Earnings Call: Q4 2019

Feb 20, 2020

Ladies and gentlemen, thank you for standing by. 18 Earnings Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Adam Therese, director of investor relations, Thank you. Please go ahead, sir. Good afternoon, everyone. Thank you for joining us for Rakeva's 4th quarter 2019 earnings conference call. This afternoon will begin with comments from our Chief Executive Officer, Marty Vanderplow, followed by our Chief Financial Officer, Stuart Miller, and then we will turn the call over to questions. Also on the line today is Joe Clint, Chief Accounting Officer. A replay of this call will be available until February 27. Information to access the replay is listed in today's press release, which is available on our website under the Investor Relations section. As a reminder, today's conference call is also being broadcast live via webcast. 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 our first quarter and full fiscal year 2020. These forward looking statements are subject to known and unknown risks and uncertainties. We're key to 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 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'll refer to certain non GAAP financial measures. Reconciliations of non GAAP to GAAP measures in certain additional information also included in today's earnings press release. With that, we'll begin by turning the call over to our CEO, Marty Vanderthal. Thank you, Adam, and thanks to everyone for joining the Warkiva Fourth Quarter and Full Year 2019 Conference Call. We are pleased with our fourth quarter full year 2019 results that beat guidance for revenue, operating loss and loss per share. I am proud of the many accomplishments in 2019. We expanded our global presence. We accelerated investment in our partner ecosystem. We transitioned a majority of our customers to solution based and year is upgrading customers to the next generation of our technology which is an end to end platform. Our customers now have the power to connect and manage all of their data from initial systems of record to final reports in our secure cloud platform. The new Workiva platform is faster, more open and scalable and feature rich. It enables customers to connect data from ERP, GR C and CRM platforms, along with other third party applications and systems of record. Examples include Oracle, SAP, Salesforce, Workday, BlackLine and Tableau. Our ability to integrate with 3rd party systems and applications is critical to the evolution of our platform. Once the data is connected in the Warkiva platform, users can automatically refresh data from multiple sources, which in turn populates the data in spreadsheets, documents, and presentations. This enables real time reporting of all types of performance data. Our advisory and service partners can combine their domain expertise with our new more open platform to create high value solutions for their clients. We see our partners as a catalyst for growth to deliver a unified and streamlined solution for We continue to see broad adoption of our platform in 2019, 72% of new solution and new logo bookings came from markets outside SEC or Cedar. It is important to reiterate. All of our solutions run on the same end to end platform. In 2019, we were pleased with increased bookings from our growth vectors, EMEA, W Data and our platform solutions for integrated risk and global statutory reporting. We are also seeing good discuss later in the call. Culture is everything at Workiva. We encourage people to truly support each other at work through peer recognition, resource groups and cultural events. Transparency is the backbone of our workplace and we empower our employees to voice their feedback through frequent town halls, Q and As of executives, employee surveys, and open digital chat channels. Just 2 days ago, Fortune Magazine named Brookiva, one of the 100 Best Companies to Work for for the second consecutive year. We are proud to be joining many of our customers in this prestigious group Our ability As we roll out the next generation of the Warkiva platform, I'm more excited never about our future. When I talk to our customers and prospects, they also see the power of the platform which we believe will fuel our growth in the coming years. With that, let me turn it over to Stuart Miller, our CFO. Thank you, Marty. To consistent with comments on previous calls, we are investing in our sales organization to drive revenue growth from EMEA, W Data, and our platform solutions for integrated risk and global statutory reporting. We're encouraged by our progress in bookings and pipeline from our growth vectors, and we remain committed to our plan. Our Q4 results and 2020 guidance reflect our investment in these vectors. Our program of converting customer to our solution based licensing model or SBL is approaching successful completion. At year end 2019, about 82 percent of subscription value was contracted on our SBL model. The lift in revenue growth from SBL, which I have previously estimated at a couple of 100 basis points, weighs after Q1. We expect bookings from new solutions and new logos, particularly from our growth factors. To drive revenue growth SBL has raised deal sizes for both new logos and new solutions. For example, average new logo size increased 32% to $72,000 in fiscal 2019. Unlimited seats per solution has made our platform easier for our customers to administer. SBL has simplified our sales process and internal administration. Thereby improving scalability. In addition, SBL has helped expand the number of active users on our platform substantially. In 2019, the number of active users on our platform increased almost 32% from 2018. Expanding our user base has created opportunities for sales of new solutions. Turning now to our financial review. As conciliation of guidance in Q4. We generated total revenue in the fourth quarter of $80,300,000, an increase of 24.6% from Q4 twenty eighteen. Breaking out revenue by reporting line item. Subscription and support revenue was 66,100,000 dollars, up 23% from Q4 2018. New logos, new solutions and conversions to solution based licensing help drive strong revenue growth in Q4 2019. 60% of the increase in SNS revenue Q4 came from existing customers. The balance of the increase came from new customers added in the last 12 months. Professional services revenue was $14,100,000 in Q4 2019, an increase of 32.5 percent from the same quarter due to a change in an revenue in Q4. We finished Q4 with 3510 customers, a net increase of 170 customers from Q4 2018, and a net increase of 56 customers from Q3 2019. Our revenue retention rates remain strong. Our subscription and support revenue retention rate was 94.7 percent for the fourth quarter of 2019, compared to 96.1% for the same period last year. More than half of the attrition in the quarter came from M And A, de listings and bankruptcies. With add on to our subscription support revenue retention rate improved to 113 1% in Q4 2018. Our progress with larger subscription contracts continues to be The number of contracts valued at over $100,000 per year totaled 6.52 in fourth quarter of 2019. Up 47% from in the fourth quarter, up 50% from Q4 2018 results. Moving down to P and L. The gross profit totaled $58,100,000 in Q4, up 22.6% from the same quarter a year ago. Consolidated gross margin was 72.3 percent in the latest quarter versus 73.5% in Q4 2018. Our long term target for consolidated gross margin continues to be 75%. Breaking out gross profit. Subscription and support gross profit totaled $54,600,000, equating to a gross margin of 82.6 percent on SNS revenue. A contraction generation platform, together with higher cloud services costs accounted for the contraction. Professional services gross profit in the 4th quarter was $3,400,000 equating to a 24.4% gross margin up expense in Q4 totaled $21,200,000, up 11.3% from Q4 2018 due to higher compensation and cloud services expense R and D expense as a percentage of revenue improved 320 basis points in the latest quarter to 26.4 percent, compared to Q4 2018. Our long term target for R and D expense to revenue continues to be 25%. Sales and marketing expense for the quarter increased 44.5 percent from Q4 2018 to $31,100,000, reflecting accelerated investments in sales talent, primarily to drive bookings in EMEA Integrated Risk Global Stat Reporting And Government. General and administrative expenses totaled $10,300,000 in Q4, up $3,300,000 compared to Q4 2018. G and A expense as a percentage of revenue increased 200 basis points to 12.9% due to higher headcount to support our growth. Our long term target for G and A expense to revenue remains at 10%. Operating loss was $4,600,000 in Q4 2019, compared to an operating loss points in the latest quarter, At December 31, 2019, cash, cash equivalents and marketable securities totaled $488,000,000. Increase of $3,200,000 compared to the balance 2019 net cash provided from operating activities totaled $2,000,000 compared with cash used $400,000 in the same quarter a year ago. Remaining performance obligations on subscription contracts continue to vary from deferred revenue Turning to our guidance. For the first quarter of 2020, $3,000,000. At the midpoint, we're guiding to a growth rate of 18.7 percent for total revenue in Q1 20 20 compared to Q1 2019. As a reminder, Q1 is seasonally the high point for our services revenue in terms of contribution to total revenue. We anticipate that the highest quarterly growth rate for services we will post this year will be in Q1. Nevertheless, we expect our subscription growth rate to outpace our professional growth rate, professional services growth rate. $7,000,000 to $7,500,000 in Q1 2020. For full year 2020, We expect total revenue to range from $341,500,000 to $343,500,000. We expect non GAAP operating loss to range from $36,000,000 to $38,000,000, reflecting investment in the growth factors we highlighted earlier. We expect positive operating cash flow for the full year 2020, which would represent our 4th consecutive year of positive cash flow. Before I close, I want to highlight 2 items related to our full year guidance. First, we expect revenue from professional services to grow at a low single digit rate for fiscal 2020. When updating your financial models, please note that we posted one time increases in professional services revenue in Q2 2019 18 of $2,500,000 that we do not expect to recur in 20 2nd, our revenue guidance assumes strong growth in EMEA in 2020, but it does not assume a surge of demand from new logos seeking to comply with the impending ESF mandate. We'll have better visibility on the demand from that sector later in the year. We'll now take your questions. And operator, we're ready to begin the Q And A session. Certainly. As a reminder, Your first question comes from the line of Tom Roberts with Stifel. Your line is open. Hey, gentlemen. Thank you for taking my questions. A nice finish to the year. Marty, let me ask you the first question here just thinking about some of the components of where you want to spend money next year and how that's all constructed. In particular, I was hoping you could start with a little bit more detail just on the platform upgrade and moving customers to a modernized platform. What is that going to take with respect to additive R and D heads, professional services bodies? And then the second part of that, I guess, is in putting that in the context of the guidance, Stuart, you know, as we look at a $36,000,000 to $38,000,000 loss on the year, that more than doubles the loss this year with $50,000,000 more in revenue. So perhaps you could kind of help us think through the components of how much of that additive increase in OpEx goes to R and D versus sales and marketing versus geographic expansion, that would be great. Thank you. Thanks, Tom. First off, I would say that, in terms of moving to the new platform, there is not an increase in R and D costs. That's pretty much behind us. Now we're moving toward onboarding our customers. And we're well underway in that effort. We did hire some additional, customer support people. Most of those are already on board. And, the bulk of the new spend this year is still go to market. It's primarily sales. And building out sales teams both in North America and in EMEA. So that's where the bulk of the spend is. Stuart, do you want to add anything? No, I mean, I agree with that. And so that when you see the incremental spend that it's on the sales and marketing line, Tom. There's a little bit of there's a little bit of port on G And A is a little bit on customer success. But as Marty said, we've already hired those people, but we'll have a flow through of a full year of expense on them. Got it. That's helpful. And Stuart, just kind of parsing through your comment there in terms of expecting strong EMEA growth but that seems to be, even without the benefits of of the ESF mandate, let me work backwards on that statement, just terms of do you still feel like that can be a real catalyst for the business that regulatory mandate? Any update in terms of the way that in that geography, you're thinking about their digital transformations, and are you hopeful that that mandate will in fact start drive an impact to your business as you look at to 2021. Just talk a little bit more about Europe with being able to drive growth without that mandate even really playing a factor this year, it sounds like. Yeah. So I think that the mandate has played a factor in the sense that it, it has prompted discussions. With customers, and it's been it's been easier to get meetings as a result of, that staring company in the face. But, you know, our success to date there has been more about selling our whole platform to larger companies. And the sort of the, as I mentioned, we're not projecting sort of the surge of growth in new, new logos coming from compliance with the ESF mandate. We need to, watch how that's going to play out, through the, you know, the rest of the year. We're confident, we'll get our share of that business. But I just wanted the street to know that that's not in that's not baked into our forecast. So hopeful that the, that the mandate plays out, but but not baking it into the forecast. So if it happens, we'll treat it as upside. I think that's right. I mean, we've got we've experienced quite a bit of success in Europe with the current go to market strategy. Yes, this is Marty. We haven't really had any indication one way or the other in terms of more or less optimistic. We still see that mandate coming. It looks like it's going to be enforced. We're getting a lot of incoming calls asking about it. And so, but you, you know, those types of things, you just don't know. So we more or less have modeled just based on selling the platform, which is going very well. Got it. Really helpful. I'll jump back in the queue. Thank you, gentlemen. Thanks, Tom. Your next question comes from the line of Terry Tillman with SunTrust. Your line is open. Hey, Ori, guys. This is actually Nick on for Terry. Can you hear me okay? You can. Okay, great. Thanks for taking my questions. So I guess the first one, just wanted to ask about the competitive dynamics. Has there been any changes competitively in terms of SEC reporting or their use case areas? And I guess what are you seeing right now in Europe, competition wise? So we really we haven't seen any, change competitively, really anywhere in the globe. And in Europe, you know, the competitive situation there, it's, at least for ESF is very similar to what is the is in the U. S. It's the financial printers and then there's some smaller companies that are going to be focused on their home countries. So no change there. And for me, what I always look for primarily is competition from a platform point of view and we still don't see any reporting platforms on the horizon. Got you. Okay. That's helpful. And I guess just looking into and beyond and also taking account of the growth investments you guys have previously mentioned. Can you just talk about the driver of the model between new customers and expansion sales? Going forward? Did you say 2021 or on the 2020 and beyond? Well, I think it's going to stay pretty, pretty consistent. It'll be balanced for the most part between new logos and add on sales. New logos. There's a lot of new logo opportunity obviously overseas. And, also in the private company space, And now that we have, you know, we've launched our new platform with the connectivity, there's a lot of opportunity in our existing customers. I think it's going to stay pretty well balanced. Okay that's helpful. Thanks guys. Your next question comes from the line of Chris Merwin with Goldman Sachs. Your line is open. Hi, thanks so much for taking my question. I just wanted to ask a bit about billings growth, obviously revenue super healthy in the quarter, billing credits stepped down just a little bit. So I was wondering if you could talk a bit about why that was? Is it just the fact that we're lapping the impact of solution based pricing. I'm just curious if there's anything else to call out there. Thanks. Hey, Chris, it's Stewart. So, as you know, we had record, billings for the quarter. And, the, you know, was up about the current billings were up about 15%. The, as we've called out on the previous, the last November or so, we had pointed out that there was it had been a surge of conversions in Q4 2018. So that's on to SBL. So that's really what you're seeing is the comparison, from the conversion to SBL. Got it. That makes sense. And just a follow-up on Europe, from an investment standpoint, where are you in particular without any headcount, I mean, a sales headcount that is. Just trying to think about, you know, any further hiring there and and how that could then impact the pace of new logo growth. Right? Well, we are continuing to grow our sales team there. We really don't disclose exact numbers, but we're still aggressively hiring sales people in Europe. We had good progress in hiring them in the latter half of twenty nineteen. And so you'll see full year impacted that. But as Marty said, we're continuing to hire in Europe. It's such a natural market for us. Thank you. Your next question comes from the line of Rob Oliver with Baird. Your line is open. Hey gentlemen, good evening. Thanks for taking my questions. Marty, one for you and then Stewart, I had one follow-up for you. Marty, you mentioned Fed Government's prepared remarks. As early positive signs there, I can't remember exact words, but I know having recently gotten FedRAMP just was curious for any more color around the Fed opportunity how that's shaking up, how that's shaking out and, a color on, on activity there. Sure. Yeah, I mean, you hit the nail on the head. The FedRAMP really enabled us to the authorization really enabled us to to go after that. And, we hired several really seasoned salespeople and had some good initial success. The pipeline looks good and the deal size is, is really good. One thing our core team has a lot of experience here is in the government. So we're quite optimistic. Okay, great. That's helpful. Thanks Marty. And then Stewart, yes, sorry, I'm going to go back to Europe. Yeah. Yeah. So you I mean, I think a pretty good indicator, I guess, that, you know, you guys aren't expecting a lot from from me, Seth, really, in the numbers this year. And, just, you know, the risk of of of of beating it at horse, just wanted to diving a little bit more on that. I mean, I know you guys have put some some sales resources on the ground there and that it sounds like things are going pretty well. I know deal sizes have been moving higher for you guys. Generally, just curious, you know, getting that kind of like platform South Traction early on in Europe would seem to be a positive. So I'm curious for a little bit more color there and whether there are other maybe outside drivers like S4HANA upgrades or people just thinking about their financials more broadly, which are helping to drive interest in Workiva's platform. Thanks guys. Thanks, Rob. Yeah, I mean, not a lot more color to give other than to say that, the ESET mandate has catalyzed a lot of conversations that otherwise would take us longer, to earn. And, there is real openness to, digitization of the office of the CFO. There's, certainly a compliance focus among, it's really larger European companies that is, every bit as sophisticated as the most sophisticated companies. In the U. S. And, real appreciation for the power of our platform. So we're quite encouraged. Yeah, this is Marty. Certainly, we've used Europe as a test bed for platform selling. And because of that, we've we've learned a lot, the deal size in Europe is really proven that selling a platform is really a good way to approach our market. In other words, one place to do all of your reporting and compliance activities. And resonating in Europe. And obviously, we're going to start to do that in the U. S. As well, and we're getting underway with that. But just the fact we've launched the new platform and we have direct connectivity now is really enabled platform selling. So that's really what is forecasted in EMEA this year as opposed to the ESF, which is more of a on the high end as a platform sell, but on the bottom half, it's more of a application sell. Your next question comes from the line of Mike Grondahl with Northland Securities. Yes, thanks guys. Hey, your 4 growth vectors, any chance you could kind of rank those how you're doing kind of on a relative basis there? Well, the short is no. But I will give some more color. I mean, you know, we've talked a lot about EMEA and, that that is going well. Integrated risk, just having a platform approach there is already we're already seeing good results there, selling multiple types of use cases within GRC on our platform. And that's really helped tick up the ADS and has really helped to minimize the competition in many ways. So, W data has been really, special thing in terms of getting ABS up across the board. It's had played a big role in getting ABS up for all of our new solution sales. And then obviously, we're going back to our existing customers and getting an uptick there when we put W data in. So That's been a really good story as well. So, you know, they're all working out fairly well. I really would say that, we're all very we're very positive on all of them and we continue to invest in all of them. Outside global status, doing well both in North America and in Europe. Very promising. I didn't mean to leave global staff. Yeah, it's doing very well as as the other 3 are. Got it. And with the solution based pricing, you kind of called out like 82% penetration. Can that go a lot higher or is that kind of a top end ceiling? So that was the number at year end, which in you know, some of the contracts that were signed right at twelvethirty 1. So I, you know, I think it's fair to say that that we're hopeful to drive that number higher, I doubt it'll ever be 100 percent, Mike, just because the preferences of customers, certain customers, Sure. Any thoughts, high level, just on your acquisition pipeline, kind of post the convert what you're thinking? Sure. So, there's nothing that rises to the level of disclosure. Of course, We look at everything. We're continuing to, evaluate targets that were reaching out to as well as ones that are brought to us, by our management team, in our, around the world and, bankers and, consultants and so forth. So, we have, we've been Canvassing quite a few, prospects. And, but nothing has has risen to that level yet. We're not in any real hurry to do something we want to when we make an acquisition, we want it to be the right one that really enhances our platform and, has strong business logic behind it. We're not interested in doing a deal for deal sake. Yes, I just want to reiterate that. I mean, we're going to we're looking for potential acquisitions that have a high probability of success and really mesh with what we're trying to accomplish strategically We're hoping we find the right one, but obviously you never know. Mike. Your next question comes from the line of Stan Zlotsky with Morgan Stanley. Your line is open. Hey guys. Thank you so much for taking my questions. Good afternoon. So one from us, just as investors think about the opportunity in the EU, right? When, when could they start to see, see the, the results show up in actual reported numbers? Whether it's billings or that's probably going to be the leading indicator? And what are some of the success milestones that we should be mindful of in engaging the traction that you guys are seeing in Europe? One thing that might help Dan is, for the first time, I know we just filed the 10 K today and it's buried in a footnote, but for the first time, we started to disclose revenue, by geography at a high level. And so we reported America's, revenue and then non America's revenue. And most of the, revenue outside of the Americas EMEA for us because it's early days elsewhere. And so you'll see, the growth rate in revenue in, in non Americas revenue was 66%. It was like 66.7 if memory serves versus 20% in Americas. So, that's a new disclosure that should help investors a bit. Super helpful. Thank you. And then maybe just one more How are you thinking about partnerships specifically as you push deeper into the European opportunity? Well, this is Marty. I would say that obviously partnerships in in EMEA are very important. The real significant change for us is that We're starting to see pull from partners, meaning partners are calling us quite regularly, both in the US and in in EMEA. And that's, you know, that's because now we really feel we have a platform that's end to end that you can connect directly to. So they're gonna be a big part of growth in EMEA and also in the US. We have to get that that that engine going, which we've been sort of late to do, but we didn't want to do it before the new platform came out. Okay, very helpful guys. Thank you so much. Thanks, Dan. Your next question comes from the line of Brian Peterson with Raymond James. Your line is open. Thanks guys. Kevin here on for Brian. I think you posted some nice upside on margin this quarter, despite some of the investments you've mentioned stepping up in 2020, was there any change in the timing of some of those items that might have been planned for this year, but maybe got pushed out into 2020? No, I think most of the margin beat was really as a result of the revenue beat. And, you know, a lot of the revenue beat was in services. So that's the I think that's the right way to interpret it. Got it. And then maybe just another one on the partner ecosystem can you help us frame the percentage of deals that involved the partner in the quarter versus a year ago? And maybe how many certified partners do you have now versus same time last year? I don't have the number off top of my head, but, you know, our number of partners has increased significantly. And, we, we really haven't disclosed historically what percentage of our bookings come from that. So But it's up. Yes, it's definitely up. Gotcha. Thanks guys. Thank you. There are no further questions at this time. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.