Earnings Call: Q1 2020

Apr 30, 2020

Ladies and gentlemen, thank you for standing by and welcome to the Workiva, Inc. 1st Quarter 2020 Earnings Conference Call. At this time, all participants I would now like to hand the conference over to your speaker today, Adam Terese. Good afternoon, and thank you for joining us for Akebia's first quarter 2020 earnings conference call. Today's conference call is pre recorded. This afternoon, we'll begin with comments from our Chief Executive Officer, Marty Vanderplow followed by our Chief Financial Officer, Stuart Miller. A replay of this call will be available until May 7. 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, 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 our second quarter and commentary on our full year of 2020. These forward looking statements are subject to known and unknown risks and uncertainties. Orkiva cautions 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 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 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 earnings press release. With that, we'll begin by turning the call over to our CEO, Marty Vanderplow. Thank you, Adam, and thanks to everyone for joining the Warkiva first quarter 2020 conference call. Our hearts go out to the people directly affected by COVID 19 and we are grateful for the essential workers and community leaders around the world who are on the front lines. At Warkiva, we are doing everything we can to protect our employees and their families during this difficult time. And that we are able To keep our team connected and focused, I host a weekly live stream Q And A to offer updates, insights, advice and support all employees. As a cloud based technology company with a highly distributed workforce, the shift to work from home has been smooth for us. With cloud platforms and digital channels, it's been mostly business as usual. We continue to deliver highest levels of performance, availability and security. Our technology, global infrastructure and operating model, along with our 20 fourseven customer support, enable our customers to work from home in a controlled, secure environment with their most sensitive data. Disability to work from anywhere is becoming the new baseline. We believe that Warkiva will be a key player in this broad based shift to remote work, which will drive increased demand for our reporting and compliance platform for years to come. Warkiva entered this global crisis from a position of financial strength. We believe we are on a stronger more flexible financial position now than ever before, including nearly 500,000,000 in unrestricted cash and short term investments. We are pleased with our first quarter 2020 financial results, which exceeded guidance for revenue and operating results. However, like many other companies, the month of March delivered some unprecedented challenges as we saw a number of customers and prospects delay software purchases. In March, we restricted non essential business travel and we transitioned to all virtual sales meetings. Even though our traditional sales process has been disrupted, in many cases, we are finding it easier to access people and we are having engaging conversations with customers and prospects. In fact, most of the companies that delayed first quarter purchases are back in our pipeline. Stuart Miller, our CFO, will provide more details about our financial results later in the call. In times of rapid change, our commitment to each other and our customers remains the same. Fortiva is driven by our values. Which sustain us in these uncertain times. We are a strong resourceful company and we are moving forward, staying focused on our goals and objectives. We continue to execute and our platform solutions for integrated risk, global statutory reporting and the U. S. Government. And we are continuing to hire people in the areas where we see the most potential for growth. 25% to 30% of our total revenue over time. We recently launched a new solution to help midsize companies comply with the European single electronic format, commonly known as ESF. Our new solution offers limited functionality specifically for this market. Because this solution resides on the Warkiva platform, customers are able to upgrade to our more We also plan to Earlier this week, we announced that we will be working with Utility, pipeline and other energy companies, many of which are existing customers, automate data integration and streamline reporting to the Federal Energy Regulatory Commission, known as FERC. Last June, FERC adopted EXPAREL as its reporting standard. With our connected reporting platform and our leadership in EXPAREL Orkiva is ideally positioned to capture this market. In response to COVID-nineteen, we shifted all marketing activities to virtual channels. As a result, our annual Amplify user conference will be hosted virtually later this year. In March our 2 day virtual event Amplify Go was attended by nearly 2400 customers, prospects and partners and was our largest event to date. I want to thank our amazing employees for their ongoing dedication and commitment to delivering our platform and supporting our customers and partners around the world. With that let me turn it over to Stuart Miller, our CFO. Thank you, Marty. I'll comment on our financial position, review our business model, and then explain at a high level why we beat our Q1 guidance. Next, I'll discuss Q1 twenty twenty results versus Q1 last year and finish with forward guidance. We believe workiva is well positioned financially to weather the storm from COVID-nineteen. Indeed, we believe workiva has never had a stronger more flexible financial position than we do now. At March 31, Warkiva had $496,000,000, of unrestricted cash and short term investments. The 1st maturity on our funded debt occurs in Our debt obligations have no restrictive financial covenants. We believe our business model mitigates many of the challenges posed by COVID-nineteen for 6 reasons. First, demand for our solutions is relatively insulated from the business cycle. Software to assist larger enterprises with regulatory compliance and performance management is needed in both good times and bad. 2nd, our cloud based platform is designed for team members to collaborate remotely, including those who work from home. On premise systems cannot compete as well in this environment. 3rd, we enjoy high revenue retention rates. Because our customers love the design and functionality of our software and the high quality of our customer service. Our platform saves time, reduces risk, and eliminates many of the tedious aspects of financial and managerial reporting. We think our value proposition is compelling relative to alternatives and markets we serve. 4th, most of our customers pay us annually in advance for a subscription to our software platform. These contracts were new fairly evenly among the 4 quarters of the year. As a result, around 90% of the subscription revenue we recognize every quarter comes from deferred revenue. 5th, no customer accounts for more than 1% of our revenue. Our 10 largest customers account for less than 5% of our revenue in the aggregate. 6th, The sources of our revenue are diverse. But note 8 to the financials in our 10 Q breaks out revenue contribution by industry of our customers. Shifting 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 talk about how well we did against guidance first. We beat Q1 twenty twenty revenue guidance at the midpoint by two point $75,000,000. Higher subscription revenue accounted for about a third of the beat, while higher services revenue contributed the balance. We beat guidance on Q1 operating income by a relatively wide margin. I'd like to explain the $8,000,000 positive operating income swing at a high level. The revenue beat I just mentioned accounted for a third of the swing. Expenses accounted for the remaining 2 thirds of the beat as follows. Travel and entertainment expenses were just over $1,000,000 better than forecast due to COVID 19 travel restrictions. Medical care expenses were almost a $1,000,000 better than forecast due to postponement of discretionary medical visits from COVID-nineteen restrictions and a higher percentage of our employees electing the high deductible medical insurance plan. Sales commission expense was about $500,000 better than forecast due primarily to a change in our sales commission structure. These paid to recruiters, consultants and legal advisors were $500,000 better than forecast. The remainder of the beat on Q1 operating income just above $2,000,000 came from hiring at a slower pace than forecast. Some of which was related to COVID 19. Now turning to a comparison of Q1 2020 to Q1 last year. We generated total revenue in an increase of 22.6 percent from Q1 2019. Breaking out revenue by a reporting line item, Subscription and support revenue was $68,400,000, up 21.8% from Q1 2019. New solutions, new logos and conversions to solution based licensing helped drive strong revenue growth in Q1 2020. 56% of the increase in SNS revenue in Q1 came from existing customers. The balance of the increase came from $4,000,000 in Q1 2020, an increase of 26% from the same quarter last year. Growth was driven by helping customers migrate to inline XBRL, additional revenue and setup and consulting, and organic XBRL growth. As a reminder, the first quarter is seasonally the high point for our revenue from XBRL tagging since most of our publicly traded customers prepare their 10 Ks in the first quarter. Turning to our supplemental metrics. We finished Q1 with 3507 customers, a net increase of 141 customers, from Q1 twenty nineteen and a net decrease of 3 customers from Q4 twenty nineteen. On a gross basis, 70 three customers churned in Q1, which is a normal level of churn for us. And we added 70 new logos Q1, which is below normal for us and was due to the impact of COVID-nineteen. In early March, 50 new deals in our pipeline carried our highest rating for probability to close by month end. Of the 50 deals, 10 did close in March and 32 returned to the pipeline, of which 30 would have been new logos. Normally, a very high percentage of these types of deals would have closed by month end. Our revenue retention rates remain strong. Our subscription and support revenue retention rate was 94.5% for the first quarter of 2020. Compared to 95.7 percent for the same period last year. Almost half of the attrition in the quarter came from M and A de listings and bankruptcies. Looking ahead, we expect a higher incidence of bankruptcies and de listings. On the positive side, we expect less pressure our subscription support revenue retention rate improved to 110.9 percent for the first quarter of 2020. Compared to 110.7 percent in Q1 2019. Our progress with larger subscription contracts continues to be promising. The number of contracts valued at over $100,000 per year totaled $670,000 in the first quarter of 2020 up 36% from Q1 the prior year. The number of contracts valued at over $150,000 totaled 308 customers in the first quarter, up 49% from Q1 twenty nineteen results. Moving down to P and L, gross profit totaled $64,300,000 in Q1, up 25.5% from the same quarter a year ago. Consolidated gross margin was 74.9% in the latest quarter, versus 73.2 percent in Q1 2019, a net expansion of 170 basis points. Breaking out gross profit. Subscription and support gross profit totaled $56,600,000 equating to a gross margin of 80 compared to Q1 twenty nineteen. Additional headcount to help upgrade customers to our next generation platform was the primary driver of the contraction. Professional services gross profit in the first quarter was $7,600,000. Equating to a 43.7% gross margin compared to 32.7% in Q1 2019 due to improved utilization. Research and development expense in Q1 totaled $21,400,000, up 6.5% from Q1 2019, primarily due to higher compensation costs. R and D expense as a percentage of revenue improved to 25% in Q1, twenty twenty from 28.7 percent in Q1 2019. Sales and marketing expense for the quarter increased 42.6 percent from Q1 2019 to $33,400,000, reflecting our investment in sales talent, primarily to drive bookings in EMEA, integrated risk, global statutory reporting in U. S. Government. General and administrative expenses totaled $8,700,000 in Q1, up $1,900,000 compared to Q1 2019. G and A expenses as a percentage of revenue increased forty basis points and increased rent expense. We posted an operating profit of $800,000 in Q1 2020, compared to an operating profit guys earlier. Turning to our balance sheet and cash flow statement. At March 31, 2020, Cash, cash equivalents and marketable securities totaled $496,000,000, an increase of $8,100,000 compared to the balance at December 31, 2019. In Q1 2020, net cash provided from operating activities totaled $4,700,000 compared with cash provided of $5,100,000 in the same quarter a year ago. At the end of each due to a variety of factors, including credit risk, consistent with ASC 606. We removed the invoices at risk, taking the amounts out of both accounts receivable and deferred revenue. Until payment is collected, which is when we begin to recognize revenue. At March 31, 2020, we classified $6,000,000 of receivables to this reserve account, up $1,700,000 from the reserve at year end. In anticipation of the impact of COVID 19. The increase in 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 for the second quarter of 2020, We expect total revenue to range from $80,300,000 to $80,800,000. We expect subscription revenue to grow at a rate in the low teens compared to Q2 last year. We expect services revenue to show the normal seasonal decline from Q1, In addition, we expect to post Q2 services revenue below last year's Q2 results. You may recall we had a one time contribution to services revenue from a regulatory change in Q2 last year. We expect non GAAP operating loss to range from $6,800,000 to $7,300,000 in Q2 2020. The depth and duration of the economic disruption from COVID 19 is unknown. While we have a large pipeline of new deals, we have limited visibility on when the deals will close. So we are suspending specific guidance for full year 2020. However, we are providing some directional guidance for the rest of the year. Relative to the guidance that we gave in February we now expect We will now take Thank you. And your first question will come from the line of Brian Peterson with Raymond James. Hi, thanks. This is Alex Sklar on for Brian. Marty, first one for you, this is in your prepared remarks, but can you just talk more about the resiliency of Workiva's platform and a work from anywhere environment. And with that, I think you talked about demand potentially picking up. Are you already seeing that in the current environment? Catalyzing greater number of conversations or leads, and then I have a follow-up for Stewart. Thank you. Adam, are you still online? Yes. Maybe I'll just ask one for Stewart here. Well Yes. Sorry. Marty's phone was muted. Yes. Okay. Go ahead. All right. I guess just talk about the visibility on the backlog. The RPO growth this quarter, especially in light of that commentary you gave on the March late stage pipeline. Is there any reason from a Workiva standpoint that you wouldn't be able to implement or go live on any portion of that next 12 month balance. Understanding customers may ultimately timing, but just curious on your own ability to meet all that backlog? No, I don't think there's any restriction from our perspective on that most of the, onboarding we do or virtually all the onboarding we do is remote anyway. Did you hear me? Sorry. Yes, yes. Did we lose Marty on the the first question. Yes, I think he's trying to dial back in. Okay. Well, maybe another one for you then, Stuart. On the backlog growth, it accelerated some even with the even with the I'm sorry, should I get some of the comment there Yes, the backlog growth accelerated on the full RPO, not just the next 12 months 1, which is impressive, I think, given your comping SBL last year, just was curious if you'd call out any of your kind of 4 to 5 growth opportunities as having an outsized contribution. Yes. So just to remind you on the RPO side, Some of the growth there is due to our signing 3 year deals with 1 year pay. And so that's picking up the, that's accelerating on the RPO side, but we did show good deal size growth in, in Q1. All right. Great. Thank you. Next question is from the line of Rob Oliver with Baird. Please go ahead with your question. Hey, Marty Stewart. It's Matt Lemenager on for Rob. So the question was And the 30, I guess, would be the 32 deals that got pushed or I guess returned to the pipeline. Was there any recurring message, your theme there. I realized it was COVID driven, but was it people, the discretionary spend for maybe around CFO, suite or accounting suite being kind of pushed to the back burner as kind of near term other IT trends took priority? Or kind of looking, is there any theme or message that happened in those 32 deals that got pushed? Let me see if Marty is not still on. So I guess Can anyone hear me now? Yes, we can now, Marty. You want to take down? Yes, I was on the right line. They didn't have me connected. I'm sorry. Because I could hear everything. And same number, anyway, I apologize everybody. Back to the resiliency question, the, you know, in 2008, when we started the company, we were, you know, we were focused on cloud in the very early days. And we said we were always going to make a 100% web tool, web and a cloud based tool. And We've heard tremendous, number of positive things from our customers during this as they all moved to work from home. I think some of them had already been doing it, but, everyone was able to achieve what they needed to in terms of activities that they were actually doing in our product. In terms of seeing leads, it's too early to say. We really, I can't say for sure, but we have seen some upticks in indefinitely inquiries, when a lot of our competitors have software that's on prem. So It's early days, but again, I really believe that this will help us in the long run. Marty, you want to comment on the Matt specific question about the 32 logo, the 32 deals that went back into the pipeline. Did you see any theme there on why they went back? Whether we're postponed? Well, I would say this. The end of March, everybody was in a state of shock. And, everyone was trying to understand how it was going to affect their cash flow. There were 2 categories of those from my perspective. One was industries that saw an immediate drop in cash flow like, airlines or even credit card companies, things like that. Obviously hospitality. Those were put on hold indefinitely, and we had several of those occur The second category was very prudent CFOs, saying, Hey, let's just put the brakes on on, on new deals, anything we're spending that's new for the next 2 or 3 months to see how this all shakes out. And, most of the stuff that we saw slip was in that category where they're just being prudent and saying, let's see what's going to happen. Obviously, none of us have ever seen anything like this and how it affects the economy. That shock is sort of settling out now, and we're starting to see a lot of activity So we're optimistic that things are going to slowly come back to normal in terms of our sales process. That's helpful, Marty. And then my other question would just be on, for your sales quota carrying folks are you making any changes to things like expanding the amount of quota they're required to carry? Just maybe assuming some of the close rates won't be as high and so kind of to get to the numbers we thought maybe at the initial plan that people need to carry more quota or any changes around that to kind of sales go to market? No, not yet. You know, this is two months old. We're 2 months we're into this. And so we are, you know, we're not going to do anything, knee jerk. We're watching what's happening. We're happy with our pipeline right now. But again, no one's been through anything like this, so we just don't know how it's going to play out, but we don't have any plans to make any dramatic changes to our sales team or the size of their patches or our quotas. Your next question is from the line Terry Tillman with SunTrust Robinson. Please go ahead. Yeah. Hey, Marty and Adam. I appreciate taking my questions and I do appreciate also the extra color that you added this quarter as it relates to the sales activity and pipeline. So that was helpful. I appreciate it. First question just relates to you all had an announcement a couple of weeks ago as it relates to sales leadership change, Scott Ryan leaving, or resigning. Looks like Julie's taking over more responsibilities. But what I was curious is if we could just learn a little bit more about the decision making and what catalyze that And I think in that press release, it talked about broader sales leadership changes and a focus on sales efficiency. So we just love some more color on what exactly happened and and kind of the driver of it? Sure. If you recall when I got the the CEO title here a little over a year and a half ago. I was the Acting Chief Operating Officer at the time. And, that happened rather abruptly. And, we knew that eventually we wanted a new COO. That's what we wanted. And so this is sort of the manifestation of going back to that traditional model of having a COO and not a Chief Revenue Officer, a company our size clearly doesn't need both. The second thing is we brought Scott into really upgrade. We were transactional company, it's smaller deal size. And we really brought him in to bring us up that deal size ladder in terms of the talent. Sales process and the skills of the sellers. And he did a good job of getting us substantial improvement there. He also brought in a lot of other managers and helped bring some of our other managers up the learning curve. And, also brought in a leader for services when he was CRO. And, then when Julie came in and sort of got her legs we realized that it was we had one extra layer and really didn't need both titles. At the same time, Scott had said that he had been in the sales leadership job a long time, wanted to take a short break and maybe look for another company where he could do the same type of thing he did for us. So we it was a joint agreement to have him move on and, we worked out a joint deal and we're not replacing him as we mentioned. A couple other sales leaders also were were left the company and, we feel we have a very lean and very good sales management team now. We really didn't need the excess layers. But Scott really brought us along to a good place and, it was a good time in terms of being efficient at the top of the org. Okay. Thanks Marty. And I guess Stuart follow-up question just relates to the 111 percent revenue retention in the quarter. For 2Q kind of any perspective direction on how to think about that? And even for the full year, again, I know you're not giving guidance for the full year, but just how to think or what would be a base case for revenue retention as you see it? Thanks. So as you indicate, we don't give guidance on that number. It's as you know, it's a build up that includes, add on solutions and price increases and it's net of of solution churn. So, we were pleased with the number that we posted in, in Q1. And, we're pleased with the pipeline of new deals both new logos and add on sales. And as we indicated, we don't have visibility on when those deals are going to close. As I indicated in my remarks, 2nd quarter, we have such great visibility on revenue. As you know, because of the business model that we felt comfortable giving guidance on Q2, but, until COVID duration and death, is, greater visibility. We're not going to have visibility on, closing new deals at the end of Q2 or Your next question comes from the line of Stan Zlotsky with Morgan Stanley. Please go ahead. Hi, this is Sarah on for Stan. I'm following up on your prior comments. In the past, you've used growth as a balance between new logos and add on sales. And we're wondering to what extent is this still kind of your growth equation or in reaction to COVID, are you seeing it leaning towards one or the other? I really don't see a change there. I think we're still going to see about fifty-fifty add on sales and new logos. And I think that a lot of the new logo activity or more of it will be in Europe. But I still see a lot of new logo activity in North America as well. So we really think it's going to remain about a fifty-fifty clip. Got it. Thanks. And then a quick follow-up. Are you seeing any customers asking to come back essentially downsize your contract or adjust payment terms, in reaction to your business reacting to COVID? Yes, we haven't seen too much of that, honestly. We, we're we're, you know, aware of the, we certainly watch our renewal activity in track, you know, who's in what industry that might be affected. But, so far that hasn't been a big issue. Your next question is from the line of Tom Roderick with Stifel. Please go ahead. Hey, Marty. Hey, Stuart. Glad to hear you guys are both doing well and the team is staying as healthy as can be. So That's a great start with where we're at right now. Thanks. I would love to chat you bet. I would love to chat a little bit more. I apologize. I had a little trouble getting in the call. So you may have addressed in the first few minutes, Marty. But relative to the European expansion plans, opportunity is still there. I'm guessing, your efforts hiring people and looking at potential M and A targets with your solid balance sheet. I'm guessing that's probably been pushed back a little bit, but perhaps you can go into a little bit more detail about how you're tactically able to proceed in an area where you didn't perhaps have as many boots in the ground as you wanted. You're looking to hire how much does that sort of set you back from a timing standpoint and what's the urgency of customers, over there to move forward with digital transformations in light of January 15th, 2021 mandate? Well, you had several aspects. First off, the, yeah, the M and A activity is definitely slowed. And as I've always said, we're going to be very careful doing acquisitions to make sure we get something that that checks most of the boxes we're concerned about, but that has slowed. I would say that our ability to recruit people in EMEA has not changed that much. We're finding that we've been able to continue to recruit sales people and the delivery people quite effectively there. We're a little bit behind, but it really wasn't a COVID thing. It's, that our EMEA team is very thorough when they hire, and they've had a very good track record of hiring good talent and having very low attrition. So I would say it's more about, them being more careful and making sure we have the best people possible. And then in terms of, our growth strategy, we're continuing in EMEA. We haven't slowed that at all. And, and we're seeing good reception from the customers. It's, it's quite it's quite amazing and, and our pipeline is growing at the exact rate we anticipated. So we're pretty pleased with EMEA and we're going to continue to expand there. It's really greenfield for us in many way. It's really greenfield in terms of how late we went into the mail. Yeah, perfect. Got it. And then now that you've fully lapsed the SBL impact in the model and maybe more importantly, you've gotten your customer is up on this sort of all you can eat plan. How does that sort of roll through the way you think about churn. And customers now that they're sort of on this all you can eat, that wouldn't seem like even if they have fewer employees, the number of seats they would utilize would go down. So I guess churn would be exposed to the usual suspects of bankruptcies and M and A and some of the things that Stuart talked about. But can you just sort of talk through a churn as a concept going forward and how that might differ from the past with your with all your customers on SBL now? Well, I, I, going out of limb, I don't think SBL really affects, churn I think what's happened is we have given customers, you know, as we talked about before, the customers were always limited by the number of seats they had and they would make careful decisions on when they'd expand. I think a lot of customers have expanded a number of seats. We've seen the number of users go substantially higher since we enacted SBL. So it makes it more sticky in general. I really haven't seen a decline in users And maybe that's, maybe that's something that will come as COVID, you know, goes through its life cycle here. But, Remember, we do stuff that's regulatory in general and stuff that's downstream in the reporting process. And it's really mission critical or it's required by the government. So I, you know, our churn, I'm glad we're talking about this a lot because that's probably the thing that is, we're most proud of We have a very low churn rate and that just induces incredible stability in our financial model. So I'm really not that concerned about churn from an SBL point of view. And, I don't think companies that are going to stay in business are going to look at us any differently after COVID. Excellent. Really helpful. Thank you guys. Appreciate it. Thanks, Tom. You have a question from the line of Mike Grondahl with Northland Capital. Hi, this is Mike on for Mike. Thanks for taking our questions. Maybe just one quick one on the announced been yesterday. Can you give us a rough idea of just the number of logos in that space? It's about $600,000,000, isn't it, Marty? Yes. I think it's $660,000,000 roughly somewhere in there. Mostly good sized companies. And so, and like we said in the press release, a lot of our customers already, and they've been bugging us about whether we were going to do this. What we're finding is customers see more and more EXPAREL coming. It's coming all over the world for all the regulatory, agencies slowly but surely. And these, our customers wanna standardized on one platform to do all their XPRL. So a lot of our SEC customers was pestering us about this, and we really didn't want to commit to it until FERC put out their taxonomy, which happened a couple of months ago. And then we went through the due diligence of understanding how it would affect product and our go to market, but we're really well positioned as we said in the press release to take a significant amount of that market. Thanks. That's helpful. And there are no other questions at this time. Great. Well, thank you everybody. We appreciate it. Yeah. I think we're done, Adam. Thank you. Thank you. Thank you again for joining today's conference call. You may now disconnect.