Earnings Call: Q2 2021

Aug 3, 2021

Good afternoon, ladies and gentlemen. My name is Rachel, and I will be your host operator on this call. After the prepared comments, we will conduct a question and answer session. Instructions will be provided at that time. Please note that this call is being recorded on August 3, 2021, at 5 P. M. Eastern Time. I would now like to turn the meeting over to your host for today's call, Mr. Mike Rosh, Vice President of Corporate Development and Investor Relations at Workiva. Please go ahead. Good afternoon and thank you for joining us for Workiva's 2nd quarter 2021 conference call. Today's call has been prerecorded and will include comments from our Chief Executive Officer, Marty Vander Plow followed by our Chief Financial Officer, Jill Clint. We will then open the call up for a live Q and A session. Julie Isco, our Chief Operating Officer is also on the call. A replay of this webcast will be available until August 10, 2021. Information to access the replay is listed in today's press release, which is available on our website under the Investor Relations section. Before we begin, I would like to remind everyone that during today's call, we will be making forward looking statements regarding future events and financial performance, including guidance for the Q3 and full fiscal year 2021. These forward looking statements are subject to known and unknown risks and uncertainties. Orkiva cautions that these statements are not guarantees of All forward looking statements made today reflect our current expectations only, and we will undertake no obligation to update any statement to reflect the events that occur after this call. Please refer to the company's annual report on Form 10 ks and subsequent filings for factors that could cause our actual results to differ materially from any forward looking statements. Also, during the course of today's call, we will refer to certain non GAAP financial measures. Reconciliations of non GAAP to GAAP measures and certain additional information are also included in today's press release. With that, we'll begin by turning the call over to our CEO, Marty Vander Plow? Hello, and thank you for joining today's call. The The Workiva team delivered another strong quarter, beating 2nd quarter guidance for revenue and operating income. The past quarter reflected our steady execution With the addition of 149 net new customers, growing our customer base to almost 4,000. Our results continue to build on our market leadership and the increased demand for regulatory reporting and fit purpose solutions to support digital transformations. We are very pleased that nearly all of our solutions exceeded plan and contributed to our broad based growth. Our strong bookings from existing customers reflect the breadth of our platform and our enhanced ability to cross sell multiple solutions. This resulted in Q2 year over year growth of 29% in subscription and support revenue and almost 26% in total revenue. We target being a low to mid-twenty percent growth company. And for the first half of twenty twenty one, we delivered total revenue growth of 23.7 percent. Other highlights of the quarter included posting strong operating cash flow, our 3rd highest in company history, achieving our highest revenue retention rate in 2.5 years And continuing to grow the percentage of customers with an annual contract value of over $100,000 $150,000 Due to continued broad based demand and resulting top line growth, we are raising full year guidance. Joe will provide further details about our financial results And outlook. A strong IPO and SPAC market propelled sales of our capital market solution. This solution continued to exceed our revenue contribution plans in the Q2. Capital Markets is a great Source of new logos, which fuels our SEC, integrated risk and management reporting solutions. We will continue to model The incremental contribution of capital markets as an upside to our plan given its limited predictability. The EMEA team continued to build a strong new logo pipeline with a focus on ESF and other use cases. We are pleased with our incremental performance in the ESF market. We believe it is still early days and that the market has a long tail. We remain optimistic about the opportunity and are expanding our selling organization to capture the market as it reopens. Our ESG solution pipeline is growing. We are pleased with the customer traction we are achieving and remain optimistic about the market's Potential and expanding TAM. We are also accelerating our own corporate wide ESG efforts as we work towards strengthening our company and ultimately promoting a better world. 2 recent corporate ESG highlights include: First, we recently received an MSCI ESG AA rating. We performed at a leader level and marked our debut in the top 23% of 148 SaaS Companies with strong performance in governance, privacy and data security and human capital management. And second, Workiva has joined the UN Global Compact CFO Task Force. We are the 1st SaaS company to join and Jill will participate and work alongside her peers to shape credible goals that are aligned with corporate sustainability strategies. We continue to strengthen our partner ecosystem. In the Q2, we signed a number of large deals where our partners played a significant role. A few examples include, working in partnership with a big four advisory firm, a large global auto manufacturer Shows Workiva to manage their global statutory reporting transformation for over 500 legal entities. We worked with our partner on the joint RFP response and the partner will deliver the services to implement our platform. Another key partner related win was with a large healthcare company. The customer invested in the Kiva platform purchasing 4 solutions geared towards privately held companies, including financial reporting, management reporting, Internal controls and policy management. Expanding our partner ecosystem has powered growth in our multi solution opportunities. We also continue to expand our footprint with partners utilizing Workiva as part of their managed service delivery. We closed 4 opportunities in the Q2 with new and existing partners. 3 of the big four advisory Firms have now invested in the Workiva platform to support the delivery of managed services. We are The investment that our partners are making in growing their Workiva practices and the impact they have had in delivering transformative results for our customers. Last week, we launched our new marketplace offering over 200 templates, services and no code third party connectors. Customers can now streamline existing processes and reporting and solve new business problems all within our platform's connected and secure ecosystem. Our partners played a crucial role in the launch of the marketplace by contributing content and services that are readily available for customers to add to their workspaces. All four tenants of our company strategy are now fully in motion. We expect fit for purpose solutions along with our modern platform, Marketplace and partner ecosystem to drive our growth. Our company's strategy enables us to make thoughtful and deliberate decisions, aligning And focusing the organization and exposing and mitigating risk through rigor and discipline. Yesterday, we announced the strategic tuck in acquisition of 1Cloud, a pioneer in Ipaas technology. We acquired 1Cloud to extend Form capabilities and data integration and preparation. OneCloud has been an OEM partner of ours since July 2019. Their technology expanded the Workiva platform, enabling our customers to connect data from third party sources such as ERP, GRC, HCM and CRM systems as well as other third party cloud and on premise applications. We believe connecting, harmonizing and controlling data across multiple disparate source systems further differentiates the Workiva platform from its competition. By acquiring OneCloud, we now fully own the complete end to end technology of our platform. We expect a smooth integration given the successful Our 2 companies have shared and we welcome the 1Cloud employees to Workiva. We are proud of the extraordinary talent that driving our outstanding customer experience and values based culture. Recently, we were honored to be named once again to Fortune Magazine's list Best workplaces for millennials. Approximately 70% of our employees are millennials, making this recognition even more meaningful. We also were renamed as a best workplace in both Chicago and New York. In closing, we delivered strong quarterly results driven by the focused execution of our strategy. We are growing the business through new logos, maintaining high customer retention and expansion and investing in our people, tools and technology. It continues to be an exciting time for Workiva. The world is changing at a rapid pace and we believe we are well positioned to capitalize on the increasing opportunities to power transparent reporting for a better world. With that, I will now turn the call over to Jill. Thank you, Marty, and good afternoon, everyone. We saw strong performance during Q2 with new logo and add on sales contributions as well as continued robust performance across The team skillfully executed on our strategy and operating plans. I will talk about our results and guidance on a non GAAP Refer to our press release for a reconciliation of our non GAAP and GAAP results and guidance. We continued See broad based demand for our solutions in Q2. As a result, we are raising guidance for 2021 revenue and operating income, which I will discuss later. I'll address our performance against Q2 guidance first. We beat Q2 2021 revenue guidance at the midpoint by 4,100,000 Higher subscription revenue accounted for the majority of the beat. We beat guidance on Q2 operating income at the midpoint by 4 $8,000,000 The revenue beat mentioned above coupled with lower T and E versus forecast make up the beat on operating income. Turning to Q2 twenty twenty one results versus Q2 the year before. We generated total revenue in 2nd quarter of $105,600,000 showing growth of 25.9 percent from Q2 2020. Breaking out revenue by reporting line item. Subscription and support revenue was $91,200,000 Up 29% from Q2 2020. New logos and new solutions helped drive strong revenue growth in Q2 2021. 63% of the increase in S and S revenue in Q2 came from new customers added in the last 12 months. Higher capital markets revenue was also a factor. Professional services revenue was $14,400,000 in Q2 2021, up 9.3% from the same quarter last year. This was largely due to higher XBRL services revenue. Turning to our supplemental metrics. We finished Q2 with 3,949 A net growth of 4 37 customers from Q2 2020 and a net growth of 149 customers from Q1 2021. Our revenue retention rates improved. Our subscription and support revenue retention rate was 96% for the Q2 of 2021, an increase compared to 94.5% for the same period last year. With add ons, our subscription and support Revenue retention rate improved to 111.6 percent for the Q2 of 2021 compared to 107.9% in Q2 2020. The number of larger subscription contracts continues to show impressive growth. In the Q2 of 2021, We have 9.52 contracts valued at over $100,000 per year, up 33% from Q2 the prior year. The number of contracts valued at over $150,000 totaled 500 customers in the 2nd quarter, up 46% Moving down the P and L. Gross profit totaled $82,000,000 Q2, up 31.4 percent from the same quarter a year ago. Consolidated gross margin was 77.7% in the latest quarter versus 74.4 percent in Q2 2020, a net expansion of 330 basis points. Breaking out gross profit. Subscription and support gross profit totaled $77,700,000 equating to a gross margin of 85 point 2% on S and S revenue, an expansion of 170 basis points compared to Q2 2020, primarily driven by higher S and S revenue. Professional Services gross profit in the 2nd quarter was $4,300,000 up 27% versus Q2 2020. Gross margin was 29.9 percent, a net expansion of 4 20 basis points. Research and development expense in Q2 totaled $25,400,000 up 18.4 percent from Q2 2020 due to new head R and D expense as a percentage of revenue improved to 24.1 percent in Q2 2021 from 25 0.6% in Q2 2020. Sales and marketing expense for the quarter increased 19.7% from Q2 2020 to $38,700,000 as we invest in the growth of our business. General and administrative expenses Totaled $12,600,000 in Q2, up $2,100,000 compared to Q2 2020. G and A expenses as a percentage of revenue improved to 11.9% from 12.5% in Q2 2020. We posted an operating profit of $5,300,000 in Q2 2021 compared to an operating loss of $1,800,000 in 2020. Turning to our balance sheet and cash flow statement. At June 30, 2021, cash, Cash equivalents and marketable securities totaled $552,000,000 an increase of $11,000,000 compared to the balance at March 31, 2021. Net cash provided from operating activities in Q2 2021 totaled 12 $800,000 compared with cash provided of $7,200,000 in the same quarter a year ago. Turning to our guidance. We are factoring in the expected impact of the COVID-nineteen pandemic on our business and For the Q3 of 2021, We expect total revenue to range from $108,000,000 to $109,000,000 We expect subscription revenue will continue to grow at a We expect non GAAP operating loss to range from $4,500,000 to $5,500,000 For the full year 2021, we are raising guidance for revenue. We now expect total revenue to range from $430,000,000 to $432,000,000 We expect non GAAP operating income to range from breakeven to $2,000,000 We are modeling higher travel And in 2021, We expect to post positive free cash flow for the 5th consecutive year. I am proud of our team's performance this quarter and would like to thank all our employees We will now take your questions. Operator, we are ready to begin the Q and A session. Thank Our next question comes from the line of Matt Spottler from William Blair. Sir, your line is open. Hey, everybody. Thanks for taking the questions. I guess to start off, great to see the tuck in acquisition here, the OneCloud acquisition. We'd love to get maybe some color on how that came about. I mean, this is a close part of yours for a couple of years. Could you just share some of the thoughts that led to the decision to buy versus continuing to partner in this case? Yes, sure. We had been working with them since July of 20 'nineteen OEM in your product as you alluded to. And from our point of view, connecting disparate data systems It's a very important part of what we do. We had a lot of use of that OEM and a lot of customers using those connectors. And I firmly believe and if it's strategic technology, you own it. It's just a lot safer. You can do better integrations, Can be more aligned, better security. And we'd worked well together, really bright group of People in one cloud, very good people. And so it was a tuck in strategic technology buy, I would say. Always own what's strategic and the team wanted to join. That's another good thing. So we expect the integration to go really Smoothly, we've worked on them for so long. Got it. That's helpful. And then maybe just one more on ESG Chi, maybe this one's for Julie. The last time we heard I guess the first time we talked about this, Last earnings call, it was about a week after you kind of officially announced the product, and they're still kind of figuring out some things on the go to market front. Any progress that you can In terms of the packaging pricing go to market around this product and then how it's progressing? Well, what I would say is that We've made really good progress on understanding the market. We've seen Some good progress in terms of growing pipeline. We closed a few deals. And Julie's team, I'll let her comment on that, are Real hard to optimize the product. So we're seeing you see out in the press Pretty clearly that everyone's talking a lot about it. And even though a lot of the regulations aren't Approved yet or fully baked, you can see the writing on the wall. And the reason we know that is the Customers are calling us. We're seeing that type of draw. But in terms of optimizing our product, I'll turn that over to Julie. Sure. As Marty said, we're pleased with the momentum of how the solution is performing. We've been having prospect conversations, pipeline is building. Those conversations help us refine, define the solution for the market and the technology capabilities that we need to lead in this market. Great. And thanks again for taking the questions. Thank you. Our next question comes from the line of Alex Sklar from Raymond James. Sir, your line is open. All right. Thank you. Marty, it's Julie. On the new marketplace, some really impressive templates and connectors available at the GetGo. I had two questions around this. First on the connectors and all the data integrations, can you just remind us the strategy there relative to the W Data solution? Those are just kind of light versions versus much greater functionality with WDATA? And then second, what are the important KPIs you're going to be tracking in terms of Success of the marketplace and opening up the platform over the next couple of years, is it based on how many partners are building, customer usage or any other color there would be great? Sure. As far as the metrics, we're in the process of defining those now, but there'll be classic metrics for marketplace success in terms of usage, download, adoption, engagement and so forth. And The connectors are starting points for customers who want to begin using the capabilities of W Data and our broader offerings with respect to the data platform. Okay, great. And then just a follow-up for Jill. On the revenue growth, the 63% coming from new customers in the last 12 months, I think that implies you're landing much larger with new customers. Can you just help parse out what's Driving those higher deal sizes, is it coming from the partner influenced deals? I know Marty mentioned a 4th solution win. Is it Europe successful with some of the other higher price Solutions like Global Status, any other color there would be helpful. Thank you. Yes. Thanks for the question. And it's Actually, a combination of not only larger deals, but also continued add on deals to those new customers. So, it could be that they're coming in the door in one solution and then, pulling in other solutions all in place. So, it is just a combination of A lot of different very strong activities that we're seeing across all our solutions. Okay. Thank you. Thank you. Our next question comes from the line of Tom Roderick of Stifel. Sir, your line is open. Great. Hi, everybody. Thanks for taking my questions. Marty, let me start with you. I mean, I think you've been pretty clear so far in Call that it would be in saying that it's a little too early to suspect that the results we're looking at in front of us are driven by ESG. But I'd love to understand what's really kind of behind the pickup in customer activity. When we look at these metrics, they're accelerating on kind of all key metrics. They're blowing away the expectations. And yet some of the things that perhaps your investors are talking about the most Might not even be happening just yet, if I think about ESF and ESG and some of that excitement. So Help me to understand what you're seeing that's driving a pickup in activity, maybe it's a pickup in win rates. Where it's happening? Is it still predominantly U. S? Or are we in Faxing Europe kicking into these numbers now. And is just the talk around ESG creating new deal activities even if they're not purchasing ESG solution? Or is that Still too far off in the future. Hey, Tom, thanks. That's a question I could go on for quite a while. But I would start by saying that the performance has been very broad based. I mean, I mentioned that And I've always talked about a portfolio approach. We have a number of different solutions, management reporting, SEC, integrated risk, Annual and Interim Reporting, GSR, ECEF, there's quite a lengthy list. And The thing that we've always been very successful at is that portfolio approach. And each Solution can have some noise in it from time to time, a little weaker quarter than a very strong quarter, just depending on how deals close and things. It's always given us a really smooth bookings trajectory when you average all those out. And this quarter, Almost all of them produced really good sales. And so it was pretty broad based. We keep saying that broad based. And I would agree with you 100% that ECEF and ESG are upside. We did do as expected in ESEF. It's tracking the SEC business that we started 10 years ago. And that has a long tail of solid growth ahead for us. And then the same thing I would say about ESG, we'll see Some revenue from this year, but it's not going to be that material to our business. And all the upside there is 20222023, that's when the activity will really pick up. Now as I mentioned, we're very pleased with the ECEP Sales to date, it's back loaded because it's an annual report and we're seeing the pipeline grow very nicely. And so, Yes, I think the good news for investors to hear is that all that upside is ahead of us. And we're just our core business is Performing really well. Is that partially because of COVID? I think partially, but I think that's a long tail too. And We talked about Europe being a bigger and bigger percentage. It's trying to be, it's growing faster. But North America It's growing faster too. So pretty much across the board broad based, just solid Performance, everybody in the company getting better at what they do. So that's and more demand. So those are sort of the core Drivers of it and there's not one that you would say. Only cat markets was stronger than normal, that's for sure. But In general, it's just very broad based. Excellent. Okay. There's a lot to be excited about, so we'll keep checking in On the new items, but that's great. Thanks for that detail. Jill, a follow-up for you, a much simpler question. I apologize if I missed it, but is there any impact from 1 cloud In the guidance? So Marty has mentioned earlier in the call OneCloud being a smaller it's more of a strategic acquisition and so it's immaterial to our total results. We have modeled into Our forecast and it is included in our guidance anything, any of the operational results related to 1Cloud, but they really are not A big impact on our it's not a part of the growth. It's not our guidance raise is not being driven by that acquisition. So no material revenue is what you're saying? Correct. Yes, that's correct. Excellent. Very good. That's what you're saying? Correct. Yes, that's correct. Excellent. Very good. Okay, thank you. I'll jump back in the queue. I appreciate it. Thanks. Thank you. Our next question comes from the line of Andrew DeGasperi from Berenberg. Sir, your line is open. Hi, everyone. Thanks for taking my question. My first one, I'd like to ask on ESEF. I know it's Still early days, but one of the things we've heard from the advisory firms there is that usually the customers or the issuers have 3 options. They can either do it themselves, Use a third party software solution like Workiva or outsource it. But that even if 2021, they choose one of the other solutions that wouldn't be a Final Mile software. They could eventually move in that direction because of the expense For the resources needed to do it themselves, is that the type of conversations you're hearing? And would you agree that's why you feel it's a long tailed opportunity? Yes. I think you hit the nail on the head. I think that same thing happened in North America. We entered the market late, invested heavily and built a really sophisticated powerful tool. And when we got in the market, most of the customers were either outsourcing it or bought some other sort of bolt on applications. And they were 20% of the cost of our solution, but you saw the end result. When you put a really good product out there that Minimize risk for the customer produces a really high quality output in terms of their disclosures and reports, You win that battle. So I was clear a call or 2 ago that we didn't expect just to take this whole market by storm with a premium solution, people sort of have to learn what they have to do and learn the pain associated with it. And then there's more and more requirements as you go. They have to do more different types of tagging the following year, every time the hurdle gets higher for the bolt on Solutions. And so, yes, we expect to see a really long tail. It's very similar to the SEC market we've gone through in North America. We have that advantage having watched that. Meanwhile, we're closing really good business in ESOP in terms of The quality of the customer, the deal size and each country is a little different how we're doing, but we have a really good plan and the pipe Building really nicely. As you recall, most of the countries delayed ECEP. So a lot of the countries are just Seriously for the first time in the second half of this year, but I think you've got a real good handle on what's going on there. Thanks. That's helpful. And then maybe on the JOLA, if you can help on this, in terms of the contribution from Capital Markets, I mean, you've mentioned it was stronger. Can you maybe give us directionally, if not quantitatively, What that contribution is? I mean, has it sequentially become bigger in Q2? So we don't disclose that deal size or that as a separate solution, But it did have we did have an upside in Q2 related to that. There'll be some amount that will still be closing to the end of the year that we'll be completing to the end of the year. That's included in our guidance updated guidance. And so what we would say is that There's a potential for more upside depending on that market, but there's just too many variables for us to really know how that's going To go through? I would add that when we manage the business, we're pretty conservative and we model Cat markets is upside every quarter. And when it outperforms, obviously, it's good for the business. We do the same with ECEP. We have very, very moderate models for ECEP. And if and when it takes off, that's also all upside. So we model all these different solutions Conservatively, knowing numbers that we can reach in general. And yes, I mean, cat markets did outperform. But remember, we have a very small Percentage of that market, that market is still pretty much dominated by the printers for a bunch of structural reasons that Not anything about our services or software, it's just how legal firms work. And so even though we did outperform, It's not like a big part of our business by any means. Got it. Thank you. Thank you. Our next question comes from the line of Terry Tillman from Truist Securities. Sir, your line is open. Hey, team. This is Conor Bassarawa on for Terry Tillman. Thanks for taking my questions. First one for me, we've been hearing from customers looking at the ESG solution There are numerous data collection elements and frameworks to be addressed there. I'm just wondering what are the implications of the 1 cloud technology as it relates to ESG Well, I think that of all the solutions we deal with, It will have as much connectivity as any of them and possibly more. All the different parts of ESG Also other little solutions people use. And so we're going to have to pull data in from a lot of different places and do prep work on it. So Clearly, that was a big part of our motivation that one cloud would play a big role in that, especially the connecting And the preparation of the data as it comes in, the frameworks, we're looking at different ways to deal with that. We have several different database So we were looking at and using for existing customers, trying to optimize and see, there's several frameworks. And I think the whole world, including us, is hoping that The plan itself is on 1 or 2 of those frameworks. We don't support so many. But we can do that. We're prepared to do it. The data collection is another, Obviously, nuance of all this and there's work you have to do. There's questionnaires. There's audit work that has to be done and we have an audit solution to fit over that. And then as I've talked about before, we're working on a lot of workflow stuff that will start to come out of the pipeline at the end of this year. It's already Starting to come out some of our data collection stuff. So we're really well positioned to address all of those different needs of Yes, G. They're not dramatically different with the exception of the frameworks than a lot of the stuff we're doing already. Great. And then just a quick follow-up from me. Just curious on hiring goals and thoughts on sales capacity moving forward. Thank you. Well, you say hiring goals, I'll take some leeway of what you meant. I mean, we are surprisingly finding good talent. We're very pleased with our talent acquisition team is just knocking the ball to park. And we're adding heads primarily in sales, quota carrying and also inside salespeople. And then we're also adding heads in R and D. We have a lot of things we want to do with the product. And I always talk about Durable growth, and I believe that for durable growth, and we think we can grow this company for an extended period of time, You need to have high value products that enable us to charge more and that are sticky. And so we're investing in the product because we see the markets that we can serve. There are some really big markets that we can address. And so that's where the heads are being added and we're having good luck filling those heads. It always takes time. We're very picky and We really focus on high level talent, but we're doing really well there in terms of meeting our objectives. In In terms of what our objectives are, we really don't comment on that. That'll be pretty clear as we move along. Hello, is the operator still there? Yes, I'm still here. I'm so sorry about that. And our next question comes from the line of Mike Grondahl from Northland Securities. Sir, your line is open. Thanks. This is Michael on for Mike. Hey, first off, just on those partner deals, were those completely new logos for that auto maker in the healthcare company or those Already had some existing solutions in there. Well, I know the auto solution, we already had existing solutions in there. The healthcare Provider, I think it wasn't available, but I'm not 100% sure. Got it. And then maybe just on the marketplace, can you Doc, maybe on the strategy of this, is it more? You cut out. I just heard, is it more? I want to talk about the strategy of the marketplace. The initial phases of the marketplace Focusing on easier and faster adoption of our solutions and our platform, faster time to use some value for users, customers And engagement with our partner ecosystem. So indirect monetization, showing customers the stability of what can be done with our platform. We'll evolve the marketplace and move towards enabling 3rd party builders Again, in later phases and move forward as a direct monetization and capture that network effect to really Grow adoption. So the strategy is to initially start out with targeting Got it. That's helpful. There are no further questions on the queue. And this concludes our question and answer session. And speakers, if you have any remarks. No, I think we're done. Thank you very much. This concludes today's conference call. Thank you all for participating. You may now disconnect.