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Zuora: A Case Of SaaS-Ception

Jul. 05, 2018 11:26 AM ETZuora, Inc. (ZUO)23 Comments
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  • Zuora is a relatively new IPO since April, and it has performed quite well.
  • Zuora's management is not trying to capitalize on some fad; it created the fad.
  • Based on some issues with the scalability of its business model, the difficult path to profitability, and, on top of this, a rich valuation, Zuora is not a buy.

A SaaS (software-as-a-service) business trying to help businesses become SaaS business? Talk about SaaS inception! When I first heard about Zuora (NYSE:ZUO) in its successful April IPO, I was very skeptical. It seemed like a company trying to take advantage of the SaaS hype. But the story is a little more interesting than that superficial judgment.

ChartZUO data by YCharts

Investment Thesis

Though subscription revenue has been accelerating and Zuora has a valid business, I am not convinced this company is a buy, based on business quality relative to valuation.

A World Subscribed

CEO and founder, Tien Tzuo, was the 11th employee at a small startup on Sand Hill road, named Salesforce.com (CRM). There, he was the first Chief Marketing Officer, building the billing system, then later, transitioning into a strategy role. After his 9 years at, what is now the biggest, most well-known SaaS company in the world, he started Zuora in 2007.

He even termed the phrase "Subscription Economy" and, recently, wrote a book on the power of subscription business models. So, it is fair to say Mr. Tzuo is not just trying to profit off of a fad-craze. He practically started the craze.

The Business and Financials

Zuora sells subscriptions to enable any company in any vertical to launch, manage, and transform into a subscription business. ERP (enterprise resource planning) software programs fail to capture the nuance and complexity of subscription models. This is where Zuora comes in. Its flagship products are Zuora Billing and Zuora RevPro. But the main platform is called Zuora Central, which allows companies to transform into SaaS businesses by managing pricing, order, payments, metrics, and accounting.

Source: Zuora

The company has more than 950 customers, including 15 of the Top Fortune 100 enterprises. It also estimates that its market will grow at a CAGR (compounded

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