Earnings Call: Q2 2019

Aug 6, 2019

Good afternoon. My name is Jesse and I'll be your conference operator today. At this time, I would like to welcome everyone to the Workiva, Inc. 2nd Quarter 2019 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. Thank you. Alan Rogers, Director of Investor Relations, you may begin your conference. Thank you, and good afternoon, everyone. Welcome to the Warkiva Second Quarter 2019 Earnings Conference Call. This afternoon, we'll begin with comments from our Chief Executive Officer, Marty Vanderplow. Followed by our Chief Financial Officer, Stuart Miller. And then we'll call, turn the call over to questions. Also on the line today is Jill Clint, Chief Accounting Officer. A replay of this call will be available until August 13th. Information to access the replay is listed in today's press release which is also 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'd like to remind everyone that during today's call, we'll be making forward looking statements regarding future events and financial performance. Including guidance for our third quarter full fiscal year 2019. These forward looking statements are subject to known and unknown risks and uncertainties. Receiver cautions that these statements are not guarantees of future performance. 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 quarterly report on Form 10 Q 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. And 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 Second Quarter 2019 conference call. We are proud of our 2nd quarter results, which exceeded guidance for revenue, operating loss and loss per share, Stewart will provide more details later in the call. As we have discussed, this past year, we improved operational efficiencies focused our growth strategy and invested in key growth opportunities. Based on our success to date, we will continue to increase our investments in our EMEA expansion, global statutory reporting, integrated risk and W Data which includes data prep, APIs, and connectors. We are encouraged by our progress in EMEA with our traditional solutions and we are seeing increased demand for our platform as the ESIP mandate approaches for more than 5000 companies in the EU. We plan to accelerate our investments and aggressively build out sales and support in EMEA throughout the remainder of 2019 and into 20 and global statutory reporting, our initial go to market efforts have validated 3 important factors. 1st, a demand for our solutions in this marketplace second, our product fit and third, the lack of significant competition, all of which are contributing to early sales activity. We also plan to continue to invest in expanding Part of this expansion is based on requests from our to provide a broader integrated risk platform that supports general frameworks for internal controls, a wide variety of audit types enterprise risk management and policies and procedures. Every customer or prospect I speak with is faced with the same problem how to reduce risk when reporting vast amounts of data from their systems of record, such as ERP, HCM, and CRM systems, as well as specialized applications for To solve these universal problems, we continue to invest in W. Data to build more APIs and connectors to improve data integrations and automate downstream reports and analysis. With W Data, our customers are able to seamlessly orchestrate data between many of their systems and applications, resulting in accurate and transparent data for connected reporting and compliance. As we continue of the broader global sophistication that enterprises and governments need and trust. We continue to win awards for our amazing culture which underpins our ability to for innovators list, which places us among some of the most successful companies in the world. Other awards quarter included best workplaces for millennials by Fortune Magazine and a best places to work in IT by Computer World Magazine. We look forward to spending which will feature more than 80 sessions on best practices and advanced ways to use our connected reporting platform As in past years, our user conference will also include an invitation only track for investors and analysts As I visit with customers and prospects, I am even more confident that Workiva will continue to be a driving force in data transparency and trusted connected reporting throughout the world. With that, let me turn over to Stuart Miller, our CFO. Thank you, Marty. So we're pleased with the acceleration of revenue growth over the past few quarters. And we are raising guidance on revenue growth to solution based licensing or SBL has contributed to both our revenue growth rate and revenue retention with add ons. As we complete conversion of customers to the SBL model later this year, this source of revenue growth will end and create more challenging comparisons in 2020. As Marty said, the 4 major growth vectors are EMEA Global Statutory Reporting, Integrated Risk And W Data. The progress we are making on these growth opportunities is encouraging. Also, our guidance on operating loss for the rest of 2019 reflects our investments in these As always, I'll talk about our results and guidance before stock based compensation are on a non GAAP basis. Please refer to our press release for a reconciliation of our non GAAP We outperformed our revenue guidance for the quarter. We generated total revenue in the 2nd quarter of nearly $73,500,000 an increase of 24.3 percent from Q2 2018. Breaking out revenue by reporting line item, Subscription and support revenue was $60,500,000, up 23.8% from Q2 2018. Deepening our penetration of existing customers with both add on solutions and conversion to solution based licensing helped accelerate growth of subscription revenue in Q2 2019. Professional services revenue was $13,000,000 in Q2, an increase of 26.4 percent from the same quarter last year. Growth in revenue from XBRL professional services overcame a decrease in revenue from other services. Growth in XBRL services in Q2 was seasonal and related to regulatory changes. We expect revenue from professional services to return to low single digit growth in the second half of twenty nineteen. Turning to our supplemental metrics. We finished Q2 with 3421 customers a net increase of 119 customers from Q2 2018 and a net increase of 55 customers from Q1 twenty nineteen. Our retention rates continue to show strength. Our subscription and support revenue retention rate was 95.4% for the second quarter of 2019 compared to 95.6% for the same period last year. With add ons, our subscription and support revenue retention rate improved to 114.5 percent for the second quarter of 2019, compared to 106.9 percent at June 2018. Our progress with larger subscription contracts is encouraging. The number of contracts valued at over $100,000 per year totaled $558,000 in the second quarter of 2019, up 52% from Q2 last year. For annual contract value of $150,000 plus, We had 2 38 customers in the 2nd quarter, up 48% from Q2 2018 results. Moving down to P and L. Gross profit was $53,600,000 in Q2, up 24.1% from the same quarter a year ago and in line with revenue growth. Consolidated gross margin was 73% the latest quarter. Breaking out gross profit. Subscription and support gross profit was $50,700,000 equating to a gross margin of 83.8 percent on S And S revenue, an improvement of 100 basis points from Q2 2018, due to a higher utilization rate and better pricing. Professional services gross profit in the second quarter was $3,000,000, equating to a 22.8 percent gross margin, down $200,000 from the same period last year due to investments and additional talent to enhance services, address new markets and help transition customers to our next generation platform. Looking forward to Q3, we expect these investments together with seasonally lower demand for XBRL services, to result in lower Research and development expense in Q2 was $19,900,000, up 3.8% from Q2 last year due to higher compensation. R and D expense as a percentage of revenue improved 540 basis points this quarter to 27.1% compared to Q2 last year. Sales and marketing expense for the quarter increased 25.8 percent from Q2 last year. To $26,200,000 in line with revenue growth. General and administrative expenses totaled $7,400,000 in Q2, down $1,200,000 compared to Q2 2018. G and A expenses as a percentage of revenue improved over four percentage points to 9.7%, due primarily to a reduction of compensation expenses. Operating income was $86,000, q22 2019 compared to an operating loss of $5,400,000 in Q2 2018. Rockiva's operating margin improved 9.30 basis points in the latest quarter compared to Q2 last year. Turning to our balance sheet and cash flow statement. At June 30, 2019, cash, cash equivalents in marketable securities totaled $137,600,000, an increase of $23,200,000 compared with the balance at March 31, 2019. In Q2 2019, net cash provided from operating activities totaled $18,800,000 Relative to the same quarter last year, higher profit margins, growth in deferred revenue and improved working capital management, all contributed to record operating cash flow. Remaining performance obligations continue to differ from deferred revenue as we implement multi year contracts with annual billing terms. $5,000,000 at the midpoint. Half of the beat came from services revenue. As we stated on previous calls, our services revenue was lumpy quarter to quarter and seasonally higher in the first half. We expect revenue from services to return to low single digit growth in the second half. Specifically for the third quarter of 2019, we expect total revenue to range from $72,000,000 to $72,500,000. The sequential decline in total revenue in We expect subscription revenue to grow sequentially. At the midpoint, we are guiding to a growth rate of 18.7% for total revenue in Q3 compared to Q3 last year. We expect non GAAP operating loss to range from to $8,000,000, reflecting investment in the growth factors we mentioned. In addition, our spend on marketing reaches a seasonal high point with our user We are raising guidance for total revenue to a range of $290,000,000 to $291,000,000. At the midpoint of this updated guidance, Revenue growth for the year is 18.9 percent. We expect the growth rate of subscription revenue to outpace the growth rate of services revenue in the second half and for all of 2019. We expect non GAAP operating loss to range from $12,000,000 to $14,000,000 modestly improved from our previous guidance. Now we've never given specific guidance on operating cash flow previously, but we wanna do so this one time because OCF was was high in q 2 due in part to favorable changes in working capital. We don't expect change in working capital to help materially in Q3. So for the full year 2019, we expect cash flow from operations to total approximately $32,000,000. Now we're ready to take your questions. And operator, please begin the Q and A session. Certainly. Your first question comes from Eric Lemus with SunTrust Robinson. Your line is open. Hi, Eric. Hey, guys. Nice job on the quarter and thanks for taking the question. I was looking through some of the notes in the 10 Q and it looks like you changed your expectations for when you want the transition to solution based pricing from mid-twenty 20 to to now the end of the year of 2019. So you just give a little bit of color on why you decided to make that target change, for this year? And I guess, you know, what do you see as far as the overall uplift with that change in terms of guidance? Yes. So we, we made really good progress on that on, in the first and second order and sort of accelerated into the 2nd quarter, because frankly customers see so much value from it. And so, you know, certainly majority of our customer relationships are now on SBL. So that's why we, we changed our outlook on it In terms of an uplift, I think on the last call, Marty may have said it was sort of 20% to 30%. It depends on where the customer was starting because we try to keep an equalization by solution with customers and some started from different points. One of the things, sorry, Eric, I can just interrupt. One other thing on your before we get back to you is, I apparently misspoke on the script here and misread it. We actually, the number of new customer adds was 199, 199, I misspoke, give a different number. So, thank you. I just wanted to add one thing to your question. And that is, keep in mind that as I've always talked about, the solution based licensing is really a strategic thing because, it will continue to help us not only because our ADS is higher, and we compete with companies who, you know, in, in certain niches, offer similar types of licensing But, also it allows us to go out and sell more solutions and get the value for a lower number of seats. So it's going to have a long term impact. I really like everyone to realize it's a strategic thing that we've done. Yes. Understood. Okay. And then, just recently, a press release out about One cloud OEM OEM agreement with Workiva and receiving some investment. Can you guys just go into a little bit of detail on what your expectations are with that partnership? Sure. When I talked about, our connectors and APIs and the data prep tool, that has been a really good thing for us. And I'll explain what I mean by that. But first off, every deal that we have, W data included in, not only do the customers see a lot more value, the deal sizes substantially higher. And, so our goal is to connect with as many systems as possible. The more systems we're connected to the more value the customers get. And we found that this company was really good at connecting with a number of traditionally hard systems to connect to. And so, we're embedding some of their technology in our platform to interface with some of the more popular consolidation systems and ERP systems. And it's really accelerated our ability to connect to those systems very, and easy for the end user. Thanks, Eric. Your next question comes from Tom Roderick with Stifel. Your line is open. Yeah, guys. Thanks, Matt Vanbleed on for Tom. Appreciate you taking the questions. I guess touching on the the last point about, you know, w data helping drive deal sizes larger wonder if you could give us some color in terms of how that acceleration on large deals has been formulating throughout this year. Are you getting more for some of the newer solution based pricing, or are you seeing customers buying more and more modules now or more and more use cases than you were just a couple of years ago? Well, it's a multi tiered effect. First off, just going to solution based licensing is an increase the value for a given solution. So therefore, we charge more. So that's been a factor for sure. When we include W data. Obviously, that's a line item and we see more and more customers seeing that as a large part of the value on our platform. That increases deal size. And then I think the most important and last point is that we're really maturing starting to mature as a platform company. And we're definitely seeing this in Europe. We go in selling a platform right off the bat that are selling a single solution. So we go in and say, this platform you can use to do all these different things that you have to report on, And then we at that point, we get an initial deal size that's much higher just when we bring on a new logo. So learning not only getting the technology up to snuff to be a platform, but also learning how to sell and describe the value of a platform. We're really starting to mature and we're getting good at communicating that. And then as you look at the opportunity in Europe, in particular, where are you in terms of being fully sort of ready and having those sales conversations with with customers as the regulation comes down, in in the next year plus and how confident or I guess where's the security that that that will in fact sort of hit the market on time, as these things you know, tend to be delayed at times or in what we saw with. The method side of things are being delayed a full year. I guess, how are you approaching that situation? How is some of that early deal flow in the pipeline? Well, first off, every indication is we don't expect it to be delayed. They've already put the taxonomy out. And in fact, when the taxonomy, the EXPAREL taxonomy came out, we, all of a sudden, it became real to all those companies in the European Union and that's when the interest level ticked up dramatically. Just in terms of our scaling, I think on schedule the way we wanted to, we wanted to be fully ready to take the load, both from a sales point of view and a providing support. And so we have a ramp pretty well designed for the next year and a half to be ready in 20 21. And so I think we're doing well there. We've had really good luck hiring salespeople. I've been very happy with that, we so I think we're doing very well on hitting the timing mark. But the last thing I would just say is that it's interesting to us that, you know, we see a very similar pattern on how companies are responding. The larger companies are taking it very seriously. You see a mixture in the mid tier and then you see on the lower end, you know, they aren't as focused on it yet. So I think we'll see a very similar process to how the SEC rolled out in the States several years ago. Great. Thank you. Your next question comes from Rob Oliver with Baird. Your line is open. Thanks guys. It's Matt Lemenager on for Rob. I have one on the 4 growth vectors, Marty. It sounds like so we have solution based licensing gonna kind of roll through in 2019. And then in 2020, we have these 4 growth factors. Would there be any way you could kind of rank those growth factors in terms of the timeline and, like, are any going to to hit sooner than the others? And just kind of if you could stack rank those in terms of the potential impact and when they could have impact? That's a really tough question for me to answer frankly. I, we're seeing, really good reception from the marketplace for all 4 of the growth vectors. When we laid these out, I was hopeful that 2 or 3 would hit. And all of them so far have shown really good legs in the marketplace. So we're very, very pleased with the vectors we chose. Obviously, we've been talking about increased investment because we think all four of them have a lot of juice. And so, we plan to invest in all of them, and I really can't, you know, sort of stack rank. And I would say that EMEA is just the most obvious. We're still single digit revenue there. It's almost the same size as GDP as the U. S, the HolyU. And, we've barely scratched the surface in terms of number of logos there. So That's a sort of a slam dunk from my point of view. And the other 3, when we actually sit down and figure out revenue potential and all those things, all are really substantial for us. And, we've seen great initial early days, but great initial reception on all of them. Okay. No, I appreciate that. And but I was gonna ask on the sales cycle in EMEA, and I realized it's early days. We're limited in what we've sold so far, but comparing that to the sales cycles in the U. S. Back when it was ramping with SCC as you go in selling more of a platform, do you expect any be any difference in the sales cycles in EMEA this time around comparing it to kind of the early days of U. S. SEC? Well, it's interesting you asked that we've, you know, the, I think, the European, the larger companies and in Europe, watched what happened in the U S quite and have studied that. And so the larger companies are approaching us already. And we're doing deals that are platform deals. Now those are 6 figure deals, and they take, they do have a longer sales cycle just because they're their bigger deals and there's more approvals and things like that. We expect that the those deals will be slower, but bigger. I also think there'll be a significant part of the market that's transactional. That will be much similar to what we did in the SEC because remember in the SEC days, we've been at very few six figure deals in our 1st 3 or 4 years. So I think that, we're gonna see in the mid market, lower mid market, and the smaller companies, I think we're gonna see a very transactional market that's gonna just like the SEC and we'll go very fast in many instances. So it's really a bifurcated market and I think we have a good handle on how to approach both ends of that market. Your next question comes from Alex Sklar with Raymond James. Based licensing and then the increased investments around connectivity. Can you just talk about how user growth has trended for the companies that have moved over to the SBL plans and terms of what kind of usage are you getting or number of users per enterprise? That's a astute question. Thank you. It's really ramping. I mean, the number of users is growing, I don't want to say exponentially, but the slope of the curve is increasing quite dramatically in terms of end users, which is exactly what we want. We want the value of the platform to be visible to as many, users in these organizations as possible. That creates stickiness and then drives demand for other solutions. We're already starting to see the early days of that too. So as I've talked about SBL being so strategic, We're definitely seeing that in number of users. Are you able to track in terms of maybe amount of work papers that are that are kept in your in your system versus outside systems of record in terms of a a proof case of of that as well? Yeah, we, we do keep track of how many links customers are in all types of things to obviously monitor usage and customer health. That's the reason we monitor those things. And And, but we have, we also monitor, you know, not we also, I have to be very careful to say how we monitor why we monitor those as solely for customer health and making sure that customers are using the platform to the best that they can. If they don't, we, you know, approach them and help them use it better. We have global numbers we watch of how many types of different documents are created and things like that. And And we've seen that scale as well. Not as dramatic as users. I think the first cycle has seen more users being brought into each process. As opposed to more processes being launched, but also more processes are also being put on the platform as well. So we monitor that in a global sense. Got it. And then you mentioned the IXBRL mandate helped boost professional services revenue in the quarter. Did that have any impact on logo growth as well or were those customers already with you? Most of those were vast majority of those are already customers. All right, great. Thank you. Your next question comes from Mike Grondahl with Northland Capital. Your line is open. Thanks. This is Michael on for Mike. Thanks for taking our questions. Maybe just You talked about Europe and EMEA, but maybe longer term, the opportunity in APAC? Yes, we when we did, when we started in EMEA, we sort of put a smaller team out there and build some logos, build some references, learn the market, learn the different applications for a platform like this. And and got a number of logos. So we knew it. And then decided to really ramp when the time was right. I would say we're going to do a very similar thing in APAC We have a small team there that started. We're starting to see some early sales. We're figuring out the market. And when the time is right, we'll accelerate there as well. Obviously, for me, it's a measured investment. We're very measured in our investments. We want to see returns after we invest And so when we think the time is right to invest, we'll certainly tell everybody, but we are, we are sniffing it out and seeing what's there. And so far, it looks like there's a good opportunity for us. Okay, thanks. And then maybe just on seems like growth is pretty broad based. But maybe is there any specific channel partners to call out? Well, I would say that The consultancy firms are some of the larger ones are definitely starting to show interest and starting to push bookings for us. You know, as I've talked about, we didn't really talk about it much on this call. We sort of want to wait another quarter or 2 and we have more more solid results to talk about, but, partners are going to be a huge part of our strategy moving forward both in North America and in Europe. And, we're seeing good success with some of the larger consultancy firms, household names that we'll talk about later, but it's certainly we're in double digits now in terms of bookings that are assisted by partners Your next question comes from Stan Slotsky with Morgan Stanley. Your line is open. Hey guys, good afternoon and thank you so much for taking my questions. Maybe just a high level question. Should, should investors start thinking about Workiva as, hey, this is a company that is now going to be a sustainable 20% the guidance that you put out for this quarter, I mean, for the for this year. But just as we look at 2020, 2021, with so many, citing initiatives coming on board, the 4 growth vectors as well as the regulatory environment being so supportive. And, EMEA, Is that the right way for investors to kind of start thinking about Fortiva? Hey, Stan. So I think you can infer from our guidance that we expect kind of 20% plus growth in subscription revenue in Q3 and Q4. And then thereafter, it's really too early to forecast, but highteens subscription revenue growth should be reasonable. We aspire to do better than high teens subscription growth. Which is why we are investing in these 4 vectors. And we'll keep you updated as appropriate. I would like to just add one comment to that. And that is that it's really interesting. If you look at all the different markets out there, there's a lot of, people in the ERP space, the human, all the different system of records, and then in the business intelligence, there's There's a lot of SaaS companies, very, very good polished companies. And when you look at the space we're in, we're very much alone right now. And that's partially because we're making a market So there's good and bad with that, but we're definitely seeing a large opportunity without a lot of competition right now. Now competition could come We also believe in measured investment, we're not going to plunge into something and spend a lot of money and some SaaS companies have had success doing that, having very large negative margins, but we're going to take it at a very measured approach just because we feel that's the most prudent thing to do. And we do see that opportunity based on some of the things you said, Stan, that is certainly there. And it's a much larger market than the size of our company. I'll tell you that. For sure. And then just following up on the prior question around the APAC opportunity, are there any specific regulatory initiatives that we need to kind of track sort of in line with what we've been seeing in EMEA? You know, it's interesting. The there are around there's over 100 EXPAREL mandates around the world now and we're seeing those exponentially increase. We're seeing those in a lot of Asia companies coming on and So we're monitoring that very carefully. I think EXPAREL is going to become widespread over the next 5 years, and that puts us in just a excellent position. So we're monitoring that. There's not one that stands out. There's a bunch we're looking at. And so, you know, and then by the time we get to APAC, it will be a platform sale. We'll go to large companies sell a platform that can address of record and take out that manual word excel process. They're all using now. And so, it's not any one that's going to, get us to where we're consistently a 6 figure deal maker. It's going to be us selling a platform that addresses their needs for a number of different regulatory things. And then, and then we are going to continue to add more and more. So that's sort of how that's going to happen in, I think, all of the new markets and we're we have a team that does nothing, but pay attention to those regulatory changes and what's happening. And in terms of moving to EXPAREL, that just positions us in an ideal location. Okay, perfect. If I could just sneak in one very quick detailed question. The very strong metrics on customers with great than $100,000 $150,000, but we noticed for customers less than $100,000, the 1st 2nd sequential quarter declined. Is that just a function of essentially customers graduating up to those higher tiers along with just maybe some natural and down at the low end? That's it for me. Thank you. Yes. So I think that we're definitely seeing customers buying new solutions and converting to SBL, which is pushing them up into the higher categories. But I would say, we've also seen on the new logo side, we had a 55 net new logos in the quarter that the size of new logos is, those initial deals are are going up too and not just at the high end, but at, you know, the middle market level. So, you know, we're cheered by that, particularly as long as the, you know, we see growth across the board. I wouldn't read too much into the metric that you quoted. Yeah, I think it's some of it's an artifact. I mean, when Europe really comes online, that could totally swing back the other way. It's just hard to predict But, we don't expect the other way in terms of number of new logos. Yes, number of new logos. But I mean, we don't manage the business that way. I mean, we're managing it for the highest return. We're going to sell wherever the highest return is in any given quarter. And that means the least amount of friction to to get more bookings. So we'll see how that goes, but I don't think it's a real relevant indicator. Got it. Perfect. All right. Thank you, guys. There are no further questions. This concludes today's conference call. You may now disconnect.