Workiva Inc Q2 FY2021 Earnings Call

Good afternoon, ladies and gentlemen. My name is Rachel, and I will be your host operator on this call. Please note that this call is being recorded on August 3, 2021, at 5:00 p.m. Eastern Time. I'd now like to turn the meeting over to your host for today's call, Adam Terese, Director of Investor Relations at Workiva. Please go ahead.

Good afternoon, and thank you for joining us for Workiva's Second Quarter 2021 Conference Call. Today's call has been prerecorded and will include comments from our Chief Executive Officer, Marty Vanderploeg, followed by our Chief Financial Officer, Jill Klindt. We'll then open the call up for a live Q&A session. Julie Iskow, our Chief Operating Officer is also on the call. A replay of this webcast will be available until August 10, 2021. Information to access the replay is listed in today's press release, which is available on our website under the Investor Relations section. Before we begin, I would like to remind everyone that during today's call, we'll be making forward-looking statements regarding future events and financial performance, including guidance for the third quarter and full fiscal year 2021. These forward-looking statements are subject to known and unknown risks and uncertainties. Workiva cautions that these statements are not guarantees of future performance. All forward-looking statements made today reflect our current expectations only, and we undertake no obligation to update any statements to reflect the events that occur after this call. Please refer to the Company's annual report on Form 10-K and subsequent filings for factors that could cause our actual results to differ materially from any forward-looking statements. Also, during the course of today's call, we will refer to certain non-GAAP financial measures. Reconciliations of non-GAAP to GAAP measures and certain additional information are also included in today's press release. With that, we'll begin by turning the call over to our CEO, Marty Vanderploeg.

Hello and thank you for joining today's call. The Workiva team delivered another strong quarter, beating second quarter guidance for revenue and operating income. The past quarter reflected our steady execution with the addition of 149 net new customers, growing our customer base to almost 4,000. Our results continue to build on our market leadership and the increased demand for regulatory reporting and fit-for-purpose solutions to support digital transformations. We are very pleased that nearly all of our solutions exceeded plan and contributed to our broad-based growth. Our strong bookings from existing customers reflect the breadth of our platform and our enhanced ability to cross-sell multiple solutions. This resulted in Q2 year-over-year growth of 29% in subscription and support revenue, and almost 26% in total revenue. We target being a low to mid 20% growth company. For the first half of 2021, we delivered total revenue growth of 23.7%. Other highlights of the quarter included posting strong operating cash flow, our third highest in company history, achieving our highest revenue retention rate in 2.5 years and continuing to grow the percentage of customers with an annual contract value of over $100,000 and $150,000. Due to continued broad-based demand and resulting top line growth, we are raising full year guidance. Jill will provide further details about our financial results and outlook. A strong IPO and SPAC market propelled sales of our capital markets solution. This solution continued to exceed our revenue contribution plans in the second quarter. Capital Markets is a great source of new logos which fuels our SEC integrated risk and management reporting solutions. We will continue to model the incremental contribution of capital markets as an upside to our plan given its limited predictability. The EMEA team continued to build a strong new local pipeline with a focus on ESEF and other use cases. We are pleased with our incremental performance in the ESEF market. We believe it is still early days and that the market has a long tail. We remain optimistic about the opportunity and are expanding our selling organization to capture the market as it reopens. Our ESG solution pipeline is growing. We are pleased with the customer traction we are achieving and remain optimistic about the market's potential and expanding TAM. We are also accelerating our own corporate-wide ESG efforts as we work towards strengthening our company and ultimately promoting a better world. Two recent corporate ESG highlights include, first, we recently received an MSCI ESG AA rating. We performed at a leader level and mark 30 deals in the top 23% of 140 SaaS companies with strong performance in governance, privacy and data security and human capital management. Second, Workiva has joined the UN Global Compact CFO Task Force. We're the first SaaS Company to join, and Jill will participate and work alongside her peers to shape credible goals that are aligned with corporate sustainability strategies. We continue to strengthen our partner ecosystem. In the second quarter, we signed a number of large deals where our partners played a significant role. A few examples include working in partnership with a big four advisory firm, and a large global auto manufacturer chose Workiva to manage their global statutory reporting transformation for over 500 legal entities. We worked with our partner on the joint RFP response, and the partner will deliver the services to implement our platform. Another key partner related was with a large healthcare company; the customer invested in the Workiva platform purchasing four solutions geared towards privately held companies, including financial reporting, management reporting, internal controls and policy management. Expanding our partner ecosystem is powered by growth in our multi-solution opportunities. We also continue to expand our footprint with partners utilizing Workiva as part of their managed service delivery. We closed four opportunities in the second quarter with new and existing partners. Three of the big four advisory firms have now invested in the Workiva platform to support the delivery of managed services. We are pleased with the investment that our partners are making in growing their Workiva practices and the impact they have had in delivering transformative results for our customers. Last week, we launched our new marketplace offering over 200 templates, services, and no-code third party connectors. Customers can now streamline existing processes and reporting and solve new business problems all within our platform's connected and secure ecosystem. Our partners played a crucial role in the launch of the marketplace by contributing content and services that are readily available for customers to add to their workspaces. All four tenets of our company strategy are now fully in motion. We expect fit-for-purpose solutions, along with our modern platform, marketplace, and partner ecosystem to drive our growth. Our company strategy enabled us to make thoughtful and deliberate decisions aligning and focusing the organization and exposing and mitigating risks through rigor and discipline. Yesterday, we announced the strategic tuck-in acquisition of OneCloud, a pioneer in iPaaS technology; we acquired OneCloud to extend our platform capabilities in data integration and preparation. OneCloud has been an OEM partner of ours since July of 2019. Their technology expanded the Workiva platform, enabling our customers to connect data from third-party sources such as ERP, GRC, HCM, and CRM systems, as well as other third-party cloud and on-premise applications. We believe connecting, harmonizing, and controlling data across multiple disparate source systems further differentiates the Workiva platform from its competition. By acquiring OneCloud, we now fully own the complete end-to-end technology of our platform. We expect smooth integration given the successful history that our two companies have shared, and we welcome the OneCloud employees to Workiva. We are proud of the extraordinary talent that is driving our outstanding customer experience and values-based culture. Recently, we were honored to be named once again to Fortune magazine's list of best workplaces for millennials. Approximately 70% of our employees are millennials, making this recognition even more meaningful. We also were renamed as a best workplace in both Chicago and New York. In closing, we delivered strong quarterly results driven by the focused execution of our strategy. We are growing the business through new logos, maintaining high customer retention and account expansion and investing in our people, tools, and technology. It continues to be an exciting time for Workiva. The world is changing at a rapid pace and we believe we are well positioned to capitalize on the increasing opportunities to power transparent reporting for a better world. With that, I will now turn the call over to Jill.

Thank you, Marty, and good afternoon, everyone. We saw strong performance during Q2 with new logo and add-on sale contributions as well as continued robust performance across our solution portfolio. The team skillfully executed on our strategy and operating plans. I will talk about our results and guidance on a non-GAAP basis. Refer to our press release for a reconciliation of our non-GAAP and GAAP results and guidance. We continued to see broad-based demand for our solutions in Q2. As a result, we are raising guidance for 2021 revenue and operating income, which I will discuss later. I'll address our performance against Q2 guidance first. We beat Q2 2021 revenue guidance at the midpoint by $4.1 million. Higher subscription revenue accounted for the majority of the beat. We beat guidance on Q2 operating income at the midpoint by $4.8 million. The revenue beat mentioned above coupled with lower T&E versus forecast made up the operating income. Turning to Q2 2021 results versus Q2 the year before. We generated total revenue in the second quarter of $105.6 million, showing growth of 25.9% from Q2 2020. Breaking out revenue by reporting line item, subscription and support revenue was $91.2 million, up 29% from Q2 2020. New logos and new solutions helped drive strong revenue growth in Q2 2021, 63% of the increase in SMS revenue in Q2 came from new customers and over the last 12 months. Higher capital markets revenue was also a factor. Professional Services revenue was $14.4 million in Q2 2021, up 9.3% from the same quarter last year. This was largely due to higher XBRL services revenue. Turning to our supplemental metrics, we finished Q2 with 3,949 customers, a net growth of 437 customers from Q2 2020 and a net growth of 149 customers from Q1 2021. Our revenue retention rates improved. Our subscription and support revenue retention rate was 96% for the second quarter of 2021, an increase compared to 94.5% for the same period last year. With add-on, our subscription and support revenue retention rate improved to 111.6% for the second quarter of 2021 compared to 107.9% in Q2 2020. The number of larger subscription contracts continues to show impressive growth. In the second quarter of 2021, we had 952 contracts valued at over $100,000 per year, up 33% from Q2 the prior year. The number of contracts valued at over $150,000 totaled 500 customers in the second quarter, up 46% from Q2 2020. Moving down the P&L; gross profit totaled $82 million in Q2, up 31.4% from the same quarter a year ago. Consolidated gross margin was 77.7% in the latest quarter versus 74.4% in Q2 2020, a net expansion of 330 basis points. Breaking out gross profit, subscription and support gross profit totaled $77.7 million, equating to a gross margin of 85.2% on SMS revenue, an expansion of 170 basis points compared to Q2 2020, primarily driven by higher SMS revenue. Professional Services gross profit in the second quarter was $4.3 million, up 27% versus Q2 2020. Gross margin was 29.9%, an expansion of 420 basis points. Research and Development expense in Q2 totaled $25.4 million, up 18.4% from Q2 2020 due to new headcount investment. R&D expense as a percentage of revenue improved to 24.1% in Q2 2021 from 25.6% in Q2 2020. Sales and Marketing expense for the quarter increased 19.7% from Q2 2020 to $38.7 million as we invest in the growth of our business. General and administrative expenses totaled $12.6 million in Q2, up $2.1 million compared to Q2 2020. G&A expenses as a percentage of revenue improved to 11.9% from 12.5% in Q2 2020. We posted an operating profit of $5.3 million in Q2 2021, compared to an operating loss of $1.8 million in Q2 2020. Turning to our balance sheet and cash flow statement; at June 30, 2021, cash, cash equivalents, and marketable securities totaled $552 million, an increase of $11 million compared to the balance at March 31, 2021. Net cash provided from operating activities in Q2 2021 totaled $12.8 million, compared with cash provided of $7.2 million in the same quarter a year ago. Turning to our guidance, we are factoring in the expected impact of the COVID-19 pandemic on our business and results of operations based on information available to us today. For the third quarter of 2021, we expect total revenue to range from $108 million to $109 million. We expect subscription revenue will continue to grow at a faster rate than services revenue in Q3. We expect non-GAAP operating loss to range from $4.5 million to $5.5 million. For the full year 202, we are raising guidance for revenue; we now expect total revenue to range from $430 million to $432 million. We expect non-GAAP operating income to range from breakeven to $2 million. We are modeling higher travel costs and investments in growth opportunities and hiring through the remainder of 2021. In 2021, we expect to post positive free cash flow for the fifth consecutive year. I am proud of our team's performance this quarter. And we'd like to thank all our employees for their hard work and incredible dedication. We will now take your questions.

Our next question comes from Matthew Stotler from William Blair.

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

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

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

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

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

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

Alright, thank you, Marty or Julie, on the new marketplace, some really impressive templates and connectors available at get-go. I had two questions around this; first on the connectors and all the data integrations, can you just remind the strategy there relative to the W data solution, those just kind of light versions versus much greater functionality with W data? And then second, what are the important KPIs you're going to be tracking in terms of success of the marketplace? And opening up the platform over the next couple of years? Is it based on how many partners are building customer usages or any other color that would be great?

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

Okay, great. And then just a follow-up for Jill, on the revenue growth, the 63% coming from new customers in the last 12 months; I think that implies you're landing much larger with new customers. Can you just help parse out what's driving those higher deal sizes? Is it coming from the partner influence deals? I know Marty mentioned four solution wins. Is Europe successful and another higher price solutions like global staff, any other color that would be helpful? Thank you.

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

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

Great, hi, everybody. Thanks for taking my questions. Marty, let me start with you. I mean, I think you've been pretty clear so far in this call that it would be in saying that it's a little too early to suspect that the results we're looking at in front of us are driven by ESG. But I'd love to understand what's really kind of behind the pickup in customer activity. We look at these metrics that are accelerating on all key metrics. They're blowing away the expectations. Yet some of the things that perhaps your investors you're talking about the most might not even be happening just yet. If I think about ESEF and ESG, and some of that excitement, so help me to understand what you're seeing that's driving a pickup in activity. Maybe it's pickup on win rates, where it's happening, is still predominantly the US, or are we in fact seeing Europe kicking into these numbers now? Is just the talk around ESG creating new deal activities, even if they're not pursuing ESG solutions, or is that still too far off in the future?

Thank you, Tom. That's a question I could elaborate on for quite some time. I want to emphasize that our performance has been very broad-based. As I’ve mentioned before, we take a portfolio approach with various solutions, including management reporting, SEC, integrated risk, annual and interim reporting, GSR, and ESEF, among others. Each solution can experience fluctuations, with some quarters being stronger or weaker depending on deal closures. However, this strategy has resulted in a smooth overall bookings trajectory when averaged out. This quarter, nearly all of our solutions achieved strong sales, confirming that broad base I keep referring to. I completely agree that there is significant upside in ESEF and ESG. We performed as expected in ESEF; it's following the path of our SEC business from a decade ago and has a long-term growth trajectory ahead. The same applies to ESG; while we expect some revenue this year, it will not be substantial for our business. Most of the potential lies in 2022 and 2023 when we anticipate increased activity. We are very pleased with our ESEF sales so far, which tend to be back-loaded due to the nature of annual reports, and we are noticing a healthy growth in our pipeline. As you may recall, many countries delayed ESEF compliance, and several of them are only beginning to implement it in the latter half of this year. You have a solid understanding of the current situation.

Excellent. Okay. There's a lot to be excited about. So we'll keep checking in on the new items. But that's great. Thanks for that detail. Jill, a follow-up for you; much simpler question. I apologize if I missed it. But is there any impact from OneCloud in the guidance?

So Marty has mentioned earlier in the call about OneCloud being a smaller, it's more of a strategic acquisition. It's immaterial to our total results; we have modeled into our forecasts that any operational results related to OneCloud are included in our guidance, but they really are not a big impact on our growth. Our raised guidance is not being driven by that acquisition.

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

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

Yes, I think you hit the nail on the head. I think that same thing happened in North America. We entered the market late, invested heavily, and built a really sophisticated, powerful tool. When we got in the market, most of the customers were either outsourcing it or bought some other sort of bolt-on applications. They were 20% of the cost of our solution. But you saw the end result when you put a really good product out there that minimizes risk for the customer and produces high-quality output in terms of their disclosures and reports, you win that battle. I was clear a call or two ago that we didn't expect just to take this whole market by storm. With a premium solution, people sort of have to learn what they have to do and learn the pain associated with it. There are more requirements as you go on; they have to do more different types of tagging the following year; every time the hurdle gets higher for the bolt-on solutions. Yes, we expect to see a really long tail; it's very similar to the SEC market we've gone through in North America. We have that advantage, having watched that; meanwhile, we're closing really good business in ESEF in terms of the quality of the customer, the deal size, and each country is a little different in how we're doing, but we have a really good plan. The pipeline is building nicely. As you recall, most of the countries delayed ESEF so a lot of the countries are just seriously for the first time in the second half of this year. I think you have a real good handle on what's going on.

Thanks, that's helpful. Jill, could you provide some insight regarding the contribution from capital markets? You noted that it was stronger. Can you give us a directional sense of what that contribution looks like? Has it increased sequentially in Q2?

So we don't disclose that deal size or that as a separate solution. It did have an upside in Q2 related to that. There'll be some amounts that we will still be closing to the end of the year. That's included in our updated guidance. There's a potential for more upside depending on that market, but there are too many variables for us to really know how that's going to go through.

I would add that when we manage the business, we're pretty conservative. We model capital markets as upside. Every quarter, when it outperforms, obviously, it's good for the business. We do the same with ESEF; we have very moderate models for ESEF. If and when it takes off, that's also all upside. We model all these different solutions conservatively knowing the numbers that we can reach in general. Yes, capital markets did outperform. Remember, we have a very small percentage of that market; that market is still pretty much dominated by the printers, for a bunch of structural reasons that are not anything about our services or software. It’s just how legal firms work. Even though we did outperform, it's not a big part of our business by any means.

Our next question comes from the line of Terry Tillman from Truist.

Hey team, this is Connor for Terry Tillman. Thanks for taking my questions. My first question is regarding the ESG solution. We've been hearing from customers that there are many data collection elements and frameworks to consider. I was curious about the implications of the OneCloud technology for ESG reporting in the future.

Well, I think that of all the solutions we deal with, it will have as much connectivity as any of them and possibly more. All the different parts of ESG have also had other little solutions people use. We're going to pull data from a lot of different places and do prep work on it. Clearly, that was a big part of our motivation that OneCloud would play a big role in that, especially the connecting and preparation of data as it comes in. The frameworks: we're looking at different ways to deal with that, we have several different database attempts that we were looking and using for existing customers, trying to optimize and see there are several frameworks. The whole world, including us, is hoping that the planet settles on one or two of those frameworks to be able to support so many. We're prepared to do it. The data collection is another obviously nuance of all this, and there's work you have to do. There are questionnaires, there's audit work that has to be done, and we have an audit solution to fit over that. We are working on a lot of workflows that will start to come out of the pipeline by the end of this year. It’s already starting to come out with some of our data collection stuff. We're really well positioned to address all of those different needs of ESG. They're not dramatically different, apart from the frameworks; many of the things we're doing already.

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

When discussing hiring goals, I interpret that broadly. We are pleasantly surprised to find strong talent; our talent acquisition team is excelling. We're primarily adding personnel in sales, including quota-carrying roles and inside sales positions. We're also increasing our workforce in R&D because there are many initiatives we want to pursue with our product. I often mention the importance of sustainable growth. I believe we can grow this company over a long period. To achieve sustainable growth, we need high-value products that allow us to charge more and create lasting customer relationships. We're investing in product development because we see significant markets to tap into. That’s where we are hiring. We are successfully filling those roles, although it does take time. Our approach is selective; we prioritize high-caliber talent. We're making great progress in achieving our hiring goals.

Our next question comes from the line of Mike Grondahl from Northland Securities.

This is Michael on for Mike. Maybe just on those partner deals, were those completely new logos for that automaker and the healthcare company? Or do you already have some existing solutions in there?

Well, I know the auto solution; we already had existing solutions in there. I'm not 100% sure about the healthcare provider.

Got it. And then maybe just on the marketplace, can you talk maybe on the strategy of this?

Did you cut out? I just heard, is it more about the strategy and the marketplace?

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

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

No, I think we're done.

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