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 first quarter 2018 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. Mr. Adam Rogers, Director of Investor Relations, you may begin your conference.
Thank you, and good afternoon, everyone. Welcome to the Workiva first quarter 2018 earnings conference call. This afternoon we'll begin with comments from Chairman and Chief Executive Officer, Matt Rizai, 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 are Martin Vanderploeg, President and Chief Operating Officer, and Jill Klindt, Senior Vice President and Chief Accounting Officer. A replay of this call will be available until May 9th. 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 and full fiscal year 2018. These forward-looking statements are subject to known and unknown risks and uncertainties. Workiva 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 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.
With that, we'll begin by turning the call over to our Chairman and CEO, Matt Rizai.
Thank you, Adam, and thanks to everyone for joining us today to discuss our first quarter 2018 results. Workiva is off to a strong start this year. Total revenue for the first quarter was $59.9 million, with subscription and support revenue up 17.5% and professional services revenue up 8.7% over Q1 of 2017. We outperformed our guidance for quarterly revenue, operating loss, and loss per share. As a result, we are raising our full year 2018 guidance, which Stuart will discuss in more detail later in the call. We continue to sign new customers, and we continue to add more seats across our existing customers' organizations for use cases in SEC reporting, capital markets, finance and accounting, Sarbanes-Oxley and internal controls, audit, risk, compliance, and management and performance reporting. State and local governments and universities are also increasing their use of Wdesk.
We continue to improve our Wdesk platform and build our ecosystem to meet growing customer demand for a broader-based, enterprise-wide solution where we see great potential for widespread adoption and long-term growth. We also continue to sign more partners. Our advisory and service partners offer a wide range of domain and functional expertise that broadens the capabilities of Wdesk. Our technology partners enable more data and process integration to help customers connect critical transactional systems directly to Wdesk. In March, we announced our partnership with Anaplan to help companies streamline performance and management reporting. I'd like to share a few examples of customer use cases that illustrate the breadth and depth of Wdesk usage. Third Point Reinsurance is using our spreadsheets to connect and update data directly from its ERP to Wdesk.
A private software company is using Wdesk to create and distribute its monthly board report, monthly performance report to its banks, and annual report. A large British construction company is using Wdesk for U.K. statutory reporting. We see growing demand and success in the capital market space as customers and their advisors leverage Wdesk and our services for IPOs and other equity offerings, debt offerings, and M&A transactions to improve efficiency and accuracy in their transactions. We also continue to see strong demand for Wdesk for SOX and internal controls. In the first quarter, SOX customers wins include CarMax, Boston Beer, Redding Bank of Commerce, and EMC Insurance Group. We continue to see growing demand for Wdesk among private companies for a variety of use cases. New non-public customers include companies in software, information technology, consumer electronics, and oil and gas.
We also remain encouraged by the growth opportunities for Wdesk in performance and management reporting, including FP&A. Customers currently using Wdesk for these types of use cases include companies in internet security, healthcare products, and energy. We see increasing demand for Wdesk from state and local governments and higher education institutions. New customers in this market include public employee retirement systems, state government agencies, and local transportation authorities. For example, Florida Atlantic University and Temple University are using Wdesk to improve efficiencies and data consistency in their financial reporting and budgeting processes. The city of Rochester, New York, is using Wdesk to streamline its comprehensive annual financial report process. We remain the leader in the SEC compliance market, where we continue to add customers at large and small public companies, because Wdesk is widely regarded as the best practice for SEC reporting, XBRL, and Inline XBRL.
We're looking forward to our seventh annual user conference, which will be September 19th to the 21st in Nashville, where we will offer sessions on a wide variety of advanced ways to use Wdesk. In summary, our first quarter was strong. Adoption of Wdesk continues to gain traction with new and existing customers, and our sales pipeline continues to build. We're excited about the multiple growth opportunities in front of us, and we remain focused on executing on our initiatives. With that, let me turn it over to Stuart Miller.
Thanks, Matt. I'll start with how our adoption of ASC 606 affected our Q1 income statement. Adopting the new standard reduced our Q1 professional services revenue by $1.7 million and cut our Q1 sales and marketing expenses by $1.6 million. Net of other items, adopting the new standard reduced our net loss by $155,000 in Q1. The accounting standard had no impact on cash flow, of course. Adopting ASC 606 required several changes to our balance sheet, which are detailed in the 10-Q we filed today. Let's review our first quarter results. Thereafter, I'll comment on our second quarter and full year 2018 financial outlook. We generated total revenue in the first quarter of $59.9 million, an increase of 15.4% from Q1 2017. Breaking out revenue by reporting line item, subscription and support revenue was $46.5 million, up 17.5% from Q1 2017.
55% of the SNS revenue increase in Q1 came from new customers added in the last 12 months. The remainder of the increase came from deeper penetration of our existing customer base. Professional services revenue was $13.4 million in Q1 2018, an increase of 8.7% from the same quarter in 2017. Professional services revenue rose beyond our expectations in Q1, despite the loss of revenue from adopting ASC 606. Some professional services revenue was recognized in Q1 that we had expected to be recognized in Q2. Turning to our supplemental metrics. We finished Q1 with 3,119 customers, a net increase of 294 customers from Q1 2017, and a net increase of 56 customers from Q4 2017. Our subscription and support revenue retention rate was 95.7% for the month of March 2018, compared with 96% in December 2017 and 95.1% in March 2017.
Customers being acquired or otherwise ceasing to file SEC reports accounted for a majority of our revenue attrition, consistent with our experience to date. With add-ons, our subscription and support revenue retention rate was 105.3% for the month of March 2018, compared with 107.6% in December 2017 and 106.6% in March 2017. We calculated revenue retention rates using the legacy accounting standard, ASC 605. We'll start reporting revenue retention rates using the new accounting standard when we have comparable data. For annual contract values in excess of $100,000, we had 335 customers in the first quarter, up 34% from 250 customers in Q1 2017. For ACV in excess of $150,000, we had 151 customers in the first quarter, up 50% from 101 customers in Q1 last year. Moving down the income statement, I'll talk about our results before stock-based compensation, that is on a non-GAAP basis.
Please refer to our press release for a reconciliation of our non-GAAP and GAAP results. Gross profit was $43.7 million in Q1, up 15.3% from the same quarter a year ago. Gross margin was 73% in the latest quarter, compared to a gross margin of 73.1% in Q1 2017. Breaking out gross profit, subscription and support gross profit was $37.8 million, equating to a gross margin of 81.4% on S&S revenue, compared to $32 million, or a gross margin of 81% in Q1 2017. Professional services gross profit in the first quarter was $5.9 million, equating to a 43.7% gross margin, compared to $5.9 million, or 47.6% gross margin in the same period a year ago. In Q1 2018, under the legacy accounting standard, our professional services gross margin would have been 630 basis points higher than what we reported under ASC 606.
Turning to operating expenses, research and development expense in Q1 was $19.1 million, an increase of 27% from Q1 last year, due to higher compensation, consulting expenses, and increased cloud infrastructure costs. R&D expense as a percentage of revenue rose this quarter to 31.9%, compared to 29% in Q1 last year, in line with the planned spending we discussed on our last call. Sales and marketing expense for the quarter increased 10.2% from Q1 last year to $19.9 million. Sales and marketing expense as a percentage of revenue this quarter improved 160 basis points from Q1 last year to 33.2%. General and administrative expenses were $8.3 million in Q1, up 24.6%, compared with $6.7 million in Q1 2017. G&A expense as a percentage of revenue in the latest quarter rose 100 basis points to 13.9% due to higher compensation and growth in administrative and shared services headcount.
Operating loss was $3.6 million in Q1 2018, compared to the operating loss of $1.8 million in Q1 2017. Workiva's operating margin contracted 240 basis points in Q1 2018 versus Q1 last year, primarily due to growth in headcount and compensation, consistent with the spending plan we discussed on our February call. Net loss of $3.7 million for Q1 2018, compared to a net loss of $1.7 million in the comparable quarter a year ago. We posted net loss per share of $0.09 in Q1 2018, compared to a net loss per share of $0.04 in the same quarter last year. Turning to our statement of cash flows and balance sheet. In Q1 2018, net cash provided by operating activities was $1.8 million, compared with cash provided of $2.6 million in the same quarter a year ago.
At March 31, 2018, cash equivalents, and marketable securities totaled $81.1 million, an increase of $4.4 million compared with the balance at December 31, 2017. The modified retrospective method of implementing ASC 606 required a one-time adjustment to a few accounts on our balance sheet at January 1, 2018. Our 10-Q that we filed today has the details, but I will highlight a few items of that adjustment. Consistent with the new standard, we began capitalizing all sales commissions over the expected life of the contract, resulting in an increase in deferred commissions of $5.3 million that we will amortize over three years. Accounts receivable increased $16.9 million under the new accounting standard because we no longer gross down invoices that are both expected to start after the quarter and past the customer's cancellation window.
Accrued expenses and other liabilities increased $7 million, appearing in a new account called Customer Deposits, representing prepayments on services contracts. This item appeared in deferred revenue under the previous accounting standard. Under ASC 606, deferred revenue primarily reflects invoiced amounts on subscription and support contracts. We recorded an increase of $6.9 million to deferred revenue at the January 1 transition. The net effect of the adjustments to assets and liabilities was a one-time improvement in accumulated deficit of $8.4 million, which reflects both revenue that we will not recognize on the income statement and commissions that will be expensed a second time in future periods. Finally, I'll comment on change in deferred revenue from the starting balance sheet under ASC 606 at January 1 to the end of the first quarter. At March 31, total deferred revenue decreased $2.3 million from January 1.
Long-term deferred revenue declined $2 million because contracts with terms of greater than one year continued to amortize. We proceed to standardize on one-year contracts. Short-term subscription support deferred revenue declined $366,000. We continue to migrate customers from quarterly to annual contracts, a group of contracts totaling approximately $1 million were excluded from deferred revenue pending finalization of contract renewal terms. We're making good progress on converting customers to annual contracts, and we expect to convert a substantial majority of the remaining 500 to 550 quarterly contracts to annual terms by the end of Q1 2019. Turning to our guidance for 2018. Our guidance on a non-GAAP loss from operations and non-GAAP loss per basic share excludes the impact of stock-based compensation. Please refer to our press release for a reconciliation of non-GAAP and GAAP guidance.
For the second quarter of 2018, we expect total revenue to range from $55.7 million to $56.2 million. We expect the year-over-year growth rate of subscription revenue to continue to outpace the growth rate of services revenue in the second quarter. We expect GAAP operating loss to range from $16.9 million to $17.4 million. non-GAAP operating loss is expected to be in the range of $10 million to $10.5 million. We expect GAAP net loss per share in Q2 to range from $0.40 to $0.41. non-GAAP net loss per share is expected to be in the range of $0.24 to $0.25. Our loss per share guidance assumes 43.3 million basic and diluted shares outstanding. We are raising guidance for the full year 2018 as follows. We are raising the midpoint of our previous full-year total revenue guidance by $1.3 million.
We now expect our full-year total revenue to range from $235.5 million to $237 million. We expect the growth rate of subscription revenue to continue to outpace the growth rate of services revenue for the full year 2018. We're also raising the midpoint of our previous full-year GAAP operating loss guidance, this time by $1.1 million, and non-GAAP operating loss guidance, raising by $2.3 million. We now expect GAAP operating loss to range from $56.3 million to $57.8 million. non-GAAP operating loss is expected to be in the range of $30 million to $31.5 million. We continue to expect Workiva to be cash flow positive in 2018. We expect GAAP net loss per share to range from $1.32 to $1.35. We expect non-GAAP net loss per share to be in the range of $0.72 to $0.75.
Our loss per share guidance for the full year assumes 43.5 million basic and diluted shares outstanding. In summary, Workiva posted another strong quarter. Demand remains robust for our platform, and we remain focused on executing a growth plan to capitalize on our multi-billion dollar market opportunity. We will now take your questions. Operator, we're ready to begin the Q&A session.
At this time, I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. Your first question comes from the line of Terry Tillman Jr. from SunTrust Robinson Humphrey. Your line is open.
Yeah. Hey, thanks, everyone. Let me make sure I get all the names right. Matt, Marty, Stuart, Jill, and Adam. Hi, all.
Jill. Jill and Adam.
Jill. Sorry. If there's a Jill too, sorry about that. I really worked on that. Gosh.
How are you doing, Terry?
Pretty good.
Hi, Terry.
I'll shut up and ask questions now. Yeah, the first question, I don't know if I'm just reading too much into this, when I look at your press release, you've changed kind of the nomenclature here. It used to be enterprise productivity, and you've said it other ways in the past in terms of the tagline describing the business. In this press release, I see a leader in data collaboration, reporting, and compliance solutions. Data collaboration is broad, it seems like, that term, and I know your platform is extensible and could really serve a lot of use cases. As you all talk about branding and thinking about your markets you're serving, am I reading too much into this, or are you all kind of evolving some of your go-to-market strategies in different ways to tap into these broader opportunities?
Well, I'm not sure if you're reading into it too much, but I think it's, in general, as you know, the data is quite important, and our customers are continuously making sure that they can deal with both the data that they author and the data that they bring, their legacy data, and so forth. We're seeing quite a bit of emphasis from our customers to make sure that they feel comfortable to be able to bring data into Wdesk, because it's turning out to be a very important thing for them to feel that there's as reported and trusted data within Wdesk.
I think you're probably reading too much into it, but it allows us to be able to have as much expansion as possible, because within the context of our penetration into enterprise, not only that we are focusing on with our initiatives where Wdesk has a usage, but we're also opening and leaving expansive enough that to be able to also get some input and allow the customers to use Wdesk for a variety of different uses. To be able to have that expansive view allows us to be able to have more freer way to deal with Wdesk within an enterprise.
Okay. In terms of SEC reporting, you commented on continuing to win customers, but maybe the health of that business. Related to that, I feel like I'm hearing more about capital markets, maybe you could talk about SEC reporting and the health of it, as well as how material capital markets is becoming.
Well, both of them, actually. When you talk about SEC reporting, that's a very good market for us, and we continually grow that market. Our XBRL and iXBRL capabilities are allowing us to do a lot of different things. We are very confident that it's a growth business still with us. Having said that, I'm glad that you brought that capital markets business. That business is surprisingly quite healthy for us, and it's continually booming, and it's continually getting a lot more traction, especially as more of the law firms or other entities who are involved in those processes see and appreciate the capabilities and efficiencies that bring into the activities that they do in capital markets. We're quite bullish on the capital markets business, and I think we're going to continually start seeing some domination in that market in the future.
Just maybe one last one here, Stuart, in terms of deferred revenue, I think you had called out, there's obviously a variety of moving parts here and dynamics. Some of the PS out of it now, the long-term's obviously draining down and going probably to a minimal number. You mentioned $1 million or so kept out of the balance, and maybe that's because of some of the contracts and when they renew, getting them on different terms. Should we think the rest of the year deferred revenue, not that it's ever been a great proxy for demand, but could that be volatile the rest of the year with some of these moving parts? Thank you, and nice job.
Yeah, it could be. I think, though, you make a good point. The change in deferred revenue as a component of billings, because of the different maturities we have in our contracts, makes billings not predictive of bookings or predictive of future revenue. I think we should see some growth in deferred revenue, apples to apples, for the rest of the year.
Your next question comes from the line of Tom Roderick from Stifel. Your line is open.
Yes, hi, guys. Matthew Van Vleet on for Tom. Thanks for taking my questions.
Matt.
Hi. I guess building on Terry's last question there, around the deferred revenue and certainly a lot of noise there. As you look into the bookings performance from the first quarter and maybe more importantly, what your pipeline build looks like for the rest of the year, what gives you the confidence that you'll continue to accelerate through the year and raising guidance? Maybe what are the biggest drivers, whether it's by product or by vertical, that's really driving the pipeline at this point?
I think there's several engines. Certainly, SEC continues to be a strong contributor. As Matt mentioned, the capital markets side has got good traction. We've got good demand out of Europe and Canada. We've got good demand out of SOX. The pipeline looks really good on the enterprise side, again, which we think we'll start to see more visible to people from the outside later this year. I'd say it's across the board, we're pretty comfortable with it.
Looking at some of the large deal metrics, or the larger contracts that you have out there, how does the mix of those larger deals skew, whether it's those customers have more use cases that they're paying for, or is it the size of the company is more indicative of where those numbers are going to be? When you look at that relative to your existing customer base, how penetrated do you feel like you are maybe looking at it on a two- to three-year basis of, we can double that, we can triple that in terms of getting those customers into maybe that 150K bucket, relative to what you have in the existing customer base now?
I'll take part of that, and Matt or Marty can chime in. As you know, we don't forecast any of our supplemental metrics. We have seen strong growth in the 100,000 and the 150,000 range. The 150,000 range is 151 customers out of our 3,000. It's up 50%, which is terrific. We have a long runway to continue to penetrate that group, which is the good news. A lot of those are multiple use case customers, but there definitely are some companies that are just big, that start big. It's a bit of both.
Lastly, as you continue to make pretty strong progress on getting to a positive free cash flow and really sort of turning the corner there, what's the next big driver leveraging the model to make the next step of getting to positive EBITDA? Is it just scaling up the revenue side of the business, or do you feel like you can sort of plateau on some of the middle of the P&L spending and accelerate the leverage in the model?
As you know, we have been cash flow positive six of the last seven quarters, and we've given guidance that we'll be cash flow positive for the full year. We're feeling good about that. In terms of getting to EBITDA positive, certainly that's a long-term goal. We haven't put any time horizon on it. That's consistent with the target P&L model that we've given. It's really going to be driven by growth at the top line coming out of the investments that we've made in the last couple of years. I think we gave some indication in the February call that we were at a sort of full run rate on our guidance for 2018 on the expense side, hoping to get the lift at the latter half of the year on the revenue side.
That's certainly the main focus and goal of all people who work at Workiva.
Great. Thank you.
Your next question comes from the line of Brian Peterson from Raymond James. Your line is open.
Thanks. Great job.
Thanks, Brian.
First off, maybe just a high-level question on Inline XBRL. I know you put out some data last month. I think it was 84% of facts filed recently were through Wdesk. I want to understand, what is the latest from a regulatory perspective related to Inline XBRL, and how do you think that changes your competitive positioning?
This is Marty. I think that it's pretty well established, just based on the international community, that XBRL will all be Inline at some point. The SEC is making noise, although they haven't announced when it will become mandatory. Being the leader in that and having a lot of experience with it obviously helps us. I think it will help our competitive position. It'll certainly help us much sooner in the foreign markets.
Okay, got it. Thanks, Marty. Maybe just some clarity on the capital markets momentum you're seeing. I just want to understand, how does that monetization work? Because obviously, we're familiar with the IPO process, but there seems to be a lot of constituents involved. Do you have a larger license or user base initially in that process that transitions into maybe a smaller recurring stream? Just want to make sure I understand how that monetization works. Thanks, guys.
Yeah, I think you had it right. It starts with a bigger team and, in almost all cases, we roll right into doing their compliance work, and in many cases, we roll into their SOX work. Not only do we get the initial number of seats, but it really gives us a situation where we do get to land and expand over time.
Understood. Thanks, guys.
Thanks.
Your next question comes from the line of Michael Nemeroff from Credit Suisse. Your line is open.
Thanks. This is Alex, on for Michael. Congrats on the results, and thanks for taking our questions.
Yeah.
Matt or Stuart, I believe the customer count with ACV greater than 100,000 actually accelerated this quarter, or is there anything worth noting or call in the marketplace that drove this acceleration? Was the uptick driven by new customers you signed this quarter or simply just continuing progress on your land and expand sales strategy? Within these larger customers, do you generally see higher retention rates given how mission-critical Wdesk is to them?
Yeah, it's a good question. I would say partner leverage would be sort of a big contributor to some of the larger deals, and just success penetrating existing customers across additional use cases. There are a number of contributors to that factor. Did I?
Just to comment on the retention. Clearly our retention is extremely high across all of our different markets. Certainly in the larger installations, it even gets stickier. Your assessment is correct.
Okay, great. Just one follow-up. Stuart, Q1 beat handily on the bottom line, Q2, I think OpEx came in a little above what we were expecting. Can you just sort of help us understand where the investments are being made and whether there are any one-time items we should be aware of for Q2?
Sure. Yeah, as you know, this is the first time we've given guidance on Q2. The big part of that is the fact that we pulled forward about $1 million worth of services revenue into Q1 that we thought we were going to be recognizing in Q2. The work just got done in Q1, that piece is non-recurring. That reflects a big piece of it. The other piece of it is on the expense side. We didn't hire as quickly in Q1 as we had originally thought we would, that pace started to quicken at the end of March. That's where you'll see the higher expenses in Q2.
All right. Very helpful. Thanks for taking our questions.
Got it.
Your next question comes from the line of Rob Oliver from Baird. Your line is open.
Hi, guys. Thanks for taking my question. Stuart, I just wanted to drill down a little bit on your comment about strong enterprise pipeline and maybe being a little bit more visible back half of the year. Certainly compliance and collaboration are key themes we're hearing from all of our covered companies and many of the checks that we do. Just wanted to get a little bit more color on that. As a follow-up, I know you guys-- I saw the Rochester press release earlier in the quarter, and clearly one of the key selling points for them was the ability to integrate with their older systems, and clearly SLED has a lot of antiquated systems. Just wondering what this does for you guys in terms of the TAM. Is that a new sales force and how you're attacking that? Thank you, guys.
Thanks, Rob.
Well, this is Marty. On the SLED side, that's a very large market and there's thousands and thousands of government entities out there. They're slow to adopt, but a herd mentality. Certainly, we're very pleased with our progress there. We're starting to penetrate states and cities, and we're very pleased with that, and it definitely is a large market for us.
On the enterprise side, Matt and Marty might want to comment on this too, We've made a very deliberate investment on sales and marketing around penetrating the enterprise and have rolled that out at the beginning of the year and are seeing good progress in the pipeline that we expect to turn into bookings. Those are big deals, and it's broadening the touch points that we have at the customer, beyond just the business user into the IT or shadow IT side. It takes time, but we like what we're seeing.
Okay. That's helpful color. Thank you guys very much.
Your next question comes from the line of Mike Grondahl from Northland Securities. Your line is open.
Yeah, thanks, guys. Hey, what product category maybe was the most surprising to you guys in the quarter, kind of as it affected the pipeline?
I'd say capital markets. We're really very pleased with the traction that we're getting there, recognition by the family of law firms or the group of law firms that dominate that business, really beginning to understand the efficiencies that Wdesk brings to an otherwise very painful process.
In an average capital markets transaction, roughly how many seats are required? Is there such a number?
Yeah. I guess we're really not pricing it based entirely on seats. It's more about the process and the value that we bring to that process.
Got it. That's probably good for you guys.
Thank you.
What's the update on the partnership strategy?
Well, I mean, that's, partnership strategy is going extremely well. We are making a lot of headway with broadening our ecosystem. We're very pleased with that. Martin, do you want to add anything?
No, we're just very happy with our progress.
Any specific ones to call out or ones that are maybe driving the pipeline more than others?
No.
Got it. Lastly, just anything new on the competitive environment that you guys have seen?
Well, I mean, I think that, as one of your colleagues or competitors mentioned earlier, we're hearing a lot more about collaboration and the value that collaboration brings to enterprises. I think that there's a lot of focus from a lot of software companies on that, but nothing to indicate it's affecting our numbers, but we certainly watch that carefully.
Got it. Okay. Thanks, guys.
Your next question comes from the line of Stan Zlotsky from Morgan Stanley. Your line is open.
Hey, gentlemen. Good afternoon. Thank you so much for taking our questions. Operating margins in Q1 were very strong. These are significantly better than our expectations and definitely consensus expectations. It looks like consensus was mismodeled a little bit for Q2 op margins, and that's why optically that looks odd. As we think about the rest of the year, why do margins step down so much? How much of it is conservative? I think Q3, you get impacted by the user conference. Is there anything else? Is there an expected, some kind of ramp in op margins? The reason I'm asking is because the trajectory over the year looks somewhat similar to what we saw last year where your Q1 started off, very nice op margins. Then, as you hired people, your margins declined a little bit as we went through the year.
Anything for us to keep in mind?
Yeah. Two things on that. One is just as you were indicating that, and I'd mentioned earlier that, we didn't hire people as rapidly, as early in Q1 as we thought we were going to. We'll be more at a full run rate in the second quarter than we were in the first quarter on expenses, on headcount. The second thing is, remember that Q1 is our seasonal high point in terms of revenue, and particularly, that affects the services side. The contribution margin from the services side is at its peak in Q1. Some of that falls and helps the op line. I'm sorry, the operating income line.
Got it. Okay. All right. That's helpful. Just one more on net retention rate. I realize it's a very volatile number. Is there anything on the 105% that we need to keep in mind? It was a little bit lower than what we saw in recent quarters.
Yeah, that does bounce around a little bit. We certainly watch that very carefully. We didn't see anything there that gave us any cause for concern.
All right. Perfect. Thank you, guys.
Thanks, Stan.
All right. In closing, I want to thank you for joining us today, and operator, you may now end the call.
This concludes the Workiva first quarter 2018 earnings conference call. You may now disconnect.