Earnings Call: Q1 2019

May 1, 2019

Good afternoon. My name is Chris, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Workiva Q1 twenty nineteen Earnings Call. After the speakers' remarks, there will be a question and answer Thank you. Adam Rogers, Director of Investor Relations, you may begin the conference. Thank you, and good afternoon, everyone. Welcome to Workiva's first quarter 2019 earnings conference call. The 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 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 May 8th. 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'd 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 full fiscal year 2019. 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 that reflect that occur 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 Ten Q for factors that could cause our actual results to differ materially from any forward looking statements. Also during the course of today's 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 Fortiva first quarter 2019 conference call. We are pleased with our first quarter results. We exceeded quarterly guidance for revenue and operating results, and we are raising our full year 2019 revenue guidance, which Stuart will discuss in more detail later in the call. Since I became CEO over 10 months ago, we have accelerated our revenue growth rate, increased average revenue per customer increased average deal size, I'm sorry, increased average new deal size, cut expenses and gained other efficiencies throughout the company. And improved our licensing And as a result, we have refined our focus and our investments. We are working more closely with partners than ever before, Our technical and advisory service partners enable us to scale more efficiently and deliver higher value to our customers. We are aggressively building APIs and connectors enable our customers to replace manual data transfer and bring larger amounts of data into Wdesk. These integrations ensure accuracy and transparency throughout the entire reporting process. It is essential that we are tightly integrated with our customer systems of record and other core enterprise applications. This connectivity increases our stickiness and our footprint in our customer's application ecosystems and will remain one of our key areas of investment moving forward. Risk. And we are aggressively expanding our footprint in Europe, including new offices in Frankfurt and Paris, which better position us to attract and support customers in these countries. Met with executives from a wide range of industries, including shipping, telecommunications, semi conductors, banking, mining, and pharmaceuticals, and they, like many others, are faced with the same problem, how to report vast amounts of data from their systems of record to regulators and stakeholders in an accurate and efficient way. Wdesk is the only cloud platform that provides trusted data throughout the entire analysis and reporting process from ERP transactional data to final reports. As I continue to visit with customers and prospects, I am even more confident that Wdesk will be a driving force in data and trusted financial reporting throughout the world. With that let me turn it over to Stuart Miller, our CFO. Thank you, Marty. I'll start with our first quarter results and then I'll comment on our guidance for second quarter and full year 2019. And then we'll open up the call for your questions. As always, I'll talk about our results and guidance before stock based compensation or on a non GAAP basis. So please refer to our press release for a reconciliation of our non GAAP and GAAP results and guidance. The billings increased 25% from Q1 2018 to Q1 2019 using comparable ASC 606 data. We posted record subscription bookings in Q1 relative to other first quarters at Warkila. Billings declined 19% sequentially from Q4 2018 to Q1 2019. Q4 is seasonally the strongest quarter for billings and Q1 is seasonally the weakest. So we expected some decline in this comparison. Also in Q4, twenty eighteen, we had pulled forward some renewals related to solution based licensing. We posted an operating profit Operating margin improved 7.20 basis points due mainly to better operating leverage on both the R and D and G and A expense lines. While we are pleased with our progress on operating margin, accelerating growth in subscription revenue remains our the few quarters. So our guidance on operating loss for full on a non GAAP basis 2nd highest priority in financial terms. Even with our stepped up investments, we expect OCF to improve significantly in 2019 compared to in the first quarter of nearly $70,000,000, an increase of 16.8% from Q1 2018. Breaking out revenue by reporting line item, subscription and support revenue was $56,100,000, up deepening our penetration of existing customers with both add on solutions and conversion to solution based licensing helped accelerate growth of in Q1 twenty nineteen, an increase of 3% from the same quarter in 2018. Growth in revenue from XBRL professional services overcame a decrease in revenue from other services. We expect the revenue growth rate from subscription and support to continue to outpace revenue growth from professional services 6 customers, a net increase of 247 customers from Q1 2018 a net increase of 26 customers from Q4 2018. In Q1 this year, we added fewer new logos than in the comparable quarter last year as our sales team focused on penetrating existing accounts and concentrating on larger contracts with new logos. Regarding our retention rates, please recall that through 2018, we calculated revenue retention rates using monthly ASC 605 revenue. Starting with Q1 2019, we are reporting revenue retention rates using quarterly ASC 606 reduce the variability of this data. Our retention rates continue to be strong. Our subscription and support revenue retention rate was 95.7%, for the first quarter retention rate improved to 110.7 percent for March 2018. Our progress with larger subscription contracts is encouraging. The number of contracts valued at over $100,000 year totaled 493 in first quarter of 2019, up 47% from Q1 last year. For annual contract value of $150,000 plus, we had 207 customers in the first quarter, up 37% from Q1 2018 results. Now moving down the P and L. Gross profit was 51 point $2,000,000 in Q1, up 17 point 2% in the latest quarter an improvement of 20 basis points compared to Q1 last year. Breaking out gross profit. Subscription and support gross profit was $46,700,000 equating to a gross margin of 83.2 percent on S and S revenue. An improvement of 180 basis points from Q1 2018 due to a higher utilization rate and better pricing. Professional services gross profit for the first quarter was $4,500,000 equating to a 32.7 percent gross margin, down $1,400,000 or 11 percentage points from the same period last year. Due to investments and additional talent to enhance services and address new markets. Research and development expense in Q1 was $20,100,000, up 5.3 percent from Q1 last year due to higher compensation. R and D expense as a percentage of revenue improved 3 20 basis points this quarter to 28.7 percent compared to Q1 last year. Sales and marketing expense for the quarter increased 17.6 percent from Q1 last year to $23,400,000 in line with revenue growth. General and administrative expenses totaled $6,800,000 down $1,500,000 compared to Q1 2018. G and A expenses as a percentage of revenue improved over 4 percentage points to 9.7% due primarily to a reduction of expenses for executive compensation consulting and bad debt. Operating income was $861,000 in Q1 2019 compared to an operating loss of $3,600,000 in Q1 2018. Turning to our balance sheet and cash flow statement at March 31, 2019 cash, cash equivalents and marketable securities totaled $114,400,000, an increase of $16,100,000 compared with the balance at December 31, 2018. In Q1 2019, net cash provided from operating activities totaled $5,100,000 compared with cash provided of $1,800,000. In the same quarter a year ago. Turning now to guidance in the second quarter of 2019, we expect total revenue to range from $68,600,000 to $69,100,000 Non GAAP operating loss is expected to be in the range of $4,200,000 to $4,700,000. And we expect post positive operating cash flow again in Q2 and for the full year 2019. For full year 2019, we are raising guidance for total revenue to a range of $84,000,000 to $286,000,000. We expect the growth rate of subscription revenue to continue outpace the growth rate of services. We expect non GAAP operating loss to range from $15,000,000 to $17,000,000 unchanged from our previous guidance. Investing in new talent is necessary to pursue our attractive growth opportunities. So we're ready to take your questions now. And operator, please begin the and A session. Your first question comes from Tom Roderick with Stifel. Your line is open. Hey guys, good afternoon. Thanks for taking my questions. So I guess the thing that jumped out relative to the P and L on the quarter is you've got the subscription growth rate here back above 20%, almost 21% in the quarter. So a lot of the in the first quarter of 2019. So, I think that's a pretty good question. I think that's a pretty good question. I think that's a pretty good question. I think that's a pretty good question. So, I think that's a pretty good question. Sounds like you're going to invest more aggressively on OpEx, presumably quite a bit in sales and marketing that'll sort of trickle through later in the year. How would you sort of suggest we think about that modeling function for subscription relative to ProServe, which is now down in the low single digits? Thanks, Tom. So as you know, we don't break out our guidance on the 2 revenue streams other than say we expect subscription growth to, outpace services growth. So, yeah, I do, I do think, we are obviously expecting to see good sequential, growth in, in subscription revenue in certainly our hope and our aim to, continue to keep the growth rate in in that area. And we're making investments. The investments we're making, an additional talent, we're expecting to start to show up on the revenue line in 2020. Fair enough. Okay. And then looking at the back to base efforts, you pointed out and we could see it in the numbers here that your 150 K ACV customers up 37%, 100 Ks up 47%. So, you know, tremendous success with the back to base. How much of that can you ascribe to some of the solution based pricing where are we in the curve to kind of push customers into that? And then I guess the other question around that is what sort of pushback are you getting, if any, from customers as you sort of migrate them along to that newer solution based pricing approach? Interestingly, we're less, we're still less than half of our customers are on a revenue basis. Are on on solution based licensing, but it's going very well. And of the group that graduated to the over 100 K, apartment. You know, some of those were clearly new. Some of those were new logos. But of the ones who were existing customers who graduated, selling less than half of those were, related to solution based licensing, so quite a bit of add on sales there. Wonderful. I'll jump back in the queue. Thank you guys. Your next question is from Eric Lemus with SunTrust. Your line is open. Yeah. Hey, guys. Nice job in the quarter. I just want to expand on Tom's last question as far as looking at those customers that did move on to solution based pricing. Is there anything measurable that you guys can talk about as far as the uplift in pricing moving to solution based pricing from those customers already? So we definitely are getting an uplift and giving them good value for that uplift. We've had very strong reception from customers. It's easier for them to administer. It's it's much more flexible for them to add seats and broaden adoption throughout their own organizations. Frankly makes their job easier from administrative perspective. We have not commented specifically on a percentage uplift that we're receiving. I mean it differs from, from customer to customer. Okay. Great. And then more on the solution based pricing, you know, one of the advantages that you guys have talked about is just simplifying the sales process Is there any sort of metric that you guys can give as far as shorten sales cycles or even a larger initial deal sizes that you're seeing because of the solution based pricing? Yeah, this is Marty. The, it's pretty early to tell in terms of, cycle time in terms of making sales because there is a lot of interconnection time there. And but we definitely have seen an increase in new deal sizes I alluded to on the opening comments. And again, just so, we talk a lot, everyone's talking a lot about solution based licensing. It's it definitely reflects an uptick across our customer base. But for us, it's a very strategic thing. The most important thing is that it has increased our new deal size. It has simplified the selling process. And we are seeing some examples where where the sales cycle time has shortened, but as I said, we don't have a lot of data there yet. And then the last thing is it just it creates so much more exposure for our product, across the enterprises as they add more and more users. So for us, we view it as a very strategic thing contributing to all three of those things I mentioned. Thanks guys. Nice job. Your next question is from Rob Oliver with Baird. Great. Thanks. It's Matt Lemenager on for Rob. Thanks for taking the question. So I had one on the new European XBRL mandate the European single electronic format mandate that's coming January 2021. And just seeing you guys opening the 2 new offices over there Just wondering, is there any sort of customers that are starting to come early ahead of that mandate or what are we starting to see with that kind of pending? Well, certainly, with our larger customers over there, and I would say across sort of the top half of that market we talk about, they are definitely starting to look at how they're going to solve that problem. We're already getting inquiries on a pretty steady basis, just because of our EXPAREL reputation. So we are starting to see that percolate certainly, those offices are partially only partially a reflection of that, but That stuff is definitely starting to get on the radar screens of the finance reporting teams in Europe. Got it. And a quick follow-up on the renewal values, those ticked up nicely this quarter, just under 111%. Is that how much is it hard to know, but how much of that was due to the now being quarterly versus for it was monthly and would fluctuate? Or I guess how sustainable is that $111,000,000 going forward? We do think it'll be less volatile for sure. If you did the same calculation on a monthly basis to be comparable to last year. It was actually a bit over 113. So the we, what we're reporting the 110 because, as you know, we committed to support the calculation on a quarterly basis going forward. Got it. Thanks. Congrats guys. Your next question is from Brian Peterson with Raymond James. Your line is open. Thanks. This is Alex Clark here for Brian. I'm sticking with the solutions based pricing theme here. Could you just talk about, I think you hit on increased number of users, but can you talk about any increased usage from enterprises in terms of how they're using the products after they switch over? Well, remember that the solution based licensing through the use of workspaces we are bracketing that usage in terms of the use case, meaning, you know, if it's for socks they can only use it for SOX. If it's for financial internal, you know, performance reporting, you can only use it for that use case. So, we haven't seen it, go broad in that sense. Within each workspace though, we've definitely seen an increase in the number pushing our goals there. So I would say that it's been successful from that point of view just getting, getting more exposure. And, we're definitely seeing, you know, as that, as we see more exposure within the org, we're getting more inquiries for the other solutions. So, we are seeing the effect we want. Got it. And then maybe, Stuart, following up on your prepared remarks about the logo growth, and your customers with over 100,000 ACV growing faster than the overall new logo. Could you just provide some color on what the initial deal sizes look like for the new logos that were added versus a year ago? Yeah. We have not historically disclose that. But I will I'll tell you that the there's been a very nice, steady growth, in in new deal sizes. Some of that, you know, has to do with the move to solution based licensing since we're offering more value. But, you know, it's up in the, it's sort of in the north of the 30% the new deal, new logos. And some of that quarter to quarter, that can depend on the mix of the new logos, because, you know, some use cases can be, quite large, in other use cases or not. So it can, that number can vary quarter to quarter, which is one of the reasons why we have not historically disclosed specific numbers around that. Got it. Maybe just one last one here on the increased hiring. Is this still predominantly a European focus or are you also looking to ramp some sales people in the US as well? Thanks. Yep. I the certainly a significant portion of that is the European expansion. The initial expansions we started have shown really good results. And so we decided to accelerate that even more. We're also really doubling down on partnerships and adding folks to help us nurture those partnerships with primarily the larger consultancy firms. And then we've also decided to invest slightly more in around our solution and our solution around other people's solutions and also providing very good connections to their system of record. Is really a theme we see with other companies in our space and we see that it definitely is what the customers want builds that stickiness. So those are really the three places. We will add some more sales people in North America too, but the first things I mentioned are the primary uses of that in increased investment. Your next question is from Mike Grondahl with on kind of pushing on the accelerator. First question is just if you look at the new wins or dentions in 1Q, any categories to call out or any sort of partner channels to call out At this point, I would really say it's been pretty consistent across the board I would say our partnerships were further ahead on the integrated risk than we are on the other businesses, but I think has been pretty much across the board. Yes. We had good addition. We had groups contributing. SEC, capital markets, integrated risk, financial close reporting, some of the use cases that are specific to Europe was pretty broad based. Got it. Okay. And then the investment in some sales, firepower and whatnot, is it basically just people to attack the channel partners a little bit more or any more details there, just sort of where the dollars are going? Well, as I alluded to, in Europe, it is primarily all of, you know, revenue generation activity, meaning salespeople, some, presalespeople, and then some delivery folks That's where a very significant part of the investment is going. And then in terms of in North America, it's more about a little more focused in some of our territories and things like that. It's really fine tuning where we're making the investments. Okay. Thank you. And our last question comes from Stan Zlotsky with Morgan Stanley. Your line is open. All right, perfect. Thank you so much, gentlemen. Maybe a high level question. The expansion into Europe Is there any specific significance in the new offices being opened up in Frankfurt and Paris as opposed to some of the other big hubs that where we've seen a lot of other a number of other software companies also have headquarters. Hey, Stan. So as you know, we were in, Amsterdam in London, I guess, since 2013 or even late 2012, something in that, in that area. So we started there and we started with, the English speaking, countries and and, have been there for a while. And so, after that, you know, we're really following the size of the market. And as you know, Germany and France are the had the biggest GDPs in the EU, which itself is as large as the U S GDP. So it's important culturally to have, a local presence there and have, as you know, and have sales and marketing people who our local calling on those, on those companies. Got it. Perfect. And then, on the new logos, the 26 new logos, obviously we can see in the net revenue retention rate, you're doing a great job of upselling into existing customers, how should we think about the pace of new logo additions as we move through the rest of the year? And I realize you don't guide to it, but just maybe just qualitatively, how should we be thinking about it? Yes. So one data point that might be helpful is, historically, the balance of new subscription revenue has been about fifty-fifty between new logos and existing customers on upsell and so forth. And this quarter, it tilted, toward existing customers, but it only tilted a little bit. It's 52%, 53% existing customers. So, don't expect that to change a whole lot going forward. This quarter, there was a pretty good blend of, new logos from the different groups like SEC And Capital Markets and some of the customer teams that call them private companies and the SOX team and so forth. We don't, you know, we had the team that was very focused on, converting to solution based licensing and focusing on add on solutions to existing customers. That that very well could be the case in Q2 as well. To be a whole lot different from around fifty-fifty. I was specifically talking about more about just the pure count of logos rather than mix of revenue. Well, this is Marty, Stan. I think that I really think that we'll We'll see a more consistent with what we've done in the past number as we move forward. Again, it bounces around quite a bit. But in general, I think that, you know, we are very focused on just making sure our deal sizes on our new deals are substantial it just, it brings so much better discipline to, you know, the whole process of onboarding and getting happy customers and seeing and providing value to them. So, you know, until the organization totally adjusts to that, it might be a little lower, but in the long run, I anticipate you'll see similar numbers of new logos, added. And that ratio that Stewart talks about that we watch more than the actual gross number of logos, the, you know, the bookings, it's still about fiftyfifty each quarter. That's a number I'm more concerned about. Got it. And the last one for me since the last question and the last question and all. But maybe just a slightly different way asked the prior question of within your sales comp plan, do you specifically differentiate between new ACV from new logos versus if the new ACV comes from upsell into existing customers? We don't. It's all a function of incremental revenue and we're indifferent whether it's from a new logo or whether it's from an add on sale. This concludes the Q And A session and today's call. Thank you for joining and you may now disconnect.