Q2 2019 Earnings Call
At this time I'd like to welcome everyone to the Workiva Inc. second quarter 2019 earnings Conference call.
Oh, what some place on mute to prevent any background noise.
After the speakers remarks, there will be a question and answer session.
If you like to ask a question. Please press star one on your telephone keypad.
To withdraw your question press about key.
Thank you.
This afternoon, we'll begin with comments from our Chief Executive Officer, Marty Vanderploeg.
Followed by our Chief Financial Officer Stuart Miller.
And then we'll call turn the call over to questions also on the line today is Joe Quinn Chief Accounting Officer.
A replay of this call will be available until August 13 information to access. The replay is listed in today's press release, which is also available on our website under the Investor Relations section.
As a reminder, today's conference call is also being broadcast live via webcast.
Before we begin I'd like to remind everyone that during today's call, we'll be making forward looking statements regarding future events and financial performance.
Including guidance for third quarter and full fiscal year 2019.
These forward looking statements are subject to known and unknown risks and uncertainties.
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 CEO Marty Vanderploeg.
Thank you Adam and thanks to everyone for joining the Workiva second quarter 2019 conference call.
We are proud of our second quarter results, which exceeded guidance for revenue operating loss and loss per share Stuart will provide more details later in the call.
As we have discussed this past year, we improved operational efficiencies focused our growth strategy and invested in key growth opportunities.
Based on our success to date, we will continue to increase our investments in our AMEA expansion.
Global statutory reporting.
Integrated risk and W. data, which includes data prep eight p. eyes and connectors.
We are encouraged by our progress in the mail with our traditional solutions and we are seeing increased demand for our platform as the Isa mandate approaches for more than 5000 companies in the E U.
We plan to accelerate our investments and aggressively build out sales and support in AMEA throughout the remainder of 2019 and into 2020 to capture a significant part of this growing market.
We also plan to accelerate our investments in global statutory reporting.
Our initial go to market efforts have validated three important factors.
First a demand for our solutions in this marketplace.
Second our product fit.
And third the lack of significant competition.
All of which are contributing to early sales activity.
We also plan to continue to invest in expanding our solution set in the integrated risk market.
Part of this expansion is based on requests from our customers and prospects to go beyond Sox and audit to provide a broader integrated risk platform that supports general frameworks for internal controls a wide variety of audit types enterprise risk management and policies and procedures.
Every customer or prospect I speak with the space with the same problem how to reduce risk when reporting vast amounts of data from their systems of record such as ERP, HCM and CRM systems as well as specialized applications for financial consolidation reconciliation and planning.
To solve these universal problems, we continue to invest in W. data the build more npis and connectors to improve data integrations and automate downstream reports and analysis.
With W. data, our custom customers are able to seamlessly orchestrate data between many of their systems and applications, resulting an accurate and transparent data for connective reporting compliance.
As we continue to expand our platform into new markets and geographies. We are even more confident of the broader global demand for our platform.
We're keep as the only cloud platform for connected reporting and compliance with the scale and sophistication the enterprises and governments need and trust.
We continue to win awards for our amazing culture, which underpins our ability to attract and retain top talent.
On Monday Fast Company magazine named Workiva to its best workplaces for innovators list.
Which places us among some of the most successful companies in the world.
Other awards. This quarter include best workplaces for millennials by Fortune magazine, and the best places to work in IP by Computerworld magazine.
We look forward to spending time next month with our customers and prospects at amplify our annual user conference.
Which will feature more than 80 sessions on best practices and advanced ways to use our connected reporting platform.
As in past years, our user conference will also include an invitation only track for investors and analysts.
As I visit with customers and prospects I'm, even more confident that we're capable will continue to be a driving force in data transparency and trusted connected reporting throughout the world.
With that let me turn it over to Stuart Miller, our CFO .
Thank you Marty.
So we're pleased with the.
Acceleration of revenue growth.
Over the past few quarters.
And we are raising guidance on revenue growth for the rest of 2019.
We want investors to understand that converting our customers to solution based licensing.
Or SPL.
Has contributed to both our revenue growth rate and revenue retention with add ons.
As we complete conversion of customers to the SBL model. Later this year. This source of revenue growth will end and create more challenging comparisons in 2020.
To meet this challenge we've been investing in four vectors to drive revenue growth in 2020, as Marty said, the four major growth sectors, our AMEA global statutory reporting integrated risk and W. data.
The progress we are making on these growth opportunities is encouraging.
Also our guidance on operating loss for the rest of 2019 reflects our investments in these areas.
Now turning to our second quarter results and financial outlook for the rest of 2019.
As always I will talk about our results and guidance before stock based compensation were on a non-GAAP basis.
Please refer to our press release for a reconciliation of our non-GAAP and GAAP results and guidance.
We outperformed our revenue guidance for the quarter, we generated total revenue.
In the second quarter of nearly 73, and a half million dollars an increase of 24.3% from Q2 2018.
Breaking out revenue by reporting line item.
Subscription and support revenue was $60.5 million up 23.8% from Q2 2018.
Dipping deepening our penetration of existing customers with both add on solutions and conversion to solution based licensing helped to accelerate growth of subscription revenue in Q2 2019.
Professional services revenue was $13 million in Q2, an increase of 26.4% from the same quarter last year.
Growth in revenue from XBRL professional services overcame a decrease in revenue from other services.
Gross that XBRL services in Q2 was seasonal and related to regulatory changes.
We expect revenue from professional services to return to low single digit growth in the second half of 2019.
Turning to our supplemental metrics. We finished Q2 with 3421 customers a net increase of 119 customers from Q2, 2018, and a net increase of 55 customers from Q1 2019.
Our retention rates continue to show strength, our subscription and support revenue retention rate was 95.4% for the second quarter of 2019.
Compared to 95.6% for the same period last year.
With add ons, our subscription and support revenue retention rate improved to 114.5% for the second quarter of 2019 compared to 106.9% at June 2018.
Our progress with larger subscription contracts is encouraging.
The number of contracts valued at over $100000 per year totaled 558 in the second quarter of 2019 up 52% from Q2 last year.
For annual contract value of $150000, plus we had 238 customers in the second quarter up 48% from Q2 2018 results.
Moving down the PML.
Gross profit was $53.6 million in Q2.
Up 24.1% from the same quarter, a year ago and in line with revenue growth.
Consolidated gross margin was 73% in the latest quarter.
Breaking out gross profit.
Subscription and support gross profit was $50.7 million equating to a gross margin of 83.8% on SNS revenue.
And improvement of a 100 basis points from Q2 2018.
Due to a higher utilization rate and better pricing.
Professional services gross profit in the second quarter was $3 million equating to a 22.8% gross margin.
Down $200000 from the same period last year due to investments in additional talent.
To enhance services address new markets and help transition customers to our next generation platform.
Looking forward to Q3, we expect these investments together with seasonally lower demand for XBRL services.
To result in lower revenue and a negative gross margin on professional services for the quarter.
Research and development expense in Q2 was $19.9 million up 3.8% from Q2 last year due to higher compensation.
R&D expense as a percentage of revenue improved 540 basis points this quarter to 27.1%.
Compared to Q2 last year.
Sales and marketing expense for the quarter increased 25.8% from Q2 last year.
To $26.2 million in line with revenue growth.
General and administrative expenses totaled $7.4 million in Q2.
Down $1.2 million compared to Q2 2018.
DNA expenses as a percentage of revenue improved over four percentage points to 9.7% due primarily to a reduction of compensation expenses.
Operating income was $86000 in Q2 2019 compared to an operating loss of $5.4 million in Q2, 2018, Workiva as operating margin improved 930 basis points in the latest quarter compared to Q2 last year.
Turning to our balance sheet cash flow statement.
At June 32019.
Cash cash equivalents and marketable securities totaled $137.6 million, an increase of $23.2 million compared with the balance at March 31 2019.
In Q2, 2019, net cash provided from operating activities totaled $18.8 million compared with cash used of $2.5 million in the same quarter a year ago.
Relative to the same quarter last year.
Higher profit margins.
Growth in deferred revenue and improved working capital management, all contributed to record operating cash flow.
Remaining performance obligations continue to defer from deferred revenue as we implement multi year contracts with annual billing terms.
Turning to our guidance.
So we beat our guidance on total revenue in Q2 by four and a half million dollars at the midpoint.
Half of the beat came from services revenue.
As we stated on previous calls our services revenue is lumpy quarter to quarter and seasonally higher in the first half.
We expect revenue from services to return to low single digit growth in the second half.
Specifically for the third quarter of 2019.
We expect total revenue to range from 72 to 72 and a half million dollars. The sequential decline in total revenue in Q3 is due entirely to an expected reduction in professional services revenue, we expect subscription revenue to grow sequentially.
At the midpoint, we are guiding to a growth rate of 18.7% for total revenue in Q3 compared to Q3 last year.
We expect non-GAAP operating loss to range from seven and a half day $8 million, reflecting investment in the growth vectors. We mentioned in addition, our spend on marketing reaches a seasonal high point with our user conference in September .
For full year 2019.
We are raising guidance for total revenue to a range of $290 million to $291 million.
At the midpoint of this updated guidance revenue growth for the year is 18.9%.
We expect the growth rate of subscription revenue to outpace the growth rate of services revenue in the second half and for all of 2019.
We expect non-GAAP operating loss to range from $12 million to $14 million modestly improved from our previous guidance.
No we've never given specific guidance on operating cash flow previously, but we want to do so this one time because.
Jeff with was high in Q2 due in part to favorable changes in working capital. We don't expect change in working capital to help materially in Q3.
So for the full year 2019, we expect cash flow from operations to total approximately $32 million.
So now we're ready to take your questions. Operator, please begin the Q and a session.
Certainly as a reminder, if you'd like to ask a question. Please press Star then one on your telephone keypad, we'll pause for just a moment to compile the QD roster.
Your first question comes from Eric Lemus with Suntrust Robinson Your line is open.
Hi, Eric Hey, Hey, guys nice job on the quarter and thanks for taking the question.
Yes, I wouldn't do that some of the notes and the 10-Q and it looks like you changed your expectations for when you want that transition to solution based pricing from mid 2020 to now the end of the year of 2019. So can you just give a little bit of color on why you decided to make that target change.
For this year and I guess, what what do you see as far as the overall uplift.
With that change in terms of guidance.
Yes, so we.
We've made really good progress on that on in the first and second quarter, it sort of accelerated into the second quarter, because frankly customers see so much value from it.
And so.
Certainly a majority of our customer relationships are now on SPL. So that's why we we changed our outlook on it.
In terms of an uplift I think on the last call. Marty May have said it was sort of 20% to 30% it depends on.
Where the customer was starting because we try to keep an equalization.
By solution with customers and some started from different points.
One other thing sorry, Eric if I could just interrupt one other thing on your.
Before we get back to you is.
I apparently misspoke on the the.
Script here and I misread it we actually the number of new customer adds was a 199 199, I misspoke give a different number.
Thank you.
Okay.
I just wanted to add one thing to your question and that is.
Keep in mind that the.
As Ive always talked about the solution based licensing is really a strategic thing because.
It will continue to help us not only because our Mds is higher.
And we compete with companies who.
In certain niches offer similar types of licensing.
But.
Also it allows us to go out and sell more solutions and get the value for a lower number c.. So it's kind of a long term.
Impact I really like us.
Like everyone to realize its a strategic thing that we've done.
Yep understood. Okay, and then just recently in a press release out about one cloud on OEM OEM agreement with Workiva and receiving some investment can you guys. Just go into a little bit of detail on what your expectations are with that partnership.
Sure when I talked about.
Our connectors and Apiay eyes, and the data prep tool.
That has been a.
Really.
Good thing for us and I'll explain what I mean by that but first off every deal that we.
Have w. data included in not only do the customers see a lot more value the deal sizes substantially higher.
And so our goal is to connect with this many systems as possible.
The more systems were connected to.
The more value to customers get and we we found that this company was really good to connecting with the number of traditionally hard systems to connect to and so.
We're embedding some of their technology in.
Our platform to interface with some of the more popular consolidations systems and ERP systems, and it's really accelerated our ability to connect to those systems very efficiently and easy for the end user.
Okay, great. Thank you.
Thank you Sir.
Your next question comes from Tom Roderick with Stifel. Your line is open.
Hi, guys. Thanks, Matt Vanvliet on for Tom Appreciate you, taking my questions I guess touching on that the last point about W. data, helping drive deal sizes larger wonder if you could give us some color in terms of how that acceleration on large deals has has been formulating throughout this year.
Are you getting more for some of the newer solution based pricing or are you seeing customers buying more and more modules now or more and more use cases than you were just a couple of years ago.
Well, it's a multi tiered effect first off.
Just going to solution based licensing is increase the value it for us given solution. So therefore, we charge more so that's been a factor for sure.
When we include the up.
W. data, obviously, that's a line item and we see more and more customers seeing that as a large part of the value on you know on our platform.
That increases deal size and then I think the most important than last point is is that.
We're really maturing starting to mature as a platform company.
And we're definitely seeing this in Europe , we go in selling a platform right off the bat instead of selling a single solution. So we go in and say this platform you can use to do all these different things that you have to report on.
And then we you know at that point, we get an initial deal size that's much higher just when we bring on a new logo. So.
Learning not only getting the technology up to snuff to be a platform, but also learning how to sell and and described the value of a platform.
We're really starting to mature and we're getting good at communicating that.
And then as you look at the opportunity in Europe in particular.
Where where are you in terms of being fully sort of ready and having those sales conversations with with customers as the regulation comes down.
In the next year, plus and how confident or I guess, where where's the security that that that will in fact sort of hit the market on time as these things tend to be delayed at times or in what we saw with.
Limited side of things are being delayed a full year.
You know I guess, how are you approaching that situation how some of the early deal flow in the pipeline.
Well first off every indication is we don't expect that to be delayed they've already put the taxonomy out and in fact, when the taxonomy. The extra rail taxonomy came out we all of a sudden became real to all those companies in the European Union and that's when the interest level ticked up dramatically.
Just in terms of our scaling I think we're on schedule. The way we wanted that we wanted to be fully ready to take the load both from a sales point of view and a and a.
You know providing support and so you know we have a ramp pretty well designed for the next a year and a half to be ready and 20.
21, and so I think we're doing well there we've had really good luck hiring salespeople I've been very happy with that and we you know so I think we're doing very well on a.
You know hitting the timing mark but the last thing I would just say is that.
It's interesting to us that we see a very similar pattern on how companies are responding the larger companies are taking it very seriously you see a mixture in the mid tier and then you see on the lower end you know they arent as focused on it yet so I think we'll see a very similar process to how the FCC rolled out in the states several years ago.
Great. Thank you.
Your next question comes from Bob Rob Hello for with Baird. Your line is open.
Thanks, guys its Matt Lemenager on for Rob I had one on the four growth vectors, Marty or it sounds like so we had solution based licensing going to kind of roll through in 2019, and then in 2020. We have these four growth factors would there be any way you could kind of rank those growth factors in terms of the timeline and like we are any going to to hit sooner than the others and just kind of if you could stack rank those in terms of the potential impact and when they could have impact.
I, that's that's a really.
Tough question for me to answer frankly, I, we're seeing.
Uh huh.
Really.
Good.
You know reception from the market place for all four of the growth vectors.
No when we lay these out I was hopeful that two or three would hit and all of them. So far have shown really.
Good legs in the marketplace. So we're very very pleased with the vectors we chose.
Obviously, we've been talking about increased investment because we think all four of them.
Have a lot of juice and so we plan to invest in all of them and I really can't.
You know sort of stack rank. It I would say that you know AMEA is just the the most obvious there we're still single digit revenue there. It's almost the same size of GDP is as the U.S. the whole you.
And.
We've barely scratched the surface in terms of number of logos there so.
That that's a sort of a slam dunk from my point of view and the other three when we actually sit down and figure out.
Revenue potential and all those things all are really substantial for us and we've seen great.
Initial early days, but great initial reception on all of them.
Okay, No I can appreciate that and.
Yes, I was going to ask on the sales cycles in EMEA and I realize it's early days, we're limited in what we've sold so far but comparing that to the sales cycles in the U.S. back when it was ramping with FCC as you go in selling more of a platform do you expect it to be any difference in the sales cycles in EMEA. This time around comparing it to kind of the.
The early days of U.S. FCC.
Well, it's interesting you asked that we've you know the I think the European the larger companies in Europe .
Watched what happened in the U.S. quite and have studied that and so the larger companies are approaching us already and we're doing deals that are platform deals.
Now those are six figure deals and they take they do have a longer sales cycle, just because they're they're bigger deals and theres more approvals and things like that.
We expect that the those deals will be slower, but bigger I also think there will be a significant part of the market. That's transactional that will be much similar to what we did in the FCC because you know remember the FCC days, we've been very few six figure deals in our first three or four years, So I think that.
We're going to see in the Midmarket lower mid market and the smaller company I think you're going to see a very transactional market that's going to be just like the FCC animal will go very fast in many instances. So it's really a bifurcated market and I think we have a good handle on how to approach both ends of that market.
Got it thanks for taking my questions guys.
Thank you Matt.
Your next question comes from Alex Sklar with Raymond James Your line is open.
Thanks, sticking with a solutions based licensing and then increase investments around kind of activity can you just talk about how user growth is trended for the companies that have moved over to the SPL plan in terms of what kind of usage are you getting or number of users per per enterprise.
Oh, that's a stupid question. Thank you, yes, it's really ramping I mean, a number of users is growing up.
I don't want to say exponentially, but the slope of the curve is increasing quite dramatically in terms of end users.
Which is exactly what we want we want the value of the platform to be visible to as many.
Users in these organizations as possible that creates stickiness and then drives demand for other solutions were already starting to see the early days of that too so.
As I've talked about SBL being so strategic.
Yeah, we're definitely seeing that a number of users.
Are you are you able to track in terms of maybe amount of work papers that are that are kept in your in your system versus the outside systems of record in terms of.
Proof case of all of them as well.
Oh, yes, we.
We do keep track of you know.
How many links customers doing all types of things that too obviously monitor usage and customer health. That's the reason, we monitor those things and.
And but we have we also monitor not we also have to be very careful to say, how we model why we monitor those as solely for customer health and making sure that customers are using the platform to the best that they can if they don't we approached them and help them use it better.
We have global numbers, we watch.
Of.
How many.
Types of different documents or create and things like that and and we've seen that scale as well I'm not as dramatic as users I think the first cycle as seen more users being brought into each process as opposed to more processes being launched but also more processes are also being put on the platform as well. So so we monitor that and the global sense.
Got it and then you mentioned that I expect our L. mandate helped boost professional services revenue in the quarter did did that have any impact on local growth as well or were those customers already with you.
Most of those were vast majority of those are already customers.
All right great. Thank you.
Your next question comes from Mike Grondahl with Northland Capital. Your line is open.
Thanks.
Michael on for Mike Thanks for taking my question.
Maybe just a.
You talked about Europe , and EMEA, but on a longer term opportunity payback.
Yeah, we were when we did when we started the may up we sort of put up a smaller team out there and build some logos built some references learn the market learn the different applications for a platform like this and.
And got a number of logos. So we knew it and then and then decided that really ramp when when the time was right.
I would say we are going to do a very similar thing in APAC. We have a small team there that started we're starting to see some early sales were figuring out the market and when the time is right, we'll we'll accelerate there as well.
Obviously, you know for me its a measured investment.
We're very measured in our investments we want to see returns after we invest and so when we think the time is right to invest we'll certainly tell everybody, but we are we are sticking it out and seeing what's there and so far it looks like there's a good opportunity for us.
Okay. Thanks, and then maybe just on.
It seems like growth is pretty broad based.
But maybe is there any specific channel partners to call out.
Well I would say that you know that.
The consultancy firms are some of the larger ones are definitely starting to show.
Interest and starting to push up.
Bookings for us.
As I've talked about we didn't really talk about it much on this call we sort of want to wait another quarter or two and we have more more solid results to talk about but.
Partners are going to be a huge part of our strategy moving forward.
Ah both in North America and in Europe .
And we're seeing good success with some of the larger.
A consultancy firm. So you know household names that we'll talk about later, but it's certainly we're in double digits now in terms of bookings that are assisted by partners.
As a percentage.
Helpful.
Your next question comes from Stan Zlotsky with Morgan Stanley . Your line is open.
Hey, guys.
Good afternoon, and thank you so much for taking my questions.
Maybe just a high level question you should <unk> should investors started thinking about workiva as hey. This is a company that is now going to be a sustainable 20% grower on a going forward basis, because I mean I I appreciate the guidance that you put out for this quarter and you mean for the for this year, but just you know as we look at 20 2021.
With with so many.
Exciting initiatives coming on board.
Yeah, and then the four growth factors as well as the regulatory environment being so supportive in EMEA.
Yeah is that is that the right way to for investors to kind of start thinking about workiva.
Hey, Stan.
So I think you can infer from our guidance that we expect kind of 20% plus growth in subscription revenue in Q3, and Q4 and then thereafter, it's yeah, it's really too early to forecast.
But you know high Tech high teens subscription revenue growth should be reasonable, we aspire to do better than high teens subscription gross which is why we are investing in these four vectors and we'll we'll keep you updated as appropriate.
I would like to just add one comment to that and that is that it's really interesting. If you look at all the different markets out there. There is a lot of people in the ERP space. The huge you know all the different system of records and then in the business intelligence. There is that Theres a lot of of both SaaS companies very very good polished.
Companies and when you look at the space we're in.
We're very much alone right now and that's partially because we're making a market.
So there's good and bad with that but we're definitely seeing a large opportunity without a lot of competition right. Now now you know competition could come.
We also believe in measured investment, we're not going to you know plunge into something and spend a lot of money and some SaaS companies have had success doing that having very large negative margins, but we're going to take it at a very measured approach just because we feel that the most prudent thing to do and we do see that opportunity based on you know some of the things you said stand that is certainly there and.
It's a much larger market than than the size of our company I will tell you that.
For sure.
And then just just following up on the prior question around the APEC opportunity are there any specific regulatory initiatives that we need to give me a kind of side track.
Sort of in line with what we've been seeing in EMEA.
You know it's interesting the.
But there are you know around.
Theres over 100, EXPAREL mandates around the world now and we're seeing those exponentially increase.
We're seeing those and a lot of Asia companies coming on and so were monitoring that very carefully.
I think expert all is going to become.
Widespread over the next five years and that puts us in just the excellent position. So were monitoring that theres not one that stands out theres a bunch were looking at.
And so you know and then by the time, we get to eight pack. It will be a platform sale will go to large companies sell a platform that can address a number of different regulatory needs.
And is well integrated with all of their systems of record and take out the manual word excel process Theyre all using now on so.
It's not any one that's going to you know.
Get us to where we're consistently a six figure deal maker, it's going to be you know.
US selling a platform that addresses their needs for a number of different regulatory things and then and then we are going to continue to add more and more so that's that's sort of how that's going to happen and I think all of the new markets and we're we have a team that does nothing but pay attention to those regulatory changes and whats happening and in terms of moving to expert all that just positions us and in an ideal location.
Okay, perfect if I could just sneak in one very quick.
Detailed question.
The very strong metrics on customers with greater than 100, K. and 150 K.
But we noticed for customers and less than 100, k. that for second sequential quarter declined.
Is that just a function of essentially customers, graduating up to those higher tiers, along with just maybe some just some natural attrition down at the low end.
That's it for me thank you.
Yes, so I think that we're definitely seeing customers buying new solutions and converting to SPL, which is pushing them.
Up into the higher categories.
But I would say we've also seen on the new logo side, we had a 55 net new logos in the quarter that the size of new logos is that those initial deals are going up too and not just the high end, but at the middle market level, So were cheered by that particularly as long as the.
We see growth across the board I wouldn't read too much into that metric that you quoted I think it's some of it's an artifact I mean, when when Europe really comes on line you know that that could totally swing back the other way, it's just hard to predict.
But we don't like the other way in terms of the number of new logos, yes number of new logos, but I mean, we don't manage the business that way I mean, we're managing it for the highest return we're going to sell wherever the highest return is any given quarter and that means you are the least amount of friction to to to to get more bookings. So we'll see how that goes but I don't think its a real relevant indicator.
Got it perfect all right. Thank you guys.
Yeah.
There are no further questions. This concludes today's conference call you may now disconnect.