Earnings Call: Q2 2018

Aug 7, 2018

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 Second 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. Adam Rogers, Director of Investor Relations. You may begin the conference. Thank you, and good afternoon, everyone. Welcome to the Workiva Second Quarter 2018 earnings conference call. This afternoon, we'll begin with comments from our President and Chief Executive Officer, Marty Vanderplow. Followed by 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 August 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 or future events and financial performance. Including guidance for our third quarter full fiscal year 2018. These forward looking statements are subject to known and unknown risks and uncertainties. For Kiva 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 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 call, we will refer to certain non GAAP financial measures. Reconciliations of non GAAP 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 Vanderbluff. Thank you, Adam, and thanks to everyone for joining the Warkiva Q2 2018 conference call. I would like to start because of the investments we have made in our Wdesk platform and our distribution organization, I believe we have never been in a better position to grow and I excited about our future. 1000 of organizations use Wdesk for a reason. We give them the tools they need for data control transparency and accountability, saving them time and money, and most importantly reducing risk. We signed 103 net new customers in the 2nd quarter and now have over 3200 customers. More than 75% of the Fortune 500 companies use Wdesk for at least one use case and we are just getting started. We continue to post world class customer retention rates and our net promoter score, it is an all time high of 81. Which is remarkably high for any B2B SAS company. Our subscription revenue per customer continues to increase quarter over quarter, we expect that trend to continue. In June, we began the rollout of our value based pricing, which offers Wdesk subscriptions by solution rather than by our previous seat based model. Value based pricing is easier to scale, delivers more value to our customers and opens more We continue to hire top talent which in the past year included leaders in product marketing, sales EMEA and APAC. Adoption of in line EXPAREL as a standard reporting format continues to spread worldwide. European Securities And Markets Authority, known as ESMA, requires in line EXPAREL for its European single electron format taxonomy. More than 5000 EU issuers will be required to use this taxonomy for their annual financial reports ending on or after January 1, 2020. Warkiva leads Global Adoption of In Line EXPAREL and we are well positioned to capture by expanding Wdesk use could contribute more than 20 serve the enterprise with new capabilities, including workflow, workspaces and improved collaboration. In addition, we recently launched W Data, which combines our new data preparation capabilities with existing connectors and APIs to enable our customers We continue to augment our sales channel with advisory and service partners as well as technology partners. For example, we recently announced an OEM agreement with SAP to provide a 1st party integration with Wdesk. We recently achieved FedRAMP's authorization to operate which demonstrates our commitment to improving processes and ensuring the security of our customers data. With this new authorization, federal government agencies can more easily adopt Wdesk to help streamline a wide range of data analysis Consider FedRAMP the highest standard of security assessment, authorization, and continuous monitoring for cloud software. We continue to strengthen our collaborative culture throughout Workiva, which results in high employee retention rates and several best place to work awards. We are proud that Gartner recently placed Warkiva in the furthest position for completeness of vision in the leaders quadrant in its 2018 Magic Quadrant for Cloud Financial Closed Solutions for the 2nd year in a row. We are looking forward to our 7th annual user conference in September, We will track. Today, I would like to tell investors that Warkiva is committed to pursuing profitable growth. We will continue to enhance our WDS platform, add new customers and partners and expand WDS across our customers' organizations. With that, let me turn it over to Stuart Miller, our CFO. Stuart? Thank you, Marty. I'll review our second quarter results thereafter, I'll comment on third quarter full year 2018 financial outlook. One note on accounting, as discussed in our last call, we adopted the new revenue recognition standard ASC 606 using the modified retrospective model method Our Form 10 Q provides a reconciliation of the impact of the adoption of ASC 606 on our second quarter year to date financial results. Now on to revenue. So we outperformed our revenue guidance for the quarter We generated total revenue in the 2nd quarter of $59,100,000, an increase of 19.7%. From Q2 2017. Breaking out revenue by reporting line item, subscription and support revenue was 48 point $8,000,000, up 19.2 percent from Q2 2017, 50.6 percent of the SNS revenue increase in Q2 came from new customers added in the last 12 months. The remainder of the increase came from deeper penetration of our existing customer base. Revenue growth accelerated in Q2 due to a higher volume of transactions both for new logos and add on sales. SEC, internal controls, capital markets, and internal reporting all showed strength. We believe some of the acceleration Professional services revenue was $10,300,000 17. Professional services revenue, particularly XBRL tagging, was above our expectation in Q2 due to a large number We finished Q2 with 3222 customers, a net increase of 3 14 customers from Q2 2017. And a net increase of 103 customers from Q1 2018. Our retention rates continue to be strong. Our subscription and support revenue retention rate was 95.6 percent for the month of June 2018. Customers being acquired or otherwise ceasing to file SEC reports accounted for a majority of revenue attrition consistent with our experience to date. Port revenue retention rate was 106.9 percent for the month of June 2018. As a reminder, we calculate revenue retention rates using the legacy account, I guess, we're making with larger contracts. For annual contract value exceeding $100,000, we had 3.66 customers in the 2nd quarter. Up 33% from 275 customers in Q2 last year. For ACV, exceeding $150,000, we had 161 customers in the 2nd quarter, up 33% from 121 customers in Q2 2017. Moving down the income statement, I'll talk about our results before stock based compensation and CEO separation expense, which are the 2 adjustments to our GAAP numbers. Please refer to our press release for a reconciliation of our non GAAP 1% in the latest quarter compared to a gross margin of 70 Subscription and support gross profit was $40,400,000 equating to a gross margin of 82.8 percent on S and S revenue, up from a gross profit margin of 81.5% in Q2, 2017 due to a higher utilization rate and better pricing. Professional Services gross profit in the 2nd quarter was $2,800,000, equating to a 27% gross margin, up from a 23.6% gross margin in the same period last year due to a higher utilization rate. Moving We outperformed our guidance for quarterly operating loss. Research and development expense in Q2 was $19,200,000, an increase of 21.9 percent from Q2 last year due to higher headcount in compensation. R and D expense as a percentage of revenue rose slightly this quarter to 32.5% compared to 31.9% in Q2 last year. Our R and D spend was relatively flat sequentially from Q1. Sales and marketing expense for the quarter increased 9% from Q2 last year to $20,800,000. Sales and marketing expense as a percentage of revenue this quarter improved 350 basis points from Q2 last year to 35.2%. Most of the improvement was due to capitalizing sales commissions $6,000,000 in Q2, up $2,600,000 compared to Q2 2017. Due to higher headcount and compensation in the executive ranks and administrative and shared services. Operating loss was $5,400,000 in Q2 2018 compared to the operating loss of $5,500,000 in the same quarter last year. Warkiva's operating margin improved 190 basis points in Q2 2018 versus Q2 last year, primarily because revenue growth exceeded growth in compensation expense. Net loss was $5,400,000 compared to the net loss of 5,800,000 in Q2 twenty eighteen compared to a net loss per share of $0.14 the same quarter a year ago. Turning to our statement of cash flows and balance sheet. In Q2 2018, net cash used in operating activities was $2,500,000. Net cash used in the latest quarter included a severance payment CEO. At June 30, 2018, cash, cash equivalents and marketable securities totaled $80,700,000, a decrease of $346,000 compared with the balance at March 31, 2018. Short term subscription and support deferred revenue increased $7,800,000 due to sales growth and conversion of customer contracts from quarterly to annual payment. We continue to make good progress converting customers to annual contracts and we expect to convert a substantial majority of the remaining 400 or so quarterly contracts to annual terms by the end of Q1 2019. Long term subscription support deferred revenue grew just under $1,000,000 in the quarter. Short term customer deposits, which represents payment of professional services decreased to $128,000 in Turning to our guidance for 2018. Our guidance on non GAAP loss from operations and non GAAP loss per basic share excludes the impact of stock based compensation and for the full year guidance also excludes CEO Separation expense. Please refer to our press release for a reconciliation of our non GAAP and GAAP guidance. For the third quarter of 2018, we expect total revenue to range from $59,500,000 to $60,000,000. We expect of $8,900,000 to $9,400,000. We expect GAAP net loss per share in Q3 to range from $0.36 to $0.37 a share non GAAP net loss per share is expected to be in the range of $0.21 to $0.22. Our loss per share guidance assumes 43,800,000 basic and diluted shares outstanding. Our full year 2018 guidance is as follows we are raising the midpoint of our previous full year total revenue guidance by $4,300,000. We now expect our full year total revenue to range from $240,000,000 to $241,000,000. We now expect GAAP operating loss to range from $57,900,000 We're raising our guidance on non GAAP operating loss to a range of $22,500,000 to 23,500,000. We continue to expect Workiva to show positive cash flow from operations in 2018. We expect GAAP net loss per expected to be in the range of $0.53 to $0.55 per share. Our loss per share guidance for the full year assumes $43,500,000 basic and diluted shares outstanding. In summary, Warkiva posted another strong quarter. Demand remains robust for our platform and we remain focused on executing our growth plan to capitalize on our multibillion dollar market opportunity. We're now ready to take your questions. So operator, I'll turn it back to you. Our first question comes from Terry Tillman with SunTrust Robinson Humphrey. Your line is open. Hey, guys. This is Eric Lemus on for Terry. Thanks for taking the question. And really nice job on the quarter across the board. And specifically looking at profitability, I think this is one of the largest beats that you've had since going public. And so when we think about going forward, is there any sort of philosophical change between the balance between growth and profitability? Yeah, definitely. We have taken a more focused view on our investments. We gotten fairly good clarity on where to make investments. And so moving forward, we definitely will lean toward accelerating our journey to profitability. We believe we can do this without sacrificing growth And, again, anything from you, Stuart? No, I think it reflects where we are in in building on the development side and on the product side. And that's, that's really underlying our confidence. Okay. Thank you for that. And then you mentioned the Gartner Magic Quadrant for the cloud financial cloud solutions and you guys performed, really well in that Magic Quadrant. But looking at some of the other vendors in that report, where do you guys fit into that space? And are those vendors, did you see overlap with those vendors in that in the Magic Quadrant, like Plaqueline or TrendTech? With BlackLine, clearly not, they focus on reconciliation. As you know, we focus on downstream on the report process. And with Trintech, there's a slight overlap, but not significant. There's still a little bit of overlap with IBM. Yeah. That, yeah, the in those 2 he referred to, there's very little overlap. Some of the larger players have products, but they really don't focus on it. Okay, great. Thanks guys. Nice job. Thanks, Eric. Your next question comes from Tom Roderick with Stifel. Your line is open. Hey gentlemen, thanks for the question. Marty, I'll echo the sentiments on the quarter. Great job, great execution and congratulations on your appointment here at the CEO. I want to double down on Eric's last question there just on the concept of profitable growth. And I guess as it relates to some of the investments you were making more aggressively at the end of last year, particularly remember there is a lot of sales and development it's going into the financial CPM product, and really just a broader push towards the enterprise. With that push in particular to the enterprise going after larger seats and within the context of financial CPM as a product line How should we think about the ongoing commitment to that and the desire to push upstream going after larger deal sets in the enterprise? Well, that's clearly still a big part of our growth strategy. Having such a large foot in the Fortune 500, it gives us great access to those accounts. And as I mentioned in the call, we've really just getting the place we've rounded out our platform We have our sales team, having gone through a lot of, training and and improving process and messaging We really feel we can focus and, and that's really the key. And then back that question, as you think about the trade off and investments in R&D versus sales and marketing, Stuart, this might be a better one for you, but how would you encourage us collectively to think about, where we should model a little bit more leverage in the model? Should it come on the sales and marketing side, or should we model a little bit more leverage in R and D going forward? Yes, I think probably, not to give, we're not going to give guidance on 2019, but I would say you would probably expect to see more leverage on the R Okay. Perfect. And, Stuart, last quick one from you. I think this may have something to do with the push towards more annualized contracts and, and upfront payments. Can you just help us understand what role that push has played in the context of rising DSOs and accounts receivables and on the course of the balance sheet there? Yes. So the biggest impact on DSOs we talked about last time was the adoption of ASC 606. And there was a, simultaneous increase in receivables and, deferred revenue and also in, customer deposits, which shows up as different line item on the right hand side of the balance sheet. So there really was no actual change in DSOs. It was simply how, ASC 606 requires us to show, the receivable. There was, previously, there was a gross of the receivable, now at the time when you actually issue the invoice, the receivable shows up on the left hand side of the balance sheet, Perfect. Yes. Really helpful. That's great. I'll jump back in queue, but thank you guys very much. Your next question comes from Brian Peterson with Raymond James. Thanks. This is Vince Salentano on for Brian. I just had a quick question on the net adds in the quarter. It looks like it was the biggest quarter over quarter increase since 2014. You'd mentioned that there was some acceleration due to sales training, but I don't know if you had seen any kind of change in the overall environment that you wanted to point out. So thanks for the question. So it was pretty broad based. I mean, it wasn't, it wasn't just SEC. It was, internal controls. Some of that came from partners from managed services accounts. It was from, private company reporting and also, capital markets that made a nice, made a nice contribution. But you're right, it was the largest ad of net new logos actually since, I think, 2013. And we really saw the demand across all of our markets, in a very there was, there's not one that stood out. And I think that really is a reflection of the, you know, improvement in our sales organization and also getting the product to where it is now that all those things are just coming together at the same time. Okay, great. And then looking at the revenue by industry, it looks like the information technology the most growth in the quarter is up 4% quarter over quarter and looks like outside of the other buckets, the largest bucket Is there anything in that particular area that is worth pointing out? Obviously, it's only 2 quarters of data, but just wanted to see what you think. Oh, am I glad people, people like you read our footnotes. It's a, it's a beautiful thing. Yeah, it's, it's, you know, it is remarkable how broadly distributed, our revenues are, among industries. Information Technology, leads the way there in part because so many of those customers are sophisticated and comfortable using cloud and, have a real appreciation for the kind of productivity increases they can get from using WDS. They tend to be early adopters. And so that's why you see them leading the way. But, it definitely, it's been very broad across industry groups. Perfect. Thank you. Thank you. Your next question comes from Mike Grondahl with Northland Capital Markets. Your line is open. Thanks. This is Mike Patucci on for Mike Grondahl. Maybe first, just on the value based rollout in June, any initial feedback there you can give us on how customers are responding to that? Sure. I think in general, the customers have been very positive about it. The thing about value based pricing is we let customers have as many seats as they want. And that really simplifies the process of of, not only, you know, administering the account, you know, and also It also prevents them from trying to manage cost and leaving out important people in the process. The real strength of our platform is when you get everybody in the process on. So by standardizing a value based price that's based on other metrics, it really simplifies it. And our back office too, it simplifies things. So it's it's been a real positive. Yes, I'd say, just to clarify, the customer is going to have as many seats as they want within that solution set. And some of that has been enabled by the further development of the platform which allows workspaces. And so it allows, the SEC team to have unlimited number seats within the SEC workspace and SOX team to have unlimited numbers seats within the socks workspace, for example. And, it's a lot easier to track and it scales nicely. And it also exposes just a lot more people in the organization to our platform. And, for us to get as much exposure in those organizations as possible, we'll really drive the expansion within those accounts. That's helpful. And then just on the pipeline and increased guidance, should we just be thinking about the things that drove the 2nd quarter are the capital markets, internal controls, investments in sales? Or is there anything else you should be paying attention to there? I'm sorry, did you say can you repeat the question? I didn't catch it exactly. Yes, just on the How about pipeline looks today and then increase guidance for the full year? Is it the similar things that have driven the second quarter, or is there anything else we should be paying attention to there? No, I think it's very we think it's pretty broad based. Services in the back half of the year than than we had in the second quarter, but it's pretty broad based. Our last question comes from Stan Zlotsky with Morgan Stanley. Your line is open. Hi. This is Hamza Fodderwala in for Stanislavsky. I wanted to dig in a little bit on the partnerships. We've heard a number of tech integrations recently and some announcements with the sort of market partners. Has this been material to numbers yet? And if not, when could we start to see that? So we definitely have seen visible contribution from partners, on the number of logos and revenue contribution, but I wouldn't say it's, you know, it's not, it's still early days and it's not really driving the bus yet. But they do help influence purchases. And it's not always easy to track exactly, you know, which partner was influencing which sale But we do think it's, it's been well worth the effort as a force multiplier. And, certainly, we've seen it even though it's not material, it's growing rapidly. And the other thing is it really simplifies the delivery process for us. So there's a lot of other advantages to that type of distribution.