Earnings Call: Q4 2018

Feb 20, 2019

Good afternoon. My name is Christine, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Workita Quarter 4 and Full Year 2018 Earnings Conference Call. Thank you. Adam Rogers, Director of Investor Relations, you may begin your conference. Thank you, and good afternoon, everyone. Welcome to Workiva's 4th quarter 2018 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 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 February 27th. 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 including guidance for our first 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 to reflect the events that occur after this call. Please refer to the company's annual report on Form 10 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 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 President and CEO, Marty Vanderplow. Thank you, Adam. And thanks to everyone for joining the Warkiva Fourth Quarter and Full Year 2018 Conference Call. We are very pleased with Our operating margin improved significantly and we remain committed to achieving profitable growth over time. Stewart will review the numbers in detail and provide guidance later in the call. I want to start by saying our customers are continuing to validate huge investments in ERP systems that provide transactional data, which is the source for numerous reports to executives, shareholders, regulators, and tax authorities. Amazingly, these reports are still being created manually using email, spreadsheets and word processors. The inefficiencies and risks associated with these manual processes are becoming widely recognized driving the need for financial transformation in organizations all over the world. Wdesk is the only cloud platform that provides data assurance, and connected reporting throughout the entire reporting process from ERP data all the way to final reports. As customers use Wdesk, move more additional reports onto the WNS platform, driving broad based adoption across their organizations. As we watch our WDS deployments expand, we become even more excited about our platform's potential and how we can capture the large underserved market of compliance and financial reporting. Our solution based licensing model, which gives our customers unlimited seats per solution, is showing good early success. This new pricing model is easier to scale, drives wider adoption and opens more markets for Wdesk We are already seeing increased user counts per solution as customers are recognizing the value of unlimited seats and predictable costs. In fourth quarter, we continued to improve our operating margin by streamlining our current go to market activities. These operating efficiencies have positioned us to increase our investments in 2019 in the areas where we see We plan to continue to invest in integrated risk, which includes SOX, internal audit, enterprise risk management and policy and procedures. Since launching internal audit last year, we are encouraged by early demand. We are also expanding our presence in EMEA where we are seeing strong demand for Wdesk for financial reporting and compliance. Currently, less than 5% of our revenue comes from EMEA We expect to grow that business We are also accelerating investments in global statutory reporting, which is complex financial reporting mandated for legal entities across all countries where they operate. Over fifty customers are already using Wdesk to create statutory reports. This is yet another large and underserved market for WDS that we will aggressively pursue. We see increasing demand for WDS from the government agencies, our authorization to operate under the FedRAMP program makes it easier for federal agencies to choose Wdesk. We also continue to win awards just last week, Fortune Magazine named Kiva, one of the 100 best companies to work for across all industries. This year, we are the youngest company to make that list. And in January, Fortune named Workiva, one of the best workplaces for technology, we are proud to be joining many of our customers on these prestigious In summary, we are very pleased with our many accomplishments in 2018 and we are excited about capitalizing on our growth opportunities going forward. With that, let with guidance. So first, our operating margin improved 1500 basis points in Q4. Compared to the same quarter last year. And we're obviously pleased with that outcome, growing our top line 18% while maintaining tight controls on hiring accounted for 8.60 basis points of the improvement in our operating margin. The balance of the improvement, 640 basis points, came from deferring sales commissions consistent with ASC 606. 2nd, we're raising our guidance for 2019 revenue due mainly to improved bookings growth in Q4 2018. In fact, Warkiva generated the highest quarterly bookings for subscription and support in the history of the company in Q4 2018, Beginning to implement solution based licensing definitely helped our bookings, but we would have recorded record q4 subscription bookings, even if solution based licensing were excluded from the calculation. The breadth of improvement in bookings across most use cases was impressive. Our team selling SEC reporting, integrated risk, managerial reporting, and capital market all made strong contributions reflecting our recent investments in product, messaging and sales training. While we have not commented on bookings in the past and we don't intend to do so on a regular basis, we thought it was important to do so today is to provide context for our guidance. A substantial part of the improvement in bookings was generated late in Q4, boosting accounts receivable at year end. We caught up with collections in Q1 and accounts receivable are back down now to normal levels of DSO those. On a related note, I want to highlight change in billings. As we approach the end of our program to convert our customer contracts, from quarterly to annual payment, the average age of our contract terms has stabilized at around 1 year making change in billings a more comparable metric than it used to be at Workiva. Billings to find out the sum of quarterly revenue and change in both deferred revenue and customer deposits rose 28% sequentially in Q4 from Q3. One reminder on accounting, as discussed last year at length, we adopted ASC 606, the revenue recognition standard, using the modified retrospective method. Our Form 10 K provides a reconciliation of the impact of the adoption of ASC 606 on our full year 2018 financial results. Now to some details on the quarter we outperformed our revenue guidance for the quarter. We generated total revenue in the fourth quarter of $64,400,000 an increase of 18.2 percent from Q4 2017. Breaking out revenue by reporting line item Subscription and support revenue was $53,800,000, up 18.1% from Q4 2017. 51% of SNS revenue increase in Q4 came from new customers added in the last 12 months. Professional services revenue was $10,700,000 in Q4 2018, an increase of 19% from the same quarter last year. Growth of services revenue is largely a function of the growth in subscription revenue. Turning to our supplemental metrics, we finished Q4 with 2240 customers, a net increase of 2.77 customers from Q4 last year. And a net increase of 51 customers from Q3 2018. Our retention rates continue to be strong. Subscription and support revenue retention rate was 96.1 percent for the month of December 2018. With that on, our subscription and support revenue retention rate was 107.1 percent for the month of December 2018. So one comment on calculating revenue retention rates. Through December 2018, we calculated revenue retention rates using monthly ASC 605 revenue. We'll start reporting revenue retention rates using quarterly ASC 6 revenue when we have comparable data in Q1 twenty nineteen. We expect a new quarterly measurement to reduce the variability of this metric, which to date we've been calculating monthly. Our progress with larger contracts is encouraging for annual contract value of $100,000 plus, we had 443 customers in the fourth quarter, up 37% from Q4 last year. For ACVs of 150 k plus, we had 190 customers in the 4th quarter, up 30% from Q4 2017. Moving down the income statement, I'll talk about our results and guidance before stock based compensation or on a non GAAP basis. Please refer to our press release for a reconciliation of our non GAAP $4,000,000 in Q4, up 22.1 percent from the same quarter a year ago. Gross margin was 73.5% in the latest quarter, compared to a gross margin of 70 Subscription and support gross profit was 2% on S and S revenue, an improvement of 300 basis points from Q4 2017 due to a higher utilization rate and better pricing. Professional services gross profit in the 4th quarter was $2,100,000 equating to a 19 point 4% gross margin, down 50 basis points from the same period last year due to investments in additional talent to enhance services and $1,000,000, an increase of 4.7 percent from Q4 last year due to higher compensation. R and D expense as a percentage of revenue improved this quarter to 29.6% compared to 33.4% in Q4 last year. Sales and marketing expense for the quarter increased 2.1 percent from Q4 last year to $21,500,000 of sales and marketing expense as a percentage of revenue this quarter improved due to the capitalization of sales commissions as required under ASC 606. General and administrative expenses totaled $7,000,000 in Q4, down $844,000 compared to Q4 2017. Operating loss was $268,000 in Q4 2018 compared to an operating loss of 8 $400,000 in Q4 2017. Turning to our balance sheet and cash flow statement. At December 31, 2018, cash, cash equivalents and marketable securities totaled $98,300,000, an increase of $1,400,000 compared with the balance at September 30, 2018. In Q4 twenty net cash used in operating activities totaled $419,000 compared with cash used of $6,200,000 in the same quarter here. Full year 2018 cash from operations was a positive $6,400,000. That Warkiva has posted positive operating cash flow. Turning to our guidance. In the first quarter of 2019, we expect total revenue to range from $68,800,000 to $69,300,000 Non GAAP operating loss is expected to We're raising guidance for total revenue to a range of $282,500,000 to $284,500,000. We expect the growth rate We expect non GAAP Seri to pursue the attractive growth opportunities that Marty discussed. However, we intend to continue to manage headcount growth carefully. We expect cash flow from operations to be positive in 2019 operations will improve significantly in 2019. So we're now ready to take your questions. Operator, please begin the Q And A session. Your first question comes from the line of Terry Tillman from SunTrust Robinson. Your line is open. Hey, gentlemen. Can you hear me okay? Can. Hey, great job on the bookings. Great to hear that. Hi, Marty Stewart and Adam. Maybe my first question, Marty, for you, in terms of what Stuart's commentary was about the bookings strength, And it sounded like peel might be onion. It wasn't just the replatforming, but also, other factors. What I'm curious about is, if guys are to continue those bookings momentum into 2019, could you maybe stock rank what do you think the drivers of that would be the expanded product or use cases, execution and or just replatforming benefits? Maybe just trying to understand how each of these could affect bookings and the relative importance? Well, we don't comment on bookings per se. And so I will say this, as Stuart indicated, we saw good growth across all of our business lines. And feel positive and good about all the existing business lines. And then the second thing is execution. We're just much more focused now, as I've always talked about, And, and we're looking for growth opportunities where we have some experience before we invest heavily. The 3 I mentioned, all of those we've seen enough success to know that there is real growth opportunities if we invest. So those are really, you know, it's across the board and those are the main drivers. Okay. And my follow-up question, Stuart, as it relates to the replatforming, how do we think about, though, as we move out over couple of years existing customers and how they might move to this new solution based pricing model and how that would reflect in billings. Just trying to understand, you know, is this a long dated kind of process, or is this going to be more compressed in terms of time frame and the and how we'd see that in the model? Thank you. Sure. Thanks, Terry. So, we comment on this in the 10 K too, but we expect to be completed with the move to solution based licensing sort of by mid-twenty 20 or so. And it's a longer term conversion process. There is uplift, when we convert and we are providing quite a bit of incremental value to our customers, which Marty touched on. But we haven't, we're not breaking out the difference between that contribution. That's it for me. Thanks. Your next question comes from the line of Tom Roderick from Stifel. Your line is open. Hey, gentlemen, good afternoon. Thanks for taking my questions. So Marty, I couldn't help but notice one of the growth drivers you addressed in your comments was, was Europe, you know, EMEA representing less than 5% of revenues today. And the thought that you can get that to 25%, 30% over time is obviously pretty appealing. Talk a little bit about what the drivers and catalysts are in that market. And in particular, I think you've noted before sort of ESMA announcing a mandate for a variety of public companies, moving to in line XBRL tagging. So I don't know if there's a parallel to drawn from the U. S, but would love to hear about that as a catalyst. And then, and with a catalyst like that and other demand out there, how fast do you want to move new bodies and new sales heads into Europe and what kind of investment does that sort of look like? Thanks. Well, that was a long question. I'll see what I can do here. First off, I want to say that, Europe is more heavily regulated than the North America is. And, they have a lot of different types of financial reporting and compliance requirements. And there's just a whole host of those I could list SME is only one of those. And so I would, I would say that we see, broad based demand for this, it's very similar to the things we do in the U. S. They have control, different control requirements, not just like SOX, but still they have different types of things that they mandate, they manage controls on. And the financial reporting needs there not just in ESMA, but in other areas are just as prevalent or even more than in the U. S. So we view a broad based demand there very much like we see in the U. S. Now in North America. So, we know Esmed is going to Esmed is going to help us that's still, you know, a couple of years away, but, the, the increase in, in success we've had there recently has been because of our leadership change there and more of a focus there. So it's really across a wide number of use cases. Excellent. Okay. Good. And then what was the second part of the question? I forgot already. Well, the second part is just simply how fast you want to ramp resources into that market, particularly on sales heads? We really don't talk much about sales said, I think Stuart referenced that, or maybe you didn't, that most of the investment that we're making in terms of the guidance is in sales and marketing. And it'll be both in Europe and then also going after the statutory reporting I referenced. Perfect. Stuart, I'll make my second question shorter for you here. Looking at the guide for Q1, And then sort of looking at the full year, it certainly implies a pretty aggressive ramp in operating expenses I would assume that's where they're coming from. So is this just a ramp that's informed by the record bookings and the traction in the marketplace And you simply need more sales and marketing coverage? Or is there other things we should be thinking about here? So a couple of things there. I think that we, absorbed a lot of the capacity that we had in sales last year. And so we did feel that we it to add incrementally to sales and marketing. That's number 1. Number 2 is, Europe is obviously and geography. And so we, we've got to add there and we're going to add in, as Marty indicated, in statutory supporting and go after that incrementally. But, we did, we had sort of reached that point where, we need to make, incremental investments in sales and marketing. And the ramp, you're right, reflects the additional hiring that we're going to be doing throughout the year. Perfect. I'll jump back in queue. Your next question comes from the line of Brian Peterson from Raymond James. Your line is open. Thanks guys and congrats on the quarter. Just one question from me, but it'll be in 50 parts. But no, seriously, just on the solutions based pricing. I wanted to get a sense for customers that have moved over to the new model. Is there anything that you can share beyond just use cases anything related to usage of the platform or activity? I'm just curious how those customers have actually used the platform since they switched over. Sure. I'll take that. We have seen a market increase in the number of users in each solution. Which is if you recall some of the previous, conference calls, our goal is to get more exposure in these organizations and to reduce the friction get seats out. And when you charge an additional dollar for each seat, there's just a lot of organizational friction from from, back office functions, procurement, things like that. So this frictionless way is allowing us to have many more users, more eyes on it, more people looking at it over someone's shoulder and just getting more exposure and also providing a much higher value for the customer. When they have everybody that's in the process using it, it's a higher value for the customer. So we're seeing the number of users go up quite significantly and we're very pleased about that. I think the other aspect of it Ryan, is that it does simplify the sales process, on, on incremental solution sales. As it just reduces the number of variables that are being discussed. Your next question comes from the line of Rob Oliver from Baird. Your line is open. Share on for Rob, Stuart or Marty, either one, I suppose. The 4Q bookings numbers are quite strong across the board. Was curious if there was any business that was pulled forward or maybe came in renewed early that you were expecting to perhaps renew in the quarter ended up, contributing to that 4th quarter bookings number? Well, I'd say that some of the solution based licensing, there was quite a lot of enthusiasm. I think for that, so there was a little bit of pull forward there, but not not a great amount. But I think it was more about the sort of better execution and these investments that we've been making sales and marketing and the product coming to roost. Got it. As I said, it's been broad based improvement in terms of execution and efficiency on generating bookings. Okay, got it. Yes, that's helpful. It seems like the execution has really picked up. Bill, second question I had was on the next generation enterprise platform. I think we talked at the Analyst Day that it was about 30 customers who had been filing with that, first quarter and then it was 60 in the second quarter. There any update on the uptick of that next generation platform and the number of people filing? Just generally, is it perhaps over $100,000,000 or is there any estimate you could give us? I can give you, we've had well over 100 customers in the app. I think it's over 150 in the new platform. You know, the way you want to roll this software out when you have a very happy customer base who are used to a very, you know, high functioning piece of software is to is to roll it out slowly. When the time comes that we're comfortable, we'll migrate the rest of the customer base fairly quick. We just intend to slowly raise it each quarter and as I mentioned, we're way north of 100 now. That's 150 filing. 150 customers filing, yes. Got it. Thanks, guys. Thank you. Your next question comes from the line of Mike Grandahl from Northland Securities. Your line is open. Hey, thanks guys. Any update on W Data kind of progress there and kind of client engagement? Sure. I mean, we're, you know, w data is is part of our platform. And, it has had several effects. Number 1 is it's increased, where it's been included in these deals, it's increase deal size quite a bit. And secondly, it enables, a lot more customers that are anxious to integrate directly and bring in large amounts of data. So we're very pleased with the success we've had there, but it is part of the platform. It is a standalone solution as we've alluded to before, but it has done a lot of good things for us in terms of increasing deal size and enabling us to bring in much, much larger data sets in the Wdesk. Got it. And then SAP or NetSuite, any update there on how that progress is going? Sure. With the SAP integration, we've, that partnership as we talked about enabled us to build an integration into SAP that is sanctioned by us and SAP. And it's a very it allows us to get into these accounts and have the credibility knowing that we're going to be able to get SAP's data into our platform. So from that point of view, it's been a it's been a success for us. Got it. Hey, thanks a lot guys and congratulations. Your next question comes from the line Stan Zlotsky from Morgan Stanley. Your line is open. Hey guys. Stan Zlotsky on for Stan Zlotsky. Maybe just wanted to follow-up on a few questions from Terry and Tom. Just on the unlimited seats, as we continue to see more of unlimited seats and solution based pricing, What is the impact to net revenue retention rates as we move forward? So the specific impact of SBL on revenue retention rates should be, it should help retention rates because it will, make as we as Marty mentioned, we've seen a pretty big uptick in the number of users per account. And historically, when we've seen a lot of engagement with the customer or it tends to make the application stickier. Yes, that's exactly right. The more people in the app, the more the process is sort of woven throughout the organization and it just makes it a lot stickier. Well, I was I was I was more referring to like the the net revenue retention rate, the 105 ballpark percentage net revenue retention rate. As we move forward, with contracts getting bigger, would you expect net revenue retention rate to increase as well as more users come onto the platform? Certainly, it's our hope that that's the case. I mean, one way to look at it, Stan, was, relative to what it displaced, which was seed add ons. And the breakeven relative to feed add ons are no longer right, with this model. And the breakeven relative to what we were earning from seed add ons is a no brainer. And so take that into account, you take into account the broader use of the platform, the broader exposure within companies within these companies, we think it'll accelerate, the adoption of additional solutions. Got it. Perfect. And then just a clarification on the EMEA opportunity. It certainly sounds very interesting to take to be able take it from 5% now to 20% to 25% over time. How do you guys come up with 20% to 25% estimates? What do you see, what are the milestones that you're looking at to try to get there? And I'll stop there. Thank you. Yes. So a couple of things. Certainly, we're looking at the current pipeline. For, the applications that we have, which are around, Cass, CASS for Banks And Asset Management Firms. And around ICAP and ILAP and resolution plans and stress testing for banks and then global stat reporting. And then longer term, you know, the, the, mandate affecting 5000 companies. That we only have, as Marty said, a very relatively small number of customers there. So, it's a, certainly our goal to increase it to 25% to 30%. We're certainly seeing a lot of other B2B SaaS companies with that sort of contribution. And it's heartening to see from a ground up basis that these use case supports that analysis. And we've actually looked at, we've actually drawn up all the target lists and see what regulatory requirements they have. And it's, it's potentially a larger market than the U. S. In terms of number of companies and all the different regulations and requirements they have for reporting. So we've done that very thoughtfully. Got it. And maybe just a quick follow-up. I know you mentioned that you plan to get there, to the 20% to 25% over time. But, you know, maybe just narrow that down over the next 5 to 10 years. Is that the time frame we should be thinking about? Well, I mean, I think that the answer is we don't forecast it that far out. But we are we're comfortable for instance that this, again, the progress that we've got existing progress we've got and then the visibility we have on these use cases and with the regulatory mandate coming to Visa, which will really affect us in 2020 2021. Give us some confidence in that viewpoint. And there are no further questions at this time. This concludes today's conference call. You may now disconnect. Everyone else has left the call.