Workiva Inc. (WK) Q3 2016 Earnings Report, Transcript and Summary

Good evening. My name is Susan, and I will be your conference operator today. At this time, I would like to welcome everyone to the Workiva Inc. Third Quarter 2016 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-answer session. [Operator Instructions] Thank you. Mr. Adam Rogers, Senior Manager of Investor Relations, you may begin your conference.

Thank you, and good afternoon everyone, and welcome to the Workiva’s Third Quarter 2016 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 available until November 16th. Information to access the replay is listed in 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’d like to remind everyone that during today’s call we’ll be making forward-looking statements regarding future events and financial performance, including guidance for our fourth quarter and full fiscal year 2016. 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 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 2016 results. We’re pleased with our third quarter results, which are highlighted by continuing strong revenue growth and better than expected operating margin. Total revenue for the quarter was $45 million, an increase of 23% over the third quarter of 2015. Subscription and support revenue was up 21%, and professional services revenue grew 32% year-over-year. We’re pleased to have generated positive operating cash flow in the third quarter, and we expect to post positive operating cash flow again in the fourth quarter as we make progress towards sustained positive operating cash flow. Our success in delivering multiple solutions has created demand from numerous customers for a broader-based enterprise-wide Wdesk solution. In response, we’ve been evolving our business model, enhancing user management and improving our technology to capitalize on our growing enterprise- wide opportunities even as we continued to focus on improving operating cash flow. We are adding several enterprise-grade capabilities that are necessary to continue attracting new larger customer and spreading throughout existing customers, who need more functionality and capacity. We believe this naturalization of broad-based Wdesk use will add seats and revenue and continue to support our high revenue retention rates. We are optimistic about the growth potential for enterprise-wide deployments and we expect that these deal sizes will be larger and more complex which lengthened the sales cycle. Our brand recognition and market penetration are also generating opportunities for us to develop partnerships with subject-matter experts and consultants as well as with distribution and technology firms. Earlier this week, we announced two partnerships Frazier & Deeter, a CPA advisory firm, recently became Wdesk partner certified; and they will be complementing Wdesk implementation with their advisory services and subject-matter expert expertise in the areas of stocks and risk management. We also announced our partnership with Business Wire to integrate the corporate earnings press release process to improve efficiency. Workiva also become Business Wire's preferred provider for SEC reporting including XBRL. We expect to announce additional partnerships in the coming weeks and months. We have shown how we have evolved from a single SEC solution in 2010 to now expecting that non-SEC use cases will generate about half of our subscription bookings for the full year of 2016. Demand for Wdesk in the third quarter remains strong for non-SEC use cases. We continue to win new customers and expand Wdesk across existing customers which is increasing our average subscription and support contract value. Our experience has been that as our deals sizes have increased, the sale cycle has lengthened. I would like to share just a few customer examples that show the breadth and depth of Wdesk. A national private insurance company is using Wdesk for GAAP reporting for 10 separate entities. Medline a leading manufacturer of medical products is moving various sales reports into Wdesk including its bonus, compensation and commissions calculations. A Fortune 500 financial service company is using Wdesk to manage employee benefit plans as well as financial reporting for its charitable foundation. We also continue to see strong demand for Wdesk in the stocks market in the third quarter. Recent stocks customer wins include Buffalo Wild Wings, Hudson Global, Channel Advisor, LGI Homes, Westbury Bank and High Hotels. We continue to see growth in audit management, which is a subset of our much larger market that’s defined as governance risk and compliance known as GRC. We have recently signed several customers for audit planning and risk assessment, and we see a lot of expansion opportunities in the GRC space. In the regulatory risk market, we continue to win new business. For example, a Fortune 500 private financial services company has hundreds of Wdesk users who create stress testing and other annual and quarterly financial reports. We also see growing demand for Wdesk within private companies in the U.S. and Canada. For example, CrossFirst Bank used Wdesk to consolidate reports as streamlined their processes across the bank. Black Swan Energy in Canada is expected to begin using Wdesk for its quarterly and annual reporting in the fourth quarter of this year. We also continue to gain market share in the SEC compliance market where demand remains robust because Wdesk is the best practice. Lastly, we see increasing demand for additional and use cases in state and local governments and other similar organizations. For example, we recently announced that University System of Florida be its reporting deadline by one month by using Wdesk to collect data from 12 public Universities and create and distribute tuition fees and other financial reports. Additional customers in this market include the California State Lottery, State of Arizona, Des Moines Regional Transit System, Los Angeles World Airports and various cities such as Salt Lake City, Utah; El Paso, Texas; Tuscan, Arizona; and Rochester New York. We're also proud of the continued recognition that Workiva receives. In the third quarter, Chartis Research recognized Wdesk as a leader in its FinTech Quadrant for data integrity and control. Fortune Magazine ranked Workiva as one of the best work places for women. And Workiva was named one of the highest rated public cloud computing companies to work for by Barry ventures and Glassdoor. Finally, I'd like to report that our annual user conference in September drew audits, finance, risk and compliance professionals from nearly 1000 companies. Many of the people listening to this call attended our user conference and you saw firsthand, how much of our customers love Wdesk, and how we showed customers and prospects the many different ways they can use Wdesk. In summary, our third quarter was strong. We're pleased with the progress 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 improve productivity and accountability and gain insight into our 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 continue to advance on our path to sustain positive operating cash flow. We're pleased to have generated positive operating cash flow in Q3, and we expect to post positive operating cash flow again in Q4 which have us tracking in line with our expectation, that for the full year 2016 Workiva lease less cash from operations than we did in 2015. Also, we continue to believe that in the second half of 2017, Workiva will reach sustainable operating cash flow at breakeven or better on a forward 12 month basis. Today, we are announcing improved guidance for our Q4 operating loss and loss per share, but at the same time we are lowering guidance for our Q4 revenue. I will follow our typical format discussing specific numbers in a few minutes, but I wanted to start with some color commentary on the quarter and on our guidance. So, two factors had a positive impact on our cash flow in Q3. First, we've been taking steps to rebalance our business model to improve our operating margin. Operating margin improved 10.7 percentage points in Q3 2016 versus last year's Q3. And our guidance indicates, we expect some improvement on operating margin in Q4 year-over-year. We've been managing the growth of hiring at a rate below the growth rate of revenue accounting for much of the improvement in operating margin. We have also focused on improving the efficiency of our sales and marketing efforts by spending more carefully and making some adjustments to optimize account coverage. On the G&A side, we're seeing the cost of being a public company flattened. Second, as we've discussed on previous conference calls, we have programs in place to migrate customer contracts from quarterly to annual contract terms. Longer contract terms help cement customer relationships, reduce frequency of invoicing and generally improve efficiency in account management. In addition, it helps cash flow marginally. Also we've reintroduced some programs in Q3 for multiyear contract terms that contributed to the increase in long-term deferred revenue. Dollars associated with LinkedIn contract terms appear on our cash flow statement as an increase in differed revenue partially offset by the increase in accounts receivable. We expect to revenue growth rate to slow in Q4 for a few reasons. One, because we are pursuing larger deals with more parties involved. We are seeing longer sale cycles in stocks, internal controls, enterprise risk management and regulated risk. Also while the pipeline line of our sled business continues to build nicely, the sales cycle in that group is longer than we expected. Two, we have been allocating resources toward diversifying our distribution channels to compliment our direct sales model. While we are making progress on partnerships and complimentary distribution channels, revenue from these efforts is not yet reflected in our results. Three, our evolution toward capitalizing on enterprise-wide opportunities has required resources from our entire organization, but again we don’t expect to positive revenue impact in the near term. Four, focus on improving operating margin through managing the growth rate of hiring has had some impact on revenue growth. Five, M&A and delisting continue to account from majority of our churn and the last 12 months customers being acquired or ceasing to file SEC reports equated to $4.3 million reduction in annual contract revenue. Our Q4 guidance reflects our expectations that M&A related churn will continue to be robust. So based on our pipeline and the growth drivers as Matt mentioned earlier in the call, we expect revenue growth to trend higher in 2017 from expected Q4 2016 levels. We will offer more specific guidance on 2017 when we report fourth quarter results. Now, turning to more detailed review of our financial performance in starting with revenue, we generated total revenue in the third quarter of $44.7 million, an increase of 23.3% from the third quarter last year, breaking out revenue by reporting line item. Subscription and support revenue was $36.2 million, up 21.5% from Q3 of 2015. 54% of the increase came from deeper penetration of our existing customer base. The remaining 46% of the S&S revenue increase in Q3 came from new customers added in the last 12 months. The average contract value on subscription and support from all customers continue to rise. Professional services revenue was $8.5 million, an increase of 31.7% from the third quarter of 2015. Higher customer count and services for non-SEC use cases accounted for the majority of the growth in services revenue. Turning to our supplemental metrics, we finished the third quarter with 2,696 customers, a net increase of 228 customers from Q3 of 2015, and a net increase of 74 from Q2 of 2016. Our subscription and support revenue retention rate excluding add-ons was 95% for the month of September 2016, compared with 95.1% in June2016, and 96.4% in September 2015. As noted customers being acquired or ceasing to file SEC reports accounted for over half of the revenue attrition. With add-ons, our subscription and support retention was 108.7% for the month of September 2016 compared with 110.2% in June 2016. Increased subscription revenue on non-SEC cases from existing customers continued to be the primary driver of our add-on revenue retention rate. Moving down to the income statement, I’ll talk about our results before stock-based compensation, in other words on a non-GAAP basis. Please refer to our press release for a reconciliation of our non-GAAP and GAAP results. Gross profit was $32.2 million in the third quarter, up 20.7% from the same quarter a year ago, representing a gross margin of 72% compared to a gross margin of 73.5% in the third quarter of 2015. Now breaking out gross profit, subscription and support gross profit was $29.7 million equating to a gross margin of 81.9% on S&S revenue, compared to 24.6 million or 82.5% gross margin in the third quarter of 2015. Gross margin from S&S contracted 61 basis points due to an increase in employee compensation as well as increased server costs. Professional services gross profit in the third quarter was $2.5 million, equating to a 29.9% gross margin, compared to $2.1 million or 32.1% gross margin in the same period last year. Gross margin from professional services contracted 225 basis points due to an increase in employee compensation and travel costs associated with continued demand for our services. Turning to operating expenses, research and development expense in the third quarter was $13.7 million, an increase of 12.9% from 12.2 million in the prior year’s third quarter due to additional staff as we continue to dedicated more resources to enhance our Wdesk platform. Our R&D, expense as a percentage of revenue this quarter improved to 30.7% which is 290 basis points better than in Q3 last year because revenue expanded at a faster rate than headcount growth, and the positive impact of an R&D tax credit. Sales and marketing expense increased 6.6% over Q3 of 2015, to $21.8 million, driven primarily by additional headcount in line with our expectations. Q3 is a seasonal high point for marketing expenses due to our annual user conference as we’ve discussed on previous calls. Sales and marketing expense as a percentage of revenue this quarter improved 770 basis points to 48.7% from 56.4% in Q3 last year through improve operating efficiency. Reduced T&E expense together with greater efficiency and spend around with marketing programs and our annual user conference accounted for most of the improvement. General and administrative expenses were $5.7 million in Q3, an increase of 8.1% compared with $5.3 million in the third quarter of 2015, driven by higher compensation and additional staff uses the growth of our business. G&A expense as a percentage of revenue in the latest quarter improved 180 basis points to 12.8% from Q3 2015 due to improved operating efficiency. Headcount compensation expense, T&E expense and professional services, professional fees all grew at a slower rate than revenue did. Operating loss was $9.1 million in the third quarter of 2016, compared to $11.2 million in the same period a year ago. Workiva’s operating margin improved over 10 percentage points in the latest quarter versus the same quarter a year ago. Net loss is $9.2 million for the third quarter of 2016 compared to the net loss of 11.5 million in the third quarter of 2015. We posted a net loss per share of $0.23 in the third quarter of 2016 compared to a net loss per share of $0.29 in the same quarter a year ago. Turning to our balance sheet and our statement of cash flows; at September 30, 2016, we had cash, cash equivalents, and marketable securities of $53.8 million, an increase of $2.9 million compared with the balance at June 30, 2016. In the third quarter of 2016, net cash provided by operating activities was $2.8 million, compared with a use of $4.7 million in the same quarter a year ago. At September 30, 2016, total deferred revenue increased $13.2 million from June 30, this year. Long-term subscriptions support deferred revenue increased $6.7 million during the quarter, driven by existing customer contract renewals for longer terms. Our short-term subscription support deferred revenue increased to $6.8 million during the quarter. Our services deferred revenue declined $345,000 during the quarter. As noted, we continue to make steady progress on converting quarterly contracts to annual contracts. In the third quarter of 2016, accounts receivable balance increased $4 million due to a rise in longer term subscriptions support contract renewals from our existing customers. Turning to our guidance on our income statement for the rest of 2016; our guidance on a non-GAAP loss from operations and non-GAAP loss per basic shares excludes 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 2016, we expect total revenue to range from $45.2 million to $45.7 million. We expect GAAP operating loss to range from $11.8 million to $12.3 million. Non-GAAP operating loss is expected to be in the range of $8 million to $8.5 million. We expect GAAP net loss per share to range from $0.30 to $0.31, non-GAAP net loss per share is expected to be in the range of $0.20 to $0.21. Our loss per share guidance assumes 41 million basic and diluted shares outstanding. Our guidance for the full fiscal year 2016 is as follows. We are raising our guidance for the full fiscal year 2016 as follows. We expect total revenue to range from $177.5 million to $178 million. We expect GAAP operating loss to range of $48 million to $48.5 million. Non-GAAP operating loss is expected to be in the range of $33.6 million to $34.1 million. We expect GAAP net loss per share to range from $1.19 to $1.20. Finally non-GAAP loss per share is expected to be in the range of $0.84 to $0.85. Our loss per share guidance for the full year also assumes 40.7 million basic and diluted shares outstanding. Finally, we intend to provide guidance on 2017 financial data when we communicate our fourth quarter and full fiscal year financial results. In summary, Workiva posted another strong quarter. Demand remains robust for our solutions and we remain focused on executing our growth plan to capitalize on our multi- billion dollar market opportunity. We'll now take your questions. Operator, we are ready to begin the Q&A session.

Thank you [Operator Instruction] And your first question comes from the line of Tom Roderick of Stifel. Your line is open.

Yes, Matt VanFleet on for Tom, this afternoon. Thanks for taking my question. I guess first-off I really wanted to look at the growth of the SEC business relative to some of the other use cases in terms of a rate of growth, because we're starting to see deceleration in your overall growth rate. And it would seemingly make sense that if the SEC market is as penetrated as you guys have it, then it's naturally going to slow down. So can you provide a little more commentary around growth rates for both the SEC and the non-SEC use cases?

So it's interesting, the mix hasn't changed. It's still about 50% SEC and 50% non-SEC. So we really haven't seen any differential in the growth rate.

And then Matt you talked about expanding the functionality on the platform to be more enterprise-wide deployment capable. Could you give us a little bit more detail in terms of what type of functionality you still need to add to the platform? What's sort of the timeline to get there? And what types of systems are you expecting to displace within these customers that makes it more of an enterprise-wide productivity platform?

Let me kind of -- let me start that and then, Marty, you can join too, but it's a good question. First of all, as you know, we've always been talking about the landing and expanding and going after large customers. And we've been doing it through a point solution. So we've been going to different groups, and introducing Wdesk for that to be able to find a benefit to use that. And we've been successful on that. And one of the reasons that we wanted to go in that direction that eventually we would want these businesses to look at to say hey, look, maybe we should look at this more of an enterprise-wide point of view. And we've been really successful on that. Now, we start seeing that result is coming to picture, and now we specialized six months or so. We start seeing quite a few of our customers coming-in and talking to us to really start looking at, from an enterprise point of view as opposed to go in these different groups and trying to sell or convince them to use Wdesk. What that starts creating is, now that when you look at, from an enterprise-wide point of view, than more communication, what the IT folks that the user management capabilities have to be much more robust, and product packaging and pricing, and the data integration. And that all has to be put together, so that we can have the enterprise-wide type of capability that goes along with that So if I had to summarize it, and Marty you can join in, is the user management, the ease of users coming-in and going out is becoming quite important. In the point solution, we don't have to worry about that as much. But now that we're getting into enterprise-wide, where there're hundreds of users that come and go, and can hop-in and hop-out, that's becoming important, data duration is becoming important an part of that. Marty, do you want to add anything?

Sure. First off in a minute I’ll go with some of the different things that we’re having to develop. And I want to start by saying that a lot of these are known and they were on our roadmap prior. But to sort of elaborate on what Matt said, what happens is when we get three, or four, or five point solutions, sometimes only a couple point solutions in a company, it becomes apparent to IT. And then the question start coming about enterprise-wide type solutions, because they see a lot of opportunities to solve other problems in the organization. But they have quite a list of requirements they need. The top of that list is user management. They want integration with their LDAP or their active directory systems. They want work spaces, so that you can define different areas different that people can go, role definition. So fewer certain titles, you get certain permissions and certain capabilities. We have to get good at billing, because they want to know by user how much they’re using, not only of our software usage but also the infrastructure cost. And so there is a lot of those types of things form, building. As these partners have gotten more and more involved, they want to start building forms and creating their own intellectual property in our technology that they would then take out as a value-add layer on top of our. So we’re having to build tinplating, and form building for our third-parties, our partners. And billing automation, we need to get that a lot better. And so there is just a lot of things, and the reason that these things have become front and center is that the demand for this came sooner than we anticipated. We knew this would come down the road. But to Matt’s point, we had a lot of companies ask for that. And once IT gets in the middle of that, then things -- the sale cycles definitely extend. So, we’re working with IT groups and quite a few of our customers. And we’re trying to accelerate a lot of these development things, at the same time trying to manage cash, so that’s really what the essence of it.

And then lastly, just following up on that last point on -- you made a couple of comments about the sales cycles extending. Just curious where they are now relative to maybe what you were expecting on the SOX team as you built that out over the last couple of years. And then on some of the other GRC functions that you’ve built more sales team specific to those functions. What's changed and what other training or support you need to give those folks to get those sales cycles shortened, or back in line with the expectations?

Just to make sure that we’re clarifying. When we talked about sales cycles, and there are the two different types; one is relating the bigger deals. Now we’re facing with on the SOX and other areas. And then also we’ve talked about sales cycle within the context of enterprise, which we think is coming down to pipe sooner than we expected. But having said that, in terms of currently and we would start experiencing this last few months. And it's becoming clear that for us it's all good news. The good news is that as we expected that the deal sizes are getting bigger and bigger. Now, we do still close, let's say given the SOX, some of the deal sizes that are more normal in the $40,000, $50,000, $60,000 deals. But then when you start to doubling and more of those sizes, we are seeing that they are getting more and more again, which is good news from my point of view. But by definition, as you know, whenever the dollar amounts go up, naturally the sales cycles go up with that. Because now you’re dealing with various different entities in the organization, I’m not sure, once there is really no magic to when the size of the deal gets bigger that you can really shorten that. So, we’re closing the deal sizes that where you see, we’re seeing it. But at the same time, now we’re seeing more and more larger deal sizes that’s giving us the longer sales cycle that we experienced, that we’re dealing with.

And your next question comes from the line of Terry Tillman with Raymond James. Your line is open.

Hi, good afternoon guys. Can you all hear me okay?

Yes.

So, I guess Matt, maybe a question for you, or Marty, or I don’t know who should answer this. But as you guys are evolving here and having bigger, more enterprise-wide opportunities. What I’m sure it’s about is accumulating your sales forces just the way is composed now. Do you have the right sales force to go after this market? Or is there some potential re-tooling that you have to do in order to better optimize these bigger opportunities?

Yes, let me start with that, is that, we’ve always talked about it. We’re cognizant of as we start to selling -- landing and expanding, and even from a enterprise-wide point of view, as well as the lifecycle of the Company as we’re growing. We’ve always known and we’re working on it to make sure that we have a comprehensive distribution channels, that includes the, obviously, direct sales that includes inside sales, that includes various different kinds of distributions, and as well as the partnership. As a matter of fact, one of the things that now you’re seeing is that, especially when you get into this enterprise level discussions that we’re having, one of the things that we see our customers or the potential customers who want to do this enterprise deals that would like us to be able to also coming to them with the expertise in terms of deployment and other things where we’re seeing the demand from them and telling us that we should be, perhaps come with other partners to be able to opt them to deploy, either they’re working with them already. And so the partnership also becomes part of our distribution strategy moving forward. And in terms of the larger deals, we obviously -- when you have direct sales people is that you’re working with. You also have to have some of those, which we do have. And we also have to continually hiring some of that sales people who can deal with the larger deals. So it’s a combination of all that, but we’ve always looked at it as a lifecycle of the Company as we’re growing. We would see this more comprehensive distribution strategy that includes the whale hunters, and the inside sales, and the online sales, and with the partnerships and with the other means to be able to sell our capabilities and platform. Marty, do you want to add anything?

Yes, that’s a very good question, and one obviously we anticipated. Because it is something we have to do. As we sit today, we have a number of sales people who are quick to do this. They’ve developed and gotten very good. And over-time, we’re going to have to add more of those people. There is no doubt. The part of our business that’s built out the midterm deals some of those people are maturing and moving up. And so it’ll be a combination of using internal people, and adding some new blood. And so, it will be a combination of those two. And I just want to mention one more thing. At this whole -- from our point of view, this demand for bigger deals and demand for enterprise type engagements, as Matt said, the sales cycle is what it is. You’re dealing with a lot more people, and we’re dealing with IT. And you’re negotiating pricing for our huge organizations and through that carefully. But long-term, it's a very promising thing. And one thing -- and actually very exciting for us, we didn’t anticipate this happening, as soon as it has. So, it's going to affect us as we start to ramp-up to do this. But the long-term is very optimistic, because of the rate at which Company starting to realize that this can be used that way.

I guess question in terms of the idea of a multi-year contract, and getting paid for multiple years. I guess what I am curious about in order to get that from the customer. What do you all have to give up, or if you keep pricing flat for a number of years? And just where are you in the process, maybe trying to execute on this?

Yes, so there are couple parts to that; one is the ongoing program of migrating quarterly to the annual, and that’s going to continue to take a while. I think we said last time it's going to take a couple of years. The second part of that though is more discretionary. And -- well some of that actually is companies that had maybe long-term contracts two year contracts, that happen to come up for renewal in the third quarter, and the fourth quarter. And we definitely are seeing some of that. And another point there is there are some customers who were quite eager to sign-up for strategic reasons, or account management reasons, for competitive purposes. And there are different programs out there that it's hard to generalize exactly. But there are some incentives that we’ve applied in certain cases, but we’ve done it strategically. We had not really -- we used that programs sparingly, and we only used it for part of the third quarter, reaching at some new accounts because we had enough that was renewing on its own for two and three year periods. And some of the customers are very happy to sign-up for two or three years, because they know that they love the application. I know they’re going to use it long-term. And it works for them to minimize a number of touches as well.

Okay. And maybe, Stuart, I’ll take the hardest question for you, my last question. I think in either your prepared remarks or Matt's prepared remark, the commentary was growth will reaccelerate. And I know you’re guiding for '17. But we’ve got guidance for 4Q that is definitely much lower than we were expecting. I think it's like 14% to 15%, depending on what you take in terms of the range. If things are shifting or getting more elongated on these bigger deals, that’s obviously affecting your bookings. I mean, I guess, should we think that about how this flows into '17, the growth could actually further decline at some point in first half of year. And then when would we actually start seeing that inflection point and grow? Thanks.

Yes, so we're going to provide detailed guidance on 2017 at the end of the fourth quarter. And I'll just leave it at what I said earlier, which is that we expect revenue growth to trend higher in 2017 from the expected -- the Q4 2016 levels that we gave you. But that's for the full-year, not necessarily to quarters.

And your next question comes from the line of Steve Ashley of Robert W. Baird. Your line is open.

So wondering what areas of the business are slowing in the fourth quarter, or going from growing in the low 20s to growing in the kind of mid-teens. Where is the slowdown taking place?

So Steve, in related to the earlier question, we really -- the mix hasn't changed. It's sort of -- if you look at the mix of bookings, it's still about 50% SEC and about 50% non-SEC. So, I don't know that it’s -- we called out elongation of the sales cycle in all those non-SEC areas.

You could bifurcate the business into large deals, and then an underlying point product a run-rate business. And it seems like the point product run-rate business has slowed down. Does that sound right?

Well, I don't know that. We don't really look it that way. As Matt was talking about, Marty has done it over-time. We’ve gone through this evolution. We're going through this evolution from point solution, to multi-use case, to enterprise wide opportunities. And we're between stages two and three there. So it's hard to compare data points.

And my last question was you talked about making some adjustments to the sales force account coverage to help with the efficiencies there. Could you give a little color on that?

Sure. I mean I think a lot of that has to do with the existing customer teams partnering with inside sales; and in setting priorities on direct contact; and working also with the customer teams; and the professional services team; and in strategizing on particular accounts; and how they're going to go at it.

And your next question comes from the line of Michael Nemeroff of Credit Suisse. Your line is open.

Hey guys thanks for taking my questions, most of them have been asked and answered. But Stuart I just was wondering, how much specifically did M&A reduced the Q4 revenue versus the longer sales cycles that you're talking about. How many of the $3 million in Q4 guide down, what’s the mix of M&A versus sales cycle impact?

So, I don't think we've got it cut that finely. I mean the data we gave on the impact in M&A and activity and de-listings, right, because those are some of the de-listings related to customer bankruptcies and that sort of thing. I think we said in the last 12 months, customers being acquirers, ceasing to file SEC reports equated at $4.3 million reduction in annual contract revenue. So that we believe that rates to continue. And we have some visibility in that, because we -- not perfect visibility, but we see announced M&A deals. It doesn’t really happen to us until M&A deal closes. But sometimes they don’t cancel. Sometimes they continue on. So we’re building all of that to the forecast.

On the cash flow, I don’t think anybody was expecting these multi-year arrangements. And I am curious, how much of the Q4 expected positive cash flow is going to be driven by new multi-year billings that where you collect the cash upfront versus operational efficiencies to get you there? And should we expect a level of multi-year billings in every quarter going forward? Is this part of the new sales strategy?

Well, we’re doing that strategically, right. I mean there’re certain accounts where we think we see value in having that. And then we also have the roll-over timeline. So just to go back for a second, when we went public in 2014 December, we were funding the Company through some longer term prepays. And while those have come up for renewal this year, and a lot of those customers have decided, hey, I’d liked the two year deal, so I am going to roll over for another two year deal. And a lot of those happened in the third, and many will happen again in the fourth quarter. So I would say the bulk of the increase you will see in long-term differed during the fourth quarter will be those type of deals plus a few strategic deals.

Having said that, the operational efficiency. Operational efficiency has been a focus for us too. So, I mean that’s been a focus to make sure that we kind of run the business at level of path of profitability. So that has been, I’d say pretty big focus this year. So I want to make sure that you guys understand that, that’s been [multiple speakers].

The other aspect of...

Yes, the other aspect of...

Cash flow improvement.

And just to put a financial point, I don’t necessarily know if you’ve answered Terry's earlier question. Does the customer get a discount for giving you those multi-years of cash upfront? And then also, Stuart, the Q3 sales and marketing expense was a pretty significant slowdown. I am just curious whether those were operational efficiencies, or just lower commissions pay-outs because of fewer deals?

Well, on that point on sales and marketing, it was definitely a mix. But I would say it was heavily oriented towards teeny and some of these operational efficiencies. So definitely there was commission was in their composition, was in there. What was the first part of that, you said Terry’s...

It was whether the customers get a discount.

Yes, there is, for multi-year contracts, there is a very modest discount. And we have tested the elasticity of demand for those discounts. And in a zero interest rate environment, they are pretty low and they’re pretty sensitive.

And your next question comes from line of Mike Grondahl of Northland Securities. Your line is open.

This is Greg on for Mike. Thanks for taking my question. So just following up on the moving to annual contracts, I think last quarter you were saying roughly 50% to 60% of new clients were starting on annual contract terms. And I’m just wondering if this has changed at all? And if you expected to change -- or will you expect...

Yes, it’s actually higher. It’s actually higher than that. I’m guessing it's closer to 70%, or 80%, I’m getting the nods here, it's closer to 80% of new customers are on annual contracts. So, the real effort is on converting existing customers from quarterly to annual.

And what do you expect that to get to like long-term then?

Well, I mean I don’t think we’re going to ever get to a 100%. But that in the next two years or so, I would expect it would be the substantial majority of accounts would be one year longer.

Okay, great...

And that’s the goal. But again, it’s operationally intensive and we’ve got almost 2,700 customers. And there are a lot of contracts out there and we have competing priorities for customer interaction.

And then in the past you were -- you spoken about the potential opportunity that’s presented by the DATA Act. I was just kind of wondering if you could maybe provide an update on the size or timing of this opportunity, if anything has changed, any color there would be great.

Yes, I don’t think anything has changed. That’s more of a long-term play for us? Marty, if you want to add anything on that?

No, I think that it's about the same. Those bills are still tracking that are going to in Congress, and they were not affected by this election, as far as we know.

In closing, I want to thank you for joining us today. Operator, you may now end the call.

Thank you gentlemen. This does conclude today’s conference call. And you may now disconnect.