Workiva Inc. (WK) Q3 2015 Earnings Report, Transcript and Summary

Good afternoon. My name is Melissa, and I will be your conference operator today. At this time, I would like to welcome everyone to the Workiva Q3 2015 results conference call. [Operator Instructions] Thank you. Mr. Adam Rogers, Senior Manager of Investor Relations, you may begin your conference.

Good afternoon everyone. And welcome to the Workiva third quarter 2015 earnings conference call. This afternoon, we'll begin with comments from Chairman and Chief Executive Officer, Matt Rizai; followed by Executive Vice President, Treasurer and Chief Financial Officer, Stuart Miller. And then we'll turn the call over to questions. Also on the line today are Marty Vanderploeg, President and Chief Operating Officer; and Mike Sellberg, Executive Vice President and Chief Product Officer. A replay of this call will be made available until November 12th. Information to access the replay is listed on today's press release, which is 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 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 our fourth quarter and full fiscal year 2015. 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 obligations 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 Chairman and CEO, Matt Rizai.

Thank you, Adam. And thanks to everyone for joining us today to discuss our third quarter 2015 results. Our third quarter results were strong, with revenue and operating results that exceeded the high end of our guidance range. Total revenue for the quarter was $36 million, an increase of 30% over the third quarter of 2014. Subscription and support revenue was up 26%, and professional services revenue grew 52% year over year. Based on our results for the first nine months of 2015 and our visibility into the fourth quarter of this year, we are again raising our full-year 2015 revenue outlook. Stuart will discuss our guidance in greater detail later in the call. Demand for Wdesk remains strong. We're seeing good momentum in new customer wins, and our existing customers continue to expand their use of Wdesk throughout their organizations, which is increasing our average subscription and support contract value. The investments we are making in sales and marketing, recent enhancements to our technology platform, and strong execution by the entire Workiva team are driving our growth. Now, turning to some recent operational and business highlights – in the third quarter, we continued to see growing demand for our Wdesk solution for the Sarbanes-Oxley or SOX market. For example, one of our new SOX customers is a large airline services company. Prior to Wdesk, they would print physical copies of their internal controls and pass them back and forth to make changes. Now with Wdesk, all of their SOX testing and work papers are in digital formats and linked to their test of controls in Wdesk. They now save nearly five days each quarter in the SOX review process. Another recent Wdesk SOX customer is a large manufacturer of electronic products. They've acquired several companies spread over many geographic locations, making SOX compliance extremely difficult. Now, all of their SOX data is linked, stored and managed in Wdesk. Because Wdesk is in the cloud, collaborators are able to seamlessly work together regardless of location. With Wdesk, they have reduced their SOX process by three weeks each quarter. We're also seeing early customer successes from our evidence management solution for SOX compliance that we released in the second quarter of this year. For example, Republic Airways has decreased its quarterly review time by 20 hours. Another customer, Diversified Healthcare Services, reduced its annual consulting fees related to SOX by $38,000 and lowered its time spent on collecting evidence by 20%. SOX continues to be an exciting market for us for several reasons. First of all, SOX deal sizes are larger than SEC deals. Second, SOX processes cut across many different departments, which introduces Wdesk to audit, risk and finance teams, further supporting the expense side of our growth strategy. We expect Wdesk to continue to grow organically throughout these solution areas. Here's how it happens – our main focus in the SOX market is in controlled management, which primarily focuses on risk. Teams who work in the areas of risk must also work closely with audit management, which includes the audit planning process and the internal audit group. These teams are subsets of a much larger market that's defined as governance, risk and compliance, or GRC. Through this pathway, we're just beginning to scratch the surface of the GRC market, which is a large and complex set of businesses processes. According to industry analysts, GRC includes SOX compliance, audit management, enterprise risk management, policies and procedures, vendor management, incident loss management, IT risk and controls, compliance management, threat and vulnerability, business continuity planning, and disaster recovery. While it's still early for us, we see a lot of expansion opportunities for Wdesk within the GRC market. For example, one of the fastest-growing financial institutions in the United States signed on for our SEC solution immediately after going public in 2014. When searching for a GRC solution for their SOX and risk processes, they turned to Wdesk. In addition to SOX compliance, the Company now uses Wdesk to create risk assessments for its operational credit and fraud risk reports. Another subset of the GRC market where Wdesk is expanding is in the audit management and enterprise risk management, which includes internal controls and management processes. For example, one utility customer that uses Wdesk to manage its rate case, reporting through a subsidiary, also uses Wdesk to collect, aggregate and present reports and dashboards related to key risk indicators and matrices as part of its enterprise risk-management function. By having all of this ERM data in Wdesk, the customer is also able to easily create executive memos, as well as ERM framework and policy documentation. On the SEC side of our business – our market strength continues to grow. While we picked up four more Fortune 500 customers this quarter, we also had many exciting wins in companies of all size. We believe that the constant improvements in our Wdesk platform continue to attract new customers and further enrich our relationship with our current customers, which supports our high-revenue retention rates. For example in Q3, we released support binders for the SEC market, which is a digital paper trail that gives our customers a better way to reference and verify supporting work documents that are required by boards, auditors and regulators. While it's early, we are seeing strong customer demand for support binders. Our customers continue to adopt Wdesk for management reporting. Here are a few examples this quarter – a global real estate management firm signed onto a corporate reporting package for its executive management team. A major car manufacturer uses Wdesk for its financial consolidation process and its annual plan. A leading hotel chain uses Wdesk for its quarterly business reviews. And a private cybersecurity company now creates their annual audit report in Wdesk. I'd like to share one final example of how our customers are expanding Wdesk across their organizations. The Berkshire Hathaway Energy company began using Wdesk for SEC reporting and adapted Wdesk for SOX compliance. Based on their experience, they now also use Wdesk for regulatory reporting, specifically their rate case process. They have increased their number of Wdesk seats by more than 10 times since our initial contract. And we expect them to continue to expand Wdesk into more departments. We're very enthusiastic about the accelerating expansion of Wdesk across our customers' organizations. We believe it underscores the value that our solutions deliver to our customers. The value of Wdesk continues to be recognized not only by our customers but also by third-party industry experts. For example, Wdesk recently won a 2015 GRC innovation award in internal controlled management for the best user experience by analyst firm GRC 2020. We believe this award further validates the strength of our platform and solutions. Finally, I'd like to highlight that in September, we held our most successful annual user conference to date. The conference, which we call [indiscernible] exchange community, drew more than 1,500 audit, finance, risk and compliance professionals from nearly 800 companies. Besides the educational component and the opportunity for us to showcase Wdesk to our customers and prospects, we also benefit greatly from direct feedback from our customers who've spent a lot of time with our product and development teams. We were also encouraged by interest and attendance at our first summit on SOX in internal controls, which preceded our tech conference. In summary – our third quarter was strong. The more functionality we give to our customers, the more ways they find to use Wdesk. We're pleased with the process we've made on our land-and-expand growth strategy, and we believe the investments we're making positions us in several markets for future growth. The adoption of Wdesk continues to gain traction as companies increasingly embrace our solutions to collect, link, report and analyze business data. With that, let me turn it over to Stuart Miller.

Thank you. As Matt discussed, we posted strong results in the third quarter. We generated total revenue of $36.3 million, an increase of 30% from the third quarter last year. Breaking out revenue by reporting line item – subscription and support revenue was $29.8 million, up 26% from Q3 2014. 59% of the S&S revenue increase came from new customers added in the last 12 months. The remaining 41% of the increase came from deeper penetration of our existing customer base. The average contract value on subscription and support from all customers continued to rise. Professional services revenue was $6.4 million, an increase of 52% from the third quarter of 2014. Higher customer count in services from non-SEC use cases accounted for the majority of growth. Turning to our supplemental metrics – we finished the third quarter with 2,468 customers, a net increase of 292 customers from Q3 of 2014 and a net increase of 78 from Q2 of 2015. Our subscription and support revenue retention rate excluding add-ons was 96.4% at the September 2015 measurement date, up slightly from 96.3% in June 2015. Customers being acquired or ceasing to file SEC reports once again accounted for over half of the revenue attrition. Including add-ons, our subscription and support revenue retention rate was 107.7% as of September 2015 measurement date, compared with 108.4% in June 2015. We continued to invest in our inside sales and farmer teams to expand our account footprint with our existing customers. Moving down the income statement – I will talk about our non-GAAP results, which are before stock-based compensation. Please refer to our press release for a reconciliation of our non-GAAP and GAAP results. Gross profit was $26.7 million in the third quarter, up 37% from the prior-year period, representing a gross margin of 73.5%; compared to a gross margin of 69.9% in the third quarter of 2014. Now, breaking out gross profit – subscription and support gross profit was $24.6 million, equating to a gross margin of 82.5% on subscription revenue; compared to $18.4 million or 77.6% gross margin in the third quarter of 2014. Improved efficiency of our customer success team accounted for the margin expansion. Professional services gross profit in the third quarter was $2.1 million, equating to a 32.1% gross margin, compared to $1.1 million or 26.6% gross margin in the same period last year. Better utilization of capacity compared to Q3 last year accounted for the higher margin. Turning to operating expenses – research and development expense in the third quarter was $12.2 million, an increase of 12%, from $10.8 million in the prior year's third quarter, due to higher compensation and additional stuff to further strengthen and enhance our technology platform. Our R&D expense as a percent of revenue this quarter declined to 33.6%, compared to 38.8% in Q3 last year. Sales and marketing expense increased 28% over Q3 of 2014, to $20.4 million, driven primarily by additional headcount and cash incentive compensation. We remain on track with our plans to expand our quota-carrying sales team by 25% to 30% in 2015. In September, we hosted our annual tech user conference, as Matt mentioned, which caused an increase in our sales and marketing expense for Q3 as it did in Q3 last year. So Q3 is a seasonal high point for marketing expenses, as we've discussed on previous calls. General and administrative expenses were $5.3 million in Q3, an increase of 35%, compared with $3.9 million in the third quarter of 2014, driven by the cost of being a public company, together with increased compensation, software and support fees. Operating loss was $11.2 million in the third quarter of 2015, essentially unchanged from the same period a year ago. Net loss was $11.5 million for the third quarter of 2015 compared to the net loss of $12 million in the third quarter last year. We posted a net loss of $0.29 in the third quarter 2015 compared to a net loss per share of $0.38 the same quarter a year ago. Turning to our balance sheet in our statement of cash flows – at September 30, we had cash, cash equivalents and marketable securities of $81.8 million, a decrease of $4.7 million compared with June 30's balance sheet. In the third quarter of 2015, net cash used in operating activities was $4.7 million, compared to $4.6 million in the same quarter a year ago. As you may remember from previous calls, we cut incentives for long-term prepayments from customers in order to capture more margin. And we continue to implement that plan. As a result, our long-term preferred revenue declined $1.7 million in the third quarter of 2015. Offsetting this decline was an increase in current deferred revenue of $3.3 million, which was comprised of a $3.2 million rise in subscription and support deferred revenue and a $0.1 million increase in professional services deferred revenue. Turning to our guidance for 2015 – our guidance on non-GAAP loss from operations and non-GAAP loss for basic share, excluding the impact of stock-based compensation – please refer to our press release for a reconciliation of our non-GAAP and GAAP guidance. For the fourth quarter of 2015, we expect total revenue to range from $37.6 million to $38.1 million. We anticipate non-GAAP operating loss to range from $10.8 million to $11.3 million. We expect GAAP operating loss in the range of $14 million to $14.5 million. We anticipate non-GAAP net loss per share to range from $0.24 to $0.25, with GAAP loss per share in the range of $0.32 to $0.33. Our loss-per-share guidance assumes 40 million basic and diluted shares outstanding. Our guidance for the full fiscal year 2015 is as follows – we are raising our revenue guidance to range of $143 million to $143.5 million. So we are actually increasing the high end and narrowing the range of revenue guidance. We expect non-GAAP operating loss to be in the range of $34.8 to $35.3 million and anticipate GAAP operating loss to range from $45.9 million to $46.4 million. We expect non-GAAP net loss per share for the year to be in the range of $0.87 to $0.88 and expect GAAP net loss per share to range from $1.15 to $1.16. Our loss-per-share guidance for the full year assumes 40 million basic and diluted shares outstanding. Finally, I want to mention that we intend to provide guidance on 2016 financial data when we communicate our fourth quarter financial results. In summary – Workiva posted another strong quarter. Demand remains robust for our solutions. We remain focused on executing our growth plan to capitalize on our multibillion-dollar market opportunity. And we will now take your questions. Melissa, if you're ready to begin the Q&A session?

[Operator Instructions] Your first question comes from Brian Peterson with Raymond James.

Thanks, guys, for taking the question, and congrats on the quarter. I was impressed with the new customers adds. Just wondering how many of those were core SEC customers, and how many of the net new came outside for additional use cases.

Yes, we don't typically give that breakdown. Like you mentioned, we had a pretty strong quarter. And we are continuing to acquire SEC customers, as well as the customers that are non-SEC. And obviously, we're also getting a lot of additional business from our current customers.

Okay, got it, thanks. And the professional services line – Stuart, you mentioned that was related to some non-SEC-related use cases. As that proliferates, is that business going to become less seasonal? How should we think about that going forward?

Yes. So the two major contributors there are SOX and risk. And they have their own seasons. And they are different from the SEC seasonality. So looked at on a consolidated basis, we will see – we do expect to see less seasonality in the future.

Okay, that's it for me. Thanks, guys.

Thank you, Brian.

Your next question comes from Michael Nemeroff with Credit Suisse. Your line is open

Hi, this is [indiscernible] for Michael Nemeroff. Thanks for taking the question, and congratulations on a really solid quarter. I guess, just to start off – can you talk a little bit about the timing cadence of your cross-sell activity with existing customers, new products? Just trying to get a better understanding of how quickly customers are coming back, or your farmers are reaching out to cross-sell additional products, use cases – or is it just sort of during the annual renewal time? Is there any way you can sort of quantify the cadence or provide any metrics around that? Thanks.

Well, let me try to kind of set the stage in terms of how we're gaining those customers. Number one – as you know, we really started to go after the SOX market less than a year ago, and we started moving our sales organization to both go after new logos as well as going after our current customers. And that takes a little bit of time for them to be trained to get up to speed. And we think that we're on track in terms of start gaining traction, both from our current customers, who are looking at our SOX solutions, as well as getting new logos. And I think we're looking at next year as a very robust year for us to be able to gain a lot of business from both the new customers and those of our current customers within the context of SOX and other areas that we're gaining a lot momentum. Marty, do you want to add anything?

Sure. There's really two ways we've seen more revenue from our customers in general. We tend to get a sprinkling of seat adds that are more based around the existing solutions. They have – typically a quarter or two after we acquire a new customer in a new area, they add a few seats. I think the more relevant one is we sell a completely new solution, one of which is – Matt referred to as SOX and risk, and some of the other ones that we're moving into. And we start addressing that with the customers, with our farmers, if you will. But they're really a hybrid farmer-hunter, because they're going into different groups and trying to make substantial sales. We start that a quarter after we initially land in the Company [indiscernible] the prospect.

Got it, that's really helpful. I guess just secondly, as we understand it, a key pillar of your product strategy is not only to invest in functionality for new use cases but to also develop incremental product enhancements, like risk management for SOX, and now support binders. I guess, how should we think about their general pricing in the ASP trends for embedded features versus add-on modules and other modules that you released thus far? Can you give us a sense of what the attach rates are, and how we should think about ASP uplift going forward?

Mike, do you want to answer that?

Yes, I can – really, it's a combination of embedded features, if you will. So just adding to the current platform and solutions to kind of keep up with user requests and competitive pressures, if you will. And then we also have add-on modules. So as you mentioned, we've got evidence management and support binders. Those were both – those are currently being sold as add-on modules. And then there's something like tasking, which we released at our tech conference, which is an embedded feature that everyone gets across all the solutions. And so we are seeing – as we mentioned, we're seeing some good early success in all those areas.

Got it. It's helpful. Congratulations again.

Thank you.

Thank you

Your next question comes from Steve Ashley with Robert W. Baird. Your line is open.

This is Jason Velkavrh on for Steve. Thanks for taking my questions. The first one I have is about sales rep hiring and training. Just curious, first, on the SOX teams – where would you say those teams are in terms of their ramp? Are you still hiring new reps into those teams? And I guess, how many of those reps are, at this point, fully ramped?

Well, the way that we kind of communicate with you guys in terms of sales organization that we kind of give overall growth number, which we have said and Stuart mentioned it – 25%, 30% for 2015, which were on track. And then, as we bring in the new salespeople, they have to ramp up within six to nine months from a training point of view. And so far, based on the business that we see from our customers and based on the performance that we see from our salespeople, I think we're seeing everything as expected, and we're executing the sales funnels and the pipeline as we expected the beginning of the year. Marty, you want to add anything?

Just one thing. I think your referenced the SOX directly – I think that it's fair to say that those reps are starting to mature now. It's been – some of them been here nine months, some six. But in general, we're getting there in terms of that maturity. And in all sales force, there's always some turnover in the 10% or 15% range. But in general, starting to mature.

That's helpful. And then, one additional question building on that – outside of SOX – at the tech conference, you mentioned some new sales groups on major accounts – state, legal, education. Just wondering – how is hiring into those new groups tracking? Have you identified any other verticals since we last spoke that you're focusing on?

Yes, we're always looking to see where else we can gain traction in terms of our platform, what we can do. And we start seeing demand on the state and local government reporting side of the business, and we start hiring salespeople. I think we expect to continue to hire and train them next year. And so far, both in that and the risk side, and for the financial industry, and then as well as the SOX and SEC, we continue to see good traction with the type of salespeople that we're hiring.

Okay. Great. Thanks, guys.

Your next question comes from Stan Zlotsky with Morgan Stanley. Your line is open.

Digging into professional services – very nice ramp, 50% plus growth year on year. How much is professional services a leading indicator of future subscription revenue?

Well, let me kind of [indiscernible] Stuart, you can go deeper. Well, first of all, both on the SOX and risk – and we're seeing a lot of demand. And that really – we're seeing that they like to be able to make sure that we understand and they understand how our platform would work. And they happily allow us to be able to get in and really put together the right process together for them to be able to leverage Wdesk. So the fact that that portion of our business has been quite healthy really is a positive indication how Wdesk is being – getting traction in those areas. So it's very positive from our point of view. That means that those are great businesses. And those people that we work with in the services side really get in and make sure that we are present in their operation. And that really allows us to be able to add more seats as time goes on. So we do see a correlation in terms of having professional services activities leading us to the more seats as the customers get comfortable with Wdesk. Stuart, you want to add anything?

Yes. So the doc setup for SOX and risk is obviously quite a bit more involved than it is for SEC. And because there are more people involved in SOX as a customer, there is more add-on sales opportunity with them over time, because it does scale with the size of the Company. So to that extent, it can be considered to be kind of a leading indicator. But I wouldn't say that there's one-to-one correlation or anything.

Okay. Well, obviously, I understand that. I certainly didn't expect your revenue to accelerate 50% next year. Although it'd be nice. Okay. And then, just one more from me – gross margin – very nice uptick on the subscriptions to 82.5%. Was there anything one-time there? And how sustainable is that level going forward?

Yes. So we agree the improvement there in gross margin was impressive. Over time, many of our customers need less support, and our team becomes more efficient in providing support. And that function, the customer success function, is tremendously important to our business. But like other variable costs, there are limits at the end of the day. And even, for instance, this quarter, we're expanding our customer success teams to further expand our growth. So we think that a range in kind of the low 80s to high 70s is sustainable.

Okay. And if I could just sneak in one more – I apologize – very nice customer momentum in the quarter. How much of the new signed business came from customers buying more than one solution at the same time? And that's it for me. Thank you.

Yes, we don't typically provide that information in general. But I think we are seeing a really healthy traction from the non-SEC side as we're seeing both new customers and our current customers in terms of Wdesk usage.

Thanks, Stan.

Thanks, guys.

[Operator Instructions] Your next question comes from Jeff Houston with Northland Securities.

Looking at your cash balance, it's above $80 million. Could you provide an update on your M&A strategy? What types of deals would you consider; their size – how big would you go – and a bit around what the pipeline looks like for M&A?

Well, we certainly look at everything. And we approach it cautiously. We look at both – we've got such a good organic growth opportunity that we're more focused on that than we are on M&A. But that said, we have an obligation to think about inorganic growth. And we do look at a lot of opportunities. But you can expect, I think – certainly there's nothing in the pipeline right now that we're aware of. And anything we do is likely to be on the small side.

Got it, great. And then, just given the success of your non-SEC filing products – just curious about what impacted how you think seasonality in your business could evolve, lessening the total mix on the SEC filing products.

Well, I think overall, obviously with SEC, we have seen a seasonality. But as we get into the other areas in terms of stock, risk and audit management, they have somewhat their own seasonality that have not necessarily aligned with the SEC seasonality. So I think as time goes on, as we see the Wdesk being leveraged in different parts of the organization, that we're going to see less and less seasonality, or will depend on less and less seasonality in terms of our business, other than the regular software seasonality. Usually, August is [indiscernible] what you do is tough from a vacations point of view. And you have the Christmas and the Thanksgiving type of seasonalities, and those kinds of calendar seasonalities. And I think as time goes on, we're going to see less and less of the type of seasonalities that we've seen in the past.

Got it, that's helpful. Thank you.

Thanks, Jeff.

And there are no further questions in queue at this time.

All right. Thank you. In closing, I want to thank you for joining us today. And operator, you may now end the call.

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