What’s the most successful pure SaaS company of all time? The answer is Salesforce, and it’s no contest — the company closed the year on an $18 billion run rate, placing it in a category no other company born in the cloud can touch.
That Salesforce is on such an impressive run rate might suggest that reaching a billion in revenue is a fairly easy proposition for an enterprise SaaS company, but firms in this category grow or drive revenue like Salesforce. Some, in fact, find themselves growing much more slowly than anyone thought, but keep slugging it out as they inch steadily toward the $1 billion mark. This happens to public and private SaaS companies alike, which means that we can look at few public ones thanks to their regular earnings disclosures.
It’s a good time to look back at the year and analyze a few firms that should reach the mythical $1 billion in revenue at some point. Today we’re examining Zuora, a SaaS player focused on building and managing subscription-based services. GuideWire, a company transitioning to SaaS with big ambitions and Box, a well-known SaaS player caught somewhere between big and a billion.
Zuora: betting on SaaS
We’ll start with the smallest company that caught our eye, Zuora. We’ll proceed from here going up in revenue terms.
Zuora is as pure a SaaS company as you can imagine. The San Mateo-based company raised nearly a quarter billion dollars while private to build out the technology that other companies use to help build their own subscription-based businesses. To some degree, Zuora’s success can be viewed as a proxy for SaaS as a whole.
However, while SaaS has chugged along admirably, Zuora has seen its share price fall by more than half in recent quarters.
At issue is the firm’s slowing growth:
- In the quarter detailed on March 21, 2019, Zuora’s subscription revenue growth slowed to 35% compared to the prior year period. Total revenue growth grew an even slower at 29%.
- In the quarter announced on May 30, 2019, Zuora’s subscription revenue grew 32% while its total revenue expanded 22%.
- Moving forward in time, the company’s quarter reported on August 28, 2019 saw subscription revenue growth of 24% and total revenue growth of 21% compared to the year-ago quarter.
- Finally, in its most recent quarterly report earlier this month, Zuora reported marginally better 25% subscription revenue growth, but slower total revenue growth of 17%.
Why is Zuora’s growth slowing? There’s no single reason to point out. Reading through coverage of the firm’s earnings report reveals a number of issues that the company has dealt with this year, including slow sales rep ramp and some technology complaints. Add in Stripe’s meteoric rise (the unicorn added tools for subscription billing in 2018, expanding the product to Europe earlier this year) and you can see why Zuora has had a tough year.
Adding to its difficulties, the company has lost more money while its growth has slowed. Zuora’s net loss expanded from $53.6 million in the three calendar quarters of 2018. That rose to $59.9 million over the same period in 2019. But the news is not all bad.
In spite of these numbers, Zuora is still growing; the company expects around $276 to $278 million in revenue in its current fiscal year and between $206 and $207 million in subscription top-line revenue over the same period.
At the revenue growth pace set in its most recent quarter (17% in the third quarter of its fiscal 2020) the company is eight years from reaching $1 billion in revenue. However, Zuora’s rising subscription growth rate in the same period is very encouraging. And, the company’s cash burn is declining. Indeed, in the most recent quarter Zuora’s operations generated cash. That improvement led to the firm’s free cash flow improving by half in the first three calendar quarters of 2019.
It also has pedigree on its side. Founder and CEO Tien Tzuo was employee number 11 at Salesforce when the company launched in 1999. He left the company in 2007 to start Zuora after realizing that traditional accounting methods designed to account for selling a widget wouldn’t work in the subscription world.
Zuora’s subscription revenue is high-margin, but the rest of its revenue (services, mostly) is not. So, with less thirst for cash and modestly improving subscription revenue growth, Zuora is still on the path towards the next revenue threshold despite a rough past year.
Guidewire: going SaaS the hard way
It’s not easy being Guidewire today. The San Mateo-based insurance software company founded in 2001 is in the process of converting to SaaS. If Zuora is a bet on the future of SaaS as a category, Guidewire is a bet on the same global transformation, but localized to its own operations. In effect, each passing quarter brings Guidewire closer to being a pure SaaS shop.
The strain of the company’s move from selling software to selling services is apparent in its most recent earnings report. It generated $157.0 million in revenue, off 13% from the same period a year ago. The same bad news continues when you dig into the figures more deeply: “license and subscription” top line was down 13%; services revenue fell 17% and maintenance top line was off 21%.
Why, then, do we highlight the company as one of the firms in our mix that will grind its way to $1 billion in revenue on the back of SaaS-y ARR growth? Three reasons:
- The company’s SaaS transition is deeply underway. Guidewire is currently slogging its way forward but the trend lines mostly look good. During its most recent earnings call the company noted that, “from a new sales mix perspective, in the first quarter, 43% of new software sales were subscriptions compared to 26% a year ago.”
- From a base $463 million ARR, the company can inch forward towards the $1 billion revenue mark. Reconciling ARR and revenue is somewhat easy with Guidewire. The company expects GAAP revenue of $759 million to $771 million in its current fiscal year. Its ARR will form a large chunk of those figures. And, as we would expect with any real SaaS business, ARR growth will be how it reaches the billion-dollar top line threshold.
- It hired an ex-Salesforce exec to help guide it. You can’t get more SaaS than that.
When researching this piece, we initially wanted only pure SaaS companies that were growing slowly but were on track to reach the $1 billion revenue floor. Guidewire, however, is pushing hard in that direction with the added difficulty of molting into a modern software delivery approach while trying to grow. This makes it a perfect fit for our “will get there in time” crew.
Box: it’s a long way to the top
We’ve been waiting for Box to take off for years. It is the ultimate manifestation of a company that is slowly but steadily moving toward that billion-dollar revenue goal. It has a huge market opportunity, little competition in the cloud content management market where it plays and a deep product bench built for upselling.
It ended the year with a billion dollars of top-line revenue in reach sometime in the next few years. It reported revenue of $177.2 million or a run rate of $708.8 million in its most recent November earnings report. Revenue grew at 14.4% for the quarter, but it’s worth noting that the company now faces additional earnings pressure after activist investor Starboard Value bought a 7.5% stake in Box in September. So far, it has kept a fairly low profile.
The company has been slammed at points for different reasons ranging from a high sales and marketing spend before it IPOed in 2014 to sacrificing profitability at the altar of growth, but CEO Aaron Levie told TechCrunch in an interview in November that it plans to balance growth and profitability in the future.
“We believe we can drive more efficient growth, and frankly in the long run, even higher growth rates because of our product portfolio. That means we can now drive greater efficiency in our go-to-market strategy because of the fact that we now have nearly 100,000 customers that we can go and sell into,” he said.
Box’s free cash flow position plus revenue position puts some muscle behind that statement. It expects that combo to grow by 25% in its FY21, 30% in FY22 and 35% in FY23. If it can maintain those predicted levels, it should be well on its way to the billion-dollar mark.
Box could potentially reach that magic billion mark some time in 2022, assuming it continues growing at 14% YoY, but its market opportunity is so large — an addressable market for content and collaboration that Box pegs at more than $45 billion it seems like it’s just a matter of when, not if. This is especially true when Box reports seeing growth in its larger deals and add-on uptake. In other words, it’s getting bigger deals and then selling additional services to those customers.
Box has moved more slowly towards that $1 billion goal than many expected when it first filed to go public back in 2014. But it was a far smaller company at the time, with just $38.8 million in its quarter ending January 31, 2014. The company has grown steadily since the earliest days of going public, generating more than 4.5x the revenue today. Box’s time will come.
It’s just a number
As Levie said in an on-stage interview at TechCrunch Sessions Enterprise in September, it’s really just one stop in the evolution of an enterprise SaaS company, not an end unto itself.
“We’re very firmly on a path to a billion in revenue in the next few years and that remains a really important milestone on the journey. It’s not the only focus of the company. Our core focus of the company is again to grow in a very sustainable way…”
The fact that so few pure enterprise SaaS companies have reached that heady goal shows just how hard it is to get there — but if you’ve built a product set and a company for the long haul, while it might take patience, you’ll get there.
Not every company will be Salesforce, but surely a good number will pass a billion in the next decade and be highly successful companies by any measure.