Earnings Call: Q3 2020

Nov 4, 2020

Good afternoon, ladies and gentlemen. My name is Angela, and I will be your host operator on this call. As of the prepared comments, we will conduct a question and answer Please note that this call is being recorded on November 4, 2020 at 5 o'clock PME I would now like to turn the meeting over to your host for today's call, Adam Threes, Director of Corporate Development And Investor Relations of Work Covey. Please go ahead. Good afternoon, and thank you for joining us for Kiva's third quarter 2020 conference call. Today's call has been prerecorded and will include comments from our Chief Executive Officer, Marty Vanderplow, followed by our Chief Financial Officer, Stuart Miller, We will then open the call up for our live Q and A session. Jill Spunt, our Chief Accounting Officer, is also on the call. A replay of this webcast will be available until November 11. 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, will be making forward looking statements regarding future events and financial performance, including guidance for the fourth quarter full fiscal year 2020. These forward looking statements are subject to known and unknown risks and uncertainties. Fortiva cautions that these statements are not guarantees of future performance. All forward looking statements made today reflect our current expectations only. We 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 K and subsequent filings for factors that could cause our actual results to differ materially from any forward looking statements. Also, during the course 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. Martin Vanderfile. Hello, everyone, and thank you for joining today's call. We made great progress in our third quarter, The global trends of online collaboration and remote work continue to benefit Fortiva. Customers use our cloud platform to simplify their complex work by connecting data and teams and by automating and streamlining processes. Financially, we exceeded guidance for revenue and operating income. We delivered more than 20% growth in subscription revenue and generated record bookings. In particular, our reporting, management reporting, and capital markets. As a result, we are raising guidance for the 4th quarter Stewart will provide details later in the call. In Q3, we continued to upgrade customers to our next generation platform. Customers accounting for over 90% of our annual contract value are now utilizing our new platform. The next generation Waukiva platform is a key enabler for our growth strategy. Our new platform is more open, intuitive, and scalable. We can now more quickly build We believe delivering new platform extending solutions will continue to drive our Our virtual marketing events continue to produce positive results in terms of record attendance in global reach and targeted sales leads. In September, 6000 customers, prospects and partners from over 60 countries participated in Amplify. Our annual user conference. Our virtual sessions focused on solving universal challenges around data, workflow and complex reporting, and last month, 76 key technology and advisory partners joined us for our annual partner summit. Our summit addressed how partners can better leverage our platform with their deep domain expertise to develop high value solutions. We expect our partners to drive an increasingly higher percentage of our future revenue growth I'd like to take this opportunity to thank our employees for supporting our culture, even in the face of a challenging 2020, it delivered our next gen platform upgraded our customers and generated strong sales platform as enterprises continue to move to the cloud. With that, I will turn the call over to Stuart Miller. Thank you, Marty. As mentioned on our last call, we began to see a more predictable cadence to closing deals at the end of the second quarter. Suggesting that our customers and prospects were settling into a new normal. That pace accelerated in the third quarter across a broad range of our solutions. Particularly global statutory reporting, management reporting and capital markets. Both transaction volume and average deal size came in above our expectations in As a result, we are raising guidance for Q4, which I will discuss On October 21st, the European Union granted its member states the option to delay compliance with the ESF mandate for 1 year to help companies free up resources for more urgent pandemic related matters. We expect all EU member states to exercise the option. Turning now to our financials as always, I will talk about our results and guidance on a non GAAP basis. Refer to our press release for a reconciliation of our non GAAP and GAAP results and guidance. I'll address our performance against Q3 guidance first. We beat Q3 2020 revenue guidance at the midpoint by $3,500,000 higher subscription revenue accounted for most of the beat. We succeeded in collecting a high percentage of the receivables that we had held in reserve at the end of Q2 The pandemic had less of an impact on selections than we had anticipated in June. In addition, we closed more deals early in the quarter and we sold and delivered some capital markets deals within the quarter. We beat guidance on Q3 operating income by more than $9,000,000 The revenue beat I just mentioned accounted for just over a third of the swing. The remainder of the beat relative to guidance included lower travel and entertainment costs, reduced expenses from shifting marketing and internal events to a virtual format. Recovery of bad debt expense, higher PTO usage and decreased occupancy costs. Now turning to of $88,100,000, an increase of 18.8 percent from Q3 2019, breaking out revenue by a reporting line item. Subscription and support revenue was $75,900,000, up 20.4% from Q3 2019. New logos and new solutions helped drive strong revenue growth in Q3 2020. 51% of the increase in SNS revenue in Q3 came from new customers added Professional services revenue was $12,200,000 in Q3 2020, an increase of 9.8% from the same quarter last year. Set up and consulting accounted for the growth. Turning to our supplemental metrics. We finished Q3 with 3500 83 customers, a net increase of 129 customers from Q3 2019 and a net increase of 71 customers accounted for 20% of Our subscription and support revenue retention rate was 94.9% for the third quarter of 2020 compared to 94.5% for the same period last year. Consistent with our experience over the long term, almost half of the attrition in the quarter came from M and A de listings and bankruptcies. With Adodge, our subscription and support revenue retention rate was 110% for the third quarter of 2020. Compared to 112.8% in Q3, twenty nineteen and 107.9% in Q2 2020. The number of larger subscription contracts continues to increase. In the third quarter of 2020, We counted 7.85 contracts valued at over $100,000 per year, up 28% from Q3 the prior year. The number of contracts valued at over $150,000 totaled 383 customers in the 3rd quarter, up 47% from Q3 twenty nineteen results. Moving down the P and L, gross profit totaled $66,900,000 in Q3, up 25.6% from the same quarter a year ago. Consolidated gross margin was 75.9% in the latest quarter, versus 71.8% in Q3 2019, a net expansion of 410 basis points. Breaking out gross profit. Subscription and support gross profit totaled $64,300,000, equating to a gross margin of 80 compared to Q3 2019. Professional services gross profit in the third quarter was $2,600,000, equating to a 21.6% gross margin compared to 7% in Q3 2019. Research and development expense in Q3 totaled $21,800,000, up 5.6% from q33 2019. R and D expense as a percentage of revenue improved to 24.7% in Q3 2020. From 27.8% in Q3 2019. Sales and marketing expense for the quarter increased 6.5% from Q3 2019 to $32,800,000. Savings on T And E and our shift to virtual marketing events partially offset higher expenses from headcount growth in our sales team. General and administrative expenses totaled $8,700,000 in Q3, up $600,000 compared to Q3 2019. G and A expenses as a percentage of revenue improved 110 basis points to 9.8%. We posted an operating profit of $3,600,000 in Q3 2020, compared to an operating loss Turning to our balance sheet and cash flow statement. At September 30, 2020, cash, cash equivalents and marketable securities totaled $524,000,000, an increase of $15,300,000 compared to the balance at June 30, 2020. Net cash provided from operating activities in Q3 2020 totaled $7,800,000, compared with cash provided of 4,700,000 At September 30, 2020, we classified $5,200,000 of receivables to a credit reserve account. Up from $4,000,000 of receivables at September 30, 2019. This reserve account reduced deferred revenue by an equal amount and therefore, it reduced billings at the end of the quarter. Remaining performance obligations on prescription contracts continue to vary from deferred revenue as we implement multi year contracts with annual billing terms for some customers. Turning to our guidance. Operations based on information available to us today. For the fourth quarter of 2020, We expect total revenue to range from $90,200,000 to $90,700,000. We expect subscription revenue to grow at a faster rate than services revenue in Q4. As a reminder, in Q4 2019, we posted a one time increase of $2,500,000 in professional services revenue due to a regulatory change. We expect non GAAP operating income to range from $500,000 For the full year 2020, we expect total revenue to range from $348,000,000 to $348,500,000, We expect non GAAP operating income to range from $3,000,000 to 3 $500,000. Turning to 2021, on a preliminary basis, we expect total revenue to exceed $401,000,000 in 2021. We expect the growth rate of subscription and support revenue to continue to outpace the growth rate of professional services revenue. We expect non GAAP operating loss as a percentage of revenue to be a low single digit in 2021. We plan to offer detailed guidance on Operator, we are And your first question is from the line of Terry Tillman with Tru Please go ahead. Well, congrats on the improving trends. It's really good to see some of these KPIs and the billings and RPO. My first question though just relates maybe it's just a little bit of an education for me or just an update, but you called out global statutory reporting and management reporting and capital markets activity. Could you maybe kind of stack rank those in terms of are there notable differences typically in the deal sizes for those use cases? And Are those, are those prominently, kind of positioned in your guide for next year, or is there anything else that kind of comes online it's notable next year beyond these three items that you called out. And then I had a follow-up. So, Terry, I'd say, global stat is, and most of those deals are six figures, some middle 6 or high 6 figures, for sure. Management reporting has got a pretty wide range depending on the use case, the size of the customer, and so forth. And then, capital markets is sort of, typically low 6 figures. There we got good contribution from, integrated risk and, a number of other use cases and we expect that to continue into next year. We just called those out in particular because they were performing above expectation for the quarter. Okay. And just, thanks. I guess a follow-up question, and I don't know if this is for you or Marty. But seeing the big federal sector deal, this past quarter, I'd like to hear more in terms of how that kind of came about what factored into kind of the decision, to go with you guys there? And then how the federal sector and public sector is looking in general? And Well, I would say that the thing that has really changed for us and we alluded to that is we we spent 4 years re architecting our platform. We have a true platform now. And so when we go into something something like as Department of Justice, we talked about all the different uses of the platform that being financial reporting, internal controls, all sorts of different things that they have to do. And so they really view it as buying a platform for a lot of different functions. And they really don't now almost all the government agencies we've run into are still using word and Excel. So it's a pretty natural sell. The outlook is, right now, of course, everything's locked up, but the outlook is, it looks good, but it's very lumpy. It's a lumpy business. It also has a end of September spike every year. So it's but we're very optimistic about And your next question is from the line of Chris Lewin with Goldman Sachs. Please go ahead. Okay. Thank you so much for taking my question. I wanted to ask about, I guess, you mentioned on the call, there's delay, with ESF compliance for about a year, but at the same time, we saw, I think, 20% of new logos come from customers adopting an ESF solution. So As we think about the impact of this, how would you say it impacts pipeline build, if perhaps even positive way or deal close rates in that region in the coming quarters? Just trying to get a sense, if decide helps you in some way by being able to initiate more conversations or, how best would you describe the impact? You know, the, you know, Stewart, this is Marty, by the way, Stewart did say it didn't affect our outlook. For EMEA next year. What we're seeing is companies are, they realize they still have to do this. ESET has been delayed 1 year because of COVID that sort of a story. And, they know they have to do it. They're partly down the path of due diligence learning what they have to do. And we really we've been continuing to close ESF deals even after the announcement. So We really don't see that as changing our trajectory. I think if anything, you know, the type of competitors we have, there are very small companies that would less starting for this business. And if it's going to hurt anyone, it's going to hurt them more than us. And I think it is true we will be able to have more conversations. It'll be less rushed And so I think in general, it certainly is neutral and it could potentially be positive. Okay, great. Thank you. And maybe just a quick follow-up on the billings number, obviously, super impressive in the quarter and there's a big build up in that we saw on the balance sheet. So, was there anything abnormal there in terms of pull forwards or anything like that, or was it just really healthy execution in terms of closing a business? It was as Marty indicated in his talk, it was a record quarter for bookings. And, it was strong throughout the quarter. And so there was really nothing unusual going on other than just really good execution. Great. Thank you. Your next question is from the line of Stan Slotsky with Morgan Stanley. Please go ahead. Perfect, Alan. Thank you so much guys and congratulations on a very strong quarter. So maybe just following up on, on Chris's question, the strength of the quarter, I mean, I think it really surprised a lot of people to the sizes mainly manifesting in billings. And you mentioned that you had a lot of deals closing in the beginning of the quarter. Was there some essentially a maybe pent up demand from the Q1 and Q2 delays that ended up closing early in Q3 and driving some of the deferred revenue build? Stewart, go ahead. Yes. So I definitely stand. There was some we think there was some pent up demand. We were hardened though that the pipeline, we've been carrying a big pipeline all year. And we were seeing the pipeline continuing to build and we, we're bringing in a big pipeline into the fourth quarter. So, that's why we're optimistic. Okay, perfect. And maybe a quick follow-up. Obviously, we all saw the very strong capital markets activity with so many IPOs coming public in through the summer and into early fall. Can you help us characterize how much of that if at all material helped Q3 and maybe your outlook for the rest of this year? And how are you thinking about that activity going into 2021? Sure. So I think that it's fair to say that companies going public are increasingly, seeing the value of our platform. And, part of that is the fact that they're they're working remotely and trying to do deals remotely. And, certainly some of the more progressive firms are embracing it, which is a good thing. We had a very strong IPO market in Q3 and we'll see what kind of impact if any of this, election has on Q4. It's not, you know, percentage wise, it was a big, but it, but, in terms of dollar contribution, for deals that were sold and delivered within the quarter, not, not a big number. Got it. Thank you so much. Less than a $1,000,000. Thank you. I will just that all of our solutions saw in pre strength. The board execution, I would say. So it wasn't any one anomaly. Right. That makes a lot of sense. All right. Thank you so much. Your next question is from the line of Tom Roderick with Stifel. Please go ahead. Great. Hi, gentlemen. Thank you for taking my questions. Great to hear from you. I'd love to go back to Chris's question earlier, just around Europe and appreciating that 20% sure you had said that the new logos are coming from sort of ESAP related we just take a step back in Europe? And I don't know if this is a better question for you or from already, but I'd love to just hear a little bit more holistic discussion of what going on in Europe relative to market awareness of the Wdesk solution? How many customers are coming to you simply because of ESAP readiness versus just broader awareness of the overall solution base? And I guess the third part of that is just Where are you at with regards to hiring, the sales team over there, go to market, how fast do you need to build I know that's a lot in there, but maybe the broader question is just talk to us a little bit about Europe, what's happening aside from just ESA? Sure. This is Marty. I would just to touch on it first off, we built up the EMEA sales team in in the last two quarters of 2019 first quarter of this year. And were able to fill the positions we needed to fill. They are now maturing and getting into more productivity So we're very pleased with that growth aspect. So we've gotten the sales team we need there for the near term. In terms of awareness in Europe, it's really important to understand Stewart has been very consistent saying ESIP is upside in terms of how we think about things. We sell annual reporting. We sell management reporting. We sell integrated risk there. We sell some other regulatory things for banks. We have very large banking customers in Europe. And so we're definitely getting to the point where people know who we are. There's still a tremendous amount of opportunity there because it's still a small revenue number. And as you know, the EU is close to the same GDP as the U. S. So it really is a big opportunity for us. And the ESAP, the nice thing about ESIP was it did drive platform comp sations, but we're still seeing that happen. I mean, when people understand that we're sort of the premium end of that, in that we have not all the ability to produce the ESF a regulatory document you have to submit, but we have the entire platform to pull the data out of your systems of record you know, correlate it, create the report and then output it. That's really what's driving our success there, not the fact that we can file the document. I would say this though, that has enhanced our conversations, but the top end of that market, the top more than half this is something they know they're going to have to do. They're looking for a solution that has legs and is going to be around for a while. It helps them with the entire problem. So esaf is not really that big an issue for us there in terms of the delay. Yes, that's good color. And Marty, if I could just stay on sort of go to market and sales execution. I suppose it would be a little bit tempting to look at the last couple of quarters where you've had great bookings, great commentary on the broader market and say, okay, good, the market has recovered and the environment has recovered. But on the other hand, it seems like perhaps your sales execution has improved. And knowing that you handed the reins over to Julie on that front a couple of quarters ago, would love to just hear a little bit more about any changes that Julie made with respect to go to market what you're seeing on a sales execution perspective and what that means in the future? Well, I think you're spot on. I think that, obviously, our customers have adapted to the new normal as Stuart said, but also, we have gotten much more focused. Julie's brought us a lot of in terms of using metrics, not just from sales, but across the whole organization to really understand how we're optimizing all of our teams And then we did change out sales management sheet. We, we promoted an insider to take over North American sales and he's been doing a fantastic job. So there's a little bit of everything there, but in terms of optimizing everything in the company, but Certainly, Stuart's point about we have a strong pipeline that's continuing to grow is why we have the optimism we do. This isn't a one time catch up thing. We really do see strength in our pipeline and strength in terms of large or deals, which is a reflection of the fact we actually have a modern platform now that we can do a lot of different things with. And customers stand it and partners understand it. So all of those things fuel the fact that we're seeing bigger deal sizes and a stronger pipe. Yes, wonderful. Really helpful comments. I appreciate it. Congratulations. And your next question is from the line of Brian Peterson with Raymond James. Please go ahead. Good evening gentlemen and congrats on the strong results. So I wanted to dig into the booking strength a little bit. I know you've had a lot of build up and expanded relationships with your partner channel. Any commentary on how the partner channel ramp this year contributions in the quarter? Any color on that? Sure. I'll give you some color. Certainly, partner contribution is becoming meaningful I mean, it's actually becoming a meaningful part of our go to market, our new sales. Remember, we've talked the fact that we're behind the normal life cycle of a partner involvement for a company our size, mainly because we just rebuilt our platform, And now that our platform is rebuilt, they have many more opportunities to make money. Our partners can see all the different ways and all different solutions And they're starting to bring solutions to us. So our partners are saying we could use it for this solution. They help us build it out and then they take to their client base. So we're seeing good progress. Obviously, we want to see partners involved as much as possible able not only to accelerate and grow the size of deals, but also to deliver them. And we're definitely to have partners be the primary means of delivery for our solutions. And of course if they if they're going to take us into other markets, markets they're more familiar with, that's a very cost effective way for us to move into certain markets. There'll be certain markets where we don't go unless we have a partner. So we're making good progress. We have a long way to go. I think there's a lot of upside in terms of our partner development for the company, but we're making good progress. Good to hear. And Martin, maybe a follow-up. I just said on any reference that the platform Just as you think about future R and D investments, how are you thinking about adding to that, maybe from an organic or inorganic investment? Well, I would say that now that our platform has been delivered and we have I want, it's really important for me, 90% of our recurring revenue or the the annual contract value has moved to our new platform. That was a huge feat. I mean, we you talked to companies who moved customers from one platform to another. And actually, our retention rate was higher than a year ago. So that's really a substantial accomplishment. And on top of that, it's enabling us just to do bigger deals, to build the pipe and to really involve our partners. Great. Thanks a lot. Sorry to your question. Give me what was that? Oh, I was just saying great to hear. No, go ahead. No, I forgot the second part of your question. You had a 2 part question there. Oh, no, I guess I was just trying to think M and A and the platform. We're now in a really great place to develop fit for use solutions. I alluded to that. Every time we bring a new fit, a specific solution to a market, it gives our sales theme a whole new vein of potential new bookings. And so, we're going to use a significant amount of our R. D. Dollars develop those new applications. Now most of that money, when we develop new applications, also builds on our platform. So it really helps not only the having a fit for use solutions that our salespeople can sell, but it also continues to span and create more value in our core platforms. So that's how we're going to optimize the use of that R and D going forward. Great. Let me just let me jump in, Brian, because you've asked specifically about inorganic or M and A as it related to R and D and you know, it's certainly an important stream for us when we're looking at acquisition opportunities about, how well the technology could integrate with our platform. And that naturally leads us to a buy versus build analysis. But as Marty indicated, the new platform is in great shape and is much improved in terms of its ability to integrate with new software. So it's given us broader latitude, but in the same token, it's also easier for us to build on. So it's a higher bar to churn when it comes to bill versus buy. Your next question is from the line of Rob Oliver with Baird. Please go ahead. Hi, good evening gentlemen. Thanks for taking my question. Marty, one for you, and then Stuart, I had a follow-up for you. Just on the platform, there's been a lot of discussion of it in It really sounds as if some customers are really waking up to what they can do with the platform. And then that's resulting in, nice spike in the outlook that we saw this quarter. And our checks have certainly been positive on it. So I'd love to hear in particular on sensibility comment that you made. I know you guys have talked a bit about the FERC and some other markets. Just wondering if you can get an update and a little bit about some of the R and D dollars going that way, but perhaps an update on the FERC opportunity and any other opportunities that you guys might be eyeballing right now? Sure. The FERC opportunity is really a good opportunity for us for 2 reasons. One is that we had to do almost no modifications to the platform other than put a different taxonomy in it for the XBRL. So it was a really natural market to go to. 2nd off, it gives us entry into a whole bunch of new companies that are private and now is global specified reporting that has, been just a wonderful experience. We put it through a very structured incubation program, we learned how to sell it before we invested. We figured out who the competitors were, did the whole, you know, whole incubation process. And now we're in And obviously, the result was very positive. When we went to market, we knew how to message, we knew how to sell it, we knew what the price point should be. What the willingness to pay was. And it was very successful. Now we have several other solutions in that same incubation process. I really don't like to talk about them number 1, we verify we're going after them. Number 2, I don't want to alert competitors. But the fact that we built a more structured incubation program and the success we've seen with global statutory reporting really bodes well for us in the future. Great. That's very helpful color. Appreciate that. And Stuart, you made a comment about, some higher sales headcount in the quarter. And I think that wasn't Europe or was that the tail end of your hiring or were you guys already done? And if not, anything about that that we could flush out with the North America. And will there I know the general sales force will it sounds like they'll be the ones going after these more specialized opportunities that come from the extensibility of the network, but would you add on vertical salespeople in some instances as well if needed Thanks very much, gentlemen. Sure. So, as Marty indicated, we started the hiring of quote ahead, in EMEA beginning of third quarter last year and then carried it through the second quarter of this year. So it took us about a year. And so the comparing third quarter of this year to third quarter of last year We have higher head count as a result of that because we just didn't have those heads on our books. The 3rd quarter last year. There have been some hiring in the U. S. As well. So that that I think that answers that particular question. In terms of, selling the extensibility, I think that's the responsibility of all of our sales teams We have some that are specialized on, particular solutions, but our account owners are trained to sell the broader platform. Your final question is from the line of Mike Grondahl with Northland Securities. Please go ahead, sir. Thanks. This is Mike go on for Mike. Thanks for taking the questions. Maybe just on APAC, is there anything new to call out there the last couple of quarters? I know it's still early, but any color there? It's early. We're getting some wins there and we're slowly building on a team much like we did in EMEA. Several years ago. We want to get some reference, customers, our use case polished up what we want to do there, you know, develop the partner relationships. But that's going really well. And like you said, it's very early days, but we're accomplishing what we wanted to do there. So it's the new platform has localization for some of the more local, languages. So that's enables us to really get serious about it. But up till now, we're pretty much on track. I would add one thing, which is the focus on distribution in APAC has really been around partner enablement. That's really where we've been focusing our sales efforts. There's certainly partner enablement in EMEA too, but there's also a big direct sales team in EMEA. Got you. That's helpful. Thanks. And then just in in the queue under kind of the industry breakdown. So anything to call out there were some of the harder hit industries where that's commercial real estate or hotel travel type stuff, or is it pretty broad based where you will not see much of an impact? So, we're obviously not selling a lot to airlines these days, or to the hotel companies, but we do tend to skew on larger, among our customers. Some of the retail REITs have also been hit, but it has really not translated into any meaningful impact on our financials. And there are no further questions at this time. I would like to turn the call back management for closing remarks. Just like to thank everybody for joining and remind the group that we have an Investor Day scheduled for, November 19th and hope to see you there. Ladies and gentlemen. Ladies and gentlemen, this does conclude today's conference call. Thank you for participating. You may now disconnect.