Workiva Inc (WK) 2020 Q4 法說會逐字稿

Hello, and thank you for joining today's call. We are pleased with our fourth quarter and full year 2020 results, which beat guidance for revenue and operating income.

In Q4, we continued to benefit from macro business trends, which included significant increases in cloud platform deployments, digital transformations and remote workplaces. Workiva has also benefited from the growing demand for RegTech and XBRL.

Our financial results reflect the broadening adoption of our platform and fit-for-purpose solutions. We exceeded 20% growth in subscription and support revenue and generated record bookings. In 2020, 77% of new solution and new logo bookings were generated by solutions outside SEC or SEDAR.

As we recently announced, all of our customers are now on our next-generation platform, which is more open, scalable, intelligent and intuitive. This company-wide initiative was a significant undertaking, and I would like to thank our employees for their dedication and hard work in achieving this important milestone. I'd also like to thank our customers for their commitment to Workiva and recognizing the value of our new platform.

Now that our platform upgrade is complete, we are prioritizing 3 areas where we see opportunities for growth: fit-for-purpose solutions, global expansion and our partner ecosystem.

First, our fit-for-purpose solutions. Our idea to incubation framework gives us a mix of discipline, speed and agility. We will continue to launch new solutions that solve specific business problems and enable our customers to realize value quickly.

Second, global expansion. We will continue to capitalize on demand from companies outside North America that need to manage complex data sets, reduce errors and risk, improve efficiency and respond to regulatory requirements. In 2020, EMEA and APAC generated less than 8% of our consolidated revenue. We expect these markets to contribute an increasing percentage of total revenue over time.

And third, our partner ecosystem. Many of our more than 200 partners are now creating new solutions and services on top of the Workiva platform. We look forward to further expanding our partner ecosystem as we work together to deploy our platform throughout global enterprises.

In 2020, our values-based culture sustained us as we remained strong and connected to each other and to our customers, even as our global teams worked remotely for most of the year.

We also strengthened our commitment to advancing our diversity, equity and inclusion efforts through a variety of employee and company-wide initiatives.

We continued to win awards in 2020, including being named a top 100 best workplace by Fortune magazine for the second year in a row as well as being named a great place to work in technology for families and for millennials.

Earlier today, we announced that Stuart Miller, our CFO, will be retiring at the end of this month. I want to thank Stuart for his dedication over the past 7 years, guiding us from a private company, through an IPO and to the global SaaS company we are today. Stuart has been a valued colleague, and we will all miss him.

Thanks to Stuart's leadership, we are able to make a seamless transition by appointing Jill Klindt, our Chief Accounting Officer, to the CFO role. Jill has been with Workiva since our early days, building our finance and accounting teams and taking on more responsibility over the past several years. I look forward to continuing to scale Workiva with Jill on our executive management team.

In closing, I'm extremely pleased that we finished 2020 with strong revenue growth and record operating income and cash flow, while upgrading all of our customers to our new platform and continuing to provide innovative solutions.

With that, I will turn the call over to Stuart Miller.

I want to start by thanking all of my colleagues at Workiva, particularly Marty, the rest of the executive team and my team in accounting, finance and corporate development.

I believe Workiva is in great hands with Jill Klindt as CFO, having worked closely with her for many years. Working with the extraordinarily talented people at this great company for the last 7 years has been the highlight of my career.

Turning to our results. We saw broad-based demand for our solutions in Q4. As a result, we're raising guidance for 2021 revenue, which I will discuss later.

As always, 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.

I'll address our performance against Q4 guidance first. We beat Q4 2020 revenue guidance at the midpoint by $3.4 million. Higher subscription revenue accounted for all of the beat. We closed more deals early in the quarter, and we sold and delivered some capital markets deals within the quarter.

We beat guidance on Q4 operating income by more than $4.5 million. The revenue beat I just mentioned accounted for the majority of the swing. The remainder of the beat relative to guidance included lower travel and entertainment costs, reduced expenses from shifting marketing and internal events to a virtual format, higher PTO usage and decreased occupancy costs.

Turning to Q4 2020 results versus Q4 the year before. We generated total revenue in the fourth quarter of $93.8 million, an increase of 16.9% from Q4 2019.

Breaking out revenue by reporting line item. Subscription and support revenue was $81 million, up 22.4% from Q4 2019. New logos and new solutions helped drive strong revenue growth in Q4 2020. 56% of the increase in S&S revenue in Q4 came from new customers added in the last 12 months. Professional services revenue was $12.9 million in Q4 2020, down 8.9% from the same quarter last year.

A decline in XBRL services revenue outpaced growth in setup and consulting. In Q4 2019, we had posted a onetime increase of $2.5 million in XBRL services revenue due to a regulatory change.

Turning to our supplemental metrics. We finished Q4 with 3,723 customers, a net increase of 213 customers from Q4 2019 and a net increase of 140 customers from Q3 2020.

Our revenue retention rates remain strong. Our subscription and support revenue retention rate was 95% for the fourth quarter of 2020 compared to 94.7% for the same period last year.

With add-ons, our subscription and support revenue retention rate was 109.5% for the fourth quarter of 2020 compared to 113% in Q4 2019. The number of larger subscription contracts continues to increase.

In the fourth quarter of 2020, we counted 847 contracts valued at over $100,000 per year, up 30% from Q4 of the prior year. The number of contracts valued at over $150,000 totaled 419 customers in the fourth quarter, up 47% from Q4 2019 results.

Moving down to P&L. Gross profit totaled $71 million in Q4, up 22.2% from the same quarter a year ago. Consolidated gross margin was 75.6% in the latest quarter versus 72.3% in Q4 2019, a net expansion of 330 basis points.

Breaking out gross profit. Subscription and support gross profit totaled $68.1 million, equating to a gross margin of 84.2% on S&S revenue, an expansion of 160 basis points compared to Q4 2019 driven by lower server costs related to the transition to our new platform and lower travel costs. Professional services gross profit in the fourth quarter was $2.8 million, equating to a 22% gross margin.

Research and development expense in Q4 totaled $22.1 million, up 4% from Q4 2019 due to higher compensation, partially offset by lower T&E expenses and occupancy costs. R&D expense as a percentage of revenue improved to 23.5% in Q4 2020 from 26.4% in Q4 2019.

Sales and marketing expense for the quarter increased 12.8% from Q4 2019 to $35.1 million, driven by higher compensation, partially offset by lower T&E expenses.

General and administrative expenses totaled $8.6 million in Q4, down $1.7 million compared to Q4 2019 due to reduced T&E expense, lower compensation and decreased professional services fees. G&A expense as a percentage of revenue improved 370 basis points to 9.1%.

We posted an operating profit of $5.2 million in Q4 2020 compared to an operating loss of $4.6 million in Q4 2019.

Turning to our balance sheet and cash flow statement. At December 31, 2020, cash, cash equivalents and marketable securities totaled $530 million, an increase of $6.2 million compared to the balance at September 30, 2020. Net cash provided from operating activities in Q4 2020 totaled $13.4 million compared with cash provided of $2.1 million in the same quarter a year ago.

Remaining performance obligations on subscription contracts continue to vary from deferred revenue as we implement multiyear contracts with annual billing terms for some customers.

Turning to our guidance. We are factoring in the expected impact of COVID-19 pandemic on our business and results of operations based on information available to us today.

For the first quarter of 2021, we expect total revenue to range from $100 million to $101 million. We expect subscription revenue to grow at a faster rate than services revenue in Q1. We expect non-GAAP operating income to range from $4 million to $5 million.

For full year 2021, we are raising guidance for revenue. We now expect total revenue to range from $409 million to $411 million. We expect non-GAAP operating loss to range from $12 million to $10 million.

In the last 3 quarters of 2021, we are modeling higher travel costs and investment in growth opportunities. In 2021, we expect to post positive free cash flow for the fifth consecutive year.

We will now take your questions. Operator, we are ready to begin the Q&A session.

(Operator Instructions) And your first question comes from the line of Rob Oliver with Baird.

Stuart, congratulations on your retirement. And certainly, we'll miss working with you. I have 2 quick questions. One first for you, Marty. Just you talked about the 3 focus areas of growth for the business this year. Fit-for-purpose solutions, global expansion and partner -- e-partner ecosystem. I was wondering -- and you guys had laid those out, I thought, really nicely at the Analyst Day. And I was wondering if you could just provide a little bit of color on where we are with some of those key initiatives right now? And then I had just 1 follow-up for Stuart.

Sure. The -- I'll start sort of with the fit-for-purpose solutions and just say that we've had good results in the first solutions we've run through there, primarily FERC and GSR, global statutory reporting. The system that Julie put in place in terms of vetting, developing and preparing these before we go to market has been really rigorous and very good, and we have several in the pipeline for next year that we're excited about. We're not ready to talk about what they are until we're sure we're going to go, but we feel good about that.

Global expansion has been going well. The revenue growth is higher in both EMEA and APAC, and it's on a small denominator, obviously, as we referenced. But that's looking very good. And we almost have to do that because a lot of our customers are deploying us more broadly, and a lot of them are global companies. So they want representation and support in all those areas. So not only it's expanding our market, but it's better serving our biggest customers.

Partners, we're doing really well. That's really coming together. Partners are realizing that they can generate good income from themselves deploying our products and we've been going together jointly into the marketplace and doing really well. We're seeing that grow rapidly. It's a big part of what we want to do because we really want to get more involvement from our partners for delivering our product. We want to focus on being a software company not a services company. And so that's gone well.

We're really not ready to talk about metrics yet because that metric is so ill-defined. But most of what we do is go to customers together and then we contract directly with our customers.

So you had another question?

Yes. No, I appreciate. That's really great, Marty. And then, Stuart, just 1 for you, just on the guidance. I know you said it still factors in COVID-19. I think you also said from a cost perspective that it sounds like you guys are expecting some return to normalcy at least from cost outlays in the back half of the year. So just wondering how those 2 things match up. And if the -- what were some of the factors that you thought about when thinking about the revenue guidance for '19 -- for '21 in light of COVID-19?

Yes. So on the expense side, first, we're fairly optimistic about the ability to get shots in arms and the efficacy of the vaccine. And we also thought it was just prudent from a forecasting standpoint to assume that those costs were going to rise in -- due to increased travel in the back half of the year. Actually, it starts to ramp in our model starting in the second quarter.

And then on the revenue side, our optimism really is as it's always has been rooted in the pipeline and the maturity of that pipeline. And we run a fairly granular business, so -- and we've got many years of experience with it. So we're pretty confident in what we're seeing with the pipeline. And it's -- demand has been very broad-based.

Your next question comes from the line of Matt Stotler with William Blair.

Stuart, it's been a pleasure and congrats on retirement and best of luck going forward.

Thank you, Matt.

A couple of maybe product-specific questions here. So first, on ESEF, we'd just love to get an update on the traction you're seeing with that offering? How many customers you have using it today? And when you think about what that adoption could look like, what kind of penetration do you think is likely or reasonable when you look at that target 5,000-plus potential customer base over time?

Well, let me -- in terms of ESEF, it's tracking about where we thought it would be. It's behaving much like the early days for the SEC market. And we expect that we will get -- we will have success as time goes on. It's not a one-shot deal. And we are definitely closing business even in light of the delay that some of the countries have lately announced. And customers are taking it seriously. And we're seeing a good broad base all the way from very small companies to large companies looking at our solutions. So we're very optimistic.

Got it. That's helpful. And then just 1 on Wdata. So when we talk to your customers and partners, there seems to be a lot of interest in Wdata. But in a lot of cases, it's still typically pretty early stage. Customers evaluating their practical use case, value proposition, though there are some high attach areas like global stat reporting, you guys have talked about in the past.

Can you just give us more color on the overall interest or attach rate that you're seeing with this capability? And what you're doing to drive broader customer adoption here?

Yes. I think that, that question is really sort of locked in the fact that we're trying to move to more of a platform company. Obviously, our journey there takes us through selling solutions. But obviously, some of our customers have seen and understand the value of the platform.

Wdata has been more incorporated in the platform in late and is viewed as one of the key parts of it being able to connect and then prepare your data is vital to our platform. So as we move toward a platform sale, we're seeing it in a lot of the newer solutions that we're rolling out. And so Wdata is still a very important thing that we do, and we're seeing good attachment rates.

Julie, do you want to add anything?

No, Marty. I think you covered it there. It's now just a component of our end-to-end platform and part of our growth strategy rather than a single solution offering that will sell separately.

Your next question comes from the line of Terry Tillman with Truist Securities.

Congrats on the quarter. Stuart, we're going to miss you, congrats. You're going to miss our engaging questions, I'm sure, in these earnings calls.

Always.

Jill, welcome aboard and good luck with our questions. But I guess maybe my first question, and I don't know if this is for Marty or who it's for, but I'll just throw it out there.

The strength in the fourth quarter in terms of new logo activity, and I know like it can kind of move around each quarter, depending on just kind of the seasoning of the pipeline. But as we're looking at '21, we've got a couple of things going on. Your customers successfully replatformed these built-for-purpose or built-for-use solutions. Maybe there could be a quicker path of the next use case adoption in your installed base.

But I'm curious, this logo strength, should we expect kind of a similar kind of dynamic in '21, where it's stronger new logo activity? Or could it shift back to maybe where you're getting a lot more from your installed base because of the success with replatforming? And then I had a follow-up.

Sure. I'll just give a high-level question and see if Stuart wants to add anything. But what we've always said and which continues to hold true is roughly about half of our new sales each quarter come from new customers, new logos and about half comes from new solutions and existing customers. That ebbs and flows a little bit, but for the most part, it stays right in that range. And so we expect that to continue for the most part.

Stuart, do you want to add anything?

No. I think -- I mean, I think that covers it, Marty. Over the long run, it has been 50-50. We have no reason to believe it's going to be otherwise in the future.

Okay. Got it. And I know we're talking about global expansion. But if I come back kind of to the states and look at the federal opportunity, it was great to see the deal. I think it was the DOJ signature deal. We saw the value as a large deal. In the aftermath of that, maybe, Marty or team, what could you all say about the federal government and just public sector in general what you're seeing?

Well, just to back up a little bit, our plan in general for growth is to be broad-based in terms of geographies and solutions. And clearly, the state and local governments and the federal government between COVID and the election definitely took a hit. And so we see great opportunity there, and it's just starting to revive now based on the election being over and sort of every seeing the light at the end of the tunnel on COVID. So we're seeing that recover nicely.

But again, it's just part of our portfolio. And because we have a portfolio approach, we can always deal with 1 or 2 of our vectors being a little soft. So we're optimistic in the -- about the future for the federal, but you can imagine what it went through in terms of the COVID experience.

Your next question comes from the line of Stan Zlotsky with Morgan Stanley.

And Stuart, we're definitely going to miss you. Quick -- a couple of quick questions from our end, maybe just at a very high level. When you guys think about pricing for your products as you go into 2021 and beyond 2022, how do you feel about the balance of essentially the value that you are delivering to your customers from your products versus how much you're able to monetize those products across your customer base?

And I have a quick follow-up for Stuart before we let them go.

I'll just give a high level point of view on that in terms of pricing. I think that anytime you start a new solution in a market to get some market share and experience, you tend to start a little lower. And in the SEC, for instance, in that product base that we've sort of gotten those prices that match value. We also have a value team that looks at this, and we try to match that with value.

So I think in some of the solutions, we're quite mature, and I think that the value matches the price tag, and we're confident in that because of the customer set and the churn numbers.

In some of the newer markets, we'll see -- as we develop those markets, we'll rightsize it and probably move it up. But almost always, when you start in the new market, you start low.

Stuart, you want to add anything?

No. I think you covered it.

All right. And then 1 for Stuart. When you think about net revenue retention, I know you guys don't guide to it. But when you think about it for 2021, how do you -- what do you see happening to that net revenue retention rate as we go through the year?

Yes. So as you know, the components of that include price increases and add-on sales. And I expect -- we expect to see good contribution from add-on sales. We're really not planning to take price at all this year -- I mean, very little. So we're having good success selling volume. We'd rather sell more solutions to customers than take price.

So that's what I can say in terms of components of it. The pipeline would indicate that we're -- we've got good prospects when it comes to the add-on sales.

Got it. So just as people are kind of going through and trying to calibrate their models, is the current level of net revenue retention, is that what you're expecting to seek moving forward?

Well, as you indicated in your preamble, we've never -- we haven't guided to it. And so we don't want to break any news today on that front.

Your next question comes from the line of Tom Roderick with Stifel.

Stuart, I'll start with you. It's been a real pleasure working with you. So congratulations on your retirement. We're going to miss you over here on our end much more than I know you're going to miss us, but it's been great. So thank you.

Maybe I'll throw the first 1 back at you, Stuart. And Marty, Julie, please chime in. I know -- I think it was Matt earlier that asked the question just on Europe in general and ESEF. I was wondering if you could share some more statistics with us. I think, Marty, you might have said it was high single-digits international as a percentage of revenue. Do you have the exact number that Europe was either for the full year or where we're sort of finishing the year -- where we finished the year 2020 as a percentage of either revenues or new logos?

And I guess what I'm just trying to get behind it is, how quickly is that ARR or net new bookings kind of catching up to where the quota-carrying reps are? And then what does that look like for next year for Europe?

So Tom, the -- thank you for your comments. I greatly enjoyed working with you as well. So we filed the 10-K today, and there is a footnote in the -- to the financials that lays out Americas versus Rest of the World in terms of splitting out revenue. And so that is finally as we cut it, a majority of that non-Americas revenue comes from EMEA, although APAC is starting to contribute.

But certainly, in terms of 2020, substantial percentage of that $22.3 million that is subscription revenue and $4.5 million of professional services revenue is coming from EMEA. So it's Footnote 12 to the Page 90 of the 10-K.

Okay. Great. And then just maybe following up on that, Stuart, real quickly in terms of the question on headcount, and how quickly you're ramping that relative to where the opportunities are in Europe or international, if you want to cut it that way?

Yes. Marty, do you want to talk about that?

Sure. I mean the -- in terms of overall headcount, that's -- we put a lot of growth into EMEA in 2020 in terms of headcount and will continue this year as well. We think that's a big opportunity.

And in APAC, it's very early days still, and we will continue to add people there as well probably at a higher percentage even than EMEA, but it's off even a smaller denominator. But all the indications are good in terms of demand in both markets.

Great. And a quick follow-up one for me, Marty. This is a bit more thematic. But with everybody talking about ESG and how to monitor that and track it and measure it, it would certainly seem like your platform is sort of tailor-made for helping your customers take advantage of the reporting and connected reporting qualifications and needs around ESG. Can you talk about what your customers are asking for you from that matter? And how you think about that as an opportunity to monetize the platform?

Well, again, I -- the new solutions we're working on, I really don't want to comment on. We definitely see there's a market there, and you'll hear from us in the future.

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

Stuart and Jill, I'll echo my congratulations to you both as well. On the booking strength, I want to dig in a little bit more on the logo growth. Just 2 really strong quarters in a row. I think fourth quarter was the most -- any quarter in the past 6 or 7 years. I can appreciate the commentary of selling the platform more broadly, but has there been kind of any commonality you can speak to in terms of these ads? Any 2 to 3 solutions that are driving the most success or any geography in particular?

Stuart, you want to take that?

Yes. So -- I mean, it was really -- Alex, thank you for your comments, by the way. But it was very broad-based. And we saw strength with global stat, with energy, with capital markets, with ESEF, with SEC, with integrated risk. It was a very strong quarter overall.

I mean, I think we would direct you back to some of the macro trends that we're seeing, the shift to the cloud, the digital transformation, the office of the CFO, the realization that the hybrid work environment is here to stay and that customers need collaborative work platforms. So all that was heading in our direction.

Okay. And then, I guess, Stuart, a follow-up. In the prepared remarks, you mentioned new logos drove, I think, 56% of the revenue growth. I think that implies that those new customers are coming in at roughly 2x the company average. Is that right?

And then in terms of why the much bigger land, is that at all geography based? Is that just having the broader platform to sell now? Anything else you can tell us on that?

Yes. So the 56% is relative to incremental subscription revenue. And that number, it's been -- it averages -- it goes 50-50 over time. When we were implementing solution-based licensing, it got up to about 54% on existing customers and now it's 56% from new logos. And so that's just the percentage of revenue that's attributable to new logos in the past year. So I wouldn't -- really hasn't changed that much.

Your next question comes from the line of Andrew DeGasperi with Berenberg.

First congrats, Stuart and Jill as well. I had a question in terms of just the high level change in administration. Obviously, people are expecting how much more rigorous pace of regulations coming from there in the U.S. And I was just wondering if talking with your partners and clients, is there any sort of chatter or activity that reflects like either potential for more solutions that they need to adopt or anything like that?

Yes. I mean, we certainly are optimistic that the Biden administration is going to look at regulation, and the pendulum is going to go back the other way some. And so we are optimistic about that. I would say that the thing I'm more optimistic about is the adoption of XBRL. It's starting to hit a tipping point, ESEF and then FERC.

And I think XBRL is already being talked about for a number of different things, some of the solutions that we're going to look at in the future. It's being adopted across the global statutory reporting in some jurisdictions. So when XBRL hits a tipping point, it will be a meaningful thing for us.

And so I think the Biden administration in terms of the U.S. is definitely going to help us. But I think the fact that XBRL is becoming almost the go-to machine readable language now is what gives me the most optimism.

And then just had a question in terms of your go-to-market outside the U.S. I know you're planning to do this organically in EMEA. But I was just wondering if you consider doing something more in-depth with some of the larger ERP vendors when it comes to APAC. Something like, for example, BlackLine has done with SAP or something to that effect?

I don't anticipate us doing that. I mean the -- it's a double-edged sword, right? You have better access to markets, but you pay a heavy price for that in terms of go-forward S&S revenue. And you probably heard the rumored number for BlackLine.

But we want to address our market through our partners and our own direct channels and not to damage our TAM in any way. So I don't expect to see that unless it's a joint -- go-to-market jointly. But really, that's a tough thing to do, so probably not.

Your final question comes from the line of Mike Grondahl with Northland.

Stu, best of luck in your retirement, well deserved. Two quick questions. One, Stuart, is there anything to call out? You talked a little bit about the 4Q upside coming from the capital markets area. Any more you can add there or anything in the pipeline would be great. And then just maybe, for Marty, any thoughts on acquisitions going forward? Or if you've been spending any time there?

Go ahead.

Yes. So thanks, Mike. Enjoyed working with you as well. So capital markets is part of the story in Q4. But certainly, global stat and energy and ESEF, they were all big contributors. The capital market's piece was just relative to guidance because we generally have low expectations for that business or if we -- from a safety standpoint, it's better for us to assume very little from that business and some of it gets delivered within the quarter. And that's why it can be an upside surprise. We're just trying to avoid a downside surprise. So we don't assume much there.

And then on the M&A front, Marty, do you want to talk?

Sure. My answer will be the same as yours, Stuart. We continue to look. We think that there's opportunities in our future, but we're very careful. The last thing we're going to do is run out and do something that would cause us harm. We just see so much organic growth potential.

You want to comment, Stuart?

No, it's -- I mean, I think you covered it. I mean we've been looking more at small add-ons that can accelerate our existing strategy. We're not actively looking at anything that would be transformational.

And there are no further questions at this time.

Thanks, everybody.

Thank you, all.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.