Zuora, the company that helps customers deal with subscription billing, and counts cloud companies like Box, Okta and DocuSign as customers, announced its intent to acquire Leeyo Software, Inc., a privately funded, boot-strapped startup that helps automate revenue recognition.
The company did not reveal a purchase price.
Leeyo is not just any revenue recognition company, though, because it has already made the transition to the new ASC 606 accounting rules set to go into effect next year, a factor that particularly excited Zuora CEO Tien Tzuo. That’s probably because it not only gives his company a more complete subscription accounting solution, it puts him ahead of the pack when it comes to this new approach.
As Tzuo pointed out, the accounting rules have been the same for about 500 years, but now, recognizing the new way that companies buy and sell things in a subscription economy, regulators in the US and Europe are shifting the rules to allow companies to recognize recurring revenue in a fairer way. These rules are known as ASC 606 in the US and IFRS 15 in Europe. Needless to say, a deep systemic change like this one is going to be challenging for customers and vendors alike.
Tzuo calls this transition the biggest burden for businesses since the Sarbanes Oxley rules went into effect in 2002. He says that customers have told him, “You’re helping us with [subscription] billing, can you help us with revenue recognition too?” And there was a sense of urgency because everyone knows these rule changes are coming, he said.
Zuora and Leeyo had been partners for the last several years, and with the up-coming rule changes the timing was right to come together in a more official way.”We were partnering with Leeyo and it made sense to join forces. It had built the best tech for ASC 605 (the current rules), and they were able to do the conversion of ASC 606 and were able to support it much faster than the big [competing] companies,” Tzuo told TechCrunch.
Leeyo also gives Zuora 100 new employees and 100 new customers (although there is some overlap with Zuora’s 800 customers).
For Tzuo, who began his career at Salesforce and launched his company in 2008, long before most companies were thinking about subscription-based revenue, this change is the fruition of a long journey. As the world has shifted to subscription and mixed revenue models, he believed the accounting rules had to shift too — and that’s finally happening.
What’s more, he saw a change he says his bigger competitors like SAP and Oracle and other ERP vendors couldn’t see coming. “The failure of ERP companies to adopt new business models, created the opening that created both companies,” he said.
By bringing in Leeyo, his company now has a complete order to cash recognition system. This is particularly important as Zuroa, which has raised over $242 million, could be looking to IPO at some point. When the company announced a new reporting system last April that allowed customers to recognize multiple kinds of revenue, Tzuo talked about an IPO as something to think about when the markets settled.
That seems to have happened with multiple tech companies going out so far this year and more on board. With this acquisition, Zuora is certainly in a better position with a more complete product set, but the company gave no indication that this was the impetus for this deal.
The acquisition should be completed later this quarter.