Workiva Inc (WK) 2021 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen. My name is Rachel, and I will be your host operator on this call. (Operator Instructions) Please note that this call is being recorded on August 3, 2021, at 5 p.m. Eastern Time.

I would now like to turn the meeting over to your host for today's call, Mr. Mike Rost, Vice President of Corporate Development and Investor Relations at Workiva. Please go ahead.

Good afternoon, and thank you for joining us for Workiva's Second Quarter 2021 Conference Call. Today's call has been prerecorded and will include comments from our Chief Executive Officer, Marty Vanderploeg; followed by our Chief Financial Officer, Jill Klindt. We will then open the call up for a live Q&A session. Julie Iskow, our Chief Operating Officer, is also on the call.

A replay of this webcast will be available until August 10, 2021. Information to access the replay is listed in today's press release, which is available on our website under the Investor Relations section.

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 the third quarter and full fiscal year 2021. 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 will 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 subsequent filings 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 press release.

With that, we'll begin by turning the call over to our CEO, Marty Vanderploeg.

Hello, and thank you for joining today's call. The Workiva team delivered another strong quarter, beating second quarter guidance for revenue and operating income. The past quarter reflected our steady execution with the addition of 149 net new customers growing our customer base to almost 4,000. Our results continue to build on our market leadership and the increased demand for regulatory reporting and fit-for-purpose solutions to support digital transformations. We are very pleased that nearly all of our solutions exceeded plan and contributed to our broad-based growth.

Our strong bookings from existing customers reflect the breadth of our platform and our enhanced ability to cross-sell multiple solutions. This resulted in Q2 year-over-year growth of 29% in subscription and support revenue and almost 26% in total revenue. We target being a low to mid-20% growth company. And for the first half of 2021, we delivered total revenue growth of 23.7%. Other highlights of the quarter included: Posting strong operating cash flow, our third highest in company history; achieving our highest revenue retention rate in 2.5 years; and continuing to grow the percentage of customers with an annual contract value of over $100,000 and $150,000. Due to continued broad-based demand and resulting top line growth, we are raising full year guidance. Jill will provide further details about our financial results and outlook.

A strong IPO and SPAC market propelled sales of our capital market solution. This solution continued to exceed our revenue contribution plans in the second quarter. Capital Markets is a great source of new logos which fuels our SEC, integrated risk and management reporting solutions. We will continue to model the incremental contribution of capital markets as an upside to our plan, given its limited predictability.

The EMEA team continued to build a strong new logo pipeline with a focus on ESEF and other use cases. We are pleased with our incremental performance in the ESEF market. We believe it is still early days and that the market has a long tail. We remain optimistic about the opportunity and are expanding our selling organization to capture the market as it reopens.

Our ESG solution pipeline is growing. We are pleased with the customer traction we are achieving and remain optimistic about the market's potential and expanding TAM. We are also accelerating our own corporate-wide ESG efforts as we work towards strengthening our company and ultimately promoting a better world. Two recent corporate ESG highlights include: First, we recently received an MSCI ESG AA rating. We performed at a leader level and marked their debut in the top 23% of 148 SaaS companies with strong performance in governance, privacy and data security and human capital management. And second, Workiva has joined the UN Global Compact CFO task force. We are the first SaaS company to join, and Jill will participate and work alongside her peers to shape credible goals that are aligned with corporate sustainability strategies.

We continue to strengthen our partner ecosystem. In the second quarter, we signed a number of large deals where our partners played a significant role. A few examples include: Working in partnership with a big 4 advisory firm, a large global auto manufacturer chose Workiva to manage their global statutory reporting transformation for over 500 legal entities. We worked with our partner on the joint RFP response and the partner will deliver the services to implement our platform.

Another key partner-related win was with a large health care company. The customer invested in the Workiva platform purchasing 4 solutions geared towards privately held companies, including financial reporting, management reporting, internal controls and policy management. Expanding our partner ecosystem is powered growth in our multi-solution opportunities.

We also continued to expand our footprint with partners utilizing Workiva as part of their managed service delivery. We closed 4 opportunities in the second quarter with new and existing partners. 3 of the big 4 advisory firms have now invested in the Workiva platform to support the delivery of managed services.

We are pleased with the investment that our partners are making in growing their Workiva practices and the impact they have had in delivering transformative results for our customers. Last week, we launched our new marketplace, offering over 200 templates, services and no-code third-party connectors. Customers can now streamline existing processes and reporting and solve new business problems, all within our platform's connected and secure ecosystem. Our partners played a crucial role in the launch of the marketplace by contributing content and services that are readily available for customers to add to their workspaces.

All 4 tenets of our company strategy are now fully in motion. We expect fit-for-purpose solutions, along with our modern platform, marketplace and partner ecosystem to drive our growth. Our company strategy enables us to make thoughtful and deliberate decisions, aligning and focusing the organization and exposing and mitigating risk through rigor and discipline.

Yesterday, we announced the strategic tuck-in acquisition of OneCloud, a pioneer in iPaaS technology. We acquired OneCloud to extend our platform capabilities in data integration and preparation. OneCloud has been an OEM partner of ours since July of 2019. Their technology expanded the Workiva platform, enabling our customers to connect data from third-party sources, such as ERP, GRC, HCM and CRM systems as well as other third-party cloud and on-premise applications. We believe connecting, harmonizing and controlling data across multiple disparate source systems further differentiates the Workiva platform from its competition. By acquiring OneCloud, we now fully own the complete end-to-end technology of our platform. We expect a smooth integration given the successful history that our 2 companies have shared and we welcome the OneCloud employees to Workiva.

We are proud of the extraordinary talent that is driving our outstanding customer experience and values-based culture. Recently, we were honored to be named, once again, the Fortune Magazine's list of Best Workplaces for Millennials. Approximately 70% of our employees are millennials, making this recognition even more meaningful. We were also renamed as a best workplace in both Chicago and New York.

In closing, we delivered strong quarterly results driven by the focused execution of our strategy. We are growing the business through new logos, maintaining high customer retention and account expansion and investing in our people, tools and technology. It continues to be an exciting time for Workiva. The world is changing at a rapid pace, and we believe we are well positioned to capitalize on the increasing opportunities to power transparent reporting for a better world.

With that, I will now turn the call over to Jill.

Thank you, Marty. Good afternoon, everyone. We saw strong performance during Q2 with new logo and add-on sales contributions as well as continued robust performance across our solution portfolio. The team skillfully executed on our strategy and operating plans. I will talk about our results and guidance on a non-GAAP basis. Refer to our press release for a reconciliation of our non-GAAP and GAAP results and guidance.

We continue to see broad-based demand for our solutions in Q2. As a result, we are raising guidance for 2021 revenue and operating income, which I will discuss later. I'll address our performance against Q2 guidance first.

We beat Q2 2021 revenue guidance at the midpoint by $4.1 million. Higher subscription revenue accounted for the majority of the beat. We beat guidance on Q2 operating income at the midpoint by $4.8 million. The revenue beat mentioned above, coupled with lower T&E versus forecast, make up the beat on operating income.

Turning to Q2 2021 results versus Q2 the year before. We generated total revenue in the second quarter of $105.6 million, showing growth of 25.9% from Q2 2020. Breaking out revenue by reporting line item. Subscription and support revenue was $91.2 million, up 29% from Q2 2020. New logos and new solutions helped drive strong revenue growth in Q2 2021. 63% of the increase in S&S revenue in Q2 came from new customers added in the last 12 months. Higher capital markets revenue was also a factor. Professional services revenue was $14.4 million in Q2 2021, up 9.3% from the same quarter last year. This was largely due to higher XBRL services revenue.

Turning to our supplemental metrics. We finished Q2 with 3,949 customers, a net growth of 437 customers from Q2 2020 and a net growth of 149 customers from Q1 2021. Our revenue retention rates improved. Our subscription and support revenue retention rate was 96% for the second quarter of 2021, an increase compared to 94.5% for the same period last year.

With add-ons, our subscription and support revenue retention rate improved to 111.6% for the second quarter of 2021, compared to 107.9% in Q2 2020.

The number of larger subscription contracts continues to show impressive growth. In the second quarter of 2021, we had 952 contracts valued at over $100,000 per year, up 33% from Q2 the prior year. The number of contracts valued at over $150,000 totaled 500 customers in the second quarter, up 46% from Q2 2020.

Moving down the P&L. Gross profit totaled $82 million in Q2, up 31.4% from the same quarter a year ago. Consolidated gross margin was 77.7% in the latest quarter versus 74.4% in Q2 2020, a net expansion of 330 basis points.

Breaking out gross profit. Subscription and support gross profit totaled $77.7 million, equating to a gross margin of 85.2% on S&S revenue, an expansion of 170 basis points compared to Q2 2020, primarily driven by higher S&S revenue. Professional services gross profit in the second quarter was $4.3 million, up 27% versus Q2 2020. Gross margin was 29.9%, a net expansion of 420 basis points. Research and development expense in Q2 totaled $25.4 million, up 18.4% from Q2 2020 due to new headcount investment. R&D expense as a percentage of revenue improved to 24.1% in Q2 2021 from 25.6% in Q2 2020. Sales and marketing expense for the quarter increased 19.7% from Q2 2020 to $38.7 million as we invest in the growth of our business. General and administrative expenses totaled $12.6 million in Q2, up $2.1 million compared to Q2 2020. G&A expenses as a percentage of revenue improved to 11.9% from 12.5% in Q2 2020. We posted an operating profit of $5.3 million in Q2 2021, compared to an operating loss of $1.8 million in Q2 2020.

Turning to our balance sheet and cash flow statement. At June 30, 2021, cash, cash equivalents and marketable securities totaled $552 million, an increase of $11 million compared to the balance at March 31, 2021. Net cash provided from operating activities in Q2 2021 totaled $12.8 million compared with cash provided of $7.2 million in the same quarter a year ago.

Turning to our guidance. We are factoring in the expected impact of the COVID-19 pandemic on our business and results of operations based on information available to us today. For the third quarter of 2021, we expect total revenue to range from $108 million to $109 million. We expect subscription revenue will continue to grow at a faster rate than services revenue in Q3. We expect non-GAAP operating loss to range from $4.5 million to $5.5 million. For the full year 2021, we are raising guidance for revenue. We now expect total revenue to range from $430 million to $432 million. We expect non-GAAP operating income to range from breakeven to $2 million. We are modeling higher travel costs and investments in growth opportunities and hiring through the remainder of 2021. And in 2021, we expect to post positive free cash flow for the fifth consecutive year.

I am proud of our team's performance this quarter and would like to thank all our employees for their hard work and incredible dedication. We will now take your questions. Operator, we are ready to begin the Q&A session.

(Operator Instructions) Our next question comes from the line of Matt Stotler from William Baird.

I guess to start off, great to see the tuck-in acquisition here, the OneCloud acquisition. Would love to get maybe some color on how that came about? I mean this is a close partner of yours for a couple of years. So could you just share some of the thoughts that led to the decision to buy versus continuing to partner in this case?

Yes, sure. The -- we had been working with them since July of 2019, OEM and your product, as you alluded to. And from our point of view, connecting disparate data systems is a very important part of what we do. We had a lot of use of that OEM, had a lot of customers using those connectors. And I firmly believe that if it's strategic technology, you own it, it's just a lot safer. You can do better integrations, can be more aligned, better security. And we've worked well together, really bright group of people in OneCloud, very good people. And so it was a tuck-in strategic technology buy, I would say. Always own what's strategic. And the team wanted to join. That's another good thing. So we expect the integration to go really smoothly. We've worked with them for so long.

Got it. That's helpful. And then maybe just one more on ESG and maybe this one is for Julie. The last time we heard -- I guess, the first time we talked about this on our last earnings call, it was about a week after you kind of officially announced the product and they're still kind of figuring out some things on the go-to-market front. Any progress that you can share in terms of the packaging, pricing, go-to-market around this product and how it's progressing?

Well, I'll just -- go ahead, Julie. I was just going to hand it to you. Go ahead.

Okay, go ahead.

Well, what I would say is that we've made really good progress on understanding the market. We've seen some good progress in terms of growing pipeline. We've closed a few deals. And Julie's team, I'll let her comment on that, are working real hard to optimize the product. So we're seeing -- you see out in the press pretty clearly that everyone's talking a lot about it. And even though a lot of the regulations aren't approved yet or fully baked, you can see the writing on the wall. And the reason we know that is the customers are calling us, we're seeing that type of draw. But in terms of optimizing our product, I'll turn that over to Julie.

Sure. As Marty said, we're pleased with the momentum and how the solution is performing. We've been having prospect conversations, pipeline is building. Those conversations help us refine, define the solution for the market and the technology capabilities that we need to lead in this market.

Our next question comes from the line of Alex Sklar from Raymond James.

All right. Marty or Julie, on the new marketplace, some really impressive templates and connectors available to get go. I had 2 questions around this. First, on the connectors and all the data integrations. Can you just remind us the strategy there relative to the Wdata solution? Are those just kind of light versions versus much greater functionality with Wdata?

And then second, what are the important KPIs you're going to be tracking in terms of success of the marketplace and opening up the platform over the next couple of years? Is it based on how many partners are building, customer usage? Or any other color there would be great.

Sure. As far as the metrics, we're in the process of defining those now, but there'll be classic metrics for marketplace success in terms of usage, download, adoption, engagement and so forth. And the connectors are starting points for customers who want to begin using the capabilities of Wdata and our broader offerings with respect to the data platform.

Okay. Great. And then just a follow-up for Jill. On the revenue growth, the 63% coming from new customers in the last 12 months, I think that implies you're landing much larger with new customers. Can you just help parse out what's driving those higher deal sizes? Is it coming from the partner influence deals? I know Marty mentioned 4 solution wins? Is it Europe success with some of the other higher priced solutions like (inaudible)? Any other color there would be helpful.

Yes. And thanks for the question. And it's actually a combination of not only larger deals, but also continued add-on deals to those new customers. So it could be that they're coming in the door in 1 solution and then pulling in other solutions (inaudible). So it is just a combination of a lot of different very strong activity that we're seeing across all our solutions.

Our next question comes from the line of Tom Roderick of Stifel.

Marty, let me start with you. I mean I think you've been pretty clear so far in this call that it would be -- in saying that it's a little too early to suspect that the results we're looking at in front of us are driven by ESG. But I'd love to understand what's really kind of behind the pickup in customer activity? Look at these metrics, they're accelerating on kind of all key metrics. They've been blowing away the expectations. And yet some of the things that perhaps your investors are talking about the most might not even be happening just yet, if I think about ESEF and ESG and some of that excitement.

So help me to understand what you're seeing that's driving a pickup in activity, maybe it's a pickup in win rates, where it's happening? Is this still predominantly U.S.? Or are we, in fact, seeing Europe kicking into these numbers now? And it's just the talk around ESG creating new deal activities even if they're not purchasing ESG solution? Or is that still too often -- too far off in the future?

Tom, that's -- that's a question I could go on for quite a while. But I would start by saying that the performance has been very broad-based. I mean, I mentioned that, that -- and I've always talked about a portfolio approach. We have a number of different solutions, management reporting, SEC, integrated risk, annual and interim reporting, GSR, ESEF. I can -- there's quite a length people [lift]. And the thing that we've always been very successful out of that portfolio approach, and each solution can have some noise in it from time to time, a little weaker quarter than a very strong quarter, just depending on how deals close and things.

And it's always given us a really smooth bookings trajectory when you average all those out. And this quarter, almost all of them produced really good sales. And so it was pretty broad-based. We keep saying that broad-based, and I would agree with you 100% that ESEF and ESG are upside. We did do as expected in ESEF. It's tracking the SEC business that we started 10 years ago, and that has a long tail of solid growth ahead for us. And then the same thing I would say about ESG. We'll see some revenue from this year, but it's not going to be that material to our business. And all the upside there is of 2022 and 2023, that's when the activity will really pick up.

Now as I mentioned, we're very pleased with the ESEF sales to date. It's backloaded because it's an annual report, and we're seeing the pipeline grow very nicely. And so yes, I think the good news for investors to hear is that all that upside is ahead of us. And we're just -- our core business is performing really well. Is that partially because of COVID? I think partially, but I think that's a long tail, too.

And we talked about Europe being a bigger and bigger percentage. It's trying to be. It's growing faster, but North America is growing faster, too. So pretty much across the board, broad-based, just solid performance, everybody in the company getting better at what they do.

So that's -- and more demand. So those are sort of the core drivers of it, and there's not one that you would say -- cap markets was stronger than normal. That's for sure. But in general, it was very broad based.

Excellent. Okay. There's a lot to be excited about, so we'll keep checking in on the new items, but that's great.

Jill, a follow-up for you, a much simpler question. I apologize if I missed it, but is there any impact from OneCloud in the guidance?

So Marty has mentioned earlier in the call about OneCloud being a smaller -- it's more of a strategic acquisition. And so it's immaterial to our total results. We have modeled into our forecast and it is included in our guidance anything -- any of the operational results related to OneCloud, but they really are not a big impact on our -- or it's not a part of the growth. It's not -- our guidance raise is not being driven by that acquisition.

So no material revenue is what you're saying?

Correct. Yes, that's correct.

Our next question comes from the line of Andrew DeGasperi from Berenberg.

My first one, I'd like to ask on ESEF. I know it's still early days, but one of the things we've heard from the advisory firms there is that usually the customers or the issuers have 3 options. They can either do it themselves, use a third-party software solution like Workiva or outsource it. But that -- even if 2021, which is one of the other solutions that wouldn't be a final mile software, they could eventually move in that direction because of the expense or the resources needed to do it themselves. Is that the type of conversations you're hearing? And would you agree that's why you feel it's a long-tailed opportunity?

Yes. I think you hit the nail on the head. I think that same thing happened in North America. We entered the market late, invested heavily and built a really sophisticated powerful tool. And when we got in the market, most of the customers were either outsourcing it or bought some other sort of bolt-on applications, and they were 20% of the cost of our solution.

But you saw the end result. When you put a really good product out there that minimize risk for the customer, it produces a really high quality output in terms of their disclosures and reports, you win that battle. So I was clear a call or 2 ago that we didn't expect just to take this whole market by storm. With a premium solution, people sort of have to learn what they have to do and learn the pain associated with it. And then there's more and more requirements as you go. They have to do more different types of tagging the following year. Every time the hurdle gets higher for the bolt-on solutions.

And so yes, we expect to see a really long tail, very similar to the SEC market we've gone through in North America. We have that advantage, having watched that. Meanwhile, we're closing really good business in ESEF in terms of the quality of the customer, the deal size. And each country is a little different, how we're doing, but we have a really good plan and the pipe is building really nicely. As you recall, most of the countries delayed ESEF. And so a lot of the countries are just seriously for the first time in the second half of this year. But I think you've got a real good handle on what's going on there.

That's helpful. And then maybe on the -- Jill, if you can help on this. In terms of the contribution from capital markets, I mean you mentioned it was stronger. Can you maybe give us directionally, if not quantitatively, what that contribution is? I mean has it sequentially become bigger in Q2?

So we don't disclose that deal size or that as a separate solution. But it did have -- we did have an upside in Q2 related to that. There'll be some amount that will still be closing through the end of the year that we'll be completing through the end of the year. But that's included in our guidance -- updated guidance. And so what we would say is that there's a potential for more upside depending on that market, but there's just too many variables for us to really know how that's going to go through.

I would add that when we manage the business, we're pretty conservative and we model cap markets as upside every quarter. And when it outperforms, obviously, it's good for the business. We do the same with ESEF. We have very, very moderate models for ESEF. And if and when it takes off, that's also all upside. So we model all these different solutions conservatively, knowing numbers that we can reach in general.

And yes, I mean, cap markets did outperform. But remember, we have a very small percentage of that market. That market is still pretty much dominated by the printers, the -- for a bunch of structural reasons that are not anything about our services or software. It's just how legal firms work. And so even though we did outperform, it's not like a big part of our business by any means.

Our next question comes from the line of Terry Tilman from Truist Securities.

This is Connor Passarella on for Terry Tillman. First one for me. We've been hearing from customers looking at the ESG solution that there are numerous data collection elements and frameworks to be addressed there. I'm just wondering what are the implications of the OneCloud technology as it relates to ESG reporting going forward?

Well, I think that of all the solutions we deal with, it will have as much connectivity as any of them and possibly more. All the different parts of ESG have also other little solutions people use. And so we're going to have to pull data in from a lot of different places and do prep work on it. So clearly, that was a big part of our motivation that OneCloud would play a big role in that, especially the connecting and the preparation of the data as it comes in.

The frameworks, we're looking at different ways to deal with that. We have several different database attempts that we were looking at and using for existing customers, trying to optimize and see. There's several frameworks. And I think the whole world, including us, is hoping that the planet settles on 1 or 2 of those frameworks, we have to support so many. But we can do that. We're prepared to do it.

The data collection is another, obviously, nuance of all this. And there is work you have to do, there's questionnaires. There's audit work that has to be done, and we have an audit solution to fit over that. And then as I've talked about before, we're working a lot of workflow stuff that will start to come out of the pipeline at the end of this year. It's already started to come out, some of our data collection stuff.

So we're really well positioned to address all of those different needs of ESG. And they're not dramatically different, with the exception of the frameworks, than a lot of the stuff we're doing already.

Great. And then just a quick follow-up from me. Just curious on hiring goals and thoughts on sales capacity moving forward.

Well, when you say hiring goals, I'll take some leeway of what you meant. I mean we are surprisingly finding good talent. We're very pleased with -- our talent acquisition team is just knocking the ball out of the park, and we're adding heads primarily in sales, quota carrying and also inside salespeople. And then we're also adding heads in R&D. We have a lot of things we want to do with the product. And I always talk about durable growth. And I believe that for durable growth, and we think we can grow this company for an extended period of time, you need to have high-value products that enable us to charge more and that are sticky. And so we're investing in the product because we see the markets that we can serve. There are some really big markets that we can address. And so that's where the heads are being added, and we're having good luck of filling those heads.

It always takes time. We're very picky and we really focus on high-level talent, but we're doing really well there in terms of meeting our objectives.

In terms of what our objectives are, we really don't comment on that. That will be pretty clear as we move along.

The operator is still there?

Yes, I'm still here. I'm sorry about that. And our next question comes from the line of Mike Grondahl from Northland Securities.

This is Michael on for Mike. Maybe first off, just on those -- hey, just on those partner deals, were those completely new logos for that automaker and the health care company? Or are those -- you already had some existing solutions in there?

Well, I know the auto solution, we already had existing solutions in there. Health care provider, I think it was a new logo, but I'm not 100% sure.

Got it. And then maybe just on the marketplace. Can you talk maybe on the strategy of this? Is it more...

You cut out. I just heard, is it more. Why don't you talk about the strategy of the marketplace, Julie?

(inaudible) the initial phases of the marketplace is focusing on easier and faster adoption of our solutions on our platform, faster time to use and value for users, customers and engagement with our partner ecosystem. So indirect monetization, showing customers the possibility of what can be done with our platform, we'll evolve the marketplace and move towards enabling third-party builders again in later phases and move towards direct monetization and capture that network effect to really grow adoption. So the strategy is to initially start out with targeting customers easier, faster adoption and so forth, but evolve it to a full-performing marketplace.

There are no further questions on the queue. And this concludes our question-and-answer session. And speakers, if you have any remarks?

No, I think we're done. Thank you very much.

This concludes today's conference call. Thank you all for participating. You may now disconnect.