A word so typical and associated with every widget in the 21st-century economy is a subscription. Think of a widget, any gizmo, and a monthly or discounted annual subscription-based cash flow underscores its existence. A digital and cloud-based environment has cultivated a proliferation of subscriptions, from watching content on our television and mobile screens to getting amenities delivered straight to our doorstep. Take a company like Adobe Inc (NASDAQ: ADBE) and its reliance on its subscription-based revenue model. In March 2011, the company generated 10.33% of its revenue from Subscriptions. Fast-forward to June 2021; the company generated 91.79% of its revenue from Subscriptions. A subscription model with suitable parameters can create ecosystems that can help build resilient cash flow models. 

Type the words Subscription Economy in Google. One will come across the webpage The Subscription Economy prepared by Zuora Inc (NASDAQ: ZUO), a subscription software company out of Redwood City, California. The company has a market capitalization of about $2.09 billion, with 1,190 employees worldwide, and recorded $263.77 million in Total Revenues for the last four quarters. The following visual comparison breakdowns Total Revenues of Zuora Inc (NASDAQ: ZUO) into their two reportable segments- Subscription and Professional Services.

The green bar represents the Total Revenues starting April 2017, with the Orange and Black line representing Percentages of Subscription and Professional Services segment of Total Revenues. The chart illustrates that the company derives a majority of its revenue through its subscription software segment. Starting in April 2017, the company has grown its Subscription Software Revenue segment quarter-over-quarter by 6.22%.    

Their S-1 registration statement highlighted that the company provided its services to 971 customers such as NVIDIA, NCR, Zoom, Docusign, HBO, The Seattle Times, Delta Air Lines, Ford Motor Company, Caterpillar, Clear, Trip Advisor, CarGurus, and Zillow Group. Additionally, 415 out of the 971 customers, or 42.74%, represented an Annual Contract Value or ACV of $100,000 or greater as of January 31, 2018. The company released its Quarterly 10-Q Report in September, where the company registered 694 customers with ACV of $100,000 or greater, representing a year-over-year increase of 7.60% and 40.20% from March 2018. This Annual Contract Value metric is vital in further understanding the company. The following visual breaks down the number of customers in the Annual Contract Value of $100,000 or greater bracket against Total Revenues. Annual Contract Value (ACV) of $100,000 or greater is the metric used by the company to record deliverables. 

The blue bar represents the Total Number of Customers with a Contract Value greater than $100,000, with the orange bar representing an approximate Revenue Per ACV. While the total number of customers has increased, the Total Revenue per ACV has remained somewhat consistent. With the dashed representing the Average Revenue Per ACV trend, it can be understood that after six quarters of the Average Revenue Per ACV metric is above the company’s historical measurements. 

A further investigation of Income Statements helps create the following visual highlights Total Quarterly Revenues, Quarterly Net Income, Gross Profit, and Operating Expenses as a percentage of Total Quarterly Revenues. The green bar represents Total Revenues. The blue bar represents Net Loss, with the black and orange line representing Gross Profits and Operating Expenses as a Percentage of Total Revenues starting April 2017. 

Between April 2017 and July 2021, the company increased its Quarterly Revenues by 167.44% while consistently reporting a Quarterly Net Loss. The dashed line represents the Average Quartley Revenues and Net Loss of $64.13 million and $17.22 million, respectively. A closer inspection of the Percentages indicates higher Operating Expenses as a contributor to Net Loss as Gross Profits have been somewhat consistent. Notice, January 2018, where an increase in Gross Profit as a Percentage of Total Revenue and decrease in Total Operating Expenses as a Percentage of Total Revenue resulted in a better Net Income metric. Shares of Zuora Inc (NASDAQ: ZUO) went public in April 2018 and significantly underperformed the Russell 2000 Index. The following visual highlights the price performance of $100 invested in Zuroa Inc (NASDAQ: ZUO) and the Russell 2000 Index were starting April 2018.

It is pretty clear that the stock has been underperforming the broader index and is significantly cheaper than the index. Visible from the movement are two localities on the x-axis of significant share price decline; one after its Quarterly results in April 2018 and the second in early 2020. While the latter could be contributed to the market sell-off in response to the pandemic, the April 2018 decline could be in response to disappointing Revenue and Net Loss metrics. Even though the share rebounded from its all-time low in early 2020, it currently trades about 15% below its opening price of $20 and almost 116% from its all-time high of $37.78 in June 2018. 

The current management team at Zuora Inc (NASDAQ: ZUO) is led by Founder and Chief Executive Officer Tien Tuzo, former employee number 11 at Salesforce, with Todd McElhatton, former SVP and CDO of SAP Cloud, serving as Chief Financial Officer, and Robbie Traube, former VP at Adobe, serving as the Chief Revenue Officer. Interestingly, a 2015 Medium post titled, THE SUBSCRIPTION ECONOMY: A BUSINESS TRANSFORMATION, allows understanding the company, its direction, and the vision of its founder, Mr. Tien Tuzo. According to Mr. Tuzo, “In a world where every customer is now a subscriber, companies must adopt new technology to manage the entire subscriber lifecycle. The adoption of cloud technology and applications to expedite internal or external business processes relies on curated software. For technology to be technology, it takes the proper mingling of hardware and software. As physical hardware grew more minor and faster-using semiconductors, software exchange has transitioned from pre-installed Floppy Disks and CDs to the internet. Almost all software offers a subscription-style entry price, allowing providers and users to become active participants instead of just being a tourist. Interactions under a subscription model can be better monitored, adjusted for, and curated to match users’ needs. 

I started with Adobe Inc (NASDAQ: ADBE) since the company ranks in the Top 25 of the Standard and Poors 500, with a weight of 0.80%, better than the most available streaming subscription from Netflix (NASDAQ: NFLX), which weighs 0.70% (holding percentages of the SPDR S&P 500 ETF Trust SPY). Both companies derive a substantial amount of their revenue through subscription models. Even the world’s most significant publicly-traded company, Apple Inc (NASDAQ: AAPL), offers Services such as Digital Content in Apple TV, Apple Care, and Cloud Services that are run on a subscription model. As of their Q3 21 results, Net Sales from the Services segment were $17.48 billion, up 32.91% from last year, and made up 21.47% of Total Net Sales. Gross Margin as a Percent of Net Sales for Services was 69.80%, almost 33 percentage points better than Gross Margin as a Percent of Net Sales for Products which was 36.04%. Furthermore, Gross Margin as a Percent of Net Sales grew two percentage points for Apple Inc (NASDAQ: AAPL) compared to Q3 20. 

In an August 2021 interview with David Westin from Bloomberg, Mary Barra, Chief Executive Officer at General Motors (NYSE: GM), spoke to how even a company like General Motors (NYSE: GM) is looking at its services and subscriptions segment as the growth segment. In response to Mr. Westin’s question regarding how much of a contribution the software, services, and subscriptions component would contribute to overall General Motors (NYSE: GM) revenue, Ms. Barra replied that it “will have equal or greater than what we’ll have from selling the vehicle.” An addtional review of Zuora’s S-1 registration statement would highlight that Zuora Inc (NASDAQ: ZUO) lists General Motors as one of their six Transportation customers. 

Hundred years ago, the most common widget associated with a subscription was the newspaper or a magazine. However, we currently participate in an economy where widgets such as underwear, razor blades, socks, clothing, fitness & wellness, movies, television, and a whole laundry list are powered by a subscription model. Increasingly, even behind the next big “hardware” such as electric cars carries the “software” likely supported by a subscription model. A platform like Zuora Inc (NASDAQ: ZUO) enables such a transformation, making it an exciting prospect.