Q3 2024 Zuora Inc Earnings Call
Participants
Luana Wolk; VP & Head of IR; Zuora, Inc.
Robert J. E. Traube; President & Chief Revenue Officer; Zuora, Inc.
Tien Tzuo; Co-Founder, Chairman & CEO; Zuora, Inc.
Todd E. McElhatton; CFO; Zuora, Inc.
Adam R. Hotchkiss; Business Analyst; Goldman Sachs Group, Inc., Research Division
Chad Michael Bennett; Senior Research Analyst; Craig-Hallum Capital Group LLC, Research Division
Eylon Liani; Equity Associate; Jefferies LLC, Research Division
Jacob Michael Stephan; Research Analyst; Lake Street Capital Markets, LLC, Research Division
Joseph Anthony Vafi; Analyst; Canaccord Genuity Corp., Research Division
Joshua Christopher Reilly; Senior Analyst; Needham & Company, LLC, Research Division
Robert Cooney Oliver; Senior Research Analyst; Robert W. Baird & Co. Incorporated, Research Division
Presentation
Operator
Good afternoon. My name is Krista, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Zuora Fiscal Year '24 Third Quarter Earnings Conference Call. (Operator Instructions)
I would now like to turn the conference over to Luana Wolk, Vice President of Investor Relations and ESG at Zuora. You may begin your conference.
Luana Wolk
Thank you. Good afternoon and welcome to Zuora's third quarter fiscal 2024 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 will 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 discussions 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
Thank you, Luana. Congratulations, again. It's so great to have you back. And thank you, everyone, for joining us today. Welcome to Zuora's third quarter fiscal 2024 earnings call. Q3 was another quarter where we exceeded guidance on subscription revenue, total revenue, and operating income.
In Q3, subscription revenue rose to $98 million, up 14% in constant currency and 13% as reported. ARR grew by 13%. Non-GAAP operating income exceeded the high end of our guidance range by $5 million, and we exceeded our full year goal for adjusted free cash flow 1 quarter ahead of plan. I would say that the Q3 headline was our margin expansion. Our Q3 non-GAAP operating margin was 15%. This is a huge increase from nearly a breakeven position just 1 year ago. And as Todd will show, our outlook for FY '24 illustrates that we plan to deliver a $65 million positive swing in our adjusted free cash flow for the year. We've done this while building a durable business that delivers double-digit growth even in this macro environment where budgets are scrutinized and deal cycles are taking longer.
I would say that there are 2 things that have allowed us to accomplish this: our enterprise customers and our mission-critical technology. As you know, we chose to focus on the world's largest and fastest-growing companies across industries and all around the world. This gives us a customer base that many would be envious of. And in Q3, many of these companies recommitted to Zuora. We saw several expansions with multiyear commitments that drove a 20% year-over-year increase in our total RPO, or remaining performance obligations. This also helped drive our dollar-based retention rate to 108% in Q3, up 1 point quarter over quarter.
Let me give you some examples. In Q3, we expanded our work with Google Fiber, Alphabet's high-speed broadband internet service that spans 15 states and counties. Now, Zuora will power GFiber's full order to revenue process as they continue to grow. As you all know we power 12 of the top 15 automobile companies around the world. Well, in Q3, one of them, which is also one of our top 5 customers, renewed their commitment to Zuora for another 5 years. Not only that, in one of the world's largest telecommunications and entertainment companies expanded to yet another business unit, signing a 5-year, 7-digit deal which also was a competitive replacement.
Of course, this isn't just about our installed base. Because of our technology, our people, and our vision, companies continue to choose Zuora to drive the growth of their recurring revenue businesses. For example, in Q3, FreshBooks, a high-growth leading invoicing and accounting software built for business owners and accountants, came to Zuora after their previous legacy systems required complex manual intervention to meet their needs. Now, with Zuora, they plan to streamline and simplify how they manage recurring revenue, including consumption.
As another example, a leading healthcare technology platform selected Zuora to power their care services. We will be working with them to make their pricing and packaging more flexible, along with driving operational efficiency. And of course, we continued to have amazing companies go live on Zuora. In Q3, LinkedIn, the world's largest online professional network, is now using Zuora for their LinkedIn subscription revenue stream, this is within their LinkedIn Talent Solutions. After an in-depth search for the right partner, LinkedIn selected Zuora to minimize the need for manual intervention in their revenue recognition processes and expedite their time to market. This is why in Q3, we saw an uptick in both the number of large deals and the number of customers with an average contract value at or above $250,000. We now have 453 of these customers, up by 9 quarter over quarter. This quarter, we saw 7 deals with an ACV at or above $500,000 compared to 6 deals in Q3 of last year. Of those 7 deals, 2 were over $1 million. And our relationship with our system integration partners continues to be incredibly important to help us move these large companies to Zuora. In Q3, we continue to see solid growth for partner-sourced pipeline.
The second thing that enables us to continue to deliver strong results is, of course, our differentiated technology and our constant pace of innovation. And I'm so excited that this technology is more important than ever. Why? Because we believe we are entering a new phase of the subscription economy. Let me explain. The past 15 years have been a great period of growth for subscription businesses. But today you have all heard of the phrase subscription fatigue, the idea that we all have too many streaming services subscriptions or our companies have too many SaaS applications.
So does that mean the subscription era is over? Well, of course, not. What it means, however, is that a shakeout is now happening. And what we are seeing is the winners of the shakeout are using our technology to deliver not just recurring relationships or recurring revenue. They are using our technology to create recurring growth. In fact, if you came to any one of our Subscribed international events, for example in New York, London, Paris, Munich, Stockholm, or Tokyo, we showed that 2 dominant strategies are emerging for how to create recurring growth: the first is around consumption. In fact, our new research with BCG found an almost 3x increase in adoption of hybrid consumption models over the last 3 years. And so, in Q3, we expanded Zuora for Consumption to help companies take their unpredictable raw usage data, better understand exactly how their customers use their offerings, and translate that to the right pricing model.
Companies like Aviva, a global leader in industrial software in Europe, are adding Zuora for Consumption to give their customers visibility into consumption habits. And with that new transparency, deliver new value to customers. We're also seeing greater recognition of our product portfolio by third-party research firms. IDC Research, for example, has stated that Zuora is providing the revenue platform of tomorrow, especially with these new consumption-based capabilities.
The second dominant strategy we're seeing emerge is what I'll call strategic bundling and unbundling. In this digital era, companies like The New York Times, as an example, they no longer ask you to buy their entire newspaper. Instead, they have unbundled their offerings, allowing people to subscribe to just games or news or sports or cooking and more. And this is how they have grown to now more than 10 million subscribers. And so, in Q3, we announced new capabilities for Zephr that enabled our customers to gain a deeper understanding of their subscribers through their own data, combined with industry benchmarks across the entire Zuora customer user base, helping them drive conversion and retention through personalized offers.
All of this builds on our family of market-leading products: Zuora Billing, Zuora Revenue, Zuora Payments, Zephr, and the Zuora Platform, including a Zuora Warehouse with BYOB (sic) [BYOW] technology, Zuora Extension Studio, and the Zuora Command Center with the new Integration Hub. In closing, for Q3, I would like to thank every ZEO for their work, not just in the quarter, but for the entire year. We have built a fantastic customer base with the biggest and best brands. We have the right technology suite, which we are constantly innovating, and we have a passionate team of ZEOs in place to help us take the momentum that we have seen through Q3 into Q4 and into the new year.
Now, I'll turn over the call to Todd to review our financials. Todd.
Todd E. McElhatton
Thank you, Tien, and thanks to all for joining our call. In Q3, we once again did what we said we would do. Consistent with what we have seen over the past few quarters, we continue to see extended sales cycles in Q3. Regardless of the backdrop, we are committed to building a long-term durable business that can post double-digit growth while delivering double-digit operating leverage and generating healthy cash flow. In fact, we exceeded our full year goal for adjusted free cash flow 1 quarter ahead of plan.
Our subscription revenue, total revenue, and non-GAAP operating income all exceeded the high end of our guidance range. Let's start with our Q3 performance. Subscription revenue was $98 million, growing 14% year over year in constant currency and 13% as reported. Professional services revenue was $11.8 million, a decrease of 19% year over year and represented 11% of total revenue. System integrators remain an important piece of our strategy, and similar to prior quarters, we leveraged our SI partners for implementation of our solutions. Total revenue was $109.8 million, up 9% year over year.
Non-GAAP subscription gross margin in Q3 was 83%, an improvement of over 400 basis points year over year. This increase was driven by optimization of our cloud hosting and a one-time vendor credit. In the near-term, we expect our subscription gross margins to be between 81% and 82%. Non-GAAP professional services gross margin was negative 1%, an improvement of over 30 basis points year over year. Our long-term plan is to run professional services at or near breakeven. Professional services margin may fluctuate based upon investments we make in customer support for near-term subscription revenue growth.
Our non-GAAP blended gross margin was 74%, an increase of over 650 basis points year over year. We are very pleased to share that our non-GAAP operating income in Q3 was $16 million, compared to $0.6 million in the prior year and exceeded the high end of our outlook by $5 million. This resulted in a Q3 non-GAAP operating margin of 15%, a significant improvement of nearly 1,400 basis points over last year. This was driven by top line growth and our continued commitment to disciplined investment. Our fully diluted share count as of the end of the quarter was approximately 178.3 million shares, using both the treasury stock and if-converted methods. The share count increased primarily through the issuance of our second tranche of convertible debt with Silver Lake.
Now let's dive in some other key metrics. Dollar-based retention rate, or DBRR, ended at 108%, up 1 point sequentially and a 1-point reduction year over year. As Tien noted, we saw contract expansions, many of which were long-term commitments, driving our total RPO to a 20% year-over-year growth and noncurrent RPO grew 28% year over year. In addition, we continue to see very strong customer retention rates. As we deliver more innovative solutions and value, we're giving our customers more reasons to stay and grow with us, driving continued improvements and retention as a percentage of ARR. At the end of Q3, we had 453 customers that spend at or above $250,000 in average contract value, which is up 9 sequentially and 33 year over year. This cohort represents 83% of our business. This quarter, we closed 7 deals with ACV of $500,000 or more, up from 6 in Q3 of last year. This includes 2 deals over $1 million, consistent with 2 in Q3 of the prior year.
Now looking at ARR and free cash flow. At the end of Q3, ARR was $396 million and grew 13%. Adjusted free cash flow was positive $12.7 million in the quarter, a meaningful improvement of nearly $20 million over Q3 of last year. Adjusted free cash flow is operating cash flow, adjusting for capital expenditures, acquisition-related costs, and non-ordinary course litigation costs. We believe cash flow is best assessed on an annual basis as adjusted free cash flow fluctuates on a quarterly basis due to the timing of cash collections, vendor payments, and seasonality. As I noted earlier, 3 quarters into the year, we have already exceeded our annual target, which demonstrates the health and durability of our business. Total CapEx for the quarter was $3.1 million.
Turning to the balance sheet. We ended the quarter with $493.7 million in cash and cash equivalents, a sequential increase of $87.5 million. In Q3, we had 2 notable events that affected our cash balance. We received a second and final tranche of our funding from Silver Lake Partners. Additionally, we dispersed payment associated with the completion of a litigation settlement. In Q3, the macroenvironment remained challenging, and we anticipate this to continue through the near term. As we discussed last quarter, our professional services business is now a smaller portion of our revenue mix as we support our partners in leading customer implementations.
Starting with our Q4 guidance. We currently expect subscription revenue of $99.3 million to $100.3 million, professional services revenue of $10.5 million to $11.5 million, total revenue of $109.8 million to $111.8 million. We expect non-GAAP operating income of $12 million to $13 million, and non-GAAP net income per share of $0.04 to $0.05, assuming weighted average shares outstanding of approximately $144.2 million. For the full fiscal year, we're tightening the range for revenue, and based on the outperformance in Q3, we're raising our guidance for non-GAAP operating income and adjusted free cash flow. We now expect full year subscription revenue of $382.5 million to $383.5 million, porofessional services revenue of $48.3 million to $49.3 million, total revenue of $430.8 million to $432.8 million, non-GAAP operating income of $43.6 million to $44.6 million, and a non-GAAP net income per share of $0.25 to $0.26 assuming weighted shares outstanding of approximately 140.1 million.
We continue to make headway on our goal of balancing growth with profitability. For full year fiscal '24, we are raising our adjusted free cash flow guidance from $28 million to $37 million or more. This outlook is a nearly $65 million improvement in adjusted free cash flow over fiscal '23. Similarly, we are increasing our outlook for non-GAAP operating margin, which we are raising from 8% to a minimum of 10% for the full fiscal year. Recall, at the beginning of the year, we expected to be at an annual share dilution for fiscal '24 at under 5%, with a midterm target of 4%. We now expect fiscal '24 to be closer to our midterm target of 4%. For this purpose, dilution is calculated as the number of equity awards granted, net of forfeitures during the fiscal year, divided by the total shares outstanding at the end of the fiscal year.
Turning to DBRR and ARR growth. For the fiscal year, we now expect DBRR of 107% to 108% and ARR growth of approximately 12%. Since Q4 is our largest booking quarter, we believe it is best to wait 1 more quarter to provide you with full guidance for fiscal year 2025. Having said that, we do want to share some color on the year ahead. As I noted, we expect to end fiscal '24 at approximately 12% ARR growth. We believe this to be the leveling point of our ARR growth in the near term based upon the current environment. We have the product and sales capacity to accelerate top line growth when the macroenvironment changes, but we believe it is wise to be prudent at this point. I would also remind you that subscription revenue growth trails ARR growth by a couple of quarters.
Given the recent trends in our professional services business, we expect our SI partners to continue to take on more of the implementation work. As such, we expect our PS revenue mix to be approximately 10% of our total revenue. Lastly, we are committed to driving incremental operating margin improvement regardless of the economic backdrop. As you've seen this year, we have been quite aggressive in accelerating non-GAAP operating margin as the year progressed, and we plan to continue this trend next year. Our objective is to exit fiscal 2025 at a Rule of 30 run rate, as defined as the sum of the year over year subscription revenue growth plus non-GAAP operating margin.
In closing, we delivered on our strategy and did what we said we would do. Q3 has further illustrated that Zuora is a durable, double-digit margin, and growth business. We continue to expand our enterprise customer base, keeping our retention rate strong, while expanding profit margins, and increasing free cash flow.
With that Tien, Robbie, and I will take your questions, and I'll turn it over to the operator.
Question and Answer Session
Operator
(Operator Instructions) Your first question comes from the line of Rob Oliver from Baird.
Robert Cooney Oliver
Tien, I had 1 for you, and then, Todd, I had a follow-up question for you. So Tien, to start, this is the second quarter in a row where you've called out a telecom win. And I think in this 1 you talked about a competitive displacement. I think for those who've been around a while, they'll know that market was dominated by another player. Just curious to hear your take on Zuora's success in telecoms, whether this is an opportunity for you guys to double down in a new market now with I think it was TELUS you called out last quarter with some signature wins in this market. And then I had a quick follow up.
Tien Tzuo
Rob, I don't think I'm ready to say that the telecom sector is at this inflection point that we've seen in, say, the manufacturing sector, the technology, and the media sector. I think what we do see is, like all industries, the pressure on subscription businesses and the agility that you need to execute, especially these new services, is only increasing. And many of these companies are coming to us. I'd say if you look at TELUS, if you look at this other telecom company, in many cases, it's not going to be the landline business, it's not going to necessarily be the mobile business that's been around for 20, 30, 40 years. It's going to be some of these newer services, over-the-top services, corporate services and the like, and I think that's really where we shine, and that's where the differentiator that we bring to a telecom company is very much the same that we do, say, to a newspaper company or a fast-growing SaaS company.
Robert Cooney Oliver
And then, Todd, just question for you. Obviously, great work on the margin side and free cash flow side. Just relative to the top line headed into the end of the year here, just wanted to get a sense for your view relative to the outlook, whether the tweaking of the ranges around ARR and revenue, is that conservatism? Has there been any change in the macro or in the outlook for you guys in terms of customers? Just be curious to hear how we should think about that.
Todd E. McElhatton
Rob, from the outlook perspective, we are in that range. After 3 quarters and being 3 quarters of the way through the year, I felt appropriate to take a look and say, this is where we're going to end. We'll end at 12%, which is within the range. As we've said all year, we've seen elongated sales cycles. Nothing has changed. We're still staying the same there. And so I think that's a good point for us to be thinking about not only how we end this year, but how we go into next year. I'd also say, as we talked through the whole year, what we had said at the beginning of the year was, look, we'd be approaching somewhere around a Rule of 20. And if we didn't see an acceleration of top line, we would put dollars in the bottom line. And that is exactly what we've done this year. And you've seen a significant acceleration of that bottom line. So not only we have a durable top line double-digit growth, but we also now have a double-digit bottom line margin.
Operator
Your next question comes from the line of Chad Bennett from Craig-Hallum.
Chad Michael Bennett
So just maybe for Todd, just on the deferred rev and billing side of the equation this quarter, I think deferred revs were down sequentially when I think just historically, they've been up. And I'm just not sure if there was anything related to timing or I think you guys alluded to some multiyear deals where maybe billing was different from a duration standpoint than normal. Any color into the billings this quarter?
Todd E. McElhatton
Rob, as we've talked for -- I'm sorry, Chad, as we've chatted for a while, we really want to keep people focused on the ARR growth. That's the absolute dollars that we have booked. It's a great way to model the business as we think about it going forward. As you know, it's really messy when you take a look at the calculated billings numbers. There's FX numbers, there's pull forwards, there's different billing terms. Over time, that certainly evens out to the ARR, but we really think the best way to be looking at it is on the ARR. And as we did talk, we had a really nice quarter from a standpoint, our largest renewal ever with one of the largest (inaudible) automobile manufacturers. We saw one of the largest software companies in the world not only extend with us but expand that relationship, same thing with Google Fiber, some other software companies. And so we had a really strong growth not only in the current RPO but the long-term RPO with people not only making those commitments and expanding them, but going out for the long term with us.
Chad Michael Bennett
Yes. No, the RPO numbers were great. I'm just thinking, Todd, in terms of seasonality in the fourth quarter, obviously, it's your biggest bookings quarter like most in software. But just whatever that normalized baseline is on deferreds or whatever you're looking at or RPO, does this feel like a normal seasonality sequential quarter from whatever that baseline is?
Todd E. McElhatton
Yes. Like I said, there's just ebb and flow every quarter. You might have pull-ins at 1 point during the quarter, we might have something with terms that are different. So there really isn't a whole lot of consistency on that number, and that's really one of the reasons that we've gone to giving the ARR number so people can model off of that.
Chad Michael Bennett
Okay. And then maybe 1 quick follow-up. I know on last quarter, I think, Tien, you talked about new logos and maybe, Todd, also. I think they were up like 35% last quarter and sales cycles decreased. I think you talked about maybe sales cycles continuing to be down. And I think you also talked about a resumption of volume growth also last quarter. Any color into those items? And then I'll hop off.
Tien Tzuo
Yes. Clearly maybe what you're asking, maybe asking many companies is, hey, as companies, as a whole, are we seeing things turning around, are we seeing things stabilize, the economy coming around. I would say, look, we're probably experiencing the same thing that every other company is experiencing, but we want to be certainly very conservative. We do see more optimism in our customer base that's certainly led to these longer-term contracts and some of the things that we tried to talk about as color on the call. But I think there's still enough unknowns out there in the marketplace that we would want to be muted in our optimism.
Todd E. McElhatton
I guess the only other color that I would add to Tien's is one of the things we said at the beginning of this year was we were going to have the agility to land both smaller lands that we'd have the ability to expand over time, still going after the same enterprise customers that had a good runway in front of them. And we did that. And we actually saw the number of new logos is up year-over-year. So that feels like that is working well. In addition, you heard we had 2 deals over $1 million, what was it, 7 deals over $500,000. So in addition to landing some things at a smaller space, we also have some nice meaty deals.
Tien Tzuo
And that's important. You could see that's a key part of what we say we do for our customers, right? We allow our customers to give their customers flexibility in how would they engage and certainly their own technology to do the same for ourselves as well.
Operator
Your next question comes from the line of Joshua Reilly from Needham & Company.
Joshua Christopher Reilly
All right. Another question on the setup for the pipeline here for Q4. How do you foresee the linearity shaking up in terms of will the month of January be critical to hitting the 12% ARR guide? Or do you have some visibility of deals closing here in November and December, which could take some pressure off that month of January?
Robert J. E. Traube
Josh, it's Robbie. I think 1 of the big pieces there is, I think, pipeline for us grew quarter-over-quarter really well. I think as you look at especially also on our partner side of it, I think that there's really a good view in terms of a high-quality pipeline that we saw in Q3 has been very good for us. And that led to some of those new business win rates.
Todd E. McElhatton
But I guess, Josh, I'm not sure that I'm seeing anything different than what we usually do on linearity. As you know, pretty much every enterprise software company certainly sees a skewing to the back end of the quarter. And ever since I've been in this business, it's always been that way, and I would expect it would be this way again this quarter.
Joshua Christopher Reilly
And then just what are you seeing in terms of some of your -- obviously, we know tech is your largest vertical. Are you seeing some better trends with some of the B2C tech customers versus some of the B2B? It seems like some of the B2C subscription services are doing a little bit better here. Are you seeing less of a volume headwind from those customers?
Tien Tzuo
I think the big news that we're seeing across B2C and B2B, and we tried to allude to that on the call is, look, when markets slow down, competition certainly increases. People are chasing the same pie versus a growing pie. And we do see, when you look at the entire market space, our customers and other companies, that there could be a shakeout. There could be a shakeout where, hey, which streaming services are you going to drop, which newspaper subscription are you going to drop, which SaaS company are you going to drop. And so what we're busy working with our customers on is, look, the best companies are the ones that can hold on to their customers, give their customers choice, and that's a key part of our technology. So if you look at the announcements that will be made, whether it's around consumption-based billing, whether it's really bringing Zephr into not just newspaper companies but really any company. I think those are the strategies that companies are using, regardless of whether they're B2C or B2B, to continue to be a long-term grower for years and years to come.
Operator
Your next question comes from the line of Adam Hotchkiss from Goldman Sachs.
Adam R. Hotchkiss
I just wanted to touch again on the strength in current RPO sequentially. Could you just talk a little bit about where you're seeing the incremental momentum from a cross-sell perspective and what you view as the key catalyst here? I guess how much of this was some of your more seasoned products like rev rec versus some of the newer launches like Zephr and Consumption.
Tien Tzuo
Well, I would say -- I'll let Todd comment on what he's seeing, but to me, it really is a validation that our customers believe in us. Our customers believe in us. Our customers believe in our technology. And when you see an increase in RPO, a lot of that is going to be driven by, look, we're not just going to renew a year, but we're going to stick with you for many years to come. And I think that's just a really strong statement due to the fact that we have differentiated technology, we do a lot for our customers, and they continue to say, hey, we're committed to you.
Todd E. McElhatton
Yes. I think the only other color that I would add to that, Adam, is we saw the largest renewal we've ever had, one of the world's largest automobile manufacturers. Not only did they go out for 5 years, but they accelerated their spend. They're going to put a whole lot of volume through our system. One of the world's largest software companies, again, expanding how they're using our product, taking on additional volume. Google Fiber came through. So really, I think, it's been the customers that we've chosen. These enterprise customers, as they've used the system, are getting value as we're innovating, are just expanding their footprint with us, and we're becoming part of their tech stack and a mission-critical piece of their business.
Adam R. Hotchkiss
And then just on that point, Todd, is there any commonality between these $1 million deals and your go-to-market and achieving this level of commitment? How much visibility do you have when you look at the upsell cycles for companies that might be in the pipeline for this type of ACV over time?
Todd E. McElhatton
I think we have pretty good visibility to it. I think there is a little bit of does it close this quarter, next quarter? There's a little bit of variability onto what quarter it closes. But I would say, in general, we've got good tight relationships with these customers. We have customer relationship managers that are attached to them. We spend a lot of time with them. Our executives spend a lot of time with them. They understand our roadmap. A lot of times they're giving us inputs on what they'd like to see on the roadmap. So as we work together, I think we have a good visibility of where that expansion goes over time. I'm not sure that you can always, and especially in this environment, peg it down, hey, we'll [beat] this quarter, next quarter, the quarter after that. But we do know that there are things that are coming and are highly confident of our ability to close that business.
Tien Tzuo
Yes. If I were to raise it a level, we've been saying for the last 2 or 3 years that we made a strategic choice to really target the biggest and fastest-growing companies in the world. And we believe those companies give us runway. I know at the start of the year when we started talking about smaller deals, that was a big question you guys had, right? Are you chasing smaller companies? And we said, no, we're chasing the same customer base. We just want faster lands. Because what gives us confidence in that is every one of our companies, regardless of where they stand today, is a potential to be a multimillion-dollar-a-year account.
Operator
Your next question comes from the line of Joseph Vaffi from Canaccord.
Joseph Anthony Vafi
Welcome back. My congratulations on coming back too, Luana. How about maybe one question on any change in the land you're seeing now, are things gravitating toward any specific product? Just trying to get a feel for perhaps revenue, which seems to be resonating in this kind of environment. And where are you right now at this point in revenue penetration across the base? And then I'll have a quick follow-up.
Tien Tzuo
Just like we said, one key part of our strategy is targeting really the best and fastest-growing companies in the world. Another big part of our strategy is the multiproduct strategy. And we're sitting here today and we're fortunate enough to have multiple products that are resonating in the marketplace. And so that includes Billings, that includes Revenue, the Zephr acquisition has turned out to be a homerun. And so in any given quarter, you're certainly going to see puts and takes or ebbs and flows of one product versus the other. And I would say that that's just the nature of whatever is going on in that quarter. But I feel really, really good about all the products that we have and their ability to have impact in the marketplace.
Todd E. McElhatton
Yes, the other thing I'd say is, look, we're still early on in the revenue where we are from a standpoint of penetrating there. We've certainly seen consistent growth over the last year or so. But there's a lot of opportunity for us to continue to accelerate that movement. And some of the innovation that's coming out will help even more customers join the Revenue or purchase the Revenue product as we go through the next year or 2.
Robert J. E. Traube
I think added to that as well, Joe, Consumption is a big focus for us. And the way that we can actually use revenue on those lines is also really, really exciting for us and our customers.
Joseph Anthony Vafi
That's a great commentary. I appreciate that from all three of you. And then any commentary on Silver Lake balance sheet infusion here? I know it was kind of expected, but how are you looking at the landscape here? I would imagine it would be M&A centric again, as it was with Zephr. But any comments there?
Todd E. McElhatton
Yes, Joe, absolutely, that was an agreed upon deal. We took the second tranche here during the most recent quarter. We're still very active in looking at things in M&A. We're going to be extremely disciplined, just as we were with Zephr, making sure that we get the right product, that we can expand it, that it's growing faster than where we are growing, and that the culture is right and it helps us on our land and expand strategy. So we continue to look at things. I think it's an active market. We've got a lot of things, and when we have something to announce, we will announce it. But I do feel that over the next couple of quarters you'll see us have the ability to announce something.
Joseph Anthony Vafi
That's encouraging.
Operator
(Operator Instructions) Your next question comes from the line of Brent Thill from Jefferies.
Eylon Liani
This is Eylon Liani on for Brent Thill. My first question is on net new ARR. Good to see some sequential improvement here. But net new ARR was still down 10% year over year and the quarter, and the updated full year guide implies sequential improvement in 4Q. Based on your pipeline and coverage, what are you seeing out there in the market and what gives you confidence in the sequential improvement implied in the 4Q ARR guide?
Todd E. McElhatton
Eylon, we pretty much through the entire year said that here was the range where we thought we would land on ARR. We've confirmed today that we'll end up the year at about 12%. That's what we've said all year. Being 3/4 the way through and taking a look at the pipeline, the conversion rates that we see, we're comfortable that that's where we end up landing. And I think it's been pretty consistent. Every quarter this year we've had a standard or consistent increase quarter over quarter on the ARR. And so that's what we're seeing in the pipeline, and the pipeline and the conversion rate certainly support that. And so I would expect that we'll land at that approximately 12% growth for the overall year.
Eylon Liani
And just as a quick follow up, regarding targeting faster smaller lands as the environment remains challenging, can you shed some color on your progress here and what you're hearing from customers?
Tien Tzuo
I think, we've been pretty consistent throughout the whole year. We're really pleased that we have the ability to do smaller lands. Maybe going back a year ago, I think, there was some doubt that we can do that. But our products are very modular. We can land with Revenue, we can land with Billing, we can land with Zephr, or if a company chooses, we can land with the entire suite. And that flexibility has really been an important part of our growth story this year. So customers obviously appreciate that. Whenever you give customers choice, whenever you give customers flexibility, it's something that they're going to value and we've been able to translate that benefit into our growth this year.
Operator
Your next question comes from the line of Jacob Stephan from Lake Street.
Jacob Michael Stephan
I just want to focus on the [quick] land deals as well. When you think about the ARR growth rate you alluded to in FY '25, how are you thinking about these deals factoring in to that growth rate?
Tien Tzuo
Yes, that gives us optimism that we can continue this path. One of the things I alluded to on the call is, look, there's 2 dominant growth strategies that we're starting to see the best companies in the subscription economy use: one of them was consumption. It's certainly something that we've done in our pricing model since the beginning; the second one is what I call strategic unbundling bundling. I gave an example that was a B2C example with The New York Times. A big, big part of their growth story is the fact that you don't have to subscribe to the entire newspaper anymore, right? You can start with games, you can start with Wordle, you can start with news, you can start with sports. It's the same analogy applied to a B2B SaaS company setting. You can start with us with Revenue, you can start with Zephr, you can start with Billing. And I think any company that's not really using these strategies is going to be at a disadvantage. And I would say that our technology is a big, big important part of allowing any company, B2B or B2C, to do this. And so we certainly want to be the best examples of that in terms of how we use our own technology. And that's what you're hearing us talk about on this call.
Jacob Michael Stephan
And maybe just help me understand the timeline for SI partners implementations versus your internal team. What's the difference there?
Robert J. E. Traube
I think the main thing is we really focus on being partner first, and we'll continue doing that aspect of it. And again, if we look at the partner at the moment, the source pipeline continues to build. Google Fiber was a great example where they came in and an SI sourced it. They're going to help us all the way through that process as well. And look, we keep on. We will push implementation work to our SIs, and we will make sure that they are focused on that too.
Todd E. McElhatton
Yes, I think the other question, Jacob, maybe you're asking is from a timeline perspective, and I think what we've seen, as Robbie said, is we're partner first. We're just seeing more and more of our pipeline, some of the big deals that closed, that were new deals during the most recent quarter or even expansion deals were brought to us by partners. And our preference is, hey, if the partner is wanting to do the implementation, that'd be our preference to do it. We certainly have a services business and are capable of doing it, but as you know, that's a breakeven business for us, so we're more than happy for someone else to take that. So, as we said, next year we're about 11% mixed right now. Next year we'll probably be about 10% mixed. So we're happy to see our partners continuing to take on more and more of that business.
Operator
We have no further questions in our queue at this time. And with that, that does conclude today's conference call. Thank you for your participation and you may now disconnect.
