Workiva Inc (WK) 2016 Q1 法說會逐字稿

Good afternoon. My name is Mike and I will be your conference operator today. At this time, I would like to welcome everyone to the Workiva Inc. first-quarter 2016 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 session. (Operator Instructions)

I will now turn the call over to Adam Rogers, Senior Manager of Investor Relations. You may begin your conference.

Thank you, and good afternoon, everyone. And welcome to the Workiva first-quarter 2016 earnings conference call. This afternoon we'll begin with comments from Chairman and Chief Executive Officer, Matt Rizai, followed by Executive Vice President, Treasurer, and Chief Financial Officer, Stuart Miller, and then we'll turn the call over to questions. Also on the line today are Marty Vanderploeg, President and Chief Operating Officer, and Mike Sellberg, Executive Vice President and Chief Product Officer.

A replay of this call will be available until May 11. 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'll be making forward-looking statements regarding future events and financial performance, including guidance for our second quarter and full FY16. 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 or 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 Chairman and CEO, Matt Rizai.

Thank you, Adam, and thanks to everyone for joining us today to discuss our first-quarter 2016 results. Workiva is off to a strong start this year. Total revenue for the first quarter was $44.6 million, an increase of 27% over Q1 of 2015, with subscription and support revenue up 28% and professional services revenue up 23%.

We outperformed our guidance for quarterly revenue, operating loss, and loss per share. As a result, we're increasing our full-year 2016 guidance, which Stuart will discuss in more detail later in the call.

Today, we are reaffirming our expectation that for the full year of 2016, Workiva will use less cash from operations than we did in 2015. We expect further improvements in 2017.

We continue to sign new Wdesk customers as well as add seats within existing customers in our non-SEC markets, including Sarbanes-Oxley, risk processes, and management reporting, and adjacent markets like enterprise risk management and audit management.

Growth in these expanded markets supports our expectation that non-SEC use cases will contribute more than 50% of our subscription bookings for the full year 2016.

I want to give you some examples of these non-SEC use cases that show the breadth and depth of Wdesk. Several insurance companies, including American Enterprise Group, AON Corporation, and Donato Group, Employers Holding, and United Fire Group use Wdesk to streamline the Model Audit Rule compliance process, which is very similar to SOX.

The California Lottery system uses Wdesk for budget and planning and to create its comprehensive annual financial report, also known as CAFR. The CAFR reports are very similar to 10-K reports that public companies must file.

A cloud-based e-commerce company used Wdesk for its S-1 process for its IPO, and more recently for its follow-on offering. Casey General Stores is using Wdesk for internal audits and budgeting. A large real estate holding company is currently moving a massive budget project into Wdesk. And a leading global investment management company is using Wdesk to create and file investment prospectuses.

We continue to see strong demand for Wdesk in the SOX market, because it's streamlined how to use documents, implement and assess internal controls over financial reporting. Here are some of the customer examples for SOX. Hawaiian Electric turned to Wdesk to replace its legacy word processing and spreadsheet software for SOX and internal controls. With Wdesk, they decreased their time to spend on redundant administrative activities. Wdesk gives them that more time to examine and analyze their risks and controls.

Invesco Mortgage also replaced its legacy system with Wdesk to manage their SOX process. They immediately benefitted from linking, version control, collaboration during testing, and accountability among process owners.

Wdesk, for SOX and (inaudible) controls, recently won a Silver Edison Award in the applied technologies financial solutions category. In the regulatory risk market, we continue to win new businesses for resolution and recovery plans, known as RRP; comprehensive capital analysis and review, called CCAR; Dodd-Frank Act stress testing, or DFAST; and own risk and solvency assessment, known as ORSA, among other risk reports.

For example, a global bank customer has hundreds of Wdesk users who create CCAR, RRP, SEC, SPDR, which is required in Canada, and other annual and quarterly financial reports.

We also see growing demand within private companies. For example, Cloudera, a large private data management analytics platform provider, uses Wdesk for quarterly financial reports to their stakeholders, including investors, option holders, board of directors, audit committee, and executive management. And a privately-held regional medical center uses Wdesk both to compare the budget analysis on a monthly and year-to-date basis. They also use Wdesk for departmental management reports and a variety of hospital performance matrices.

We are encouraged about the growth opportunities for Wdesk in enterprise risk management, or ERM, which executives use to identify systemic risks, determine and assess risk magnitude, and plan strategic responses. For example, we have a large regional bank customer that uses Wdesk for SEC, SOX, and internal audit processes, and they recently added a significant number of seats for a company-wide ERM project.

As I mentioned on the last call, in the fourth-quarter of 2015, we began marketing Wdesk to broad-based audit management market. Along with ERM, audit management is a subset of a larger market that's defined as governance, risk, and compliance, known as GRC. We currently have several customers in the beta stage of audit planning and risk assessment where we see a lot of expansion opportunities.

One of the reasons why our customers adopt Wdesk is because of its significant ROI. We announced some examples of our customers' ROI in press releases this quarter. They included a study by Forrester Consulting that showed a large auto parts retailer saved more than $400,000 and achieved an ROI of 238% by using Wdesk to streamline SOX and internal control processes. Bel Fuse, a diversified electronics company that saved more than $500,000 in 2015 by using Wdesk to manage its SOX process throughout its global operations. And a large public insurance company that saved over $200,000 by using Wdesk to prepare its SEC Form N-4 registration statement for variable annuity contracts.

Press releases this quarter also announced Wdesk's expansion across our customers' organizations. They included (inaudible) Financial that uses Wdesk for SEC reporting, investor relations, ORSA and internal management reports, as well as other risk regulatory internal documents. JLL Income Property Trust and its advisor, LaSalle Investment Management, that called Wdesk a slam dunk for efficiency gains and uses Wdesk to manage over 80 regulatory filings and internal reports, including SEC, SOX, company-wide fund reporting, and a variety of quarterly and annual management reports. And American Enterprise Group, a privately-held insurance company, that uses Wdesk to produce internal management reports on presentations, create annual statutory footnotes and audit reports and manage model audit role compliance that involves 13 business processes and 55 control owners.

As I have mentioned in past calls, we often add seats throughout a customer's organization after an initial contract for a single-use case. However, we are seeing more (inaudible) contracts for multiple departments across a company. For example, a microelectronics manufacturer signed an initial contract for its finance, communication, legal, sales, investor relations and sustainability departments. And GCP Applied Tech, which supplies construction materials, signed an initial contract for SEC reporting, SOX and internal controls, management reporting, data collection, and certification.

So as you can see, we're focused on driving the non-SEC side of our business. We believe we have just began to scratch the surface of these large, growing markets, and therefore will continue to invest in software development, sales and marketing, to help Workiva grow.

On Monday, Workiva won two American Business Awards, also known as the Stevie Awards. We won a silver Stevie Award for the most innovative technology company of the year, and a bronze Stevie Award for most innovative company of the year. Both categories were companies with fewer than 2,500 employees.

Finally, we're looking forward to our fifth annual user conference, September 7 through 9 in San Diego. We will offer more than 50 sessions on SOX and internal controls, SEC compliance, risk mitigation, accounting and finance processes, XBRL training, unstructured data collection, and other 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.

Thank you. As Matt mentioned, our first quarter result exceeded our expectations, and we continue to see positive momentum in the market. We generated total revenue in the first quarter of $44.6 million, an increase of 26.7% from the first quarter of last year.

Breaking out revenue by reporting line item, subscription and support revenue was $33.6 million, up 27.9% from Q1 of 2015. 51.4% of the increase came from deeper penetration of our existing customer base. The remaining 48.6% of the S&S revenue increase in Q1 came from new customers added in the last 12 months. The average contract value on subscription and support from all customers continue to rise.

Professional services revenue was $11 million, an increase of 23.4% from the first quarter of 2015. Higher customer count and services for non-SEC use cases accounted for the majority of growth in the services revenue.

Turning to our supplemental metrics, we finished the first quarter with 2,557 customers, a net increase of 267 customers from Q1 of 2015, and a net increase of 33 from Q4 of 2015. Our subscription and support revenue retention rate, excluding add-ons, was 96.1% for the month of March 2016, compared with 95.8% in December of 2015. Once again, customers being required or ceasing to file SEC reports accounted for over half of the revenue attrition.

With add-ons, our subscription and support revenue retention rate was 112.1% for the month of March 2016, compared with 112.5% in December 2015. Increased subscription revenue on non-SEC use cases from existing customers continues to be the primary driver of our add-on revenue retention rate.

Moving down the income statement. I will talk about our results before stock-based compensation. In other words, on a non-GAAP basis. Please refer to our press release for a reconciliation of our non-GAAP and GAAP results. Gross profit was $31.7 million in the first quarter, up 23.5% from the same quarter a year ago, representing a gross margin of 71.1% compared to a gross margin of 73.0% in the first quarter of 2015.

Now breaking out gross profit. Subscription and support gross profit was $26.8 million, equating to a gross margin of 79.8% on S&S revenue, compared to $20.5 million or a 78% gross margin in the first quarter of 2015. Improved efficiency of our customer success team and higher subscription prices accounted for the margin expansion.

Professional services gross profit in the first quarter was $4.9 million, equating to a 44.7% gross margin, compared to $5.1 million or a 58.3% gross margin in the same period last year. We have increased both FTEs and cash compensation in the past year to handle the growing demand for services around our SOX and regulated risk use cases.

Turning to operating expenses. Research and development expense in the first quarter was $13.9 million, an increase of 19.3% from $11.7 million in the prior year's first quarter, due to higher compensation and additional staff, as we continue to dedicate resources to building the next generation of Wdesk.

Our R&D expense as a percentage of revenue this quarter declined to 31.3% compared to 33.2% in Q1 last year. Sales and marketing expense increased 47% over Q1 of 2015 to $19.6 million, driven primarily by higher compensation and additional headcount, in line with our expectations. Expanded marketing programs accounted for the remaining part of the increase.

General and administrative expenses were $6.8 million in Q1, an increase of 26.4% compared with $5.4 million in the first quarter of 2015, driven by higher compensation and additional staff, used to support the growth of our business.

Operating loss was $8.7 million in the first quarter of 2016, compared to $4.8 million in the same period last year. Net loss was $8.7 million in the first quarter of 2016 compared to the net loss of $5.3 million in the first quarter of 2015. We posted a net loss per share of $0.21 in the first quarter of 2016 compared to a net loss per share of $0.13 in the same quarter a year ago.

Turning to our balance sheet and our statement of cash flows. In March 31, 2016, we had cash, cash equivalents, and marketable securities of $55.9 million, a decrease of $20.3 million compared with the balance at December 31, 2015. In the first quarter of 2016, net cash used in operating activities was $19.1 million compared with $9.2 million in the same quarter a year ago.

Today, we are reaffirming our expectation that for the full year 2016, Workiva will use less cash from operations than we did in 2015. We expect further improvement in 2017. I spoke in our last conference call at some length about the seasonality of our cash flow from operations, noting that cash use is greatest in the first quarter.

To recap, Workiva typically pays cash bonuses to employees in the first quarter. Also, as we deliver professional services in the first quarter, we earn offshore term deferred revenue related to services that were invoiced during the prior year, which appears as a (inaudible) use of cash on that line item Q1.

Consistent with my comments last time, our cash use in Q1 was attributable to three major factors. Our loss from operations, our payment of annual cash bonuses to employees, and the seasonal decline of deferred revenue. At March 31, 2016, deferred revenue declined $3.2 million from year-end 2015, primarily due to a seasonal drop of $2.4 million of deferred revenue from professional services.

In addition, long-term deferred revenue declined $459,000 during the quarter, consistent with our plan to reduce incentives from multi-year contracts. Our short-term subscription support deferred revenue declined $323,000 during the quarter. All of the decline in short term subscription and support deferred revenue was attributable to multi-year contracts approaching their renewal date.

Turning to our guidance on our income statement for 2016, 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 our non-GAAP and GAAP guidance.

For the second quarter of 2016 we expect total revenue to range from $41.7 million to $42.2 million. We expect non-GAAP operating loss to range from $13.5 million to $14 million. GAAP operating loss is expected to be in the range of $17.2 million to $17.7 million. We expect non-GAAP net loss per share to range from $0.34 to $0.35. GAAP loss per share is expected to be in the range of $0.43 to $0.44. Our loss per share guidance assumes 40.8 million basic and diluted shares outstanding.

We are raising our guidance for the full FY16 as follows. We expect total revenue to range from $179.2 million to $181.2 million. We expect non-GAAP operating loss to be in the range of $45.5 million to $47.5 million. GAAP operating loss is expected to range from $60.2 million to $62.2 million. Non-GAAP net loss per share is expected to be in the range of $1.13 to $1.18. Finally, GAAP operating loss per share is expected to range from $1.49 to $1.54. Our loss per share guidance for the full year assumes 41 million basic and diluted shares outstanding.

In summary, Workiva posted another strong quarter, demand remains robust for our solutions, and we remain focused on executing our 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.

(Operator Instructions) Your first question is from Jeff Houston from Northland.

Hey, guys. Thanks for taking my question. Looking at the upside of the quarter, is it correct to assume that most of that came from the non-SEC business, or was it a mix of both SEC and non-SEC?

This is Matt. We don't really break out the revenue breakout with that. As we mentioned and Stuart mentioned, we will give you, at the end of the year, what that breakout is within the context of booking, and we also are communicating with you that we're expecting that SEC -- non-SEC booking is going to be greater than 50%. But we don't do a breakout for revenue split pro quo for a year yet.

Great. Great, makes sense. And then looking at the cash flow guidance, Stuart, last year I think it was $-21.5 million cash from operations, and for you to hit the guidance of improved cash flow from operations this year since you lost $19 million in the first quarter, is it safe to assume for the remaining three quarters, it should be flat to positive?

Well, I guess that, you know, we're comfortable with the guidance we've given. And so there's going to be fluctuations around each quarter, but we're definitely giving guidance that we'll be under $21.6 million.

Okay. All right. Thank you.

Thank you.

Your next question is from Steve Ashley with Robert W. Baird.

Perfect. I would just like to ask, on the non-SEC business, if we just look at that as maybe a pie chart, and just try and understand how much of that business is SOX. And I'm not looking for an exact number here, but I'm looking for just some color commentary of how much of non-SEC does the SOX business represent, maybe on a subscription bookings basis.

Yeah, Steve, I think that we're not going to break that down, but non-SEC, as we've mentioned, includes SOX, management reporting, and regulated risk, and those are probably the main areas that, at least for this year, that we're seeing a lot of, and some accounting and finance side of it, especially with private companies. So overall, those are the areas that we see quite a bit of attention and demand, but we're not ready to give you a split on each of those categories yet.

And then Stuart, new customers that you bring in, are you able to get annual billing terms for them? And then secondarily, have you had any success being able to maybe convert any existing quarterly billing customers over to annual. Thanks.

You know we've standardized around annual contracts starting second quarter last year for new customers, and I think that's gone well. We have been endeavoring to convert existing customers, and have made some progress there, but we've got a long way to go.

Thank you.

(Operator Instructions) The next question is from Michael Nemeroff with Credit Suisse.

Hey, guys. Thanks for taking the question. This is Alex on for Michael. One question, if I may. Just given the ramp in sales investments over the past couple quarters, can you provide an update on how our activity's been trending? Are you seeing a positive and improving contribution margin from your incremental salesforce hire? And if you could, can you share any metrics or quantify in any way for us? Thanks.

Well, this is Marty. And I would say that most of those new hires were in sort of our new markets, and we are seeing improved efficiencies in those, but it's still early. I mean, most of those folks have been on six months or less. And so it's a little early, but we're seeing some good signs.

All right, good. Thanks.

And there are no further questions at this time. I will turn the call over to Matt for closing comments.

In closing, I want to thank you for joining us today. And Operator, you may now end the call.

This concludes today's conference call. You may now disconnect.