Zuora, Inc. (NYSE:ZUO) Q3 2023 Earnings Conference Call December 6, 2022 5:00 PM ET
Corporate Participants
Luana Wolk – VP, IR
Tien Tzuo – Founder and Chief Executive Officer
Todd McElhatton – Chief Financial Officer
Robert Traube – President and Chief Revenue Officer
Conference Call Participants
Joshua Reilly – Needham
Chad Bennett – Craig-Hallum
Adam Hotchkiss – Goldman Sachs
Andrew DeGasperi – Berenberg
Luv Sodha – Jefferies
Operator
Good afternoon. My name is Emma, and I will be your conference operator today. At this time, I would like to welcome everyone to the Zuora’s Third Quarter Fiscal 2023 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer session. [Operator Instructions]. Thank you.
Luana Wolk, VP of Investor Relations, you may begin your conference.
Luana Wolk
Thank you. Good afternoon, and welcome to Zuora’s third quarter fiscal 2023 earnings conference call. On the call today, we have Tien Tzuo, Zuora’s Founder and Chief Executive Officer; and Todd McElhatton, Zuora’s Chief Financial Officer. Robbie Traube, our President and Chief Revenue Officer, will also be joining us for the Q&A session.
During today’s call, I’ll make several statements that represent our expectations and beliefs concerning future events that may be considered forward-looking under federal securities laws. These statements reflect our views only as of today and should not be relied upon as representative of our views as of any subsequent date. We disclaim any obligation to update any forward-looking statements or outlook. These statements are subject to several risks and uncertainties that could cause actual results to differ materially from expectations. For further discussions of the material risks and important factors that could affect our financial results, please refer to our filings with the SEC.
And finally, unless otherwise noted all numbers except revenue mentioned today are non-GAAP. You can find a reconciliation from GAAP to non-GAAP results in today’s press release. Our results, press release and a replay of today’s call can be found on Zuora’s Investor Relations website at investor.zuora.com.
Now I’ll turn the call over to you, Tien.
Tien Tzuo
Thank you, Luana, and thank you, everyone, for joining us. Welcome to Zuora’s third quarter fiscal 2023 earnings call.
Q3 was yet another quarter, where we delivered on our guidance, we posted Q3 total revenue at the high-end of our outlook. And we exceeded guidance for subscription revenue in non-GAAP operating income.
That being said, the world certainly has changed in the last 90 days. Given the macro level of certainty, we are accelerating our focus on profitability and are committed to delivering a non-GAAP operating margin of at least 6% for fiscal year 2024. What this means is today, we announced the difficult decision to reduce our workforce by 11%.
We’ve been thoughtful, and how we’ve approached this making sure that we preserve quota capacity and continue to invest in innovation. As the Founder and CEO of the company, I have not taken this decision lightly. But this was the right thing to do for our customers and our shareholders. And we’re doing everything we can as a company to help with the transition for those affected. And I want to personally thank these ZUOs for all that they’ve done for the company over the years.
Now, let me take a few moments to add some more color, and what we’re seeing out there in the market. Now talking to customers, of course, is a key part of my role. But in the last 90 days, I believe I’ve spoken to more customers across more geographies than in any time prior. And here’s what I would say.
First, digital customer experiences and subscription business models continue to be a priority. I was with the CIO of a $9 billion Information Services Company. And he said that any project that streamlines the customer experience is still being funded. Companies continue to see subscriptions as the future, and we see this in our metrics. For example, our total pipeline continues to grow year-over-year. This is not a surprise, in times like these companies that have well established subscriber relationships are going to continue to outperform those that do not. This is consistent with our recently released subscription economy index or SEI snapshot, which found that even as the world faces economic uncertainty, subscription businesses in the SEI were resilient in the first half of 2022, with higher revenue growth compared to businesses in the S&P 500.
These recurring revenue companies increased customer acquisition and revenue growth during the first half of the year and subscription cancellations continue to be lower than pre-pandemic levels. Just a few weeks ago, we had the C level executives from over 30 companies at a two day off site, including the top publishing brands, one of the biggest video streaming services, one of the biggest auto manufacturers, one of the largest SaaS companies, multi-billion-dollar technology companies. At the event, we had an incredible response to our vision for how Zephr the technology we acquired this past quarter will help in deepen subscriber engagement and put the right offer in front of the right subscriber at the right time.
Now all this being said, this is absolutely a different world than just 90 days ago, the level of uncertainty that companies are facing has risen significantly. And this is certainly affecting parts of our business. Sales cycles are being extended in certain cases, due to increased scrutiny on new software purchases. In other cases, some companies are simply putting larger scale transformation projects on hold, as a way to get a better picture of what resources they will have. In our installed base, some of our customers are finding it difficult to make longer term predictions about their own business, which may impact the level of volume commitments that they’ve historically made to our platform.
Second, we are not seeing these trends impact all industries equally. For example, we continue to see good traction in the media industry. Advertising revenue is on the decline, and it is driving these companies to double down on their subscription business.
Last quarter, we talked about how the New York Times is a prime example of what the playbook now looks like to build a modern digital media company on a foundation of a strong subscriber base. And this quarter, we had a good net to that list a leading publisher with 250 newspapers and 2 million subscribers. And they kick us off with a goal of tripling their subscriber base in the next three years. They started with door billing to give them the pricing and packaging flexibility they needed to continue their subscriber growth and in Q3, they added more revenue to help them automate their revenue recognition process so they can scale their entire order to revenue process to support their ambitious growth goals.
The media industry is also where we’re seeing our acquisition of Zephr, which be closed in Q3 play a really important role. We’ve learned a lot in our previous acquisitions. And I’m pleased to say that we are on track with our plans for company integration and for deepening the existing integration between our two products. It’s exciting to see the initial traction we’re seeing in the market, as media companies and digital publishers realize how critical it is to deliver a differentiated subscriber experience. For example, News Corp Australia, one of Zephr’s customers recently announced that their total subscriber base grew 13% year-over-year, with Zephr being a piece of this success.
As competition for these subscribers continues to grow, Zephr is able to help our customers effectively optimize and personalize the subscriber experience to better drive conversion and revenue.
Another industry that we’re seeing is the auto manufacturing industry, where new business models are critical to unlocking growth for the next decade. This quarter, we are adding another auto manufacturing company to our roster. This is one of the largest Japanese car manufacturers in the world with $75 billion in annual revenue. And they chose Zuora’s to enhance what they call the driver experience. They are launching new in-car services and helping to make billing effortless for offerings like parking, roadside assistance, maintenance, insurance, entertainment, and more. This marks now 13 of the largest 15 auto companies who have bet on Zuora to take them into the next decade of growth.
And in the broader manufacturing sector, we’re seeing companies like global tire manufacturer Michelin come to Zuora to launch its direct-to-consumer higher subscription, selecting Zuora for both our unique technology and our expertise.
Third, our product leadership remains the driving force. For those companies who need a launch in scale a recurring revenue business Zuora remains the only solution that can help them manage the entire process from delivering differentiated subscriber experiences to orchestrating the complete quote to revenue process. In fact, Zuora was recently recognized for the third time as a leader by the IDC MarketScape, a testament to our leadership.
IDC noted and I quote, “Zuora has a comprehensive and enterprise-grade subscription and usage revenue management solution to intelligently automated the quote-to-revenue process.”
A good example where this came to play from the quarter is Enercare. Enercare is one of Canada’s largest energy solutions companies. They provide water heaters, furnaces, air conditioners, and related services to more than 1.4 million customers. In the same time to replace their billing system. They evaluated both traditional ERP providers and SaaS solution and it became clear that only Zuora could provide a complete and agile audit revenue solution, as Zuora platform would not only replace their existing billing system but will enable new capabilities and a stronger customer relationship for their subscription product, rental and maintenance plans.
Finally, in this environment, we are fortunate to also have a strong value proposition around reducing costs and accelerating cash. We have a broad product portfolio and one that delivers a high level of automation across the entire quote-to-revenue process. This has enabled us to ship a lot of our messaging with products by Zuora revenue that helps companies take cost out of their business through automation, whether it’s headcount cost or audit fees, or collect that helps companies increase collections at a time when that matters more than ever.
Some examples include Vivint, a leader in Smart Home Solutions and a long time Zuora billing customer, selected Zuora revenue to automate their revenue recognition processes. Vivint’s entire order to revenue process in $1.6 billion in revenue will be automated on Zuora’s monetization platform. Or GitHub, the leading integrated software development platform, signed up for the Zuora Collect to help them optimize electronic payment authorization and recovery rates. Or lastly, a multi-billion-dollar subscription streaming service where in one quarter Zuora collect have recovered $4.3 million in otherwise lost payments, all flowing directly to their bottom-line.
So to net all of this out, our long-term vision and opportunity remains intact. We continue to see strong interest in Zuora’s products, and we remain confident in our long-term opportunity even with the current headwinds. Given the uncertainty in the macro environment, we are accelerating our path to profitability, and committing to delivery at least 6% non-GAAP operating margin next fiscal year. The approach we are taking and making this change is built on our conviction of our long-term opportunity, thereby preserving our quote-to-capacity and our ability to continue to invest in innovation. The bets we have placed on growth initiatives over the last two to three years give us a great roadmap, where to find the right growth opportunities, while at the same time allowing us to expand our margins.
Today is a difficult day for Zuora, as we say goodbye to many of our fellow ZUOs. But we remain unwavering in our commitment to our customers and our vision of the world subscribed.
Now I’ll turn the call over to Todd to review our financials and outlook. Todd?
Todd McElhatton
Thank you, Tien, and thanks everyone for joining us today. The economic environment has clearly changed over the past 90 days. Despite the backdrop and FX impact, I’m pleased that we reached the high end of our guidance for total revenue and exceeded guidance for subscription revenue and non-GAAP operating income. As many other software companies have reported, we are also experiencing pressure from the current economic trends. During Q3, we encountered some elongated sales cycles and some deals requiring additional levels of approval.
As I speak with customers engagement and demand for our solutions continues to be high. In fact, top of funnel generation has grown by double digits. As a result, we are directing our sales efforts in the areas we saw the most success over the past couple of years. We are directing resources towards our alliance partners versus internal demand generation. Similarly, we are focused on areas to help our customers reduce costs as they navigate the current environment.
As we announced earlier, we made the difficult decision to reduce our work force by 11% to align our cost structure with the expected near-term growth profile and improve operating margins. This will result in a significant improvement to our customer acquisition costs that will drop to the bottom-line.
Now, let me give you some more color on the quarterly performance. Subscription revenue was $86.6 million growing 20% year-over-year in constant currency, and 17% as reported, exceeding the high-end of our guidance, we experienced FX headwinds during the quarter based on the strength of the U.S. dollar.
Professional Services revenue was $14.5 million, a decline of 6% year-over-year, professional services represented 14% of our total revenue. In the future, we expect professional services revenue will be around 13% to 14% of total revenue. This will result in a stronger overall blended gross margin.
Total revenue ended at the high-end of our guide at $101.1 million up 17% in constant currency, and 13% as reported year-over-year, over a third of our total revenue is international, which created FX headwinds of approximately $3 million this quarter.
Non-GAAP subscription gross margin was 79%, a decline of approximately 90 basis points year-over-year. This was driven by investment in our infrastructure to scale. Non-GAAP professional services gross margin was negative 1% in line with our goal to run services at or near breakeven.
Our non-GAAP blended gross margin saw an improvement of 157 basis points year-over-year ending the quarter at 67%. This illustrates the incremental leverage we’ve experienced in our model as we benefit from working with our partner channel.
Non-GAAP operating income was $0.6 million, compared with an operating loss of $1.2 million in the prior year. This was driven by top-line growth and disciplined investment in the business. This resulted in a non-GAAP operating margin of 0.6%, 198 basis point improvement over last year. Our fully diluted share count at the end of the quarter was approximately 163.4 million shares using both the treasury stock and as if converted method.
Now, let me walk you through some of the key metrics for the quarter. In Q3, our dollar-based retention rate or DBRR was 109%, which included one point of FX headwinds, the 109% DBRR was two points reduction sequentially, and a one-point reduction year-over-year. While the current buying trends had an impact on DBRR, our retention rates continue in line with historic levels.
At the end of Q3, we had 770 customers that spend at or above $100,000 in average contract value, including acquired Zephr customers, an increase of 25 sequentially. In Q3, $100,000 cohort continue to represent 95% of our business. Given this cohort has grown from the time of our IPO to become the vast majority of our business, this metric is less indicative of overall execution. As a result, we plan to provide investors with new customer metrics at the beginning of next fiscal year.
Regarding our customer penetration, we continue to see success from our move up market strategy and our land and expand strategy. This quarter we closed six deals with ACV of $500,000 or more, including two deals over $1 million.
Turning to billing transaction volume, our systems process $22 billion of volume in the third quarter, representing 17% growth in constant currency and 15% growth as reported year-over-year. As we’ve noted before process billing transaction volume is not indicative of our revenue growth, because customer gains efficiencies as they scale. Moreover, given the success of our multi-product portfolio, this metric alone is less correlated to revenue growth. We have two other products, Zuora Revenue and Zuora Collect which generated significant volume growth year-over-year, both of which are not reflected in the billing transaction volume metric. It is our intention to revisit our metrics and provide you with additional visibility into our full suite of products in fiscal 24.
Now looking at ARR and free cash flow. At the end of Q3, ARR was $350.7 million and grew 19% as reported, with about one point of headwind due to FX. Free cash flow was negative $7.2 million for the quarter. As a reminder, free cash flow may fluctuate on a quarterly basis due to the timing of cash collections and seasonality. We believe it’s best to assess our cash flow performance over a long-term. CapEx for the quarter was $2.4 million.
Turning to the balance sheet, we ended the quarter with $401 million in cash and cash equivalents, a sequential decrease of $48 million primarily driven due to the acquisition of Zephr.
Now let’s turn to our financial outlook. As we shared earlier, we’re reducing our workforce by 11%. This will result in a non-recurring expense of approximately $9.5 million, of which 3.7 million was incurred in Q3 with a balance in Q4. These non-recurring expenses for severance, healthcare and transition assistance have been excluded from our non-GAAP presentation. While the workforce reduction is distributed across the entire company, the biggest impact is in the go-to-market organization. These changes will improve our sales team by streamlining our organization while preserving quota carrying capacity. As Tien mentioned, we’ll continue investing in R&D to deliver our multi-product roadmap and customer success.
Looking ahead, we anticipate the annualized go forward savings from this action will be approximately $29 million.
Turning to our Q4 outlook, our top of the funnel remains as strong as ever. But as we saw in Q3, customers are cautious about their spending, leading to longer deal cycles. We currently don’t expect this behavior to change in Q4 or next fiscal year. So we are being prudent on our outlook. For Q4, we currently expect subscription revenue of $87.5 million to $88.5 million, representing a year-over-year growth of 14% at the midpoint, professional services revenue of $12 million to $13 million.
Total revenue of $99.5 million to $101.5 million, representing year-over-year growth of 11% at the midpoint. As a reminder, Q4 has fewer billing days impacting services revenue and margin. This will also be our first full quarter absorbing Zephr expenses. Non-GAAP operating income of breakeven to $1 million and non-GAAP net loss per share of $0.06 to $0.07 per share, assuming a weighted average shares outstanding of 134.4 million. This includes a $4 million tax impact related to Zephr which will also impact free cash flow.
For the full year, we’re updating our outlook. We now expect subscription revenue of $336.5 million to $337.5 million representing year-over-year growth of 17% at the midpoint. Professional services revenue of $56 million to $57 million. Total revenue at $392.5 million to $394.5 million, representing a year-over-year growth of 14% at the midpoint. Non-GAAP operating income of breakeven to $1 million and a non-GAAP net loss per share of $0.15 to $0.16, assuming wage shares outstanding of approximately 131.5 million.
Next, let me review our cash flow outlook for the remainder of the year. Our prior year guidance for free cash flow for fiscal 23 was negative $13 million to negative $16 million. As we noted last quarter, it did not include the impact of acquisition related expenses associated with the Zephr transaction of approximately $4 million.
In addition, we expect to incur a $4 million tax expense related to the movement of Zephr IP. We will also incur non-reoccurring expenses associated with the workforce reduction just announced. The remainder of the free cash flow adjustment is through the impact of lower billings given extended deal cycles. As a result of these factors, we now expect free cash flow for the year to be between negative $33.5 million and negative $36.5 million. For fiscal 23, we now expect ARR growth of 15% and dollar-based retention rate of 107%.
While we will provide detailed fiscal 2024 guidance next quarter, here’s how we’re thinking about next year. For the top-line, we want to take a prudent approach, assuming the recent trends that we’ve experienced will continue in the next year. The bottom end of the range assumes conditions worsen, as such, we’re de-risking our model. For fiscal 2024, we expect subscription revenue growth between 11% and 14%. As noted earlier, we expect professional services revenue will be around 13% to 14% of total revenue going forward.
From a bottom-line perspective, regardless of the backdrop, we are committed to generating a non-GAAP operating margin of at least 6% next year.
To summarize, while there is uncertainty in the current environment, we believe Zuora is well positioned to offer long-term sustainable growth. The tough decision we announced today illustrates our commitment to bottom-line expansion as we grow the top-line. The subscription economy has changed the way companies can serve their customers, billing, revenue and collect are mission critical. These are solutions that cannot be easily replaced, and they offered improved efficiencies. We believe this is an area that customers will continue to invest in.
With that, Tien, Robbie and I will take your questions, and I’ll turn it over to the operator.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions]. Your first question today comes from the line of Joshua Reilly with Needham. Your line is now open.
Joshua Reilly
Maybe we’ll start off here on the announced layoffs. Maybe just some more color here. How are you thinking about the mix of quota bearing head you expect to retain following the layoffs? Maybe can you give us a sense either on a percent or absolute number? And second, do you need to have higher sales productivity under the new assumptions around profitability for next year?
Todd McElhatton
Hey, Josh, this is Todd, and I will go ahead and take that. So you’re right, we did focus a lot of the reductions in the go-to-market activity. One of the things that I feel very good about is the fact that we were able to retain the vast majority of our quota carrying capacity. In fact, we only lost a handful of quota carriers. And for the most part, those were in territories that have not been productive over the last several quarters, and we didn’t see them being productive going forward. What we see is, we’re going to be able to get much more efficient from a standpoint of eliminating overlay activities, simplifying the business, and then also utilizing our SI partners to help us in demand generation. So we feel pretty good about that. Overall, I would expect the quota levels to remain relatively consistent as we move forward. And we’ve got more than enough capacity to hit the guidance that we shared with you earlier.
Joshua Reilly
Got it. That’s super helpful. And then you made a comment that you’re going to focus more on leads from alliance partners versus direct qualified leads. What are the differences, if any, in the customer profiles that you’re getting from the two sources? And what’s kind of the thought process there?
Todd McElhatton
Yes. So what we have seen Josh over, maybe the last six plus quarters, is those leads that come in are better qualified, they tend to be larger, and they close quicker with a faster conversion rate. So from our perspective, as we took a look at where leads were coming from. And again, we’ve been really thoughtful about this, this hasn’t been a knee jerk reaction. It was, as we’ve been studying the business taking a look at how do we improve our go-to-market, we went ahead and said, all right, how can we improve that top of funnel, pipeline and conversion? And that’s where we came to the overall conclusion that we’d be best generating those leads and continue driving more for the SI Partners and internal lead generating them.
Tien Tzuo
Yes. I mean, Todd, I can add on that as well. I mean, our SIs, they both source pipeline, and they also implement, if I look at some of the over 500k deals that we had two of our largest ones, were against legacy incumbent ERPs. Both of those also included our size as an example. And then in Q3, our SI partners. And it’s participated in over three courses of new business deals, and the size of the deals as Todd said, and even doubled year-over-year through our SI partners. And over two thirds of our customer go live in Q3 involved a system integration partner. And also, we can see where there’s a prime deal where a partner actually leaves the deal. But those grew 30% year-over-year. So as you can see, we’re getting great momentum with our SI Partners.
Joshua Reilly
Got it. Best of luck going forward. Thanks, guys.
Tien Tzuo
Thanks, Josh.
Operator
Your next question comes from the line of Chad Bennett with Craig-Hallum. Your line is now open.
Chad Bennett
So just digging in a little bit on the new net expansion or and ARR guide for fiscal year 23 of 107 and 15. I appreciate kind of the elongation of sales cycles. And customers a little reticent to bake in volume growth. But I guess, did we, if I look at ARR, or billings, or what on the quarter, did we actually experienced that this quarter? Or do you anticipate a significant slowdown in the fourth quarter here? And then, I guess the other question would be, I seem to recall a couple years ago, when we kind of refocused and restructured the sales force, that we were going to, from a go-to-market standpoint or volume standpoint, we’re going to be significantly more conservative in kind of upfront volumes. And we’re actually going to start to see a tailwind from maybe deals that were structured maybe not properly before that are renewing now or had been renewing recently.
So has the volume growth really changed that dramatically from a quarter ago, when you’re pretty confident in 112 plus?
Todd McElhatton
Hey, Chad. Thanks a lot for the question. And things have absolutely changed pretty significantly since we did talk 90 days ago. From a standpoint of taking a look at what we saw during the quarter, we absolutely did see our install base customers become much more cautious as they were looking at volumes are still growing. However, we saw people having a real hesitancy to compete or to go ahead and commit to increase volumes for next year. That was certainly an impact to what we saw in the quarter slowing down.
We also saw several instances where customers either put projects on hold or had pushed out decisions on the upsell. So I think the good news on the DBRR is that our retention rates remained at their high levels. As a matter of fact, they’re historically where they’ve been, we continue to improve from where we were year-over-year, but from a standpoint of upsells, including volumes, customers got much more cautious. And it’s our anticipation that they will continue that not only through Q4, but as we look into next year.
And from an upfront perspective, I think I’ve hit that as we can continue to size the deals appropriately up front. I just think we’re seeing customers be much more cautious on making growth commitments and as they bring forward renewals earlier.
Chad Bennett
Okay. And then can you just talk about how the SIs, the channel performed in the quarter relative to kind of your updated kind of NRR and ARR guide, and if they are in fact performing relative to expectations and of the shortfall is direct sales.
Todd McElhatton
I don’t know that I would call it that either our direct or channel source pipeline didn’t materialize. And in fact, the top of the pipe has been healthier as ever, we ended the quarter very strong. We’re entering this quarter again, very strong. But again, we are seeing customers be very cautious before they make decisions. We are seeing in some cases where people are taking things through multiple levels of approvals, and they’re taking things for longer periods of time. But that being said, we’re also seeing areas where we did very well during the quarter. The first example that I would leave is, maybe companies that have a substantial need to shift their businesses towards subscription. Gannett was a very good example in the quarter. Here’s a company that is certainly pivoting to be more reliant on subscription versus advertising. And you’re seeing they made a seven-figure commitment to the Zuora billing platform. You’re seeing one of the largest Japanese auto manufacturers committing to the Zuora billing platform making 13 out of 15 of the auto manufacturers now committed.
You’re also seeing areas like Vivint, where on revenue automation, we can help customers be more efficient on how they manage their business. But that being said, we’re still hit as many other companies are with the macro headwinds of people being cautious on their spending.
Tien Tzuo
Chad, this is Tien. Just to jump in. I don’t want you to think that we have two distinct channels direct in SIs and they are independent. It’s not exactly how it works. We have a set of target accounts, and I would say our bet on large companies is really paying off it gives us the stability that we need in our business. It gives us the growth potential. But you’re seeing given the macro uncertainty they are just, it depends, right? If the media companies are moving forward, the tech companies might be a little bit slower.
But in terms of direct versus SIs, this set of customers, we’re still reaching out to them direct. But every one of them, practically speaking, has one or more system integrators. They view as partners that they’re going to. So it’s more of a co-selling environment. And so getting back to, when Todd says, we’ve learned from this and we could be more efficient, right, we’re able to balance our resources between, our SDR organization and our SI organization. And in terms of our target accounts, selling, in leverage the fact that our partners are already in the accounts, right, as a means to drive — continue to drive pipeline.
Chad Bennett
Got it. Thanks.
Operator
Your next question comes from the line of Adam Hotchkiss with Goldman Sachs. Your line is now open.
Adam Hotchkiss
You talked about customer cautiousness on one hand, but on the other hand, talked about the pipeline remaining really strong. Are you seeing that spending cautiousness being mirrored by business model transformation cautiousness towards subscription-based models? Are you continuing to hear customers seeing momentum there?
Tien Tzuo
I’d say the interesting thing is, we’re seeing almost a bifurcation in the business, right? A bifurcation of the deal, the bifurcation of the pipeline. And so you can see that really by some ways, by industry, but really by how important it is to the company. And so the media sector continues to buy, the manufacturing sector is saying we invested all this effort in IoT, we see vast pools of new revenue streams that we can go tap after. And some of these projects might even be smaller. We’re also seeing — we have a pretty broad product portfolio. So the parts of our product where we’re able to land a little bit quicker, including the Zephr acquisition that we did, or where the value proposition has a clear cost savings benefit. A lot of times when our revenue product goes in, there’s a whole bunch of audit fees that are saved as an example, because once you automate a lot of the revenue recognition, you’re more resilient to mistakes, and you have a less of a need to audit every single transaction.
And so those parts of our pipeline are continuing. The parts of our pipeline where — to simplify down, it’s a large investment now, over a long period of time where the benefit doesn’t accrue till 12 months out. Those are going to be put on hold, or more likely to be put on hold. We still have a few of those deals that are coming through because they’re so important. But because why is that these companies are saying, look, I don’t know where the economy is going to be in six months? Is the Fed going to continue to raise interest rates? Am I going to see recession or not? And I need clarity of that picture before I’m able to make a large investment like this. Directly speaking, this is still something we want to do. We still need to get to a target percent of subscriptions that our business model in 2, 3, 5 years, but just the uncertainty that we’re seeing, in terms of where’s inflation going to be? Where’s employment going to be? Where is the Fed going to go? It is causing them to say, look, give us another 90 days before we are able to decide. And so what Todd’s done is baked that into saying, look, what if this uncertainty continues on, because certainly signs of that. And let’s make sure, we have we have a prudent guide.
Todd McElhatton
Yes. I think just maybe they close up there, Adam is, I don’t think its customers are being cautious of jumping into the subscription business. He saw that with Gannett. You saw that with the automobile manufacturers. They’re saying, hey, our businesses are shifting, and we won’t be able to offer this. But there are some places where it’s like, oh, I need to make this transformation, or you’re seeing those decisions take longer. And we’ve taken that into account for the balance of this year and next year.
Adam Hotchkiss
Got it. All super helpful. And so when you think about that 11% to 14% for next year, is it fair to say the primary piece of the sort of slower growth relative to being something like north of 20% would be specifically around sort of that net expansion rate and customer cautiousness rather than a slowdown in the new pipeline, though fully understanding that you’re indicating that there is some slowdown there because of the extending deal cycles?
Todd McElhatton
Yes. I think what I would say is, and I think you’re asking about how did we get to the 11%. And when I really thought about that just to derisk of the different scenarios, what we said is, let’s assume that what we’re seeing in the second half now is that continue through next year, but that also gets a bit worse. And that’s how we’re looking at it. We certainly think that could hit us both on transformations that people are doing, and again our existing customers, being very cautious on pre-committing for incremental volume or taking on additional products from us, but we do expect the customers we have. They’re great enterprise customers. They are a growing business. We will be a growing business, that they will take on some of those, but again, wanting to be really cautious on what we’re seeing.
Tien Tzuo
One silver lining all this in terms of customer base. And so I don’t know that I would go so far to say this is all customer base and our new logos. I think it’s a balance, because if you look at the customer base, we do have a very, very sticky product. And just like nobody’s going to want to take on — people are slow to take on big projects, they’re not going to do it, they’re certainly not going to do a big project to replace an existing mission critical system. And so we feel really good about sustainability, and resiliency of our customer base. The question really is, how much is your volume going to grow? What is your appetite for new innovations? We think the appetite certainly there. But as long as there’s uncertainty in the economy, I think it’s, we need to be prudent. And we’re going to adjust our plans around that.
Adam Hotchkiss
Got it. Thanks Tien. Thanks, Todd.
Operator
Your next question comes from the line of Andrew DeGasperi with Bemberg. Your line is now open.
Andrew DeGasperi
I had one specifically in terms of trying to drill down a little more in the end markets, and specifically the geographies. Would you say the weakness that you were seeing is broad based, would you collide any geographies, particular has been worse than another? And then similarly, and it makes me think attraction and media. But is there any kind of end market specifically that was bad as a tech — beyond tech if there’s something else? And how would you compare that to what happened during COVID?
Tien Tzuo
Let me jump in on the geography side. The overall, as we say the pipeline continues to grow. And the continued customer interest there, we definitely have some softness and demand due to the general macro. And then, we saw some softening in the second half, as well. The bottom-line, it’s similar to our peers. We are seeing impact from macro, but a very strong interest in both the products. And also, as you said, the growth in the pipeline.
Todd McElhatton
I think the other thing that’s really important, Andrew to keep in mind is, when we’re seeing things take longer or push, we’re not seeing a change in the competitive profile. We’re not seeing that those deals are being lost, or just saying it’s taking customers longer to make a decision.
Tien Tzuo
I think this is also very different than COVID. I think the big thing is, I don’t know, March or April, we knew what was going on. But in June, July, it was pretty clear that, it was going to be a V-shaped recovery, if you will, right? Here the uncertainty is going to continue. And I’m no economist, but it certainly feels like we have to predict for a situation where were the economic uncertainty where we will be able to tame inflation in the U.S. What’s going to happen with energy in Europe, those questions may not be resolved for a few quarters.
Todd McElhatton
The other thing I’d add about the COVID comment, when we went through COVID, I think there was also two other things that were a bit of overhang. We had customers that maybe we hadn’t targeted correctly. And we saw a fair number of those churned, they probably weren’t good fits with us. And then we’d also oversold the volume. And now what you’re seeing is, we’ve got a really tight correlation between the committed volume that we have and what customers are using.
Tien Tzuo
Yes, we are very different companies.
Todd McElhatton
So I don’t expect to see anywhere, I wanted to point that out that we’re seeing our retention levels, they’ve improved. They continue to improve year-over-year. So we don’t have the challenges that we had in retention when you went back a couple years ago during COVID. I think that’s a real [quote] [ph] in differentiation.
Andrew DeGasperi
Thanks for that. And then, if I may add a follow up to Adams question earlier on the 2024 outlook. I guess, number one, why did — why provide it now before the end of the probably was seasonally a stronger quarter? Was it a question of trying to provide a floor to people’s assumptions for next year. And then, secondly, if we could talk about the high-end of the guidance, the 14%. What does that assume relative to the bear case is kind of a continuation of current conditions or something better than that. And then in terms of the margin expansion comment is, if you get up above that low end of the range, could we see those margins be above the 6%?
Todd McElhatton
So thanks a lot, Andrew. So maybe let me take you through, talk a little bit about how we got to the low case really sat there and ran the different scenarios from a standpoint of what happens. If we continue with what we’re seeing in the second half of this year, not only that continued throughout the fall of next year, but it actually gets a little bit worse. On the high end, what we would see is that we continue to see the first half being a bit of a challenge, and things getting slightly improving as we move out through the second part of next year.
I don’t want to get over my skis and get overly optimistic on what next year looks like. I’m not an economist, but we certainly have the quota carrying capacity in place that when things change, we’ll be able to move very quickly. We talked about having a really tough decision to make on realigning what our workforce look like. We went ahead and we took those actions. And what we said is, at a minimum, we will deliver 6% non-GAAP operating profit next year. If it continues to be a tight year, and it doesn’t make sense to invest in top-line growth, I’ll put more dollars towards the bottom-line and you’re absolutely right. We can see the bottom-line get better. If we think we can get a good return and accelerate that growth to the 14% or higher, we’ll certainly direct those dollars there.
But that time thinking about it at this time, and we felt like our business is relatively resilient. We certainly have good visibility with our SI Partners and what our pipeline looks like. And the different scenarios we could run. We felt like, it would be a good day to give people a point of view on how we’re thinking about the business, and we will more completely update you when we do the call in 90 days.
Operator
Your next question comes from the line of Brent Thill with Jefferies. Your line is now open.
Luv Sodha
Thank you, Tien, Todd and Robbie for taking my questions. This is Luv Sodha on for Brent Thill. Maybe you just want to start out with, again, going back to that dollar-based net retention, moderation that you’ve seen, I guess. Could you just remind us how much of that expansion is driven by volumes? And just give us a sense of the pricing mix?
Todd McElhatton
Yes, as we’ve talked about, Luv, over the last several quarters, I would say it’s relatively evenly based between three things. It’s making sure we continue to improve the absolute retention rate of our customers. The next is up sales of products and the third is volume. And so, it’s relatively balanced quarter-over-quarter, we were probably a little bit less on the volume this quarter as customers were a bit more cautious on what they were committing.
Tien Tzuo
Yes. From the full year basis do you remember, we continued have FX headwinds. So there’s going to be headwind baked into that number, when a non-U.S. dollar deal renews. At the base level, you’re taking a loss right there, right, that’s just the way the currencies work.
Luv Sodha
Got it. I wanted to ask one on, Todd, you mentioned that the top of the funnel is still pretty strong, I guess, what is driving the strength and I’m guessing the close rates are — have moderated quite a bit. So any color as to like, are these qualified leads or any color into, what drives the strength to the top of the funnel.
Todd McElhatton
So I’ll start maybe with that, and let Robbie finish it off. And anything that we’ve got in the funnel has actually been qualified. So when we talk about funnel, it’s not an opportunity that has not been qualified and accepted by our sales teams. But what we’re seeing being very strong is, we’ve talked about certain businesses that have an existential requirement for a subscription business. So we talked about what we’re seeing in manufacturing. We’ve talked about what we’ve seen in media. The other areas, we have several of our solutions, I think both collect and revenue, do a really good job of helping companies in times like this, improving their overall collection rates, automating their revenue recognition, being able to save time and money for companies. So those are things that I’ve seen that have certainly been helpful in driving the top of the pipeline, but maybe I’ll let Robbie, kind of finish that off for you.
Robert Traube
Yes. We continue to be the leader on a bidding perspective. And you see that we just saw the MGI reports as Tien mentioned, the IDC marketplace reports where we are a leader in those. And as of the tracks also the best-in-class and leader in the space and so on the natural list of people but they — the people will look at. I think the other points we talked is, with the growing maturity of our multi products around revenue and collect is giving us more places to go into to land. And then to be able to do what we’ve done very successfully, which is then expand across the entirety and not now just the auditor cache, but also the subscriber experience base.
Tien Tzuo
Yes. And I think, this is Tien. Maybe I’ll just cap it off. Maybe that’s what we’re trying to communicate is the interest level and the need for companies to move the subscriptions remains absolutely there. The question is, really, are some industries under pressure, and it’s going to take a little pause of where they move the projects. And are other industries like the media industry moving forward fast. I mean, the manufacturing industry, I just came back from Berlin, at Bosch world is connected world, it’s all about IoT. And I don’t sense a slowdown there, but a lot of these projects are more innovation projects to create new services, that that they’re monetizing.
Luv Sodha
Got it. And one last one, if I may, for Todd, I know, you provided the guidance for fiscal 24. And the commentary about de-risking it. I guess for billing source, obviously, that seems to be challenged this quarter. I guess what gives you confidence that 11% is kind of like the worst-case scenario. Thank you.
Todd McElhatton
So I think a couple things give us some confidence. One is the pipeline continues to be an all time high. We continue to see the SIs invest with us pretty significantly, whether it’s the work we’re doing with Deloitte as an example, where they’re actually adding people to help grow their business. We’ve seen some of the SI say that they are seeing Zuora as the fastest growing emerging practice that they have. So we’re seeing a lot of activity around customers doing that.
We also are seeing, our full multi-product solution really kind of come to bear here over the last couple of quarters. So not only can we lead with billing, but our revenue collect. Now, Zephr, our product that not only can we land with very quickly, but again, they’re absolutely existential, and helping many companies achieve their near-term goals and achieve some of the direct and some of the growth objectives that they have.
Tien Tzuo
We have a lot of levers at our disposal. And we talked about this many times before. We have a whole land and expand strategy, where we do have the ability to live with specific modules. So rather than going for a big transformation deal we can land with — we can even land with like a basic version of revenue recognition. We can land with one of the modules, that a lot of companies out there that just need help tracking standard selling prices, this Zephr acquisition is really, really interesting. Their sales cycles are 90 days or less. And they’re going to get live. And this is why when we show that product to our non-media customers, they’re really excited too. So we do have a lot of levers at our disposal. But, again, given the broader level of uncertainty, we took the actions that we did but committed to profitability. And we’re making sure that that we have a good guide.
Todd McElhatton
And remember, we’ve got 1000 plus total customers. We’ve got a lot of visibility as to what’s going on into their businesses. And we can take a look and as we started looking at the different scenarios, we got really comfortable that, we could get ourselves — we could de-risk ourselves and felt, really good that 11% would be a floor even if the macro environment worsen. And the last thing that I’ll say is, we’ve also got really focused as we’ve been committed for several quarters now on the profit line, but we’re absolutely committed to the minimum of 6%. And if we don’t see things picking up, we got an ability to put more dollars to the bottom-line for next year.
Luv Sodha
Got it. thank you.
Operator
This concludes the conference call. Thank you for your participation. Have a nice day.
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