Workiva Inc (WK) 2018 Q2 法說會逐字稿

Good afternoon. My name is Chris, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Workiva Second Quarter 2018 Earnings Conference Call. (Operator Instructions) Thank you. Adam Rogers, Director of Investor Relations, you may begin the conference.

Thank you, and good afternoon, everyone. Welcome to the Workiva Second Quarter 2018 Earnings Conference Call. This afternoon, we'll begin with comments from our President and Chief Executive Officer, Marty Vanderploeg; followed by Executive Vice President and Chief Financial Officer, Stuart Miller, and then we'll turn the call over to questions. Also on the line today is Jill Klindt, Senior Vice President and Chief Accounting Officer.

A replay of this call will be available until August 14. 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 our future events and financial performance, including guidance for our third 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.

And with that, we'll begin by turning the call over to our President and CEO, Marty Vanderploeg.

Thank you, Adam, and thanks to everyone for joining the Workiva Q2 2018 conference call. I would like to start my first conference call as Workiva's CEO by saying that I am very proud of our progress. Because of the investments we have made in our Wdesk platform and our distribution organization, I believe we have never been in a better position to grow, and I'm excited about our future.

Thousands of organizations use Wdesk for a reason. We give them the tools they need for data control, transparency and accountability, saving them time and money, and most importantly, reducing risk. We signed 103 net new customers in the second quarter and now have over 3,200 customers. More than 75% of the Fortune 500 companies use Wdesk for at least 1 use case, and we are just getting started.

We continue to post world-class customer retention rates, and our Net Promoter Score is at an all-time high of 81, which is remarkably high for any B2B SaaS company.

Our subscription revenue per customer continues to increase quarter-over-quarter, and we expect that trend to continue. The number of large customer contracts rose 33% over the second quarter last year.

In June, we began the rollout of our value-based pricing, which offers Wdesk subscriptions by solution rather than by our previous seat-based model. Value-based pricing is easier to scale, delivers more value to our customers and opens more markets for Wdesk.

We continue to hire top talent, which in the past year included leaders in product marketing, sales, EMEA and APAC.

Adoption of in-line XBRL as a standard reporting format continues to spread worldwide. The European Securities and Markets Authority, known as ESMA, requires in-line XBRL for its European single electronic format taxonomy. More than 5,000 EU issuers will be required to use this taxonomy for their annual financial reports ending on or after January 1, 2020. Workiva leads global adoption of in-line XBRL, and we are well positioned to capture this large market.

Meanwhile, our work in APAC is just getting started by expanding Wdesk use with our multinational customers. Over time, we expect that international markets could contribute more than 25% of our revenue. We are making great progress toward enhancing Wdesk to serve the enterprise with new capabilities including workflow, workspaces and improved collaboration. In addition, we recently launched Wdata, which combines our new data preparation capabilities with existing connectors and APIs to enable our customers to connect large datasets to Wdesk. This expands the number of use cases for Wdesk.

We continue to augment our sales channel with advisory and service partners as well as technology partners. For example, we recently announced an OEM agreement with SAP to provide a first-party integration with Wdesk.

We recently achieved FedRAMP's authorization to operate, which demonstrates our commitment to improving processes and ensuring the security of our customers' data. With this new authorization, federal government agencies can more easily adopt Wdesk to help streamline a wide range of data analysis and reporting. In addition, many commercial enterprises, particularly those in regulated industries, consider FedRAMP the highest standard of security assessment authorization and continuous monitoring for cloud software.

We continue to strengthen our collaborative culture throughout Workiva, which results in high employee retention rates and several best place to work awards. We are proud that Gartner recently placed Workiva in the furthest position for Completeness of vision in the Leaders quadrant in its 2018 Magic Quadrant for Cloud Financial Close Solutions for the second year in a row.

We are looking forward to our seventh annual user conference in September. We will offer more than 80 sessions on best practices and advanced ways to use Wdesk. As in years past, our user conference will also include an analyst track.

Today, I would like to tell investors that Workiva is committed to pursuing profitable growth. We will continue to enhance our Wdesk platform, add new customers and partners and expand Wdesk across our customers' organizations.

With that, let me turn it over to Stuart Miller, our CFO. Stuart?

Thank you, Marty. I'll review our second quarter results, and thereafter, I'll comment on third quarter and full year 2018 financial outlook.

One note on accounting, as discussed in our last call, we adopted the new revenue recognition standard, ASC 606, using the modified retrospective model method. Our Form 10-Q provides a reconciliation of the impact of the adoption of ASC 606 on our second quarter and year-to-date financial results.

Now on to revenue. We outperformed our revenue guidance for the quarter. We generated total revenue in the second quarter of $59.1 million, an increase of 19.7% from Q2 2017. Breaking out revenue by reporting line item. Subscription and support revenue was $48.8 million, up 19.2% from Q2 2017. 50.6% of the S&S revenue increase in Q2 came from new customers added in the last 12 months. The remainder of the increase came from deeper penetration of our existing customer base.

Revenue growth accelerated in Q2 due to a higher volume of transactions, both for new logos and add-on sales. SEC, internal controls, capital markets and internal reporting all showed strength. We believe some of the acceleration is related to investments we made in sales training in the last 12 months.

Professional services revenue was $10.3 million in Q2 2018, an increase of 22.4% from the same quarter in 2017. Professional services revenue, particularly XBRL tagging, was above our expectation in Q2 due to a large number of new logos and more existing customers using our services.

Turning to our supplemental metrics. We finished Q2 with 3,222 customers, a net increase of 314 customers from Q2 2017 and a net increase of 103 customers from Q1 2018. Our retention rates continue to be strong. Our subscription and support revenue retention rate was 95.6% for the month of June 2018.

Customers being acquired or otherwise ceasing to file SEC reports accounted for a majority of revenue attrition, consistent with our experience to date. With add-ons, our subscription and support revenue retention rate was 106.9% for the month of June 2018.

As a reminder, we calculate 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 next year.

We're encouraged by the progress we're making with larger contracts. For annual contract value exceeding $100,000, we had 366 customers in the second quarter, up 33% from 275 customers in Q2 last year. For ACV exceeding $150,000, we had 161 customers in the second quarter, up 33% from 121 customers in Q2 2017.

Moving down the income statement. I'll talk about our results before stock-based compensation and CEO separation expense, which are the 2 adjustments to our GAAP numbers. Please refer to our press release for a reconciliation of our non-GAAP and GAAP results.

Gross profit was $43.2 million in Q2, up 22.1% from the same quarter a year ago. Gross margin was 73.1% in the latest quarter compared to a gross margin of 71.6% in Q2 2017.

Breaking out gross profit. Subscription and support gross profit was $40.4 million, equating to a gross margin of 82.8% on S&S revenue, up from a gross profit margin of 81.5% in Q2 2017 due to a higher utilization rate and better pricing. Professional services gross profit in the second quarter was $2.8 million, equating to a 27% gross margin, up from a 23.6% gross margin in the same period last year due to a higher utilization rate.

Moving down the P&L. We outperformed our guidance for quarterly operating loss. Research and development expense in Q2 was $19.2 million, an increase of 21.9% from Q2 last year due to higher headcount and compensation. R&D expense as a percentage of revenue rose slightly this quarter to 32.5% compared to 31.9% in Q2 last year. Our R&D spend was relatively flat sequentially from Q1.

Sales and marketing expense for the quarter increased 9% from Q2 last year to $20.8 million. Sales and marketing expense as a percentage of revenue this quarter improved 350 basis points from Q2 last year to 35.2%. Most of the improvement was due to capitalizing sales commissions as required under ASC 606.

General and administrative expenses were $8.6 million in Q2, up $2.6 million compared to Q2 2017 due to higher headcount and compensation in the executive ranks and administrative and shared services.

Operating loss was $5.4 million in Q2 2018 compared to the operating loss of $5.5 million in the same quarter last year. Workiva's operating margin improved 190 basis points in Q2 2018 versus Q2 last year, primarily because revenue growth exceeded growth in compensation expense.

Net loss was $5.4 million for Q2 2018 compared to the net loss of $5.8 million in Q2 2017. We posted a net loss per share of $0.12 in Q2 2018 compared to a net loss per share of $0.14 in the same quarter a year ago.

Turning to our statement of cash flows and balance sheet. In Q2 2018, net cash used in operating activities was $2.5 million. Net cash used in the latest quarter included a severance payment of $6.6 million to our former CEO.

At June 30, 2018, cash, cash equivalents and marketable securities totaled $80.7 million, a decrease of $346,000 compared with the balance at March 31, 2018.

Short-term subscription and support deferred revenue increased $7.8 million due to sales growth and conversion of customer contracts from quarterly to annual payment. We continue to make good progress converting customers to annual contracts, and we expect to convert a substantial majority of the remaining 400 or so quarterly contracts to annual terms by the end of Q1 2019. Long-term subscription and support deferred revenue grew just under $1 million in the quarter. Short-term customer deposits, which represent a prepayment of professional services, decreased $128,000 in Q2.

Turning to our guidance for 2018. Our guidance on non-GAAP loss from operations and non-GAAP loss per basic share excludes the impact of stock-based compensation, and the full year guidance also excludes CEO separation expense. Please refer to our press release for a reconciliation of our non-GAAP and GAAP guidance.

For the third quarter of 2018, we expect total revenue to range from $59.5 million to $60 million. We expect GAAP operating loss to range from $15.5 million to $16 million. Non-GAAP operating loss is expected to be in the range of $8.9 million to $9.4 million. We expect GAAP net loss per share in Q3 to range from $0.36 to $0.37 a share. Non-GAAP net loss per share is expected to be in the range of $0.21 to $0.22. Our loss per share guidance assumes 43.8 million basic and diluted shares outstanding.

Our full year 2018 guidance is as follows: We are raising the midpoint of our previous full year total revenue guidance by $4.3 million. We now expect our full year total revenue to range from $240 million to $241 million. We now expect GAAP operating loss to range from $57.9 million to $58.9 million. We're raising our guidance on non-GAAP operating loss to a range of $22.5 million to $23.5 million. We continue to expect Workiva to show positive cash flow from operations in 2018. We expect GAAP net loss per share to range from $1.34 to $1.36. Finally, non-GAAP net loss per share is expected to be in the range of $0.53 to $0.55 per share. Our loss per share guidance for the full year assumes 43.5 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 our growth plan to capitalize on our multibillion-dollar market opportunity.

We're now ready to take your questions. So operator, I'll turn it back to you for Q&A.

(Operator Instructions) Our first question comes from Terry Tillman with SunTrust Robinson Humphrey.

This is Eric Lemus on for Terry. And specifically looking at profitability, I think this is one of the largest beats that you've had since going public. And so when we think about going forward, is there any sort of philosophical change between the balance between growth and profitability?

Yes, definitely. We have taken a more focused view on our investments. We have gotten fairly good clarity on where to make investments. And so moving forward, we definitely will lean towards accelerating our journey to profitability. We believe we can do this without sacrificing growth. And again, anything from you, Stuart?

No. I think it reflects where we are in building on the development side and on the product side, and that's really underlying our confidence.

Okay. And then you mentioned the Gartner Magic Quadrant for the Cloud Financial Close Solutions, and you guys performed really well in that Magic Quadrant. But looking at some of the other vendors in that report, where do you guys fit into that space? And are those vendors -- do you see overlap with those vendors in the Magic Quadrant, like BlackLine or Trintech?

With BlackLine, clearly not. They focus on reconciliation. As you know, we focus on downstream, on the reporting process. And with Trintech, there's a slight overlap but not significant.

There's still a little bit of overlap with IBM.

Yes. And those 2 he referred to, there's very little overlap. Some of the larger players have products, but they really don't focus on it.

Your next question comes from Tom Roderick with Stifel.

Marty, congratulations on your appointment here as the CEO. I want to double down on Eric's last question there, just on the concept of profitable growth. And I guess, as it relates to some of the investments you're making more aggressively at the end of last year, in particular, I remember there's a lot of sales and development efforts going into the financial CPM product and really just a broader push towards the enterprise. With that push in particular to the enterprise, going after larger seats and within the context of financial CPM as a product line, how should we think about the ongoing commitment to that and the desire to push upstream going after larger deal sets in the enterprise?

Well, that's clearly still a big part of our growth strategy. Having such a large footprint in the Fortune 500, it gives us great access to those accounts. And as I mentioned on the call, we've really just get into place, we've rounded out our platform. We have our sales team having gone through a lot of training and improving process and messaging. We really feel we can focus, and that's really the key.

And then maybe just sort of on the back of that question, as you think about the trade-off and investments in R&D versus sales and marketing. Stuart, this might be a better one for you, but how would you encourage us collectively to think about where we should model a little bit more leverage in the model? Should it come on the sales and marketing side or should we model a little bit more leverage in R&D going forward?

Yes. I think probably -- we're not going to give guidance on 2019. But I would say, you would probably expect to see more leverage on the R&D side beginning in 2019, a lot of headroom in there.

Okay, perfect. And Stuart, last quick one for you. I think this may have something to do with the push towards more annualized contracts and upfront payments. Can you just help us understand what role that push has played in the context of rising DSOs and accounts receivables on the course of the balance sheet there?

Yes. So the biggest impact on DSO, as we talked about last time, was the adoption of ASC 606. And there was a simultaneous increase in receivables and deferred revenue and also in customer deposits, which shows up as a different line item on the right-hand side of the balance sheet. So there really was no actual change in DSOs. It was simply how ASC 606 requires us to show the receivable. There was -- previously, there was a gross down of the receivable. Now at the time when you actually issue the invoice, a receivable shows up on the left-hand side of the balance sheet. So yes.

Your next question comes from Brian Peterson with Raymond James.

This is Vince Celentano on for Brian. I had a quick question on the net adds in the quarter. Looks like it was the biggest quarter-over-quarter increase since 2014. I know you mentioned that there was some acceleration due to sales training. But I don't know if you have seen any kind of change in the overall environment that you wanted to point out.

So thanks for the question. So it was pretty broad based. I mean, it wasn't just SEC. It was internal controls. Some of that came from partners, from managed services accounts. It was from the private company reporting, and also capital markets made a nice contribution. But you're right, it was the largest add of net new logos actually since, I think, 2013.

And we really saw the demand across all of our markets in a very -- there was not one that stood out. And I think that really is a reflection of the improvement in our sales organization and also getting the product to where it is now that all those things are just coming together at the same time.

Okay, great. And then looking at the revenue by industry. It looks like the information technology showed the most growth in the quarter. It was up 4% quarter-over-quarter and looks like outside of the other buckets, the largest bucket. Is there anything in that particular area that is worth pointing out? Obviously, there's only 2 quarters worth of data, but just wanted to see what you think.

Boy, am I glad people like you read our footnotes. It's a beautiful thing. Yes, it is remarkable how broadly distributed our revenues are among industries. Information technology leads the way there, in part because so many of those customers are sophisticated and comfortable using cloud and have a real appreciation for the kind of productivity increases they can get from using Wdesk. They tend to be early adopters, and so that's why you see them leading the way. But it definitely -- it's been very broad across industry groups.

Your next question comes from Mike Grondahl with Northland Capital Markets.

This is Mike Pochucha on for Mike Grondahl. Maybe first just on the value-based rollout in June. Is there any initial feedback there you can give us on how customers are responding to that?

Sure. I think, in general, the customers have been very positive about it. The thing about value-based pricing is we let customers have as many seats as they want, and that really simplifies the process of not only administering the account. And also, it also prevents them from trying to manage cost and leaving out important people in the process. The real strength of our platform is to get everybody in the process on. So by standardizing a value-based price that's based on other metrics, it really simplifies it. And our back office, too, it simplifies things. So it's been a real positive.

Yes. I'd say, just to clarify, the customer is going to have as many seats as they want within that solution set. And some of that has been enabled by the further development of the platform, which allows more spaces. And so it allows the SEC team to have unlimited number of seats within the SEC workspace, and the SOX team to have unlimited number of seats within the SOX workspace, for example. And it's a lot easier to track and it scales nicely.

And it also exposes just a lot more people in the organization to our platform. And for us to get as much exposure in those organizations as possible will really drive the expansion within those accounts, so.

That's helpful. And then just on the pipeline and increased guidance. Should we just be thinking about the things that drove the second quarter, like capital markets, internal controls, the investment in sales, was there anything else we should be paying attention to there?

I'm sorry. Did you say -- can you repeat the question? I didn't catch it exactly.

Yes. Just on the -- how the pipeline looks today and that increased guidance for the full year. Is it the similar things that have driven the second quarter? Or is there anything else we should be paying attention to there?

No, I think it's very -- we think it's pretty broad based. There might be a bit more on financial services in the back half of the year than we had in the second quarter, but it's pretty broad based.

Our last question comes from Stan Zlotsky with Morgan Stanley.

This is Hamza Fodderwala in for Stan Zlotsky. I wanted to dig in a little bit on the partnerships. We've heard a number of tech integrations recently and some announcements with their market partners. Has this been material to numbers yet? And if not, when could we start to see that?

So we definitely have seen visible contribution from partners on the number of logos and revenue contribution. But I wouldn't say it's not -- it's still early days. It's not really driving the bus yet. But they do help influence purchases, and it's not always easy to track exactly which partner was influencing which sale. But we do think it's been well worth the effort as a force multiplier.

And certainly, we've seen -- even though it's not material, it's growing rapidly. And the other thing is it really simplifies the delivery process for us, so there's a lot of other advantages to that type of distribution.

This does conclude the Q&A session and the conference. Thank you for your participation, and you may now disconnect.