Earnings Call: Q2 2020

Aug 4, 2020

Good afternoon, ladies and gentlemen. My name is Catherine and I will be your host operator on this call. Instructions will be provided at the time. Please note that this call is being recorded on August 4, 2020, at 5 o'clock P. M. Eastern Time. I'd now like to turn the meeting over to your host for today's call, Adam Therese, Director of Investor Relations at Workiva. Please go ahead. Good afternoon, and thank you for joining us for Fortiva's second 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 a live Q and A session. Jill Clint, our Chief Accounting Officer, will also be on the call. A replay of this webcast will be available until August 11th. 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 third quarter full fiscal year 2020. These forward looking statements are subject to known and unknown risks and uncertainties. Warkiva cautions that these statements are not guarantees of future performance. All forward looking statements made today reflect our current expectations only, and 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 Ten K 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 Vanderfau. Thank you, Adam, and thank you to everyone for joining today's call. Despite challenges from the COVID-nineteen pandemic, we are pleased with our second quarter 2020 finance results, which exceeded guidance for revenue and operating results. Our results reflect our employees' resiliency and their dedication to our customers. Our sales and marketing teams have successfully transitioned to a virtual environment and we now have greater visibility into the second half of the year. As a result, we are reinstating full Stewart will provide further details about our financial results and outlook In Q2 demand for our platform improved across all of our growth factors, which include EMEA, W data and our platform solutions for integrated risk, global statutory reporting, and the U. S. Government. Our partnerships with technology companies and advisory firms remains an important catalyst for our long term growth. We are proud that 3 of the 4 largest advisory firms in the world are now Workiva Partners. Customers are embracing our new platform's capabilities as we further streamline their complex business and reporting processes by connecting teams, documents, and data from initial sources to final reports. Our new platform also increases our flexibility and speed when developing new solutions, enabling us to enter more markets faster than ever. For example, our FERC reporting and ESF solutions were both launched on the new platform. After identifying the opportunity, we quickly moved from concept to launch within a few months developing and delivering new solutions on our platform will continue to be a key in response to COVID 19, we have been pleased with the large attendance at our virtual events and the number of sales leads generated. Next month we will host our annual Amplify Global User Conference virtually. This year's timely theme is building trust in business data and supporting business continuity in an age of transformation. Over 4500 people have already registered to attend. At Workiva, culture is a key driver of our success. Every day, whether we are in our offices or working remotely our employees created award winning workplace that attracts and retains top talent. Recently, Computer World named Borkiva, one of the 2020 best places to work in IP, and Fortune named us a 2020 best workplace in New York. In closing, we are pleased with our second quarter results and our team's ability to effectively execute during this challenging time. We remain well positioned and confident in our ability to capitalize on the many opportunities that lie ahead of us. With that, I will turn it over to Stuart Miller. Thank you, Marty. Following the initial shock of COVID 19 in March, we began to see a more predictable cadence to closing deals, particularly in June into July, suggesting that our customers and prospects are settling into a new normal. I want to highlight one market development related to COVID-nineteen. The Financial Conduct Authority or FCA that the UK regulator has opened a consultation on whether it should delay the initial ESAF reporting deadline. By year. While the comment period lasts another month, we expect the FCA to approve the delay for UK Companies. Of the 5300 companies affected by the ESF mandate, approximately 1400 or headquartered in the UK. Our expectation of a delay of the mandate for the UK market has had no material impact on our outlook for EMEA. Now turning 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 Q2 guidance first. We beat Q2 2020 revenue guidance at the midpoint by 3,300,000 higher subscription revenue accounted for most of the beat. We succeeded in collecting a high percentage of the receivables that we had held in reserves on collections than we had anticipated in March. We beat guidance on Q2 operating income by more than $5,000,000 The revenue beat I just mentioned accounted for 2 thirds of the swing. Lower employee travel and entertainment and medical care expenses accounted for the remaining third of the beat on operating income. Now turning to a comparison of Q2 2020, to Q2 last year. We generated total revenue in the second quarter of $83,900,000. An increase of 14.1 percent from Q2 2019. Breaking out revenue by a reporting line item, Description and support revenue was $70,700,000, up 16.9% from Q2 2019. New logos and new solutions helped drive strong revenue growth in Q2 2020. 53% of the increase in SNS revenue in Q2 came from new customers added in the last 12 months. The balance of the increase came from companies who have been our customers for more than a year. Professional services revenue was $13,200,000 in Q2 2020, an increase of 1.2% from the same quarter last year. Growth in revenue from setup and consulting overcame a small decrease and XBRL services relative to Q2 last year. Turning to our supplemental metrics. We finished Q2 with 3512 customers, a net increase of 91 customers, from Q2 2019 and a net increase of 5 customers from Q1 2020. The average annual contract value of the new logo signed in Q2 twenty twenty was 34% higher than the same value Our subscription and support revenue retention rate was 94.5 percent for the second quarter of 2020. Compared to 95.4 percent for the same period last year. Almost half the attrition in the quarter came from M and A de listings and bankruptcies. With add ons, our subscription and support revenue retention rate was 107.9% for the second quarter of 2020 compared to 114.5% in Q2 2019. The decline reflects winding down conversion of customer contracts to solution based licensing. As well as pandemic related impacts on both price increases We continue to increase our number of we had 716 contracts valued at over $100,000 per year, up 28% from Q2 the prior year. The number of contracts valued at over $150,000, totaled 3 42 customers in the 2nd quarter, up 44% from Q2 twenty nineteen results. Moving down the P and L, gross profit totaled $62,400,000 in Q2, up 16.4% from the same quarter a year ago. Consolidated gross margin was 74.4 percent in the latest quarter versus 73% in Q2 2019. A net expansion of 140 basis points. Breaking out gross profit, Subscription and support gross profit totaled $59,000,000 equating to a gross margin of 83.5 percent on S and S revenue. A contraction of 30 basis points compared to Q2 2019. Additional headcount to help upgrade customers to our new platform was the primary driver $4,000,000 equating to a 25.7% gross margin compared to 22.8% in Q2 2019. Research and development expense in Q2 totaled $21,500,000 up 7.6% from Q2 2019, primarily due to higher compensation costs. R and D expense as a percentage of revenue improved 25.6 percent in Q2 2020, and 27.1% in Q2 2019. Sales and marketing expense for the quarter increased 23.5 percent from Q2 2019 to $32,300,000. Primarily reflecting our investment in sales talent to drive bookings growth. General and administrative expenses totaled 10,500,000 dollars in Q2, up $3,100,000 compared to Q2 2019. G and A expenses as a percentage of revenue increased 240 basis points to 12.5 percent due to severance costs, additional headcount and higher software expenses. We posted an operating loss of $1,900,000 in Q2 2020, compared to an operating guest earlier. Turning to our balance sheet and cash flow statement. At June 30, 2020, Cash, cash equivalents and marketable securities totaled $509,000,000, an increase of $12,500,000 compared to the balance at March 31, 2020. In Q2, 2020 net cash provided from operating activity totaled $7,100,000 compared with cash provided of $18,800,000 in the same quarter a year ago. At the end of each quarter, we review outstanding invoices to determine which ones present a collection risk due to a variety of factors, including credit risk, consistent with ASC 606. We remove the invoices at risk and take the amounts out of both accounts receivable and deferred revenue until payment is collected. Which is when we begin to recognize that $5,600,000 of receivables to this reserve account, up from $3,200,000 of receivables at June 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 subscription contracts, continue to vary from deferred revenue as we implement multi year contracts with annual billing terms for some customers. Turning to our guidance. As Marty indicated, we are reinstating guidance for full year 2020 based on improved visibility on new business, both pipeline and deals closing. Our new full year guidance is close to our pre pandemic full year guidance on revenue and substantially improved on operating loss We are factoring in the expected based on information available to us today. For the third quarter of 2020 we expect total revenue to range from $84,300,000 to $84,800,000. We expect subscription revenue to grow at a faster rate than services revenue in Q3. We expect non GAAP operating loss to range from $5,200,000 For full year 2020, we expect total revenue to range from $341,500,000 to $342,500,000. We expect non GAAP operating loss to range from $11,500,000 to $10,000,000 We will now And your first question comes from the line of Tom Roderick with Stifel. Gentlemen, thank you for taking my questions. Congratulations on on a great finish to what was starting out to be a tough quarter. So well done on that. I guess I want to go back to 90 days ago and you had Marty, you had talked about a number of deals. I think at the time, there's some 50 deals that had kind of slipped out of closures and into the next quarter, 40 of them were put back in the pipeline, maybe it was 32 were put back in the pipe. But regardless, it was a pretty big number. Would love to hear about what you did with the sales team? Any strategic changes? Any spiffs you put in place? What did you do in terms of of getting the sales team to help close those deals. And then as you look at the pipeline, I'd love to hear a little bit more about what you're doing also to replenish the pipelines. It sounds like a lot of those deals did in fact close this quarter, close rates are up. But talk a little bit about more of the pipeline replenish as well. Thanks. Well, good question. The first comment I would say is that of those deals that slipped first quarter, we had a pretty typical distribution, a number of those closed, a number of those are still in the pipe for this quarter and potentially next quarter, and some went away. I mean, the examples, the really, the industries that are still suffering from COVID-nineteen, hospitality, airlines, things like that, those deals are not going to come back anytime soon. So we saw we didn't one category didn't sort of outpace the rest. But we, you know, we closed some, some slipped in the summer and long term hold for sure. In terms of our sales team pivoting to virtual selling. We've really been pleased with that. Not only in closing deals, but building pipe. And when you take into consideration a certain percentage of the economy is damaged and you really can't sell those industries. I mentioned previously, the rest of the economy is really as Stuart said, come back to a new normal. And we're seeing a pipe building very similar that we did in the past. And the closure rate is is also coming back to sort of the norms before COVID. So with the exception of those damaged industries or I should say stressed industries, for the time being, We're seeing things sort of normalize and come back to normal. So things look pretty good from from 3 months ago, the shock had definitely affected everybody. And, but now after some time has settled in, we're just seeing normalcy sort of returning. Yes, that's great to hear Marty. Thanks for that. Stewart, you mentioned Europe just a little bit and in your comments, you referenced the FDA evaluating a 1 year delay. I guess what I'd love to hear is, is how are your customers and potential customers over in Europe thinking about this ESF mandate. I know that it was meant to be sort of a multi phase in implementation anyway. So it wasn't like a Y2K event where you either did it by January 15th or you didn't. Do you think that this see a evaluation slows down the pipeline in the UK or is it sort of irrelevant where customers are thinking about digital information anyway. And you're still ramping your own build over there in terms of sales headcount and marketing spend to improve awareness? Yes, it's a good question. As we had indicated before, Tom, we were using the ESF mandate, not as an opportunity to to sell a point solution, but as an opportunity to get a meeting with the right people at the front end to sell the platform. And we're seeing a lot of success with that. So we don't see, the delay on, the potential delay coming out of FCA on ECEF is slowing down that motion at all. So in fact, we've already we've made quite a bit of penetration into those accounts and broadened the discussion beyond ESF. And as I indicated on my earlier comments, we really didn't affect our forecast and it really hasn't affect our nothing. Outstanding. I'll jump back in the queue, but thank you guys. Nice job. Thanks, guys. Your next question comes from the line of Alex Scalar with Raymond James. Thanks. Stuart, just a question, retention held really strong in Q2, but I was wondering if you could characterize the step down in the add on revenue, how much of that is just math around the lapping of SBL? Yes, certainly it was a combination of of SBL and, you know, not taking price increases, particularly on, for companies that were renewing and industries affected, you know, by COVID and then, you know, a bit of solution churn, particularly from companies that were affected by COVID. Specifically, you know, it's hard to isolate FBL but as we've said in the past, it's, you know, it accounted for probably a couple hundred basis points of the move. Okay, great. Thanks. And then, Marty, you mentioned in the prepared remarks, the partner channel, you highlighted the 3 of the top 4 global consulting partners. I'm just curious if you see any changes in terms of partner involvement and deals or partner resources being devoted to Workiva versus prior quarters? Yeah. We're we're really happy with, with our partner activity right now. Partners are starting to recognize that not only can they, they, make money deploying our solution and, you know, advising and how to use it. They can also build a real practice around it. And so we're seeing a lot of our partners, not just the big ones, taking us very seriously and engaging with their clients. So that's that's been a really positive thing for us. And, like we've said all along, it takes a while to build that momentum, but we're really seeing it pay off now. All right. Great. Thank you. Thanks, Alex. Your next question to Ed. Hey guys, this is actually Nick on for Terry. Thanks for taking the questions. First one was kind of pivoting back toward the EASF mandate opportunity. I was just hoping you guys could give us an update on the I guess, on how conversations are progressing with both large organizations and, maybe the lower of the market in which you're addressing them with the W freeze solution, you just give us an update on both sides. And I guess as a follow-up, are you seeing any changes in terms of competitive dynamics in EMEA? Let me start just by saying that, you know, sort of echoing what Stewart said. The ESF is sort of one of the mechanisms we used to get to customers and to talk to them. We've had a lot of engagement over ESEP. We are starting to close deals on the bottom 2 thirds of the market. And, on the high end of the market, the top 1 third where we saw a platform sales, not our our scaled down product. We haven't seen any effect there. Those are large companies. They're making platform type investments to satisfy more than just ESIP. They may be doing SEC in there. They may be doing all sorts of different types of, compliance and internal reporting things. So It's been a nice entry into those big companies, and I have we haven't seen any change and don't expect any, but it's going very well. On the bottom, you know, 2 thirds of the market, we're getting really good engagement. And like I said, we're starting to close some business. And again, there's a certain percent of those companies that are going to carry on no matter what. They want to get it handled. They want to, you know, comply and and and be good citizens. So, we've had good luck engaging and we don't see this, this delay in the UK really affecting our our, advancement in the market. Got it. Okay. That's helpful. I guess just kind of pivoting more toward go to market, with the higher up Julie escrow earlier this year, I was wondering if you guys could potentially touch on some of the operational enhancements she's put in place and if these enhancements are leading to increase efficiencies in certain areas of the organization. Thanks. Well, yeah, happy to answer that. Julie has been great addition for our company. She has, brought a lot of operational discipline. As I mentioned in the last call, I was trying to do 2 jobs and it was not, not going as well as it could. And so she has brought operational discipline, a lot more metric driven decisions And in terms of go to market, we have really sort of focused on, packaging, how we're going to go to market in terms of positioning, communication with the in terms of value. And so we spent a lot time investing in that, also seller skills. And she's done a great job on all that. So we feel like, The stuff she's doing is definitely going to improve sales efficiency and go to market efficiency. I could have more to talk to you about if COVID hadn't come in the middle of it, but in terms of anecdotal type of things and what I observe in the in the company itself, it's going very well. Got it. Okay. Thanks guys. Thank you. Your next question with Morgan Stanley. Perfect. Thank you so much guys. And I'm everybody is doing well in the current environment. Couple of questions for me on the ESF mandate. As much as UK is considering potentially delaying. Have you heard any kind of rumblings about the rest of EMEA potentially also putting that discussion on the table? We, I have not. I'm sure that it's being bounced around, but I have not heard anything official I tend to think that in the, you know, in the current state of the European Union, I don't think they're going to necessarily be concerned about moving forward Obviously, they're doing better than us on COVID in general. But even if they do, as Stuart has said many times, We have not built that into our forecast in a significant way. And, even if it should be the later year, as I mentioned, it's still going to be something that will give us a chance to talk to new prospects and existing customers. So, I even before COVID, you know, I had we had thought that there was a chance that we get delayed a year. That just seems to be what most of these regulatory things do and we've seen it in others. And we had built a model that more or less accounting for that already. Okay, perfect. Thanks for that question. We really haven't seen it happen in Europe, but if it does, it's not something I'm very concerned about. It's still going to happen and the conversations are still taking place. Right. No, it's just a matter of time. Makes sense. And then maybe just a follow-up for Stuart. Can you help us unpack the 5,600,000 of allowance for receivables that you guys now have? And what what how that impacted billings in the quarter just the kind of the moving pieces of billings declining 2% year on year. I just want to make sure we have all correct. Absolutely. So the way to think about it is, I think, is to compare it to the June 30 2019 And so, what, the $3,200,000 that was in the reserve, last year, at June 30, and then 5.6. So if you were to look at a pro form a change in short term billings, short term billings would have been up 6.6% if you adjusted both numbers. For that, if you added back the, that, that, those reserves, for it. But that change, that's a year on year change or is that sequentially? Yes, that's the year on year change. The sequential one would have been, I mean, I think that's the right way to look at it because our business is seasonal, right? It particularly when it comes to, when it comes to billings. But the $6,000,000 1 was at the end of, of March, this year. And so, that if you look at it as a percentage of, of the combined, number. So, you know, receivables plus the add back, it was about the total was at $6,000,000 was about 11.6% of the total. At threethirty 1, it was about 11.9% at 6 at 6:30. Got it. Got it. Okay. Maybe we can follow-up a little bit more on line. Thank you so much. I appreciate it. You bet. Thanks, Dan. Your next question comes from the line of Mike Grondahl with Northlands. Yes, this is Michael on for Mike. Thanks for taking our questions. Maybe first off, just on the 10 and few on the segments, seems like it's pretty broad based across the different silos, even a couple of points in growth and energy year over year. Anything to call out there as far as surprises in the quarter, more strengthening in certain industries? I would say that the one that's really showing a lot of promises global stat to our reporting. We're seeing a very good size deals and, the competition there is much different. It's an older technology competition. So that's all of all of the growth factors showed very good progress through the first half of the year, but global statutory reporting really, really stood out. Got it. And maybe just comments on changes in the last couple of quarters in the potential M and A market pipeline there? I'll let Stuart comment on that. Go ahead, Stuart. Yes. I mean, we continue to, look at opportunity brought to us and initiate conversations ourselves I think it's fair to say that, the the pandemic has caused, most of the companies that might be interested in selling, to to slow down on the M and A front. So I would say it's been relatively quiet. Okay. And you do have a follow-up question from the line of Tom Roderick with Stifel. Guys. Thanks for taking the follow-up. Marty, I was hoping you could just go into a little bit more detail on the next generation platform here. Getting some nice feedback from customers that have seen it play with that perhaps even using it already. That's, that feel like it's really kind of a game changer with respect to how remote employees can interact with each other and they can sort of be in the same line and edit the same line at the same time, things like that. I guess the question I'd have for you is, number 1, are you getting a better reception on the product with respect to adoption as more and more of your customers, employees are working from home? And then secondarily, what's sort of the monetary add on opportunity as you roll this product out? Does it interact better with some of these add on features, whether it's W Data or Global Statutory or some of the other products? And just kind of think love to hear a little bit more about how you're thinking about monetizing that because it does seem like it's a little bit of a functionality game changer. Well, I would say first off that our, you know, our rolling out of NexGen has been a very pleasant surprise. It's been, very, very stable and has really performed well. When you do, when you rebuild a platform the size of ours, That's a big undertaking. And and and we've been extremely, pleased with how that's turned out. In terms of the leverage we're going to get from that platform, remember, we've gone to a truly modern microservices architecture And for instance, FERC and W for ESF, those 2 solutions I mentioned in the, in the prepared remarks at the beginning, We created specific solutions for those in just a couple of months and packaged them and are selling them already and generating bookings. So we aren't gonna see direct, new revenues from switching customers from Classic to NextGen, but what we see in 2021, the leverage we're going to get there is we're going to be able to package more and more specific solutions for sellers put in their bag. And so that's really where we get the leverage. Yes. And then just perhaps one quick follow on on that. W Data would love to just hear a little bit more about that. Customers that are adopting it, what is that doing to the deal prices and who are you looking at or who are they looking at as potential alternatives for W. D. A. Is this more of a data print tool type of solution like in Alteryx or is it pretty much something historically they've just done it manually? Yeah, it's it's, it's a, let's say, a baby version of what OpEx does, but it's put together for our particular product and our particular customers. And it is sort of a data prep tool, but the the big thing for us is kinda activity. You know, you can bring your data in there and do all the things you need to prep data for our solutions and our use cases. Which customers love. But the really good thing is we can connect to a large number of source systems, not just the ERPs, but CRM tools and tools like concur, all the sales forces. So you can pull in data that's not just back office data, but front office data. And we're seeing customers using the platform more and more for that. So W data, like I said, was the missing link in the platform. And we do a platform sale with W data. We're getting considerably higher ADSs. And so it's a it was in terms of product, it was the missing piece for us having a true platform. So that's, that's really how to look at it. Your last question comes from the line of Rob Oliver with Baird. Thanks guys. It's Matt Lemenager on for Rob. I had one on the growth in customers greater than 150 k, which has held fairly steady. And I guess just comparing that with the growth in in customers greater than $100,000 kind of decelerated a little bit. Is there anything to unpack there? I mean, it seems like maybe it's more platform sale and the traction, but just kind of seeing that that growth in $100,000 has come down a bit at least compared to 2 or 3 quarters ago, while the growth in $150,000,000 holding in strong. So anything to think about there? Hey, Matt Stewart. So A, we're really happy to be growing them both at those kinds of levels during the time of COVID. I do think that the growth of the over 150 does reflect strength on selling the platform. But the 28% is down a little bit, and I do think that that's reflective of, the impact of COVID more than anything else. Okay. Okay. Got it. Yes. And Stuart, I was just going to ask on cash flow. Sometimes you've provided additional color on the on the calls around operating cash flow or how to think about that. I mean, been operating cash positive. It sounds like collections were strong in the first half. Is there anything you want to point people to looking at the second half of the year or anything around cash flow? Not specifically around the second half of the year. I mean, we're pleased to be nicely cash flow positive, on the first half of the year. Leave it at that. Ladies and gentlemen, this concludes today's conference call. We thank you for your participation. You may now disconnect.