Workiva Inc (WK) 2016 Q3 法說會逐字稿

Good evening. My name is Suzanne, and I will be your conference operator today. At this time I would like to welcome everyone to the Workiva Inc. third quarter 2016 earnings conference call.

(Operator Instructions)

Thank you. Mr. Adam Rogers, Senior Manager of Investor Relations, you may begin your conference.

Thank you, and good afternoon, everyone, and welcome to the Workiva third-quarter, 2016 earnings conference call.

This afternoon we will 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 November 16. 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 would 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 fourth 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 reports 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 will 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 third quarter 2016 results. We're pleased with our third-quarter results which are highlighted by continued strong revenue growth and better than expected operating margin.

Total revenue for the quarter was $45 million, an increase of 23% over the third quarter of 2016. (sic - see press release "2015") Subscription and support revenue was up 21%, and professional services revenue grew 32% year over year. We're pleased to have generated positive operating cash flow in the third quarter and we expect to post positive operating cash flow again in the fourth quarter as we make progress toward sustained positive operating cash flow.

Our success in delivering multiple solutions has created demand from numerous customers for a broader-based, enterprise-wide Wdesk solution. In response with the evolving our business model, enhancing user management, and improving our technology to capitalize on our growing enterprise-wide opportunities, even as we continue to focus on improving operating cash flow.

We are adding several enterprise grade capabilities that are necessary to continue attracting new, larger customers and spreading throughout existing customers who need more functionality and capacity. We believe this maturization of broad-based Wdesk use will add seats and revenue and continue to support our high revenue retention rates.

We are optimistic about the growth potential for enterprise-wide deployments and we expect that these deal sizes will be larger and more complex which lengthens the sales cycle. Our brand recognition and market penetration are also generating opportunities for us to develop partnerships with subject matter experts and consultants as well as distribution and technology firms.

Earlier this week we announced two partnerships. Frazier and Dieter, a CPA advisory firm, recently become Wdesk partner certified, and they will be complementing Wdesk implementation with their advisory services and subject matter expert -- expertise in the area of SOX and risk management.

We also announced a partnership with Business Wire to integrate the corporate earnings press release process to improve efficiency. Workiva will also become business wise preferred provider for SSU reporting including XBRL.

We expect to announce additional partnerships in the coming weeks and months. We have shown how we have evolved from a single SEC solution in 2010 to now expecting that non-SEC use cases will generate about half of our subscription bookings for the FY16.

Demand for Wdesk in the third quarter remains strong for non-SEC use cases. We continue to win new customers and expand Wdesk across existing customers which is increasing our average subscription and support contract value. Our experience has been that as our deal sizes have increased, the sales cycles have lengthened.

I'd like to share just a few customer examples that show the breadth and depth of Wdesk. A national private insurance Company is using Wdesk for GAAP reporting for 10 separate entities. MetLine, a leading manufacturers of medical products, is moving various sales reports into Wdesk including its bonus, compensation, and commissions calculations. A Fortune 500 financial service Company is using Wdesk to manage employee benefit plans as well as financial reporting for its charitable foundation.

We also continued to see strong demand for Wdesk the SOX in the third quarter. Recent SOX customer wins include Buffalo Wild Wings, Hudson Global, ChannelAdvisor, LGI Homes, Westbury Bank, and Hyatt Hotels.

We continue to see growth in audit management which is a subset of a much larger market that's defined as governance risk and compliance known as GRC. We've recently signed several customers for audit planning and risk assessment, and we see a lot of expansion opportunities in the GRC space.

In the regulatory risk market we continue to win new business. For example a Fortune 500 private financial services Company has hundreds of Wdesk users who create stress testing and other annual and quarterly financial reports. We also see growing demand for Wdesk within private companies in the US and Canada. For example, CrossFirst Bank use Wdesk to consolidate reports that streamlined their processes across the bank. Black Swan Energy in Canada is expected to begin using Wdesk for its quarterly and annual reporting in the fourth quarter of this year. We also continue to gain market share in the SEC compliance market where demand remains robust because Wdesk is the best practice.

Lastly, we see increasing demand for additional use cases in state and local governments and other similar organizations. For example we recently announced that the University system of Florida beat its reporting deadline by one month by using Wdesk to collect data from 12 public universities and create and distribute tuition, fees, and other financial reports.

Additional customers in this market include the California State Lottery, State of Arizona, Des Moines Regional Transit System, Los Angeles World Airports and various cities such as Salt Lake City, Utah; El Paso, Texas; Tucson, Arizona; and Rochester, New York.

We are also proud of the continued recognition that Workiva receives. In the third quarter Charters Research recognized Wdesk as a leader in its [syntec] quadrant for data integrity and control. Fortune magazine ranked Workiva one of the best workplaces for women, and Workiva was named one of the highest-rated public cloud computing companies to work for by Battery Ventures and Glassdoor.

Finally, I would like to report that our annual user conference in September drew audit, finance, risk and compliance professionals from nearly 1000 companies. Many of the people listening to this call attended our user conference, and you saw firsthand how much of our customers love Wdesk and how we showed customers and prospects the many different ways they can use Wdesk.

In summary, our third quarter was strong. We're pleased with the progress we made on our land and expand growth strategy, and we believe the investments we're making positions us in several markets for future growth. The adoption of Wdesk continues to gain traction as companies increasingly embrace our solutions to improve productivity and accountability and gain insight into our business data. With that let me turn it over to Stuart Miller.

Thank you. As Matt discussed, we posted strong results in the third quarter. We continue to advance on our path to sustained positive operating cash flow.

We are pleased to have generated positive operating cash flow in Q3 and we expect to post positive operating cash flow again in Q4, which has us tracking in line with our expectations that for the full year 2016, Workiva will use less cash from operations than we did in 2015. Also we continue to believe that in the 2nd half of 2017, Workiva will reach sustainable operating cash flow at breakeven or better on a forward 12 month basis.

Today we are announcing improved guidance for our Q4 operating loss and loss per share, but at the same time we are lowering guidance for Q4 revenue. I will follow our typical format discussing specific numbers in a few minutes but I wanted to start with some color commentary on the quarter and on our guidance.

Two factors had a positive impact on our cash flow in Q3. First, we have been taking steps to rebalance our business model to improve operating margin. Operating margin improved 10.7 percentage points in Q3 2016 versus last years Q3. And our guidance indicates we expect some improvement in operating margin in Q4 year over year.

We've been managing the growth of hiring at a rate below the growth rate of revenue accounting for much of the improvement in operating margin. We have also focused on improving the efficiency of our sales and marketing efforts by spending more carefully and making some adjustments to optimize account coverage. On the G&A side we're seeing the cost of being a public Company flatten.

Second, as we have discussed in the previous conference calls, we have programs in place to migrate customer contracts from quarterly to annual contract terms. Longer contract terms help cement customer relationships, reduce frequency of invoicing, and generally improve efficiency and account management. In addition, it helps cash flow marginally. Also we reintroduce some programs in Q3 for multi-year contract terms that contributed to the increase in long-term deferred revenue.

Dollars associated with LinkedIn contract terms appear on our cash flow statement as an increase in deferred revenue partially offset by an increase in accounts receivable.

We expect the revenue growth rate to slow in Q4 for a few reasons. One, because we're pursuing larger deals with more parties involved we are seeking -- we're seeing longer sales cycles in SOX, internal controls, Enterprise Risk Management and regulated risk. Also while the pipeline of our sled business continues to build nicely, the sales cycle in that group is longer than we expected.

Two, we've been allocating resources toward diversifying our distribution channels to complement our direct sales model. While we are making progress on partnerships in complementary distribution channels, revenue from these efforts is not yet reflected in our results.

Three, our evolution toward capitalizing on enterprise-wide opportunities has required resources from our entire organization, but again we do not expect positive revenue to impact in the near-term. Four, our focus on improving operating margin through managing the growth rate of hiring has had some impact revenue growth.

Five, M&A activity and D listings continue to account for majority of our churn. In the last 12 months customers being acquired or ceasing to file SEC reports equated to $4.3 million reduction in annual contract revenue. Our key four guidance reflects our expectation that M&A related churn will continue to be robust.

So based on our pipeline and the growth drivers that Matt mentioned earlier in the call we expect revenue growth to trend higher in 2017 from expected Q4 2016 levels. We will offer more specific guidance on 2017 when we report fourth-quarter results.

Now turning to or more detailed review of our financial performance and starting with revenue. We generated total revenue in the third quarter of $44.7 million, an increase of 23.3% from the third quarter last year.

Ranking out revenue by reporting line item. Subscription and support revenue was $36.2 million, up 21.5% from Q3 2016. (sic - see press release "2015") 54% of the increase came from deeper penetration of our existing customer base. The remaining 46% of the S&S revenue increase in Q3 came from new customers added in the last 12 months.

The average contract value on subscription support from all customers continued to rise. Professional services revenue was $8.5 million, an increase of 31.7% from the third quarter 2015. Higher customer count in services for non-SEC use cases accounted for the majority of the growth in services revenue.

Turning to our supplemental metrics. We finished the quarter, the third-quarter with 2696 customers, a net increase of 228 customers from Q3 2015, and a net increase of 74 from Q2 2016. Our subscription and support revenue retention rate, excluding add-ons, was 95% for the month of September, 2016, compared with 95.1% in June, 2016, and 96.4% in September 2015. As noted, customers being acquired 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 108.7% for the month of September 2016, compared with 110.2% in June, 2016. Increased subscription revenue of 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 the non-GAAP basis. Please refer to our Press Release for a reconciliation of our non- GAAP and GAAP results.

Gross profit was $32.2 million in the third quarter of 20.7% from the same quarter one year ago representing a gross margin of 72% compared to a gross margin of 73.5% in the third-quarter 2015. Now breaking out gross profit. Subscription and support gross profit was $29.7 million equating to a gross margin of 81.9% on S&S revenue compared to $24.6 million or 82.5% gross margin in the third-quarter of 2015.

Gross margin from S&S contracted 61 basis points due to an increase in employee compensation as well as increased server costs. Professional services gross profit in the third quarter was $2.5 million equating to a 29.9% gross margin compared to $2.1 million for 32.1% gross margin in the same period last year. Gross margin from professional services contracted 225 basis points due to an increase in employee compensation and travel costs associated with continued demand for our services.

Turning to operating expenses. Research and development expense in the third quarter was $13.7 million, an increase of 12.9% from $12.2 million in the prior year's third quarter due to additional staff as we continue to dedicate more resources to enhance our Wdesk platform. Our R&D expense is a percentage of revenue this quarter improved to 37.7% which is 290 basis points better than in Q3 last year because revenue expanded at a faster rate than headcount growth and the positive impact of an R&D tax credit.

Sales and marketing expense increased 6.6% over Q3 of 2015 to $21.8 million driven primarily by additional headcount in line with our expectations. Q3 is a seasonal high point for marketing expenses due to our annual user conference as we discussed on previous calls.

Sales and marketing expense as a percentage of revenue this quarter improved 770 basis points to 48.7% from 56.4% in Q3 last year through improved operating efficiency. Reduced T&E expense together with greater efficiency in spend around both marketing programs and our annual user conference accounted for most of the improvement.

General and administrative expenses were $5.7 million in Q3, an increase of 8.1% compared with $5.3 million in the third quarter of 2015 driven by higher compensation and additional staff used to support the growth of our business. G&A expense as a percentage of revenue in the latest quarter improved 180 basis points to 12.8% from Q3 2015 due to improved operating efficiency. Headcount, compensation expense, T&E expense, and professional services, and professional fees all grew at a slower rate than revenue did.

Operating loss was $9.1 million in the third-quarter of 2016 compared to $11.2 million in the same period one year ago. Workiva operating margin improved over 10 percentage points in the latest quarter versus the same quarter one year ago.

Net loss was $9.2 million for the third-quarter 2016 compared to the net loss of $11.5 million in third-quarter 2015. We posted a net loss per share of $0.23 in the third-quarter 2016 compared to a net loss per share of $0.29 in the same quarter one year ago.

Turning to our balance sheet and our statement of cash flows. At September 30, 2016, we had cash, cash equivalents, and marketable securities of $53.8 million, an increase of $2.9 [billion] compared with the balance of June 30, 2016. (sic - million)

In the third quarter 2016 net cash provided by operating activities was $2.8 million compared with the use of cash of $4.7 million in the same quarter one year ago.

In September 30, 2016, total deferred revenue increased $13.2 million from June 30 this year. Long-term subscription support deferred revenue increased $6.7 million during the quarter driven by existing customer contract renewals for longer terms. Short-term subscription support deferred revenue increased $6.8 million during the quarter. Our services deferred revenue declined $345,000 during the quarter.

As noted, we continue to make steady progress on converting quarterly contracts to annual contracts. In the third quarter of 2016 our Accounts Receivable balance increased $4 million due to our rise in longer-term subscription support contract renewals from our existing customers.

Turning to our guidance on our income statement for the rest of 2016. Our guidance on a non-GAAP loss from operations and non-GAAP loss per share -- basic 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 fourth quarter of 2016, we expect total revenue to range from $45.2 million to $45.7 million. We expect GAAP operating loss to range from $11.8 million to $12.3 million non-GAAP operating loss is expected in the range of $8 million to $8.5 million. We expect GAAP net loss per share to rate from $0.30 to $0.31 and non-GAAP net loss per share is expected to be in the range of $0.20 to $0.21. Our loss per share guidance assumes 41 million basic and diluted shares outstanding.

Our guidance for the full FY16 is as follows. We expect total revenue to range from $177.5 million to $178 million. We expect GAAP operating loss to range from $48 million to $48.5 million. Non-GAAP operating loss expected to be in the range of $33.6 million to $31.1 million. (sic - see press release "to $34.1")

We expect GAAP net loss per share to raise from $1.19 to $1.20. Finally non-GAAP net loss per share is expected to be in the range of $0.84 to $0.85. Our loss per share guidance for the full year assumes 40.7 million basic and diluted shares outstanding.

Finally, we intend to provide guidance on 2017 financial data when we communicate our fourth-quarter and full fiscal year financial results. 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.

Thank you.

(Operator Instructions)

Tom Roderick, Stifel.

Matt VanFleet on for Tom this afternoon. Thanks for taking my question.

I guess first off, I really wanted to look at the growth of the SEC business relative to some of the other use cases in terms of a rate of growth -- because we're starting to see deceleration in your overall growth rate and it would seemingly make sense that if the SEC market is as penetrated as you guys have it, it's naturally going to slow down.

Can you provide more commentary around growth rates for both the SEC and the non-SEC use cases?

Sure. Hey, Matt. It is interesting, the mix has not changed. It is still about 50% SEC and 50% non-SEC, and so we really have not seen any differential in the growth rate.

Okay. Matt, you talked about expanding the functionality on the platform to be more enterprise-wide deployment capable.

Could you give us a little more detail in terms of what type of functionality you still need to add to the platform? What sort of timeline to get there, and what types of systems are you expecting to displace within these customers that makes it more of enterprise-wide productivity platform?

Sure. Let me start and Marty you can join too, but it is a good question. First of all as you know, we have always been talking about the landing and expanding after going after large customers. And we have been doing it through a point solution.

We have been going to different groups introducing Wdesk for them to be able to find the benefit to use that and we have been successful in that and one of the reasons we wanted to go in that direction that eventually we would want these businesses to look at and say -- hey, maybe we should look at this more of an enterprise-wide point of view. We've been really successful on that.

Now we start seeing that result is coming to picture and now we specialized -- six months or so we start seeing quite a few of our customers coming in talking to us to really start looking at from an enterprise point of view as opposed to going to these different groups and trying to sell or convince them to use Wdesk. What that starts creating is now that when you look at from an enterprise-wide point of view then more communication with the IT folks, the use of management capabilities have to be much more robust and product packaging and pricing, and the data integration, that all had to be put together so we can have that enterprise-wide type of capability that goes along with that.

If I had to summarize it, and Marty, you can join in, as the user management and ease of users coming in and going out is becoming quite important. In the point solution we do not have to worry about that as much. Now that we're getting into enterprise-wide where there are hundreds of users that come and go and can come hop in and hop out, that is becoming important. Data integration is becoming an important part of that. Marty, do want to add anything?

Sure. First off, in a minute I will go over some of the different things that are having to develop. And I just want to start by saying a lot of these are known, and they were on our roadmap prior; but to sort of elaborate on what Matt said, what happens is when we get three or four or five-point solutions sometimes only a couple of point solutions in the Company, it becomes apparent to IT; and then the questions start coming about enterprise-wide type solutions because they see a lot of opportunity to solve other problems in the organization but they have quite a list of requirements they need.

The top of that list is user management. They want integration with their LDAP or their active directory systems. They want workspaces so you can define different areas and different people can go and roll definitions. If you have a certain title you have certain permissions and certain capabilities.

We have to get good at billing because they want to know by user how much they are using -- not only of our software usage but also the infrastructure cost. And so there is a lot of those types of things -- form building. As these partners have gotten more and more involved they want to start building forms and creating their own intellectual property in our technology that they would take out as a value ad layer on top of ours. So we are having to build templating and form building for our third parties, our partners.

Billing automation -- we need to get that a lot better. And so there is just a lot of things and the reason these things have become front and center is that the demand for this came much sooner than we anticipated. We knew this would come down the road but to match point -- we had a lot of companies ask for that, and once IT gets in the middle of that then the sales cycles definitely extend. We are working with the IT groups and quite a few of our customers and we are trying to accelerate a lot of these development things and at the same time trying to manage cash. That is really what is the essence of it.

And lastly following up on the last point. You made a couple of comments about the sales cycles extending. Just curious where they are now relative to maybe what you are expecting on the SOX team as you build that out over the last couple of years. And then on some of the other GRC functions that you have built more sales team specific to those functions.

What's changed and what other sort of training or support do you need to give those folks to get those sales cycles shortened or back in line with expectations?

Yes. Just to make sure we are clarifying. When we talk about sales cycles and there are two different types.

One, is relating to the bigger deals now we are facing with on the SOX and other areas, and also we talked about sales cycle within the context of enterprise which we think is coming down the pipe sooner than we expected.

But having said that in terms of currently and we start experiencing this in the last few months and it is becoming clear for us it is all good news. The good news is that as we expected the deal sizes are getting bigger and bigger.

We do still close, let's say, SOX some of the deal sizes that are more normal in the $40- $50- $60,000 deals, but then when you start doubling and more of those sizes, we are seeing that they are getting more and more again, which is good news from our point of view. But by definition whenever the dollar amounts go up, then naturally -- the sales cycles go up with that because now you are dealing with various different entities in the organization.

I am not sure, -- there's really no magic to when the size of the deal gets bigger that you can really shorten that. We are closing the deal size that we are used to. We have been seeing it but at the same time now we're seeing more and more larger deal sizes that is giving us longer sales cycle that we are experienced and that we're dealing with.

Great. Thank you.

Thanks, Matt.

Terry Tillman, Raymond James.

Hey, good afternoon guys, can you all hear me okay? So I guess Matt, maybe a question for you or Marty, I don't know who should answer this, but as you guys are evolving here and having these bigger more enterprise wide opportunities, what I am curious about is if you look at your sales force the way it's composed now, do you have the right sales force to go after this market? Or is there some potential retooling you have to do in order to better optimize these bigger opportunities?

Yes, let me start with that. We have always talked about it and we are cognizant of -- as we start selling and landing and expanding and even from an enterprise wide point of view, as well as the lifecycle of the Company as we're growing, we've always known and we are working on it to make sure we have a comprehensive distribution channels. That includes the, obviously, direct sales, that includes inside sales, that includes various different kinds of distributions, as well as the partnership. As a matter of fact, one of the things that now you're seeing especially when you get into the enterprise level discussions that we are having, one of the things that we see our customers or the potential customers that want to do this enterprise deal, would like us to be able to also come into them with the expertise on terms of deployment and other things, where we're seeing demand from them and telling us that we should perhaps come with other partners to be able to help them to deploy. They are working with them already and so the partnership also becomes part of our distribution strategy moving forward.

And in terms of the larger deals, we obviously, when you have direct sales people that you are working with, you also have to have some of those, which we do have, and we also have to continually hire some of the salespeople who can deal with the larger deal. So it's a combination of all of that. But we've always looked at it as a lifecycle of the Company as we are growing. We would see this more comprehensive distribution strategy that includes the whale hunters and the inside sales and the online sales with the partnerships and with the other means to be able to tell our capabilities on the platform. Marty, do want to add anything?

Yes. Just that is a very good question and one, obviously, we anticipated because it is something we have to do. As we sit today, we have a number of salespeople who are equipped to do this. They have developed and gotten very good and over time we're going to have to add more of those people. There is no doubt. The part of our business that still does the midterm deals, some of those people are maturing and moving up and so it will be a combination of using internal people and adding some new blood, so it will be a combination of those two.

And I just wanted to mention one more thing. This whole - from our point of view, this demand for bigger deals and demand for enterprise type engagements as Matt said, the sales cycle is what it is. You are dealing with a lot more people and you are dealing with IT and you are negotiating pricing for our huge organization, you have to do that carefully. But long term, it's a very promising thing. And one thing, actually very exciting for us, we did not anticipate is happening as soon as it has. So it's going to affect us as we start to ramp up to do this but the long-term is very optimistic because of the rate at which companies are starting to realize that this can be used that way.

Okay. Thanks, Marty. I guess, Stuart, a question in terms of the idea of multi-year contracts and getting paid for multiple years. I guess what I am curious about in order to get that from the customer, what do you all have to give up or if you keep pricing flat for a number of years? And just where are you in the process of trying to execute on this?

There are a couple of parts to that. One is the ongoing program of migrating quarterly to the annual and that is going to continue to take a while. I think we said the last time it would take a couple of years. The second part of that though is more discretionary and -- well, some of it is actually companies that had maybe long-term contracts, two-year contracts that happened to come up for renewal in the third quarter and fourth quarter and we are definitely seeing some of that.

And another point there is there are some customers who we are quite eager to sign up for strategic reasons or account management reasons for competitive purposes. And there are different programs out there, it is sort of hard to generalize exactly, but there are some incentives that we have applied in certain cases, but we have done it strategically. We have not really -- we use that program sparingly and we only used it for part of the third quarter, reaching out to new accounts because we had enough that was renewing on its own for two and three-year periods. And some of those customers are very happy to sign up for two or three years because they know they love the application, they know they are going to use it long-term and it works for them to minimize the number of touches as well.

Okay. And Stuart, I saved the hardest question for you, my last question.

( laughter )

I think in either your prepared remarks or Matt's prepared remarks, the commentary was growth will reaccelerate. And I know you're not dialed into FY17, but we have guidance here for 4Q that is definitely much lower than we were expecting. I think it's like 14 or 15, depending on what you take in terms of the range. If things are kind of shifting or getting more elongated on these bigger deals, that is obviously affecting your bookings. Should we think though about how this flows into 2017? The growth could actually further decline at some point in the first half of the year and then when would we actually start seeing that inflection point and growth? Thanks.

Yes. We are going to provide detailed guidance on 2017 at the end of the fourth quarter and I will just leave it at what I said earlier, which is that we expect revenue growth to trend higher in 2017 from the expected Q4 2016 levels that we gave you. But that is for the full year, not necessarily the quarters.

Okay. That's all I got.

Okay. Thanks, Jerry.

Steve Ashley, Robert W. Baird.

Wondering what areas of the business are slowing in the fourth quarter? We are going from growing in the low 20s to growing in the mid-teens. Where is the slow-down taking place?

Steve, it related to the earlier question. The mix has not changed. If you look at the mix of bookings it is still about 50% SEC and about 50% non-SEC. So I do not know that -- we called out the elongation of the sales cycle and all of those were the non-SEC areas.

Sure. But there I -- you could bifurcate the business into large deals and then an underlying point product, kind of a run rate business. And it seems like the point product run rate business has slowed down. Does that sound right?

Well I don't know -- we don't really look at it that way. As Matt was talking about it and Marty [said] over time we are -- we've gone through this evolution, we are going through this evolution from point solution to multi-use case, to enterprise wide opportunities. And we are between stages two and three there, so it is hard to compare data points.

And my last question was you talked about making some adjustments to the sales force [call] coverage to help with the efficiencies there. Can you give a little color on that?

Sure. Sure, I think a lot of that has to do with the existing customer teams partnering with inside sales and in setting priorities on direct contact and working also with the customer teams and the professional services teams, and strategizing on particular accounts and how they are going to go at it.

Great. Thanks a lot.

Michael Nemeroff, Credit Suisse.

Hi guys, thanks for taking my questions. Most of them have been asked and answered. But Stuart, I just was wondering how much specifically did M&A reduce the Q4 revenue versus the longer sales cycles that you are talking about? The $3 million, Q4 guide down, what is the mix of M&A versus sales cycle impact?

Yes. So I do not think we have it cut that finely. The data we gave impacted M&A activity and the delistings, right? Because some of the delisting relate to customer bankruptcies and that sort of thing. I think we said the last 12 months, customers being acquired ceasing to file SEC reports equated to a $4.3 million reduction in annual contract revenue. So we expect that rate to continue. And we have some visibility in that because -- not perfect visibility, but we see announced M&A deals, it doesn't really happened to us until the M&A deal closes, but sometimes they don't cancel, sometimes they continue on. So we're building all of that into the forecast.

Okay. That's helpful. And then on the cash flow, I don't think anybody was expecting these multi-year [arrangements] in them. I'm curious how much of the Q4 expected positive cash flow is going to be driven by new multi-year billings where you collect the cash up front, versus operational efficiencies to get you there? And should we expect a level of multi-year billings in every quarter going forward? Is this part of the new sales strategy?

Well, we're doing that strategically, right? There are certain accounts where we think we see value in having that. And then we also have the rollover timeline. Just to go back for a second, when we went public in 2014, December, we were funding the Company through some longer-term prepays and a lot of those have come up for renewal this year. And a lot of those customers have decided, hey, I like the two-year deals, so I'm going to roll over for another two year deal. And a lot of those happened in the third quarter and many of those will happen again in the fourth quarter. So I would say the bulk of the increase you'll see in long-term deferred, particularly in the fourth quarter, will be those type of deals plus a few strategic deals.

Having said that, the operation efficiency has been a focus for us too. That has been a focus to make sure that we can run the business at the level of a path of profitability. So that is a pretty big focus this year, so I want to make sure you guys understand that.

The other aspect of cash flow improvement, yes.

And just to put a fine point. I don't know necessarily if you answered Terry's earlier question. Does the customer get a discount for giving you those multi-years of cash up front and then also, Stuart, the Q3 sales and marketing expense was a pretty significant slowdown. I am just curious whether those were operational deficiencies or just lower commission payouts because of fewer deals?

Well, on that point on sales and marketing, it was definitely a mix. I would say it was heavily oriented towards T&E and some of these operational efficiencies. But definitely the commission was in their compensation, was in there. On the -- what was the first part of that, you said about Terry? (multiple speakers)

Whether the customer got a discount?

Yes. For multi-year contracts there is a very modest discount. And we have tested the elasticity of demand for those discounts and in a zero interest rate environment they are pretty low and they are pretty sensitive.

Okay. Thanks for taking my questions, guys.

Thank you, Michael.

Mike Grondahl, Northland Securities.

This is Greg on for Mike. Thanks for taking my questions. Yes just following up a the moving to annual contracts. I think last quarter you were saying roughly 50% to 60% of new clients were starting an annual contract terms and I was just wondering if this has changed at all and if you expected to change or what -- . (multiple speakers).

It is actually higher than that. I'm guessing it is closer to 70%, 80%. I'm getting the nods here, it's closer to 80% of new customers are on annual contracts. So the real effort is on converting existing customers from quarterly to annual.

Okay. And what you expect that to get to long-term then?

I do not think we will ever get to 100% but in the next two years or so I would expect it would be the substantial majority of accounts would be one year or longer.

Okay.

That's the goal. But again, it is operationally intensive and we've got almost 2,700 customers and there are a lot of contracts out there and we have competing priorities for customer interaction.

Okay. Got it. And then in the past you had spoken about the potential opportunity that's presented by the Data Act. I was just kind of wondering if you could provide an update on the size or timing of this opportunity? If anything's changed? Any color there would be great.

I don't think anything has changed. It is more of a long-term play for us. Marty, do you want to add anything on that?

No. I think that it is about the same. Those bills are still tracking in Congress and they were not affected by this election, as far as we know.

Got it. Thank you.

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

Thank you, gentlemen. This does conclude today's conference call. You may now disconnect.