projected Q3 sales of between $108 million and $110 million, or just below the $111 million that most Wall Street pros were forecasting.

Zuora reduced its fiscal year projection on sales to between $428 million and $433 million, down from the prior range of $431 million to $440 million. Similarly, the outlook for non-GAAP (generally accepted accounting principles) earnings fell to between $30 million and $32 million from the prior target of between $34 million and $36 million.

These modest downgrades are to be expected from time to time, given Zuora's relatively small sales footprint. A shift in the timing of just a few contracts can be the difference between meeting or exceeding management's short-term outlook in these cases.

Still, it is understandable that the stock would decline in response to Zuora's weaker outlook. The wider growth thesis remains intact, though, as the company targets growing demand from companies looking to monetize recurring revenue.