DRS 1 filename1.htm Draft Registration Statement
Table of Contents

Confidential Draft Submitted on December 22, 2017

As filed with the Securities and Exchange Commission on                , 2018

Registration No. 333-                

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

Zuora, Inc.

(Exact name of Registrant as specified in its charter)

 

 

 

Delaware   7372   20-5530976

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

3050 South Delaware Street, Suite 301

San Mateo, California 94403

(800) 425-1281

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

 

 

Tien Tzuo

Chairman of the Board of Directors and Chief Executive Officer

Zuora, Inc.

3050 South Delaware Street, Suite 301

San Mateo, California 94403

(800) 425-1281

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

Gordon K. Davidson, Esq.

Jeffrey R. Vetter, Esq.

Faisal Rashid, Esq.

Ran D. Ben-Tzur, Esq.

Fenwick & West LLP

801 California Street

Mountain View, California 94041

(650) 988-8500

 

Jennifer Pileggi, Esq.

Senior Vice President, General Counsel, and Secretary

Zuora, Inc.

3050 South Delaware Street, Suite 301

San Mateo, California 94403

(800) 425-1281

 

Steven E. Bochner, Esq.

Robert G. Day, Esq.

Andrew D. Hoffman, Esq.

Wilson Sonsini Goodrich & Rosati, P.C.

650 Page Mill Road

Palo Alto, California 94304

(650) 493-9300

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended, or Securities Act, check the following box.  

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Securities Exchange Act of 1934, as amended. (Check one):

 

Large accelerated filer        Accelerated filer  
Non-accelerated filer     (Do not check if a smaller reporting company)    Smaller reporting company  
       Emerging growth company  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act.  

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of Securities to be Registered   Proposed
Maximum
Aggregate
Offering Price(1)(2)
 

Amount of

Registration Fee

Class A common stock, par value $0.0001 per share

  $           $        

 

 

(1) Estimated solely for the purpose of calculating the amount of the registration fee pursuant to Rule 457(o) under the Securities Act.
(2) Includes the aggregate offering price of additional shares that the underwriters have the option to purchase.

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment that specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this prospectus is not complete and may be changed. Neither we nor the selling stockholders may sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities, and neither we nor the selling stockholders are soliciting offers to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject to Completion. Dated                 , 2018.

             Shares

 

LOGO

Class A Common Stock

 

 

This is the initial public offering of shares of Class A common stock of Zuora, Inc.

We are offering                 shares of our Class A common stock. The selling stockholders identified in this prospectus are offering an additional                 shares of our Class A common stock. We will not receive any of the proceeds from the sale of the shares to be offered by the selling stockholders.

We have two classes of authorized common stock, Class A common stock and Class B common stock. The rights of the holders of Class A common stock and Class B common stock are identical, except with respect to voting and conversion rights. Each share of Class A common stock is entitled to one vote per share. Each share of Class B common stock is entitled to ten votes per share and is convertible into one share of Class A common stock. Outstanding shares of Class B common stock will represent approximately                 % of the voting power of our outstanding capital stock immediately following the completion of this offering, with our directors, executive officers, and 5% stockholders, and their respective affiliates, holding approximately                %, assuming in each case no exercise of the underwriters’ option to purchase additional shares.

Prior to this offering, there has been no public market for our Class A common stock. It is currently estimated that the initial public offering price per share will be between $                 and $                . We intend to apply to list our Class A common stock on                  under the symbol “                .”

We are an “emerging growth company” as that term is used in the Jumpstart Our Business Startups Act of 2012 and, as such, have elected to comply with certain reduced public company reporting requirements.

 

 

See the section titled “Risk Factors” beginning on page 13 to read about factors you should consider before buying shares of our Class A common stock.

 

 

Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 

 

 

     Per Share      Total  

Initial public offering price

   $               $           

Underwriting discounts(1)

   $      $  

Proceeds, before expenses, to Zuora

   $      $  

Proceeds, before expenses, to the selling stockholders

   $      $  

 

(1) See the section titled “Underwriting” for a description of the compensation payable to the underwriters.

To the extent that the underwriters sell more than                  shares of Class A common stock, the underwriters have the option to purchase up to an additional                  shares from us at the initial public offering price, less the underwriting discounts and commissions.

 

 

The underwriters expect to deliver the shares against payment in New York, New York on                 , 2018.

 

 

 

Goldman Sachs & Co. LLC   Morgan Stanley  

Allen & Company LLC

  Jefferies

 

Canaccord Genuity

   Needham & Company

 

 

Prospectus dated                 , 2018.


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TABLE OF CONTENTS

 

     Page  

Prospectus Summary

     1  

Risk Factors

     13  

Special Note Regarding Forward-Looking Statements

     50  

Industry and Market Data

     52  

Use of Proceeds

     54  

Dividend Policy

     54  

Capitalization

     55  

Dilution

     58  

Selected Consolidated Financial Data

     61  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     63  

Business

     83  

Management

     99  

Executive Compensation

     108  

Certain Relationships and Related Party Transactions

     119  

Principal and Selling Stockholders

     121  

Description of Capital Stock

     124  

Shares Eligible for Future Sale

     132  

Material U.S. Federal Tax Consequences to Non-U.S. Holders

     135  

Underwriting

     140  

Legal Matters

     148  

Experts

     148  

Where You Can Find Additional Information

     148  

Index to Consolidated Financial Statements

     F-1  

 

 

Through and including                      , 2018 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

 

 

Neither we, the selling stockholders, nor the underwriters have authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectuses we have prepared. We, the selling stockholders, and the underwriters take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. This prospectus is an offer to sell only the shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of the Class A common stock.

For investors outside of the United States: Neither we, the selling stockholders, nor the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. You are required to inform yourself about, and to observe any restrictions relating to, this offering and the distribution of this prospectus outside of the United States.

 

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PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus and does not contain all of the information you should consider in making your investment decision. Before deciding to invest in shares of our Class A common stock, you should read this summary together with the more detailed information, including the sections titled “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Special Note Regarding Forward-Looking Statements,” and our consolidated financial statements and the accompanying notes, provided elsewhere in this prospectus. Unless the context indicates otherwise, the terms “Zuora,” “the Company,” “we,” “us,” and “our” refer to Zuora, Inc., together with its consolidated subsidiaries, unless otherwise noted. See the sections titled “Risk Factors,” and “Special Note Regarding Forward-Looking Statements.” Our fiscal year end is January 31, and our fiscal quarters end on April 30, July 31, October 31, and January 31. Our fiscal years ended January 31, 2016 and 2017 and fiscal year ending January 31, 2018 are referred to herein as fiscal 2016, fiscal 2017, and fiscal 2018, respectively.

ZUORA, INC.

Zuora’s Vision and Mission

We provide cloud-based software on a subscription basis that enables any company in any industry to successfully launch, manage, and transform into a subscription business.

Our vision is simple. We call it “The World Subscribed,” and it’s the idea that one day every company will be a part of the Subscription Economy.

Our mission is to enable all companies to be successful in the Subscription Economy.

Overview

For at least the last hundred years, companies have operated primarily under a product-centric business model, where the goal was to make, ship, and sell more units—more cars, more clothes, more computers.

Today, consumers and businesses are realizing that they no longer have to always buy products. Why buy a DVD, CD, movie, or song when you can subscribe to streaming video and music services? Why buy software or hardware when you can subscribe to software-as-a-service or cloud computing services? Why buy a car when you can subscribe to ride-sharing services?

Ten years ago, we coined the term “Subscription Economy” to describe this new world. We foresaw a new business landscape in which traditional product or service companies shift toward subscription business models. Our vision redefines subscriptions in a broader context than a simple monthly fee. Our vision reflects the wide range of business models in the Subscription Economy, where products and services can be priced based on usage, consumption and outcomes, and the value of a company’s relationships with its customers is critical. Forrester Research has defined this as “The Age of the Customer,” a 20-year business cycle in which the most successful enterprises will systematically reinvent themselves to understand and serve increasingly powerful customers. This shift started with software, but it is spreading to many other industries that affect our lives, including media and entertainment, transportation, publishing, industrial goods, and retail.

 



 

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This shift in business models is creating a unique opportunity to disrupt the current enterprise software landscape. Traditional enterprise resource planning, or ERP, systems were built in the 1970s for product-based businesses, and these product-centric architectures do not adequately support the new requirements that companies face in the Subscription Economy. This new Subscription Economy requires different systems for managing the dynamic nature of ongoing relationships with subscribers.

We believe we are well-positioned to capitalize on this shift in business models and have spent the last ten years building and selling a leading and differentiated solution, and enhancing our proprietary deployment methodology and business model.

Architected specifically for dynamic, recurring subscription business models, our solution functions as an intelligent subscription management hub that automates and orchestrates the entire subscription order-to-cash process, including billing and revenue recognition. Our cloud-based software solution is the new system of record for subscription businesses.

As of October 31, 2017, we served more than 900 customers in 26 different countries across most industries, including 15 of the Fortune 100. Unsurprisingly, customers pay for our platform under a subscription-based model, and this model allows us to grow as the Subscription Economy grows. For fiscal 2016 and fiscal 2017, our total revenue was $92.2 million and $113.0 million, respectively. We have made significant investments to grow our business, including in sales and marketing, infrastructure, operations, and headcount. As a result, we incurred net losses for fiscal 2016 and fiscal 2017 of $48.2 million and $39.1 million, respectively.

Industry Background

Digital Technologies Have Changed the Consumption Preferences of Both Consumers and Businesses

Today, consumers and businesses function in a digital world, a world of cloud and mobile technologies, internet-enabled commerce, big data, and connected devices comprising the “Internet of Things,” or IoT. This new world has irreversibly changed consumer expectations. They want freedom: freedom to access products and services on their own terms—where, when, and how they want. They increasingly value access over ownership and care more about outcomes and experiences as opposed to simply product specifications or features.

Businesses are Realizing the Benefits of Subscription Business Models

These expectations and the proliferation of new digital services and markets are leading to increased demand in “as-a-service,” or subscription, business models. Businesses can benefit from the many strategic advantages in adopting subscription business models, including:

 

    New revenue streams and new growth opportunities;

 

    Better data-driven decisions;

 

    Improved revenue predictability; and

 

    Increased customer lifetime value.

This New Subscription Economy is Transforming Major Industries

In industry after industry, new disruptors are using subscription business models to upend traditional industry dynamics. Established businesses are realizing they need to innovate or risk being

 



 

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disrupted. As incumbents discover new ways of generating revenue from their existing assets and customers, it is becoming increasingly clear that much of their future growth can come from subscriptions.

The Subscription Economy Index, or SEI, our study of long-term Zuora customers, indicates that over the last five years, subscription businesses that were a part of our SEI grew revenues eight to nine times faster than S&P 500 companies grew revenue. See the section titled “Industry and Market Data.”

The Subscription Economy Represents a Once-in-a-Century Shift in How Businesses Operate

We believe we are still in the early stages of the Subscription Economy, with an inevitable multi-industry and multi-decade global shift toward subscription business models.

To be successful in the Subscription Economy, businesses need to change their mindsets from one-time product sales to earning and maintaining long-term customer relationships. To deliver on the promise of the Subscription Economy, businesses need freedom from old technologies and business models of the product-centric era.

New Requirements and the Limitations of Traditional Approaches

Requirements for Success in the Subscription Economy

Orienting businesses around the subscriber and maintaining an ongoing relationship with subscribers are prerequisites for success with subscription business models. To succeed in this new environment, businesses must:

 

    Offer recurring or consumption-based pricing models;

 

    Offer seamless customer experiences;

 

    Quickly adapt operations;

 

    Track subscriber lifecycles; and

 

    Access and react to subscription metrics.

Limitations of Traditional ERP Systems and In-House Custom Built Systems

Traditional ERP systems were not specifically designed to meet the needs of successful subscription business models in the digital era. They were built for the product era and designed to support linear, order-based, sequential, one-time transactions that focus on selling and shipping products to customers and accounting for those transactions.

To meet the needs of the Subscription Economy, ERP systems would need to be completely re-architected. Simply adding customizations to ERP systems does not adequately solve for the growing complexities of the Subscription Economy.

Similarly, in-house custom built systems usually require a significant amount of engineering and IT resources to build and maintain and frequently prove to be inadequate as companies seek to expand their offerings and operations.

 



 

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Market Opportunity

We believe the global, multi-decade shift across industries toward the Subscription Economy is creating a significant opportunity for subscription management systems.    

The market size for our current core billing and revenue recognition products was nearly $2.0 billion in 2017 and is expected to be $9.1 billion by 2022, growing at a 38% CAGR, according to MGI Research. Additionally, Gartner estimates that spending on ERP software is expected to reach $40.6 billion by 2021. As ERP systems cannot fully address the needs of companies in the Subscription Economy, we believe we are well-positioned to take a share of this spend as the Subscription Economy continues to grow.

Solution

Our solution functions as an intelligent subscription management hub that automates and orchestrates the entire subscription order-to-cash process. Our cloud-based software solution is the new system of record for subscription businesses. Zuora offers businesses the ability to meet the constantly-evolving needs of their subscribers, capitalize on new revenue opportunities, and accelerate business growth.

We have developed a deployment methodology designed to ensure that our customers can successfully acquire and nurture their subscribers by offering a flexible pricing model and automated billing, streamlined collection, and efficient accounting features.

Benefits

 

    Reduce Time to Market.    Our solution significantly reduces the time required to go-to-market with new subscription offerings and to iterate on the pricing and packaging of existing offerings, enabling businesses to quickly react without having to re-code or re-engineer back office systems.

 

    Increase Operational Efficiencies.    In the Subscription Economy, customers regularly make changes to their subscriptions. Zuora automates these processes and reduces the impact of such changes on businesses.

 

    Free Up IT and Engineering Resources.    Our cloud-based solution reduces both system complexity and costs. With Zuora, engineering and IT departments no longer need to build in-house custom systems or customizations for their ERP systems to keep up with market changes, ongoing customer demands, and new order-to-cash processes.

 

    Establish a Single System of Record.    Zuora captures financial and operational data, enabling subscription businesses to have a single system of record rather than having to reconcile data from multiple systems.

 

    Make Customer Data-Driven Decisions.    Because our solution serves as a single source of data and information for subscribers, companies use Zuora to gain insights into customer behavior. This helps them understand their subscribers better, predict upsell opportunities, and increase customer retention.

 

    Access Growing Ecosystem of Order-to-Cash Partners.    Our solution has over 50 pre-built connectors to various order-to-cash partners, including payment gateways, tax vendors, general ledgers, and customer relationship management, or CRM, systems.

 



 

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    Support Rapid International Expansion.    With over 26 pre-built payment gateways, over 150 supported currencies, and over 20 supported payment methods, our solution enables companies to quickly expand internationally.

Competitive Strengths

We believe the following competitive advantages enable us to maintain and extend our leadership as the system of record for companies in the Subscription Economy:

 

    Proven track record with more than 900 customers as of October 31, 2017 and 99.95% average annual uptime, which includes scheduled downtime, over the last several years;

 

    Comprehensive solution built specifically to handle the complexities of subscription business models;

 

    Flexible technology with a broad range of customers and use cases;

 

    Mission-critical system that is difficult to replace;

 

    Accelerated pace of innovation with ten years of development experience;

 

    Deep domain expertise across a broad range of subscription business models;

 

    Proprietary deployment methodology; and

 

    Growing subscription economy ecosystem with more than 80 applications and a broad network of partners and integrators.

Growth Strategies

Key elements of our growth strategies include:

 

    New Customer Acquisition.    As the Subscription Economy evolves, we intend to capitalize on our leadership and acquire new customers in current and future markets.

 

    Expand Relationships with Existing Customers.    Once we acquire a customer, we intend to expand our footprint and drive sustainable growth in multiple ways, such as increasing transaction volume and upsells and cross-sells with additional products.

 

    Enter New Vertical Markets.    We currently have a strong position in four key markets—technology, media and telecommunications, manufacturing, and IoT—and intend to expand to multiple vertical markets.

 

    Expand our Global Footprint.    As adoption of the Subscription Economy evolves throughout the world, we intend to expand into new geographies where we see future expansion opportunities.

 

    Leverage Global Systems Integrators to Accelerate our Growth.    We intend to work with large global systems integrators, or GSIs, and leverage their role in advocating for transformation to subscription business models.

 

    Launch New Products and Extend our Technology Lead.    As we grow and evolve with our customers, we intend to continue to develop additional products and enhance our current offerings.

 

    Optimize Pricing and Packaging.    We intend to optimize and enhance pricing and packaging to align the value customers realize from our products with the revenue we receive.

 



 

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Selected Risks Associated with Our Business

Our business is subject to numerous risks and uncertainties, including those highlighted in “Risk Factors” immediately following this prospectus summary. Some of these risks include:

 

    We have a history of net losses and may not achieve or sustain profitability;

 

    If the shift by companies to subscription business models develops slower than we expect, our growth may slow or stall, and our operating results could be adversely affected;

 

    We have experienced rapid growth in recent periods and we may not be able to sustain or manage any future growth effectively;

 

    If our security measures are breached or if our products are perceived as not being secure, customers may reduce the use of or stop using our products, and we may incur significant liabilities;

 

    Our success depends in large part on a limited number of products, and our business will suffer if these products fail to gain, or lose, market acceptance;

 

    If we are unable to attract new customers and expand sales to existing customers, our revenue growth could be slower than we expect and our business may be adversely affected;

 

    Our operating results may fluctuate from quarter to quarter, which makes our future results difficult to predict;

 

    A customers’ failure to deploy our solution after it enters into a subscription agreement with us, or the incorrect or improper deployment or use of our solution, could result in customer dissatisfaction and negatively affect our business, operating results, financial condition, and growth prospects;

 

    If we are not able to develop and release new products and services, our business could be adversely affected;

 

    Our business depends largely on our ability to attract and retain talented employees, including senior management;

 

    The market in which we participate is competitive, and if we do not compete effectively our operating results could be harmed; and

 

    The dual class structure of our common stock will have the effect of concentrating voting control with those stockholders who held our capital stock prior to the completion of this offering, including our directors, executive officers, and 5% stockholders.

Corporate Information

We were incorporated in the State of Delaware in September 2006. Our principal executive offices are located at 3050 South Delaware Street, Suite 301, San Mateo, California 94403 and our telephone number is (800) 425-1281. Our website address is www.zuora.com. The information contained on, or that can be accessed through, our website is not incorporated by reference into, and is not a part of, this prospectus. Investors should not rely on any such information in deciding whether to purchase our Class A common stock.

Zuora, the Zuora logo, Subscription Economy, The World Subscribed, Zuora Central Platform, Zuora Billing, Zuora RevPro, Zuora CPQ, Zuora Insights, Zuora Collect, Zuora Connect Marketplace,

 



 

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and other registered or common law trade names, trademarks, or service marks of Zuora appearing in this prospectus are the property of Zuora. This prospectus contains additional trade names, trademarks, and service marks of other companies that are the property of their respective owners. We do not intend our use or display of other companies’ trade names, trademarks, or service marks to imply a relationship with, or endorsement or sponsorship of us by, these other companies. Solely for convenience, our trademarks and tradenames referred to in this prospectus appear without the ® and ™ symbols, but those references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights, or the right of the applicable licensor, to these trademarks and tradenames.

Implications of Being an Emerging Growth Company

As a company with less than $1.07 billion in revenue during our most recently completed fiscal year, we qualify as an “emerging growth company” as defined in Section 2(a) of the Securities Act of 1933, as amended, or the Securities Act, as modified by the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. As an emerging growth company, we may take advantage of specified reduced disclosure and other requirements that are otherwise applicable, in general, to public companies that are not emerging growth companies. These provisions include:

 

    an exemption from compliance with the auditor attestation requirement on the effectiveness of our internal control over financial reporting pursuant to the Sarbanes-Oxley Act of 2002;

 

    an exemption from compliance with any requirement that the Public Company Accounting Oversight Board, or PCAOB, may adopt regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements;

 

    reduced disclosure about our executive compensation arrangements;

 

    exemptions from the requirements to obtain a non-binding advisory vote on executive compensation or a stockholder approval of any golden parachute arrangements; and

 

    extended transition periods for complying with new or revised accounting standards.

We will remain an emerging growth company until the earliest to occur of: (i) the last day of the fiscal year in which we have more than $1.07 billion in annual revenue; (ii) the date we qualify as a “large accelerated filer,” with at least $700 million of equity securities held by non-affiliates; (iii) the date on which we have issued, in any three-year period, more than $1.0 billion in non-convertible debt securities; and (iv) the last day of the fiscal year ending after the fifth anniversary of the completion of this offering.

We may take advantage of these exemptions until such time that we are no longer an emerging growth company. Accordingly, the information contained herein may be different than the information you receive from other public companies in which you hold stock.

 



 

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The Offering

 

Class A common stock offered by us

                    shares

Class A common stock offered by the selling stockholders

  


                 shares

Total shares of Class A common stock offered

                    shares

Option to purchase additional shares of Class A common stock offered by us

  


                 shares

Class A common stock to be outstanding after this offering

  


                 shares (         shares if the option to purchase additional shares is exercised in full)

Class B common stock to be outstanding after this offering

  


                 shares

Total Class A and Class B common stock to be outstanding after this offering

  


                 shares

Use of proceeds

  

We intend to use the net proceeds that we receive from this offering for working capital and other general corporate purposes. We also may use a portion of the net proceeds from this offering to make strategic acquisitions or investments. We will not receive any proceeds from the sale of shares of our Class A common stock by the selling stockholders.

See the section titled “Use of Proceeds” for additional information.

Voting rights

  

Shares of Class A common stock are entitled to one vote per share. Shares of Class B common stock are entitled to ten votes per share.

Holders of our Class A common stock and Class B common stock will generally vote together as a single class, unless otherwise required by law or our restated certificate of incorporation. Following the completion of this offering, each share of our Class B common stock will be convertible into one share of our Class A common stock at any time and will convert automatically upon certain transfers and upon the earliest of (i) the date specified by a vote of the holders of 66 2/3% of the outstanding shares of Class B common stock, (ii) ten years from the effective date of this offering, and (iii) the date the shares of Class B common stock cease to represent at least 5% of all outstanding shares of our common stock.

The holders of our outstanding Class B common stock will hold         % of the voting power of our outstanding capital stock following this offering,

 



 

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   with our directors, executive officers, and 5% s
tockholders and their respective affiliates holding         % in the aggregate. These holders will have the ability to control the outcome of matters submitted to our stockholders for approval, including the election of our directors and the approval of any change of control transaction. See the sections titled “Principal and Selling Stockholders” and “Description of Capital Stock” for additional information.

Proposed                  symbol

   “                ”

The number of shares of our Class A and Class B common stock to be outstanding after this offering is based upon no shares of our Class A common stock outstanding and 173,238,905 shares of our Class B common stock outstanding (without giving effect to the automatic conversion of shares of our Class B common stock into an equivalent number of shares of our Class A common stock upon their sale by the selling stockholders in this offering), in each case, as of January 31, 2017, and does not include:

 

    24,236,055 shares of our Class B common stock issuable upon the exercise of options to purchase shares of our Class B common stock outstanding as of January 31, 2017, with a weighted-average exercise price of $1.42 per share;

 

    shares of our Class B common stock issuable upon the exercise of options to purchase shares of our Class B common stock or the vesting of restricted stock units, or RSUs, granted after January 31, 2017; and

 

                         shares of our common stock reserved for future issuance under our equity compensation plans, consisting of (i) 9,021,995 shares of our Class B common stock reserved for future issuance under our 2015 Equity Incentive Plan, or the 2015 Plan, as of January 31, 2017 (which number of shares is prior to the options to purchase shares of our Class B common stock and RSUs granted after January 31, 2017 and an increase of 2,870,000 shares of our Class B common stock reserved future issuance under our 2015 Plan after January 31, 2017), (ii)                      shares of our Class A common stock reserved for future issuance under our 2018 Equity Incentive Plan, or the 2018 Plan, which will become effective on the date immediately prior to the date of this prospectus, and (iii)                      shares of our Class A common stock reserved for issuance under our 2018 Employee Stock Purchase Plan, or the 2018 ESPP, which will become effective on the date of this prospectus.

On the date immediately prior to the date of this prospectus, any remaining shares available for issuance under our 2015 Plan will be added to the shares of our Class A common stock reserved for issuance under our 2018 Plan, and we will cease granting awards under the 2015 Plan. Our 2018 Plan and 2018 ESPP also provide for automatic annual increases in the number of shares reserved thereunder. See the section titled “Executive Compensation—Employee Benefit Plans” for additional information.

Except as otherwise indicated, all information in this prospectus assumes:

 

    the amendment to our restated certificate of incorporation to redesignate our outstanding common stock as Class B common stock and create a new class of Class A common stock to be offered and sold in this offering;

 



 

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    the automatic conversion and reclassification of all outstanding shares of our convertible preferred stock as of January 31, 2017 into 123,968,054 shares of our Class B common stock immediately prior to the completion of this offering;

 

    a      -to-1 reverse stock split of our outstanding capital stock, that was effected in                      2018;

 

    the automatic conversion and reclassification of                      shares of our Class B common stock into an equivalent number of shares of our Class A common stock upon their sale by the selling stockholders in this offering;

 

    the filing and effectiveness of our restated certificate of incorporation and the effectiveness of our restated bylaws, each of which will occur immediately prior to the completion of this offering;

 

    no exercise of outstanding stock options or settlement of outstanding RSUs after January 31, 2017; and

 

    no exercise by the underwriters of their option to purchase up to an additional                      shares of our Class A common stock from us in this offering.

 



 

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Summary Consolidated Financial Data

The following tables summarize our consolidated financial data. We derived our summary consolidated statements of comprehensive loss for fiscal 2016 and fiscal 2017 and our summary consolidated balance sheet data as of January 31, 2017 from our audited consolidated financial statements included elsewhere in this prospectus. Our historical results are not necessarily indicative of the results to be expected in the future. You should read the following summary consolidated financial data in conjunction with the sections titled “Selected Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements, the accompanying notes, and other financial information included elsewhere in this prospectus. Our fiscal year end is January 31, and our fiscal quarters end on April 30, July 31, October 31, and January 31. Our fiscal years ended January 31, 2016 and 2017 and fiscal year ending January 31, 2018 are referred to herein as fiscal 2016, fiscal 2017, and fiscal 2018, respectively.

 

     Fiscal Year Ended
January 31,
 
     2016     2017  
     (in thousands, except per
share data)
 

Consolidated Statements of Comprehensive Loss:

    

Revenue:

    

Subscription

   $ 68,228     $ 89,836  

Professional services

     23,956       23,172  
  

 

 

   

 

 

 

Total revenue

     92,184       113,008  
  

 

 

   

 

 

 

Cost of revenue:

    

Subscription(1)

     17,820       22,840  

Professional services(1)

     25,540       25,322  
  

 

 

   

 

 

 

Total cost of revenue

     43,360       48,162  
  

 

 

   

 

 

 

Gross profit

     48,824       64,846  
  

 

 

   

 

 

 

Operating expenses:

    

Research and development(1)

     20,485       26,355  

Sales and marketing(1)

     64,508       62,384  

General and administrative(1)

     11,979       15,140  
  

 

 

   

 

 

 

Total operating expenses

     96,972       103,879  
  

 

 

   

 

 

 

Loss from operations

     (48,148     (39,033

Interest and other (expense) income, net

     (528     219  
  

 

 

   

 

 

 

Loss before income taxes

     (48,676     (38,814

Income tax (provision) benefit

     469       (284
  

 

 

   

 

 

 

Net loss

     (48,207     (39,098
  

 

 

   

 

 

 

Comprehensive loss:

    

Foreign currency translation adjustment

     (191     (470

Comprehensive loss

     (48,398     (39,568
  

 

 

   

 

 

 

Net loss per share attributable to common stockholders, basic and diluted(2)

   $ (0.29   $ (0.23
  

 

 

   

 

 

 

Weighted-average shares outstanding used to compute net loss per share attributable to common stockholders, basic and diluted(2)

     168,821       171,654  
  

 

 

   

 

 

 

Pro forma net loss per share attributable to common stockholders, basic and diluted (unaudited)(2)

     $ (0.13
    

 

 

 

Pro forma weighted-average shares outstanding used in calculating pro forma net loss per share attributable to common stockholders, basic and diluted (unaudited)(2)

       295,622  
    

 

 

 

 



 

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(1) Includes stock-based compensation expense as follows:

 

     Fiscal
Year Ended
January 31,
 
     2016      2017  
     (in thousands)  

Cost of revenue:

     

Subscription

   $ 235      $ 326  

Professional services

     566        583  

Research and development

     827        1,126  

Sales and marketing

     1,536        1,577  

General and administrative

     497        771  
  

 

 

    

 

 

 

Total

   $ 3,661      $ 4,383  
  

 

 

    

 

 

 
(2) See notes 1 and 13 of the notes to our consolidated financial statements included elsewhere in this prospectus for an explanation of the calculations of our net loss per share attributable to common stockholders, basic and diluted, and pro forma net loss per share attributable to common stockholders, basic and diluted.

 

     As of
January 31, 2017
 
     Actual      Pro Forma(1)      Pro Forma
As Adjusted(2)
 
     (in thousands)  

Consolidated Balance Sheet Data:

  

Cash and cash equivalents

   $ 72,645      $      $                       

Working capital

     39,663        

Total assets

     120,468        

Deferred revenue, current portion

     42,554        

Convertible preferred stock

     12        12     

Total stockholders’ equity

     54,980        54,980     

 

(1) The pro forma column reflects the automatic conversion of all outstanding of our convertible preferred stock as of January 31, 2017 into 123,968,054 shares of our Class B common stock.
(2) The pro forma as adjusted column reflects the items described in footnote (1) and the sale by us of        shares of our Class A common stock in this offering at an assumed initial public offering price of $        per share, which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. The pro forma as adjusted information discussed above is illustrative only and will be adjusted based on the actual public offering price and other terms of this offering determined at pricing. Each $1.00 increase (decrease) in the assumed initial public offering price of $        per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) cash and cash equivalents, working capital, total assets, and total stockholders’ equity by $        million, assuming that the number of shares offered, as set forth on the cover of this prospectus, remains the same, and after deducting the estimated underwriting discounts and commissions payable by us. Similarly, each increase (decrease) of one million shares in the number of shares offered by us would increase (decrease) cash and cash equivalents, working capital, total assets, and total stockholders’ equity by approximately $        million, assuming the assumed initial public offering price, which is the midpoint of the price range set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions payable by us.

 



 

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RISK FACTORS

Investing in our Class A common stock involves a high degree of risk. You should consider carefully the risks and uncertainties described below, together with all of the other information in this prospectus, including the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the accompanying notes included elsewhere in this prospectus before deciding whether to invest in shares of our Class A common stock. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that we are unaware of or that we deem immaterial may also become important factors that adversely affect our business. If any of the following risks occur, our business, financial condition, operating results, and future prospects could be materially and adversely affected. In that event, the market price of our Class A common stock could decline, and you could lose part or all of your investment.

Risks Related to Our Business and Industry

We have a history of net losses, anticipate increasing our operating expenses in the future, and may not achieve or sustain profitability.

We have incurred net losses in each fiscal year since inception, including net losses of $48.2 million and $39.1 million in fiscal 2016 and fiscal 2017, respectively, and we expect to incur net losses for the foreseeable future. As of January 31, 2017, we had an accumulated deficit of $211.5 million. We expect to make significant future expenditures related to the development and expansion of our business, including increasing our overall customer base, expanding relationships with existing customers, entering new vertical markets, expanding our global footprint, leveraging GSIs to accelerate our growth, optimizing pricing and packaging, and expanding our operations and infrastructure, both domestically and internationally, and in connection with legal, accounting, and other administrative expenses related to operating as a public company. These efforts may prove more expensive than we currently anticipate, and we may not succeed in increasing our revenue sufficiently, or at all, to offset these higher expenses. While our revenue has grown in recent years, if our revenue declines or fails to grow at a rate faster than these increases in our operating expenses, we will not be able to achieve and maintain profitability in future periods. As a result, we may continue to generate losses. We cannot assure you that we will achieve profitability in the future or that, if we do become profitable, we will be able to sustain profitability.

If the shift by companies to subscription business models, including consumer adoption of products and services that are provided through such models, and, in particular, the market for subscription management software, develops slower than we expect, our growth may slow or stall, and our operating results could be adversely affected.

Our success depends on companies shifting to subscription business models and consumers choosing to consume products and services through such models. Many companies may be unwilling or unable to offer their solutions using a subscription business model, especially if they do not believe that the consumers of their products and services would be receptive to such offerings. Our success will also depend, to a large extent, on the willingness of medium and large businesses that have adopted subscription business models utilizing cloud-based products and services to manage billings and financial accounting relating to their subscriptions. The adoption of these models is still relatively new, and enterprises may not choose to shift their business model or, if they do, they may decide that they do not need a solution that offers the range of functionalities that we offer. Many companies have invested substantial effort and financial resources to develop custom-built applications or integrate traditional enterprise software into their businesses as they shift to subscription or subscription business models and may be reluctant or unwilling to switch to different applications. Accordingly, it is

 

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difficult to predict customer adoption rates and demand for our solution, the future growth rate and size of the market for subscription management software, or the entry of competitive solutions. Factors that may affect market acceptance of our solution include:

 

    the number of companies shifting to subscription business models;

 

    the number of consumers and businesses adopting new, flexible ways to consume products and services;

 

    the security capabilities, reliability, and availability of cloud-based services;

 

    customer concerns with entrusting a third party to store and manage their data, especially transaction-critical, confidential, or sensitive data;

 

    our ability to minimize the time and resources required to deploy our solution;

 

    our ability to maintain high levels of customer satisfaction;

 

    our ability to deploy upgrades and other changes to our solution without disruption to our customers;

 

    the level of customization or configuration we offer; and

 

    the price, performance, and availability of competing products and services.

The markets for subscription products and services and for subscription management software may not develop further or may develop slower than we expect. If companies do not shift to subscription business models and subscription management software does not achieve widespread adoption, or if there is a reduction in demand for subscription products and services or subscription management software caused by technological challenges, weakening economic conditions, security or privacy concerns, decreases in corporate spending, a lack of customer acceptance, or otherwise, our business could be materially and adversely affected. In addition, our subscription agreements with our customers generally provide for a minimum subscription platform fee and usage-based fees, which depend on the total dollar amount that is invoiced or managed on our solution. Because a portion of our revenue depends on the volume of transactions that our customers process through our solution, if our customers do not adopt our solution throughout their business, if their businesses decline or fail, or if they are unable to successfully shift to subscription business models, our revenue could decline and our operation results could be adversely impacted.

We have experienced rapid growth and expect to invest in our growth for the foreseeable future. If we fail to manage our growth effectively, then our business, operating results, and financial condition could be adversely affected.

We have experienced rapid growth in recent periods. For example, the number of our employees has grown from 577 as of October 31, 2016 to 866 as of October 31, 2017. In May 2017, we acquired Leeyo Software, Inc., or Leeyo, which had significant operations in the United States and India. The growth and expansion of our business has placed and continues to place a significant strain on our management, operations, financial infrastructure, and corporate culture. In the event of further growth of our operations or in the number of our third-party relationships, our information technology systems and our internal controls and procedures may not be adequate to support our operations.

To manage growth in our operations and personnel, we will need to continue to improve our operational, financial, and management controls and our reporting systems and procedures. Failure to manage growth effectively could result in difficulty or delays in deploying customers, declines in quality or customer satisfaction, increases in costs, difficulties in introducing new products and services or enhancing existing products and services, loss of customers, or other operational difficulties, any of which could adversely affect our business performance and operating results.

 

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If our security measures are breached, if unauthorized access to customer data, our data, or our solution is otherwise obtained, or if our solution is perceived as not being secure, customers may reduce the use of or stop using our solution, and we may incur significant liabilities.

Security breaches and other security incidents could result in the loss of information, litigation, indemnity obligations, penalties, and other liability. If our security measures or those of our service providers are breached, or are perceived to have been breached, as a result of third-party action, including cyber-attacks or other intentional misconduct by computer hackers, employee error, malfeasance, or otherwise, and someone obtains unauthorized access to our data or other data we or our service providers maintain, including sensitive customer data, personal information, intellectual property, and other confidential business information, we could face loss of business, regulatory investigations, or orders, and our reputation could be severely damaged. We could be required to expend significant capital and other resources to alleviate the problem, as well as incur significant costs and liabilities, including due to litigation, indemnity obligations, damages for contract breach, penalties for violation of applicable laws or regulations, and costs for remediation and other incentives offered to customers or other business partners in an effort to maintain business relationships after a breach or other incident. Moreover, if our solution is perceived as not being secure, regardless of whether our security measures are actually breached, we could suffer harm to our reputation, and our operating results could be negatively impacted.

We cannot assure you that any limitations of liability provisions in our contracts would be enforceable or adequate or would otherwise protect us from any liabilities or damages with respect to any particular claim relating to a security breach or other security-related matter. We also cannot be sure that our existing insurance coverage will continue to be available on acceptable terms or will be available in sufficient amounts to cover one or more large claims related to a security incident or breach, or that the insurer will not deny coverage as to any future claim. The successful assertion of one or more large claims against us that exceed available insurance coverage, or the occurrence of changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, could have a material adverse effect on our business, including our financial condition, operating results, and reputation.

Cyber-attacks and other malicious Internet-based activities continue to increase generally. Because the techniques used to obtain unauthorized access to or sabotage systems change frequently and generally are not identified until they are launched against a target, we and our service providers may be unable to anticipate these techniques or to implement adequate preventative measures. In addition, third parties may attempt to fraudulently induce employees, contractors, or users to disclose information to gain access to our data or our customers’ data. We could suffer significant damage to our brand and reputation if a cyber-attack or other security incident were to allow unauthorized access to or modification of our customers’ data, other external data, or our own data or our IT systems or if the services we provide to our customers were disrupted, or if our solution is perceived as having security vulnerabilities. Customers could lose confidence in the security and reliability of our solution and perceive them to be not secure. This could lead to fewer customers using our products and services and result in reduced revenue and earnings. The costs we would incur to address and respond to these security incidents, and to prevent them thereafter, would increase our expenses. These types of security incidents could also lead to lawsuits, regulatory investigations and claims, and increased legal liability, including in some cases costs related to notification of the incident and fraud monitoring.

 

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Our success depends in large part on a limited number of products. If these products fail to gain or lose market acceptance, our business will suffer.

We derive substantially all of our revenue and cash flows from sales of subscriptions and associated deployment of our Zuora Central Platform and our Zuora Billing and Zuora RevPro products. As such, the continued growth in market demand for these products is critical to our success. Demand for our solution is affected by a number of factors, many of which are beyond our control, including the growth or contraction of the Subscription Economy, continued market acceptance of our solution by customers for existing and new use cases, the timing of development and release of new products and services, features, and functionality introduced by our competitors, changes in accounting standards, policies, guidelines, interpretations, or principles that would impact the functionality and use of our solution, and technological change. We expect that an increasing transition to disaggregated solutions that focus on addressing specific customer use cases would continue to disrupt the enterprise software space, enabling new competitors to emerge. We cannot assure you that our solutions and future enhancements to our solution will be able to address future advances in technology or the requirements of enterprise customers. If we are unable to meet customer demands in creating a flexible solution designed to address all these needs or otherwise achieve more widespread market acceptance of our solution, our business, operating results, financial condition, and growth prospects would be adversely affected.

If we are unable to attract new customers and expand sales to existing customers our revenue growth could be slower than we expect, and our business may be adversely affected.

Our ability to achieve significant growth in revenue in the future will depend, in large part, upon our ability to attract new customers. This may be particularly challenging where an organization has already invested substantial personnel and financial resources to integrate billings and other business and financial management tools, including custom-built solutions, into its business, as such an organization may be reluctant or unwilling to invest in new products and services. If we fail to attract new customers and fail to maintain and expand new customer relationships, our revenue may grow more slowly than we expect and our business may be adversely affected.

Our future revenue growth also depends upon expanding sales and renewals of subscriptions to our solution with existing customers. If our existing customers do not expand their use of our solution over time or do not renew their subscriptions, our revenue may grow more slowly than expected, may not grow at all, or may decline. Additionally, increasing incremental sales to our current customer base requires increasingly sophisticated and costly sales efforts that are targeted at senior management. During fiscal 2016 and fiscal 2017, sales and marketing expenses represented approximately 70.0% and 55.2% of our total revenue, respectively. We plan to continue expanding our sales efforts, both domestically and internationally, but we may be unable to hire qualified sales personnel, may be unable to successfully train those sales personnel that we are able to hire, and sales personnel may not become fully productive on the timelines that we have projected or at all. Additionally, although we dedicate significant resources to sales and marketing programs, including our Subscribed events, these sales and marketing programs may not have the desired effect and may not expand sales. We cannot assure you that our efforts would result in increased sales to existing customers, and additional revenue. If our efforts to expand sales and renewals to existing customers are not successful, our business and operating results could be adversely affected.

Our customers generally enter into subscription agreements with one- to three-year subscription terms and have no obligation to renew their subscriptions after the expiration of their initial subscription period. Moreover, our customers that do renew their subscriptions may renew for lower subscription or usage amounts or for shorter subscription periods. In addition, in the first year of a subscription, customers often purchase a higher level of professional services (such as training and deployment

 

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services) than they do in renewal years. Costs associated with maintaining a professional services department are relatively fixed in the short-term, while professional services revenue is dependent on the amount of billable work actually performed for customers in a period, the combination of which may result in variability in, and have a negative impact on, our gross profit. Customer renewals may decline or fluctuate as a result of a number of factors, including the breadth of early deployment, reductions in our customers’ spending levels, higher volumes of usage purchased upfront relative to actual usage during the subscription term, changes in customers’ business models and use cases, our customers’ satisfaction or dissatisfaction with our solution, our pricing or pricing structure, the pricing or capabilities of products or services offered by our competitors, or the effects of economic conditions. If our customers do not renew their agreements with us, or renew on terms less favorable to us, our revenue may decline.

Our operating results may fluctuate from quarter to quarter, which makes our future results difficult to predict.

Our quarterly operating results have fluctuated in the past and may fluctuate in the future. Additionally, we have a limited operating history with the current scale of our business, which makes it difficult to forecast our future results and subjects us to a number of uncertainties, including our ability to plan for and anticipate future growth. As a result, you should not rely upon our past quarterly operating results as indicators of future performance. We have encountered, and will continue to encounter, risks and uncertainties frequently experienced by growing companies in rapidly evolving markets, such as the risks and uncertainties described herein. Our operating results in any given quarter can be influenced by numerous factors, many of which are unpredictable or are outside of our control, including:

 

    our ability to maintain and grow our customer base;

 

    our ability to retain and increase revenue from existing customers;

 

    our ability to introduce new products and services and enhance existing products and services;

 

    the transaction volume that our customers processes through our system;

 

    our ability to respond to competitive developments, including pricing changes and the introduction of new products and services by our competitors;

 

    the productivity of our sales force;

 

    changes in the mix of products and services that our customers use;

 

    the length and complexity of our sales cycles;

 

    cost to develop and upgrade our solution to incorporate new technologies;

 

    seasonal purchasing patterns of our customers;

 

    impact of outages of our solution and reputational harm;

 

    costs related to the acquisition of businesses, talent, technologies, or intellectual property, including potentially significant amortization costs and possible write-downs;

 

    failures or breaches of security or privacy, and the costs associated with responding to and addressing any such failures or breaches;

 

    foreign exchange fluctuations;

 

    changes to financial accounting standards and the interpretation of those standards that may affect the way we recognize and report our financial results, including changes in accounting rules governing recognition of revenue;

 

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    the impact of changes to financial accounting standards, such as ASC 606, and the interpretation of those standards on customer adoption and use of our products and services and our ability to service our customers’ needs, including through Zuora RevPro;

 

    general economic and political conditions and government regulations in the countries where we currently operate or plan to expand;

 

    decisions by us to incur additional expenses, such as increases in sales and marketing or research and development;

 

    the timing of stock-based compensation expense; and

 

    potential costs to attract, onboard, retain, and motivate qualified personnel.

The impact of one or more of the foregoing and other factors may cause our operating results to vary significantly. As such, we believe that quarter-to-quarter comparisons of our operating results may not be meaningful and should not be relied upon as an indication of future performance. If we fail to meet or exceed the expectations of investors or securities analysts, then the trading price of our Class A common stock could fall substantially, and we could face costly lawsuits, including securities class action suits.

A customers’ failure to deploy our solution after it enters into a subscription agreement with us, or the incorrect or improper deployment or use of our solution could result in customer dissatisfaction and negatively affect our business, operating results, financial condition, and growth prospects.

Our solution is deployed in a wide variety of technology environments and into a broad range of complex workflows. We believe our future success will depend in part on our ability to increase both the speed and success of our deployments, by improving our deployment methodology, hiring and training qualified professionals, deepening relationships with deployment partners, and increasing our ability to integrate into large-scale, complex technology environments. We often assist our customers in deploying our solution. In other cases, customers rely on third-party partners to complete the deployment. In some cases, customers initially engage us to deploy our solution, but, for a variety of potential reasons, including strategic decisions not to utilize subscription business models, fail to ultimately deploy our solution. If we or our third-party partners are unable to deploy our solution successfully, or unable to do so in a timely manner and, as a result, customers do not utilize our solution, we would not be able to generate future revenue from such customers based on transaction or revenue volume and the up-sell of additional products and services, and our future operating results could be adversely impacted. In addition, customers may also seek refunds of their initial subscription fee. Moreover, customer perceptions of our solution may be impaired, our reputation and brand may suffer, and customers may choose not to renew or expand their use of our solution.

If we are not able to develop and release new products and services, or successful enhancements, new features, and modifications to our existing products and services, our business could be adversely affected.

The market for our solution is characterized by rapid technological change, frequent new product and service introductions and enhancements, changing customer demands, and evolving industry standards. The introduction of products and services embodying new technologies can quickly make existing products and services obsolete and unmarketable. Additionally, because we provide billing and finance solutions to help our customers with compliance and financial reporting, changes in law, regulations, and accounting standards could impact the usefulness of our products and services and could necessitate changes or modifications to our products and services to accommodate such

 

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changes. Subscription management products and services are inherently complex, and it can take a services depends on several factors, including timely completion, competitive pricing, adequate quality testing, integration with new and existing technologies and our solution, and overall market acceptance. We cannot be sure that we will succeed in developing, marketing, and delivering on a timely and cost-effective basis enhancements or improvements to our platform or any new products and services that respond to continued changes in subscription management practices or new customer requirements, nor can we be sure that any enhancements or improvements to our platform or any new products and services will achieve market acceptance. Since developing our solution is complex, the timetable for the release of new products and enhancements to existing products is difficult to predict, and we may not offer new products and updates as rapidly as our customers require or expect. Any new products or services that we develop may not be introduced in a timely or cost-effective manner, may contain errors or defects, or may not achieve the broad market acceptance necessary to generate sufficient revenue. Moreover, even if we introduce new products and services, we may experience a decline in revenue of our existing products and services that is not offset by revenue from the new products or services. For example, customers may delay making purchases of new products and services to permit them to make a more thorough evaluation of these products and services or until industry and marketplace reviews become widely available. Some customers may hesitate to migrate to a new product or service due to concerns regarding the complexity of migration or performance of the new product or service. In addition, we may lose existing customers who choose a competitor’s products and services or choose to utilize internally developed applications instead of our products and services. This could result in a temporary or permanent revenue shortfall and adversely affect our business.

In addition, because our products and services are designed to interoperate with a variety of other business systems applications, we will need to continuously modify and enhance our products and services to keep pace with changes in application programming interfaces, or APIs, and other software and database technologies. We may not be successful in either developing these new products and services, modifications, and enhancements or in bringing them to market in a timely fashion. Furthermore, modifications to existing platforms or technologies, including any APIs with which we interoperate, will increase our research and development expenses. Any failure of our products and services to operate effectively with future network platforms and technologies could reduce the demand for our products and services, result in customer dissatisfaction, and adversely affect our business.

Our business depends largely on our ability to attract and retain talented employees, including senior management. If we lose the services of Tien Tzuo, our founder, Chairman, and Chief Executive Officer, or other members of our senior management team, we may not be able to execute on our business strategy.

Our future success depends on our continuing ability to attract, train, assimilate, and retain highly skilled personnel, including software engineers, sales personnel, and professional services personnel. We face intense competition for qualified individuals from numerous software and other technology companies. In addition, competition for qualified personnel, particularly software engineers, is particularly intense in the San Francisco Bay Area, where our headquarters are located. We may not be able to retain our current key employees or attract, train, assimilate, or retain other highly skilled personnel in the future. We may incur significant costs to attract and retain highly skilled personnel, and we may lose new employees to our competitors or other technology companies before we realize the benefit of our investment in recruiting and training them. As we move into new geographies, we will need to attract and recruit skilled personnel in those areas. If we are unable to attract and retain suitably qualified individuals who are capable of meeting our growing technical, operational, and managerial requirements, on a timely basis or at all, our business may be adversely affected.

 

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Our future success also depends in large part on the continued service of senior management and other key personnel. In particular, we are highly dependent on the services of Tien Tzuo, our founder, Chairman and Chief Executive Officer, who is critical to the development of our technology, platform, future vision, and strategic direction. We rely on our leadership team in the areas of operations, security, marketing, sales, support, and general and administrative functions, and on individual contributors on our research and development team. Our senior management and other key personnel are all employed on an at-will basis, which means that they could terminate their employment with us at any time, for any reason, and without notice. We do not currently maintain key-person life insurance policies on any of our officers or employees. If we lose the services of senior management or other key personnel, or if we are unable to attract, train, assimilate, and retain the highly skilled personnel we need, our business, operating results, and financial condition could be adversely affected.

Volatility or lack of appreciation in our stock price may also affect our ability to attract and retain our key employees. Many of our senior personnel and other key employees have become, or will soon become, vested in a substantial amount of stock or stock options. Employees may be more likely to leave us if the shares they own or the shares underlying their vested options have significantly appreciated in value relative to the original purchase price of the shares or the exercise price of the options, or conversely, if the exercise price of the options that they hold are significantly above the market price of our common stock. If we are unable to retain our employees, or if we need to increase our compensation expenses to retain our employees, our business, results of operations, financial condition, and cash flows could be adversely affected.

The market in which we participate is competitive, and if we do not compete effectively our operating results could be harmed.

The market for subscription management products and services is highly competitive, rapidly evolving, and fragmented, and subject to changing technology, shifting customer needs, and frequent introductions of new products and services. Our main competitors fall into the following categories:

 

    providers of traditional ERP software, such as Oracle Corporation and SAP AG;

 

    traditional order-to-cash solutions that address individual elements of the subscription order-to-cash process such as traditional CPQ management, billing, collections, revenue recognition, or e-commerce software;

 

    telecommunications billing systems and other niche systems, such as Amdocs Limited; and

 

    in-house custom systems.

Many of our current and potential competitors have longer operating histories, significantly greater financial, technical, marketing, distribution or professional services experience, or other resources or greater name recognition than we do. In addition, many of our current and potential competitors supply a wide variety of products to, and have strong and well-established relationships with, current and potential customers. As a result, our current and potential competitors may be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards, or customer requirements or devote greater resources than we can to the development, promotion, and sale of their products and services. In addition, some current and potential competitors may offer products or services that address one or a limited number of functions at lower prices or with greater depth than our solution, or integrate or bundle such products and services with their other product offerings. Potential customers may prefer to purchase from their existing suppliers rather than from a new supplier. Our current and potential competitors may develop and market new technologies with comparable functionality to our solution. In addition, because our products and services are integral to our customers’ ability to accurately maintain books and records and prepare financial

 

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statements, our potential customers may prefer to purchase applications that are critical to their business from one of our larger, more established competitors, or leverage the software that they have already purchased from our competitors for their billing and accounting needs, or control such infrastructure internally. We may experience fewer customer orders, reduced gross margins, longer sales cycles, and loss of market share. This could lead us to decrease prices, implement alternative pricing structures, or introduce products and services available for free or a nominal price in order to remain competitive. We may not be able to compete successfully against current and future competitors, and our business, operating results, and financial condition will be adversely impacted if we fail to meet these competitive pressures.

Our ability to compete successfully in our market depends on a number of factors, both within and outside of our control. Some of these factors include: ease of use; subscription-based product features and functionality; ability to support the specific needs of companies with subscription business models; ability to integrate with other technology infrastructures and third-party applications; enterprise-grade performance and features such as system scalability, security, performance, and resiliency; vision for the market and product innovation; relationships with GSIs, management consulting firms, and resellers; total cost of ownership; strength of sales and marketing efforts; brand awareness and reputation; and customer experience, including support and professional services. Any failure by us to compete successfully in any one of these or other areas may reduce the demand for our solution, as well as adversely affect our business, operating results, and financial condition.

Moreover, current and future competitors may also make strategic acquisitions or establish cooperative relationships among themselves or with others, including our current or future technology partners. By doing so, these competitors may increase their ability to meet the needs of our customers or potential customers. These developments could limit our ability to obtain revenue from existing and new customers. If we are unable to compete successfully against current and future competitors, our business, operating results, and financial condition could be adversely impacted.

Because we recognize subscription revenue over the term of the applicable agreement, a lack of subscription renewals or new subscription agreements may not be reflected immediately in our operating results and may be difficult to discern.

We generally recognize subscription revenue from customers ratably over the terms of their contracts, which typically vary between one and three years. As a result, most of the subscription revenue we report in each quarter is derived from the recognition of unearned revenue relating to subscriptions entered into during previous quarters. Consequently, a decline in new or renewed subscriptions in any particular quarter would likely have a minor impact on our revenue results for that quarter, but would negatively affect our revenue in future quarters. Accordingly, the effect of significant downturns in sales and market acceptance of our solution, and potential changes in our pricing policies or rate of renewals, may not be fully reflected in our operating results until future periods. Moreover, our subscription model makes it difficult for us to rapidly increase our revenue through additional sales in any period, as revenue from new customers must be recognized over the applicable subscription term.

As a substantial portion of our sales efforts are increasingly targeted at large enterprise customers, our sales cycle may become increasingly lengthy and more expensive, we may encounter still greater pricing pressure and deployment and customization challenges, and we may have to delay revenue recognition for more complicated transactions, all of which could adversely impact our business and operating results.

As a substantial portion of our sales efforts are increasingly targeted at large enterprise customers, we face greater costs, longer sales cycles, and less predictability in the completion of some

 

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of our sales. In this market segment, the customer’s decision to use our solution may be an enterprise-wide decision, in which case these types of sales frequently require approvals by multiple departments and executive-level personnel and require us to provide greater levels of customer education regarding the uses and benefits of our solution, as well as education regarding security, privacy, and scalability of our solution, especially for those large “business to consumer” customers or those with extensive international operations. These large enterprise transactions might also be part of a customer’s broader business model or business systems transformation project, which are frequently subject to budget constraints, multiple approvals, and unplanned administrative, processing, security review, and other delays that could further lengthen the sales cycle. Larger enterprises typically have longer decision-making and deployment cycles, may have greater resources to develop and maintain customized tools and applications, demand more customization, require greater functionality and scalability, expect a broader range of services, demand that vendors take on a larger share of risks, demand higher levels of customer service and support, require acceptance provisions that can lead to a delay in revenue recognition, and expect greater payment flexibility from vendors. We are often required to spend time and resources to better familiarize potential customers with the value proposition of our solution generally. Additionally, while we currently offer and sell our solution in the cloud, large enterprise customers could require us to provide our solution on-premises to give them more control over data security and software infrastructure. Deploying our solution on-premises would cause us to incur significant additional research and development expense, and, even if we were to make these investments, we may be unsuccessful in implementing a competitive on-premises offering. As a result of these factors, sales opportunities with large enterprises may require us to devote greater sales and administrative support and professional services resources to individual customers, which could increase our costs, lengthen our sales cycle, and divert our own sales and professional services resources to a smaller number of larger customers. We may spend substantial time, effort, and money in our sales efforts without being successful in producing any sales. All these factors can add further risk to business conducted with these customers. In addition, if sales expected from a large customer for a particular quarter are not realized in that quarter or at all, our business, operating results, and financial condition could be materially and adversely affected.

The market for our revenue recognition automation software product, Zuora RevPro, is rapidly evolving as a result of the effectiveness of ASC 606, which makes it difficult to forecast adoption rates and demand for this product, and could have a material adverse effect on our business and operating results.

We began selling Zuora RevPro following our acquisition of Leeyo in May 2017. We have less experience marketing, determining pricing for, and selling Zuora RevPro, and we are still determining how to best market, price, and support adoption of this offering. We have directed, and intend to continue to direct, a significant portion of our financial and operating resources to develop and grow Zuora RevPro. The market for Zuora RevPro is rapidly evolving as a result of the effectiveness of ASC 606, the revenue recognition accounting standard that will take effect for most public companies in January 2018. While we have seen a significant number of Zuora RevPro deployments, particularly in the second half of fiscal 2018, associated with the effectiveness of ASC 606, it is uncertain whether Zuora RevPro will achieve and sustain high levels of demand and market acceptance. Accordingly, our future success depends in part upon growth in this market and the ability of our Zuora RevPro product to meet the demand for revenue recognition automation solutions. We have limited experience with respect to determining the optimal prices for this solution. Companies may choose to purchase our Zuora RevPro product to comply with ASC 606 in the short-term but may develop proprietary solutions in-house or migrate toward other solutions developed by our competitors in the future. Customers may purchase Zuora RevPro as a standalone product and not purchase other core Zuora products. The rapidly evolving nature of this market, as well as other factors that are beyond our control, reduces our ability to accurately evaluate our long-term outlook and forecast annual performance. A reduction or slowdown in demand for revenue recognition automation software, caused by shifts in the marketplace,

 

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regulatory requirements, accounting standards, lack of acceptance, technological challenges, and competing solutions, could have a material adverse effect on our business, future growth, operating results, and financial condition.

Our revenue growth and ability to achieve and sustain profitability will depend, in part on being able to expand our direct sales force and increase the productivity of our sales force.

To date, most of our revenue has been attributable to the efforts of our direct sales force. In order to increase our revenue and achieve and sustain profitability, we must increase the size of our direct sales force, both in the United States and internationally, to generate additional revenue from new and existing customers.

We believe that there is significant competition for sales personnel with the skills and technical knowledge that we require. Because our solution is often sold to large enterprises and involves long sales cycle and complex customer requirements, it is more difficult to find sales personnel with the specific skills and technical knowledge needed to sell our solution and, even if we are able to hire qualified personnel, doing so may be expensive. Our ability to achieve significant revenue growth will depend, in large part, on our success in recruiting, training, and retaining sufficient numbers of direct sales personnel to support our growth. New sales personnel require significant training and can take a number of months to achieve full productivity. Our recent hires and planned hires may not become productive as quickly as we expect and if our new sales employees do not become fully productive on the timelines that we have projected or at all, our revenue will not increase at anticipated levels and our ability to achieve long-term projections may be negatively impacted. We may also be unable to hire or retain sufficient numbers of qualified individuals in the markets where we do business or plan to do business. Furthermore, hiring sales personnel in new countries requires additional set up and upfront costs that we may not recover if the sales personnel fail to achieve full productivity. In addition, as we continue to grow, a larger percentage of our sales force will be new to our company and our solution, which may adversely affect our sales if we cannot train our sales force quickly or effectively. Attrition rates may increase, and we may face integration challenges as we continue to seek to expand our sales force. If we are unable to hire and train sufficient numbers of effective sales personnel, or if the sales personnel are not successful in obtaining new customers or increasing sales to our existing customer base, our business will be adversely affected.

We periodically change and make adjustments to our sales organization in response to market opportunities, competitive threats, management changes, product and service introductions or enhancements, acquisitions, sales performance, increases in sales headcount, cost levels, and other internal and external considerations. Any future sales organization changes may result in a temporary reduction of productivity, which could negatively affect our rate of growth. In addition, any significant change to the way we structure our compensation of our sales organization may be disruptive and may affect our revenue growth.

If we are unable to grow our sales channels and our relationships with strategic partners, such as GSIs, management consulting firms, and resellers, sales of our products and services may suffer and our growth could be slower than we project.

In addition to our direct sales force, we use strategic partners, such as GSIs, management consulting firms, and resellers, to market and sell our solution. Historically, we have used these strategic partners to a limited degree, but we anticipate that these partners will become an increasingly important aspect of our business, particularly with regard to enterprise and international sales where these partners may have more expertise and established business relationships than we do. Our relationships with these strategic partners are at an early stage of development. We have generated limited revenue through these relationships to date, and we cannot assure you that these partners will

 

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be successful in marketing and selling our solution. Identifying these partners, negotiating and supporting relationships with them, and maintaining these relationships requires significant commitment of time and resources that may not yield a significant return on our investment in these relationships. Our future growth in revenue and ability to achieve and sustain profitability depends in part on our ability to identify, establish, and retain successful strategic partner relationships in the United States and internationally, which will take significant time and resources and involve significant risk. If we are unable to establish and maintain our relationships with these partners, or otherwise develop and expand our indirect distribution channel, our business, operating results, financial condition, or cash flows could be adversely affected.

We also cannot be certain that we will be able to maintain successful relationships with any strategic partners and, to the extent that our strategic partners are unsuccessful in marketing our solution, our ability to sell our solution and our business, operating results, and financial condition could be adversely affected. Our strategic partners may market our customers the products and services of several different companies, including products and services that compete with our solution. Because our strategic partners do not have an exclusive relationship with us, we cannot be certain that they will prioritize or provide adequate resources to marketing our solution. Moreover, divergence in strategy by any of these partners may materially adversely affect our ability to develop, market, sell, or support our solution. We cannot assure you that our strategic partners will continue to cooperate with us. In addition, actions taken or omitted to be taken by such parties may adversely affect us. We are unable to control the quantity or quality of resources that our systems integrator partners commit to deploying our products and services, or the quality or timeliness of such deployment. If our partners do not commit sufficient or qualified resources to these activities, our customers will be less satisfied, be less supportive with references, or may require the investment of our resources at discounted rates. These, and other failures by our partners to successfully deploy our products and services, may have an adverse effect on our business and our operating results.

Our long-term success depends, in part, on our ability to expand the sales of our solution to customers located outside of the United States and our current, and any further, expansion of our international operations exposes us to risks that could have a material adverse effect on our business, operating results, and financial condition.

We have been recognizing increased revenue from international sales, and we conduct our business activities in various foreign countries. We currently have operations in North America, Europe, Asia (including India), and Australia. In fiscal 2016 and fiscal 2017, we derived approximately 27% and 26% of our total revenue, respectively, from customers located outside the United States. Our ability to manage our business and conduct our operations internationally requires considerable management attention and resources and is subject to the particular challenges of supporting a rapidly growing business in an environment of multiple cultures, customs, legal systems, regulatory systems, and commercial infrastructures. International expansion will require us to invest significant funds and other resources. Our operations in international markets may not develop at a rate that supports our level of investment. Expanding internationally may subject us to new risks that we have not faced before or increase risks that we currently face, including risks associated with:

 

    recruiting and retaining talented and capable employees in foreign countries;

 

    providing our solution to customers from different cultures, which may require us to adapt to sales practices, modify our solution, and provide features necessary to effectively serve the local market;

 

    the burden of complying with a wide variety of laws, including those relating to labor matters, consumer protection, privacy, data protection, information security, and encryption;

 

   

compliance with privacy, data protection and information security laws, such as the European Union Data Protection Directive and the General Data Protection Regulation, or GDPR (which

 

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will supersede the Data Protection Directive in May 2018), and the Cybersecurity Law of the People’s Republic of China;

 

    longer sales cycles in some countries;

 

    increased third-party costs relating to data centers outside of the United States;

 

    generally longer payment cycles and greater difficulty in collecting accounts receivable;

 

    credit risk and higher levels of payment fraud;

 

    weaker intellectual property protection in some countries;

 

    compliance with anti-bribery laws, such as the U.S. Foreign Corrupt Practices Act of 1977, as amended, or FCPA, and the UK Bribery Act 2010, or UK Bribery Act;

 

    currency exchange rate fluctuations;

 

    tariffs, export and import restrictions, restrictions on foreign investments, sanctions, and other trade barriers or protection measures;

 

    foreign exchange controls that might prevent us from repatriating cash earned outside the United States;

 

    economic or political instability in countries where we may operate;

 

    corporate espionage;

 

    compliance with the laws of numerous taxing jurisdictions, both foreign and domestic, in which we conduct business, potential double taxation of our international earnings, and potentially adverse tax consequences due to changes in applicable U.S. and foreign tax laws;

 

    increased costs to establish and maintain effective controls at foreign locations; and

 

    overall higher costs of doing business internationally.

If we fail to offer high-quality customer support, our business and reputation will suffer.

Once our solution is deployed to our customers, our customers rely on our support services to resolve any related issues. High-quality customer education and customer support is important for the successful marketing and sale of our products and for the renewal of existing customers. The importance of high-quality customer support will increase as we expand our business and pursue new enterprises. If we do not help our customers quickly resolve post-deployment issues and provide effective ongoing customer support, our ability to upsell additional products to existing customers could suffer and our reputation with existing or potential customers could be harmed.

Any disruption of service at our third-party data centers or Amazon Web Services could interrupt or delay our ability to deliver our services to our customers.

We currently host our solution, serve our customers, and support our operations in the United States primarily from a third-party Las Vegas-based data center and using Amazon Web Services, or AWS, a provider of cloud infrastructure services. As part of our current disaster recovery arrangements, our customer data in the Las Vegas-based data center production environment is replicated to a third-party data center located in the San Francisco Bay Area. Additionally, in Europe, we host our solution using AWS. We are also in the process of transitioning the hosting of a portion of our U.S. solution infrastructure to AWS, which may be more expensive than our current data center providers. Despite precautions, we may also experience planned and unplanned costs, interruptions, delays, and outages in service or other performance problems in connection with such transition. We also do not have control over the operations of the facilities of our data center providers or AWS.

 

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These facilities are vulnerable to damage or interruption from earthquakes, hurricanes, floods, fires, cyber security attacks, terrorist attacks, power losses, telecommunications failures, and similar events. The occurrence of a natural disaster or an act of terrorism, a decision to close the facilities without adequate notice, or other unanticipated problems could result in lengthy interruptions in our solution. In particular, the California-based data facilities are located in an area known for seismic activity, increasing our susceptibility to the risk that an earthquake could significantly harm the operations of these facilities. The facilities also could be subject to break-ins, computer viruses, sabotage, intentional acts of vandalism, and other misconduct. Our solution’s continuing and uninterrupted performance is critical to our success. Because our products and services are used by our customers for billing and financial accounting purposes, it is critical that our solution be accessible without interruption or degradation of performance, and we typically provide our customers with service level commitments with respect to annual uptime. Customers may become dissatisfied by any system failure that interrupts our ability to provide our solution to them. Outages could lead to the triggering of our service level agreements and the issuance of credits to our customers, in which case, we may not be fully indemnified for such losses pursuant to our agreement with AWS. We may not be able to easily switch our AWS operations to another cloud provider if there are disruptions or interference with our use of AWS. Sustained or repeated system failures would reduce the attractiveness of our solution to customers and result in contract terminations, thereby reducing revenue. Moreover, negative publicity arising from these types of disruptions could damage our reputation and may adversely impact use of our solution. We may not carry sufficient business interruption insurance to compensate us for losses that may occur as a result of any events that cause interruptions in our service.

Neither our third-party data center providers nor AWS have an obligation to renew their agreements with us on commercially reasonable terms, or at all. If we are unable to renew our agreements with these providers on commercially reasonable terms, if our agreements with our providers are prematurely terminated, or if in the future we add additional data center providers, we may experience costs or downtime in connection with the transfer to, or the addition of, new data center providers. If these providers were to increase the cost of their services, we may have to increase the price of our solution, and our operating results may be adversely impacted.

Errors, defects, or disruptions in our solution could diminish demand, harm our financial results, and subject us to liability.

Our customers use our products for important aspects of their businesses, and any errors, defects, or disruptions to our solution, or other performance problems with our solution could harm our brand and reputation and may damage our customers’ businesses. We are also reliant on third-party software and infrastructure, including the infrastructure of the Internet, to provide our products and services. Any failure of or disruption to this software and infrastructure could also make our solution unavailable to our customers. Our solution is constantly changing with new software releases, which may contain undetected errors when first introduced or released. Any errors, defects, disruptions in service, or other performance problems with our solution could result in negative publicity, loss of or delay in market acceptance of our products, loss of competitive position, delay of payment to us, lower renewal rates, or claims by customers for losses sustained by them. In such an event, we may be required, or may choose, for customer relations or other reasons, to expend additional resources in order to help correct the problem. Accordingly, any errors, defects, or disruptions to our solution could adversely impact our brand and reputation, revenue, and operating results.

 

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We typically provide service level commitments under our customer contracts. If we fail to meet these contractual commitments, we could be obligated to provide credits or refunds for prepaid amounts related to unused subscription services or face contract terminations, which could adversely affect our operating results.

Our customer contracts typically provide for service level commitments, which relate to annual uptime, response times, and escalation procedures. If we are unable to meet the stated service level commitments or suffer extended periods of unavailability for our solution, we may be contractually obligated to provide these customers with service credits, refunds for prepaid amounts related to unused subscription services, or other remedies, or we could face contract terminations. In addition, we could face legal claims for breach of contract, product liability, tort, or breach of warranty. Although we have contractual protections, such as warranty disclaimers and limitation of liability provisions, in our customer agreements, they may not fully or effectively protect us from claims by customers, commercial relationships, or other third parties. We may not be fully indemnified by our vendors for service interruptions beyond our control, and any insurance coverage we may have may not adequately cover all claims asserted against us, or cover only a portion of such claims. In addition, even claims that ultimately are unsuccessful could result in our expenditure of funds in litigation and divert management’s time and other resources. Thus, our revenue could be harmed if we fail to meet our service level commitments under our agreements with our customers, including, but not limited to, maintenance response times and service outages. Typically, we have not been required to provide customers with service credits that have been material to our operating results, but we cannot assure you that we will not incur material costs associated with providing service credits to our customers in the future.

Additionally, any failure to meet our service level commitments could adversely impact our reputation, business, operating results, and financial condition.

Our customers and third-party partners often need training in the proper use of our solution to maximize its potential. If our solution is not deployed or used correctly or as intended, inadequate performance may result.

Because our customers rely on our solution to manage a wide range of subscription management operations, the incorrect or improper deployment or use of our solution, our failure to train customers on how to efficiently and effectively use our solution, or our failure to provide adequate support to our customers, may result in customers not renewing their subscriptions, customers reducing their use of our solution, negative publicity, or legal claims against us. Also, as we continue to expand our customer base, any failure by us to properly provide these services will likely result in lost opportunities for additional subscriptions to our solution. Future changes in market conditions or customer demand could require changes to our prices or pricing model, which could adversely affect our business, operating results, and financial condition.

We generally charge our customers a flat fee for their use of our platform and a variable fee based on the amount of transaction volume they process through our system. If our customers do not increase their transaction volume, or an economic downturn reduces their transaction volume, our revenue may be adversely impacted by customers reducing their contracted transaction volume. We have limited experience with respect to determining the optimal prices for our platform, and, as a result, we have in the past needed to and expect in the future to need to change our pricing model from time to time. As the market for our platform matures, or as new competitors introduce new products or services that compete with ours, we may be unable to attract new customers at the same price or based on the same pricing models as we have used historically. We may experience pressure to change our pricing model to defer fees until our customers have fully deployed our solution. Moreover, larger organizations, which comprise a large and growing component of our direct sales efforts, may

 

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demand substantial price concessions. As a result, in the future we may be required to reduce our prices or change our pricing model, which could adversely affect our revenue, gross margin, profitability, financial position, and cash flow.

If we fail to integrate our solution with a variety of operating systems, software applications, and hardware platforms that are developed by others, our solution may become less marketable, less competitive, or obsolete, and our operating results may be adversely affected.

Our solution must integrate with a variety of network, hardware, and software platforms, and we need to continuously modify and enhance our solution to adapt to changes in cloud-enabled hardware, software, networking, browser, and database technologies. We have developed our solution to be able to integrate with third-party software-as-a-service, or SaaS, applications, including the applications of software providers that compete with us, through the use of APIs. For example, Zuora CPQ integrates with certain capabilities of Salesforce using publicly available APIs. In general, we rely on the fact that the providers of such software systems, including Salesforce, continue to allow us access to their APIs to enable these integrations. To date, we have not relied on a long-term written contract to govern our relationship with Salesforce. Instead, we are subject to the standard terms and conditions for application developers of Salesforce, which govern the distribution, operation, and fees of applications on the Salesforce platform, and which are subject to change by Salesforce from time to time. We also integrate certain aspects of our solution with other platform providers. Any deterioration in our relationship with any platform provider may adversely impact our business and operating results.

Our business may be adversely impacted if any platform provider:

 

    discontinues or limits access to its APIs by us;

 

    terminates or does not allow us to renew or replace our contractual relationship;

 

    modifies its terms of service or other policies, including fees charged to, or other restrictions on, us or other application developers, or changes how customer information is accessed by us or our customers;

 

    establishes more favorable relationships with one or more of our competitors, or acquires one or more of our competitors and offers competing services to us; or

 

    otherwise develops its own competitive offerings.

In addition, we have benefited from these platform providers’ brand recognition, reputations, and customer bases. Any losses or shifts in the market position of these platform providers in general, in relation to one another or to new competitors or new technologies could lead to losses in our relationships or customers, or to our need to identify or transition to alternative channels for marketing our solutions. Such changes could consume substantial resources and may not be effective. If we are unable to respond to changes in a cost-effective manner, our solution may become less marketable, less competitive, or obsolete and our operating results may be negatively impacted.

If we fail to develop, maintain, and enhance our brand and reputation cost-effectively, our business and financial condition may be adversely affected.

We believe that developing, maintaining, and enhancing awareness and integrity of our brand and reputation in a cost-effective manner are important to achieving widespread acceptance of our solution and are important elements in attracting new customers and maintaining existing customers. We believe that the importance of our brand and reputation will increase as competition in our market further intensifies. Successful promotion of our brand and the Subscription Economy concept will depend on the effectiveness of our marketing efforts, our ability to provide a reliable and useful solution

 

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at competitive prices, the perceived value of our solution, and our ability to provide quality customer support. In addition, the promotion of our brand requires us to make substantial expenditures, and we anticipate that the expenditures will increase as our market becomes more competitive, as we expand into new markets, and as more sales are generated through our strategic partners. Brand promotion activities may not yield increased revenue, and even if they do, the increased revenue may not offset the expenses we incur in building and maintaining our brand and reputation. We also rely on our customer base and community of end-users in a variety of ways, including to give us feedback on our solution and to provide user-based support to our other customers. If we fail to promote and maintain our brand successfully or to maintain loyalty among our customers, or if we incur substantial expenses in an unsuccessful attempt to promote and maintain our brand, we may fail to attract new customers and partners or retain our existing customers and partners and our business and financial condition may be adversely affected. Any negative publicity relating to our employees, partners, or others associated with these parties, may also tarnish our own reputation simply by association and may reduce the value of our brand. Damage to our brand and reputation may result in reduced demand for our solution and increased risk of losing market share to our competitors. Any efforts to restore the value of our brand and rebuild our reputation may be costly and may not be successful.

Failure to protect our intellectual property could adversely affect our business.

Our success depends in large part on our proprietary technology. We rely on various intellectual property rights, including patents, copyrights, trademarks, and trade secrets, as well as confidentiality provisions and contractual arrangements, to protect our proprietary rights. If we do not protect and enforce our intellectual property rights successfully, our competitive position may suffer, which could adversely impact our operating results.

Our pending patent or trademark applications may not be allowed, or competitors may challenge the validity, enforceability or scope of our patents, copyrights, or trademarks or the trade secret status of our proprietary information. There can be no assurance that additional patents will be issued or that any patents that are issued will provide significant protection for our intellectual property. In addition, our patents, copyrights, trademarks, trade secrets, and other intellectual property rights may not provide us a significant competitive advantage. There is no assurance that the particular forms of intellectual property protection that we seek, including business decisions about when to file patents and when to maintain trade secrets, will be adequate to protect our business.

Moreover, recent amendments to U.S. patent law, developing jurisprudence regarding U.S. patent law, and possible future changes to U.S. or foreign patent laws and regulations may affect our ability to protect and enforce our intellectual property rights. In addition, the laws of some countries do not provide the same level of protection of our intellectual property as do the laws of the United States. As we expand our international activities, our exposure to unauthorized copying and use of our solution and proprietary information will likely increase. Despite our precautions, our intellectual property is vulnerable to unauthorized access through employee error or actions, theft, and cybersecurity incidents, and other security breaches. It may be possible for third parties to infringe upon or misappropriate our intellectual property, to copy our solution, and to use information that we regard as proprietary to create products and services that compete with ours. Effective intellectual property protection may not be available to us in every country in which our solution is available. For example, some foreign countries have compulsory licensing laws under which a patent owner must grant licenses to third parties. In addition, many countries limit the enforceability of patents against certain third parties, including government agencies or government contractors. In these countries, patents may provide limited or no benefit. We may need to expend additional resources to defend our intellectual property rights domestically or internationally, which could impair our business or adversely affect our domestic or international expansion. Moreover, we may not pursue or file patent applications or apply for registration of copyrights or trademarks in the United States and foreign jurisdictions in

 

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which we operate with respect to our potentially patentable inventions, works of authorship, marks and logos for a variety of reasons, including the cost of procuring such rights and the uncertainty involved in obtaining adequate protection from such applications and registrations. If we cannot adequately protect and defend our intellectual property, we may not remain competitive, and our business, operating results, and financial condition may be adversely affected.

We enter into confidentiality and invention assignment agreements with our employees and consultants and enter into confidentiality agreements with other parties. We cannot assure you that these agreements will be effective in controlling access to, use of, and distribution of our proprietary information or in effectively securing exclusive ownership of intellectual property developed by our current or former employees and consultants. Further, these agreements may not prevent other parties from independently developing technologies that are substantially equivalent or superior to our solution.

We may need to spend significant resources securing and monitoring our intellectual property rights, and we may or may not be able to detect infringement by third parties. Our competitive position may be harmed if we cannot detect infringement and enforce our intellectual property rights quickly or at all. In some circumstances, we may choose to not pursue enforcement because an infringer has a dominant intellectual property position or for other business reasons. In addition, competitors might avoid infringement by designing around our intellectual property rights or by developing non-infringing competing technologies. Litigation may be necessary in the future to enforce our intellectual property rights and to protect our trade secrets. Litigation brought to protect and enforce our intellectual property rights could be costly, time-consuming, and distracting to management, and could result in the impairment or loss of portions of our intellectual property. Further, our efforts to enforce our intellectual property rights may be met with defenses, counterclaims attacking the scope, validity, and enforceability of our intellectual property rights, or with counterclaims and countersuits asserting infringement by our products and services of third-party intellectual property rights. Our failure to secure, protect, and enforce our intellectual property rights could seriously adversely affect our brand and our business.

Additionally, the United States Patent and Trademark Office and various foreign governmental patent agencies require compliance with a number of procedural, documentary, fee payment, and other similar provisions in order to complete the patent application process and to maintain issued patents. There are situations in which noncompliance or non-payment can result in abandonment or lapse of the patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. If this occurs, it could have a material adverse effect on our business operations and financial condition.

We are vulnerable to intellectual property infringement claims brought against us by others.

There has been considerable activity in our industry to develop and enforce intellectual property rights. Successful intellectual property infringement claims against us or our resellers or customers could result in monetary liability or a material disruption in the conduct of our business. We cannot be certain that our products and services, content, and brand names do not or will not infringe valid patents, trademarks, copyrights, or other intellectual property rights held by third parties. We may be subject to legal proceedings and claims from time to time relating to the intellectual property of others in the ordinary course of our business. Any intellectual property litigation to which we might become a party, or for which we are required to provide indemnification, may require us to cease selling or using solutions that incorporate the intellectual property that we allegedly infringe, make substantial payments for legal fees, settlement payments, or other costs or damages, obtain a license, which may not be available on reasonable terms or at all, to sell or use the relevant technology, or redesign the allegedly infringing solutions to avoid infringement, which could be costly, time-consuming, or

 

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impossible. Any claims or litigation, regardless of merit, could cause us to incur significant expenses and, if successfully asserted against us, could require that we pay substantial damages or ongoing royalty payments, prevent us from offering our products and services, or require that we comply with other unfavorable terms. We do not have a significant patent portfolio, which could prevent us from deterring patent infringement claims through our own patent portfolio, and our competitors and others may now and in the future have significantly larger and more mature patent portfolios than we have. We may also be obligated to indemnify our customers or strategic partners in connection with such infringement claims, or to obtain licenses from third parties or modify our solution, and each such obligation could further exhaust our resources. Some of our IP infringement indemnification obligations are contractually capped at a very high amount or not capped at all.

Even if the claims do not result in litigation or are resolved in our favor, these claims, and the time and resources necessary to resolve them, could divert the resources of our management and adversely affect our business and operating results. We expect that the occurrence of infringement claims is likely to grow as the market for subscription management products and services grows. Accordingly, our exposure to damages resulting from infringement claims could increase and this could further exhaust our financial and management resources.

Adverse litigation judgments or settlements resulting from legal proceedings in which we may be involved could expose us to monetary damages or limit our ability to operate our business.

We have in the past and may in the future become involved in private actions, collective actions, investigations, and various other legal proceedings by clients, employees, suppliers, competitors, government agencies, or others. The results of any such litigation, investigations, and other legal proceedings are inherently unpredictable and expensive. Any claims against us, whether meritorious or not, could be time consuming, result in costly litigation, damage our reputation, require significant amounts of management time, and divert significant resources. If any of these legal proceedings were to be determined adversely to us, or we were to enter into a settlement arrangement, we could be exposed to monetary damages or limits on our ability to operate our business, which could have an adverse effect on our business, financial condition, and operating results.

We employ third-party licensed software for use in or with our software, and the inability to maintain these licenses or errors in the software we license could result in increased costs or reduced service levels, which could adversely affect our business.

Our software incorporates certain third-party software obtained under licenses from other companies. We anticipate that we will continue to rely on such third-party software and development tools from third parties in the future. Although we believe that there are commercially reasonable alternatives to the third-party software we currently license, including open source software, this may not always be the case, or it may be difficult or costly to migrate to other third-party software. Our use of additional or alternative third-party software would require us to enter into license agreements with third parties. In addition, integration of our software with new third-party software may require significant work and require substantial investment of our time and resources. Also, any undetected errors or defects in third-party software could prevent the deployment or impair the functionality of our software, delay new updates or enhancements to our solution, result in a failure of our solution, and injure our reputation.

Our solution contains open source software components, and failure to comply with the terms of the underlying licenses could restrict our ability to sell our solution.

Our solution incorporates certain open source software. An open source license typically permits the use, modification, and distribution of software in source code form subject to certain conditions.

 

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Some open source licenses contain conditions that any person who distributes a modification or derivative work of software that was subject to an open source license make the modified version subject to the same open source license. Distributing software that is subject to this kind of open source license can lead to a requirement that certain aspects of our solution be distributed or made available in source code form. Although we do not believe that we have used open source software in a manner that might condition its use on our distribution of any portion of our solution in source code form, the interpretation of open source licenses is legally complex and, despite our efforts, it is possible that we may be liable for copyright infringement, breach of contract, or other claims if our use of open source software is adjudged to not comply with the applicable open source licenses.

Moreover, we cannot assure you that our processes for controlling our use of open source software in our solution will be effective. If we have not complied with the terms of an applicable open source software license, we may need to seek licenses from third parties to continue offering our solution on terms that are not economically feasible, to re-engineer our solution to remove or replace the open source software, to discontinue the sale of our solution if re-engineering could not be accomplished on a timely basis, to pay monetary damages, or to make available the source code for aspects of our proprietary technology, any of which could adversely affect our business, operating results, and financial condition.

In addition to risks related to license requirements, use of open source software can involve greater risks than those associated with use of third-party commercial software, as open source licensors generally do not provide warranties, assurances of title, performance, or non-infringement, or controls on the origin of the software. There is typically no support available for open source software, and we cannot assure you that the authors of such open source software will not abandon further development and maintenance. Many of the risks associated with the use of open source software, such as the lack of warranties or assurances of title or performance, cannot be eliminated, and could, if not properly addressed, negatively affect our business. We have established processes to help alleviate these risks, including a review process for screening requests from our development organizations for the use of open source software, but we cannot be sure that all open source software is identified or submitted for approval prior to use in our solution.

Our customers may fail to pay us in accordance with the terms of their agreements, necessitating action by us to compel payment.

We typically enter into non-cancelable agreements with a term of one to three years with our customers. If customers fail to pay us under the terms of our agreements, we may be adversely affected both from the inability to collect amounts due and the cost of enforcing the terms of our contracts, including litigation. The risk of such negative effects increases with the term length of our customer arrangements. Furthermore, some of our customers may seek bankruptcy protection or other similar relief and fail to pay amounts due to us, or pay those amounts more slowly, either of which could adversely affect our operating results, financial position, and cash flow.

We may be unable to integrate acquired businesses and technologies successfully or to achieve the expected benefits of such acquisitions. We may acquire or invest in additional companies, which may divert our management’s attention, result in additional dilution to our stockholders, and consume resources that are necessary to sustain our business.

Our business strategy may, from time to time, include acquiring other complementary products, technologies, or businesses. In May 2015, we acquired Frontleaf, Inc., and in May 2017, we acquired Leeyo. We are still in the process of integrating Leeyo’s operations into our business. An acquisition, investment, or business relationship may result in unforeseen operating difficulties and expenditures. In particular, we may encounter difficulties assimilating or integrating the businesses, technologies,

 

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products, personnel, or operations of the acquired companies, including Leeyo, particularly if the key personnel of the acquired company choose not to work for us, if an acquired company’s software is not easily adapted to work with ours, or if we have difficulty retaining the customers of any acquired business due to changes in management or otherwise. Acquisitions may also disrupt our business, divert our resources, and require significant management attention that would otherwise be available for development of our business. Moreover, the anticipated benefits of any acquisition, investment, or business relationship may not be realized or we may be exposed to unknown liabilities.

We may in the future seek to acquire or invest in additional businesses, products, technologies, or other assets. We also may enter into relationships with other businesses to expand our products and services or our ability to provide our products and services in foreign jurisdictions, which could involve preferred or exclusive licenses, additional channels of distribution, discount pricing, or investments in other companies. Negotiating these transactions can be time consuming, difficult, and expensive, and our ability to close these transactions may often be subject to approvals that are beyond our control. Consequently, these transactions, even if undertaken and announced, may not close. For one or more of those transactions, we may:

 

    issue additional equity securities that would dilute our stockholders;

 

    use cash that we may need in the future to operate our business;

 

    incur debt on terms unfavorable to us or that we are unable to repay;

 

    incur large charges or substantial liabilities;

 

    encounter difficulties retaining key employees of the acquired company or integrating diverse software codes or business cultures; and

 

    become subject to adverse tax consequences, substantial depreciation, or deferred compensation charges.

Any of these risks could adversely impact our business and operating results.

If we are not able to satisfy data protection, security, privacy, and other government- and industry-specific requirements, our growth could be harmed.

There are a number of data protection, security, privacy, and other government- and industry-specific requirements, including those that require companies to notify individuals of data security incidents involving certain types of personal data. Security compromises experienced by us or our service providers may lead to public disclosures, which could harm our reputation, erode customer confidence in the effectiveness of our security measures, negatively impact our ability to attract new customers, or cause existing customers to elect not to renew their subscriptions with us. In addition, some of the industries we serve have industry-specific requirements relating to compliance with certain security and regulatory standards, such as those required by the Health Insurance Portability and Accountability Act. We also maintain compliance with the Payment Card Industry Data Security Standard, which is critical to the financial services and insurance industries. As we expand into new verticals and regions, we will likely need to comply with these and other requirements to compete effectively. If we cannot comply or if we incur a violation in one or more of these requirements, our growth could be adversely impacted, and we could incur significant liability.

Privacy concerns and laws, or other domestic or foreign regulations, may reduce the effectiveness of our solution and adversely affect our business.

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operate and in which our customers operate have adopted, are considering adopting, or may adopt laws and regulations regarding the collection, use, storage, processing, and disclosure of information obtained from consumers and other individuals, which could impact our ability to offer our products and services in certain jurisdictions or our customers’ ability to deploy our solution globally. Laws and regulations relating to the collection, use, disclosure, security, and other processing of individuals’ information can vary significantly from jurisdiction to jurisdiction and are particularly stringent in Europe. We also may be bound by contractual obligations and other obligations relating to privacy, data protection, and information security that are more stringent than applicable laws and regulations. The costs of compliance with, and other burdens imposed by, laws, regulations, standards, and other obligations relating to privacy, data protection, and information security are significant. In addition, some companies, particularly larger enterprises, often will not contract with vendors that do not meet these rigorous standards. Accordingly, our failure, or perceived inability, to comply with these laws, regulations, standards, and other obligations may limit the use and adoption of our solution, reduce overall demand for our solution, lead to regulatory investigations, litigation, and significant fines, penalties, or liabilities for actual or alleged noncompliance, or slow the pace at which we close sales transactions, any of which could harm our business. Moreover, if we or any of our employees or contractors fail or are believed to fail to adhere to appropriate practices regarding our customers’ data, it may damage our reputation and brand.

Additionally, we expect that existing laws, regulations, standards, and other obligations may be interpreted in new and differing manners in the future, and may be inconsistent among jurisdictions. Future laws, regulations, standards, and other obligations, and changes in the interpretation of existing laws, regulations, standards, and other obligations could result in increased regulation, increased costs of compliance and penalties for non-compliance, and limitations on data collection, use, disclosure, and transfer for us and our customers. The European Union and United States agreed in 2016 to a framework for data transferred from the European Union to the United States, called the Privacy Shield, but this framework has been challenged by private parties and may face additional challenges by national regulators or additional private parties. Additionally, the European Union adopted the GDPR in 2016, and it will become effective in May 2018. The GDPR establishes new requirements applicable to the handling of personal data and imposes penalties for non-compliance of up to the greater of 20 million or 4% of worldwide revenue. The costs of compliance with, and other burdens imposed by, the GDPR may limit the use and adoption of our products and services and could have an adverse impact on our business.

The costs of compliance with, and other burdens imposed by, laws and regulations relating to privacy, data protection, and information security that are applicable to the businesses of our customers may adversely affect our customers’ ability and willingness to process, handle, store, use, and transmit certain types of information, such as demographic and other personal information, of their customers using our solution, which could limit the use, effectiveness, and adoption of our solution and reduce overall demand. In addition, the other bases on which we and our customers rely for the transfer of personal data across national borders, such as the Standard Contractual Clauses promulgated by the EU Commission Decision 2010/87/EU, commonly referred to as the Model Clauses, continue to be subjected to regulatory and judicial scrutiny. If we or our customers are unable to transfer data between and among countries and regions in which we operate, it could decrease demand for our solution, require us to modify or restrict our solution, products, services, or operations, and impair our ability to maintain and grow our customer base and increase our revenue. With respect to any changes we consider necessary or appropriate to make to our solution, products, services, or practices in an effort to comply, or allow our customers to comply, with laws, regulations, or other obligations relating to privacy, data protection, or information security, we may be unable to make those changes in a commercially reasonable manner, in a timely fashion, or at all. Even the perception of privacy concerns, whether or not valid, may inhibit the adoption, effectiveness, or use of our solution.

 

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In addition to government activity, privacy advocacy groups, the technology industry, and other industries have established or may establish various new, additional, or different self-regulatory standards that may place additional burdens on us. Our customers may expect us to meet voluntary certifications or adhere to other standards established by them or third parties, and we may be required or otherwise find it advisable to obtain these certifications or adhere to these standards. If we are unable to maintain these certifications or meet these standards, it could reduce demand for our solution and adversely affect our business.

Failure to comply with anticorruption and anti-money laundering laws, including the FCPA and similar laws associated with our activities outside of the United States, could subject us to penalties and other adverse consequences.

We are subject to the FCPA, the U.S. domestic bribery statute contained in 18 U.S.C. § 201, the U.S. Travel Act, the USA PATRIOT Act, the UK Bribery Act, and possibly other anti-bribery and anti-money laundering laws in countries in which we conduct activities. We face significant risks if we fail to comply with the FCPA and other anti-corruption laws that prohibit companies and their employees and third-party intermediaries from promising, authorizing, offering, or providing, directly or indirectly, improper payments or benefits to foreign government officials, political parties, and private-sector recipients for the purpose of obtaining or retaining business, directing business to any person, or securing any advantage. In many foreign countries, particularly in countries with developing economies, it may be a local custom that businesses engage in practices that are prohibited by the FCPA or other applicable laws and regulations. In addition, we use various third parties to sell our solution and conduct our business abroad. We or our third-party intermediaries may have direct or indirect interactions with officials and employees of government agencies or state-owned or affiliated entities and we can be held liable for the corrupt or other illegal activities of these third-party intermediaries, our employees, representatives, contractors, partners, and agents, even if we do not explicitly authorize such activities. We have implemented an anti-corruption compliance program but cannot assure you that all of our employees and agents, as well as those companies to which we outsource certain of our business operations, will not take actions in violation of our policies and applicable law, for which we may be ultimately held responsible.

Any violation of the FCPA, other applicable anti-corruption laws, and anti-money laundering laws could result in whistleblower complaints, adverse media coverage, investigations, loss of export privileges, or severe criminal or civil sanctions, which could have a materially adverse effect on our reputation, business, operating results, and prospects. In addition, responding to any enforcement action may result in a significant diversion of management’s attention and resources, significant defense costs, and other professional fees.

We are required to comply with governmental export control laws and regulations. Our failure to comply with these laws and regulations could have an adverse effect on our business and operating results.

Our solution is subject to governmental, including United States and European Union, export control laws and regulations, and as a U.S. company we are covered by the U.S. sanctions regulations. U.S. export control and economic sanctions laws and regulations prohibit the shipment of certain products and services to U.S. embargoed or sanctioned countries, governments, and persons, and complying with export control and sanctions regulations for a particular sale may be time-consuming and may result in the delay or loss of sales opportunities. While we take precautions to prevent our solution from being exported in violation of these laws or engaging in any other activities that are subject to these regulations, if we were to fail to comply with U.S. export laws, U.S. Customs regulations and import regulations, U.S. economic sanctions, and other countries’ import and export laws, we could be subject to substantial civil and criminal penalties, including fines for the company,

 

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incarceration for responsible employees and managers, and the possible loss of export or import privileges as well as incur reputational harm.

We incorporate encryption technology into certain of our products and certain encryption products may be exported outside of the United States only by a license or a license exception. In addition, various countries regulate the import of certain encryption technology, including import permitting and licensing requirements, and have enacted laws that could limit our ability to distribute our products or could limit our customers’ ability to deploy our products in those countries. Although we take precautions to prevent our products from being provided in violation of such laws, we cannot assure you that inadvertent violations of such laws have not occurred or will not occur in connection with the distribution of our products despite the precautions we take. Governmental regulation of encryption technology and regulation of imports or exports, or our failure to obtain required import or export approval for our products, could harm our international sales and adversely affect our operating results.

Further, if our partners fail to obtain required import, export, or re-export licenses or permits, we may also be harmed, become the subject of government investigations or penalties, and incur reputational harm. Changes in our solution or changes in export and import regulations may create delays in the introduction of our solution in international markets, prevent our customers with international operations from deploying our solution globally or, in some cases, prevent the export or import of our solution to certain countries, governments, or persons altogether. Any change in export or import laws or regulations, economic sanctions, or related legislation, shift in the enforcement or scope of existing laws and regulations, or change in the countries, governments, persons, or technologies targeted by such laws and regulations, could result in decreased use of our solution by, or in our decreased ability to export or sell our solution to, existing or potential customers with international operations. Any decreased use of our solution or limitation on our ability to export or sell our solution would likely harm our business, financial condition, and operating results.

Our ability to use our net operating losses to offset future taxable income may be subject to certain limitations which could subject our business to higher tax liability.

We may be limited in the portion of net operating loss, or NOL, carryforwards that we can use in the future to offset taxable income for U.S. federal and state income tax purposes. As of January 31, 2017, we had U.S. federal NOL carryforwards of approximately $184.4 million and state NOL carryforwards of approximately $153.2 million, which if not utilized will begin to expire in 2028.

In addition, under Section 382 of the Internal Revenue Code of 1986, as amended, or the Code, a corporation that undergoes an “ownership change” under Section 382 of the Code is subject to limitations on its ability to utilize its NOLs to offset future taxable income. A Section 382 “ownership change” generally occurs if one or more stockholders or groups of stockholders who own at least 5% of our stock increase their ownership by more than 50 percentage points over their lowest ownership percentage within a rolling three-year period. We have not commissioned a Section 382 study, and therefore, if we earn net taxable income, our ability to use our current NOLs, and any NOLs of companies we have acquired, may be subject to limitations, thereby increasing our overall tax liability. In addition, future changes in our stock ownership, including as a result of this or future offerings of our capital stock, as well as other changes that may be outside of our control, could result in additional ownership changes under Section 382 of the Code. Our NOLs may also be impaired under similar provisions of state law. We have recorded a full valuation allowance related to our NOLs and other net deferred tax assets due to the uncertainty of the ultimate realization of the future benefits of those assets. Our NOLs may expire unutilized or underutilized, which could prevent us from offsetting future taxable income.

 

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The applicability of sales, use and other tax laws or regulations on our business is uncertain. Adverse tax laws or regulations could be enacted or existing laws could be applied to us or our customers, which could subject us to additional tax liability and related interest and penalties, increase the costs of our services and adversely impact our business.

The application of federal, state, local, and international tax laws to services provided electronically is evolving. New income, sales, use, value-added, or other tax laws, statutes, rules, regulations, or ordinances could be enacted at any time (possibly with retroactive effect), and could be applied solely or disproportionately to services provided over the Internet or could otherwise materially affect our financial position and results of operations. Many countries in the European Union, as well as a number of other countries and organizations such as the Organization for Economic Cooperation and Development, have recently proposed or recommended changes to existing tax laws or have enacted new laws that could impact our tax obligations. In addition, tax reform legislation will come into effect beginning January 1, 2018. We are in the process of reviewing the impact of the tax reform legislation.

In addition, state, local, and foreign tax jurisdictions have differing rules and regulations governing sales, use, value-added, and other taxes, and these rules and regulations can be complex and are subject to varying interpretations that may change over time. Existing tax laws, statutes, rules, regulations, or ordinances could be interpreted, changed, modified, or applied adversely to us (possibly with retroactive effect), which could require us or our customers to pay additional tax amounts on prior sales and going forward, as well as require us or our customers to pay fines or penalties and interest for past amounts. Although our customer contracts typically provide that our customers must pay all applicable sales and similar taxes, our customers may be reluctant to pay back taxes and associated interest or penalties, or we may determine that it would not be commercially feasible to seek reimbursement. If we are required to collect and pay back taxes and associated interest and penalties, or we are unsuccessful in collecting such amounts from our customers, we could incur potentially substantial unplanned expenses, thereby adversely impacting our operating results and cash flows. Imposition of such taxes on our services going forward could also adversely affect our sales activity and have a negative impact on our operating results and cash flows.

Economic uncertainty or downturns, particularly as it impacts particular industries, could adversely affect our business and operating results.

In recent years, the United States and other significant markets have experienced cyclical downturns and worldwide economic conditions remain uncertain. Economic uncertainty and associated macroeconomic conditions make it extremely difficult for our customers and us to accurately forecast and plan future business activities, and could cause our customers to slow spending on our solution, which could delay and lengthen sales cycles. Furthermore, during uncertain economic times our customers may face issues gaining timely access to sufficient credit, which could result in an impairment of their ability to make timely payments to us. If that were to occur, we may be required to increase our allowance for doubtful accounts and our results could be negatively impacted.

Furthermore, we have customers in a variety of different industries. A significant downturn in the economic activity attributable to any particular industry, including, but not limited to, the retail and financial industries, may cause organizations to react by reducing their capital and operating expenditures in general or by specifically reducing their spending on information technology. In addition, our customers may delay or cancel information technology projects or seek to lower their costs by renegotiating vendor contracts. To the extent purchases of our solution are perceived by customers and potential customers to be discretionary, our revenue may be disproportionately affected by delays or reductions in general information technology spending. Also, customers may choose to develop in-house software or modify their legacy business software as an alternative to using our solution. Moreover, competitors may respond to challenging market conditions by lowering prices and attempting to lure away our customers.

 

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We cannot predict the timing, strength, or duration of any economic slowdown or any subsequent recovery generally, or any industry in particular. If the conditions in the general economy and the markets in which we operate worsen from present levels, our business, financial condition, and operating results could be materially adversely affected.

If currency exchange rates fluctuate substantially in the future, the results of our operations, which are reported in U.S. dollars, could be adversely affected.

As we continue to expand our international operations, we become more exposed to the effects of fluctuations in currency exchange rates. Although we expect an increasing number of sales contracts to be denominated in currencies other than the U.S. dollar in the future, the majority of our sales contracts have historically been denominated in U.S. dollars, and therefore, most of our revenue has not been subject to foreign currency risk. However, a strengthening of the U.S. dollar could increase the real cost of our solution to our customers outside of the United States, which could adversely affect our business, operating results, financial condition, and cash flows. In addition, we incur expenses for employee compensation and other operating expenses at our non-U.S. locations in the local currency. Fluctuations in the exchange rates between the U.S. dollar and other currencies could result in the dollar equivalent of such expenses being higher. This could have a negative impact on our operating results. Although we may in the future decide to undertake foreign exchange hedging transactions to cover a portion of our foreign currency exchange exposure, we currently do not hedge our exposure to foreign currency exchange risks.

Our reported financial results may be adversely affected by changes in accounting principles generally accepted in the United States.

Accounting principles generally accepted in the United States, or U.S. GAAP, are subject to interpretation by the Financial Accounting Standards Board, or FASB, the SEC, and various bodies formed to promulgate and interpret appropriate accounting principles. A change in these principles or interpretations could have a significant effect on our reported financial results, and could affect the reporting of transactions completed before the announcement of a change.

In particular, in May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), or ASC 606, which supersedes the revenue recognition requirements in ASC 605, Revenue Recognition. The core principle of ASC 606 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Any difficulties in implementing these pronouncements could cause us to fail to meet our financial reporting obligations, which could result in regulatory discipline and harm investors’ confidence in us.

The forecasts of market growth we have provided publicly, including those incorporated by reference in this prospectus, may prove to be inaccurate, and even if the markets in which we compete achieve the forecasted growth, we cannot assure you our business will grow at similar rates, if at all.

Growth forecasts are subject to significant uncertainty and are based on assumptions and estimates that may not prove to be accurate. The forecasts we have provided publicly, including those incorporated by reference in this prospectus, relating to the expected growth in the subscription billing and revenue recognition industry and ERP software market may prove to be inaccurate. Even if these markets experience the forecasted growth, we may not grow our business at similar rates, or at all. Our growth is subject to many factors, including our success in executing our business strategy, which is subject to many risks and uncertainties. Accordingly, the forecasts of market growth we have provided publicly, including those incorporated by reference in this prospectus, should not be taken as indicative of our future growth.

 

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Certain of our operating results and financial metrics may be difficult to predict as a result of seasonality.

Although we have not historically experienced significant seasonality with respect to our subscription revenue throughout the year, we have seen seasonality in our sales cycle as a large percentage of our customers make their purchases in the third month of any given quarter. In addition, our fourth quarter has historically been our strongest quarter. We believe that this results in part from the procurement, budgeting, and deployment cycles of many of our customers. We generally expect a relative increase in sales in the second half of each year as budgets of our customers for annual capital purchases are being fully utilized. We may be affected by seasonal trends in the future, particularly as our business matures. Such seasonality may result from a number of factors, including a slowdown in our customers’ procurement process during certain times of the year, both domestically and internationally, and customers choosing to spend remaining budgets shortly before the end of their fiscal years. These effects may become more pronounced as we target larger organizations and their larger budgets for sales of our solution. Additionally, this seasonality may be reflected to a much lesser extent, and sometimes may not be immediately apparent, in our revenue, due to the fact that we recognize subscription revenue over the term of the applicable subscription agreement. In addition, our ability to record professional services revenue can potentially vary based on the number of billable days in the given quarter, which is impacted by holidays and vacations. To the extent we experience this seasonality, it may cause fluctuations in our operating results and financial metrics and make forecasting our future operating results and financial metrics more difficult.

We may need to raise additional capital required to grow our business, and we may not be able to raise capital on terms acceptable to us or at all.

In order to support our growth and respond to business challenges, such as developing new features or enhancements to our solution to stay competitive, acquiring new technologies, and improving our infrastructure, we have made significant financial investments in our business, and we intend to continue to make such investments. As a result, we may need to engage in equity or debt financings to provide the funds required for these investments and other business endeavors. If we raise additional funds through equity or convertible debt issuances, our existing stockholders may suffer significant dilution, and these securities could have rights, preferences, and privileges that are superior to that of holders of our common stock. If we obtain additional funds through debt financing, we may not be able to obtain such financing on terms favorable to us. Such terms may involve restrictive covenants making it difficult to engage in capital raising activities and pursue business opportunities, including potential acquisitions. If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, our ability to continue to support our business growth and to respond to business challenges could be significantly impaired and our business may be adversely affected, requiring us to delay, reduce, or eliminate some or all of our operations.

The requirements of being a public company may strain our resources, divert management’s attention, and affect our ability to attract and retain additional executive management and qualified board members.

As a public company, we will be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, the Sarbanes-Oxley Act of 2002, or Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the listing requirements of the                , and other applicable securities rules and regulations. Compliance with these rules and regulations will increase our legal and financial compliance costs, make some activities more difficult, time-consuming, or costly, and increase demand on our systems and resources, particularly after we are no longer an emerging growth company. The Exchange Act requires, among other things, that we file annual, quarterly, and current reports with respect to our business and operating results. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and

 

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procedures and internal control over financial reporting. In order to maintain and, if required, improve our disclosure controls and procedures and internal control over financial reporting to meet this standard, significant resources and management oversight may be required. As a result, management’s attention may be diverted from other business concerns, which could adversely affect our business and operating results. Although we have already hired additional employees to comply with these requirements, we may need to hire more employees in the future or engage outside consultants, which would increase our costs and expenses.

In addition, changing laws, regulations, and standards relating to corporate governance and public disclosure are creating uncertainty for public companies, increasing legal and financial compliance costs, and making some activities more time consuming. These laws, regulations, and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We intend to invest resources to comply with evolving laws, regulations, and standards, and this investment may result in increased general and administrative expenses and a diversion of management’s time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new laws, regulations, and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to their application and practice, regulatory authorities may initiate legal proceedings against us, and our business may be adversely affected.

We also expect that being a public company and these new rules and regulations will make it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified members of our board of directors, particularly to serve on our audit committee and compensation committee, and qualified executive officers.

As a result of disclosure of information in this prospectus and in filings required of a public company, our business and financial condition will become more visible, which we believe may result in threatened or actual litigation, including by competitors and other third parties. If such claims are successful, our business and operating results could be adversely affected, and even if the claims do not result in litigation or are resolved in our favor, these claims, and the time and resources necessary to resolve them, could divert the resources of our management and adversely affect our business and operating results.

In addition, as a result of our disclosure obligations as a public company, we will have reduced flexibility and will be under pressure to focus on short-term results, which may adversely affect our ability to achieve long-term profitability.

As a result of becoming a public company, we will be obligated to develop and maintain proper and effective internal control over financial reporting. If we fail to develop and maintain an effective system of disclosure controls and internal control over financial reporting, our ability to produce timely and accurate financial statements or comply with applicable regulations could be impaired.

The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. We are continuing to develop and refine our disclosure controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file with the SEC is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and that information required to be

 

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disclosed in reports under the Exchange Act is accumulated and communicated to our principal executive and financial officers. We are also continuing to improve our internal control over financial reporting. For example, we have worked to improve the controls around our key accounting processes and our quarterly close process, we have implemented a number of new systems as part of our control environment, and we have hired additional accounting and finance personnel to help us implement these processes and controls. In order to maintain and improve the effectiveness of our disclosure controls and procedures and internal control over financial reporting, we have expended, and anticipate that we will continue to expend, significant resources, including accounting-related costs and significant management oversight. If any of these new or improved controls and systems do not perform as expected, we may experience material weaknesses in our controls.

Our current controls and any new controls that we develop may become inadequate because of changes in conditions in our business. Further, weaknesses in our disclosure controls and internal control over financial reporting may be discovered in the future. Any failure to develop or maintain effective controls or any difficulties encountered in their implementation or improvement could harm our operating results or cause us to fail to meet our reporting obligations and may result in a restatement of our financial statements for prior periods. Any failure to implement and maintain effective internal control over financial reporting also could adversely affect the results of periodic management evaluations and annual independent registered public accounting firm attestation reports regarding the effectiveness of our internal control over financial reporting that we will eventually be required to include in our periodic reports that are filed with the SEC. Ineffective disclosure controls and procedures and internal control over financial reporting could also cause investors to lose confidence in our reported financial and other information, which would likely have a negative effect on the trading price of our Class A common stock. In addition, if we are unable to continue to meet these requirements, we may not be able to remain listed on                . We are not currently required to comply with the SEC rules that implement Section 404 of the Sarbanes-Oxley Act and are therefore not required to make a formal assessment of the effectiveness of our internal control over financial reporting for that purpose. As a public company, we will be required to provide an annual management report on the effectiveness of our internal control over financial reporting commencing with our second annual report on Form 10-K.

Our independent registered public accounting firm is not required to formally attest to the effectiveness of our internal control over financial reporting until after we are no longer an “emerging growth company” as defined in the JOBS Act. At such time, our independent registered public accounting firm may issue a report that is adverse in the event it is not satisfied with the level at which our internal control over financial reporting is documented, designed, or operating. Any failure to maintain effective disclosure controls and internal control over financial reporting could adversely affect our business and operating results and could cause a decline in the price of our Class A common stock.

Our management team has limited experience managing a public company.

Most members of our management team have limited experience managing a publicly traded company, interacting with public company investors, and complying with the increasingly complex laws pertaining to public companies. Our management team may not successfully or efficiently manage our transition to being a public company subject to significant regulatory oversight and reporting obligations under the federal securities laws and the continuous scrutiny of securities analysts and investors. These new obligations and constituents will require significant attention from our senior management and could divert their attention away from the day-to-day management of our business, which could adversely affect our business, financial condition, and operating results.

 

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Our corporate “ZEO” culture has contributed to our success, and if we cannot maintain this culture as we grow, we could lose the innovation, creativity, and teamwork fostered by our culture, and our business may be harmed.

We believe that Zuora’s entrepreneurial corporate culture has been a key contributor to our success. We have worked to develop what we call our “ZEO” culture, which is based on the idea that each employee is the CEO of their job and career, and we strive to empower every employee to make and own their decisions and contributions to the company. If we do not continue to develop our corporate culture as we grow and evolve, including maintaining a culture that encourages individual entrepreneurship by our employees, it could harm our ability to foster the innovation, creativity, and teamwork we believe that we need to support our growth. We expect to continue to hire as we expand. As our organization grows and we are required to implement more complex organizational structures, we may find it increasingly difficult to maintain the beneficial aspects of our corporate culture, which could negatively impact our future success. In addition, potential liquidity events could create disparities of wealth among our employees, which could adversely impact relations among employees and our corporate culture in general. Our anticipated headcount growth and our transition from a private company to a public company may result in a change to our corporate culture, which could harm our business.

Our revolving credit facility provides our lender with a first-priority lien against substantially all of our assets, including our intellectual property, and contains financial covenants and other restrictions on our actions, which could limit our operational flexibility and otherwise adversely affect our financial condition.

Our credit agreement restricts our ability to, among other things:

 

    use our accounts receivable, inventory, trademarks, and most of our other assets as security in other borrowings or transactions;

 

    incur additional indebtedness;

 

    sell certain assets;

 

    declare dividends or make certain distributions; and

 

    undergo a merger or consolidation or other transactions.

Our credit agreement also prohibits us from exceeding an adjusted quick ratio. Our ability to comply with this and other covenants is dependent upon a number of factors, some of which are beyond our control.

Our failure to comply with the covenants or payment requirements, or the occurrence of other events specified in our credit agreement, could result in an event of default under the credit agreement, which would give our lender the right to terminate their commitments to provide additional loans under the credit agreement and to declare all borrowings outstanding, together with accrued and unpaid interest and fees, to be immediately due and payable. In addition, we have granted our lender first-priority liens against all of our assets, including our intellectual property, as collateral. Failure to comply with the covenants or other restrictions in the credit agreement could result in a default. If the debt under our credit agreement was to be accelerated, we may not have sufficient cash on hand or be able to sell sufficient collateral to repay it, which would have an immediate adverse effect on our business and operating results. This could potentially cause us to cease operations and result in a complete loss of your investment in our Class A common stock.

 

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We are an emerging growth company, and we cannot be certain that the reduced disclosure requirements applicable to emerging growth companies will not make our Class A common stock less attractive to investors.

We are an emerging growth company, as defined in the JOBS Act, and, for so long as we continue to be an emerging growth company, we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.

We will remain an emerging growth company until the earliest of (i) the last day of the fiscal year following the fifth anniversary of this offering, (ii) the last day of the first fiscal year in which our annual gross revenue is $1.07 billion or more, (iii) the date on which we have, during the previous rolling three-year period, issued more than $1.0 billion in non-convertible debt securities, or (iv) the last day of the fiscal year in which the market value of our common stock that is held by non-affiliates exceeds $700.0 million as of the last day of our then most recently completed second fiscal quarter.

We cannot predict if investors will find our Class A common stock less attractive or our company less comparable to certain other public companies because we will rely on these exemptions. For example, if we do not adopt a new or revised accounting standard, our future operating results may not be as comparable to the operating results of certain other companies in our industry that adopted such standards. If some investors find our Class A common stock less attractive as a result, there may be a less active trading market for our Class A common stock and our stock price may be more volatile.

We may be adversely affected by natural disasters and other catastrophic events, and by man-made problems such as terrorism, that could disrupt our business operations and our business continuity and disaster recovery plans may not adequately protect us from a serious disaster.

Natural disasters or other catastrophic events may also cause damage or disruption to our operations, international commerce, and the global economy, and could have an adverse effect on our business, operating results, and financial condition. Our business operations are subject to interruption by natural disasters, fire, power shortages, pandemics, and other events beyond our control. In addition, acts of terrorism and other geo-political unrest could cause disruptions in our business or the businesses of our partners or the economy as a whole. In the event of a natural disaster, including a major earthquake, blizzard, or hurricane, or a catastrophic event such as a fire, power loss, or telecommunications failure, we may be unable to continue our operations and may endure system interruptions, reputational harm, delays in development of our solution, lengthy interruptions in service, breaches of data security, and loss of critical data, all of which could have an adverse effect on our future operating results. For example, our corporate headquarters are located in California, a state that frequently experiences earthquakes. Additionally, all of the aforementioned risks may be further increased if we do not implement a disaster recovery plan or our partners’ disaster recovery plans prove to be inadequate.

 

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Risks Related to this Offering and Ownership of Our Class A Common Stock

There has been no prior public market for our Class A common stock, the stock price of our Class A common stock may be volatile or may decline regardless of our operating performance, and you may not be able to resell your shares at or above the initial public offering price.

There has been no public market for our Class A common stock prior to this offering. The initial public offering price for our Class A common stock will be determined through negotiations among the underwriters, us, and the selling stockholders and may vary from the market price of our Class A common stock following this offering. The market prices of the securities of newly public companies such as us have historically been highly volatile. The market price of our Class A common stock may fluctuate significantly in response to numerous factors, many of which are beyond our control, including:

 

    overall performance of the equity markets;

 

    actual or anticipated fluctuations in our revenue and other operating results;

 

    changes in the financial projections we may provide to the public or our failure to meet these projections;

 

    failure of securities analysts to initiate or maintain coverage of us, changes in financial estimates by any securities analysts who follow our company, or our failure to meet these estimates or the expectations of investors;

 

    recruitment or departure of key personnel;

 

    the economy as a whole and market conditions in our industry;

 

    negative publicity related to the real or perceived quality of our solution, as well as the failure to timely launch new products and services that gain market acceptance;

 

    growth of the Subscription Economy;

 

    rumors and market speculation involving us or other companies in our industry;

 

    announcements by us or our competitors of new products, commercial relationships, or significant technical innovations;

 

    acquisitions, strategic partnerships, joint ventures, or capital commitments;

 

    new laws or regulations or new interpretations of existing laws or regulations applicable to our business;

 

    lawsuits threatened or filed against us, litigation involving our industry, or both;

 

    developments or disputes concerning our or other parties’ products, services, or intellectual property rights;

 

    changes in accounting standards, policies, guidelines, interpretations, or principles;

 

    other events or factors, including those resulting from war, incidents of terrorism, or responses to these events;

 

    the expiration of contractual lock-up or market stand-off agreements; and

 

    sales of shares of our Class A common stock by us or our stockholders.

In addition, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. Stock prices

 

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of many companies, and technology companies in particular, have fluctuated in a manner unrelated or disproportionate to the operating performance of those companies. In the past, stockholders have instituted securities class action litigation following periods of market volatility. If we were to become involved in securities litigation, it could subject us to substantial costs, divert resources and the attention of management from our business, and adversely affect our business.

Sales of substantial amount of shares of our Class A common stock in the public market, particularly sales by our directors, executive officers, and significant stockholders, or the perception that these sales could occur, could cause the market price of our Class A common stock to decline and may make it more difficult for you to sell your Class A common stock at a time and price that you deem appropriate.

Sales of a substantial number of shares of our Class A common stock into the public market, particularly sales by our directors, executive officers, and principal stockholders, or the perception that these sales might occur, could cause the market price of our Class A common stock to decline.

All of the shares of Class A common stock sold in this offering will be freely tradable without restrictions or further registration under the Securities Act, except for any shares held by our affiliates as defined in Rule 144 under the Securities Act.

Subject to certain exceptions, we, all of our directors and executive officers, and all of the holders of our common stock, or securities exercisable for or convertible into our common stock outstanding immediately prior to this offering, are subject to market stand-off agreements with us or have entered into lock-up agreements with the underwriters under which they have agreed, subject to specific exceptions described in the section titled “Underwriting”, not to sell, directly or indirectly, any shares of common stock without the permission of each of Goldman Sachs & Co. LLC and Morgan Stanley & Co. LLC on behalf of the underwriters, for a period of 180 days from the date of this prospectus; provided that such restricted period will end with respect to 25% of the shares subject to each lock-up agreement if at any time beginning 90 days after the date of this prospectus (i) we have filed at least one quarterly report on Form 10-Q or annual report on Form 10-K, and (ii) the last reported closing price of our Class A common stock is at least 33% greater than the initial public offering price of our Class A common stock for 10 out of any 15 consecutive trading days ending on or after the 90th day after the date of this prospectus (which 15 trading day period may begin prior to such 90th day); provided further, that if such restricted period ends during a trading black-out period, the restricted period will end one business day following the date that we announce our earnings results for the previous quarter. When the lock-up period expires, we and our securityholders subject to a lock-up agreement or market stand-off agreement will be able to sell our shares in the public market. In addition, the underwriters may, in their sole discretion, release all or some portion of the shares subject to lock-up agreements prior to the expiration of the lock-up period. See the section titled “Shares Eligible for Future Sale” for more information. Sales of a substantial number of such shares upon expiration of the lock-up and market stand-off agreements, or the perception that such sales may occur, or early release of these agreements, could cause our market price to fall or make it more difficult for you to sell your Class A common stock at a time and price that you deem appropriate.

In addition, as of October 31, 2017, we had options outstanding that, if fully exercised, would result in the issuance of 31,637,722 shares of Class B common stock and RSUs that, if fully settled, would result in the issuance of 1,712,614 shares of Class B common stock. All of the shares of Class B common stock issuable upon the exercise or settlement of stock options and RSUs, and the shares reserved for future issuance under our equity incentive plans, will be registered for public resale under the Securities Act. Accordingly, these shares will be able to be freely sold in the public market upon issuance subject to existing lock-up or market stand-off agreements and applicable vesting requirements.

 

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Immediately following this offering, the holders of                shares of our Class B common stock have rights, subject to some conditions, to require us to file registration statements for the public resale of the Class A common stock issuable upon conversion of such shares or to include such shares in registration statements that we may file for us or other stockholders.

We may also issue our shares of common stock or securities convertible into shares of our common stock from time to time in connection with a financing, acquisition, investments, or otherwise. We also expect to grant equity awards to employees, directors, and consultants under our equity incentive plans. Any such issuance could result in substantial dilution to our existing stockholders and cause the market price of our Class A common stock to decline.

The dual class structure of our common stock will have the effect of concentrating voting control with those stockholders who held our capital stock prior to the completion of this offering, including our directors, executive officers, and 5% stockholders who will hold in the aggregate         % of the voting power of our capital stock following the completion of this offering, which will limit or preclude your ability to influence corporate matters, including the election of directors and the approval of any change of control transaction.

Our Class B common stock has ten votes per share, and our Class A common stock, which is the stock we are offering in this offering, has one vote per share. Following this offering, our directors, executive officers, and holders of more than 5% of our common stock, and their respective affiliates, will hold in the aggregate         % of the voting power of our capital stock. Because of the ten-to-one voting ratio between our Class B and Class A common stock, the holders of our Class B common stock collectively will continue to control a majority of the combined voting power of our common stock and therefore be able to control all matters submitted to our stockholders for approval until the earliest of (i) the date specified by a vote of the holders of 66 2/3% of the outstanding shares of Class B common stock, (ii) ten years from the effective date of this offering, or (iii) the date the shares of Class B common stock cease to represent at least 5% of all outstanding shares of our common stock. This concentrated control will limit or preclude your ability to influence corporate matters for the foreseeable future, including the election of directors, amendments of our organizational documents, and any merger, consolidation, sale of all or substantially all of our assets, or other major corporate transaction requiring stockholder approval. In addition, this may prevent or discourage unsolicited acquisition proposals or offers for our capital stock that you may feel are in your best interest as one of our stockholders.

Future transfers by holders of Class B common stock will generally result in those shares converting to Class A common stock, subject to limited exceptions, such as certain transfers effected for estate planning purposes. The conversion of Class B common stock to Class A common stock will have the effect, over time, of increasing the relative voting power of those holders of Class B common stock who retain their shares in the long term. See the section titled “Description of Capital Stock—Anti-Takeover Provisions” for additional information.

The dual class structure of our common stock may adversely affect the trading market for our Class A common stock.

S&P Dow Jones and FTSE Russell have recently announced changes to their eligibility criteria for inclusion of shares of public companies on certain indices, including the S&P 500, namely, to exclude companies with multiple classes of shares of common stock from being added to such indices. In addition, several shareholder advisory firms have announced their opposition to the use of multiple class structures. As a result, the dual class structure of our common stock may prevent the inclusion of our Class A common stock in such indices and may cause shareholder advisory firms to publish negative commentary about our corporate governance practices or otherwise seek to cause us to

 

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change our capital structure. Any such exclusion from indices could result in a less active trading market for our Class A common stock. Any actions or publications by shareholder advisory firms critical of our corporate governance practices or capital structure could also adversely affect the value of our Class A common stock.

If securities or industry analysts do not publish research, or publish inaccurate or unfavorable research, about our business, the price of our Class A common stock and trading volume could decline.

The trading market for our Class A common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business. Securities and industry analysts do not currently, and may never, publish research on our company. If few securities analysts commence coverage of us, or if industry analysts cease coverage of us, the trading price for our common stock could be negatively affected. If one or more of the analysts who cover us downgrade our Class A common stock or publish inaccurate or unfavorable research about our business, the price of our Class A common stock would likely decline. If one or more of these analysts cease coverage of us or fail to publish reports on us regularly, demand for our Class A common stock could decrease, which might cause our Class A common stock price and trading volume to decline.

Even if our stock is actively covered by analysts, we do not have any control over the analysts or the measures that analysts or investors may rely upon to forecast our future results. For example, in order to assess our business activity in a given period, analysts and investors may look at the combination of revenue and changes in deferred revenue in a given period (sometimes referred to as “billings”). Over-reliance on billings or similar measures may result in analyst or investor forecasts that differ significantly from our own for a variety of reasons, including:

 

    a relatively large number of transactions occur at the end of the quarter. Invoicing of those transactions may or may not occur before the end of the quarter based on a number of factors including receipt of information from the customer, volume of transactions, and holidays. A shift of a few days has little economic impact on our business, but will shift deferred revenue from one period into the next;

 

    a shift in billing frequency (i.e. from monthly to quarterly or from quarterly to annually), which may distort trends;

 

    subscriptions that have deferred start dates; and

 

    services that are invoiced upon delivery.

In addition, the new revenue recognition standards, ASC 606, introduces new and significant disclosure requirements. These disclosure obligations will be prepared on the basis of estimates that can change over time and on the basis of events over which we have no control. Market practices surrounding the calculation of this measure are still evolving. It is possible that analysts and investor may misinterpret our disclosure or that our methods for estimating this disclosure differ significantly from others, which could lead to inaccurate or unfavorable forecasts by analysts and investors.                

An active public trading market may not develop or be sustained following this offering.

Prior to this offering, there has been no public market for our Class A common stock. We intend to list our Class A common stock on the                , however, an active trading market may not develop following the completion of this offering or, if developed, may not be sustained. The lack of an active market may impair your ability to sell your shares at the time you wish to sell them or at a price that you consider reasonable. The lack of an active market may also reduce the market price of your shares of

 

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Class A common stock. An inactive market may also impair our ability to raise capital by selling shares and may impair our ability to acquire other companies or technologies by using our shares as consideration. We cannot predict the prices at which our Class A common stock will trade. The initial public offering price of our Class A common stock will be determined by negotiations between us, the underwriters, and the selling stockholders and may not bear any relationship to the market price at which our Class A common stock will trade after this offering or to any other established criteria of the value of our business and prospects.

Because the initial public offering price of our Class A common stock will be substantially higher than the pro forma net tangible book value per share of our outstanding common stock following this offering, new investors will experience immediate and substantial dilution.

The initial public offering price is substantially higher than the pro forma net tangible book value per share of our common stock immediately following this offering based on the total value of our tangible assets less our total liabilities. Therefore, if you purchase shares of our Class A common stock in this offering, based on the midpoint of the price range set forth on the cover page of this prospectus, and the issuance of                shares of Class A common stock in this offering, you will experience immediate dilution of $                per share, the difference between the price per share you pay for our Class A common stock and its pro forma net tangible book value per share as of January 31, 2017. Furthermore, if the underwriters exercise their option to purchase additional shares, if outstanding stock options and RSUs are exercised or settled, if we issue awards to our employees under our equity incentive plans, or if we otherwise issue additional shares of our Class A common stock, you could experience further dilution. See the section titled “Dilution” for additional information.

We will have broad discretion in the use of the net proceeds to us from this offering and may not use them effectively.

We will have broad discretion in the application of the net proceeds to us from this offering, including for any of the purposes described in the section titled “Use of Proceeds,” and you will not have the opportunity as part of your investment decision to assess whether the net proceeds are being used appropriately. Because of the number and variability of factors that will determine our use of the net proceeds from this offering, their ultimate use may vary substantially from their currently intended use. If we do not use the net proceeds that we receive in this offering effectively, our business, financial condition, operating results, and prospects could be harmed, and the market price of our Class A common stock could decline. Pending their use, we may invest the net proceeds from this offering in short-term, investment-grade interest-bearing securities such as money market accounts, certificates of deposit, commercial paper, and guaranteed obligations of the U.S. government that may not generate a high yield for our stockholders. These investments may not yield a favorable return to our investors.

We do not intend to pay dividends for the foreseeable future.

We have never declared or paid any cash dividends on our common stock and do not intend to pay any cash dividends in the foreseeable future. Additionally, our ability to pay dividends on our common stock is limited by restrictions under the terms of our credit agreement. We anticipate that for the foreseeable future we will retain all of our future earnings for use in the development of our business and for general corporate purposes. Any determination to pay dividends in the future will be at the discretion of our board of directors. Accordingly, investors must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investments.

 

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Provisions in our charter documents and under Delaware law could make an acquisition of our company more difficult, limit attempts by our stockholders to replace or remove our current management, limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, or employees, and limit the market price of our Class A common stock.

Provisions in our restated certificate of incorporation and restated bylaws that will be in effect immediately following the completion of this offering may have the effect of delaying or preventing a change of control or changes in our management. Our restated certificate of incorporation and restated bylaws include provisions that:

 

    provide that our board of directors will be classified into three classes of directors with staggered three-year terms;

 

    permit the board of directors to establish the number of directors and fill any vacancies and newly-created directorships;

 

    require super-majority voting to amend some provisions in our restated certificate of incorporation and restated bylaws;

 

    authorize the issuance of “blank check” preferred stock that our board of directors could use to implement a stockholder rights plan;

 

    provide that only the chairman of our board of directors, our chief executive officer, president, lead independent director, or a majority of our board of directors will be authorized to call a special meeting of stockholders;

 

    provide for a dual class common stock structure in which holders of our Class B common stock may have the ability to control the outcome of matters requiring stockholder approval, even if they own significantly less than a majority of the outstanding shares of our common stock, including the election of directors and significant corporate transactions, such as a merger or other sale of our company or its assets;

 

    prohibit stockholder action by written consent, which requires all stockholder actions to be taken at a meeting of our stockholders;

 

    provide that the board of directors is expressly authorized to make, alter, or repeal our bylaws; and

 

    establish advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted upon by stockholders at annual stockholder meetings.

In addition, our restated certificate of incorporation will provide that the Court of Chancery of the State of Delaware will be the exclusive forum for: any derivative action or proceeding brought on our behalf; any action asserting a breach of fiduciary duty; any action asserting a claim against us arising pursuant to the Delaware General Corporation Law, or DGCL, our restated certificate of incorporation, or our restated bylaws; or any action asserting a claim against us that is governed by the internal affairs doctrine. This choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or any of our directors, officers, or other employees, which may discourage lawsuits with respect to such claims. Alternatively, if a court were to find the choice of forum provision contained in our restated certificate of incorporation to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could harm our business, operating results, and financial condition.

Moreover, Section 203 of the DGCL may discourage, delay, or prevent a change of control of our company. Section 203 imposes certain restrictions on mergers, business combinations, and other transactions between us and holders of 15% or more of our common stock. See the section titled “Description of Capital Stock” for additional information.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements. All statements contained in this prospectus other than statements of historical fact, including statements regarding our future operating results and financial position, our business strategy and plans, market growth, and our objectives for future operations, are forward-looking statements. The words “believe,” “may,” “will,” “estimate,” “potential,” “continue,” “anticipate,” “intend,” “expect,” “could,” “would,” “project,” “plan, “target,” and similar expressions are intended to identify forward-looking statements.

Forward-looking statements contained in this prospectus include, but are not limited to, statements about:

 

    our future financial performance, including our expectations regarding our total revenue, cost of revenue, gross profit or gross margin, operating expenses including changes in research and development, sales and marketing, and general and administrative expenses (including any components of the foregoing) and our ability to achieve, and maintain, future profitability;

 

    our business plan and our ability to effectively manage our growth;

 

    anticipated trends, growth rates, and challenges in our business and in the markets in which we operate;

 

    market acceptance of new technology and recently introduced solutions;

 

    beliefs and objectives for future operations;

 

    our ability to increase sales of our solution;

 

    the widespread adoption and adoption rates of subscription business models and decline in product-centric models;

 

    our ability to further penetrate our existing customer base;

 

    maintaining and expanding our customer base and our relationships with our third-party implementation and other partners;

 

    our ability to timely and effectively scale and adapt our existing solution;

 

    our ability to develop new products and bring them to market in a timely manner and make enhancements to our existing solution;

 

    the effects of seasonal trends on our results of operations;

 

    our expectations concerning relationships with third parties;

 

    our ability to maintain, protect, and enhance our intellectual property;

 

    our ability to continue to expand internationally;

 

    the effects of increased competition in our markets and our ability to compete effectively;

 

    our ability to stay in compliance with laws and regulations that currently apply or become applicable to our business both in the United States and internationally;

 

    economic and industry trends, projected growth, or trend analysis; and

 

    the estimates and estimate methodologies used in preparing our consolidated financial statements, including in determining option exercise prices.

We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, operating

 

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results, business strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties, and assumptions, including those described in the section titled “Risk Factors.” Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties, and assumptions, the future events and trends discussed in this prospectus may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.

You should not rely upon forward-looking statements as predictions of future events. The events and circumstances reflected in the forward-looking statements may not be achieved or occur. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, performance, or achievements. We undertake no obligation to update any of these forward-looking statements for any reason after the date of this prospectus or to conform these statements to actual results or revised expectations, except as required by law.

You should read this prospectus and the documents that we reference in this prospectus and have filed with the SEC as exhibits to the registration statement of which this prospectus is a part with the understanding that our actual future results, performance, and events and circumstances may be materially different from what we expect.

 

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INDUSTRY AND MARKET DATA

Unless otherwise indicated, information contained in this prospectus concerning our industry and the markets in which we operate, including our general expectations, market position, market opportunity, and market size, is based on information from various sources, including Forrester Research, Inc., or Forrester, Gartner, Inc., or Gartner, International Data Corporation, or IDC, McKinsey & Company, or McKinsey, MGI Research, LLC, or MGI, and PricewaterhouseCoopers LLP, or PwC. In presenting this information, we have also made assumptions based on such data and other similar sources, and on our knowledge of, and in our experience to date in, the market for our solution. This information involves a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates. The industry in which we operate is subject to a high degree of uncertainty and risk due to a variety of factors, including those described in “Risk Factors” and elsewhere in this prospectus. These and other factors could cause results to differ materially from those expressed in the estimates made by the independent parties and by us.

The Forrester studies described herein represent data, research, opinions, or viewpoints prepared by Forrester and are not representations of fact. We have been advised by Forrester that its studies speak as of their original date (and not as of the date of this prospectus) and any opinions expressed in the studies are subject to change without notice.

The Gartner reports described herein represents research opinion or viewpoints published, as part of a syndicated subscription service by Gartner, and are not representations of fact. Each Gartner report speaks as of its original publication date (and not as of the date of this prospectus) and the opinions expressed in the Gartner reports are subject to change without notice.

This prospectus contains statistical data, estimates, and forecasts that are based on industry publications or reports generated by third-party providers, or other publicly available information, as well as other information based on our internal sources.

The sources of certain statistical data, estimates, and forecasts contained in this prospectus are provided below:

 

    Forrester Research, Top Five Imperatives To Win In The Age Of The Customer, May 23, 2017.

 

    The Forrester Wave™: Recurring Customer And Billing Management, Q3 2017.

 

    Gartner, Forecast: Enterprise Software Markets, Worldwide, 2014-2021, 4Q17 Update, December 2017.

 

    MGI Research, Agile Monetization Platforms (AMP)—Total Addressable Market (TAM) Forecast 2018-2022, December 9, 2017.

In certain instances where reports are identified as the sources of market and industry data contained in this prospectus, the applicable report is identified by superscript notations. The sources of these data are provided below:

 

  (1) Evolve Or Crumble: Prepare For The Fate Of The Hardware Incumbents, Forrester Research, August 29, 2016.

 

  (2) Gartner, Forecast: Public Cloud Services, Worldwide, 2015-2021, 3Q17 Update, October 2017.

 

  (3) Gartner, Market Share Analysis: Enterprise Application Software as a Service, Worldwide, 2016, October 2017.

 

  (4) IDC, Worldwide Public Cloud Services Revenue Growth Remains Strong through the First Half of 2017, November 6, 2017.

 

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  (5) PwC, Perspectives from the Global Entertainment and Media Outlook 2017-2021, www.pwc.com/outlook.

 

  (6) McKinsey & Company, Overwhelming OTT: Telcos’ growth strategy in a digital world, January 2017.

 

  (7) McKinsey & Company, Automotive revolution—perspective towards 2030, January 2016.

 

  (8) PwC, 2017 Industrial Manufacturing Trends, https:www.strategyand.pwc.com/trend/2017-industrial-manufacturing-trends.

 

  (9) McKinsey & Company, The Internet of Things: Mapping the Value Beyond The Hype, June 2015.

The Subscription Economy Index, or SEI, measures the growth in the volume of business for the subscription-based products and services of our customers. To measure this growth, we use a weighted average of the growth rates of the constituents who have been on our platform for at least two years, controlling for the effects of constituent attrition, account migration, one-time charges, and other outliers. The weighted average used in the SEI growth calculation is weighted by the total amount of revenue each constituent has, so that companies with higher revenue take more weight in the average. A constituent’s revenue is calculated every quarter with a one-year rolling window in order to remove the effect of seasonality. Most companies using our billing service become part of the index after approximately two years of being on our system. A total of 353 constituents were used to calculate the first SEI released in 2016. Note that in cases where a single parent company operates either multiple entities or multiple tenants, we treat system activity for each entity or tenant as a separate constituent for purposes of SEI calculations. For example, a company with two subsidiaries, each with two tenants of its own that meet our criteria detailed in the SEI, would count as four constituents for the purposes of the SEI.

 

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USE OF PROCEEDS

We estimate that the net proceeds to us from the sale of shares of our Class A common stock in this offering will be approximately $             million, based on an assumed initial public offering price of $             per share, which is the midpoint of the price range set forth on the cover page of this prospectus, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. If the underwriters’ option to purchase additional shares is exercised in full, we estimate that the net proceeds to us would be approximately $             million, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

We will not receive any proceeds from the sale of shares of our Class A common stock by the selling stockholders, although we will bear the costs, other than underwriting discounts and commissions, associated with the sale of these shares.

A $1.00 increase (decrease) in the assumed initial public offering price of $            per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) the net proceeds that we receive from this offering by approximately $            million, assuming that the number of shares of our Class A common stock offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions payable by us. Each increase (decrease) of one million shares in the number of shares offered by us would increase (decrease) the net proceeds that we receive from this offering by approximately $             million, assuming that the assumed initial public offering price of $             per share remains the same, and after deducting the estimated underwriting discounts and commissions payable by us.

The principal purposes of this offering are to increase our capitalization and financial flexibility, create a public market for our Class A common stock, enable access to the public equity markets for us and our stockholders, increase awareness of our company, and improve our competitive position. We intend to use the net proceeds that we receive from this offering for working capital and other general corporate purposes, including research and development and sales and marketing activities, general and administrative matters, and capital expenditures. We may also use a portion of the net proceeds to invest in or acquire complementary businesses, products, services, technologies, or other assets. However, we do not have any agreements or commitments for any specific acquisitions or investments at this time.

We currently have no specific plans for the use of the net proceeds that we receive from this offering. Accordingly, we will have broad discretion in using these proceeds, and investors will be relying on the judgment of our management regarding the application of the proceeds. Pending their use, we plan to invest the net proceeds from this offering in short-term, investment-grade interest-bearing securities such as money market accounts, certificates of deposit, commercial paper, and guaranteed obligations of the U.S. government.

DIVIDEND POLICY

We have never declared or paid cash dividends on our capital stock. We currently intend to retain all available funds and any future earnings for the operation and growth of our business, and do not expect to pay dividends on our capital stock for the foreseeable future. Any future determination to declare cash dividends would be subject to the discretion of our board of directors and would depend upon various factors, including our operating results, financial condition, and capital requirements, restrictions that may be imposed by applicable law, and other factors deemed relevant by our board of directors. In addition, the terms of our credit facility contain restrictions on our ability to declare and pay cash dividends on our capital stock.

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and capitalization as of January 31, 2017 on:

 

    an actual basis;

 

    a pro forma basis to give effect to (i) the redesignation of our outstanding common stock as Class B common stock in                      2018, (ii) the automatic conversion of all outstanding shares of our convertible preferred stock as of January 31, 2017 into 123,968,054 shares of our Class B common stock, and (iii) the filing and effectiveness of our restated certificate of incorporation; and

 

    a pro forma as adjusted basis to give effect to the adjustments described above and (i) the sale by us of                      shares of our Class A common stock in this offering at an assumed initial public offering price of $                     per share, which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, and (ii) the automatic conversion of shares of our Class B common stock into an equivalent number of shares of our Class A common stock upon their sale by the selling stockholders in this offering.

You should read this table together with our consolidated financial statements and related notes, and the sections titled “Selected Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” each included elsewhere in this prospectus.

 

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     As of January 31, 2017  
     Actual     Pro Forma     Pro Forma
As Adjusted(1)
 
     (in thousands,
except share and per share data)
 

Cash and cash equivalents

   $ 72,645     $ 72,645     $               
  

 

 

   

 

 

   

 

 

 

Stockholders’ equity:

      

Convertible preferred stock, $0.0001 par value per share: 123,968,054 shares authorized, 123,968,054 shares issued and outstanding, actual; no shares authorized, issued, and outstanding, pro forma and pro forma as adjusted

   $ 12     $ —       $  

Common stock, $0.0001 par value per share: 214,000,000 shares authorized, 49,270,851 shares issued and outstanding, actual; no shares authorized, issued, and outstanding, pro forma and pro forma as adjusted

     5       —      

Class A common stock, $0.0001 par value per share: no shares authorized, issued, and outstanding, actual;         shares authorized, no shares issued and outstanding, pro forma;                      shares authorized,                     shares issued and outstanding, pro forma as adjusted

     —         —      

Class B common stock, $0.0001 par value per share: no shares authorized, issued, and outstanding, actual;                     shares authorized, 173,238,905 shares issued and outstanding, pro forma;                     shares authorized,                     shares issued and outstanding, pro forma as adjusted

     —         17    

Additional paid-in capital

     266,982       266,982    

Accumulated other comprehensive loss

     (489     (489  

Accumulated deficit

     (211,530     (211,530  
  

 

 

   

 

 

   

 

 

 

Total stockholders’ equity

     54,980       54,980    
  

 

 

   

 

 

   

 

 

 

Total capitalization

   $ 54,980     $ 54,980     $  
  

 

 

   

 

 

   

 

 

 

 

(1) The pro forma as adjusted information presented is illustrative only and will be adjusted based on the actual public offering price and other terms of this offering determined at pricing. A $1.00 increase (decrease) in the assumed initial public offering price of $             per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) our pro forma as adjusted cash and cash equivalents, additional paid-in capital, total stockholders’ equity, and total capitalization by approximately $            million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting the estimated underwriting discounts and commissions payable by us. Similarly, each increase (decrease) of one million shares in the number of shares offered by us would increase (decrease) our pro forma as adjusted cash and cash equivalents, additional paid-in capital, total stockholders’ equity, and total capitalization by approximately $            million, assuming that the assumed initial public offering price, which is the midpoint of the price range set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions payable by us. If the underwriters’ option to purchase additional shares is exercised in full, the pro forma as adjusted amount of each of cash and cash equivalents, additional paid-in capital, total stockholders’ equity, and total capitalization would increase by approximately $            million, after deducting the estimated underwriting discounts and commissions payable by us, and we would have                     shares of our Class A common stock and                     shares of our Class B common stock issued and outstanding, pro forma as adjusted.

 

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The number of shares of our Class A and Class B common stock to be outstanding after this offering is based upon no shares of our Class A common stock and 173,238,905 shares of our Class B common stock outstanding as of January 31, 2017 (without giving effect to the automatic conversion of shares of our Class B common stock into an equivalent number of shares of our Class A common stock upon their sale by the selling stockholders in this offering) and does not include:

 

    24,236,055 shares of our Class B common stock issuable upon the exercise of options to purchase shares of our Class B common stock outstanding as of January 31, 2017, with a weighted-average exercise price of $1.42 per share;

 

    shares of our Class B common stock issuable upon the exercise of options to purchase shares of our Class B common stock or the vesting of RSUs granted after January 31, 2017; and

 

                    shares of our common stock reserved for future issuance under our equity compensation plans, consisting of (i) 9,021,995 shares of our Class B common stock reserved for future issuance under our 2015 Plan, as of October 31, 2017 (which number of shares is prior to the options to purchase shares of our Class B common stock and RSUs granted after January 31, 2017 and an increase of 2,870,000 shares of our Class B common stock reserved for future issuance under our 2015 Plan after January 31, 2017), (ii)                      shares of our Class A common stock reserved for future issuance under our 2018 Plan, which will become effective on the date immediately prior to the date of this prospectus, and (iii)                      shares of our Class A common stock reserved for issuance under our 2018 ESPP, which will become effective on the date of this prospectus.

On the date immediately prior to the date of this prospectus, any remaining shares available for issuance under our 2015 Plan will be added to the shares of our Class A common stock reserved for issuance under our 2018 Plan, and we will cease granting awards under the 2015 Plan. Our 2018 Plan and 2018 ESPP also provide for automatic annual increases in the number of shares reserved thereunder. See the section titled “Executive Compensation—Employee Benefit Plans” for additional information.

 

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DILUTION

If you invest in our Class A common stock in this offering, your interest will be diluted immediately to the extent of the difference between the initial public offering price per share of our Class A common stock and the pro forma as adjusted net tangible book value per share of our Class A common stock immediately after the closing of this offering.

Our pro forma net tangible book value as of January 31, 2017 was $             million, or $             per share of common stock. Pro forma net tangible book value per share represents the amount of our total tangible assets less our total liabilities, divided by the number of shares of our common stock outstanding as of January 31, 2017, after giving effect to (i) the automatic conversion of all outstanding shares of our convertible preferred stock as of January 31, 2017 into 123,968,054 shares of our Class B common stock and (ii) the filing and effectiveness of our restated certificate of incorporation.

Pro forma as adjusted net tangible book value per share reflects the pro forma adjustments described above and the sale by us of              shares of our Class A common stock in this offering at an assumed initial public offering price of $             per share, which is the midpoint of the price range set forth on the cover page of this prospectus, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. Our pro forma as adjusted net tangible book value as of January 31, 2017 would have been $             million, or $             per share. This amount represents an immediate increase in pro forma net tangible book value of $             per share to our existing stockholders and an immediate dilution in pro forma net tangible book value of $             per share to investors purchasing shares of our Class A common stock in this offering at the assumed initial public offering price.

The following table illustrates this dilution on a per share basis to investors in this offering:

 

Assumed initial public offering price per share

      $                       

Pro forma net tangible book value per share as of January 31, 2017

   $                          

Increase in pro forma net tangible book value per share attributable to new investors purchasing in this offering

     
  

 

 

    

Pro forma as adjusted net tangible book value per share after this offering

     
     

 

 

 

Dilution in pro forma net tangible book value per share to investors in this offering

      $  
     

 

 

 

A $1.00 increase (decrease) in the assumed initial public offering price of $             per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) our pro forma as adjusted net tangible book value per share after this offering by $             and would increase (decrease) dilution per share to investors in this offering by $            , assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting the estimated underwriting discounts and commissions payable by us. Similarly, each increase (decrease) of one million shares in the number of shares of our Class A common stock offered by us would increase (decrease) our pro forma as adjusted net tangible book value per share after this offering by $             per share and would increase (decrease) dilution per share to investors in this offering by $             per share, assuming the assumed initial public offering price, which is the midpoint of the price range set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions payable by us.

If the underwriters exercise their option to purchase additional shares in full, the pro forma as adjusted net tangible book value per share after this offering would be $             per share, and the

 

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dilution in pro forma net tangible book value per share to new investors in this offering would be $             per share of common stock.

The following table presents, on a pro forma as adjusted basis as described above, as of January 31, 2017, the differences between our existing stockholders and the investors purchasing shares of our Class A common stock in this offering, with respect to the number of shares purchased from us, the total consideration paid to us, and the average price per share paid by our existing stockholders or to be paid to us by investors purchasing shares in this offering at an assumed offering price of $             per share, which is the midpoint of the price range set forth on the cover page of this prospectus, before deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

     Shares Purchased     Total Consideration     Average Price
Per Share
 
     Number      Percent     Amount      Percent    

Existing stockholders

                       $                                        $                   

Investors in this offering

            
  

 

 

    

 

 

   

 

 

    

 

 

   

Total

        100.0   $        100.0  
  

 

 

    

 

 

   

 

 

    

 

 

   

A $1.00 increase (decrease) in the assumed initial public offering price of $             per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) the total consideration paid by new investors by $             million and increase (decrease) the percent of total consideration paid by new investors by         %, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and before deducting the estimated underwriting discounts and commissions payable by us.

Sales of shares of our Class A common stock by the selling stockholders in this offering will reduce the number of shares of common stock held by existing stockholders to                 , or approximately         % of the total shares of common stock outstanding after this offering, and will increase the number of shares held by new investors to                 , or approximately         % of the total shares of common stock outstanding after this offering.

Except as otherwise indicated, the above discussion and tables assume no exercise of the underwriters’ option to purchase additional shares of our Class A common stock from us. After giving effect to sales of shares in this offering by us and the selling stockholders, assuming the underwriters’ option to purchase additional shares is exercised in full, our existing stockholders would own         % and our new investors would own         % of the total number of shares of our common stock outstanding after this offering.

In addition, to the extent we issue any additional stock options or RSUs or any stock options are exercised or RSUs settle, or we issue any other securities or convertible debt in the future, investors participating in this offering may experience further dilution.

The number of shares of our Class A and Class B common stock to be outstanding after this offering is based upon no shares of our Class A common stock and 173,238,905 shares of our Class B common stock outstanding as of January 31, 2017 (without giving effect to the automatic conversion of shares of our Class B common stock into an equivalent number of shares of our Class A common stock upon their sale by the selling stockholders in this offering) and does not include:

 

    24,236,055 shares of our Class B common stock issuable upon the exercise of options to purchase shares of our Class B common stock outstanding as of January 31, 2017, with a weighted-average exercise price of $1.42 per share;

 

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    shares of our Class B common stock issuable upon the exercise of options to purchase shares of our Class B common stock or the vesting of RSUs granted after January 31, 2017; and

 

                        shares of our common stock reserved for future issuance under our equity compensation plans, consisting of (i) 9,021,995 shares of our Class B common stock reserved for future issuance under our 2015 Plan, as of January 31, 2017 (which number of shares is prior to the options to purchase shares of our Class B common stock and RSUs granted after January 31, 2017 and an increase of 2,870,000 shares of our Class B common stock reserved for future issuance under our 2015 Plan after January 31, 2017), (ii)                  shares of our Class A common stock reserved for future issuance under our 2018 Plan, which will become effective on the date immediately prior to the date of this prospectus, and (iii)                  shares of our Class A common stock reserved for issuance under our 2018 ESPP, which will become effective on the date of this prospectus.

On the date immediately prior to the date of this prospectus, any remaining shares available for issuance under our 2015 Plan will be added to the shares of our Class A common stock reserved for issuance under our 2018 Plan, and we will cease granting awards under the 2015 Plan. Our 2018 Plan and 2018 ESPP also provide for automatic annual increases in the number of shares reserved thereunder. See the section titled “Executive Compensation—Employee Benefit Plans” for additional information.

 

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SELECTED CONSOLIDATED FINANCIAL DATA

The following tables summarize our consolidated financial data. We derived our selected consolidated statements of comprehensive loss for fiscal 2016 and fiscal 2017 and our selected consolidated balance sheet data as of January 31, 2016 and 2017 from our audited consolidated financial statements included elsewhere in this prospectus. Our historical results are not necessarily indicative of the results to be expected in the future. You should read the following selected consolidated financial data in conjunction with the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements, the accompanying notes, and other financial information included elsewhere in this prospectus. Our fiscal year end is January 31, and our fiscal quarters end on April 30, July 31, October 31, and January 31. Our fiscal years ended January 31, 2016 and 2017 and fiscal year ending January 31, 2018 are referred to herein as fiscal 2016, fiscal 2017, and fiscal 2018, respectively.

 

     Fiscal Year Ended
January 31,
 
     2016     2017  
     (in thousands, except per
share data)
 

Consolidated Statements of Comprehensive Loss:

    

Revenue:

    

Subscription

   $ 68,228     $ 89,836  

Professional services

     23,956       23,172  
  

 

 

   

 

 

 

Total revenue

     92,184       113,008  
  

 

 

   

 

 

 

Cost of revenue:

    

Subscription(1)

     17,820       22,840  

Professional services(1)

     25,540       25,322  
  

 

 

   

 

 

 

Total cost of revenue

     43,360       48,162  
  

 

 

   

 

 

 

Gross profit

     48,824       64,846  
  

 

 

   

 

 

 

Operating expenses:

    

Research and development(1)

     20,485       26,355  

Sales and marketing(1)

     64,508       62,384  

General and administrative(1)

     11,979       15,140  
  

 

 

   

 

 

 

Total operating expenses

     96,972       103,879  
  

 

 

   

 

 

 

Loss from operations

     (48,148     (39,033

Interest and other (expense) income, net

     (528     219  
  

 

 

   

 

 

 

Loss before income taxes

     (48,676     (38,814

Income tax (provision) benefit

     469       (284
  

 

 

   

 

 

 

Net loss

     (48,207     (39,098
  

 

 

   

 

 

 

Comprehensive loss:

    

Foreign currency translation adjustment

     (191     (470
  

 

 

   

 

 

 

Comprehensive loss

     (48,398     (39,568
  

 

 

   

 

 

 

Net loss per share attributable to common stockholders, basic and diluted(2)

   $ (0.29   $ (0.23
  

 

 

   

 

 

 

Weighted-average shares outstanding used in calculating net loss per share attributable to common stockholders, basic and diluted(2)

     168,821       171,654  
  

 

 

   

 

 

 

Pro forma net loss per share attributable to common stockholders, basic and diluted (unaudited)(2)

     $ (0.13
    

 

 

 

Pro forma weighted-average pro forma shares outstanding used in calculating pro forma net loss per share attributable to common stockholders, basic and diluted (unaudited)(2)

       295,622  
    

 

 

 

 

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(1) Includes stock-based compensation expense as follows:

 

     Fiscal Year Ended
January 31,
 
     2016      2017  
     (in thousands)  

Cost of revenue:

     

Subscription

   $ 235      $ 326  

Professional services

     566        583  

Research and development

     827        1,126  

Sales and marketing

     1,536        1,577  

General and administrative

     497        771  
  

 

 

    

 

 

 

Total

   $ 3,661      $ 4,383  
  

 

 

    

 

 

 

 

(2) See notes 1 and 13 of the notes to our consolidated financial statements included elsewhere in this prospectus for an explanation of the calculations of our net loss per share attributable to common stockholders, basic and diluted, and pro forma net loss per share attributable to common stockholders, basic and diluted.

 

     As of
January 31,
 
     2016      2017  
     (in thousands)  

Consolidated Balance Sheet Data:

     

Cash and cash equivalents

   $ 103,353      $ 72,645  

Working capital

     75,348        39,663  

Total assets

     143,935        120,468  

Deferred revenue, current portion

     35,097        42,554  

Convertible preferred stock

     12        12  

Total stockholders’ equity

     87,880        54,980  

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our “Selected Consolidated Financial Data” and our consolidated financial statements, the accompanying notes and other financial information included elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those forward-looking statements below. Factors that could cause or contribute to those differences include, but are not limited to, those identified below and those discussed in “Risk Factors” included elsewhere in this prospectus. Our fiscal year end is January 31, and our fiscal quarters end on April 30, July 31, October 31, and January 31. Our fiscal years ended January 31, 2016 and 2017 and fiscal year ending January 31, 2018 are referred to herein as fiscal 2016, fiscal 2017, and fiscal 2018, respectively.

Overview

We provide cloud-based software on a subscription basis that enables any company in any industry to successfully launch, manage, and transform into a subscription business. Architected specifically for dynamic, recurring subscription business models, our solution functions as an intelligent subscription management hub that automates and orchestrates the subscription order-to-cash process, including billing and revenue recognition. We offer businesses the ability to meet the constantly-evolving needs of their subscribers, capitalize on new revenue opportunities, and accelerate business growth.

An increasing number of industries are undergoing a transformation in business models as part of a broader shift to the Subscription Economy. Success in the Subscription Economy requires companies with legacy product-centric businesses to undertake a large-scale systemic shift in how they operate, reorienting themselves around their subscribers.

This new business model is inherently dynamic, with multiple interactions and constantly-changing relationships and events. The capabilities to launch, price, and bill for products, facilitate and record cash receipts, process and recognize revenue, and produce the data required to close their books and drive key decisions are mission critical and particularly complex for companies with subscription business models. As a result, as companies launch or grow a subscription business, they often conclude that traditional ERP-centric systems are inadequate.

We began operations in 2007 with a vision of providing the cloud-based software necessary to bring about, and enable companies to succeed in, the Subscription Economy. Since our inception, we have continued to innovate and have made significant investments to deliver a comprehensive solution for a broad array of use cases in the Subscription Economy. Key milestones in our growth include:

 

    In fiscal 2008, we launched Zuora Billing, our first product to address the complex challenges of subscription management.

 

    In fiscal 2011, we expanded our operations into Europe with our first office in London.

 

    In fiscal 2013, we expanded our operations into Australia. We also held our first Subscribed conference.

 

    In fiscal 2015, we launched Zuora CPQ to address the unique needs of quoting, pricing and packaging for subscription businesses.

 

    In fiscal 2016, we acquired Frontleaf to add subscription analytics (now called Zuora Insights) to our product portfolio. We also launched our Zuora Connect Marketplace of applications and expanded our operations into Japan.

 

    In fiscal 2017, we crossed the threshold of $100.0 million in total revenue.

 

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    In fiscal 2018, we acquired Leeyo, which added our revenue recognition product, Zuora RevPro.

We target companies of all sizes, ranging from small businesses to some of the world’s largest enterprises. As of October 31, 2017, we had more than 900 customers, including 15 of the Fortune 100. We have employees located throughout North America and Western Europe and in Australia, India, China, and Japan.

For fiscal 2016 and fiscal 2017, our total revenue was $92.2 million and $113.0 million, respectively. We have made significant investments to grow our business, including in sales and marketing, infrastructure, operations, and headcount. As a result, we have incurred net losses for fiscal 2016 and fiscal 2017 of $48.2 million and $39.1 million, respectively.

Our Business Model

Our business model is similar to many of our customers in the Subscription Economy—we seek to maximize the lifetime value of our customer relationships over time. We initially acquire customers through a sale of one or more of our products. Over time, as customers experience success with Zuora, they can renew their subscriptions and expand their usage of our solution.

We sell through our direct sales force and with our GSI partners, and in many cases do so in a combined and coordinated fashion. Customers initially subscribe to one or both of our two flagship products—Zuora Billing, our subscription billing product, or Zuora RevPro, our revenue recognition product. Because of the transformative nature of the shift to subscription business models, especially in larger organizations, the initial selling process can be lengthy and complex.

Given the foundational nature of our solution, its deployment typically requires a professional services engagement with either us or one of our third-party deployment partners. Our partners include GSIs, which deploy the solution, often as part of a broader business transformation project. Professional services engagements typically last between three and twelve months with the goal of enabling our customers to utilize our solution as broadly and quickly as possible. These projects usually involve integrating our solution with the customers’ other business applications. Once deployed, our solution becomes a mission-critical system of record for our customers, often deeply entrenched into their core IT and operational infrastructure.

Our business is based on a recurring revenue model, with our subscriptions having fixed and variable pricing components. Our subscription agreements typically range from one to three years. We charge an annual fixed platform fee ranging from $25,000 to $500,000 or more, depending on the Zuora Central Platform edition and associated level of functionality. In addition to the base platform fee, we charge annual committed volume fees based on anticipated usage of our products. Volume fees are based on posted invoice volumes for Zuora Billing and on the customer’s annual revenue volume for Zuora RevPro. Our variable pricing components are designed to align our success with our customers’ success in the Subscription Economy as they expand usage and reliance on our products.

Once customers are operating on our solution, we have multiple ways to expand our footprint and drive revenue growth from these customers:

 

    Customers can upgrade to a more robust edition of the Zuora Central Platform.

 

    Customers that started with Zuora Billing or Zuora RevPro can also subscribe to the other flagship product.

 

    Customers can increase their committed volume amounts as they grow.

 

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    Customers can subscribe to one or more of our additional products, such as Zuora CPQ, Zuora Insights, Zuora Collect, or one of the Connect Marketplace applications.

Given their significant potential lifetime value, we invest upfront in acquiring our customers and facilitating a successful deployment. Our ability to participate in our customers’ growth does not require the same investment as selling to a new customer, which we believe will result in increased margins over time.

Factors Affecting Our Performance

The growth of our business and our future success will depend on many factors, including those described below. While each of these factors presents significant opportunities for us, they also pose important challenges that we must successfully address in order to grow our business and improve our financial results.

Continued Growth of the Subscription Economy.    We believe that we are in the early days of the Subscription Economy and that there is a large market opportunity for our solution. As companies from all industries continue to shift to subscription business models and consumers increasingly use products and services that are provided through such models, we believe demand for our solution will increase. Our success will continue to largely depend on the timing of the shift to the Subscription Economy and the willingness of businesses to adopt cloud-based software solutions to manage their subscription business models.

Expansion and Further Penetration of Our Customer Base.    We believe that our ability to expand our customer base will enable us to grow our business. We focus on acquiring new customers through our flagship products, Zuora Billing and Zuora RevPro, and growing our relationship with our customers over time through increased transaction or revenue volume. We also have the ability to expand revenue through the sale of additional products. As we grow and evolve with our customer base, we intend to continue to introduce additional products and capabilities and address new revenue opportunities.

International Expansion.    We generated total revenue outside of the United States of $24.6 million and $29.6 million for fiscal 2016 and fiscal 2017, respectively. We believe that global demand for our platform will continue to increase as international customers continue to shift to the Subscription Economy. We believe that international expansion represents a significant opportunity, particularly in geographies where the Subscription Economy is becoming more important, such as Europe and Asia and we plan to continue to invest in growing our presence internationally.

Investment in Sales and Marketing.    We expect to continue to invest significantly in our sales and marketing organization to drive additional revenue by supporting our existing customer base and acquiring new customers. We intend to continue to add headcount to our sales and marketing teams to capitalize on our market opportunity, although this would increase our operating expenses in the near term. We believe that improving the efficiency of our investments in sales and marketing can contribute to our long-term operating results. We also intend to continue to invest in our brand awareness activities, including our global Subscribed events, as well as the content we create and publish across multiple channels.

Improving Subscription Gross Margins.    As our business grows, we intend to continue to invest in our cloud architecture to meet the needs of our current and future customers. In addition, we intend to evaluate the expansion of our data center locations to address new markets while also investing to support growth at our existing data centers. We will need to determine whether it would be

 

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more beneficial to rely on co-located datacenters with our own equipment or to utilize cloud hosting providers. The mix of these investments in any particular period may cause fluctuations to our cost of revenue, operating expenses, and capital expenditures, and we intend to optimize these investments with the goal of improving our long-term gross margins.

Ability to Increase our Deployment Efficiency.    Our ability to grow our relationships with our customers over the long term depends on the successful deployment of our solutions. There are several factors that can lead a customer to not ultimately deploy our solution, including unexpected complexities or delays associated with deployment, a change in a customer’s strategic direction, a customer’s decision not to launch its subscription business, or sale of the customer’s business. We strive to increase both the speed and success of our deployments, by improving our deployment methodology, hiring and training qualified professionals, and deepening relationships with deployment partners.

Ability to Expand Relationships with GSIs and Other Partners.    We have established relationships with GSIs and other third-party partners to deploy and market our solution and strengthen our go-to-market strategy. We hope to further leverage these relationships to improve deployment success, maintain our professional services margins, and to drive additional sales of our products, although investing in these relationships can be time consuming and costly.

Leeyo Acquisition

In May 2017, we acquired Leeyo. We paid $31.2 million in cash and 2,307,782 million shares of common stock, for total consideration of approximately $37.1 million. As a result of the acquisition, we introduced our Zuora RevPro product. The acquisition has been accounted for as a business combination under U.S. GAAP and ASC 850: Business Combinations.

The total cash portion of the consideration, which is preliminarily considered to be purchase consideration, consists of three separate payments: (i) $16.7 million was paid out in the second fiscal quarter of 2018, (ii) $1.9 million will be paid by December 31, 2017, and (iii) $12.6 million will be paid by May 31, 2018. We also issued 2,307,782 shares of common stock to former stockholders of Leeyo. This stock portion had a fair value upon issuance of approximately $6.0 million, and was issued at the closing. A portion of the purchase price totaling $3.0 million in cash and an additional 726,387 shares, was placed into escrow for one year to secure indemnification obligations. Acquisition-related costs of approximately $0.8 million were expensed as incurred and are included in operating expenses in the consolidated statement of comprehensive loss.

Under the terms of the acquisition, we agreed to pay cash of $3.1 million to certain former Leeyo employees, $2.5 million of which was paid upon closing and will be recorded as compensation, and the remaining $0.6 million of which will be disbursed to the employees upon the 12-and 24-month anniversaries of the acquisition, contingent upon continued employment with us. These payments are being recognized to expense over the service period.

In connection with the Leeyo acquisition, we also issued 5,664,826 shares of restricted common stock with a total grant date fair value of $14.6 million, which shares have service-based vesting requirements and are therefore excluded from the purchase consideration. These restricted shares will vest over three years, with a cliff-vest after the first year and monthly vesting thereafter. We also issued 1,712,614 RSUs with a total fair value of $4.4 million, which also have service-based vesting requirements and are therefore also excluded from the purchase consideration. 439,114 of these RSUs vest over three years with a cliff vest after one year. The remaining 1,273,500 RSUs will vest over four years with a cliff-vest after one year.

 

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Components of Our Results of Operations

Revenue

Subscription revenue.    Subscription revenue consists of fees for access to, and use of, our products, as well as customer support. We generate subscription fees pursuant to non-cancelable subscription agreements with terms that typically range from one to three years. Subscription revenue is primarily based on fees to access our services platform over the subscription term. We typically invoice customers in advance in either annual or quarterly installments. Customers can also elect to purchase additional volume blocks or products during the term of the contract. We recognize subscription revenue ratably over the term of the subscription period, beginning on the date that access to our platform is provided, which is generally on or about the date the subscription agreement is signed.

Professional services revenue.    Professional services revenue consists of fees for services related to helping our customers deploy, configure, and optimize the use of our solution. These services include system integration, data migration, process enhancement, and training. Professional services projects generally take three to twelve months to complete. Once the contract is signed, we generally invoice for professional services on a time and materials basis, although we occasionally engage in fixed-price service engagements and invoice for those based upon agreed milestone payments. We recognize revenue as services are performed for time and materials engagements and if we are performing the services on a fixed-fee basis on a proportional performance method as the services are performed for fixed fee engagements.

Impact of ASC 606 Adoption.    In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (ASU 2014-09), or ASU 2014-09, and has modified the standard thereafter. These standards replace existing revenue recognition rules with a comprehensive revenue measurement and recognition standard and expanded disclosure requirements ASU 2014-09, as amended. These new revenue standards become effective for public companies for the fiscal year beginning after December 15, 2017, and interim periods within that year. Private companies have an additional year to adopt the standard. The standard permits the use of either the retrospective or modified retrospective transition method. Under the modified retrospective transition method, the standard applies only to contracts still open as of the beginning of the fiscal year of adoption, recognizing in retained earnings at the beginning of the period an adjustment for the cumulative effect of the change and providing additional disclosures comparing results to previous rules. We are currently in the process of evaluating the timing and impact of adopting ASC 606.

Deferred Revenue

Deferred revenue consists of customer billings in advance of revenue being recognized from our subscription and support services and professional services arrangements. We primarily invoice our customers for subscription services arrangements annually or quarterly in advance. Amounts anticipated to be recognized within one year of the balance sheet date are recorded as deferred revenue, current portion, and the remaining portion is recorded as deferred revenue, net of current portion in the consolidated balance sheets.

Overhead Allocation and Employee Compensation Costs

We allocate shared costs, such as facilities costs (including rent, utilities, and depreciation on capital expenditures related to facilities shared by multiple departments), information technology costs, and certain administrative personnel costs to all departments based on headcount and location. As such, allocated shared costs are reflected in each cost of revenue and operating expense category. Employee compensation costs consist of salaries, bonuses, commissions, benefits, and stock-based compensation.

 

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Cost of Revenue and Gross Profit

Cost of subscription revenue.    Cost of subscription revenue consists primarily of costs related to hosting our platform and providing customer support. These costs include data center costs and third-party hosting fees, employee compensation costs for employees associated with our cloud-based infrastructure and our customer support organizations, amortization expense associated with capitalized internal-use software and purchased technology, allocated overhead, software and maintenance costs, and outside services associated with the delivery of our subscription services. We intend to continue to invest in our platform infrastructure, including third-party hosting capacity, and support organizations. However, the level and timing of investment in these areas could fluctuate and affect our cost of subscription revenue in the future.

Cost of professional services revenue.    Cost of professional services revenue consists primarily of costs related to the deployment of our platform. These costs include employee compensation costs for our professional services team, allocated overhead, travel costs, and costs of outside services associated with supplementing our internal staff. Cost of providing professional services has historically been similar to the associated professional services revenue, and we expect this to continue for the foreseeable future.

Gross profit and gross margin.    Our gross profit and gross margin may fluctuate from period to period as our revenue fluctuates, and as a result of the timing and amount of investments to expand hosting capacity, including through third party cloud providers, our continued efforts to build platform support and professional services teams, as well as the amortization expense associated with capitalized internal-use software and acquired technology.

Operating Expense

Sales and marketing.    Sales and marketing expense consists primarily of employee compensation costs, including commissions for our sales personnel, allocated overhead, costs of general marketing and promotional activities, and travel costs. We currently expense sales commissions in the period of sale. Once adopted, under ASC 606, commissions will be amortized in sales and marketing expense over the period of benefit. Our sales and marketing expense as a percentage of total revenue has decreased in recent periods. We expect to continue to make significant investments as we expand our customer acquisition and retention efforts and, therefore, expect sales and marketing expense to increase in absolute dollars but may vary as a percentage of total revenue for the foreseeable future.

Research and development.    Research and development expense consists primarily of employee compensation costs, allocated overhead, and travel costs. We capitalize research and development costs associated with the development of internal-use software. As of January 31, 2017, capitalized costs for internal-use software were $3.3 million, and we expect to amortize these costs over a remaining period of approximately three years into cost of subscription revenue. All other research and development costs are expensed as incurred. We believe that continued investment in our platform is important for our growth, and as such, expect our research and development expense to continue to increase in absolute dollars for the foreseeable future but may vary as a percentage of revenue.

General and administrative.    General and administrative expense consists primarily of employee compensation costs, allocated overhead, and travel costs for finance, accounting, legal, human resources, and recruiting personnel. In addition, general and administrative expense includes non-personnel costs, such as accounting fees, legal fees, and all other supporting corporate expenses not allocated to other departments.

 

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Following the completion of this offering, we expect to incur additional costs as a result of operating as a public company, including costs related to compliance and reporting obligations of public companies, and increased costs for insurance, investor relations, and professional services. As a result, we expect our general and administrative expense to continue to increase in absolute dollars for the foreseeable future but may vary as a percentage of revenue.

Interest and Other Income (Expense), net

Interest and other income (expense), net primarily consists of interest income from our investment holdings, interest expense associated with our credit facility, and foreign exchange fluctuations.

Income Tax Provision (Benefit)

Income tax provision (benefit) consists of U.S. federal and state income taxes and income taxes in certain foreign jurisdictions in which we conduct business. As of January 31, 2017, we had federal and state NOL carryforwards of $184.4 million and $153.2 million, respectively, which will begin to expire in fiscal 2028. Our existing NOLs may be subject to limitations arising from previous ownership changes and, if we undergo an ownership change in connection with this offering or otherwise in the future, our ability to utilize our NOLs could be further limited by Section 382 of the Code. Future changes in our stock ownership, many of which are outside of our control, could result in an ownership change under Section 382 of the Code. Our NOLs may also be impaired under similar provisions of state law. We have not performed any analyses under Section 382 and cannot forecast or otherwise determine our ability to derive benefit from our various federal or state tax attribute carryforwards. We maintain a full valuation allowance related to our U.S. federal and state NOLs and other deferred tax assets due to the uncertainty of the ultimate realization of the future benefits of those assets.

 

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Results of Operations

The following tables set forth our consolidated results of operations data for the fiscal years presented in dollars and as a percentage of our total revenue:

 

     Fiscal Year Ended
January 31,
 
     2016     2017  
     (in thousands)  

Revenue:

    

Subscription

   $ 68,228     $ 89,836  

Professional services

     23,956       23,172  
  

 

 

   

 

 

 

Total revenue

     92,184       113,008  

Cost of revenue:

    

Subscription(1)

     17,820       22,840  

Professional services(1)

     25,540       25,322  
  

 

 

   

 

 

 

Total cost of revenue

     43,360       48,162  
  

 

 

   

 

 

 

Gross profit

     48,824       64,846  
  

 

 

   

 

 

 

Operating expenses:

    

Research and development(1)

     20,485       26,355  

Sales and marketing(1)

     64,508       62,384  

General and administrative(1)

     11,979       15,140  
  

 

 

   

 

 

 

Total operating expenses

     96,972       103,879  
  

 

 

   

 

 

 

Loss from operations

     (48,148     (39,033

Interest and other (expense) income, net

     (528     219  
  

 

 

   

 

 

 

Loss before income taxes

     (48,676     (38,814

Income tax provision (benefit)

     469       (284
  

 

 

   

 

 

 

Net loss

   $ (48,207   $ (39,098
  

 

 

   

 

 

 

 

(1) Includes stock-based compensation expense as follows:

 

     Fiscal Year Ended
January 31,
 
     2016      2017  
     (in thousands)  

Cost of revenue:

     

Subscription

   $ 235      $ 326  

Professional services

     566        583  

Research and development

     827        1,126  

Sales and marketing

     1,536        1,577  

General and administrative

     497        771  
  

 

 

    

 

 

 

Total

   $ 3,661      $ 4,383  
  

 

 

    

 

 

 

 

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     Fiscal Year Ended
January 31,
 
     2016     2017  

Revenue:

    

Subscription

     74     79

Professional services

     26       21  
  

 

 

   

 

 

 

Total revenue

     100       100  

Cost of revenue:

    

Subscription

     19       20  

Professional services

     28       22  
  

 

 

   

 

 

 

Total cost of revenue

     47       43  

Gross profit

     53       57  

Operating expenses:

    

Research and development

     22       23  

Sales and marketing

     70       55  

General and administrative

     13       13  
  

 

 

   

 

 

 

Total operating expenses

     105       92  
  

 

 

   

 

 

 

Loss from operations

     (52     (34

Interest and other income (expense), net

     —         —    
  

 

 

   

 

 

 

Loss before income taxes

     (52     (34

Income tax provision (benefit)

     —         —    
  

 

 

   

 

 

 

Net loss

     (52 )%      (34 )% 
  

 

 

   

 

 

 

Fiscal Years Ended January 31, 2016 and 2017

Revenue

 

     Fiscal Year
Ended January 31,
             
     2016     2017     $ Change     % Change  
           (dollars in thousands)        

Revenue:

        

Subscription

   $ 68,228     $ 89,836     $ 21,608       32

Professional services

     23,956       23,172       (784     (3
  

 

 

   

 

 

   

 

 

   

Total revenue

   $ 92,184     $ 113,008     $ 20,824       23  
  

 

 

   

 

 

   

 

 

   

Percentage of revenue:

        

Subscription

     74     79    

Professional services

     26       21      
  

 

 

   

 

 

     

Total

     100     100    
  

 

 

   

 

 

     

Subscription revenue increased by $21.6 million, or 32%, for fiscal 2017 compared to fiscal 2016, primarily due to the addition of new customers and continued expansion in usage of our platform by, and sales of additional products to, existing customers.

Professional services revenue decreased by $0.8 million, or 3%, for fiscal 2017 compared to fiscal 2016, primarily due to a larger number of deployments provided by third-party providers.

 

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Cost of Revenue, Gross Profit, and Gross Margin

 

     Fiscal Year
Ended January 31,
             
     2016     2017     $ Change     % Change  
     (dollars in thousands)  

Cost of revenue:

        

Subscription

   $ 17,820     $ 22,840     $ 5,020       28

Professional services

     25,540       25,322       (218     (1
  

 

 

   

 

 

   

 

 

   

Total cost of revenue

   $ 43,360     $ 48,162     $ 4,802       11  
  

 

 

   

 

 

   

 

 

   

Gross profit

   $ 48,824     $ 64,846     $ 16,022       33  

Gross margin:

        

Subscription

     74     75    

Professional services

     (7     (9    

Total gross margin

     53       57      

Cost of subscription revenue increased by $5.0 million, or 28%, for fiscal 2017 compared to fiscal 2016, primarily due to an increase of $1.9 million in employee compensation costs related to higher headcount, an increase of $1.0 million in allocated overhead, an increase of $0.9 million in third-party data center costs, an increase of $0.5 million in software license costs, an increase of $0.5 million related to the amortization of purchased technology and amortization of internal-use software, and an increase of $0.2 million in contractor costs.

Our gross margin for subscription revenue increased from 74% for fiscal 2016 to 75% for fiscal 2017, primarily due to efficiencies of our infrastructure investments and data center capacity.

Cost of professional services revenue decreased by $0.2 million for fiscal 2017 compared to fiscal 2016 primarily due to a larger number of deployments provided by third-party providers.

Our gross margin for professional services revenue decreased from (7%) for fiscal 2016 to (9%) for fiscal 2017, primarily due to the decrease in professional services revenue due to a larger number of deployments being provided by third-party providers.

Operating Expense

Sales and Marketing

 

     Fiscal Year
Ended January 31,
             
     2016     2017     $ Change     % Change  
     (dollars in thousands)  

Sales and marketing

   $ 64,508     $ 62,384     $ (2,124     (3 )% 

Percentage of total revenue

     70     55    

Sales and marketing expense decreased by $2.1 million for fiscal 2017 compared to fiscal 2016, primarily due to a decrease of $1.5 million in travel costs, a decrease of $0.8 million in marketing and event costs, and a decrease of $0.5 million in employee compensation costs related to lower headcount. These costs were partially offset by an increase of $0.9 million in allocated overhead costs. The reduction in headcount and marketing, travel, and marketing and event costs was due to our focus on driving efficiencies across the organization.

 

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Research and Development

 

     Fiscal Year Ended January 31,               
             2016                     2017             $ Change      % Change  
     (dollars in thousands)  

Research and development

   $ 20,485     $ 26,355     $ 5,870        29

Percentage of total revenue

     22     23     

Research and development expense increased by $5.9 million, or 29%, for fiscal 2017 compared to fiscal 2016, primarily due to an increase of $5.6 million in employee compensation costs due to increased headcount, an increase of $1.0 million in allocated overhead, and an increase of $0.5 million in third-party contractor costs. This was partially offset by an increase of $1.1 million in costs capitalized as internal-use software, which had the effect of reducing research and development expense.

General and Administrative

 

     Fiscal Year Ended January 31,               
             2016                     2017             $ Change      % Change  
     (dollars in thousands)  

General and administrative

   $ 11,979     $ 15,140     $ 3,161        26

Percentage of total revenue

     13     13     

General and administrative expense increased by $3.2 million, or 26%, for fiscal 2017 compared to fiscal 2016, primarily due to an increase of $3.6 million in employee compensation costs related to higher headcount and an increase of $0.9 million in allocated overhead costs, partially offset by a non-recurring expense for fiscal 2016 of $1.0 million and a decrease of $0.4 million in professional services fees, comprised primarily of legal, accounting, and consulting fees.

Interest and other income (expense), net

 

     Fiscal Year Ended January 31,                
             2016                     2017              $ Change      % Change  
     (dollars in thousands)  

Interest and other income (expense), net

   $ (528   $ 219      $ 747        141

Interest and other income (expense), net increased by $0.7 million for fiscal 2017 compared to fiscal 2016. The increase was primarily due to $0.4 million in unrealized currency translation gains resulting from foreign operations and $0.2 million in interest income on invested cash balances.

Income tax (provision) benefit

 

     Fiscal Year Ended January 31,              
             2016                      2017             $ Change     % Change  
     (dollars in thousands)  

Income tax (provision) benefit

   $ 469      $ (284   $ (753     (161 )% 

We recorded a tax benefit of $0.5 million and a tax provision of $0.3 million for fiscal 2016 and fiscal 2017, respectively. The tax benefit for fiscal 2016 was primarily due to the release of a valuation allowance on a deferred tax liability associated with purchased intangible assets, partially offset by foreign tax expense. The tax provision for fiscal 2017 was primarily due to taxes on foreign income.

 

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Liquidity and Capital Resources

As of January 31, 2017, we had cash and cash equivalents of $72.6 million. Since inception, we have financed our operations primarily through the net proceeds we received through private sales of equity securities, payments received from customers for subscription and professional services, and borrowings from our credit facility.

We believe our existing cash and cash equivalents and restricted cash balances, funds available under our credit facility, and cash provided by subscriptions to our platform and related professional services will be sufficient to meet our working capital and capital expenditure needs for at least the next 12 months. Our future capital requirements will depend on many factors, including the rate of our revenue growth, the timing and extent of spending on research and development efforts and other business initiatives, the expansion of sales and marketing activities, the introduction of new and enhanced product offerings, and the continuing market adoption of our platform. We may in the future enter into arrangements to acquire or invest in complementary businesses, services, and technologies, including intellectual property rights. We may be required to seek additional equity or debt financing. If we raise additional funds through the incurrence of indebtedness, such indebtedness may have rights that are senior to holders of our equity securities and could contain covenants that restrict operations. Any additional equity or convertible debt financing may be dilutive to stockholders. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital or generate cash flows necessary to expand our operations and invest in new technologies, it could reduce our ability to compete successfully and harm our results of operations.

SVB Loan and Security Agreement

In June 2017, we entered into a Loan and Security Agreement, or Debt Agreement, with Silicon Valley Bank. The Debt Agreement established a revolving loan and a term loan facility of $10.0 million and $30.0 million, respectively.

Revolving Loan.    The Debt Agreement allows us to borrow up to $10.0 million until June 2019 in revolving loans. Advances drawn down under the revolving loan incur interest at the prime rate as published by the Wall Street Journal, or WSJ Prime Rate, which is due monthly on any amounts drawn down, with the principal due at maturity. Any outstanding amounts must be fully repaid before June 14, 2019. We are required to pay an annual fee of $20,000 on this revolving loan, regardless of any amounts drawn down. As of October 31, 2017, we had not drawn down any amounts under this revolving loan.

Term Loan.    The Debt Agreement allows us to borrow up to $30.0 million in term loans. In June 2017, we drew down $15.0 million of the proceeds to partially finance the acquisition of Leeyo, and the remaining $15.0 million is available for draw-down until June 14, 2018. Any outstanding amounts drawn down under the term loan accrue interest at the WSJ Prime rate plus 1.00%. We are required to make monthly payments of interest with respect to any amounts drawn down until June 2018 and subsequently must make equal monthly payments of principal and interest over the following 36 months. We may prepay all outstanding principal and accrued interest at any time. We will incur a facility fee of 1.5% upon the earlier to occur of prepayment or the termination of the facility. As of October 31, 2017, we had $15.0 million outstanding under the term loan.

Both the revolving loan and the term loan are subject to certain covenants, including a requirement to maintain an adjusted quick ratio of no less than 1.10:1.00. As of October 31, 2017, we were in compliance with the covenants under the Debt Agreement.

 

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Cash Flows

The following table summarizes our cash flows for the fiscal years indicated:

 

     Fiscal Year Ended
January 31,
 
     2016     2017  
     (in thousands)  

Cash used in operating activities

   $ (37,359   $ (24,975

Cash used in investing activities

     (6,187     (4,835

Cash provided by (used in) financing activities

     7,043       (428

Effects of changes in foreign currency exchange rates on cash and cash equivalents

     (191     (470
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

   $ (36,694   $ (30,708
  

 

 

   

 

 

 

Operating Activities

Our largest source of operating cash is cash collections from our customers for subscription and professional services. Our primary uses of cash from operating activities are for employee-related expenditures, marketing expenses, and third-party hosting costs.

For fiscal 2017, cash used in operating activities was $25.0 million, which consisted of a net loss of $39.1 million, adjusted for non-cash charges of $12.0 million and net cash inflows of $2.1 million provided by changes in our operating assets and liabilities. Non-cash charges primarily consisted of stock-based compensation and depreciation and amortization of property and equipment and intangible assets and provision for doubtful accounts. The changes in operating assets and liabilities were primarily due to a $7.9 million increase in deferred revenue, offset by a $7.6 million increase in accounts receivable, net, resulting primarily from increased subscription arrangements as a majority of our customers are invoiced in advance for annual subscriptions. Additionally, the change in operating assets and liabilities was due to an increase of $3.3 million in accrued employee liabilities partially offset by an increase of $1.1 million in prepaid expenses and other current assets.

For fiscal 2016, cash used in operating activities was $37.4 million, which consisted of a net loss of $48.2 million, adjusted for non-cash charges of $9.1 million and net cash inflows of $1.8 million provided by changes in our operating assets and liabilities. Non-cash charges primarily consisted of stock-based compensation and depreciation and amortization of property and equipment and intangible assets and provision for doubtful accounts. The changes in operating assets and liabilities were primarily due to a $6.7 million increase in deferred revenue, offset by an $8.5 million increase in accounts receivable, net, resulting primarily from increased subscription arrangements as a majority of our customers are invoiced in advance for annual subscriptions. Additionally, the change in operating assets and liabilities was due to an increase of $1.0 million in accounts payable, an increase of $2.1 million in accrued expenses and other current liabilities, and an increase of $1.2 million in prepaid expenses and other current assets, all due to increased activity.

Investing Activities

Net cash used in investing activities for fiscal 2017 of $4.8 million was primarily due to $3.8 million in purchases of capital equipment and the capitalization of internal-use software and an increase of $1.2 million in restricted cash.

Net cash used in investing activities for fiscal 2016 of $6.2 million was primarily due to $2.5 million of cash used for our acquisition of a Frontleaf. In addition, net cash used in investing activities also was due to $3.2 million in purchases of capital equipment.

 

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Financing Activities

Cash used in financing activities for fiscal 2017 of $0.4 million was primarily the result of payments of $2.0 million related to capital leases partially offset by $1.6 million in proceeds from the exercise of stock options, net of repurchases.

Cash provided by financing activities for fiscal 2016 of $7.0 million was primarily due to $7.7 million in net proceeds from the sale of our convertible preferred stock, net of issuance costs, partially offset by payments of $1.6 million related to capital leases.

Obligations and Other Commitments

Our principal commitments consist of obligations under our operating leases for office space. The following table summarizes our contractual obligations as of January 31, 2017:

 

     Payments Due by Period  
     Total      Less
Than 1
Year
     1 to 3
Years
     3 to 5
Years
     More
Than
5 Years
 
            (in thousands)         

Operating lease obligations(1)

   $ 9,381      $ 3,692      $ 5,166      $ 523      $ —    

Capital lease obligations(2)

     2,923        1,945        978        —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 12,304      $ 5,637      $ 6,144      $ 523      $ —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) We lease our facilities under long-term operating leases which expire on varying dates through September 2021. The lease agreements often contain provisions which require us to pay taxes, insurance, and maintenance costs.
(2) Capital lease obligations include data center equipment under capital lease agreements which expire on varying dates through September 2019.

In the ordinary course of business, we enter into agreements of varying scope and terms pursuant to which we agree to indemnify customers, vendors, lessors, business partners, and other parties with respect to certain matters, including, but not limited to, losses arising out of the breach of such agreements, services to be provided by us, or from data breaches or intellectual property infringement claims made by third parties. In addition, we have entered into indemnification agreements with our directors and certain officers and employees that will require us, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors, officers, or employees. No demands have been made upon us to provide indemnification under such agreements and there are no claims that we are aware of that could have a material effect on our consolidated balance sheets, consolidated statements of operations and comprehensive loss, or consolidated statements of cash flows.

As of January 31, 2017, we had accrued liabilities related to uncertain tax positions, which are reflected on our consolidated balance sheet. These accrued liabilities are not reflected in the table above since it is unclear when these liabilities will be paid.

In June 2017, we entered into the Debt Agreement with SVB, which established a revolving loan and a term loan facility of $10.0 million and $30.0 million, respectively. In June 2017, we drew down $15.0 million of the term loan to partially finance the acquisition of Leeyo. Borrowings under the revolving loan bear interest at a floating rate equal to the WSJ Prime Rate. Any outstanding amounts drawn down under the term loan accrue interest at the WSJ Prime rate plus 1.00%. We are required to make monthly payments of interest with respect to any amounts drawn down until June 2018 and subsequently must make equal monthly payments of principal and interest over the following 36 months.

 

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Off-Balance Sheet Arrangements

As of January 31, 2017, we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities that would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

Quantitative and Qualitative Disclosures about Market Risk

We are exposed to certain market risks in the ordinary course of our business. Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily a result of fluctuations in foreign currency exchange rates and interest rates.

Foreign Currency Exchange Risk

The functional currencies of our foreign subsidiaries are the respective local currencies. Our sales are typically denominated in the local currency of the country in which the sale was made. The majority of our sales are made in the United States and those sales are denominated in U.S. dollars. Therefore, our revenue is not currently subject to significant foreign currency risk. Our operating expenses are denominated in the currencies of the countries in which our operations are located, which are primarily in the United States, Europe, China, India, Japan, and Australia. Our consolidated results of operations and cash flows are, therefore, subject to fluctuations due to changes in foreign currency exchange rates and may be adversely affected in the future due to changes in foreign exchange rates. To date, we have not entered into any hedging arrangements with respect to foreign currency risk or other derivative financial instruments. For fiscal 2016 and fiscal 2017, a hypothetical 10% change in foreign currency exchange rates applicable to our business would not have had a material impact on our consolidated financial statements.

Interest Rate Risk

We had cash and cash equivalents of $72.6 million as of January 31, 2017. Our cash and cash equivalents are held for working capital purposes. We do not make investments for trading or speculative purposes.

Our cash equivalents are subject to market risk due to changes in interest rates. Fixed rate securities may have their market value adversely affected due to a rise in interest rates. Due in part to these factors, our future investment income may fall short of our expectations due to changes in interest rates or we may suffer losses in principal if we are forced to sell securities that decline in market value due to changes in interest rates. However, because we classify our short-term investments as “available for sale,” no gains or losses are recognized due to changes in interest rates unless such securities are sold prior to maturity or declines in fair value are determined to be other-than-temporary.

Under our Debt Agreement, we pay interest on any outstanding balances under this agreement based on a variable market rate. A significant change in these market rates may adversely affect our operating results.

As of January 31, 2017, a hypothetical 10% relative change in interest rates would not have had a material impact on the value of our cash equivalents or investment portfolio. Fluctuations in the value of our cash equivalents and investment portfolio caused by a change in interest rates (gains or losses on the carrying value) are recorded in other comprehensive income, and are realized only if we sell the underlying securities prior to maturity.

 

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Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with U.S. GAAP. The preparation of these consolidated financial statements requires our management to make estimates, assumptions, and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the applicable periods. We base our estimates, assumptions, and judgments on historical experience and on various other factors that we believe to be reasonable under the circumstances. Different assumptions and judgments would change the estimates used in the preparation of our consolidated financial statements, which, in turn, could change the results from those reported. We evaluate our estimates, assumptions, and judgments on an ongoing basis.

The critical accounting estimates, assumptions, and judgments that we believe have the most significant impact on our consolidated financial statements are described below.

Revenue Recognition

We generate revenue primarily from two sources: (1) subscription services which is comprised of revenue from subscription fees from customers accessing our cloud-based software and (2) professional services and other revenue which consists primarily of fees from consultation services to support business process mapping, configuration, data migration, integration, and training. Subscription revenue is recognized on a ratable basis over the related subscription period beginning on the date the customer is first given access to the platform (i.e. provision date). We recognize professional services revenue based on a proportional performance method as the service is being provided to the customer.

We commence revenue recognition when all of the following conditions are met:

 

    there is persuasive evidence of an arrangement;

 

    the service is being provided to the customer;

 

    the collection of the fees is reasonably assured; and

 

    the amount of fees to be paid by the customer is fixed or determinable.

Revenue is often generated under subscription agreements with multiple elements, comprised of subscription fees from customers accessing our platform and professional services associated with consultation services. We apply the provisions of Financial Accounting Standards Board Accounting Standards Update, ASU, 2009-13, Multiple-Deliverable Revenue Arrangements, to its multiple-element arrangements. We evaluate each element in a multiple-element arrangement to determine whether it represents a separate unit of accounting. An element constitutes a separate unit of accounting when the delivered item has stand-alone value and delivery of the undelivered element is probable and within our control. Subscription services have stand-alone value because they are routinely sold separately by us. Professional services have stand-alone value because we sell professional services separately and there are several third-party vendors that routinely contract directly with the customer and provide these services to the customer on a stand-alone basis.

In accordance with ASU 2009-13, we allocate revenue to each element in an arrangement based on a selling price hierarchy. The selling price for an element is based on its vendor-specific objective evidence, or VSOE, if available; third-party evidence, or TPE, if VSOE is not available; or estimated selling price, or ESP, if neither VSOE nor TPE is available. We have established VSOE for elements of our arrangements based on prices at which such elements are sold by us in stand-alone arrangements. As we have not been able to establish VSOE or TPE for elements of our arrangements,

 

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we have established the ESP for such elements primarily by considering the weighted average of actual sales prices of the element when sold together with other elements, and other factors such as gross margin objectives, pricing practices, and growth strategy. The consideration allocated to subscription services is recognized as revenue over the non-cancelable contract period on a straight-line basis. The consideration allocated to professional services is recognized as revenue on a proportional performance method over the period the services are performed.

Capitalized Internal-Use Software Costs

We capitalize costs related to developing new functionality for our suite of products that are hosted by us and accessed by its customers on a subscription basis. We also capitalize costs related to specific upgrades and enhancements when it is probable the expenditures will result in additional functionality. Costs incurred in the preliminary stages of development are expensed as incurred. Once an application has reached the development stage, internal and external costs, if direct and incremental, are capitalized until the software is substantially complete and ready for its intended use. Capitalized costs are recorded as part of property and equipment, net in our consolidated balance sheets. Maintenance and training costs are expensed as incurred. Internal-use software is amortized on a straight-line basis over its estimated useful life, generally three years. We evaluate the useful lives of these assets on an annual basis and test for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets. There were no impairments to internal-use software during the fiscal 2016 and fiscal 2017.

Stock-Based Compensation

We have granted stock-based awards, consisting of stock options, restricted stock, and RSUs, to our employees, certain consultants, and certain members of our board of directors. Stock-based compensation is measured based on the fair value of the awards on the grant date.

We estimate the fair value of our stock options using the Black-Scholes option-pricing model. This requires the input of highly subjective assumptions, including the fair value of our underlying common stock, the expected term of stock options, the expected volatility of the price of our common stock, risk-free interest rates, and the expected dividend yield of our common stock. The assumptions used in our option-pricing model represent our best estimates. These estimates involve inherent uncertainties and the application of management’s judgment. If factors change and different assumptions are used, our stock-based compensation expense could be materially different in the future. The resulting fair value, net of estimated forfeitures, is recognized on a straight-line basis over the period during which an employee is required to provide service in exchange for the award.

These assumptions used in the Black-Scholes option-pricing model, other than the fair value of our common stock, are estimated as follows:

 

    Expected volatility.    Since a public market for our common stock has not existed and, therefore, we do not have a trading history of our common stock, we estimated the expected volatility based on the volatility of similar publicly-held entities (referred to as “guideline companies”) over a period equivalent to the expected term of the awards. In evaluating the similarity of guideline companies to us, we considered factors such as industry, stage of life cycle, size, and financial leverage. We intend to continue to consistently apply this process using the same or similar guideline companies to estimate the expected volatility until sufficient historical information regarding the volatility of the share price of our Class A common stock becomes available.

 

   

Expected term.    We determine the expected term of awards which contain only service conditions using the simplified approach, in which the expected term of an award is presumed

 

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to be the mid-point between the vesting date and the expiration date of the award, as we do not have sufficient historical data relating to stock-option exercises. For awards granted which contain performance conditions, we estimate the expected term based on the estimated dates that the performance conditions will be satisfied.

 

    Risk-free interest rate.    The risk-free interest rate is based on the United States Treasury yield curve in effect during the period the options were granted corresponding to the expected term of the awards.

 

    Estimated dividend yield.    The estimated dividend yield is zero, as we have not declared dividends in the past and do not currently intend to declare dividends in the foreseeable future.

The following table summarizes the assumptions, other than the fair value of our common stock, relating to stock options granted during the periods indicated:

 

     Fiscal Year Ended January 31,  
         2016             2017      

Expected volatility

     46.86     43.48

Expected term (in years)

     5.98       6.00  

Risk-free interest rate

     1.69     1.43

Expected dividend yield

     —         —    

In addition to the assumptions used in the Black-Scholes option-pricing model, we must also estimate a forfeiture rate to calculate the stock-based compensation expense for our awards. Our forfeiture rate is based on an analysis of our actual forfeitures. We will continue to evaluate the appropriateness of the forfeiture rate based on actual forfeiture experience, analysis of employee turnover, and other factors. Changes in the estimated forfeiture rate can have a significant impact on our stock-based compensation expense as the cumulative effect of adjusting the rate is recognized in the period the forfeiture estimate is changed. If a revised forfeiture rate is higher than the previously estimated forfeiture rate, an adjustment is made that will result in a decrease to the stock-based compensation expense recognized in our financial statements. If a revised forfeiture rate is lower than the previously estimated forfeiture rate, an adjustment is made that will result in an increase to the stock-based compensation expense recognized in our financial statements.

We will continue to use judgment in evaluating the expected volatility, expected term and estimated forfeiture rate utilized in our stock-based compensation expense calculations on a prospective basis.

As we continue to accumulate additional data related to our common stock, we may refine our estimates of expected volatility, expected term, and estimated forfeiture rates, which could materially impact our future stock-based compensation expense.

We estimate the fair value of its restricted stock and RSU grants based on the grant date fair value of our common stock. The resulting fair value, net of estimated forfeitures, is recognized on a straight-line basis over the period during which an employee is required to provide service in exchange for the award, which is generally three- to four years. Estimated forfeitures are based upon our historical experience and we revise our estimates, if necessary, in subsequent periods if actual forfeitures differ from initial estimates.

Common Stock Valuations

The fair value of the common stock underlying our stock-based awards was determined by our board of directors, with input from management and contemporaneous third-party valuations.

 

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Given the absence of a public trading market for our common stock, and in accordance with the American Institute of Certified Public Accountants Practice Guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation, or AICPA Guide, our board of directors exercised reasonable judgment and considered numerous objective and subjective factors to determine the best estimate of the fair value of our common stock including:

 

    contemporaneous valuations performed at periodic intervals by unrelated third-party specialists;

 

    rights, preferences, and privileges of our convertible preferred stock relative to those of our common stock;

 

    our actual operating and financial performance;

 

    relevant precedent transactions involving our capital stock;

 

    likelihood of achieving a liquidity event, such as an initial public offering or a sale of our company given prevailing market conditions and the nature and history of our business;

 

    market multiples of comparable companies in our industry;

 

    stage of development;

 

    industry information such as market size and growth;

 

    illiquidity of stock-based awards involving securities in a private company; and

 

    macroeconomic conditions.

The enterprise value of our company was determined using both the income and the market approach valuation methods. The income approach estimates value based on the expectation of future cash flows that a company will generate. These future cash flows are discounted to their present values using a discount rate based on the venture capital rates of return as recommended in the AICPA Guide for early stage companies and is adjusted to reflect the risks inherent in our cash flows. The market approach estimates value based on a comparison of the subject company to comparable public companies in a similar line of business. From the comparable companies, a representative market value multiple is determined and then applied to the subject company’s financial results to estimate the enterprise value of our company. The enterprise value was then adjusted to equity value based on cash and debt balances.

The resulting equity value was then allocated to the common stock using a probability weighted expected return method, or PWERM. The PWERM approach involves the estimation of multiple future potential outcomes for us, and estimates of the probability and expected timing of each respective potential outcome. The common stock per share value determined using this approach is ultimately based upon probability-weighted per share values resulting from the various future scenarios, which include an initial public offering, merger, or sale, or continued operation as a private company. Additionally, the Option Pricing Method, using the preferred stockholders’ liquidation preferences, participation rights, dividend rights, and conversion rights to determine the value of each share class in specific potential future outcomes, was considered in the PWERM approach.

After the equity value is determined and allocated to the various classes of shares, a discount for lack of marketability, or DLOM, is applied to arrive at the fair value of the common stock. A DLOM is applied based on the theory that as a private company, an owner of the stock has limited opportunities to sell this stock and any such sale would involve significant transaction costs, thereby reducing overall fair market value. Our assessments of the fair value of the common stock for grant dates between the dates of the valuations were based in part on the current available financial and operational information and the common stock value provided in the most recent valuation as compared to the timing of each grant.

 

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Application of these approaches involves the use of estimates, judgment, and assumptions that are highly complex and subjective, such as those regarding our expected future revenue, expenses and future cash flows, discount rates, market multiples, the selection of comparable companies, and the probability of possible future events. Changes in any or all of these estimates and assumptions or the relationships between those assumptions impact our valuations as of each valuation date and may have a material impact on the valuation of our common stock.

Following this offering, we will rely on the closing price of our Class A common stock as reported on the date of grant to determine the fair value of our Class A common stock, as shares of our Class A common stock will be traded in the public market.

Based on the assumed initial public offering price per share of $        , which is the midpoint of the offering price range set forth on the cover page of this prospectus, the aggregate intrinsic value of our outstanding stock options as of January 31, 2017 was $                million, with $                million related to vested stock options.

Recent Accounting Pronouncements

See “Summary of Business and Significant Accounting Policies” in note 1 of the notes to our consolidated financial statements for more information.

 

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BUSINESS

Zuora’s Vision and Mission

We provide cloud-based software on a subscription basis that enables any company in any industry to successfully launch, manage, and transform into a subscription business.

Our vision is simple. We call it “The World Subscribed,” and it’s the idea that one day every company will be a part of the Subscription Economy.

Our mission is to enable all companies to be successful in the Subscription Economy.

Overview

For at least the last hundred years, companies have operated primarily under a product-centric business model, where the goal was to make, ship, and sell more units—more cars, more clothes, more computers.

Today, consumers and businesses are realizing that they no longer have to always buy products. Why buy a DVD, CD, movie, or song when you can subscribe to streaming video and music services? Why buy software or hardware when you can subscribe to software-as-a-service or cloud computing services? Why buy a car when you can subscribe to ride-sharing services?

Ten years ago, we coined the term the “Subscription Economy” to describe this new world. We foresaw a new business landscape in which traditional product or service companies shift toward subscription business models. Our vision redefines subscriptions in a broader context than a simple monthly fee. Our vision reflects the wide range of business models in the Subscription Economy, where products and services can be priced based on usage, consumption, and outcomes, and the value of a company’s relationships with its customers is critical. Forrester Research has defined this as “The Age of the Customer,” a 20-year business cycle in which the most successful enterprises will reinvent themselves to systematically understand and serve increasingly powerful customers. This shift started with software, but it is spreading to many other industries and sectors affecting our lives, including media and entertainment, transportation, publishing, industrial goods, and retail.

This shift in business models is creating a unique opportunity to disrupt the current enterprise software landscape. Today, many of the world’s largest companies use enterprise resource planning, or ERP, software for their operations. These systems were built in the 1970s for product-based businesses, and their product-centric architectures have largely remained unchanged. They were designed to automate mission-critical processes in a product-only era, such as inventory, distribution, and supply chain management, and they do not adequately support the new requirements that companies face in the Subscription Economy. This new Subscription Economy requires a different system for managing the dynamic nature of ongoing relationships with subscribers.

We believe we are well-positioned to capitalize on this shift in business models to capture an increasing portion of ERP spend. We have spent the last ten years building and selling a leading and differentiated solution, and enhancing our proprietary deployment methodology, and a business model that enables us to deliver on our mission and achieve sustainable growth.

Architected specifically for dynamic, recurring subscription business models, our solution functions as an intelligent subscription management hub that automates and orchestrates the entire subscription order-to-cash process, including billing and revenue recognition. Our cloud-based software solution is the new system of record for subscription businesses.

 

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As of October 31, 2017, we served more than 900 customers in 26 different countries across most industries, including 15 of the Fortune 100. Unsurprisingly, customers pay for our platform under a subscription-based model, and this model allows us to grow as the Subscription Economy grows. For fiscal 2016 and fiscal 2017, our total revenue was $92.2 million and $113.0 million, respectively. We have made significant investments to grow our business, including in sales and marketing, infrastructure, operations, and headcount. As a result, we incurred net losses for fiscal 2016 and fiscal 2017 of $48.2 million and $39.1 million, respectively.

Industry Background

Digital Technologies Have Changed the Consumption Preferences of Both Consumers and Businesses

Today, consumers and businesses today function in a digital world, a world of cloud and mobile technologies, internet-enabled commerce, big data, and connected devices comprising the “Internet of Things,” or IoT. This new digital world has irreversibly changed consumer expectations. They want freedom—freedom to access products and services on their own terms—where, when, and how they want. They increasingly value access over ownership and care more about outcomes and experiences as opposed to simply product specifications or features. They are becoming accustomed to “everything-as-a-service” subscriptions with the freedom to try, buy, upgrade, downgrade, pause, cancel, and rejoin at will.

While the change has largely been consumer-driven—for example, entertainment subscriptions from Apple or Amazon or Netflix—it has also expanded into the workplace through a variety of cloud-based tools such as Salesforce products, Zendesk, and Box. All of these new expectations, advancements in digital technologies, and “as-a-service” business models are converging collectively into what we call the Subscription Economy.

Businesses are Realizing the Benefits of Subscription Business Models

These expectations and the proliferation of new digital services and markets are leading to increased demand for “as-a-service,” or subscription business models. Businesses can benefit from the many strategic advantages in adopting subscription business models, including:

 

    New Revenue Streams and New Growth Opportunities.    With more opportunities to create and launch new services rather than simply selling products, companies have the opportunity to drive additional revenue streams and to expand and grow their businesses. For example, Apple offers music and entertainment services across its products; General Motors offers new vehicle security or emergency services for cars via OnStar; and Amazon offers infrastructure-as-a-service to business subscribers via AWS.

 

    Better Data-driven Decisions.    Businesses that embrace subscription models have the opportunity to gather more data and garner insights from customer usage patterns to make more informed decisions. For example, real customer usage data can significantly impact product design and go-to-market decisions. We believe that the Subscription Economy enables a virtuous cycle—the more effectively businesses serve their customers, the more feedback they can gather. This will allow them to innovate and make decisions around improving the customer experience, providing the opportunity for increased revenue, greater customer retention, increased lifetime customer value, and, potentially, a sustainable competitive advantage.

 

    Improved Revenue Predictability.    The recurring nature of subscription models helps businesses gain revenue predictability, and helps them plan for growth and scale. In addition, investors often value recurring revenue greater than one-time revenue, because of the predictability and continuing engagement with customers.

 

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    Increased Customer Lifetime Value.    In the Subscription Economy, it can be more efficient and profitable over the long-term to retain and grow relationships with existing customers than it is to continually acquire and re-acquire customers. For example, Amazon Prime offers a premium delivery service, special discounts, and entertainment services that makes the subscription valuable to Amazon customers, providing the opportunity for increased customer lifetime value.

This New Subscription Economy is Transforming Major Industries

In industry after industry, new disruptors are using subscription business models to upend traditional industry dynamics. Established businesses are realizing that they need to innovate not just what, but also how they sell or risk being disrupted. As incumbents discover new ways of generating revenue from their existing assets and customers, it is becoming increasingly clear that much of their future growth can come from subscriptions.

For example:

 

    In technology, on-premises infrastructure revenue has declined, with server revenue down 13% and storage revenue down 32%, respectively, between 2007 and 2015.1 Infrastructure-as-a-service, or IaaS, is expected to grow revenues at a 30.2% CAGR between 2016 and 2021.2 According to Gartner, SaaS is the growth engine for enterprise application software. SaaS revenue grew 28% to $44.3 billion in 2016, while new software license sales declined 5%.3 SaaS subscription revenues are expected to grow to $159 billion by 20214, up 25-27% annually over the past four years.1

 

    In media, global revenue from the rental and sales of physical home video will decline at an 8.8% CAGR through 2021.5 For the first time in 2017, the global streaming internet video market was projected to overtake the physical home video market, growing at an 11.6% CAGR by 20215. According to PwC, digital music streaming was up 99.1% in 2016 and is expected to become the dominant revenue source for recorded music in 2017.5

 

    In telecommunications, new growth is being driven by over-the-top, or OTT, services with growth in messaging, fixed voice, and mobile voice projected to be as high as 60%, 50%, and 25%, respectively, by 2018 in an all-IP environment.6

 

    In transportation, automotive sales annual growth rates are expected to decline from 3.6% over the five years ended December 2015 to approximately 2% annually by 2030. However, driven by shared mobility, connectivity services, and feature upgrades, new business models could expand automotive revenue pools by about 30%, adding up to $1.5 trillion by 2030.7

 

    In manufacturing, the global demand for manufactured products is experiencing only single digit growth at roughly 3.4% in 2017.8 However, in factory settings, IoT applications could add up to $3.7 trillion in new revenue growth by 2025.9

 

1  Forrester; see note (1) in the section titled “Industry and Market Data.”
2  Gartner; see note (2) in the section titled “Industry and Market Data.”
3  Gartner; see note (3) in the section titled “Industry and Market Data.”
4  IDC; see note (4) in the section titled “Industry and Market Data.”
5  PwC; see note (5) in the section titled “Industry and Market Data.”
6  McKinsey; see note (6) in the section titled “Industry and Market Data.”
7  McKinsey; see note (7) in the section titled “Industry and Market Data.”
8  PwC; see note (8) in the section titled “Industry and Market Data.”
9  McKinsey; see note (9) in the section titled “Industry and Market Data.”

 

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The Subscription Economy Index, or SEI, our study of long-term Zuora customers, indicates that over the last five years, subscription businesses that were a part of our SEI grew revenues eight to nine times faster than S&P 500 companies grew revenues. See the section titled “Industry and Market Data.”

The Subscription Economy Represents a Once-in-a-Century Shift in How Businesses Operate

We believe we are in the early stages of the Subscription Economy, with an inevitable multi-industry and multi-decade global shift toward subscription business models.

This large-scale systemic shift to subscription business models is significantly changing the way companies operate. Companies with product-centric business models were once driven by the objective of shipping more units—more laptops, more cars, more clothes, more pens, more CDs, more phones, more computers. Products were largely standardized on an assembly line to be virtually identical.

Adopting subscription business models requires companies to reorient their operations around their subscribers, not only their products, thus shifting the focus of their business model. To be successful in the Subscription Economy, businesses need to change their mindsets from one-time sales to earning and maintaining long-term customer relationships. Everything changes, including how businesses build products, go to market, price and package, measure their health, and invest in research and development. To deliver on the promise of the Subscription Economy, businesses need freedom from the old technologies and business models of the product-centric era. They need the freedom to easily change products, services, and pricing; the freedom to grow and scale; and the freedom to build meaningful relationships with their subscribers.

New Requirements and the Limitations of Traditional Approaches

Requirements for Success in the Subscription Economy

Orienting businesses around the subscriber and maintaining an ongoing relationship with subscribers are prerequisites for success with subscription business models. Subscription business models are inherently dynamic, with multiple interactions and constantly changing relationships and events.

 

LOGO

To succeed in this new environment, businesses must:

 

    Offer Recurring or Consumption-Based Pricing Models.    Pricing for subscription businesses is different because businesses must be able to price a service in various ways, such as usage-based, time-based, or outcome-based.

 

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    Offer Seamless Customer Experiences.    The dynamic nature of subscriptions requires real-time and automated management of subscriber events such as plan upgrades, product usage, overage limits, payment changes, pauses, and cancellations to ensure a seamless customer experience without delays and errors.

 

    Quickly Adapt Operations.    To capitalize on opportunities, subscription businesses must be able to quickly create new offerings, scale their operations, enter new markets, and quickly offer product or service enhancements. They must also be able to react to changing customer needs by iterating and experimenting with a variety of pricing and packaging options in real-time.

 

    Track Subscriber Lifecycles.    Subscription businesses must be able to access and track the entire subscriber lifecycle in a single place as it changes over time in order to improve customer relationships, predict upsell opportunities, and guard against churn.

 

    Access Subscription Metrics.    Subscription businesses must be able to access and analyze up-to-date financial and operational metrics to report accurately, comply with regulations, and make important data-driven business decisions to understand the health of their business and plan for future growth.

Limitations of Traditional Order-to-Cash Systems

In traditional business models, order-to-cash was a linear process—a customer orders a product, is billed for that product, payment is collected, and the revenue recognized. ERP systems were not specifically designed to handle the complexities and ongoing customer events of recurring relationships and their impact on areas such as billing proration, revenue recognition, and reporting in real-time. Trying to use this legacy software to build a subscription business frequently results in prolonged and complex manual downstream work, hard-coded customizations, a proliferation of stock-keeping units, or SKUs, and inefficiency.

 

LOGO

In the Subscription Economy, order-to-cash processes are typically non-linear and managed dynamically in the context of an ongoing subscription or with a consumption- or outcome-based recurring business model. For example, a single customer event such as a subscription downgrade can have simultaneous impact on the quoting, order management, provisioning, invoicing, revenue recognition, and analytics systems.

ERP systems were not specifically built as systems of record for subscriptions and ongoing customer relationships—they were built as systems of record for one-time sales of products. With every new product, service, or geography a new SKU would be created to replicate this linear process leading to multiple order-to-cash systems and processes. This means subscriber data is often housed in these multiple disparate systems across different teams or business lines, and companies are

 

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unable to track or have visibility into the entire subscriber lifecycle in one place. To meet the needs of subscription businesses, ERP systems would need to be completely re-architected. Simply adding customizations to ERP systems does not adequately address the growing complexities and the recurring nature of the Subscription Economy. As a result, these limitations may impede businesses’ ability to grow in the Subscription Economy.

Challenges of In-House Custom Built Systems

We believe the evolving nature of the Subscription Economy makes it extremely challenging to build and maintain an in-house custom subscription management system. To do this, a significant amount of engineering and IT resources are required to build and maintain them. These systems frequently prove to be inadequate as companies seek to expand their offerings and operations.

Companies are often challenged in their growth and expansion opportunities as a result of IT and engineering resource limitations. Evolving these systems as new customer needs emerge can require substantial additional resources and customizations, which may not be successful or prove to be insufficient and time-consuming. For example, the ability to support new payment gateways or new currencies for international expansion usually requires significant engineering effort and can divert valuable resources away from innovating in their own products and services.

To be successful in the Subscription Economy, companies need a subscription management hub that serves as the system of record for this new business model.

This system needs to enable a wide range of pricing models, respond to critical customer events, enable quick experimentation and iteration, track the entire subscriber lifecycle, and produce critical business metrics. Businesses also need to orient their order-to-cash processes around this hub and connect it to their CRM and financial systems.

Market Opportunity

We believe the global, multi-decade shift toward the Subscription Economy that is happening across industries is creating a significant opportunity for subscription management systems.

The market size for our current core billing and revenue recognition products was nearly $2.0 billion in 2017 and is expected to be $9.1 billion by 2022, growing at a 38% CAGR, according to MGI Research. Additionally, Gartner estimates that spending on ERP software is expected to reach $40.6 billion by 2021. As ERP systems cannot fully address the needs of companies in the Subscription Economy, we believe we are well-positioned to take a share of this spend as the Subscription Economy continues to grow.

 

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Solution

Our solution functions as an intelligent subscription management hub that automates and orchestrates the entire subscription order-to-cash process and is architected specifically for dynamic subscription business models.

 

LOGO

Our cloud-based software solution is the new system of record for subscription businesses. Zuora offers businesses the ability to meet the constantly-evolving needs of their subscribers, capitalize on new revenue opportunities, and accelerate business growth.

Our solution has been designed to handle a wide range of use cases for any business in any industry in the Subscription Economy. Our solution enables customers to successfully:

 

    Price to meet diverse customer needs in the Subscription Economy, such as different consumption models, custom product or service bundles, and outcome-based or tiered pricing options.

 

    Acquire subscribers across multiple channels with flexible promotions, integrated quoting, multi-channel commerce, and automated customer acquisition workflows.

 

    Bill accurately with automated invoices that reflect everything from up-to-date proration and plan changes to usage-based billing.

 

    Collect payments globally and instantly through automated channels, while maximizing completed transactions and minimizing write-offs.

 

    Nurture customers through seamless customer experiences by automating and orchestrating rapid changes such as upgrades, conversions, renewals, and other orders across the subscriber lifecycle.

 

    Account for revenue, comply with the latest revenue recognition rules, close books faster, orchestrate subscription transactions, and process revenue in real-time.

 

    Measure and integrate subscriber and financial data, including data from third-party sources such as CRM and financial systems, so businesses can track the entire subscriber lifecycle and access subscription metrics in a single place.

 

    Iterate quickly on numerous pricing options to meet unique customer needs and dynamic market situations.

 

    Scale easily and capitalize on new growth opportunities such as global expansion, sudden growth in customers, and acquisitions of new businesses.

 

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Benefits

Key benefits of the Zuora solution include the following:

 

    Reduce Time to Market.    Zuora significantly reduces the time required to go-to-market with new subscription offerings and to iterate on the pricing and packaging of existing offerings, enabling businesses to quickly react to changing market and customer needs, launch new services, and enter new markets. Changes can be made in minutes without having to re-code or re-engineer back office systems.

 

    Increase Operational Efficiencies.    In the Subscription Economy, customers regularly make changes to their subscriptions. Zuora automates these processes and reduces the impact of changes, including proration for invoices, changes to revenue recognition, taxation, provisioning, and reporting. Automating these functions saves businesses valuable time and resources by eliminating manual processes and customizations, increasing operational efficiencies.

 

    Free Up IT and Engineering Resources.     Our cloud-based solution reduces both system complexity and costs. With Zuora, engineering and IT departments no longer need to build in-house custom systems or customizations for their ERP systems to keep up with market changes, ongoing customer demands, and new order-to-cash processes.

 

    Establish a Single System of Record.    Our solution captures financial and operational data and enables subscription businesses to have a single system of record rather than having to reconcile data from multiple systems. Key business metrics can be accessed at any point in time to make critical business decisions.

 

    Make Customer Data-Driven Decisions.    Because our solution serves as a single source of data and information for subscribers, companies can use Zuora to gain insights into customer behavior. This helps them understand their subscribers better, predict upsell opportunities, and increase customer retention.

 

    Access Growing Ecosystem of Order-to-Cash Partners.    Our solution has over 50 pre-built connectors to various order-to-cash partners, including payment gateways, tax vendors, general ledgers, and CRM systems. Rather than building integrations for each of these, our customers can take advantage of pre-built connectors to extend the capabilities of Zuora for specific industries.

 

    Support Rapid International Expansion.    With over 26 pre-built payment gateways, over 150 supported currencies, and over 20 supported payment methods, our solution enables companies to quickly expand internationally and acquire and support customers in new geographical regions.

Competitive Strengths

 

    Proven Track Record.    Our proven track record with over 900 customers around the world, including 15 of the Fortune 100 companies as of October 31, 2017, demonstrates the strength of our solution. Over the last several years, we have managed our systems successfully to 99.95% average annual uptime, which includes scheduled downtime. We have 75 million accounts in our system. In the 12 months ended December 15, 2017, we managed 89 million subscriptions on behalf of those customer accounts, sent out 165 million invoices on behalf of our customers, and processed 136 million payment transactions across more than 26 different payment gateways.

 

   

Comprehensive Solution.    Unlike many legacy ERP systems, Zuora was built specifically to handle the complexities of subscription business models from customer acquisition to financial records close, and it has become the system of record for managing subscriptions for our

 

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customers. Zuora was named a leader in The Forrester Wave™: Recurring Customer and Billing Management, Q3 2017, where it achieved the highest overall scores in the category of strategy and current offering.

Since inception, we have invested significantly in research and development. We believe that this investment, combined with our ten years of experience across a broad range of use cases and the comprehensiveness of our solution, provides us with a competitive advantage.

 

    Flexible Technology with a Broad Range of Customers.    Zuora was purpose-built to broadly address all industries in the evolving Subscription Economy. Unlike software designed for limited vertical markets, our solutions are designed to handle the widest possible range of use cases for businesses of all sizes in any industry in the Subscription Economy. We believe the breadth and adaptability of our solution uniquely positions us to capture the opportunity presented by the continued shift to the Subscription Economy.

 

    Mission-Critical System that is Difficult to Replace.    The ability to process orders, send invoices, collect, and book revenue is mission-critical to any business and requires secure and trusted solutions. Because our solution addresses all of these mission-critical needs, our customers depend on our solutions for managing their subscription business models. Once deployed, our solution becomes a mission critical system of record for our customers, often deeply entrenched into their core IT and operational infrastructure.

 

    Accelerated Pace of Innovation.    Our differentiated microservices architecture helps us achieve scale and enables us to accelerate our pace of innovation. Geographically-distributed teams working on independent components of our solution allows for rapid iterations with extremely complex, large-scale systems resulting in a continuous enhancement cycle and increased velocity of innovation. The combination of ten years of development and deployment experience with a broad array of use cases and rapid innovation cycles has resulted in a highly-capable platform and a rich portfolio of products, providing us a competitive advantage.

 

    Deep Domain Expertise.    We serve a broad range of subscription business models across industries. This has allowed us to develop deep institutional knowledge and expertise in subscription management, the financial complexities of subscription businesses, and what is necessary to achieve a successful customer deployment. This enables us to innovate and anticipate and address emerging customer needs as the Subscription Economy evolves. Our technology, knowledge of financial complexities, and deep understanding of the evolution of subscription business models across a wide variety of industries give us a distinct competitive advantage.

 

    Proprietary Deployment Methodology.    Based on our learnings over the years from hundreds of deployments across industries, we have developed a comprehensive deployment process, which we refer to as our “9 Keys” methodology, and series of workshops to help our customers and ensure a successful deployment with Zuora.

 

    Growing Subscription Economy Ecosystem.    We believe our ecosystem of GSI partners and more than 80 applications that connect with our solution enables us to scale and enter new vertical markets and geographies. This ecosystem facilitates our ability to cater to customer-specific requirements and also helps to reduce our costs and to scale sustainably.

 

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Growth Strategies

Key elements of our growth strategies include:

 

    New Customer Acquisition.    Our two leading products, Zuora Billing and Zuora RevPro, attract new customers for two very distinct needs in the Subscription Economy—flexible subscription billing and revenue recognition automation. Moreover, with many industries transitioning to subscription business models, we believe we are well-positioned to acquire customers, as businesses increasingly realize that their existing systems are insufficient. As the Subscription Economy evolves, we intend to continue to capitalize on our leadership and acquire new customers in our current and future markets.

 

    Expand Relationships with Existing Customers.    Once we acquire customers, we have multiple ways to expand our footprint and drive sustainable growth with them. These include increasing transaction volume and upsells and cross-sells with additional products and services. We intend to continue investing in expanding our relationships with existing customers in order to capitalize on opportunities within our installed base.

 

    Enter New Vertical Markets.    We currently have a strong position in the technology, media and telecommunications, manufacturing, and IoT markets. While we have placed a strategic focus on the markets that we believe are most quickly transitioning to the Subscription Economy, we believe there are a wide range of vertical markets to pursue, and we intend to invest in targeting vertical markets as they shift to the Subscription Economy.

 

    Expand our Global Footprint.    We began expanding internationally in fiscal 2011 in Europe. In fiscal 2013, we expanded to Australia, and in fiscal 2016, we commenced operations in Japan. We continue to grow in these regions with both existing and new customers. As adoption of the Subscription Economy evolves throughout the world, we intend to invest in new geographies where we see future global expansion opportunities.

 

    Leverage Global Systems Integrators to Accelerate our Growth.    We believe there is a significant opportunity to work with large GSIs and leverage their role in advocating for business model transformation to subscription business models. GSIs can benefit from working with us as they can sell their portfolio of services from consulting to deployment, application support, and integration to our common prospects and customers. We intend to pursue additional GSI partners and strengthen our relationships with our existing GSI partners to drive engagement with large enterprises.

 

    Launch New Products and Extend our Technology Lead.    As we grow and evolve with our customers, we intend to continue to develop additional technologies and products and to enhance our current offerings, allowing us to unlock additional revenue streams. We intend to continue to invest in our solutions and monitor changing customer needs and requirements across emerging industries where we see the greatest opportunity for growth.

 

    Optimize Pricing and Packaging.    We intend to optimize and enhance pricing and packaging to align the value customers realize from the usage of our products with the revenue we receive from our customers.

 

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Products

Our solution is the system of record for our customers’ subscription business models and consists of three components: our Zuora Central Platform, order-to-cash products, and an application marketplace.

 

LOGO

Zuora Central Platform

Our Zuora Central Platform acts as an intelligent subscription management hub, allowing customers to orient order-to-cash products around it to create a dynamic order-to-cash process designed specifically for subscription business models. Our Zuora Central Platform is composed of six core engines.

 

    Pricing Engine allows customers to price and package in minutes without having to recode or re-engineer back-office systems. This includes mixing and matching one-time, recurring, or usage pricing models in order to design strategic and tailored pricing plans.

 

    Subscription Orders Engine automates the subscription management lifecycle and recalculates billing, payments, and revenue for events during the subscriber lifecycle.

 

    Rating Engine enables our customers to meter and rate any monetization or account model so their customers are charged accurately.

 

    Global Payments Engine simplifies worldwide payment operations by enabling our customers to charge using over 26 pre-built payment gateways, over 150 supported currencies, and over 20 supported payment methods.

 

    Subscription Metrics Engine provides insight into metrics required to run a subscription business.

 

    Subscription Accounting Engine increases business agility by helping our customers close their books with audit-ready, automated financial operations.

Products

We can deploy and configure our portfolio of order-to-cash products to meet a wide variety of use cases for subscription business models.

 

    Zuora Billing.    Designed specifically for subscription billing, Zuora Billing allows our customers to bill in multiple ways, calculate prorations when subscriptions change, and to group customers into batches for different billing and payment operations. The product also helps our customers set payment terms, manage hierarchical billing relationships, consolidate invoicing across multiple subscriptions, and collect revenue using a global network of payment gateways.

 

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    Zuora RevPro.    Zuora RevPro is a revenue recognition automation solution that enables our customers to group transactions of goods and services into revenue contracts and performance obligations in accordance with the new ASC 606 / IFRS 15 revenue standards. Zuora RevPro helps our customers automate revenue and deferred revenue management in accordance with their accounting policies, business rules, and pricing models.

 

    Zuora CPQ.    Designed specifically for configuring deals, pricing, and quoting in a subscription business, Zuora CPQ allows our customers to configure any type of deal, such as multi-year subscriptions, and price ramp deals and use the rules engine and guided selling workflows to scale their sales team.

 

    Zuora Insights.    Presented as an interactive dashboard, Zuora Insights integrates subscription data and metrics to give a single source of truth for subscription analytics. Zuora Insights helps our customers visualize trends of important subscription metrics. It allows them to monitor cohorts of subscribers, automate alerts, and take proactive action to increase customer retention.

 

    Zuora Collect.    Specifically designed to handle the complicated function of collections associated with dynamic subscription-based businesses, Zuora Collect helps our customers streamline their collections processes by configuring their own automated dunning workflow, orchestrating various retry rules for electronic payments, and targeting the root cause of a payment decline.

Zuora Connect Marketplace

The Zuora Connect Marketplace offers industry-specific tools and third-party applications that extend Zuora’s capabilities for our customers. The Zuora Connect Marketplace has over 80 applications and features from over 50 partners. Applications include a broad range of applications needed by subscription businesses, such as pre-built general ledger connectors, pre-built tax connectors, pre-built payment gateways connectors, pre-built lockbox connectors, developer applications, and collections applications.

Technology

We have a globally distributed technology organization comprised of engineering, technical operations, and security teams. Key features of our technology include:

 

    Enterprise-grade Product Operating at Web-scale.    Our solutions are designed to meet the requirements of the world’s largest enterprises in critical areas such as security, reliability, availability, ease of use, and scalability.

 

    Microservices Architecture.    Our microservices architecture helps us offer web-scale solutions. By deconstructing our applications into smaller microservices components, we create more flexible and scalable software capabilities that can support billions of transactions in real time. Our microservices architecture also allows our geographically-distributed teams to work on different parts of the same product.

 

    Reliability and Availability.    Over the last several years, we have managed our systems successfully to 99.95% average annual uptime, which includes scheduled downtime. We publish our uptime and latency metrics on our public trust website so our customers know how our systems are performing at any point in time.

 

   

Data Security.    Data security is a key area of focus for us because we store our customer’s most valuable assets—we are their system of record for customer payment, billing, and financial information. Our solution is designed to meet the rigorous privacy and security requirements of customers, including the world’s largest enterprises. To protect customer data,

 

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we have built a mature and world-class security program. We have data centers with data redundancy in third-party data centers located in the United States and Europe to protect our customers in the event of a natural disaster and allow us to provide low latency to our customers.

Important security and privacy certifications include:

 

    ISO 27001 certified;

 

    ISO 27018 certified;

 

    SSAE18 SOC 1 Type II and SOC 2 Type II;

 

    PCI DSS Level 1 certified;

 

    TrustArc certified;

 

    HIPAA compliant (Business Associate); and

 

    US-EU Privacy Shield and US-Swiss Privacy Shield certified.

We have also built a replicable data center model designed to meet privacy and compliance requirements in the countries in which we operate. We will continue to invest significantly in our security program to ensure we are advancing and staying current on emerging security and compliance requirements.

Customers

Organizations of all sizes and across a wide variety of industries have adopted our platform. We had more than 900 customers as of October 31, 2017, including 15 of the Fortune 100 companies.

No customer represented more than 10% of our total revenue for the fiscal 2016 and fiscal 2017.

Research and Development

We believe that our differentiated intellectual property and technical deployments will help us maintain a leading position in the market for subscription management solutions. Our ten-year head start and cumulative learning further strengthen our ability to grow our intellectual property and foster innovation.

Our research and development expense was $20.5 million and $26.4 million for fiscal 2016 and fiscal 2017, respectively.

Sales and Marketing

We market and sell to organizations of all sizes across a broad range of industries. Our key focus areas are companies that are adopting, transforming, and expanding their subscription businesses.

We have a mature enterprise sales model and have built and trained a nimble, enterprise-scale sales and field organization. Because of the transformative nature of our solution, especially in larger organizations, the selling process is often complex and can involve agreement across multiple departments inside an organization, including the chief executive officer. Over the years, we have developed methodologies and best practices to enable our sales teams to be successful at navigating these challenges and have built these learnings into our sales enablement and training to ensure successful

 

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onboarding and productivity of new sales account executives. We believe our mature sales methodologies and processes offer us significant advantages, particularly in long enterprise sales-cycles. Our sales teams are organized by geographic territories, customer size, and customer verticals. We plan to continue to invest in our direct sales force to grow our enterprise customer base, both domestically and internationally.

We conduct a wide range of marketing activities such as our annual Subscribed events around the world; partner marketing events with our GSIs, consultants, technology, and ecosystem partners; the Subscription Economy Index, our study of the collective health of subscription businesses and their impact on the overall economy; and educational content and best practices sharing for the Subscription Economy in a variety of formats such as digital, print, and video.

As newer markets emerge domestically and internationally, we plan to continue investing in our sales and marketing to grow our customer base.

Professional Services

We have a leading global services team that is responsible for scoping, integration, and successful deployment of Zuora for our customers. Deployment is often a complex process involving secure data migration and the establishment of new processes, requiring a dedicated team during deployment. Deployment times vary depending on the scale, complexity, and number of consolidated systems associated with the customer moving to our subscription management solutions.

Based on our learnings over the years from hundreds of deployments across industries, we have developed our “9 Keys” methodology and series of workshops to help our customers ensure successful deployment and utilization of our solution. We believe this differentiates us and provides us with a significant competitive advantage.

We also work closely with GSIs as well as regional partners on deployment. By working with these partners, we both augment our pipeline and our ability to scale globally by franchise, size, and complexity of deployment.

Customer Success and Support

Our Customer Success team is committed to delivering great customer experiences to drive high customer retention, growth, and strong customer advocacy.

 

    Customer Success.    Our Customer Success Managers help our customers benefit from their investment in Zuora. The team shares best practices, and work with customers to identify success metrics, conduct business and process optimization workshops, and provide recommendations for increasing the usage and adoption of Zuora.

 

    Zuora University.    We have a library of training courses where users can learn about the features and functions of our solution and how to apply them. We also offer a catalog of self-paced courses, weekly virtual instructor-led training, and certification tests.

 

    Zuora Community.    We created this moderated, online forum to foster global collaboration among our customers and Zuora experts. They can engage with each other in this community to find answers, share expertise, submit product feedback, and subscribe to product notifications and announcements.

 

    Customer Support.    We have six support centers located around the world—San Mateo and San Jose in the United States, London and Paris in Europe, and Chennai and Beijing in Asia. Our customer support team operates 24x7, 365 days a year ensuring our customers always have the help they need.

 

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Competition

The market for subscription management products and services is highly competitive, rapidly evolving, fragmented, and subject to changing technology, shifting customer needs, and frequent introductions of new products and services. Our main competitors fall into the following categories:

 

    providers of traditional ERP software, such as Oracle Corporation and SAP AG;

 

    traditional order-to-cash solutions that address individual elements of the subscription order-to-cash process, such as traditional CPQ management, billing, collections, revenue recognition, or e-commerce software;

 

    telecommunications billing systems and other niche systems, such as Amdocs Limited; and

 

    in-house custom built systems.

The competitive factors that companies in our industry need to have are:

 

    subscription-based product features and functionality;

 

    ability to support the specific needs of companies with subscription business models;

 

    ease of use;

 

    vision for the market and product innovation;

 

    enterprise-grade performance and features such as system scalability, security, performance, and resiliency;

 

    customer experience, including support and professional services;

 

    strength of sales and marketing efforts;

 

    relationships with GSIs, management consulting firms, and resellers;

 

    ability to integrate with legacy and other enterprise infrastructures and third-party applications;

 

    brand awareness and reputation; and

 

    total cost of ownership.

We believe we compete favorably with respect to these factors.

Intellectual Property

Intellectual property is an important aspect of our business, and we seek protection for our intellectual property as appropriate. We currently rely on a combination of patents, copyrights, trademarks, trade secrets, confidentiality procedures, contractual commitments, and other legal rights to protect our intellectual property. As of October 31, 2017, in the United States, we had eight patent applications pending. We also had one issued patent and six patent applications pending in foreign jurisdictions. We continually review our development efforts to assess the existence and patentability of new intellectual property. We also pursue the registration of our domain names, trademarks, and service marks in the United States and in certain foreign jurisdictions. As of October 31, 2017, we had 11 registered trademarks in the United States, including Zuora and Subscription Economy. We also had eight registered trademarks in foreign jurisdictions.

Intellectual property laws, procedures, and restrictions provide only limited protection and any of our intellectual property rights may be challenged, invalidated, circumvented, infringed, or misappropriated. Further, the laws of certain countries do not protect proprietary rights to the same extent as the laws of the United States and, therefore, in certain jurisdictions, we may be unable to protect our proprietary technology.

 

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Employees

As of October 31, 2017, we had a total of 866 employees, including 326 outside of the United States. None of our employees is represented by a labor union or covered by a collective bargaining agreement. We believe we have a good relationship with our employees and our unique, strong culture differentiates us and is a key driver of business success.

Facilities

Our corporate headquarters are located in San Mateo, California where we currently lease approximately 29,000 square feet under a lease agreement that expires in December 2019.

We also lease facilities in other areas of California, Colorado, Georgia, Massachusetts, New York, and Texas in the United States and Australia, China, France, Germany, India, Japan, and the United Kingdom.

We intend to procure additional space as we add employees and expand geographically. We believe that our facilities are adequate to meet our needs for the immediate future, and that, should it be needed, suitable additional or substitute space will be available as needed to accommodate any such expansion.

Legal Proceedings

We are not a party to any material pending legal proceedings. From time to time, we may be subject to legal proceedings and claims arising in the ordinary course of business.

 

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MANAGEMENT

Executive Officers and Non-Employee Directors

The following table provides information regarding our executive officers and directors as of October 31, 2017.

 

Name

 

Age

 

Position(s)

Executive Officers:

Tien Tzuo

  49   Chairman of the Board of Directors and Chief Executive Officer

Tyler Sloat

  44   Chief Financial Officer

Marc Diouane

  49   President

Brent R. Cromley, Jr.

  48   Senior Vice President, Technology

Jennifer W. Pileggi

  53   Senior Vice President, General Counsel, and Corporate Secretary
Non-Employee Directors:

Peter Fenton(1)

  45   Director

Kenneth A. Goldman(1)

  68   Director

Timothy Haley(2)

  63   Director

Jason Pressman(2)

  43   Director

Michelangelo Volpi(1)

  50   Director

Magdalena Yesil(3)

  59   Director

 

* Lead independent director.
(1) Member of the audit committee.
(2) Member of the compensation committee.
(3) Member of the nominating and corporate governance committee.

Executive Officers

Tien Tzuo has served on our board of directors and as our Chief Executive Officer since November 2007 and as the Chairman of our board of directors since December 2017. Prior to joining us, Mr. Tzuo served as Chief Strategy Officer at salesforce.com, inc., a provider of customer relationship management software, from 2005 to 2008, and as Chief Marketing Officer from 2003 to 2005. Mr. Tzuo holds a B.S. in electrical engineering from Cornell University and an M.B.A. from Stanford University. We believe that Mr. Tzuo is qualified to serve on our board of directors because of the industry perspective and experience that he brings as our founder, Chairman of our board of directors, and Chief Executive Officer.

Tyler Sloat has served as our Chief Financial Officer since September 2010. Prior to joining us, Mr. Sloat served as Vice President of Finance and Chief Financial Officer of Obopay, Inc., a mobile payments technology company, from 2007 to 2010. From 2005 to 2007, Mr. Sloat served as the Controller of the Emerging Products Group at Network Appliance, Inc., a provider of networked storage solutions. Mr. Sloat is a Certified Public Accountant (inactive) and holds a B.A. in economics from Boston College and an M.B.A. from Stanford University.

Marc Diouane has served as our President since February 2015. Prior to this, Mr. Diouane served as our Executive Vice President, Field Operations from March 2014 to February 2015. Prior to joining us, Mr. Diouane served as Executive Vice President, Global Services & Partners at PTC Inc., a product development software company, from October 2010 to March 2014, and as Senior Divisional Vice President—Europe, Middle East, Africa and Asia, from 2005 to 2010. Mr. Diouane holds a Masters from Bordeaux Business School, or ESICI, with specializations in computer science and business management.

 

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Brent R. Cromley, Jr. has served as our Senior Vice President of Engineering since September 2015. Prior to joining us, Mr. Cromley served as Chief Technology Officer at Zappos.com, Inc., an online retailer that was acquired by Amazon.com, Inc., from November 2013 to June 2015, as Vice President of Technology from October 2011 to November 2013, and as Senior Director of Engineering from January 2007 to October 2011. Mr. Cromley holds a B.A. in computer science from Dartmouth College.

Jennifer W. Pileggi has served as our Senior Vice President, General Counsel, and Corporate Secretary since June 2015. Prior to joining us, Ms. Pileggi served as Senior Vice President, General Counsel, Chief Compliance Officer, and Corporate Secretary at Silicon Graphics International Corp., a high performance computing server manufacturer, from September 2011 to May 2015. From 2004 to 2011, Ms. Pileggi served as Executive Vice President, General Counsel, Chief Privacy Officer, and Corporate Secretary at Con-way Inc., a transportation and supply chain solutions company, and from 1996 to 2004, as Vice President and Corporate Counsel for Menlo Worldwide, Con-way’s logistics division. Ms. Pileggi was previously a corporate associate at the law firms of Marron, Reid & Sheehy and Heller Ehrman LLP. Ms. Pileggi holds a B.A. in art history from Yale University and a J.D. from New York University.

Non-Employee Directors

Peter Fenton has served as a member of our board of directors since December 2007. Since 2006, Mr. Fenton has served as a General Partner of Benchmark Capital Partners, a venture capital firm. From 1999 to 2006, Mr. Fenton served as a Managing Partner at Accel Partners, a venture capital firm. Mr. Fenton currently serves on the boards of directors of Hortonworks, Inc., New Relic, Inc., Yelp Inc., and several private companies. Mr. Fenton served on the board of directors of Twitter, Inc. from October 2013 to May 2017. Mr. Fenton holds a B.A. in philosophy and an M.B.A. from Stanford University. We believe Mr. Fenton is qualified to serve as a member of our board of directors because of his extensive experience in the venture capital industry and his knowledge of technology companies.

Kenneth A. Goldman has served as a member of our board of directors since February 2016. From October 2012 to June 2017, Mr. Goldman served as the Chief Financial Officer of Yahoo! Inc. Prior to this, Mr. Goldman was the Vice President and Chief Financial Officer of Fortinet Inc., a provider of threat management technologies, from 2007 to 2012. From 2006 to 2007, Mr. Goldman served as Executive Vice President and Chief Financial Officer of Dexterra, Inc., a mobile enterprise software company. From 2000 until 2006, Mr. Goldman served as Senior Vice President of Finance and Administration and Chief Financial Officer of Siebel Systems, Inc. Mr. Goldman was appointed in January 2015 to a three-year term to the PCAOB, Standing Advisory Group. Mr. Goldman currently serves on the board of directors of GoPro, Inc., NXP Semiconductor N.V., TriNet Group, Inc. and RingCentral, Inc. Previously, Mr. Goldman served on the board of directors of Gigamon Inc. and Infinera Corporation. Mr. Goldman is also a Trustee Emeritus on the board of trustees of Cornell University. Mr. Goldman holds a B.A. in electrical engineering from Cornell University and an M.B.A. from Harvard Business School. We believe Mr. Goldman is qualified to serve as a member of our board of directors based on his experience serving on the boards of directors of numerous companies, his extensive executive experience, and his service as a member of the Financial Accounting Standards Board Advisory Council and the PCAOB’s Standing Advisory Group.

Timothy Haley has served as a member of our board of directors since October 2010. Mr. Haley is a Managing Director at Redpoint Ventures, a venture capital firm, which he co-founded in 1999. Prior to that time, Mr. Haley served as a Managing Director of Institutional Venture Partners, a venture capital firm. From 1986 to 1998, Mr. Haley was the President of Haley Associates, an executive recruiting firm in the high technology industry. Mr. Haley currently serves on the board of directors of

 

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Netflix, Inc., 2U, Inc., and several private companies. Mr. Haley holds a B.A. in philosophy from Santa Clara University. We believe that Mr. Haley brings strategic and financial experience to the board of directors. He has evaluated, invested in, and served as a board member on numerous companies. His executive recruiting background also provides the board of directors with insight into talent selection and management.

Jason Pressman has served as a member of our board of directors since September 2008. Mr. Pressman is a Managing Director at Shasta Ventures, a venture capital firm, where he has worked since 2005. Prior to Shasta Ventures, Mr. Pressman served as a Vice President of Strategy and Operations at Walmart.com, a subsidiary of Wal-Mart Stores, Inc., a worldwide retailer, from 2000 to 2004. Mr. Pressman is currently a member of the board of directors of several private companies. Mr. Pressman holds a B.S. in finance from the University of Maryland, College Park and an M.B.A. from Stanford University. We believe that Mr. Pressman is qualified to serve on our board of directors because of his operations and strategy experience gained from the retail industry and for his corporate finance expertise gained in the venture capital industry serving on boards of directors of various technology companies.

Michelangelo Volpi has served as a member of our board of directors since November 2011. Mr. Volpi is a General Partner at Index Ventures, a venture capital firm, where he has worked since 2009. From 2007 to 2009, Mr. Volpi served as Chief Executive Officer of Joost N.V., an internet video services company. Mr. Volpi served in various executive roles at Cisco Systems, Inc., a technology company, including Senior Vice President and General Manager, Routing and Service Provider Group from 2001 to 2007 and as Chief Strategy Officer from 1994 to 2000. Mr. Volpi currently serves on the board of directors of Pure Storage, Inc., Hortonworks, Inc., Exor N.V., and Fiat Chrysler Automobiles N.V., and several private companies. From April 2010 to April 2013, Mr. Volpi served on the board of directors of Telefonaktiebolaget L. M. Ericsson. Mr. Volpi earned a B.S. in mechanical engineering, an M.S. in manufacturing systems engineering, and an M.B.A. from Stanford University. Mr. Volpi’s qualifications for board service include his leadership experience, expertise as a venture capital investor, and knowledge regarding the enterprise technology industry.

Magdalena Yesil has served as a member of our board of directors since May 2017. Ms. Yesil is a co-founder of Broadway Angels, an angel investment group, since 2010. She is also the Executive Chair of Informed, Inc., d/b/a DriveInformed, a software company serving the auto lending industry, since 2017. Ms. Yesil was an early investor in salesforce.com, inc. and served on that company’s board of directors for more than six years. She was a General Partner at U.S. Venture Partners, a venture capital firm, from 1998 to 2006. Ms. Yesil founded MarketPay Associates, L.L.C., a software company, and served as its Chief Executive Officer and President from 1996 to 1997. Ms. Yesil co-founded and served as Vice President of Marketing and Technology of CYCH, Inc. f/k/a CyberCash, Inc., a secure electronic payment company. Ms. Yesil currently serves on the board of directors of RPX Corporation and several private companies. Ms. Yesil received a B.S. in industrial engineering and management science and an M.S. in electrical engineering from Stanford University. We believe Ms. Yesil is qualified to serve as a member on our board of directors based on her extensive experience as an investor in the technology industry, as a founder of multiple technology companies, as well as her public and private company board experience.

Election of Officers

Our executive officers are elected by, and serve at the discretion of, our board of directors. There are no family relationships among any of our directors or executive officers.

 

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Board of Directors Composition

Current Board of Directors

Our board of directors currently consists of seven members with no vacancies.

Pursuant to our amended and restated certificate of incorporation as in effect prior to the completion of this offering and, amended and restated voting agreement, Messrs. Fenton, Goldman, Haley, Pressman, Tzuo, and Volpi, and Ms. Yesil have been designated to serve as members of our board of directors. Pursuant to our amended and restated certificate of incorporation and amended and restated voting agreement, Mr. Tzuo and Ms. Yesil were elected as the designee for the holders of our common stock, Mr. Fenton was elected by the holders as the designee for our Series A convertible preferred stock, Mr. Pressman was elected as the designee for the holders of our Series B convertible preferred stock, Mr. Haley was elected as the designee for the holders of our Series C convertible preferred stock, Mr. Volpi was elected as the designee for the holders of our Series D convertible preferred stock, and Mr. Goldman was elected as the designee for holders of a majority of our capital stock, voting together. The provisions of our amended and restated certificate of incorporation and the amended and restated voting agreement by which the directors are currently elected will terminate in connection with this offering and there will be no contractual obligations regarding the election of our directors.

After this offering, the number of directors will be fixed by our board of directors, subject to the terms of our restated certificate and restated bylaws that will become effective immediately prior to the completion of this offering. Currently serving members of our board of directors will continue to serve as directors until their resignations or until their successors are duly elected by the holders of our common stock.

Classified Board of Directors

Our restated certificate of incorporation that will be in effect immediately prior to the completion of this offering provides that, immediately after the completion of this offering, our board of directors will be divided into three classes with staggered three-year terms. Upon expiration of the term of a class of directors, directors for that class will be elected for three-year terms at the annual meeting of stockholders in the year in which that term expires. As a result, only one class of directors will be elected at each annual meeting of our stockholders, with the other classes continuing for the remainder of their respective three-year terms. Each director’s term will continue until the election and qualification of his or her successor, or his or her earlier death, resignation, or removal. Our directors will be divided among the three classes as follows:

 

    Class I directors, whose initial term will expire at the annual meeting of stockholders to be held in 2019, will consist of                      and                     ;

 

    Class II directors, whose initial term will expire at the annual meeting of stockholders to be held in 2020, will consist of                     and                     ; and

 

    Class III directors, whose initial term will expire at the annual meeting of stockholders to be held in 2021, will consist of                    ,                     , and                     .

Our restated certificate of incorporation and restated bylaws that will be in effect upon the completion of this offering provide that only our board of directors may fill vacancies on our board. Any additional directorships resulting from an increase in the number of directors will be distributed among the three classes so that, as nearly as possible, each class will consist of one-third of the total number of directors.

 

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The classification of our board of directors may have the effect of delaying or preventing changes in our control or management. See the section titled “Description of Capital Stock—Anti-Takeover Provisions—Restated Certificate of Incorporation and Restated Bylaws Provisions” for additional information.

Director Independence

Our Class A common stock will be listed on the                 . Under                  rules, independent directors must comprise a majority of a listed company’s board of directors within a specified period of the completion of this offering. In addition,                  rules require that, subject to specified exceptions, each member of a listed company’s audit, compensation, and nominating and corporate governance committees be independent. Under                  rules, a director will only qualify as an “independent director” if, in the opinion of that company’s board of directors, that person does not have a relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director.

Audit committee members must also satisfy the independence criteria set forth in Rule 10A-3 under the Exchange Act. In order to be considered independent for purposes of Rule 10A-3, a member of an audit committee of a listed company may not, other than in his or her capacity as a member of the audit committee, the board of directors, or any other board committee: (i) accept, directly or indirectly, any consulting, advisory, or other compensatory fee from the listed company or any of its subsidiaries; or (ii) be an affiliated person of the listed company or any of its subsidiaries. We intend to satisfy the audit committee independence requirements of Rule 10A-3 as of the closing of this offering.

Our board of directors has undertaken a review of the independence of each director and considered whether each director has a material relationship with us that could compromise his ability to exercise independent judgment in carrying out his responsibilities. As a result of this review, our board of directors determined that Messrs. Fenton, Goldman, Haley, Pressman, and Volpi and Ms. Yesil are “independent directors” as defined under the applicable rules and regulations of the SEC and the listing requirements and rules of                 . In making these determinations, our board of directors reviewed and discussed information provided by the directors and us with regard to each director’s business and personal activities and current and prior relationships as they may relate to us and our management, including the beneficial ownership of our capital stock by each non-employee director and the transactions involving them described in “Certain Relationships and Related Party Transactions.”

Lead Independent Director

Our board of directors will adopt, effective prior to the completion of this offering, corporate governance guidelines that provide that one of our independent directors will serve as our lead independent director. Our board of directors has appointed                to serve as our lead independent director. As lead independent director,                will preside over periodic meetings of our independent directors, serve as a liaison between the Chairperson of our board of directors and the independent directors and perform such additional duties as our board of directors may otherwise determine and delegate.

Committees of Our Board of Directors

Our board of directors has established an audit committee, a compensation committee, and a nominating and corporate governance committee, each of which will have the composition and responsibilities described below as of the closing of this offering. Members serve on these committees

 

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until their resignation or until otherwise determined by our board of directors. Each committee will operate under a written charter approved by our board of directors that satisfies the applicable rules of the SEC and the listing standards of                . Following this offering, copies of each committee’s charter will be posted on the Investor Relations section of our website.

Audit Committee

Our audit committee is comprised of Messrs. Goldman, Volpi, and Fenton. Mr. Goldman is the chairperson of our audit committee. Messrs. Goldman, Volpi, and Fenton each meet the requirements for independence under the current                  listing standards and SEC rules and regulations. Each member of our audit committee is financially literate. In addition, our board of directors has determined that Mr. Goldman is an “audit committee financial expert” as defined in Item 407(d) of Regulation S-K promulgated under the Securities Act. This designation does not impose any duties, obligations, or liabilities that are greater than are generally imposed on members of our audit committee and our board of directors. Our audit committee is directly responsible for, among other things:

 

    selecting a firm to serve as the independent registered public accounting firm to audit our consolidated financial statements;

 

    ensuring the independence of the independent registered public accounting firm;

 

    discussing the scope and results of the audit with the independent registered public accounting firm and reviewing, with management and that firm, our interim and year-end operating results;

 

    establishing procedures for employees to anonymously submit concerns about questionable accounting or audit matters;

 

    considering the adequacy of our internal controls and internal audit function;

 

    reviewing material related party transactions or those that require disclosure; and

 

    approving or, as permitted, pre-approving all audit and non-audit services to be performed by the independent registered public accounting firm.

Compensation Committee

Our compensation committee is comprised of Messrs. Haley, Pressman, and                 . Mr. Haley is the chairperson of our compensation committee. The composition of our compensation committee meets the requirements for independence under the current                  listing standards and SEC rules and regulations. Each member of this committee is an outside director, as defined pursuant to Section 162(m) of the Code and a non-employee director, as defined in Rule 16b-3 promulgated under the Exchange Act. Our compensation committee is responsible for, among other things:

 

    reviewing and approving the compensation of our executive officers;

 

    reviewing and recommending to our board of directors the compensation of our directors;

 

    administering our stock and equity incentive plans;

 

    reviewing and approving, or making recommendations to our board of directors with respect to, incentive compensation and equity plans; and

 

    reviewing our overall compensation philosophy.

Nominating and Corporate Governance Committee

Our nominating and corporate governance committee is comprised of Ms. Yesil and Messrs.                  , and                 .                  is the chairperson of our nominating and corporate governance

 

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committee. The composition of our nominating and corporate governance committee meets the requirements for independence under the current                  listing standards and SEC rules and regulations. Our nominating and corporate governance committee is responsible for, among other things:

 

    identifying and recommending candidates for membership on our board of directors;

 

    recommending directors to serve on board committees;

 

    reviewing and recommending our corporate governance guidelines and policies;

 

    reviewing proposed waivers of the codes of conduct for directors, executive officers, and employees (with waivers for directors or executive officers to be approved by the board of directors);

 

    reviewing succession plans for senior management positions, including the chief executive officer;

 

    evaluating, and overseeing the process of evaluating, the performance of our board of directors and individual directors; and

 

    assisting our board of directors on corporate governance matters.

Compensation Committee Interlocks and Insider Participation

None of the members of our compensation committee is or has been an officer or employee of our company. None of our executive officers has served as a member of the board of directors, or as a member of the compensation or similar committee, of any entity that has one or more executive officers who served on our board of directors or compensation committee during fiscal 2017.

In January and February 2015, we sold shares of our Series F convertible preferred stock to Redpoint Omega, L.P. and Redpoint Omega Associates, LLC (together, Redpoint Omega), and to Shasta Ventures II, L.P., or Shasta Ventures. Timothy Haley, a member of our compensation committee, is a Managing Director of Redpoint Omega, and Jason Pressman, another member of our compensation committee, is a Managing Director of Shasta Ventures. We have described the amounts of these sales and purchases in more detail under “Certain Relationships and Related Party Transactions.” In connection with the sales of our preferred stock, we entered into agreements that grant customary preferred stock rights to all of our major preferred stock investors. These rights include registration rights, rights of first refusal, co-sale rights with respect to certain stock transfers, information rights, and other similar rights. All of these rights, other than the registration rights, will terminate upon the closing of this offering. For a description of the registration rights, see the section titled “Description of Capital Stock—Registration Rights.”

Codes of Business Conduct and Ethics

Our board of directors will adopt codes of business conduct and ethics that apply to all of our employees, officers, and directors. The full text of our codes of conduct will be posted on the Investor Relations section of our website. The reference to our website address in this prospectus does not include or incorporate by reference the information on our website into this prospectus. We intend to disclose future amendments to certain provisions of our codes of conduct, or waivers of these provisions, on our website or in public filings.

Non-Employee Director Compensation

The table below provides information regarding the total compensation of the non-employee members of our board of directors who served on our board of directors during fiscal 2017. All

 

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compensation that we paid to Mr. Tzuo, our only employee director, is set forth in the table below in “Executive Compensation—Summary Compensation Table.” No compensation was paid to Mr. Tzuo in his capacity as a director during fiscal 2017. Other than as set forth in the table and described more fully below, during fiscal 2017, we did not pay any fees to, make any equity awards or non-equity awards to, or pay any other compensation to the non-employee members of our board of directors.

 

Name

   Option
Awards ($)(1)(2)
     Total ($)  

Peter Fenton

   $      $  

Kenneth A. Goldman

     350,451        350,451  

Timothy Haley

             

Jason Pressman

             

Michelangelo Volpi

             

Craig Hanson(3)

             

Abhishek Agrawal(4)

             

 

(1) The amounts reported in the Option Awards column represent the grant date fair value of the stock options granted to our non-employee directors during fiscal 2017 as computed in accordance with FASB Accounting Standards Codification Topic 718. The assumptions used in calculating the grant date fair value of the stock options reported in the Option Awards column are set forth in Note 1 of the notes to our consolidated financial statements included in this prospectus. Note that the amounts reported in this column reflect the accounting cost for these stock options, and do not correspond to the actual economic value that may be received by our non-employee directors from the stock options.
(2) The following table sets forth information on stock options granted to non-employee directors during fiscal 2017, the aggregate number of shares of our Class B common stock underlying outstanding stock options held by our non-employee directors as of January 31, 2017, and the aggregate number of unvested shares of our Class B common stock underlying outstanding stock options held by our non-employees directors as of January 31, 2017:

 

Name

   Number of Shares
Underlying Stock
Options Granted in
Fiscal 2017
     Number of Shares
Underlying Stock
Options Held at Fiscal
Year-End
     Number of Shares
Underlying Unvested
Stock Options Held at
Fiscal Year-End
 

Peter Fenton

                    

Kenneth A. Goldman(a)

     500,000        500,000        406,250  

Jason Pressman

                    

Michelangelo Volpi

                    

Craig Hanson

                    

Abhishek Agrawal

                    

 

  (a) The stock option vests over a four-year period at the rate of 1/16th of the shares of our Class B common stock underlying the stock option quarterly following the February 1, 2016 vesting commencement date and expires up to ten years after the date of grant. The stock option is early exercisable and also provides that, in the event of a change of control, all of the unvested shares subject to the stock option will become immediately vested and exercisable as of the date immediately prior to the change of control.
(3) Mr. Hanson resigned from our board of directors in May 2017.
(4) Mr. Agrawal resigned from our board of directors in May 2017.

Offer Letters

Mr. Goldman’s Offer

Mr. Goldman was appointed to our board of directors in February 2016. In connection with his appointment, we entered into an offer letter pursuant to which we granted Mr. Goldman an option to purchase 500,000 shares of our Class B common stock at an exercise price of $1.62 per share. The stock option vests over a four-year period at the rate of 1/16th of the shares of our Class B common stock underlying the stock option quarterly following the February 1, 2016 vesting commencement date and expires up to ten years after the date of grant. As of October 31, 2017, 312,500 shares of our Class B common stock subject to the stock option remain unvested. The stock option contains an early-exercise provision and is exercisable as to unvested shares, subject to our right of repurchase. The stock option provides that, in the event of a change of control, all of the unvested shares subject to

 

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the stock option will become immediately vested and exercisable as of the date immediately prior to the change of control.

Ms. Yesil’s Offer Letter

Ms. Yesil was appointed to our board of directors in May 2017. In connection with her appointment, we entered into an offer letter pursuant to which we granted Ms. Yesil an option to purchase 250,000 shares of our Class B common stock at an exercise price of $2.58 per share. The stock option vests over a four-year period at the rate of 1/16th of the shares of our Class B common stock underlying the stock option quarterly following the May 23, 2017 vesting commencement date and expires up to ten years after the date of grant. As of October 31, 2017, 234,375 shares of our Class B common stock subject to the stock option remain unvested. The stock option contains an early-exercise provision and is exercisable as to unvested shares, subject to our right of repurchase. The stock option provides that, in the event of a change of control, all of the unvested shares subject to the stock option will become immediately vested and exercisable as of the date immediately prior to the change of control.

Prior to this offering, we did not have a formal policy to provide any cash or equity compensation to our non-employee directors for their service on our board of directors or committees of our board of directors.

 

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EXECUTIVE COMPENSATION

The following tables and accompanying narrative disclosure set forth information about the compensation provided to our executive officers during fiscal 2017. These executive officers, who include our principal executive officer and the two most highly compensated executive officers (other than our principal executive officer) who were serving as executive officers as of January 31, 2017, the end of our last completed fiscal year, were:

 

    Tien Tzuo, Chairman of the Board of Directors and Chief Executive Officer;

 

    Tyler Sloat, Chief Financial Officer; and

 

    Marc Diouane, President.

We refer to these individuals in this section as our “Named Executive Officers.”

Summary Compensation Table

The following table presents summary information regarding the total compensation that was awarded to, earned by, or paid to our Named Executive Officers for services rendered in all capacities during fiscal 2017.

 

Name and Principal Position

   Year      Salary($)      Option
Awards ($)(1)
     Non-Equity
Incentive Plan
Compensation
($)(2)
     Total($)  

Tien Tzuo
Chairman of the Board of Directors and Chief Executive Officer

     2017        300,000               116,274        416,274  

Tyler Sloat
Chief Financial Officer

     2017        300,000        490,920        116,274        907,194  

Marc Diouane
President

     2017        350,000        166,590        206,092        722,682  

 

(1) The amounts reported in the Option Awards column represent the grant date fair value of the stock options granted to our Named Executive Officers during fiscal 2017 as computed in accordance with FASB Accounting Standards Codification Topic 718. The assumptions used in calculating the grant date fair value of the stock options reported in the Option Awards column are set forth in note 1 of the notes to our consolidated financial statements included in this prospectus. Note that the amounts reported in this column reflect the accounting cost for these stock options and do not correspond to the actual economic value that may be received by our Named Executive Officers from the stock options.
(2) The amounts reported represent the amounts earned based upon achievement of certain performance goals under our executive bonus program. Payments for fiscal 2017 are described in greater detail in the section titled “—Non-Equity Incentive Plan Compensation.”

Equity Compensation

From time to time, we have granted equity awards in the form of stock options to our Named Executive Officers, which are generally subject to vesting based on each of our Named Executive Officer’s continued service with us. Each of our Named Executive Officers currently holds outstanding stock options to purchase shares of our Class B common stock that were granted under our 2006 Stock Plan, or 2006 Plan, and 2015 Plan, as set forth in the “Outstanding Equity Awards at Fiscal Year-End Table” below.

Non-Equity Incentive Plan Compensation

Messrs. Tzuo, Sloat, and Diouane participated in our executive bonus program during fiscal 2017. Incentives under our executive bonus program were payable quarterly based on our

 

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achievement of certain company financial targets. For fiscal 2017, the performance metrics were based on revenue targets, sales and marketing efficiency, and margin targets. For fiscal 2017, the target bonus amounts were $120,000 for Messrs. Tzuo and Sloat and $250,000 for Mr. Diouane.

Offer Letters and Employment Arrangements

Mr. Tzuo’s Offer Letter

In October 2007, we entered into an offer letter with Mr. Tzuo, our Chairman and Chief Executive Officer. The offer letter provides for an initial annual base salary of $180,000 and a grant of 2,635,200 shares of our Class B common stock. The grant vested with respect to 1/48th of the shares subject thereto each month, subject to Mr. Tzuo’s continued service to us on each applicable vesting date. Mr. Tzuo’s initial grant is fully vested. Mr. Tzuo’s current annual base salary is $300,000. Mr. Tzuo is an at-will employee and does not have a fixed employment term. He is also eligible to participate in our executive bonus program and other employee benefits, including health insurance, as we establish for our other similarly situated employees from time to time.

Mr. Sloat’s Offer Letter

In July 2010, we entered into an offer letter with Mr. Sloat, our Chief Financial Officer. The offer letter provides for an initial annual base salary of $225,000, a signing bonus of $20,000, and an initial option grant. Mr. Sloat’s initial option grant covered 1,082,080 shares of our Class B common stock and vested with respect to 25% of the shares subject thereto on the first anniversary of the vesting commencement date and 1/48th of the shares subject thereto each month thereafter, subject to Mr. Sloat’s continued service to us on each applicable vesting date. Mr. Sloat’s initial grant is fully vested. Mr. Sloat’s current annual base salary is $300,000. Mr. Sloat is an at-will employee and does not have a fixed employment term. He is also eligible to participate in our executive bonus program and other employee benefits, including health insurance, as we establish for our other similarly situated employees from time to time.

Mr. Diouane’s Offer Letter

In March 2014, we entered into an offer letter with Mr. Diouane, who currently serves as our President. The offer letter provides for an initial annual base salary of $350,000, a relocation reimbursement of up to $25,000, and an initial option grant. Mr. Diouane’s initial option grant covered 1,000,000 shares of our common stock and vests with respect to 6.25% of the shares subject thereto at the end of his first month of employment and 1/48th of the shares subject thereto each month thereafter, subject to Mr. Diouane’s continued service to us on each applicable vesting date. Mr. Diouane’s current annual base salary is $350,000. Mr. Diouane is an at-will employee and does not have a fixed employment term. He is also eligible to participate in our executive bonus program and other employee benefits, including health insurance, as we establish for our other similarly situated employees from time to time.

Potential Payments upon Termination or Change of Control

In May 2017, we entered into change in control and severance agreements, or severance agreements, with all of our executive officers, including our Named Executive Officers. The severance agreements provide for the following benefits upon a qualifying termination, which means a termination by us without cause or, for Mr. Tzuo only, a termination by the executive for good reason (as such terms are defined in the severance agreement), outside of a change in control (as such term is defined in the severance agreement) in exchange for a general release of claims: a (i) lump sum severance payment of six months of base salary and (ii) payment of premiums for continued medical benefits (or

 

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equivalent cash payment if applicable law so requires) for six months for the executive officer and his or her eligible dependents. If the executive officer is subject to a qualifying termination within the three months preceding a change in control (but after a legally binding and definitive agreement for a potential change of control has been executed) or within the 12 months following a change in control, the severance agreements provide the following benefits in exchange for a general release of claims: (i) a lump sum severance payment of 12 months of base salary, (ii) 100% acceleration of any then-unvested equity awards, and (iii) payment of premiums for continued medical benefits (or equivalent cash payment if applicable law so requires) for 12 months for the executive officer and his or her eligible dependents.

The benefits under the severance agreements supersede all prior cash severance and vesting acceleration arrangements.

Outstanding Equity Awards at Fiscal Year-End Table

 

            Option Awards(1)  

Name

   Grant Date      Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable
     Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable
     Options
Exercise
Price
($)
     Option
Expiration
Date
 

Tien Tzuo

     11/18/2014 (2)       3,772,762               1.52        11/17/2024  
     11/18/2014 (2)       59,808               1.67        11/17/2019  

Tyler Sloat

     11/18/2014 (3)       300,000               1.52        11/17/2024  
     5/24/2016 (4)       720,000               1.54        5/23/2026  

Marc Diouane

     11/18/2014 (5)       250,000               1.52        11/17/2024  
     5/24/2016 (6)       250,000               1.54        5/23/2026  

 

(1) Outstanding equity awards with a grant date of November 18, 2014 were granted under our 2006 Plan and the outstanding equity awards with a grant date of May 24, 2016 were granted under our 2015 Plan.
(2) The stock option vests at a rate of 1/60th of the shares of our Class B common stock underlying the stock option vesting each month following the November 18, 2014 vesting commencement date. The stock option contains an early-exercise provision and is exercisable as to unvested shares, subject to our right of repurchase. As of January 31, 2017, 2,171,791 shares of our Class B common stock subject to the stock option were unvested. The stock option is subject to acceleration upon certain events as described in the section titled “—Potential Payments upon Termination or Change of Control.”
(3) The stock option vests at a rate of 1/24th of the shares of our Class B common stock underlying the stock option vesting each month following the November 18, 2014 vesting commencement date. The stock option contains an early-exercise provision and is exercisable as to unvested shares, subject to our right of repurchase. As of January 31, 2017, all shares of our Class B common stock subject to the stock option were fully vested. The stock option is subject to acceleration upon certain events as described in the section titled “—Potential Payments upon Termination or Change of Control.”
(4) The stock option vests at a rate of 1/48th of the shares of our Class B common stock underlying the stock option vesting each month following the May 24, 2016 vesting commencement date. The stock option contains an early-exercise provision and is exercisable as to unvested shares, subject to our right of repurchase. As of January 31, 2017, 600,000 shares of our Class B common stock subject to the stock option remain unvested. The stock option is subject to acceleration upon certain events as described in the section titled “—Potential Payments upon Termination or Change of Control.”
(5) The stock option vests at a rate of 1/12th of the shares of our Class B common stock underlying the stock option vesting each month following the January 1, 2018 vesting commencement date. The stock option contains an early-exercise provision and is exercisable as to unvested shares, subject to our right of repurchase. As of January 31, 2017, 250,000 shares of Class B common stock subject to the stock option remain unvested. The stock option is subject to acceleration upon certain events as described in the section titled “—Potential Payments upon Termination or Change of Control.”
(6) The stock option vests at a rate of 1/48th of the shares of our Class B common stock underlying the stock option vesting each month following May 24, 2016. The stock option contains an early-exercise provision and is exercisable as to unvested shares, subject to our right of repurchase. As of January 31, 2017, 208,334 shares of our Class B common stock subject to the stock option remain unvested. The stock option is subject to acceleration upon certain events as described in the section titled “—Potential Payments upon Termination or Change of Control.”

 

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Employee Benefit Plans

2006 Stock Plan

Our board of directors originally adopted our 2006 Plan, which was subsequently approved by our stockholders, in September 2006. Our 2006 Plan was most recently amended and restated in January 2015. Our board of directors, or a committee thereof appointed by our board of directors, administers the 2006 Plan and the awards granted under it.

The 2006 Plan provided for the grant of both incentive stock options, which qualify for favorable tax treatment to their recipients under Section 422 of the Code, and nonstatutory stock options, as well as for the issuance of stock purchase rights, also referred to as restricted stock awards, or RSAs.

In the event we are a party to a change in control (as defined in the 2006 Plan), our 2006 Plan provides that each outstanding award (whether vested or unvested or a portion thereof) may, without the consent of any award holders, be assumed, continued, or substituted for a substantially equivalent award by the surviving corporation or its parent. An award shall be deemed assumed if, following the change in control, the award confers the right to receive, subject to the terms and conditions of our 2006 Plan and the applicable award agreement, for each share subject to the award, the consideration (whether stock, cash, other securities or property, or a combination thereof) to which a holder of a share of stock was entitled. Our board of directors may, in its sole discretion and without the consent of any award holder, determine that in the event of a change in control, each or any award (or a portion thereof) outstanding immediately prior to the change in control will be canceled in exchange for a cash or stock payment or other property with respect to each vested (and unvested, if so determined by the board of directors) share subject to such canceled award, which shall be in an amount equal to the fair market value of the consideration to be paid per share in the change in control over the exercise price per share under such canceled award. Upon a change in control, all outstanding awards shall terminate and cease to be outstanding, except to the extent such awards have been continued or assumed.

We ceased issuing awards under our 2006 Plan and our 2006 Plan terminated upon the effectiveness of our 2015 Plan, as described below. As a result, we will not grant any additional awards under our 2006 Plan. However, any outstanding stock options granted under our 2006 Plan will remain outstanding, subject to the terms of our 2006 Plan and stock option agreements, until such outstanding stock options are exercised or settled or until they terminate or expire by their terms. Stock options granted under our 2006 Plan generally have terms similar to those described below with respect to stock options granted under our 2015 Plan. As of October 31, 2017, options to purchase 10,148,066 shares of Class B common stock remained outstanding under our 2006 Plan. The options granted under the 2006 Plan and outstanding as of October 31, 2017 had a weighted-average exercise price of $1.28 per share.

2015 Equity Incentive Plan

Our board of directors originally adopted our 2015 Plan, which was subsequently approved by our stockholders, in May 2015. Our board of directors, or a committee thereof appointed by our board of directors, administers the 2015 Plan and the awards granted under it.

The 2015 Plan provides for the grant of both incentive stock options, which qualify for favorable tax treatment to their recipients under Section 422 of the Code, and nonqualified stock options, as well as for the issuance of stock appreciation rights, or SARs, and shares of RSUs and RSAs. We may grant incentive stock options only to our employees. We may grant nonqualified stock options, RSUs, SARs, and RSAs to our employees, directors, and consultants.

 

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Unless expressly determined in writing by our board of directors, or a committee thereof, on the option’s date of grant, the exercise price of each stock option must be at least equal to the fair market value of our common stock on the date of grant. The maximum permitted term of options granted under our 2015 Plan is ten years. Options generally vest over a four-year period. Options may vest based on time or achievement of performance conditions. Our compensation committee may provide for options to be exercised only as they vest or to be immediately exercisable with any shares issued on exercise being subject to our right of repurchase that lapses as the shares vest. After a participant’s termination of service, the participant generally may exercise his or her options, to the extent vested as of such date of termination at any time within three months following termination or such longer period of time as specified in the applicable option agreement. If termination is due to death or disability, the option generally will remain exercisable, to the extent vested as of such date of termination at any time within 12 months following such termination. However, in no event may an option be exercised later than the expiration of its term.

RSUs are awards representing the right to receive shares of our Class B common stock at a specified date in the future, subject to forfeiture of that right because of a termination of employment or service or failure to achieve certain performance or liquidity-based conditions.

Our 2015 Plan provides that, in the event of an acquisition or other combination (as defined in the 2015 Plan), outstanding awards under our 2015 Plan shall be subject to the agreement evidencing the acquisition or other combination, which need not treat all outstanding awards in an identical manner, and may include one or more of the following: (i) the continuation of the outstanding awards; (ii) the assumption of the outstanding awards by the surviving corporation or its parent; (iii) the substitution by the surviving corporation or its parent of new options or equity awards for the outstanding awards; (iv) the settlement of full value of the outstanding awards (whether or not then vested or exercisable) in cash, cash equivalents, or securities of the successor entity with a fair market value equal to the required amount, as determined in accordance with the 2015 Plan and which payments may be deferred until the date or dates the award would have become exercisable or vested; (v) the cancellation of the outstanding awards in exchange for a payment as set forth in the 2015 Plan; (vi) the cancellation of the outstanding awards for no consideration; or (vii) the termination of early exercise rights so that outstanding awards may only be exercised for vested shares after the transaction. Upon a change of control, all outstanding awards shall terminate and cease to be outstanding, except to the extent such awards have been continued or assumed.

As of October 31, 2017, we had reserved 23,922,207 shares of our Class B common stock for issuance under our 2015 Plan. As of October 31, 2017, options to purchase 21,489,656 of these shares and RSUs that may be settled for 1,712,614 of these shares remained outstanding and 698,689 of these shares remained available for future grant. The stock options outstanding as of October 31, 2017, had a weighted-average exercise price of $1.63 per share. We have granted options to purchase 693,725 shares of our Class B common stock between October 31, 2017 and December 15, 2017. Our 2018 Plan will be effective upon the date immediately prior to the date of this prospectus. As a result, we will not grant any additional equity awards under the 2015 Plan following that date, and the 2015 Plan will terminate at that time. However, any outstanding stock options and RSUs granted under the 2015 Plan will remain outstanding, subject to the terms of our 2015 Plan and stock option and RSU agreements, until such outstanding stock options and RSUs are exercised or settled or until they terminate or expire by their terms. Upon the effectiveness of our 2018 Plan, the shares reserved but not issued or subject to outstanding awards under our 2015 Plan on the date immediately prior to the date of this prospectus will become available for grant and issuance under our 2018 Plan as Class A common stock.

 

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2018 Equity Incentive Plan

In                2018, our board of directors adopted and our stockholders approved our 2018 Plan. The 2018 Plan will become effective on the date immediately prior to the date of this prospectus and will serve as the successor to our 2015 Plan. We reserved                shares of our Class A common stock to be issued under our 2018 Plan. The number of shares reserved for issuance under our 2018 Plan will increase automatically on the first day of February of each of 2019 through 2028 by the number of shares of our Class A common stock equal to         % of the total outstanding shares of all of our classes of common stock as of the immediately preceding January 31. However, our board of directors may reduce the amount of the increase in any particular year. In addition, the following shares will be available for grant and issuance under our 2018 Plan as Class A common stock:

 

    shares subject to awards granted under our 2018 Plan that cease to be subject to the awards for any reason other than exercise of stock options or SARs;

 

    shares issued or subject to awards granted under our 2018 Plan that are subsequently forfeited or repurchased by us at the original issue price;

 

    shares surrendered, cancelled, or exchanged for cash or a different award (or combination thereof);

 

    shares reserved but not issued or subject to outstanding awards under our 2015 Plan on the effective date of our 2018 Plan;

 

    shares issuable upon the exercise of options or subject to other awards under our 2006 Plan and 2015 Plan that cease to be subject to such options or other awards by forfeiture or otherwise after the effective date of our 2018 Plan;

 

    shares issued under our 2006 Plan and 2015 Plan before or after the effective date of our 2018 Plan that are repurchased by us at the original issue price or forfeited after the effective date of our 2018 Plan; and

 

    shares subject to awards under our 2006 Plan and 2015 Plan that are used to pay the exercise price of a stock option or withheld to satisfy the tax withholding obligations related to any award.

Our 2018 Plan authorizes the award of stock options, RSAs, SARs, RSUs, performance awards, and stock bonuses. No person will be eligible to receive more than                shares in any calendar year under our 2018 Plan other than a new employee of ours, who will be eligible to receive no more than                 shares under the plan in the calendar year in which the employee commences employment. The aggregate number of shares of our Class A common stock that may be subject to awards granted to any one non-employee director pursuant to the 2018 Plan in any calendar year shall not exceed                .

Our 2018 Plan will be administered by our compensation committee, all of the members of which are outside directors as defined under applicable federal tax laws, or by our board of directors acting in place of our compensation committee. The compensation committee will have the authority to construe and interpret our 2018 Plan, grant awards, and make all other determinations necessary or advisable for the administration of the plan.

Our 2018 Plan will provide for the grant of awards to our employees, directors, consultants, independent contractors, and advisors, provided the consultants, independent contractors, directors, and advisors render services not in connection with the offer and sale of securities in a capital-raising transaction. The exercise price of stock options must be at least equal to the fair market value of our Class A common stock on the date of grant.

 

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We anticipate that in general, options will vest over a four-year period. Options may vest based on time or achievement of performance conditions. Our compensation committee may provide for options to be exercised only as they vest or to be immediately exercisable with any shares issued on exercise being subject to our right of repurchase that lapses as the shares vest. The maximum term of options granted under our 2018 Plan is ten years.

A RSA is an offer by us to sell shares of our Class A common stock subject to restrictions, which may vest based on time or achievement of performance conditions. The price, if any, of a RSA will be determined by the compensation committee. Unless otherwise determined by the compensation committee at the time of award, vesting will cease on the date the holder no longer provides services to us and unvested shares will be forfeited to or repurchased by us.

SARs provide for a payment, or payments, in cash or shares of our Class A common stock, to the holder based upon the difference between the fair market value of our Class A common stock on the date of exercise and the stated exercise price at grant up to a maximum amount of cash or number of shares. SARs may vest based on time or achievement of performance conditions.

RSUs represent the right to receive shares of our Class A common stock at a specified date in the future, subject to forfeiture of that right because of termination of employment or failure to achieve certain performance conditions. If a RSU has not been forfeited, then on the date specified in the RSU agreement, we will deliver to the holder of the RSU whole shares of our Class A common stock (which may be subject to additional restrictions), cash or a combination of our Class A common stock and cash. We anticipate that, in general, RSUs will vest over a four-year period.

Performance awards cover a number of shares of our Class A common stock that may be settled upon achievement of the pre-established performance conditions as provided in the 2018 Plan in cash or by issuance of the underlying shares. These awards are subject to forfeiture prior to settlement due to termination of employment or failure to achieve the performance conditions.

Stock bonuses may be granted as additional compensation for service or performance, in the form of cash, Class A common stock, or a combination thereof, and may be subject to restrictions, which may vest based on time or achievement of performance conditions.

In the event there is a specified type of change in our capital structure without our receipt of consideration, such as a stock split, appropriate adjustments will be made to the number of shares reserved under our 2018 Plan, the maximum number of shares that can be granted in a calendar year, and the number of shares and exercise price, if applicable, of all outstanding awards under our 2018 Plan.

The 2018 Plan permits the grant of performance-based stock and cash awards that may qualify as performance-based compensation that is not subject to the $1,000,000 limitation on income tax deductibility imposed by Section 162(m) of the Code. Our compensation committee may structure awards so that the stock or cash will be issued or paid only following the achievement of certain pre-established performance goals during a designated performance period. No person will be eligible to receive more than $        in performance-based compensation in any calendar year under our 2018 Plan.

Our compensation committee may establish performance goals by selecting from one or more of the following performance criteria: (i) profit before tax; (ii) billings; (iii) revenue; (iv) net revenue; (v) earnings (which may include earnings before interest and taxes, earnings before taxes, and net earnings); (vi) operating income; (vii) operating margin; (viii) operating profit; (ix) controllable operating profit or net operating profit; (x) net profit; (xi) gross margin; (xii) operating expenses or operating

 

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expenses as a percentage of revenue; (xiii) net income; (xiv) earnings per share; (xv) total stockholder return; (xvi) market share; (xvii) return on assets or net assets; (xviii) our stock price; (xix) growth in stockholder value relative to a pre-determined index; (xx) return on equity; (xxi) return on invested capital; (xxii) cash flow (including free cash flow or operating cash flows); (xxiii) cash conversion cycle; (xxiv) economic value added; (xxv) individual confidential business objectives; (xxvi) contract awards or backlog; (xxvii) overhead or other expense reduction; (xxviii) credit rating; (xxix) strategic plan development and implementation; (xxx) succession plan development and implementation; (xxxi) improvement in workforce diversity; (xxxii) customer indicators; (xxxiii) new product invention or innovation; (xxxiv) attainment of research and development milestones; (xxxv) improvements in productivity; (xxxvi) bookings; (xxxvii) annual recurring revenue; (xxxviii) customer retention and attrition; (xxxix) growth efficiency; (xl) attainment of objective operating goals and employee metrics; and (xli) any other metric that is capable of measurement as determined by our compensation committee.

Awards granted under our 2018 Plan may not be transferred in any manner other than by will or by the laws of descent and distribution or as determined by our compensation committee. Unless otherwise permitted by our compensation committee, stock options may be exercised during the lifetime of the optionee only by the optionee or the optionee’s guardian or legal representative. Stock options granted under our 2018 Plan generally may be exercised for a period of three months after the termination of the optionee’s service to us, for a period of 12 months in the case of death or for a period of six months in the case of disability, or such longer period as our compensation committee may provide. Stock options generally terminate immediately upon termination of employment for cause.

Our 2018 Plan provides that, in the event of a sale, lease or other disposition of all or substantially all of our assets or specified types of mergers or consolidations, or a Corporate Transaction, outstanding awards under our 2018 Plan may be assumed or replaced by any surviving or acquiring corporation, the surviving or acquiring corporation may substitute similar awards for those outstanding under our 2018 Plan, outstanding awards may be settled for the full value of such outstanding award (whether or not then vested or exercisable) in cash, cash equivalents, or securities of the successor entity with payment deferred until the date or dates the award would have become exercisable or vested, or outstanding awards may be terminated for no consideration. Our board of directors has the discretion to provide that a stock award under our 2018 Plan will immediately vest as to all or any portion of the shares subject to the stock award at the time of a Corporate Transaction or in the event a participant’s service with us or a successor entity is terminated actually or constructively within a designated period following the occurrence of the transaction. Stock awards held by participants under our 2018 Plan will not vest automatically on such an accelerated basis unless specifically provided in the participant’s applicable award agreement. In the event of a Corporate Transaction, the vesting of all awards granted to non-employee directors shall accelerate and such awards shall become exercisable (as applicable) in full upon the consummation of the Corporate Transaction.

Our 2018 Plan will terminate ten years from the date our board of directors approves the plan, unless it is terminated earlier by our board of directors. Our board of directors may amend or terminate our 2018 Plan at any time. If our board of directors amends our 2018 Plan, it does not need to ask for stockholder approval of the amendment unless required by applicable law or listing rules.

2018 Employee Stock Purchase Plan

In                 2018, our board of directors adopted and our stockholders approved our 2018 ESPP. The 2018 ESPP will become effective on the date of this prospectus. We have adopted the 2018 ESPP in order to enable eligible employees to purchase shares of our Class A common stock at a discount

 

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following the date of this offering. Purchases will be accomplished through participation in discrete offering periods. Our 2018 ESPP is intended to qualify as an employee stock purchase plan under Section 423 of the Code. We initially reserved                shares of our Class A common stock for issuance under our 2018 ESPP. The number of shares reserved for issuance under our 2018 ESPP will increase automatically on the first day of February of each of 2019 through 2028 by the number of shares equal to         % of the total outstanding shares of our common stock as of the immediately preceding January 31 (rounded to the nearest whole share). However, our board of directors may reduce the amount of the increase in any particular year. The aggregate number of shares issued over the term of our 2018 ESPP will not exceed                shares of our Class A common stock.

Our compensation committee will administer our 2018 ESPP. Our employees generally are eligible to participate in our 2018 ESPP if they are employed by us for at least 20 hours per week and more than five months in a calendar year. Employees who are 5% stockholders, or would become 5% stockholders as a result of their participation in our 2018 ESPP, are ineligible to participate in our 2018 ESPP. We may impose additional restrictions on eligibility. Under our 2018 ESPP, eligible employees will be able to acquire shares of our Class A common stock by accumulating funds through payroll deductions. Our eligible employees will be able to select a rate of payroll deduction between         % and        % of their base cash compensation. We will also have the right to amend or terminate our 2018 ESPP at any time. Our 2018 ESPP will terminate on the tenth anniversary of the last day of the first purchase period, unless it is terminated earlier by our board of directors.

When an initial offering period commences, our employees who meet the eligibility requirements for participation in that offering period will automatically be granted a nontransferable option to purchase shares in that offering period. For subsequent offering periods, new participants will be required to enroll in a timely manner. Once an employee is enrolled, participation will be automatic in subsequent offering periods. An employee’s participation automatically ends upon termination of employment for any reason.

Except for the first offering period, each offering period will run for no more than         months, with purchases occurring every         months. The first offering period will begin upon the date of this prospectus and will end approximately         years following the date of this prospectus. An employee’s participation automatically ends upon termination of employment for any reason.

No participant will have the right to purchase shares of our Class A common stock in an amount, when aggregated with purchase rights under all our employee stock purchase plans that are also in effect in the same calendar year, that have a fair market value of more than $25,000, determined as of the first day of the applicable purchase period, for each calendar year in which that right is outstanding. In addition, no participant will be permitted to purchase more than                 shares of our Class A common stock during any one purchase period or a lesser amount determined by our compensation committee. The purchase price for shares of our Class A common stock purchased under our 2018 ESPP will be 85% of the lesser of the fair market value of our Class A common stock on (i) the first trading day of the applicable offering period and (ii) the last trading day of each purchase period in the applicable offering period.

If we experience a change of control transaction, any offering period that commenced prior to the closing of the proposed change of control transaction will be shortened and terminated on a new purchase date. The new purchase date will occur prior to the closing of the proposed change of control transaction, and our 2018 ESPP will then terminate on the closing of the proposed change of control.

401(k) Plan

We maintain a 401(k) retirement plan for the benefit of our employees. The 401(k) plan is intended to be qualified under Section 401(a) of the Code and contains a cash or deferred

 

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arrangement governed by Section 401(k) of the Code, so that contributions to the 401(k) plan, and income earned on such contributions, are not taxable to participants until withdrawn or distributed from the 401(k) plan (except in the case of any contributions under the 401(k) plan that may be designated as Roth contributions). Under the 401(k) plan, participating employees may defer 100% of their eligible pre-tax earnings up to the Code’s annual contribution limit. With certain exceptions, all full-time employees who are over the age of 21 are eligible to participate in the 401(k) plan immediately. The 401(k) plan does not permit investment of participant contributions or employer contributions in our common stock. Employer contributions under the 401(k) plan are discretionary. Such employer contributions, if made, would vest according to a six-year graduated schedule. We have made no employer contributions to the plan to date.

Limitation of Liability and Indemnification of Directors and Officers

Our restated certificate of incorporation that will become effective in connection with the closing of this offering contains provisions that limit the liability of our directors for monetary damages to the fullest extent permitted by the DGCL. Consequently, our directors will not be personally liable to us or our stockholders for monetary damages for any breach of fiduciary duties as directors, except liability for:

 

    any breach of the director’s duty of loyalty to us or our stockholders;

 

    any act or omission not in good faith or that involves intentional misconduct or a knowing violation of law;

 

    unlawful payments of dividends or unlawful stock repurchases or redemptions as provided in Section 174 of the DGCL; or

 

    any transaction from which the director derived an improper personal benefit.

Our restated certificate of incorporation and our restated bylaws that will become effective in connection with the closing of this offering require us to indemnify our directors and officers to the maximum extent not prohibited by the DGCL and allow us to indemnify other employees and agents as set forth in the DGCL. Subject to certain limitations, our restated bylaws also require us to advance expenses incurred by our directors and officers for the defense of any action for which indemnification is required or permitted.

We have entered, and intend to continue to enter, into separate indemnification agreements with our directors, officers, and certain of our other employees, in addition to the indemnification provided for in our restated certificate of incorporation and restated bylaws. These agreements, among other things, require us to indemnify our directors, officers, and key employees for certain expenses, including attorneys’ fees, judgments, penalties, fines, and settlement amounts actually incurred by these individuals in any action or proceeding arising out of their service to us or any of our subsidiaries or any other company or enterprise to which these individuals provide services at our request. Subject to certain limitations, our indemnification agreements also require us to advance expenses incurred by our directors, officers, and key employees for the defense of any action for which indemnification is required or permitted.

We believe that provisions of our restated certificate of incorporation, bylaws, and indemnification agreements are necessary to attract and retain qualified directors, officers, and key employees. We also maintain directors’ and officers’ liability insurance.

The limitation of liability and indemnification provisions in our restated certificate of incorporation and restated bylaws may discourage stockholders from bringing a lawsuit against our directors and

 

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officers for breach of their fiduciary duty. They may also reduce the likelihood of derivative litigation against our directors and officers, even though an action, if successful, might benefit us and other stockholders. Further, a stockholder’s investment may be adversely affected to the extent that we pay the costs of settlement and damage awards against directors and officers as required by these indemnification provisions.

At present, there is no pending litigation or proceeding involving any of our directors or executive officers as to which indemnification is required or permitted, and we are not aware of any threatened litigation or proceeding that may result in a claim for indemnification.

Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, executive officers, or persons controlling us, we have been informed that, in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.

 

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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

In addition to the executive officer and director compensation arrangements discussed above under the sections titled “Management—Non-Employee Director Compensation” and “Executive Compensation,” below we describe transactions since February 1, 2014 to which we have been or will be a participant, in which the amount involved in the transaction exceeds or will exceed $120,000 and in which any of our directors, executive officers, or beneficial holders of more than 5% of any class of our capital stock, or any immediate family member of, or person sharing the household with, any of these individuals, had or will have a direct or indirect material interest.

Series F Convertible Preferred Stock Financing

In January and February 2015, we sold an aggregate of 30,268,734 shares of our Series F convertible preferred stock at a purchase price of $3.7993 per share for an aggregate purchase price of approximately $115.0 million. Each share of our Series F convertible preferred stock will convert automatically into one share of our Class B common stock immediately prior to the completion of this offering.

The purchasers of our Series F convertible preferred stock are entitled to specified registration rights. For additional information, see the section titled “Description of Capital Stock—Registration Rights.” The terms of these purchases were the same for all purchasers of our Series F convertible preferred stock. See the section titled “Principal and Selling Stockholders” for more details regarding the shares held by certain of these entities.

The following table summarizes the Series F convertible preferred stock purchased by affiliates of members of our board of directors and holders of more than 5% of our outstanding capital stock:

 

Name of Stockholder

   Shares of Series F
Convertible
Preferred Stock
     Total Purchase Price ($)  

Benchmark Capital Partners V, L.P.(1)

     131,603        499,999  

Entities affiliated with Index Ventures(2)

     1,158,108        4,400,000  

Entities affiliated with Redpoint Omega, L.P.(3)

     789,619        2,999,999  

Shasta Ventures II, L.P.(4)

     131,603        499,999  

Entities affiliated with Tenaya Capital V, L.P.(5)

     131,603        499,999  

Entities affiliated with Wellington Management Company LLP(6)

     17,634,827        66,999,998  

 

(1) Benchmark Capital Partners V, L.P., or Benchmark V, holds more than 5% of our outstanding capital stock. Peter Fenton, a member of our board of directors, is one of the managing members of Benchmark Capital Management Co. V, L.L.C., the general partner of Benchmark V.
(2) Includes shares of preferred stock purchased by Index Ventures Growth II (Jersey), L.P., Index Ventures Growth II Parallel Entrepreneur Fund (Jersey), L.P., and Yucca (Jersey) SLP (together, Index Funds). Michelangelo Volpi, a member of our board of directors, is a general partner at Index Ventures advisory group, which acts as an advisor to Index Funds.
(3) Redpoint Omega, L.P. and Redpoint Omega Associates, LLC, together, hold more than 5% of our outstanding capital stock. Redpoint Omega, LLC is the general partner of Redpoint Omega, L.P. Timothy Haley, a member of our board of directors, is one of the managing members of Redpoint Omega, LLC and one of the managers of Redpoint Omega Associates, LLC.
(4) Shasta Ventures II, L.P. holds more than 5% of our outstanding capital stock. Shasta Ventures II GP, LLC is the general partner of Shasta Ventures II, L.P. Jason Pressman, a member of our board of directors, is one of the managing members of Shasta Ventures II GP, LLC.
(5) Tenaya Capital V, L.P. and Tenaya Capital V-P, L.P., together, hold more than 5% of our outstanding capital stock.
(6) Consists of shares purchased by entities advised by Wellington Management Company LLP, which collectively hold more than 5% of our outstanding capital stock.

 

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Amended and Restated Investor Rights Agreement

On January 16, 2015, we entered into an amended and restated investor rights agreement with certain holders of our convertible preferred stock, including entities with which certain of our executive officers and directors are affiliated. These stockholders are entitled to rights with respect to the registration of their shares following this offering. For a description of these registration rights, see the section titled “Description of Capital Stock—Registration Rights.”

Indemnification Agreements

We have entered into indemnification agreements with each of our directors and executive officers. The indemnification agreements and our restated bylaws, which will become effective immediately prior to the completion of this offering, will require us to indemnify our directors to the fullest extent not prohibited by Delaware law. Subject to certain limitations, our restated bylaws also require us to advance expenses incurred by our directors and officers. For more information regarding these agreements, see the section titled “Executive Compensation—Limitation of Liability and Indemnification of Directors and Officers.”

Review, Approval, or Ratification of Transactions with Related Parties

Our written related party transactions policy and the charters of our audit committee and nominating and corporate governance committee to be adopted by our board of directors and in effect immediately prior to the completion of this offering require that any transaction with a related person that must be reported under applicable rules of the SEC must be reviewed and approved or ratified by our audit committee, unless the related party is, or is associated with, a member of that committee, in which event the transaction must be reviewed and approved by our nominating and corporate governance committee.

Prior to this offering we had no formal, written policy or procedure for the review and approval of related party transactions. However, our practice has been to have all related party transactions reviewed and approved by a majority of the disinterested members of our board of directors, including the transactions described above.

 

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PRINCIPAL AND SELLING STOCKHOLDERS

The following table presents certain information with respect to the beneficial ownership of our common stock, and as adjusted to reflect the sale of Class A common stock offered by us and the selling stockholders in this offering assuming no exercise of the underwriters’ option to purchase additional shares, by:

 

    each of our directors;

 

    each of our named executive officers;

 

    all of our directors and executive officers as a group;

 

    each stockholder known by us to be the beneficial owner of more than 5% of our outstanding shares of Class A or Class B common stock; and

 

    each selling stockholder.

We have determined beneficial ownership in accordance with the rules of the SEC. Unless otherwise indicated below, to our knowledge, based on information furnished to us, the persons and entities named in the table have sole voting and investment power with respect to all shares that they beneficially own, subject to applicable community property laws. We have deemed shares of our common stock subject to options that are currently exercisable or exercisable within 60 days of October 31, 2017 to be outstanding and to be beneficially owned by the person holding the option for the purpose of computing the percentage ownership of that person but have not treated them as outstanding for the purpose of computing the percentage ownership of any other person. No RSUs were releasable within 60 days of October 31, 2017.

We have based our calculation of the percentage ownership of our common stock before this offering on no shares of our Class A common stock and 183,855,345 shares of our Class B common stock outstanding on October 31, 2017, which includes 123,968,054 shares of our Class B common stock resulting from the conversion of an equivalent number of outstanding shares of our convertible preferred stock in connection with this offering, as if this conversion had occurred as of October 31, 2017. Percentage ownership of our common stock after this offering also assumes the sale by us and the selling stockholders of                      shares of our Class A common stock in this offering. Unless otherwise indicated, the address of each beneficial owner in the table below is c/o Zuora, Inc., 3050 South Delaware Street, Suite 301, San Mateo, California 94403.

 

    Shares Beneficially
Owned Before
this Offering
Class B
    % Total
Voting
Power
Before
this
Offering(1)
    Number
of Shares
Being
Offered
    Shares Beneficially
Owned After this Offering
    % Total
Voting
Power
After
this
Offering(1)
 
        Class A     Class B    

Name of Beneficial Owner

  Shares     %         Shares     %     Shares     %    

Directors and Named Executive Officers:

                 

Tien Tzuo(2)

    20,037,281       10.7       10.7              

Tyler Sloat(3)

    2,252,080       1.2       1.2              

Marc Diouane(4)

    3,155,800       1.7       1.7              

Peter Fenton(5)

    20,515,454       11.2       11.2              

Kenneth A. Goldman(6)

    530,000       *       *              

Timothy Haley(7)

    11,945,738       6.5       6.5              

Jason Pressman(8)

    15,368,328       8.4       8.4              

Michelangelo Volpi(9)

    8,568,945       4.7       4.7              

Magdalena Yesil(10)

    314,408       *       *              

All executive officers and directors as a group (11 persons)(11)

    84,438,034       43.7       43.7              

 

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    Shares Beneficially
Owned Before
this Offering
Class B
    % Total
Voting
Power
Before
this
Offering(1)
    Number
of Shares
Being
Offered
    Shares Beneficially
Owned After this Offering
    % Total
Voting
Power
After
this
Offering(1)
 
        Class A     Class B    

Name of Beneficial Owner

  Shares     %         Shares     %     Shares     %    
Other 5% Stockholders:                                                      

Benchmark Capital Partners V, L.P.(5)

    20,515,454       11.2       11.2              

Entities affiliated with Redpoint Omega, L.P.(7)

    11,945,738       6.5       6.5              

Shasta Ventures II, L.P.(8)

    15,368,328       8.4       8.4              

Entities affiliated with Tenaya Capital V, LP(12)

    12,194,932       6.6       6.6              

Entities affiliated with Wellington Management Company LLP(13)

    17,634,827       9.6       9.6              
Other Selling Stockholders:                                                      

 

* Less than 1 percent.
(1) Percentage of total voting power represents voting power with respect to all shares of our Class A and Class B common stock, as a single class. The holders of our Class B common stock are entitled to ten votes per share, and holders of our Class A common stock are entitled to one vote per share. See the section titled “Description of Capital Stock—Common Stock” for more information about the voting rights of our Class A and Class B common stock.
(2) Consists of (i) 14,730,605 shares of our Class B common stock held of record by Tien Tzuo, as Trustee of the 70 Thirty Trust, (ii) 737,053 shares of our Class B common stock held of record by Tien Tzuo, as Trustee of the Tien Tzuo 2010 Annuity Trust, (iii) 737,053 shares of our Class B common stock held of record by Renyan Tzuo, Mr. Tzuo’s spouse, as Trustee of the Renyan Tzuo 2010 Annuity Trust, and (iv) 3,832,570 shares of our Class B common stock subject to options that are exercisable within 60 days of October 31, 2017, of which 1,596,905 shares are unvested but early exercisable within 60 days of October 31, 2017.
(3) Includes 1,039,276 shares of our Class B common stock subject to options held by Mr. Sloat that are exercisable within 60 days of October 31, 2017, of which 590,000 shares are unvested, but early exercisable within 60 days of October 31, 2017.
(4) Includes 2,200,000 shares of our Class B common stock subject to options held by Mr. Diouane that are exercisable within 60 days of October 31, 2017, of which 2,028,126 shares are unvested, but early exercisable within 60 days of October 31, 2017.
(5) Consists of 20,515,454 shares of our Class B common stock held of record by Benchmark V. Benchmark Capital Management Co. V, L.L.C. is the general partner of Benchmark V. Alexandre Balkanski, Bruce W. Dunlevie, Peter Fenton, a member of our board of directors, J. William Gurley, Kevin R. Harvey, Robert C Kagle, Mitch Lasky, and Steven M. Spurlock are the managing members of Benchmark Capital Management Co. V, L.L.C., and each of them may be deemed to hold shared voting and dispositive power held by Benchmark V. The address for the Benchmark entities is 2965 Woodside Road, Woodside, California 94062.
(6) Includes (i) 300,000 shares of our Class B common stock subject to options held by Mr. Goldman that are exercisable within 60 days of October 31, 2017, all of which are unvested, but early exercisable within 60 days of October 31, 2017 and (ii) 200,000 shares of our Class B common stock subject to options held by GV Partners L.P., or GV Partners, that are exercisable within 60 days of October 31, 2017, of which 12,500 shares are unvested, but early exercisable within 60 days of October 31, 2017. GV Partners is a family limited partnership of which Mr. Goldman is the managing member, and he may be deemed to hold voting and dispositive power over the shares held by GV Partners.
(7) Consists of (i) 11,617,230 shares of our Class B common stock held of record by Redpoint Omega, L.P. and (ii) 328,508 shares of our Class B common stock held of record by Redpoint Omega Associates, LLC. Redpoint Omega, LLC is the general partner of Redpoint Omega, L.P. Jeffrey D. Brody, R. Thomas Dyal, Timothy M. Haley, a member of our board of directors, John L. Walecka, Geoffrey Y. Yang, Christopher B. Moore, and W. Allen Beasley are the managing members of each of Redpoint Omega, LLC and Redpoint Omega Associates, LLC, and each of them may be deemed to hold shared voting and dispositive power over shares held by Redpoint Omega, LLC and Redpoint Omega Associates, LLC. The address of the entities affiliated with Redpoint is 3000 Sand Hill Road, Building 2, Suite 290, Menlo Park, California 94025.
(8) Consists of shares 15,368,328 of Class B common stock held of record by Shasta Ventures II, L.P. Shasta Ventures II GP, LLC is the general partner of Shasta Ventures II, L.P. Robert Coneybeer, Tod Francis, Ravi Mohan, and Jason Pressman, a member of our board of directors, are the managing directors of Shasta Ventures II GP, LLC and each of them may be deemed to hold shared voting and dispositive power over the shares held of record by Shasta Ventures II, L.P. The address for these entities is 2440 Sand Hill Road, Suite 300, Menlo Park, California 94025.
(9)

Consists of (i) 8,430,949 shares of our Class B common stock held of record by Index Ventures Growth II (Jersey), L.P., (ii) 30,844 shares of our Class B common stock held of record by Index Ventures Growth II Parallel Entrepreneur Fund

 

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  (Jersey), L.P., and (iii) 107,112 shares of our Class B common stock held of record by Yucca (Jersey) SLP. Mr. Volpi is a general partner within the Index Ventures advisory group, which acts as an advisor to Index Funds. Advisors within the Index Ventures advisory group provide advice to Index Funds but do not have any voting, investment, and dispositive power with respect to the shares held by these entities and, therefore, Mr. Volpi is involved in making recommendations to Index Funds but does not hold voting or dispositive power over the shares held by Index Funds. The principal address of Index Ventures Growth II (Jersey), L.P. and Index Ventures Growth II Parallel Entrepreneur Fund (Jersey), L.P. is No. 1 Seaton Place, St Helier, Jersey JE4 8YJ, Channel Islands, and the principal address of Yucca (Jersey) SLP is 44 Esplanade, St Helier, Jersey JE4 9WG, Channel Islands.
(10) Includes 250,000 shares of our Class B common stock subject to options held by Ms. Yesil that are exercisable within 60 days of October 31, 2017, of which 234,375 shares are unvested, but early-exercisable within 60 days of October 31, 2017.
(11) Consists of (i) 74,966,188 shares of our Class B common stock and (ii) 9,471,846 shares of our Class B common stock subject to options that are exercisable within 60 days of October 31, 2017 held by our all our executive officers and directors, as a group, of which 5,804,615 shares subject to stock options are unvested as of such date.
(12) Consists of (i) 9,557,352 shares of our Class B common stock held of record held by Tenaya Capital V, LP and (ii) 2,637,580 shares of our Class B common stock held of record held by Tenaya Capital V-P, LP. The general partner of each of Tenaya Capital V, LP and Tenaya Capital V-P, LP is Tenaya Capital V GP, LP whose general partner is Tenaya Capital V GP, LLC. Messrs. Tom Banahan, Ben Boyer, Stewart Gollmer, Brian Melton, and Brian Paul are the managing members of Tenaya Capital V GP, LLC and such managing members share voting and dispositive power over the shared held by Tenaya Capital V, LP and Tenaya Capital V-P, LP. The address of the entities affiliated with Tenaya is 3280 Alpine Road, Portola Valley, California 94208.
(13) Consists of 17,634,827 shares of our Class B common stock held of record by 23 funds and accounts advised or sub-advised by Wellington Management Company LLP, or Wellington. Wellington serves as investment adviser with power to direct investments and/or sole power to vote the securities owned by these funds and accounts. For purposes of reporting requirements of the Exchange Act, Wellington may be deemed to be the beneficial owner of all the shares listed. The address for Wellington is 280 Congress Street, Boston, Massachusetts 02210.

 

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DESCRIPTION OF CAPITAL STOCK

The following description summarizes the most important terms of our capital stock, as they will be in effect following this offering. Because it is only a summary, it does not contain all the information that may be important to you. We expect to adopt a restated certificate of incorporation and restated bylaws that will become effective immediately prior to the completion of this offering, and this description summarizes provisions that are expected to be included in these documents. For a complete description, you should refer to our restated certificate of incorporation and restated bylaws, which are included as exhibits to the registration statement of which this prospectus forms a part, and to the applicable provisions of Delaware law.

Upon the completion of this offering, our authorized capital stock will consist of                      shares of our Class A common stock, $0.0001 par value per share,                      shares of our Class B common stock, $0.0001 par value per share, and                      shares of undesignated preferred stock, $0.0001 par value per share.

Assuming the conversion and reclassification of all outstanding shares of our convertible preferred stock into 123,968,054 shares of our Class B common stock, which will occur immediately prior to the completion of this offering, as of October 31, 2017, there were outstanding:

 

    no shares of our Class A common stock;

 

    183,855,345 shares of our Class B common stock outstanding, held by 532 stockholders of record; and