Additionally, heading into the report last night, the stock had rallied by about 20% over the past week, indicating that traders were clearly positioning themselves for a strong report. So, the slide in revenue growth, coupled with the underwhelming guidance, appears to be causing some disappointment among traders.
Taking a closer look at the numbers, ZUO reported a loss per share of ($0.10), beating the consensus number by $0.03. On the top-line, revenue jumped by 33% yr/yr to $61.6 mln, also ahead of the $59.0 mln expectation. Since going public on April 12, 2018, the company has issued earnings three times. Each time, ZUO has beaten analysts' EPS and revenue expectations.
Outside of the main headline numbers, there were a couple other very encouraging metrics. Namely, its dollar-based retention rate improved to an impressive 115%. This was driven by improvement in gross churn, in addition to healthy up-sell activity. During the conference call in Q2, management commented that it expected the dollar-based retention rate to settle near the high-end of the 108-112% range. It now appears that ZUO may outperform its expectations.
During the quarter, the company also added 30 net new customers with an ACV (annual contract value) of $100K or more. That represents yr/yr growth of 30%. So, not only is the company having success hanging onto existing customers and generating more revenue per customer, but, it is also bringing in larger, more stable customers with higher spending budgets.
In particular, the company is seeing strong demand from auto OEMs. For instance, over the past few months, it has signed new contracts with Kia and Toyota, adding to its list of GM, Ford, Renault, and Peugeot. ZUO now is involved with the connected car initiatives of six of the top ten auto makers in the world. There is a primary trend in the auto industry which is driving the strong growth of ZUO in this vertical.
As more and more people rely on ride-sharing for transportation, and as self-driving cars eventually become mainstream, auto OEMs will be selling fewer and fewer cars. In order to make up for this deficit, these companies are looking to add more services to stimulate growth -- such as content services, navigation services, diagnostics, and analytics. As a cloud software company that helps businesses launch, manage, and transform into subscription-based companies, this transition is right in ZUO's wheelhouse.
So, there are plenty of positives in ZUO's corner. However, what investors may be focusing on is that its subscriptions billings growth of 37% slipped a bit from the 42% it achieved last quarter. The general trend in revenue growth has been on the decline, going from 60% in 1Q18, to 47% in Q2, and then 33% this quarter. With the company guiding for Q4 revenue of $62.3-$63.3 mln ($60.5 mln consensus), that would represent another decline to about 27%.
One of the concerns investors may be having is that ZUO's RevPro product, a revenue recognition automation solution, may be facing a slowdown in growth as the ASC 606 catalyst wanes. ASC 606 was a new revenue recognition method by the FASB. In order to become compliant with the new accounting method, companies implemented new software, such as ZUO's RevPro, to ease the transition. With the ASC606 deadline now in the rearview mirror, the concern is that demand for RevPro will fall-off. However, during the earnings call last night, ZUO stated that it has not seen a precipitous drop off. According to ZUO, many companies are finding that there were deeper issues with how they were handling revenue recognition complexities - including using simple spreadsheets to handle the tasks -- and the onset of ASC606 simply made them more aware of these deficiencies.
To wrap up, while ZUO's growth rates are undeniably slowing, it is coming off of very high growth rates and the business is becoming larger. Naturally, its growth rates will begin to come back down to Earth. But, business still appears to be quite healthy.