Weekly Update #243: Some Thoughts on Zuora's S-1

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Hello Investors,

Zuora filed it’s S-1 late last week, becoming the third potential VC-backed IPO this year (Zscaler went public last week and Dropbox filed its S-1 in early March). Zuora expects to list on the NYSE under the ticker “ZUO”. Encouragingly, we believe the company may command a stronger valuation than its last private round, based on current SaaS trading multiples. The S-1 points to a solid operating picture, though metrics don’t particularly stand out from peers. Nevertheless, we believe investors will likely welcome Zuora’s strong market opportunity and leading competitive position as a subscription management solution.

We believe comps point to a $1.0-1.6B valuation for Zuora. Zuora’s expected pricing range is still TBA. SaaS companies trade at a mid-6x multiple on sales, on average, as shown in the table below. Our valuation estimate uses a P/S range of 5.0x-8.0x and assumes forward twelve month (FTM) revenue growth of 20% (conservatively below ZUO’s historical pace). Note that Zuora’s last private funding round implied a $850M valuation.

Chart 1: Zuora Comps

Source: YCharts, EquityZen estimates

Chart 2: Zuora Valuation Estimates

Source: YCharts, Company data and EquityZen estimates


Some of our key takeaways from the filing:

Growth solid, but lags recent SaaS IPOs. Revenue growth is a key component of valuation, particularly for software companies. Zuora has grown revenue at a ~47% CAGR over the past seven quarters. While a very respectable number, SaaS peers have, on average, posted 55% revenue CAGR over this same period heading into their IPO.

** Note that the charts below show Zuora versus peers in the seven quarters leading up to their respective IPOs. The bands show the minimum and maximum values among this peer group for each quarter before IPO.

Chart 3: Zuora Quarterly Revenue Growth (Annualized)

Source: Company data and EquityZen estimates


Chart 4:  Zuora Quarterly Subscription Revenue Growth (Annualized)

Source: Company data and EquityZen estimates


Gross Margins Slipping. Zuora’s gross margin has compressed ~600-700bps over the past year. The erosion appears to be driven in part by an unfavorable mix shift. The chart below shows that the percentage of revenue that Zuora earns from professional services (vs subscription sales) has increased. While subscription margins have held steady in the 70%+ range since mid-2016, Zuora’s professional services margins have historically been negative. Unclear whether the unfavorable mix shift will persist. Zuora attributes the increase in professional services to some larger implementations with new customers as well as ASC 606 adoption (a new accounting standard) among some clients; these may be non-recurring in nature.

Chart 5: Zuora Gross Margin

Source: Company data and EquityZen estimates


Chart 6: Zuora Product Revenue as % of Total Rev

Source: Company data and EquityZen estimates

Operating Profitability Trending Better Than Peer Group. Zuora remains unprofitable on GAAP income; however, profitability has improved and has generally trended higher than other recent SaaS IPOs. The outperformance is driven by lower G&A, R&D and sales spend (as a percentage of revenue). Operating cash flows remain negative, however.

Chart 7: Zuora Operating Margin vs. Peers

Source: Company data and EquityZen estimates

Chart 8: Zuora Sales to Revenue vs. Peers

Source: Company data and EquityZen estimates

Chart 9: Zuora R&D to Revenue vs. Peers

Source: Company data and EquityZen estimates

Chart 10: Zuora G&A to Revenue vs. Peers

Source: Company data and EquityZen estimates

Retention rates improving. Zuora’s net retention has expanded to 110% from 100% two years ago. Additionally, the company has increased the number of customers with annual contract value (ACV) of over $100,000 to 415, up 71% from 242 in 2016. Driving more revenue from existing customers often leads to improved margins and profitability.

Chart 11: Zuora Dollar-Based Net Retention Rates

Source: Company filings, EquityZen estimates

Catherine Klinchuch
Finance & Research Lead, EquityZen


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