Workiva Inc Q3 FY2020 Earnings Call

Good afternoon, ladies and gentlemen. My name is Angela, and I will be your host operator on this call. After the prepared comments, we will conduct a question-and-answer session. Instructions will be provided at the time. Please note that this call is being recorded on November 4, 2020, at 5 o’clock p.m. Eastern. I’d now like to turn the meeting over to your host for today’s call, Adam Terese, Director of Corporate Development and Investor Relations of Workiva.

Good afternoon. And thank you for joining us for Workiva’s third quarter 2020 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, Stuart Miller. We will then open the call up for a live Q&A session. Jill Klindt, our Chief Accounting Officer is on the call. A replay of this webcast will be available until November 11th. 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’ll be making forward-looking statements regarding future events and financial performance, including guidance for the fourth quarter and full fiscal year 2020. These forward-looking statements are subject to known and unknown risks and uncertainties. Workiva cautions that these statements are not guarantees of future performance. All forward-looking statements made today reflect our current expectations only and we undertake no obligation to update any statement to reflect the events that occur after this call. Please refer to the company’s annual report on Form 10-K and 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, everyone, and thank you for joining today’s call. We made great progress in our third quarter. The global trends of online collaboration and remote work continued to benefit Workiva. Customers use our cloud platform to simplify their complex work by connecting data and teams, and by automating and streamlining processes. Financially, we exceeded guidance for revenue and operating income. We delivered more than 20% growth in subscription revenue and generated record bookings. In particular, we saw strong bookings in global statutory reporting, management reporting and capital markets. As a result, we are raising guidance for the fourth quarter. Stuart will provide details later in the call. In Q3, we continued to upgrade customers through our next-generation platform. Customers accounting for over 90% of our annual contract value are now utilizing our new platform. The next-generation Workiva platform is a key enabler for our growth strategy. Our new platform is more open, intuitive, and scalable. We can now more quickly build and deliver new fit-for-purpose solutions that solve specific business problems. We believe delivering new platform extending solutions will continue to drive our success. Our virtual marketing events continue to produce positive results in terms of record attendance, global reach, and targeted sales leads. In September, 6,000 customers, prospects, and partners from over 60 countries participated in Amplify, our annual user conference. Our virtual sessions focused on solving universal challenges around data, workflow, and complex reporting, and last month 76 key technology and advisory partners joined us for our Annual Partner Summit. Our summit addressed how partners can better leverage our platform with their deep domain expertise to develop high-value solutions. We expect our partners to drive an increasingly higher percentage of our future revenue growth. I would like to take this opportunity to thank our employees for supporting our customers and upholding our values-based culture, even in the face of a challenging 2020 that delivered our next-gen platform, upgraded our customers, and generated strong sales growth. In closing, we remain confident in our ability to capitalize on our new platform, as enterprises continue to move to the cloud. With that, I will turn the call over to Stuart Miller.

Thank you, Marty. As mentioned on our last call, we began to see a more predictable cadence to closing deals at the end of the second quarter, suggesting that our customers and prospects were settling into a new normal. That pace accelerated in the third quarter across a broad range of our solutions, particularly global statutory reporting, management reporting, and capital markets. Both transaction volume and average deal size came in above our expectations in the third quarter, doing so with almost no help from price optimization. As a result, we are raising guidance for Q4, which I will discuss later. Before covering our Q3 financials, I want to provide an update on a regulatory matter. On October 21st, the European Union granted its member states the option to delay compliance with the ESEF mandate for one year to help companies free up resources for more urgent pandemic-related matters. We expect all EU member states to exercise the option. The one-year delay has had no material impact on our outlook for EMEA. Turning now to our financials. 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 Q3 guidance first. We beat Q3 2020 revenue guidance at the midpoint by $3.5 million. Higher subscription revenue accounted for most of the beat. We succeeded in collecting a high percentage of the receivables that we had held in reserve at the end of Q2. The pandemic had less of an impact on selections than we had anticipated in June. In addition, we closed more deals early in the quarter and we sold and delivered some capital markets deals within the quarter. We beat guidance on Q3 operating income by more than $9 million. The revenue beat I just mentioned accounted for just over a third 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, recovery of bad debt expense, higher PTO usage, and decreased occupancy costs. Now turning to a comparison of Q3 2020 to Q3 last year. We generated total revenue in the third quarter of $88.1 million, an increase of 18.8% from Q3 2019. Breaking out revenue by reporting line item, subscription and support revenue was $75.9 million, up 20.4% from Q3 2019. New logos and new solutions help drive strong revenue growth in Q3. 51% of the increase in subscription and support revenue in Q3 came from new customers added in the last 12 months. The balance of the increase came from companies who have been our customers for more than a year. Professional services revenue was $12.2 million in Q3 2020, an increase of 9.8% from the same quarter last year. Setup and consulting accounted for the gross. Turning to our supplemental metrics. We finished Q3 with 3,583 customers, a net increase of 129 customers from Q3 2019 and a net increase of 71 customers from Q2 2020. New customers subscribing to an ESEF solution accounted for 20% of the gross number of new logos in the quarter. Our revenue retention rates remain strong. Our subscription and support revenue retention rate was 94.9% in the third quarter of 2020, compared to 94.5 for the same period last year. Consistent with our experience over the long term, almost half of the attrition in the quarter came from M&A, delistings, and bankruptcies. With add-ons, our subscription and support revenue retention rate was 110% for the third quarter of 2020, compared to 112.8% in Q3 2019 and 107.9% in Q2 2020. The number of larger subscription contracts continues to increase. In the third quarter of 2020, we counted 785 contracts valued at over $100,000 per year, up 28% from Q3 the prior year. The number of contracts valued at over $150,000 total 383 customers in the third quarter, up 47% from Q3 2019 results. Moving down the P&L. Gross profit totaled $66.9 million in Q3, up 25.6% in the same quarter a year ago. Consolidated gross margin was 75.9% in the latest quarter versus 71.8% in Q3 2019, a net expansion of 410 basis points. Breaking out gross profit, subscription and support gross profit totaled $64.3 million, equating to a gross margin of 84.7% on subscription and support revenue and expansion of 140 basis points compared to Q3 2019. Professional services gross profit in the third quarter was $2.6 million, equating to a 21.6% gross margin, compared to 7% in Q3 2019. Research and development expense in Q3 totaled $21.8 million, up by 0.6% from Q3 2019. R&D expense as a percentage of revenue improved to 24.7% in Q3 2020 and 27.8% in Q3 2019. Sales and marketing expense for the quarter increased 6.5% from Q3 2019 to $32.8 million. Savings on T&E and a shift to virtual marketing events partially offset higher expenses from headcount growth in our sales team. General and administrative expenses totaled $8.7 million in Q3, up $600,000 compared to Q3 2019. G&A expenses as a percentage of revenue improved 110 basis points to 9.8%. We posted an operating profit of $3.6 million in Q3 2020, compared to an operating loss of $6.3 million in Q3 2019. Turning to our balance sheet and cash flow statement. At September 30, 2020, cash, cash equivalents, and marketable securities totaled $524 million, an increase of $15.3 million compared to the balance at June 30, 2020. Net cash provided from operating activities in Q3 2020 totaled $7.8 million, compared with cash provided of $4.7 million in the same quarter a year ago. At September 30, 2020, we classified $5.2 million of receivables to a credit reserve account, up from $4 million of receivables at September 30, 2019. This reserve account reduced deferred revenue by an equal amount, and therefore, it reduced billings at the end of the quarter. 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 the COVID-19 pandemic on our business and results of operations based on information available to us today. For the fourth quarter of 2020, we expect total revenue to range from $90.2 million to $90.7 million. We expect subscription revenue to grow at a faster rate than services revenue in Q4. As a reminder in Q4 2019, we posted a one-time increase of $2.5 million in professional services revenue due to a regulatory change. We expect non-GAAP operating income to range from $500,000 to $1 million in Q4. For the full year 2020, we expect total revenue to range from $348 million to $348.5 million. We expect non-GAAP operating income to range from $3 million to $3.5 million. Turning to 2021, we expect total revenue to exceed $401 million in 2021. We expect the growth rate of subscription and support revenue to continue to outpace the growth rates of professional services revenue. We expect non-GAAP operating loss as a percentage of revenue to be a low single-digit in 2021. We plan to offer detailed guidance on our outlook for 2021 on our next call.

Hey. Good afternoon, gentlemen. Can you hear me okay?

Yeah.

Yeah. Terry, we can.

Congratulations on the positive trends. It's great to see some of these key performance indicators in the billings and remaining performance obligations. My first question relates to global statutory reporting, management reporting, and capital markets activity. Could you rank these in terms of any notable differences in deal sizes for those use cases? Additionally, how prominently are these items included in your guidance for next year? Are there any other significant updates expected next year beyond these three areas you've mentioned? I have a follow-up after that.

Go ahead, Stuart.

So, Terry, I would say global statutory reporting and most of the deals are significant, some in the middle to high six figures for sure. Management reporting varies widely based on the use case and the customer's size, while capital markets typically sees lower deal sizes, often in the low six figures. We received strong contributions from integrated risk and several other use cases, and we expect this trend to continue into next year. We highlight these areas specifically because they exceeded our expectations for the quarter.

Okay. And just takes that third, I guess, the follow up question. I don’t know if this is for you Marty, but seeing the big federal sector deal this past quarter. I’d like to hear more in terms of how that kind of came about, what factored into the decision to go with you guys there and how the federal sector and public sector is looking in general, and thank you.

I would say that what has really changed for us is that we spent four years re-architecting our platform. We now have a true platform, and when we engage with entities like the Department of Justice, we discuss all the various uses of the platform, such as financial reporting and internal controls, among other functions. They essentially see it as acquiring a platform for multiple purposes. Currently, the majority of government agencies we encounter are still utilizing Word and Excel, making our solution a natural fit. While everything is currently locked up, the outlook appears positive, although it is quite unpredictable. Typically, we experience a spike at the end of September every year. Nevertheless, we remain very optimistic about it.

Thank you for taking my question. I wanted to ask about the delay with ESEF compliance that you mentioned, which is about a year, but at the same time, we saw 20% of new logos from customers adopting an ESEF solution. Considering this, how do you think it affects pipeline build or deal close rates in that region in the coming quarters? I'm trying to understand if this could actually help by prompting more conversations or how you would describe the impact. Thank you.

You know, Stuart. This is Marty. Stuart mentioned that this delay doesn’t affect our outlook for EMEA next year. What we’re observing is that companies recognize they still need to proceed with this. The ESEF compliance has been pushed back by a year due to COVID, which is part of the narrative. They understand the necessity of moving forward, and they are already engaged in the due diligence process to learn what is required of them. We have continued to close ESEF deals even after the announcement, so we don’t see this altering our trajectory. In fact, the competitors we face are mainly small companies that are relatively new to this business, and if there is any negative impact, it would likely affect them more than us. Additionally, we will have the opportunity for more discussions, making the process less rushed. Overall, this situation is likely neutral and could potentially have a positive effect.

Okay. Great. Thank you. And maybe just a quick follow up on the billings number, obviously, super impressive in the quarter and there’s a big build up and deferral that we saw on the balance sheet. So was there anything abnormal there in terms of pull-forward or anything like that or was it just really healthy execution, in terms of closing a business?

It was a record quarter for bookings, and it was strong throughout the quarter. There was really nothing unusual going on, just excellent execution.

Perfect. Thank you so much, guys, and congratulations on a very strong quarter. So maybe just following up on Chris’s question, the strength of the quarter and I think it really surprised a lot of people to the upside is mainly manifesting in billings. And you mentioned that you had a lot of deals closing in the beginning of the quarter. Was there some essentially maybe pent-up demand from the Q1 and Q2 delays that ended up closing early in Q3 and driving some of the deferred revenue build?

Stuart, go ahead.

Yes, Stan, we believe there was some pent-up demand. However, we were encouraged by the fact that we have maintained a substantial pipeline throughout the year, which continues to grow as we approach the fourth quarter. This is the reason for our optimism.

Okay. Perfect. And maybe a quick follow up. We all saw the very strong capital markets activity, with many IPOs being launched in the summer and early fall. Can you help us understand how much of that, if at all, contributed to Q3 and what your outlook is for the rest of this year? Additionally, how are you approaching that activity as we move into 2021?

Sure. It's fair to say that companies going public are increasingly recognizing the value of our platform, partly because they are working remotely and trying to execute deals from a distance. Additionally, some of the more progressive law firms are adopting this approach, which is a positive development. We had a robust IPO market in Q3, and we will see what effect, if any, the election has on Q4. While the percentage was significant, in terms of dollar contribution from deals sold and delivered in the quarter, it was not a large amount.

Got it. Thank you much guys.

Less than a $1 million. Thank you.

I will just add to that, all of our solutions saw increased strength. I mean, we this is across the board execution, I would say, so it was anyone one anomaly.

Hi, gentlemen. Thank you for taking my questions. Great to hear from you. I love to go back to Chris’ question earlier just around Europe and appreciating the 20%, instead of the new logos are coming from the ESEF related. Can we just take a step back in Europe and I don’t know if this is a better question for you or for Marty, but I’d love to just hear a little bit more a holistic discussion of what’s going on in Europe relative to market awareness and with Wdesk solution. How many customers are coming to you simply because of ESEF readiness versus just broader awareness of the overall solution base? And I guess the third part of that is just, where are you at with regards to hiring the sales team over there, go-to-market? How fast do you need to build that? I know that’s a lot in there. But maybe the broader question is, just talk to us a little bit about Europe, what’s happening aside from just ESEF?

Sure. This is Marty. I would like to discuss our progress in Europe. We have built up our EMEA sales team over the last two quarters of 2019 and the first quarter of this year, successfully filling the necessary positions. The team is now maturing and becoming more productive, which we are pleased about. We have the necessary sales team in place for the near term. In terms of market awareness in Europe, it’s crucial to note that Stuart has consistently stated that EEF represents an opportunity for us. We offer annual reporting, management reporting, and integrated risk solutions, in addition to regulatory services for banks, and we have large banking clients in Europe. We are reaching a point where more people know our brand, but there is still significant potential since our revenue there is still relatively small, especially considering that the EU has a GDP close to that of the U.S. The introduction of ESEF has sparked conversations about our platform. As clients recognize that we not only help produce the ESEF regulatory documents but also have a comprehensive platform to extract data from their systems, create reports, and generate outputs, this capability is becoming a key factor in our success. While ESEF has improved our discussions, it is not a major issue for us in light of the delays. The top players in the market know they will need to adapt, and they are seeking lasting solutions that address all their challenges.

Yeah. That’s good color. And Marty, if I could just stay on sort of go-to-market and sales execution, I suppose it would be a little bit tempting to look at the last couple of quarters, where you have had great bookings, great commentary on the broader market, say, okay, good, the market has recovered and the environment has recovered. But on the other hand, it seems like, perhaps your sales execution has improved and knowing that you handed the reins over to Julie on that front a couple quarters ago, I would love to just hear a little bit more about any changes that Julie made with respect to go-to-markets? What you’re seeing on a sales execution perspective and what that means in the future?

I believe you are correct. Our customers have indeed adapted to the new normal, as Stuart mentioned. Additionally, we have become more focused. Julie has introduced greater discipline in utilizing metrics throughout the organization, not just in sales, which has enhanced our understanding of how to optimize all our teams. We also made a change in sales management by promoting someone from within to lead North American sales, and he has been performing exceptionally well. There are various factors at play here. Regarding our company's optimization, Stuart’s observation about our strong and growing pipeline is the reason for our optimism. This isn't just a temporary improvement; we genuinely see strength in our pipeline and in larger deals. This reflects our modern platform, which allows us to offer a variety of solutions that customers and partners recognize, leading to larger deal sizes and a more robust impact.

Good evening, gentlemen, and congrats on the strong results. So I wanted to dig into the booking strength a little bit. I know you’ve had a lot of build up and expanded relationships with your partner channel. Any commentary on how the partner channel went this year or contribution in the quarter? Any color on that?

Sure, I can provide some insight. Partner contributions are becoming significant for us. It's actually becoming an important element of our go-to-market strategy and our new sales efforts. As we've mentioned before, our partner involvement has lagged compared to other companies of our size, primarily because we just rebuilt our platform. Now that the platform is updated, there are many more opportunities for our partners to generate revenue. They are recognizing various solutions and starting to present them to us. Our partners are suggesting uses for our solutions, helping us develop them, and then taking those solutions to their clients. We are seeing promising progress. Naturally, we want to engage our partners as much as possible, not just to accelerate deal sizes but also to facilitate delivery. We are aiming for partners to be the main source of delivery for our solutions. Additionally, if they can help us enter new markets where they have more expertise, that’s a cost-effective strategy for us. There are specific markets we won't enter without a partner. We continue to make good progress, though there's still much more to achieve. I believe there is significant potential for partner development within the company, and we are on the right track.

Good to hear. Marty, as a follow-up, you mentioned the platform. How are you considering future R&D investments, particularly in terms of organic or inorganic growth? Thank you.

I would like to emphasize that now that we have delivered our platform, 90% of our recurring revenue or annual contract value has transitioned to this new platform. This was a significant achievement. It's quite common for companies to face challenges when moving customers from one platform to another, yet we experienced a higher retention rate compared to last year. This is a notable success. Additionally, it allows us to pursue larger deals, enhance our pipeline, and actively engage our partners.

Brian, I want to address your question about inorganic growth or M&A in relation to R&D. It's a significant consideration for us when evaluating acquisition opportunities, especially regarding how well the technology can be integrated into our platform. This leads us to analyze whether to buy or build. However, as Marty mentioned, our new platform is in excellent condition and has greatly improved its capacity to integrate with new software. This provides us with more flexibility, but it also means that building on our platform comes with higher expectations compared to acquiring new technologies.

Hi, good evening, gentlemen. Thank you for taking my question. Marty, I have one for you, and then Stuart, I have a follow-up for you. Regarding the platform, there has been a lot of discussion about it, and it seems that some customers are really beginning to understand what they can achieve with the platform. This has led to a positive spike in our outlook this quarter, and our checks have certainly been encouraging. I would like to hear more about your comment on extensibility. I know you have mentioned the FERC and other markets, so I am wondering if you could provide an update on the FERC opportunity and any other prospects you might be considering right now, particularly in relation to the R&D funding in that area.

The FERC opportunity presents a significant advantage for us for two key reasons. First, we made minimal changes to the platform, only adjusting the taxonomy for the XBRL. This made it a natural market for us to engage with. Second, it opens doors to numerous new private companies that we previously had limited exposure to. This represents a considerable potential revenue stream for us. More importantly, it showcases how the platform can be utilized with little R&D investment, allowing us access to a new set of companies, particularly private energy firms that we hadn’t reached before. FERC has been a strong example of this. A prime example we can discuss is global statutory reporting, which has been an excellent experience. We implemented a structured incubation program that taught us how to market it before making significant investments. We identified competitors and followed the entire incubation process, which resulted in a positive outcome. When we launched it, we knew how to position it, sell it, and what price points to set based on customer willingness to pay. This initiative was very successful. We also have several other solutions currently undergoing the same incubation process. While I prefer not to elaborate on them to avoid alerting competitors, I can assure you that we are actively pursuing these initiatives. The structured incubation approach and the success we've achieved with global statutory reporting bode well for our future.

Sure. As Marty mentioned, we began hiring quota heads in EMEA at the start of the third quarter last year and continued through the second quarter of this year. This process took about a year, resulting in a higher headcount when comparing the third quarter of this year to the same period last year, as we did not have those positions filled during the third quarter last year. There has also been some hiring in the U.S. I believe that addresses that specific question. Regarding selling the extensibility, this is a responsibility shared by all of our sales teams. While some teams specialize in certain solutions, our account owners are trained to sell the entire platform.

Thanks. This is Michael on behalf of Mike. Thank you for taking the questions. Regarding APAC, is there anything new to mention over the last couple of quarters? I know it's still early, but any insights?

It’s still early, but we are seeing some successes and gradually building a team similar to what we did in EMEA a few years back. We aim to acquire reference customers, refine our use cases, and develop our partner relationships. This process is progressing well, and as mentioned, it’s still in the early stages, but we are achieving our goals. The new platform includes localization for various local languages, which has allowed us to take this seriously. Until now, we are largely on track.

I would add one thing, which is the focus on distribution in APAC has really been around partner enablement. That’s really where we’ve been focusing our sales efforts. There certainly partner enablement in EMEA too, but there’s also big direct sales team in EMEA.

Got you. Helpful. Thanks. And just in the queue under kind of the industry breakdown. So needing to call, there were some of the harder hit industries, whether that’s commercial real estate or hotel travel, travel and stuff or is it pretty broad based where you’re not seeing much of an impact?

We are currently not experiencing significant sales to airlines or hotel companies. However, we tend to have a larger customer base among retail REITs, which have also been affected, but this has not meaningfully impacted our financials.

Just like to thank everybody for joining and remind the group that we have Investor Day scheduled for November 19th and hope to see you there. Thank you.

Ladies and gentlemen, this does conclude today’s conference call. Thank you for participating. You may now disconnect.