Zuora Inc

NYSE:ZUO

Earnings Call Analysis

Earnings Call Transcript 2025-Q2

[Operator]

Good afternoon, and welcome to Zuora's Second Quarter of Fiscal 2025 Earnings Conference Call. [Operator Instructions] And with that, I would now like to turn the call over to Luana Wolk, Head of Investor Relations for introductory remarks. Please go ahead.

[Luana Wolk, executive]

Thank you. Good afternoon, and welcome to Zuora's Second Quarter Fiscal 2025 Earnings Conference Call. On the call, we have Tien Tzuo, Zuora's Founder and Chief Executive Officer; and Todd McElhatton, Zuora's Chief Financial Officer; Robbie Traube,our President and Chief Revenue Officer will be joining us for the Q&A session.

During today's call, we'll make statements that represent our expectations and beliefs concerning future events that may be considered forward-looking under federal securities law. These statements reflect our views only as of today and should not be relied upon as representative of our views as of any subsequent date. We disclaim any obligation to update any forward-looking statements or outlook. These statements are subject to several risks and uncertainties that could cause actual results to differ materially from expectations. For further discussion of the material risks and other important factors that could affect our financial results, please refer to our filings with the SEC.

And finally, unless otherwise noted, all numbers except revenue mentioned today are non-GAAP. You can find a reconciliation from GAAP to non-GAAP results for both the current and the prior year periods in today's press release. A press release and a replay of today's call can be found on Zuora's Investor Relations website at investor.zuora.com. Now I'll turn the call over to you, Tien.

[Tien Tzuo, executive]

Thank you, Luana, and thank you, everyone, for joining Zuora's Second Quarter Fiscal 2025 Earnings Call. Looking back in the quarter, I would say that this quarter was a solid follow-up to our Q1. We continue to execute our land and expand strategy while navigating the current macro environment. Let's start with the numbers. In Q2, subscription revenue was $104 million, up 9% year-over-year. We again exceeded our guidance for non-GAAP operating income coming in at $25.6 million, which equates to a 22% operating margin, another quarterly record.

We generated adjusted free cash flow of $12.2 million during the quarter. And finally, against the Rule of 40 framework, which combines growth and profitability, we closed the quarter at 31. This is ahead of our goal for the full fiscal year. Looking beyond the numbers, I would say that we continue to benefit from our customer base, some of the biggest and best companies in the world. And this shows in 2 areas. First, this is a segment where the depth and breadth of our portfolio truly matters. And second, this installed base continues to represent strong expansion opportunities for us that we can fuel through both ongoing organic innovations as well as targeted acquisitions.

On the first point, let me give you an example from the quarter. I am proud to welcome Canva as a new customer. Canva is the leading online design and visual communications platform. They have over 190 million monthly users that have created over 25 billion designs. Now Canva came to Zuora as part of preparing for their next phase of growth across both their B2C and enterprise offerings. What made the difference to Canva, with our ability to combine billing and revenue to address their needs across the entire [ quote-to-revenue ] process and give them new speed and flexibility to drive their current and future pricing strategies.

And Canva is not the exception. In fact, in Q2, half of our logos both Zuora Billing and Zuora Revenue that power [ quote-to-revenue ]. On the second point, once companies like Canva become customers, their growth and ever-evolving needs represent strong expansion opportunities. Here are some examples of customers who expanded with us in Q2. For instance, Zillow Group, which includes the Zillow Trulia and other brands that provide solutions to consumers and real estate professionals for buying, selling, financing, and renting homes. They began to use Zuora Billing a few years back and in Q2 they added Zuora Revenue to automate their revenue recognition and additional Zuora payment modules to provide customers with more flexible payment options.

Another great example is a long-time customer Oura. A great example of a fast-growing customer who has sold over 2.5 million smart rings that track fitness level, sleep and more. They renewed and grew with us as their subscriber base continues to grow. We've also been working with a world leader in transportation, e-commerce and business services that generates over $80 billion in annual revenue. This customer is adopting usage-based billing models showing that this is not just a trend for technology companies. And so in Q2, they added advanced consumption modules to turn their raw data into revenue with metering, rating and billing. How big are these expansion opportunities, well, if you look at the 2 deals over $1 million or more in ACV that we had in Q2, both came from within our installed base, proof that our land and expand strategy is working.

And finally, of course, our enterprise customers also enhance our partnerships with leading system integrators. In fact, in Q2, more than half of our deals that were $500,000 or more in ACV were with an SI partner. Now what's fueling our land and expand strategy is, of course, our technology and our product portfolio. Last quarter, I talked about how our vision is to build a complete monetization stack that helps our customers win with a strategy that we call total monetization.

Now what does total monetization mean? Well, there was a time, a simpler time when a more traditional static subscription model was enough. The times they are changing. And so now we're seeing the best companies in the world introduce a wide range of monetization strategies such as maybe they allow customers to consume by the [indiscernible], so-called usage or consumption models that we talked about with this transportation company. Or maybe they are unbundling and rebundling off their offerings to craft a perfect offering for each of their customers. Maybe they offer onetime transactions such as [indiscernible] or single purchases before a customer is ready to commit to something long term.

Maybe they offer prepaid models like the Starbucks card that many of us are familiar with that I use to buy my [ minty coffees ]. Or maybe they deploy hybrid models that mix and match all of the above. Over time, we believe that companies will need to be able to monetize with any business model, and this is what we mean by total monetization. And we're seeing this concept really resonating. Those of you who joined us at Subscribe Live in the Bay Area in June, so these conversations are happening with our customers and prospects. Companies are coming to us and saying, you captured the essence of what we're trying to do. And so this vision is fueling our innovation.

The quick examples from the quarter. First, our Advanced Consumption Billing. In Q2, Advanced Consumption Billing was one of our fastest-growing products, in part driven by the rollout and monetization of AI features that you are seeing from almost all the technology vendors. And in Q2, Advanced Consumption Billing is now totally enhanced with Togai, the acquisition we announced in Q1 and closed in Q2, giving us some of the most advanced metering and rating technology in the marketplace today. Second, in Q2, we also announced the acquisition of Sub(x) to add new AI capabilities that will strengthen our Zephr products, offering media companies an advanced AI-powered paywall solution. Through reinforcement learning, Sub(x) help media companies put the right offer in front of the right customer, maximizing subscriber acquisition and conversion, all without manual testing and experimentation.

And since Sub(x) was already a Zuora partner with an integrated solution, customers can immediately take advantage of these new capabilities. And in fact, we already have joint customers like the Financial Times doing this today. And third, on the organic innovation side, in Q2, we went deeper into Zuora Payments, enhancing our Smart Retry capabilities. If a company is trying to collect a payment and that payment failed, our Smart Retry in Zuora Payments analyzes over 15 transaction characteristics, such as you count monthly recurring revenue, the currency, the payment gateway to automatically retry the sale payment at the most optimal time.

We're continuing to make the AI technology that power smart Retry more and more in advance. In the Q2 alone, we helped our customers recover over $120 million in lost revenue with the Smart Retry capability. That's an increase of over 40% year-over-year. And finally, this total monetization strategy, this message is resonating with the analyst community, too. Earlier this month, Gartner, one of the world's most respected and trusted industry analyst firms recognized Zuora as a leader in the Magic Quadrant for recurring billing applications for the Zuora modernization suite, placing us the furthest in completeness of vision.

And that's not all. Back in June, we remained a leader by ISG Research, and some of you might know formally as Ventana Research in all 4 of their subscription management buyer Guide, B2B subscription management, B2C subscription management, subscription management platform and then all around subscription management offering. ISG classified Zuora as extemporary. Out of 24 software vendors, we received the highest rating in each of the 4 buying guides. And that's not all. And just last week, Zuora revenue also ranked #1 in product and strategy in MGI's 360 ratings and Buyers Guide in Automated Revenue Management or ARM. And now the last news from the quarter, we released this quarter our latest global impact report, showcasing the progress that we have made in our ESG goals and initiatives. We continue to be a carbon-neutral company. And in this year's report, we took the next step.

We committed to the science-based targets initiative and are working on setting both near-term and long-term greenhouse gas reduction goals, including reaching net 0. So to recap the quarter, we continue to create new opportunities for our installed base to land and expand with Zuora as we build out our monetization stack. This stack is helping the biggest and best companies in the world win with a total monetization strategy. Our modular solutions, both organic innovation and strategic acquisitions over the last few years give us what's needed to capture this opportunity. And of course, we continue to focus on delivering balanced growth and improved profitability.

With that, I'll turn the call over to Todd to review the financials for the quarter.

[Todd McElhatton, executive]

Thank you, Ken, and thank you, everyone, for joining our call. In Q2, we exceeded guidance delivering solid results. We achieved the [ Rule of 30 ] two quarters ahead of plan, including absorbing the expenses associated with our recent acquisition of Togai. As a reminder, we define the Rule of 30 as a sum of year-over-year subscription revenue growth plus non-GAAP operating margin. Subscription revenue was $104.1 million, growing 9% year-over-year. Subscription revenue exceeded expectations primarily due to higher revenue share from payment processors. Professional services revenue came in at $11.3 million, representing a 10% decrease year-over-year.

Professional services revenue was 10% of total revenue, and we continue to expect our professional services revenue mix to slightly decrease over time as we further expand our partnerships with SIs. A little over 1/3 of all booked ACV was partner influenced. Non-GAAP subscription gross margin was 82%, and up over 125 basis points year-over-year. The improvement is driven by continued efficiency optimization with our hyperscalers. As a reminder, Q3 and Q4 of fiscal '24, we benefited from onetime vendor credits. Non-GAAP professional services gross margin was negative 5%, consistent with Q2 of last year.

For the remainder of the year, you can expect professional services gross margin to continue to be in the same range. Our non-GAAP blended gross margin was 73%, an increase of over 260 basis points year-over-year. Our non-GAAP operating income was $25.6 million, exceeding the high end of the guidance by $6.1 million, representing a record, non-GAAP operating margin of 22.2%. We reached our goal to operate at a rule of 30 two quarters earlier than planned. While we expect to exit the year at Rule of 30 run rate, this metric can fluctuate from quarter to quarter.

Our fully diluted share count at the end of the quarter was approximately 185.9 million shares, using both the treasury stock and [ if converted ] methods. Now let's dive into some of the key metrics for the quarter. Our dollar-based retention rate ended at 104%, flat quarter-over-quarter and down 3 points year-over-year. This decrease in DBRR year-over-year was primarily driven by the impact of churn, which we called out on prior calls. As a reminder, DBRR is a trailing 12-month metric. Total RPO ended at $577 million, growing 14% year-over-year. Noncurrent RPO was up 21% year-over-year to $258 million.

Once again, we had a large number of multiyear renewals in the quarter as customers continue to grow on our multiproduct platform. At the end of Q2, we had 445 customers with an annual contract value at or above $250,000. These customers represent approximately 85% of our ARR. This is up 1 year-over-year but down 6 sequentially. We saw several Zuora customers consolidate into one contract due to M&A. It is worth noting at the total ARR associated with a $250,000 or greater cohort grew by more than 10% year-over-year. In addition, customers in the $500,000 or greater cohort, the ARR grew by approximately 17%.

We closed 5 deals with ACV of $500,000 or more, down from 7 in Q2 of last year. This includes 2 deals over $1 million up from 1 last year. While we are still facing high levels of deal scrutiny, especially in new business, we are starting to see some positive trends on multiproduct deals. As team noted, half of our new logo deals we closed included both revenue and billings. ARR grew 7% in Q2, reaching $412.3 million. Adjusted free cash flow was $12.2 million in the quarter, up from $4 million we generated last year.

As a reminder, adjusted free cash flow does not include acquisition-related costs and [ shareholder matters ]. Our adjusted free cash flow fluctuates on a quarterly basis due to the timing of cash collections, vendor payments and seasonality. As a result, we believe it's best to assess our cash flow performance on an annual basis. Turning to the balance sheet. We ended the quarter with $543 million in cash and cash equivalents, a sequential decrease of $3.7 million. As a reminder, we closed the Togai acquisition in Q2.

Total CapEx for the quarter was [ $3.3 million ]. Turning to guidance. We assume the current challenging macro trend will continue into the second half with similar levels of deal scrutiny and elongated sales cycles. For Q3, we currently expect subscription revenue of $104.5 million to $105.5 million. Professional services revenue of $10.5 million to $11.5 million. Total revenue of $115 million to $117 million; non-GAAP operating income of $20.5 million to $21.5 million. Non-GAAP net income per share of $0.11 to $0.12, assuming a weighted average shares outstanding of approximately 152.5 million.

For the full fiscal year '25, we are raising both our revenue outlook and our non-GAAP operating income ranges as well as increasing our target for adjusted free cash flow. It is worth noting that the subscription revenue includes the revenue share from payment processors that are not included in the ARR. With the operating income, I want to point out that we're also absorbing the expenses from both of our recent acquisitions within the updated guidance. We currently expect subscription revenue up $414.5 million to $416.5 million, professional services revenue of $41 million to $45 million. Total revenue of $455.5 million to $461.5 million; non-GAAP operating income of $90 million to $93 million. Non-GAAP net income per share of $0.56 to $0.58, assuming a weighted average shares outstanding of approximately 150.9 million. Based on current buying behavior, we believe it is prudent to adjust our outlook for the fiscal year with DBRR to be between 103% and 104% and ARR growth of approximately 6%.

Double-clicking on ARR, we have a robust pipeline with some hefty opportunities within our installed base customers. But given the current environment, I remain prudent about how we set expectations for the second half as the precise timing can be difficult to predict. We will continue to see us drive our bottom line leverage and maintain our goal of exiting fiscal 2025 at a rule of 30 run rate. Based on our solid performance in Q2, we are increasing our guidance for adjusted free cash flow to be $82 million or greater for the full year.

To close that, I speak with a lot of CFOs, and I'm convinced we have the right product to give companies the tools and agility needed to monetize the business models of today and tomorrow. Gartner, ISG Software Research and MGI have declared our market leadership in this mission-critical category. In the current environment, we have taken the opportunity to dial in our cost structure and drive durable improvements in operating margin and free cash flow. This will give us the ability to drive more efficient growth in the future, while maintaining or expanding margins.

With that, Tien, Robbie and I will take your questions, and I'll turn it over to the operator.

[Operator]

[Operator Instructions] Your first question comes from Adam Hotchkiss with Goldman Sachs.

[Adam Hotchkiss, analyst]

Tien, I guess on the total monetization point, you noted that business model changes particularly around consumption billing or something that you're seeing and other folks in the industry are seeing. What's the plan to take advantage of that from a monetization perspective? And when you look 2 or 3 years out, what are the impacts to financials and sort of variables that you look at that get you excited about that business?

[Tien Tzuo, executive]

Well, the way I look at total monetization, and I appreciate the question, Adam, is it really allows us to continue the journey we've been on. And in many ways, you can think of it almost as an [ Act 2 ] where the first phase of the company was really offering billing the companies that were pure subscription businesses, right, companies like Zoom, companies like The New York Times. And total modernization is to say, look, now that subscription businesses and recurring revenue models are becoming more prevalent, companies are really looking to be much more sophisticated and blend these different business models together. So it's not just about subscription, it's about consumption. It's about onetime fees, it's about outcome-based fees. It's about really mixing all these things and customizing the right business model and the right pricing model for the customer. .

So I see this as an opportunity for us to really go beyond billing and go beyond subscription revenue. And we're seeing just that message really resonate with our customer base. We're seeing the analyst community really say, "Hey, total monetization makes sense. We can see how you really need an end-to-end solution that is billing, revenue payments and more. And so when I look at total monetization, it's really a message that's resonating with our customer base and really allows us to continue our leadership position, ideally for many years to come.

[Adam Hotchkiss, analyst]

Okay. Great. That's really helpful. And then Todd, just on the revisions lower on ARR and NRR for the year, could you just parse that out for us a little bit? How much of that is just added conservatism around the environment versus anything in particular you saw in the quarter. I guess we're just trying to understand to what extent you think sales cycles are, maybe, a little bit more elongated, and that's lasted a little bit longer than you previously thought versus just taking an added level of conservatism?

[Todd McElhatton, executive]

Sure, Adam. I really want to be prudent as we put together our forecast. We take the guidance very seriously, and we want to meet it on a quarter-by-quarter basis. If you take a look at what we're seeing here in half 2, as I mentioned, we have some meaty deals that are in our installed base and timing can be challenging to predict. And so I really want to make sure that I give you something that we're very confident that we can absolutely achieve. And based on the current environment, I think 6% is a reasonable place for us to be. .

It certainly continues to be challenging. I'd also note, at the same time, we brought up our revenue. We brought up and that's -- we're seeing other ways we're able to monetize our business such as monetizing payments from payment processors and other partners. You saw that we brought up the non-GAAP operating -- non-GAAP operating margin or profit by $10.5 million. And you also saw that we had RPO that grew 14%. So when the environment improves, I certainly feel that we're well positioned to accelerate growth. But for the environment that we're seeing right now, we really felt it was kind of appropriate to reset what we're seeing.

[Operator]

Your next question comes from the line of Jeff Van Rhee with Craig Hallum.

[Jeff Van Rhee, analyst]

A couple for me. First, maybe just spend a second on Canva, I thought that was interesting. And what was the competitive landscape there, external vendors that might have been after that as well as what was the internal environment?

[Tien Tzuo, executive]

They had a homegrown system that really made a lot of sense when they were small and they were just really selling in the self-service environment. But look, the journey that any company goes on is the bigger you are, the more successful you are, the more complex you have. If you look at what they are today, the way sell, they sell direct, they sell enterprise, they sell consumers, they sell the schools. .

And so the homegrown system really wasn't working. And you can imagine a company like that, right, they've got big plans. They looked at the market. They looked at every possible solution out there. And I'm pleased to say that we really had a set of differentiating technology that they thought was really, really important. The last thing they want to do is 2, 3 years from now have to do with yet another implementation of a system. And so we're pretty happy with our ability to meet their needs.

[Jeff Van Rhee, analyst]

Got it. And then on the payment processors, it sounds like the payment processors was the source of the upside. Can you just contrast that -- a little more color on what happened there and contrast it to what you would expect it to happen there?

[Todd McElhatton, executive]

Sure, Jeff, we've had agreements with our -- with many partners over time. And frankly, it's an area that we're revisiting. We've not monetized it as effectively as we could. We went back and did an audit with one particular one, and there was a catch-up that we had. In addition to that, we adjusted it going forward. And I would expect as we move through future quarters, you're going to see this be a source of increased revenue for us. As you know, we have over $50 billion of the payments that go through our system, and we certainly feel this is an opportunity for us to further monetize our business.

[Tien Tzuo, executive]

Yes. I mean just -- this is Tien, I'll add. I mean, that wasn't the sole contributor to any upside. I just want to make sure [indiscernible] 1 contributor. But what we really are trying to flag is look, the value of our customer base and the value that we've built so far, right, really gives us the ability to monetize in many, many different ways. We talked about our land and expand strategy that's working really well. And you're going to see us continue to find other ways to monetize this valuable customer base we have. And this is probably the first quarter we talked about this, but it's something that certainly has been in the mix for some time.

[Todd McElhatton, executive]

And Jeff, I would expect that to be an ongoing revenue, and that is not part of our ARR.

[Operator]

Your next question comes from the line of Joshua Reilly with Needham & Company.

[Joshua Reilly, analyst]

One of the things that we've heard from some of your partners as you have a pretty strong pipeline of pre-IPO customers out there, and maybe they're a little bit hesitant to spend because they don't know the timing around when they're going to go public. Just curious, is that what you're hearing from some of these prospective customers and consistent just more generally in the marketplace that an interest rate cut and a return of the IPO cycle will help some of that new customer activity, maybe just starting off there.

[Tien Tzuo, executive]

Yes, I don't know that I want to say to predict when the IPO market is going to thaw when interest rates are going to get cut. But I would say, if you look at these companies, Canva is a good example, but there's certainly many more. I wouldn't say they're obsessed with exactly when they go public. I would say they're at the size and scale right now where going public at some point in the future is definitely in the cards for them. And now is a great time to prepare, right? We had this whole set of customers going back to, say, 2018, 2019, 2020 that maybe went public, rushed in the marketplace and then went backwards and started putting in revenue recognitions and billing systems. We've talked about some of these companies in the past. But I'd say a better approach, right, to do it right now where things are calm so that when the IPO markets open, you're ready. I would say that is the primary mindset that these companies have.

[Robert J. Traube, executive]

Maybe I add 1 more thing as well, Josh, which is if we look at it, a lot of these will be closed by billing and revenue like Canva where they're future proofing. I think that's one of the big things that we mentioned Canva in the last piece. They've been solutions to future proof in the same way half of the new business deals that we did, we're buying both billing and revenue for that. So it ties in very well for people as they think about also future IPO.

[Todd McElhatton, executive]

But it certainly has been a headwind for us that as the IPO market has been slowed down, it's something that has been a drag. And as things loosen up, that would certainly be something that would help us accelerate, but we're not forecasting that at this particular point.

[Joshua Reilly, analyst]

Got it. That's helpful. And then just following up on the commentary around the ARR guidance update for the year. As you look at this kind of 6% level, can you just help us understand, are you pulling back more on the expectations around new customer activity versus the cross-sell? Or is it a little bit lower assumptions around both cross-sell and new customer activity?

[Todd McElhatton, executive]

I would say it's balanced with both, and that's certainly reflected with the DBRR guidance that we gave of 103 to 104. So we certainly see headwinds in both of those areas, Josh.

[Operator]

Our next question comes from the line of Rob Oliver with Baird.

[Robert Oliver, analyst]

My first one is just on what you guys are seeing in terms of pricing in the market. It sounds like there's some really nice lands, including obviously Canva, some other high-profile stuff in the pipe. But I just want to be curious to hear kind of what you're hearing on pricing? Are people a little bit more price sensitive? Are you seeing that in your lens? Then I had a quick follow-up as well.

[Tien Tzuo, executive]

I wouldn't say that the dominant trend there, right, obviously, it's competitive, but we have a sticky product. A lot of times, these customers that we're expanding with are already customers. There's certainly a bigger trend given the last 2 years of an inflationary environment where companies have tended to increase their prices at a point of renewal, our preference has been to say, hey, we have a lot of innovations, right?

If a better way to increase the value of our contract is to introduce new innovations and add more value to customers, that's certainly our preferred way of doing that than just a flatout price increase where they don't get additional capabilities. But I wouldn't say that we're facing increased pricing pressure, and we're managing the ability to grow our customers in a positive way.

[Robert Oliver, analyst]

Got it. Okay. And then, Todd, just one for you, and there's been a bunch of questions on the ARR. And so you've answered a lot. But just I guess to follow up one there. When you look at that pipeline for the back half of the year, when you look at the renewal profile, are you handicapping some renewals that, perhaps, could be more challenging and perhaps a bit of a spike in churn or last question was a good one on cross-sell versus new logo. It sounds like it's a mix of both. But if you can help us understand kind of what your thought is relative to churn there. That would also be helpful.

[Todd McElhatton, executive]

We have a robust pipeline, Rob, for the second half, and I feel very good about that. However, we've got some pretty large deals during the installed base. I think we have a very high confidence that we will absolutely win those deals. Timing is always a question. And with what we're seeing in the current environment, it just felt appropriate that we should adjust because if one of those or 2 of those drop out, it's not possible really to backfill it at the size of some of the transactions. So from our standpoint, it feels like this is a really reasonable place for us to land in the second half.

[Tien Tzuo, executive]

Maybe I'll add some color on top of what Todd says. Look, I'd start with the bigger picture. The bigger picture is, on a multiyear basis, right, the shift to recurring revenue is still very much a trend that's in place. It's not going to disappear. What you saw this quarter was continued recognition from third parties, the analyst community, specifically that we've got clearly the best product in the marketplace. And overall, we feel really good about some of the trends that we're seeing in our ability to create pipe -- ability to remain competitive, and our ability to close customers like Canva or customers -- or expand with customers like Zillow. I think -- look, I'll say this for Todd, he heard from you all over the years that, hey, a little stronger ARR guide compared to maybe what happened last year would be helpful.

And so we're halfway through the year. You might remember at the start of the year, there were some sense that, hey, after Q4 is technology spend is going to thaw, is going to improve. We're halfway through the year right now. You're seeing the results with other big, big SaaS companies who are saying, look, the picture out there is mixed. And given that the picture out there is mixed, let's apply good judgment and ultimately, give you guys what you're looking for, which is just a better sense of what's going to happen in the back half of the year.

[Operator]

Your next question comes from the line of Jacob Stephen with Lake Street.

[Unknown Analyst]

Yes. Maybe just touching on kind of the media vertical. Obviously, you guys have made some investments there, acquired Sub(x). I'd just like to get kind of your comments on what you're seeing in that vertical with new customers and just pipeline overall?

[Tien Tzuo, executive]

I'm really excited about the media vertical. In many ways, if you look at B2B business models, it's the technology vendors, right, the SaaS companies that have led the way to teach the rest of the world how these recurring revenue models work. In the B2C space, the media companies, especially the newspaper publishers, the transformations they've gone through, where they go, I really do think the rest of the industry will follow. I mean what we're seeing in that sector is they've been successful setting a paywall, they've been successful setting up these dynamic paywalls with these, what they call these propensity scores, right? How do we have a sense of -- based on data, whether a subscriber is going to subscribe or not. We're seeing maybe you call the Paywall 3.0 strategies that are not a surprise, AI-driven, right, that says we don't want static scores, right?

We want something that's dynamic, we want something that's changing. We want something that can look at the data. Given where AI is and technology is, there's no reason they can't do that. And so we doubled down on our Zephyr investment with Sub(x), which really gives it an AI-driven decision tree, right, using an AI technique called reinforcement learning to figure out [indiscernible] time, hey, this subscriber coming to your newspaper site or your app, what do you want to do? You want to let them look at the article? Do you want to put an offer in front of them? Do you want to cross-sell them, puzzles, the recipes or whatnot.

And so it's -- and we believe -- look, we're really focused on the media sector right now, but we believe that these techniques are certainly not specific to that sector. And every B2C company that has a recurring revenue model, ultimately, we'll have to adopt these type of capabilities.

[Robert J. Traube, executive]

Just adding further to that, you look at some of the customers, we mentioned The Economists, New York Times, we have one of the largest is probably media streaming companies, but is absolutely growing significantly in that space. And it spreads that out even more significantly. So yes, about that particular vertical. .

[Todd McElhatton, executive]

And they're taking advantage of Zuora capabilities for doing like pay-per-view events in addition to your ongoing monthly streaming costs.

[Tien Tzuo, executive]

Great example is total monetization.

[Unknown Analyst]

Got it. That's helpful. Appreciate that. And then maybe just kind of wanted to touch on the new deal -- new product deals being half billing plus revenue. I guess what are you seeing as we come through Q3 here? Is that something similar that you're seeing?

[Tien Tzuo, executive]

Well, look, on a personal basis, like you've heard us talk about [indiscernible] expands and you look at this quarter and a lot of customers came to us and said, "No, no, no, we want both products, and we want them to start." So look, ultimately, we're going to do where the customers take us. I like the fact that we can land with billing. We can land with just revenue. We can wait and cross-sell other products later. But you're seeing ultimately that the combination of these 2 really is where a lot of the magic is, right? That's what Canva found. That's what a bunch of other companies found. I can't just live with just billing. I need revenue recognition as well. And when it's appropriate, right, they're saying, look, we'd rather do it both at once. We're certainly going to support that decision. .

[Operator]

Your next question comes from the line of Brent Thill with Jefferies.

[Luv Sodha, analyst]

This is Luv Sodha on for Brent Thill. Maybe the first 1 for Tien and Robbie, I just wanted to unpack maybe the ARR weakness, I guess, this quarter. Obviously, it's a multiyear low for you guys at 7%. It sounds like the installed base was pretty strong. So could you just unpack, I guess, what drove the weakness in ARR growth this quarter?

[Tien Tzuo, executive]

Well, I'd say if you compare the ARR growth this quarter with last quarter, I think the picture looks strong. And so -- and I would say, look, in this environment, you're seeing all sorts of companies saying, it is harder to close a new customer. And so we're certainly seeing that as well, and we've seen good, solid growth in our installed base. But Canva was a new logo. And we certainly continue to close new logos, and that feels good given the current environment.

[Luv Sodha, analyst]

Got it. And one for Todd, if I may. Todd, it seems like you've delivered a lot of profitability upside. The possibility of this sustaining into the back half of the year and into next year, just any additional investments that you have planned? Any color would be helpful.

[Todd McElhatton, executive]

I think a couple of things, Luv. Thanks for the question. We've been really consistent on the fact that if we didn't think we could get a good return on investing in top line, we would put dollars to the bottom line. The cost structure that we have right now is absolutely sustainable, and we believe there is future. There's further leverage that we'll be able to gain. We are committed. We will exit the year at Rule of 30, like we said. So I have -- we're very confident about that. So I'm not concerned about that. And I do believe there are opportunities for additional leverage as we go out into next year. So we certainly don't feel like this is a onetime deal. I think this is a baseline where we have. The question becomes is when do we see an acceleration in top line? And do we hold or do we expand margins further? But I would not see us backtracking on margins as we saw top line accelerate.

[Operator]

We have time for 1 more question, and that question comes from Joseph Vafi with Canaccord Genuity.

[Joseph Vafi, analyst]

Thanks for the opportunity to ask a question here. Just maybe a lot of questions have been asked. Just get an update on Togai. And I guess more broadly, given kind of the surge and focus on do you think kind of the product set at this point is holistic enough to to capture the opportunity broadly around consumption-based pricing that's emerging with AI. And then I'll have a quick follow-up.

[Tien Tzuo, executive]

I feel really good about what's going on with Togai. We closed it this quarter, and so I think we're only 2 months in, to be fair. So it is early days. But look, we had a product in the marketplace, we call it Advanced Consumption Billing. That product is -- we talked about it being the fastest selling -- one of the fastest selling products in the last -- in Q2, and Togai is really part of that. So you can imagine engineers are really saying, hey, the 2 products can be integrated, but it's something we can do now that it's one company to make the integration even stronger, even more seamless and even more out of the box. .

And then what we get is we have an industry-leading billing solution that you've seen top right corner and all that from all the analysts, we're adding to that metering and ratings. So what does that mean? That means, look, if you're an engineering organization, you want to do consumption-based billing, how do I take all this raw data, all these events that are going on in my application, capturing it, ingesting it, translating that, transforming it and ultimately applying a price to it, right? That's what we mean by metering, rating. And that's the capability that Togai really give us a 2-year head start in terms of what we can do just basically by ourselves. So we're still selling advanced consumption billing like we did before. So I think the vision of where that product is going is now significantly stronger, multiple times better and it's getting really positive traction when we talk to our customers and prospects about it.

[Robert J. Traube, executive]

John, this is a point to that. We had our Subscribe Live. We had great, great interest there from all around the consumption area. So now we're seeing real great interest in that from both customers and from our prospects and also from our partners.

[Tien Tzuo, executive]

And I know like AI is a big driver, and we see that as well, but we try to highlight in the earnings call was that $80 billion logistics company, logistics, transportation, you might not expect it, but we're seeing a lot of traction with usage-based consumption-based models outside of the technology industry as well.

[Joseph Vafi, analyst]

Sure. That's all great color And then maybe just finally on kind of rev share coming from transaction processors. It's kind of something that we haven't heard you guys talk about that much at this point. So I appreciate that color. Just kind of getting a feel for -- is there -- I guess, we could call it your take rate or something off of payment volume here. Is there opportunity broadly to continue to increase, I guess, what you might call a take rate here of the gross dollar volumes that are running through your billing systems. Just any -- how you're looking at this over time.

[Tien Tzuo, executive]

Yes. Joseph, I know you've got deep experience in the payment space, and it's certainly something that you've talked to us about. But if I were to lift it up level, right, we're at a size and scale now where we represent a significant business, over $100 billion flows through our system every single year, close to $300 billion, if you include revenue recognition. We've got some of the best brands and best companies in the world that many other companies would die to have a chance to work with. And the question right now is how can we translate that into a durable growth engine, not that different than, say, Apple is done, obviously, the much, much larger scale, right, with the App Store or with Salesforce, I was very involved in the early days of the App exchange. I'd say it's early days for us. But certainly, we're at a size and scale now where we can find other ways to monetize our customers through the building of an ecosystem.

[Todd McElhatton, executive]

And this is an Todd, Joe, we're putting a lot more attention on. And to your point is, it's early days, but we do believe there's opportunity for us to get incremental revenue here. And this is something that is not part of our ARR, but it does hit the subscription line.

[Joseph Vafi, analyst]

Right. And it does feel like this would be kind of super high profit revenue, right? Kind of

[Todd McElhatton, executive]

That is the way to look at it.

[Operator]

That concludes our question-and-answer session, and I will now turn the conference over to Tien Tzuo, Chief Executive Officer, for closing remarks.

[Tien Tzuo, executive]

I appreciate everyone for joining us in Q2. And look forward to seeing you, hopefully, at Subscribe Live in Europe in the coming months or talk to you next quarter. Thank you very much.

[Operator]

This concludes today's conference call. Thank you for your participation, and you may now disconnect.