Earnings Call: Q3 2018

Nov 7, 2018

Good afternoon. My name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to the Workiva Third Quarter 2018 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer Thank you. Mr. Adam Rogers, Director of Investor Relations, you may begin your conference. Thank you, and good afternoon, everyone. Welcome to Workiva's third quarter 2018 earnings conference call. This afternoon, we'll begin with comments from our President and Chief Executive Officer, Marty Vanderpla. Followed by our Executive Vice President and Chief Financial Officer, Stuart Miller. And then we'll turn the call over to questions. Also on the line today is Jill Clint. Senior Vice President And Chief Accounting Officer. A replay of this call will be available until November 14th. 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 fourth quarter full fiscal year 2018. These forward looking statements are subject to known and unknown risks and uncertainties. Orkiva cautions that these statements are not guarantees of future performance. All forward looking statements may today reflect our current expectations only, 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 President and CEO, Marty Vanderplow. Thank you, Adam, and thanks to everyone for joining the Warkiva third quarter 2018 conference call. We are pleased with our reflecting our commitment to achieve profitable which Stuart will discuss in more detail later in the call. We remain focused on adding new customers and expanding our footprint in our nearly 3300 customers, and we continue to see an increase in average deal size as well as an increase in our number of large contracts which grew by 32% in Q3. Wdesk is the only cloud platform that enables data assurance throughout sees to analyze and report performance data. The errors and risks associated with these manual processes are becoming widely recognized driving the need for financial transformation in the Office of the CFO. Wdesk is the only cloud solution that enables end to end data assurance in the last mile of financial reporting. We designed the next generation of WDS to address the need for financial transformation and drive wider adoption of our platform. W data, which includes our new data prep tool along with data connectors and APIs, allows our customers to create This removes manual steps in the reporting and analysis process after the data leaves our customers' ERP and other data systems and enables data assurance throughout the entire reporting process within immutable audit trail. And just yesterday, WDATA won the Ventana Research Digital Innovation Award in the Office of Finance category. Wdesk Workspace allows our customers to have a trusted environment for teams and enables our solution based licensing. Solution based licensing offers unlimited seats by solution, which increases the value of Wdesk to our customers. Our improved user management allows much larger teams to be efficiently managed These new WDS capabilities enable even larger teams to benefit from WDS core strengths. Collaboration, control, accountability, and data assurance. We believe Workiva's future has never been more promising. In the third quarter, we continued to take market share in SEC reporting, capital markets, management reporting, regulated risk, investment funds reporting, and SOX and internal controls. We are also seeing growth from our market expansion in EMEA, and APAC as well as in local state and federal government agencies. Our SOX customers have been asking for an internal audit solution and we delivered that solution in September. Unlike legacy audit systems, Wdesk is a born in the cloud solution that offers real time collaboration documentation, work paper management and workflow, which helps internal auditors gain new insights into risk management across their organization. We continue to augment our For example, in September, we announced an alliance with KPMG. We are already working alongside KPMG in more than 10 companies on a wide range of use cases. Where nearly 1800 attendees spent 3 days of learning with our R and D and customer success teams. Many of you listening to this call attended our user conference and you saw firsthand how much our customers love Wdesk and how much it has changed their lives. It is my great pleasure to work with extraordinary people every day. We continue to strengthen our collaborative culture throughout Workiva, and we continue to win best place to work and innovation awards. In the third quarter, Fortiva was recognized as an Employer of the Year by American Business Awards and Wdesk won a Stratus award for Cloud Computing by Business Intelligence Group. As I said last quarter, Warkiva is committed to pursuing profitable growth. We will continue to enhance our Wdesk platform add new customers and partners and expand Wdesk across our customers' organizations. With that, let me turn it over to Stuart Miller, our CFO. Stewart. Thanks, Maury. I'll start by reviewing our third quarter results, which featured a substantial improvement in Orkiva's operating margin. Thereafter, I'll comment on our fourth quarter guidance and then provide a preliminary viewpoint on what we expect next year. 2019. One reminder on accounting, as discussed on our calls earlier this year, we adopted the new revenue recognition standard ASC 606 using the modified retrospective method. Our Form 10Q provides a reconciliation of the impact Now to our revenue. We outperformed our revenue guidance for the quarter. We generated total revenue in the third quarter of $60,900,000, an increase of 16.9 percent from Q3 2017, breaking out revenue by a reporting line item, Subscription and support revenue was $51,300,000, up 18.7% from Q3 2017. 51.7 percent of the SNS revenue increase in Q3 came from a deeper penetration of our existing customer base. The remainder of the increase came from new customers added in the last 12 months. A broad set of used cases showed strength. Professional services revenue was $9,600,000 in Q3 2018, an increase of 8.1% from the same quarter We finished Q3 with 3289 customers, a net increase of 2.98 customers, from Q3 2017 and a net increase of 67 customers from Q2 2018. Our retention rates continue to be strong. For the month of September 2018. Customers being acquired or otherwise ceasing to file SEC reports accounted for a majority of revenue attrition consistent with our experience today. With add ons, our subscription and support revenue retention was 104.7 percent for the month of September 2018. This metric can be lumpy because it annualizes just 1 month of data, and can be affected by true ups and other factors. Going forward, we expect this metric to be affected by some capital markets customers renewing at a lower contract value the year after their initial filing. On the other hand, we expect implementing solution based licensing will have a positive impact revenue retention rates using monthly ASC 605 revenue under the legacy accounting standard. We'll start reporting revenue retention rates using quarterly ASC 606 revenue under the new accounting standard when we have comparable data next year. We expect a new quarterly measurement to reduce Our progress with larger contracts is encouraging for annual contract value of $100,000 plus We had 398 customers in the 3rd quarter, up 32% from Q3 last year for ACV of 150 k plus. We had 173 customers in the third quarter, also up 32% from Q3 last year. Moving down the income statement, I'll talk about our results before stock based compensation or a non GAAP basis. Please refer to our press release for a reconciliation dollars 23.9% from the same quarter a year ago. Gross margin was 74.8% in the latest quarter, compared to a gross margin Subscription and support gross profit was $43,300,000 equating to a gross margin of 84.5 percent on SNS revenue, up from a gross margin of 80 point Professional services growth profit in the 3rd quarter was 3% gross margin, up from 20.4 percent gross margin in the same period last year due to a higher utilization rate. Both our customer success and professional services teams ran lean in Q3. We don't expect to run as lean in Q4 because we are investing in international markets, new use cases and the transition to our new platform. Moving down to P And L, research and development expense in Q3 was $18,400,000, an increase of 8.5 percent from Q3 last year due to higher compensation. R and D expense as a percentage of revenue improved this quarter to 30.2% compared to 32.5% in Q3 last year. Sales and marketing expense for the quarter decreased 1.1% from Q3 last year to 22.7%. Sales and marketing expense as a percentage of revenue this quarter improved 680 basis points from Q3 last year to 37.2 percent. The improvement was due mainly to lower marketing costs and the capitalization of sales commissions as required under ASC 606 adopting ASC 606 accounted for 250 basis points of the improvement. For those of you looking at quarterly sequential data, Please recall that the third quarter is our seasonal high point for marketing spend due to our annual user conference. General and administrative expenses were $8,300,000 in Q3, up two $200,000 compared to Q3 2017 due to higher headcount, higher compensation in the executive ranks, and investments in leadership in EMEA and APAC. Operating loss was $3,800,000 q33 2018 compared to an operating loss of $9,100,000 in Q3 2017. Warkiva's operating margin improved 11.30 basis points in Q3 2018, versus Q3 last year, primarily because revenue growth exceeded growth in compensation expense. Headcount grew less than 1% year over year. Investing in new talent will be necessary to pursue continue to manage headcount growth carefully. Net loss compared to the net loss of 9.4 in Q3 twenty eighteen compared to a net loss per share of $0.23 in the same quarter a year ago. Turning to our statement of cash flows and balance sheet. In Q3 twenty eighteen, net cash provided by operating activities was $7,600,000 compared with cash provided of 5.2000000 in the same quarter a year ago. At September 30, 2018, cash, cash equivalents and marketable securities totaled $97,000,000, an increase of $16,300,000 compared with Short term subscription and support deferred revenue increased almost $10,000,000 due to bookings growth and conversion of customer contracts from quarterly and annual payment. Long term subscription and support deferred revenue decreased by just over $1,000,000 in the quarter. Short term customer deposits, which represent prepayment of professional services, increased modestly in Q3. So turning to our guidance for the rest of 2018, our guidance on a non GAAP loss from operations and non GAAP loss per share Excludes the impact of stock based compensation, please refer to our press release for a reconciliation of non GAAP and GAAP guidance. We're providing our 4th quarter guidance and raising our full year guidance. In the fourth quarter of 2018, we now expect total revenue to range from $62,400,000 to $62,800,000. We expect GAAP operating loss to range from $11,500,000 to $11,900,000 Non GAAP operating loss is expected to be in the range of $4,300,000 to 4 $700,000. We expect to post operating cash flow gains in Q44 and the full year, 2018. We expect GAAP net loss per share in Q4 to range from $0.26 to $0.27. Non GAAP net loss per share is expected to be in the range of $0.10 to $0.11. Our loss per share guidance assumes 44,600,000 basic and diluted shares outstanding. Our full year 2018 guidance is as follows. We expect our full year total revenue to range from 242 $3,000,000 to $242,700,000. We expect GAAP operating loss to range from 53.5to53.9 $1,000,000. Non GAAP operating loss is expected to be in the range of $17,100,000 to $17,500,000. We expect GAAP net loss per share to range from $1.24 to $1.25. Finally, non GAAP net loss per share is expected to be in the range of 40 to 41 dollars. Our loss per share guidance for the full year assumes Now turning to 2019. So on a preliminary basis, we expect to post total revenue in 2019 of $278,000,000 to $280,000,000, we expect the growth rate of subscription support revenue to continue to outpace We expect to show In addition, we expect to report higher operating cash flow in 2019. Finally, some housekeeping, you'll see disclosure in our Form 8 K regarding Rule 10b5-1 plans adopted by Marty Vanderplow and Jeff Traum. Marty and Jeff are selling shares to repay debt and for tax and financial planning purposes. The shares to be sold under each of their plans represent less than 10% of their respective current beneficial ownership. So we're now ready to take your questions. Operator, you're ready to begin the Q And A session. Certainly. And your first question comes from the line of Tom Roderick from Stifel. Guys. Good afternoon. Thank you for taking my questions. I'll start by saying congratulations. I mean, you guys are you guys are doing it. You you're generating the growth you're doing it with more leverage. So the plan is coming together nicely. So congrats on that. It's sort of an extended question off of that topic in and Stuart appreciate the quick look into 2019. As you've been creating leverage in the model and making do making more with less. I guess the concern would have been going into next year that the growth rate would sort of naturally slow and you're not necessarily calling for that to happen. Can you talk a little bit about what you need from an additive capacity standpoint as you think about incremental investments on the sales side? And as we look for the leverage in the model to continue to show up next year, should that predominantly come from the R and D line or will it be sort of largely split on the OpEx between the three items? Sure. Tom, thanks for your comments. So a couple of things one, the on the revenue side, you know, the visibility on, professional services revenue is not as good as it is on the subscription side of the business. And as we indicated, subscription we expect subscription revenue growth to exceed professional services revenue. So that's sort of baked into our viewpoint on on 2019. Secondly, your comment about, on OpEx or growth. We're comfortable we see when the pipeline, but it is early for us to be much more specific about where we're going to be seeing the growth. I mean, Marty can talk about particular areas, but in general, it's pretty early, but we like what we see in the pipeline, particularly on the subscription side. On the offering leverage side, we do see this is mainly, growing the top line to leverage, the cost infrastructure that we've had. We've made a progress already this year. The, the incremental investments that I referenced are going to appear, probably mainly two areas, they're going to be on the probably professional services line and then also in the sales and marketing line. Not on the R and D line. Wonderful. That's great detail. Appreciate that. Let me sort of turn the and I'm not sure if this is better for Marty or Stuart, you want to take this one as well. You guys have been pushing on the notion of value based pricing here a little bit more. And I'm curious if you have any thoughts, feedback from the customer base on the new pricing approach as it's sort of resonating through. You're just coming out of your user conference. Maybe you could talk a little bit more about what value based pricing means to you, means to customers, and how that's working out. Sure, Tom. Happy this is Marty. We call it now solution based pricing that we we've had a change in how we label it. And that it's turned out to be very positive thing for us and the customers. The customers like it because, when you're pricing by seats and they have lots of users who might only use tool several times a quarter, it's hard for him to justify the cost. So, what we've done is buy solution given unlimited licenses and we obviously increase the value and the cost of that solution but then they're able to spread it across a lot of casual users, if you will. So, it's in terms of how it affects us. It's a very positive thing because more people see our platform and it draws more interest. In terms of the customer, they like it too. We've interacted with 100 of customers now, very, very positive response. Most of them view it as a no brainer. So it's been a very, very key move for us. Great. Last really quick one here, just thinking about the Gen 2 platform, you guys have opened that up to ISVs and you announced some nice partnerships there, SAP and KPMG. Maybe a little early to talk about what those partnerships mean, but just more broadly, what does the Gen 2 platform do in terms of flexibility and attracting other partners? To the extent you're seeing traction out in the field already with those 2 partnerships that you announced, would love to hear about it. Again, it's early days, but the our new platform is all API based. So as these partners need access to our platform, either to extract data or put data in, it's easy for us to open those up and we have opened up some already to them. So it gives us a lot of flexibility to integrate partners In terms of starting to see traction, I alluded to that in the prepared remarks, but the thing, since it is early, but the thing I'm most enthusiastic about is that these partners see a real way for them to make services monies. And when it's a win win, it can really drive success. We've seen that in other SaaS companies. And so We finally have the right form that we feel where we can go in and do things like financial transformations or statutory reporting or other types of use cases and have the partners not only provide domain expertise, but also take the services load, then it's a win win. And so we're seeing excitement from the partners like we've never seen in the past where they actually see a way to make money from this and it's great for us because obviously, as we've always said, we definitely wanna minimize our services component of our revenue stream. Wonderful. That's great. Thank you guys. I appreciate it. Nice job. And your next question comes from the line of Rob Oliver from Baird. Your line is open. Good afternoon. Thank you. This is Matt Limmonetcher on behalf of Rob today. The number of customers over $100,000 $150,000 both had sequential changes that were greater than the recent quarters in the year over year comparison. So those were up nicely. When a customer crosses those thresholds, I guess what I'm wondering is what does a typical profile look like? Things like average number of products or have those customers adopted solution, the new solution based pricing, guess, is there anything that could be helpful? Like, what do those customer profiles typically look like? Well, Matt, it's a mixed bag. We have some customers that are, you know, in excess of $150,000 that only have one solution just based on the size of the customer. We have customers that will cross that threshold and have 3 or 4 solutions. So it's really quite a mixture of things. The solution based licensing is in early days. We've converted a small percentage of our user base. And so that really isn't seen in those numbers yet. But it will affect them, obviously. And remember, you know, that sometimes when customers have, if it's a big customer and they have 4 or 5 solutions, then there were way above 150,000 in total revenue from that customer. So it's really a broad based support for that number. That's helpful. And then on the partners kind of following up on what Thomas. But Marty, what you talked about in your prepared remarks with KPMG, the alliance with KPMG and then working with more than 10 companies on a range of use cases, were those deals that you think maybe you wouldn't have even got to take a look at before 4 without this KPMG. I guess what I'm just wondering is did that introduce these financial transformation project that maybe just wouldn't have been on your radar before? Well, a couple of comments. First one is that the KPMG relationship so far has primarily been in the SOX and audit space. And, and, to get, you know, just for that clarification, but also it's very fair to say that KPMG and a lot of our smaller managed partners, which there's over a dozen of those, I believe, drive a lot of business we would never see without them. They have the relationships. They have the domain expertise. They bring a a ton of value when we go in in the sales process. And the certainly in the GRC space, the socks and audit and that space. They're a big contributing factor to our growth at this point. On the financial transformation, we're working with a lot of different partners that we haven't really talked about yet, but we expect the same phenomena there as we get further down the road. And your next question comes from the line of Eric Lemus from SunTrust Robinson. Your line is open. Thanks guys. Thanks for taking the question. I appreciate that early look into 2019 and specifically on that that revenue range that you guys provided. Could we just unpack that a bit? How much of that is attributable to gaining new customers? How much is to selling into the customer base? And is there anything attributable to the change into the solution based pricing that is ingrained into that guidance? Hey, Eric. It's Stuart. So the $278,000,000 to $280,000,000 the only we're not, disaggregating that. We really, we haven't even done that on a quarterly basis. But historically, we, we've been running about fifty-fifty on incremental subscription revenue growth. As being from, existing customers and new logos. I mean, that could change, but that's been the case now for quite a few quarters. We're, we certainly have a balanced offensive attack, if you will, between, selling to existing customers and new logos. I don't know that we have any particular reason to believe it's going to be any different next year. Okay. Great. And then, switching over to to SAP, you guys have talked about that's kind of a multi stage process becoming a partner with them. So, you know, what, I guess, what inning are you in with with that particular partnership? And how is that progressing? Is that was that potentially gonna be a reseller relationship or referral or technology integration. Can you just explain on that? Well, I think this is Marty. Eric, I think that we've sort of commented on that before. For us, it's already been a a very successful relationship because we have direct integration with their system. And, they're helping us build that integration And, we showed that at the user conference and it's something that really, really enables us to go into SAP accounts, whether they go in or we go in, and provide that data assurance I've been talking about where the data just comes across to automatically populates all your reports all your spreadsheets, all your presentations, all your dashboards, just in one fell swoop and takes out all that manual process. So for us, we've already hit the home run-in my mind. And, but in terms of the other business relation part, we're in early days. And, obviously, we sort of have to show what can be done in their ecosystem in terms of in terms of distribution. So that's early days. We have some accounts we're working together jointly. And when the time is right, we'll update you on that, but there's really no other definitive data on that. I've got one thing to add here. So I think it's also the relationship with SAP and the tight integration there, the OEM relationship has validated our technology with the IT departments, which are very important constituents to us, but have not historically been the focal point of our sales and marketing effort. That's a good point. We got kudos from many of our customers at that announcement just because they knew that the integration would be there, the technical support from both sides would be there. And so like I said, for us, it's already been a huge success in terms of enabling us to do a lot more with our customers. The business stuff is early days and we'll keep you posted. Got it. Great. Thanks guys. And your next question comes from the line of Brian Peterson from Raymond James. Your line is open. Hi, thanks for taking the question. So just wanted to start on this European opportunity. I know it's coming up for you guys. How should we think about sizing that? And if we look at getting in front of the customers, Is that does that need more investment or are you going to try to partner to attack that? Just how should we think about that? Well, Brian, I would here's the thing about the way the way we sort of look at Europe is that it it's always more expensive to go in there, as you know. You have some language issues and other things like that. But when you really look at it, the market size is similar to the U. S, okay? And, we have a fairly small print footprint. We have some very good logos there that really let us learn the market And so for us, it's a greenfield market in many ways. And so, we have some very good leadership now that's really made a difference And so we're bullish on, on EMEA just because it is greenfield. And when you start up aggressively pushing a set of products and with a sales team and a greenfield account, you always expect to see good things. So we're very excited about it. Thanks Martin. And maybe as a follow-up, just on the solutions based pricing, obviously, we don't have contract by contract or customer by customer details. But when would you expect the full customer base to kind of be migrated over to the new model? And what should we be thinking about or maybe in terms of 2019 that's implied in the guidance how much do you think would be through it to run the new pricing model at that point? Well, I think that it's some of the contracts we have with customers are multi year. And so some of this, we approach them early and let them do it voluntarily. And we've seen some success there. But in general, it's going to take 2 years or more to convert the bulk of our customers. That's actually fine for us. That you want to take the customers through the learning curve, understanding what they're getting. And, and, it'll just be a nice natural So it'll be over 2 years to get a little migrated. It has we haven't opted that though for our go to market for new customers and it's having an impact there as well. The new logos. And your next question comes from the line of Mike Grondahl from Northland Securities. Your line is open. Hey, thanks guys. Any update on the value pricing initiative you sort of rolled out earlier this year? This is Marty. I mean, that's what we've been talking about when I say solution based licensing. And I apologize. We switched that acronym on you after last call, but we did that just because of the customer communication. We found that solution based licensing was a lot better than value based pricing. And so, yeah, it's been very successful for us. We're very excited about us. We think it's going to really help our expansion in these accounts just because of the visibility of our tool and also provide more value, more stickiness. And giving them an actually a lower price per seat, but us a higher revenue number. So we're very enthused about it. Great, great. Okay. And then any new use cases to call out in the last quarter or so? Well, I don't know if they're new, Mike, but certainly there's some we're going to focus on a lot more. We've found that finding a use case that has a really nice addressable market. And we look at it a very finite way. People we can sell it to and how much we can get per installation. But finding those in increments of tens of 1,000,000 of dollars and then and then seeing how well our platform fits it. We focused in on a couple. 1 clearly is going to be, this financial transformation that, we're just getting a lot of buzz about in our user base and, driving some of those 100 plus $1000 new companies you're seeing in the numbers. And so financial transformation is something we're very excited about and we're doubling down on and focusing on. We also are optimistic about investments reporting. And we're focusing on that market as well. And, and then statutory reporting, we're starting to see sales there organically. And so we're going to also focus on that. So those are probably use cases that have the nicest TAMs associated with them. As we've always told you, our biggest issue has always been choosing the markets to focus on. There's so many places that platforms applicable to, it's more about us focusing so that we get the right type of return on investment. We don't have unlimited resources. So we're trying to find those. We think we found some that are going to really have a nice ROI for us. Mike. And your next question comes from the line of Hamzah Fodderwala from Morgan Stanley. Your line is open. Hi. I just wanted to dig in, a little bit on the partnerships not necessarily just KPMG, but the technology partnerships. How have those been, ramping in Q3? And when could we see that become a more meaningful portion of the business? Well, the technology partnerships that we've announced Anaplan and and SAP, both of the and in terms of, when it's going to impact it, it's a ways off, but we're seeing some really good joint go to market activities with Anaplan, Internationally. We fill a need for them and they fill a need for us. So we're very optimistic about that, and we're seeing a lot of cooperation between our sales teams. And then with SAP, I commented earlier, we're definitely seeing some joint go to market opportunities. And so, you know, those things obviously are something that take time to develop. If you look historically at other companies that have put these relationships together, it takes years months to build. But the early the early signs in terms of interest from both sides, all these partnerships take a win win so many of them you go into, you don't get you don't find that formula, but in these, we're definitely seeing that. Great. And then just a follow-up on the 2019 outlook. So you mentioned single digit operating margin, that single digit positive operating margin, correct? I just want to make sure. No, that was single digit negative operating margin. Okay. All right. Thank you. Gotcha. Thanks Hamzah. And there are no further questions at this time. And this concludes today's conference call. You may now disconnect.