Earnings Call Transcript - WK Q1 2021

Operator, Operator

Good afternoon ladies and gentlemen. My name is Kavita and I'll be your host operator on this call. After the prepared comment, we will conduct a question-and-answer session. Instructions will be provided at that time. Please note this call is being recorded on May 4th, 2021 at 5 P.M. Eastern Time. I will now turn the meeting over to your host for today's call, Mike Rost, Vice President of Corporate Development and Investor Relations at Workiva. Please go ahead.

Mike Rost, Vice President of Corporate Development and Investor Relations

Good afternoon and thank you for joining us for Workiva's first quarter 2021 conference call. Today's call has been prerecorded and will include comments from our Chief Executive Officer, Marty Vanderploeg; followed by our Chief Financial Officer, Jill Klindt. We will then open the call up for a live Q&A session. Julie Iskow, our Chief Operating Officer, is also on the call. A replay of this webcast will be available until May 11, 2021. Information to access the replay is listed in today's press release which is available on our website under the Investor Relations section. Before we begin, I would like to remind everyone that during today's call we will be making forward-looking statements regarding future events and financial performance including guidance for the second 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. Reconciliation 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.

Marty Vanderploeg, CEO

Hello and thank you for joining today's call. Workiva is off to a strong start in 2021, beating first quarter guidance for revenue and operating income. We exceeded 24% growth in subscription and support revenue, driven by broad-based demand for our platform and fit-for-purpose solutions. Macro business trends such as digital transformation, changes in the regulatory landscape, and remote workplaces continue to create favorable conditions for the adoption of our platform. Due to improved market demand and an expanding addressable market, we are raising our guidance. Jill will provide further details about our financial results and future outlook later in the call. Our team is executing. We are maintaining an aggressive pace on our 2021 growth priorities which include expanding globally, ramping our partner ecosystem, and launching new platform-based fit-for-purpose solutions. Starting with global expansion, we continue to expand outside of North America. EMEA continues to show accelerated year-over-year growth as we continue to focus on ESEF and other use cases that we expect will drive logo expansion. Strong momentum continues with our partner ecosystem. Our partners continue to play a key role in extending the value of our platform and accelerating its adoption. They are also strategically involved in the go-to-market for our new fit-for-purpose solutions. At our 2020 Investor Day, we discussed our approach to identifying and bringing new and enhanced solutions to market. Our recent ESG announcement is a result of our idea to incubation process that provides the optimum mix of discipline, speed, and agility. This process allows us to innovate on our platform validated with our partners and prospects and define a commercial offering. Our ESG solution enables global organizations to simplify the complex ESG ecosystem and achieve greater transparency and accountability. Organizations across the globe are motivated to report their non-financial data alongside their financial data to provide a broader company valuation, and we believe we are well-positioned to deliver the solution. We have years of experience delivering a cloud platform that supports investor-grade reporting for the world's largest organizations. ESG reporting is complex, making it a natural fit for our platform and a compelling market for us to enter. ESG requires the capture, management, and reporting of financial and non-financial data from many sources and the collaboration of many internal stakeholders. We have been helping customers manage complex reporting for over a decade. Our ESG solution is end-to-end where customers can automate and consolidate the collection of ESG data, connect directly to source documents and systems, utilize globally recognized or proprietary ESG frameworks, work in an audit-ready environment, bring together teammates, data sets, and data sources in a controlled setting, and achieve greater transparency and accountability with full XBRL capabilities. Currently, approximately 11,700 large companies and groups across the EU are subject to mandatory requirements for non-financial reporting. Last month, the European Commission introduced a new Corporate Sustainability Reporting Directive, CSRD, intended to improve the quality of ESG reporting and bring more companies within the mandate. Upon finalization of the European legislative process, the proposed CSRD will potentially impact nearly 50,000 companies in the EU. The directive also requires companies to digitally tag reported data using the ESEF inline XBRL standard, and Workiva is the leading provider of XBRL and inline XBRL software and services. Therefore, we believe ESG will drive global demand for our cloud platform and lead to an expansion of our addressable market. In response, we are scaling our operations by making targeted investments in R&D, sales, and marketing. For us, the launch of ESG is not just another fit-for-purpose solution. It aligns with the values we support and our mission to build trust in the global economy with transparent data and connected reporting. We believe we have the right platform at the right time to help our customers address their ESG requirements. In these extraordinary times, we are honored to contribute our part to climate awareness and sound corporate governance and to elevate fairness, trust, and overall compassion across the global community. In closing, our Q1 results are reflective of our entire global team working together to build innovative solutions, deliver superior customer experiences, and to live our values-based culture. We have always been intentional about prioritizing our culture and standing behind our values, which is why we are honored to once again be named among Fortune's 100 Best Companies to Work For and Best Workplaces in Technology. Before I turn the call over, I would like to welcome Jill Klindt to her first earnings call as our CFO. Jill is an accomplished leader with strong knowledge of our business and all aspects of our financial reporting and corporate governance. I look forward to working with her in her new capacity to position Workiva for future success. With that, I now turn the call over to Jill.

Jill Klindt, CFO

Thank you, Marty, and good afternoon, everyone. I would like to start by echoing Marty's positive sentiment on this quarter's results, and also express my appreciation to the amazing Workiva team for their continued dedication and execution. It's been a pleasure working alongside you for the last 13 years, and I'm excited to contribute to scaling the company in the CFO role. Turning to our results. 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 Q1. As a result, we are raising guidance for 2021 revenue and operating income, which I will discuss later. I'll address our performance against Q1 guidance first. We beat Q1, 2021 revenue guidance at the midpoint by $3.7 million. Higher subscription revenue accounted for the majority of the beat. We beat guidance on Q1 operating income at the midpoint by $3 million. The revenue beat mentioned was partially offset by increased compensation-related expenses. Turning to Q1 2021 results versus Q1 the year before. We generated total revenue in the first quarter of $104.2 million, showing growth of 21.5% from Q1 2020. Breaking out revenue by reporting line item, subscription and support revenue was $84.9 million, up 24.2% from Q1 2020. New logos and new solutions helped drive strong revenue growth in Q1 2021. 61% of the increase in S&S revenue in Q1 came from new customers added in the last 12 months. Professional services revenue was $19.3 million in Q1 2021, up 10.6% from the same quarter last year. This was largely due to higher XBRL services revenue. As a reminder, the first quarter is a seasonal high point for our XBRL tagging revenue, since most of our publicly traded customers prepare their 10-Ks in the first quarter. Turning to our supplemental metrics. We finished Q1 with 3,800 customers, a net growth of 293 customers from Q1 2020 and a net growth of 77 customers from Q4 2020. Our revenue retention rates remain strong. Our subscription and support revenue retention rate was 95.1% for the first quarter of 2021, an improvement compared to 94.5% for the same period last year. With add-ons, our subscription and support revenue retention rate improved to 111.2% for the first quarter of 2021, compared to 110.9% in Q1 2020. The number of larger subscription contracts continues to show impressive growth. In the first quarter of 2021, we had 884 contracts valued at over $100,000 per year, up 32% from Q1 the year before. The number of contracts valued at over $150,000 totaled 457 customers in the first quarter, up 48% from Q1 2020 results. Moving down the P&L, gross profit totaled $81.4 million in Q1, up 26.7% from the same quarter a year ago. Consolidated gross margin was 78.1% in the latest quarter versus 74.9% in Q1 2020, a net expansion of 320 basis points. Breaking out gross profit, subscription and support gross profit totaled $72.2 million, equating to a gross margin of 85% on S&S revenue, an expansion of 210 basis points compared to Q1 2020, driven by continued operating leverage on server usage related to the transition to our new platform and lower travel costs versus Q1 2020. Professional services gross profit in the first quarter was $9.2 million, up 20.4% versus Q1 2020. Gross margin was 47.6%, a net expansion of 390 basis points. Research and development expense in Q1 totaled $24.2 million, up 13% from Q1 2020, due to higher compensation, partially offset by lower T&E expenses and occupancy costs. R&D expense, as a percentage of revenue, improved to 23.2% in Q1 2021, from 25% in Q1 2020. Sales and marketing expense for the quarter increased 12.3% from Q1 2020 to $37.5 million, as we invest in the growth of our business. This increase was driven by higher compensation, partially offset by lower T&E expenses. General and administrative expenses totaled $12.2 million in Q1, up $3.6 million compared to Q1 2020, due to increased compensation-related expenses. G&A expenses, as a percentage of revenue, increased to 11.7%. Our business fundamentals are strong. We posted an operating profit of $7.5 million in Q1 2021, compared to an operating profit of $861,000 in Q1 2020. Turning to our balance sheet and cash flow statement. At March 31, 2021, cash and cash equivalents and marketable securities totaled $541 million, an increase of $10.6 million compared to the balance at December 31, 2020. Net cash provided from operating activities in Q1 2021 totaled $11.5 million compared with cash provided of $4.8 million in the same quarter a year ago. Remaining performance obligations on subscription contracts continue to vary from deferred revenue, as we implement multi-year 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 second quarter of 2021, we expect total revenue to range from $101 million to $102 million. We expect subscription revenue will continue to grow at a faster rate than services revenue in Q2. We expect non-GAAP operating income to range from breakeven to $1 million. For the full year 2021, we are raising guidance for revenue. We now expect total revenue to range from $418 million to $420 million. We expect non-GAAP operating loss to range from $5 million to $3 million. We are modeling higher travel costs and investments in growth opportunities through the remainder of 2021. And 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, Operator

And our first question comes from Matt Stotler with William Blair.

Matt Stotler, Analyst

Everybody. Thank you for taking my question. I think first we'll start with one on ESEF reporting, and then I've got a follow-up. Would love to just get an update on your expectations regarding the pace of adoption or timing in terms of ESEF adoption over the coming years, balancing the timing of the mandate with the mandatory compliance for financial statements layering in through 2022 and then expanding to non-financial data the following year, balancing that with kind of your observations in terms of customer behavior. Would love to kind of get your sense of what a realistic adoption that might look like.

Marty Vanderploeg, CEO

Hi, Matt, thanks for the question. Good question. Just to give you a state of where we're at now. We continue to close ESEF accounts and we're seeing a lot of interest there. There's no doubt. I would say it's progressing very much like the SEC did here in the early days of SEC XBRL tagging and reporting. And so I think that's very similar. I think that the overlaying of the non-financial data is sort of a new thing. I really don't have a great measure on that. I will say that when the 2022 requirements come in, which obviously raise the bar on that, I think we'll definitely see a higher rate of adoption than just like we did with SEC. And we're starting to get information about how our competitors have done, and it's trickier than it looks. So we're very optimistic and I think it'll ramp similar to SEC over the next two to four years.

Matt Stotler, Analyst

Got it. Got it. That's helpful. And then just one follow-up on ESG. Obviously, really exciting to see the solution launched last week. Still pretty new in developing in terms of landscape, which I think your platform is very well-suited to handle. But would love anything you can give some numbers around, kind of, potential companies and whatnot in terms of where this might be applicable in the EU. Any broader thoughts about the ESG opportunity globally, and looking at how that might roll out in terms of pace of adoption, any initial or early thoughts there would be helpful as well?

Marty Vanderploeg, CEO

Well, there's been quite a bit of discussion about ESG coming from the investment organization, from individuals, and from governments. We're seeing pressure coming from all directions, so I think it's a foregone conclusion that we'll see reporting requirements in a lot of jurisdictions. EMEA, or the EU, is sort of leading that charge. And as we talked about in our prepared comments, that could potentially be 50,000 companies just in the European Union. We're seeing a lot of excitement from our partners. The large advisory firms are reaching out to us and we're putting together plans on how they're going to market. So we're just seeing broad excitement and execution starting there. Certainly, the TAM expansion is in the billions, and some other companies have put out approximate numbers that you can find. But it's so early. We're just not going to put out some of our estimates until we get a little more visibility on what's happening. It's just such early days, but we feel so fortunate. This acceleration of ESG reporting couldn't have happened at a better time for us. Our platform is really maturing. We just finished our upgrade, and we have people calling us. We have customers for ESG already, so we're learning very fast. So this TAM increase is just very well-timed for where we were at.

Matt Stotler, Analyst

Got it. Yeah, very exciting. Thank you very much for taking the questions.

Marty Vanderploeg, CEO

Thank you, Matt.

Operator, Operator

And our next question comes from Tom Roderick with Stifel.

Tom Roderick, Analyst

Hi, everyone. I appreciate you taking my questions. It's great to hear from you. This is a vast topic, so I'll follow up on the question regarding ESG. Marty, you mentioned around 50,000 potential companies entering this market, which compared to ESEF in Europe suggests a 10x opportunity, highlighting a significant total addressable market. This raises the question of how to effectively approach the market. You talked about collaborating with advisory services and businesses. Could you elaborate on the investments needed to seize this opportunity, especially as regulations start to roll out and potentially increase demand? Is it essential to get ahead of the trend? Jill, I will have a follow-up question for you related to this, but first, I'd love to hear your thoughts on the go-to-market strategy, Marty and Julie.

Marty Vanderploeg, CEO

Well, thanks for the question, Tom. I would say first off that we're going to have to go at the go-to-market from several different approaches. We will definitely have a direct sales team that's working on this. We have account owners for a lot of accounts globally right now, and we're well-positioned to take any type of specialists in there and attack those accounts. The relationships with partners are also going to be really beneficial. Again, that was fortuitous. We've scaled those relationships and we see partners investing in practices around our platform, which has been very encouraging. A big segment of our go-to-market will be through partners. Then when you get to 50,000 customers, there's a big scale in the size of those customers. So we'll definitely bifurcate the market from the largest, where it will be either us, direct or with partners, to the very smaller firms, where I imagine we'll primarily use an inside sales team, or we may even get into other forms of distribution. But it's going to take a lot of different means to get to that big market, but we're just so well-positioned to do that. We have a reputation. We have a substantial footprint already doing reporting and XBRL tagging, and this is just going to dovetail nicely with our existing customer base as well. So, like I said, we're very blessed. We understand that it's going to take some investment, and it's going to take some time to watch how this market develops, but we're just extremely excited about it.

Tom Roderick, Analyst

That's great. Jill, I have a follow-up question for you regarding the impact of this. I believe you mentioned the opportunity to reach up to 25% of revenues within about five years. Can you remind me of the timeline? How does this accelerate that? Also, as we consider integrating this into the cost structure, it's clear from the implied guidance for the second half of the year that costs will increase significantly. Should we expect to front-load those costs into Q3? Will they be back-end loaded, or will they be distributed evenly? I'm trying to understand how we can transition from what's currently profitable to a projected negative $3 million to $5 million operating number for the year in terms of costs.

Jill Klindt, CFO

Okay. Sure. So we had put out and talked about the fact that in the long term, we would expect to have EMEA contribute 25% to 30% to total revenue. We have not put out a timeline around that. There's certainly something that we're aspiring to, so there isn't a specific timeline around that. But we think that this ESG opportunity you mentioned, whether or not this would accelerate the timing to that, I think we've always known there would be additional fit-for-purpose solutions that would help us toward that goal. And this is just one of those, and so this is part of the total execution on that plan and how we'll continue to consider other fit-for-purpose solutions that will also contribute to the EMEA market and globally. So we'll continue to focus on that as a goal and as part of our overall growth goals. And thinking about the guidance overall, you are correct that we are definitely ramping up now on hiring and investments in the business. We are focusing on growth and we believe that those investments will bring us to that growth. The hiring will be ramped through the end of the year. We are also ramping up and will continue to ramp up travel through the end of the year. That has been mostly on hold. We haven't really seen that through Q1, and you'll largely see that into Q3 and Q4, with Q4 probably being the heaviest. We do not expect that we'll get back to pre-pandemic levels on travel per head though. So while it will increase, we will not be back to what would have been 2019 levels of travel, we don't believe through the end of the year.

Tom Roderick, Analyst

Wonderful. Thank you for the detail. Congratulations. Thank you.

Jill Klindt, CFO

Thank you, Tom.

Operator, Operator

And our next question comes from Alex Sklar from Raymond James.

Alex Sklar, Analyst

Okay. Thank you. Marty, one more on ESG for me. You talked about all the different sources of data customers need to pull from in order to do the reporting. I'm curious if in your early customer lands, if you're finding the data needed for ESG reporting in general is already in your customer's Workiva platform, and so the value proposition for an existing customer is even greater?

Marty Vanderploeg, CEO

Well, in some instances that is the case. We've seen some customers just go off and start doing ESG reporting with the platform as it existed. We had a group of customers doing sustainability reporting for many years. So yes, some of that is already in there. I would not say it's widespread. But the other thing is the customers know how to use our platform already. The collection of financial data and non-financial data is not substantially different. We will have to make investments. Our platform, like I said, is ideally suited, but we're going to have to integrate with all sorts of different systems. That's where some of the investments will take place and just making it more fit-for-purpose, putting in a lot more of the framework. So those are all types of things we'll be investing in, but I think that just the fact that they use it and are familiar with it is going to drive a lot of adoption in our customer base.

Alex Sklar, Analyst

Okay. Got it. Very helpful. And then Jill, the XBRL services growth is a really impressive business in what I think is always a seasonally stronger quarter. But is there anything we can read into on the services that you're – in terms of the desk representative of the FERC or some of the European ESEF success? Thanks.

Jill Klindt, CFO

Thanks for the question, Alex. It really is just related to continued growth in the SEC market and that Q1 is, as you mentioned, a seasonal high point for that revenue. We do continue to expand SEC customers, and so that will be up, continues to be up year-over-year.

Alex Sklar, Analyst

Okay. Great. Thank you.

Operator, Operator

And our next question comes from Andrew DeGasperi with Berenberg.

Andrew DeGasperi, Analyst

Yes, thanks for taking my question. I wanted to ask one more on ESG just in terms of the pricing for this module. Just wondering, is this going to be in line with how you price your other products? If you can give us directionally how much they can be generally. And then secondly, just in terms of your long-term targets, just wondering as you roll out these fit-for-purpose solutions, would that delay achieving your long-term margins?

Marty Vanderploeg, CEO

Thank you for your question. Regarding pricing, it's still early for us as we're in the process of determining how to structure it. I anticipate a wide range of pricing depending on the size of the organization and usage. We're still working on the metrics, but this issue is significantly more pressing for larger companies compared to smaller ones, and we will address that. I don't expect drastic changes from our current price range, which is already quite broad. It seems we'll remain within a similar range, but it’s too soon for conclusive statements. About our long-term financial targets, we've consistently stated that we will invest in growth opportunities as they arise, since the market values growth. As we expand, our scale improves our cost structure. I'm unsure if this will affect the timeline for achieving our targets, but I know that our growth brings increased efficiency from scale. Our focus remains on growth; the faster we grow, the better, and this presents an excellent opportunity to capture more market share. I believe our investors would largely agree that the market rewards growth.

Andrew DeGasperi, Analyst

Is the competitive landscape for ESG significantly different from what you find in other financial reporting tools?

Marty Vanderploeg, CEO

Well, I would say that there's a lot of excitement around ESG, and there's a lot of startups and some that are even past the startup stage. But there's no company that has a comprehensive platform that can handle both the financial and the non-financial data, not like the platform we've built in terms of dealing with all different types of reporting with XBRL integrated. We see a lot of competition up and coming. That's okay; that definitely signals that it's a big TAM, and we see investment in different startups all over. I anticipate we'll have some competition here, but we're just very well positioned and just have such a big head start in terms of having the tools already built and having our foot in all those accounts already. So, we're just very optimistic.

Andrew DeGasperi, Analyst

Thanks, Marty.

Operator, Operator

And there are no further questions at this time and that does conclude today's conference call. Thank you for your participation. You may now disconnect.