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By Denise Lugo
When Zuora, a Silicon Valley-based provider of subscription commerce, billing and finance systems, decided to buy Leeyo Software, it did so partially to tap into a huge market that has cropped up as a result of new revenue recognition accounting rules, Zuora’s founder and chief executive officer, Tien Tzuo, told Bloomberg BNA.
“Because ASC 606 is happening now, it’s not like we have two years to build this product,” said Tzuo. “For the last six months we said ‘we have all these customers, they need ASC 606, they need it now’,” he said.
Under the deal, which closes in upcoming weeks, Zuora will add Leeyo RevPro, a software that automates the revenue recognition process so that companies can comply with the new standard. The company gains Leeyo’s 100 customers, including Dunn & Bradstreet, NetApp, Concur, Electronic Arts, Symantec, PopSugar. “There is this huge demand coming our way,” Leeyo chief executive officer Jagan Reddy told Bloomberg BNA. “Zuora and Leeyo started talking to each other and we figured out Zuora has tons of resources, investment they can make. Why can’t we join hands and take this market immediately,” he said.
The companies declined to disclose the cost of the purchase. Zuora hopes the purchase will position it to capitalize on the huge potential that the new accounting rules have opened up and to rake in more market share toward the potential of filing an initial public offering.
“I want to make sure we never fall into the trap where the timing is never right, but we have stuff we want to build in the technology,” Tzuo said. IPO is a goal, “but we’ll do it when the timing is right.” Currently, Zuora has nearly $250 million in funding from Benchmark Capital, Wellington Management, BlackRock and others. It has 600 employees and 800 customers, including Caterpillar, The Financial Times, HBO, Ford and General Motors.
The new rules, Revenue from Contracts with Customers, (ASC 606) takes effect next year for public companies. The standard is one of the biggest changes in accounting in over a decade. It will affect every industry and is applicable to every company.
Adopting the rules is a massive undertaking for some companies, many of which still haven’t completed implementation efforts. A number of companies are rushing to utilize cloud services, which enables increased capability, better access and collaboration within an organization.
“I don’t think there’s a broad appreciation for how important this is—this is the Sarbanes Oxley or the Y2K of our time—where those two things got everybody’s attention, not just the CFOs attention,” Tzuo said.
“There’s going to be time where after you implement it—you’re a public company—the street’s not going to quite understand it, will question ‘why did this number change; why assumptions differ than how we assumed,’ because there’s no precedence. This is going to impact the markets,” Tzuo said.
Forrester Research analyst Andrew Bartels told Bloomberg BNA that software companies purchase other companies generally for three reasons:
A large number of enterprise resource planning (ERP) vendors aren’t moving fast enough to tap into the accounting space, and its Leeyo acquisition was a natural solution to a problem that needed a quick action.
“This is a very niche space—it’s a very huge space but it’s a very less known space by a lot of people,” Reddy said. “When you talk outside about revenue recognition, there’s much more complexity, not many people know it. Leeyo was the first one to come in and create this market.”
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