Zuora (ZUO) reported in Q1 a good start to the year with revenue growth coming in ahead of expectations. With Q2 earnings right around the quarter, billings momentum could push revenue above expectations and the lack of travel expenses could help operating margins.
The uncertain economic environment has caused companies to re-look at their revenue streams and start to consider subscription-based models in order to improve revenue visibility. Given the complexity in the subscription model, companies will turn to Zuora to help better manage their billings and better understand growth trajectory. This broader shift to subscription-based revenue models could propel Zuora higher over time.
Q2 could be the first sign of a longer-term shift, as traditional companies who sell licenses have been under pressure. The current environment has caused enterprises to re-evaluate the larger license transaction and many have moved to subscription-based models. These models are easier for customers because it is a lower monthly expense and the provider typically provides maintenance.
Since reporting earnings in early June, Zuora initially saw their stock pop nearly 10%. However, in recent weeks the stock has pulled back and was recently down over 5% from the pre-earnings level. Investors should continue to look at valuation and with the stock recently trading at only ~3.7x FY22 revenue, the stock seems to be in a good position to buy ahead of earnings.
Q2 revenue could have some upside as the company previously noted some billings in Q1 were pushed into Q2. The economic environment, while still somewhat uncertain, has stabilized to a level where enterprises are more comfortable moving forward with capital expenditure projects. In fact, the transition to a subscription-based model may be an earlier investment made, thus pulling forward some demand into the next few quarters, which is all upside to Zuora.
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