Workiva Inc. (WK) Q2 2017 Earnings Report, Transcript and Summary

Good afternoon. My name is Heidi and I will be your conference operator today. At this time, I would like to welcome everyone to the Workiva Inc. Second Quarter 2017 Earnings Conference Call. [Operator Instructions]. It is now my pleasure to turn the call over to the Director of Investor Relations, Mr. Adam Rogers, you may begin your conference, sir.

Thank you and good afternoon, everyone and welcome to the Workiva's Second Quarter 2017 Earnings Conference Call. This afternoon, we'll begin with comments from Chairman and Chief Executive Officer, Matt Rizai; followed by Executive Vice President 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 August 10. 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 third quarter and full fiscal year 2017. 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 reports on Form 10-K or 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 second quarter 2017 results. We delivered strong second quarter performance. Total revenue for the quarter was $49.4 million, an increase of 14.8% over the second quarter of 2016. We outperformed our guidance for quarterly revenue, operating loss and loss per share. As a result, we're increasing our full year 2017 guidance which Stuart Miller will discuss in more detail later in the call. We continue to sign new Wdesk customers as well as add seeds within existing customers for use cases in finance and accounting, Sarbanes-Oxley act and internal controls, audit, risk, compliance and Corporate Performance Management at public and private companies. Customer demand for a broader-based enterprisewide Wdesk solution continues to grow as we expand across our customers' organizations. We recently announced data integration between Wdesk and more than 100 cloud and on-premise applications, including Oracle ERP Cloud. Integrating enterprise business systems with Wdesk helps our customers improve a wide range of financial, regulatory and corporate performance management functions. Expanding the amount of data that Wdesk users can directly access amplifies the power of our platform throughout our customers' organizations. Now I'd like to share a few examples of customer use cases that illustrate the breadth and depth of Wdesk. A large regional bank is using Wdesk for its call reports which are quarterly filings required by the FDIC. A large sporting-goods company is now using Wdesk for corporate performance management. The company will use Wdesk to consolidate spreadsheets into a linked workbook, thereby reducing manual data entry. The treasury department of a private electrical products manufacturer is using Wdesk for debt compliance reporting. We continue to see strong demand for Wdesk in SOX and internal controls during the second quarter. Recent SOX customer wins include Wal-Mart, Spin Master, [indiscernible] and American Axle. We also see growing demand for Wdesk from private companies for a wide variety of use cases. New customers include companies in the automotive supply, technology, real estate, analytics and energy industries. We remain focused on our leadership in the SEC compliance market. We continue to add new customers at both large and small public companies, because we believe that Wdesk is widely regarded as the best practice for SEC reporting and XBRL. In the first quarter of 2017, Wdesk was used to file 53% of all XBRL facts with the SEC. So as you can see, we have room to grow in this market. Customer press releases this quarter reported that a multinational agri business is achieving an ROI of 266% and reaping more than $677,000 in total savings and benefits over 3 years by using Wdesk to streamline its management reporting. Both 2U and Aon are using Wdesk to streamline internal controls for financial reporting as required by SOX and CalPERS is using Wdesk to modernize its comprehensive annual financial report. We're proud that Gartner recently placed Workiva in the furthest position for completeness of vision in the Leaders quadrant its 2017 Magic Quadrant for Cloud Financial Corporate Performance Management Solutions. Other awards this quarter include Workiva being named one of the Best Places to Work in IT by Computerworld magazine. Finally, we're looking forward to our sixth annual user conference September 19 to 21 in Las Vegas. We will offer more than 60 sessions on best practices and advanced ways to use Wdesk. In summary, our second quarter was strong. Adoption of Wdesk continues to gain traction with new and existing customers and our sales pipeline continues to build. We're excited about the multiple growth opportunities in front of us and we remain focused on executing on our initiatives. With that, let me turn it over to Stuart Miller.

Thank you, Matt. As Matt mentioned, our second quarter results exceeded our expectations and we continue to see positive momentum in market. Before I discuss our second quarter results, I want to mention that we filed a universal shelf registration statement today. We view filing a shelf as a natural step towards improving our financial flexibility. That said, we have no immediate intention of issuing securities under the shelf registration. Here are a few dimensions of the shelf. The nominal amount registered is $250 million. A wide range of [indiscernible] structures remain debt equity, hybrids. The shelf is limited to primary offerings by the company. Therefore, the shelf is not allowed for secondary sales by stockholders. We expect that the most likely use of shelf would be to acquire or invest in complementary businesses, products, services, technologies or other assets. No acquisition is imminent, though we regularly evaluate acquisition opportunities. Now I'll comment on our second quarter results and then I will address our third quarter and full year 2017 financial outlook. Thereafter, we'll open up the call to your questions. We generated total revenue in the second quarter of $49.4 million, an increase of 14.8% from Q2 last year. Breaking out revenue by reporting line item, subscription and support revenue was $41 million, up 17.2% from Q2 2016. 57% of the S&S revenue increase in Q2 came from new customers added in the last 12 months. The remaining 43% of the increase came from deeper penetration of our existing customer base. Professional services revenue was $8.4 million, an increase of 4.6% from Q2 2016. Increased XBRL services revenue drove the year-over-year increase. We expect the growth rate of subscription revenue to continue to outpace the growth of services revenue in Q3 2017. When comparing results from sequential quarters, please recall that Q1 is our seasonal peak for Professional Services revenue due to higher demand for services associated with the preparation of 10-Ks and proxy statements. Turning to our supplemental metrics. We finished Q2 with 2908 customers, a net increase of 286 customers from Q2 2016 and a net increase of 83 customers from Q1 2017. Our subscription and support revenue retention rate, excluding add-ons, was 96.1% for the month of June 2017 compared with 95.1% in both March 2017 and June 2016. Customers being acquired or ceasing to file SEC reports accounted for a majority of revenue attrition, consistent with our experience to date. With add-ons, our subscription and support revenue retention rate was 106% for the month of June 2017 compared with 106.6% in March 2017 and 110.2% in June 2016. Increased subscription revenue on non-SEC use cases from existing customers continues to be the primary driver of our add-on revenue retention rate. Moving down the income statement. I'll talk about our results before stock-based compensation that is on a non-GAAP basis. Please refer to our press release for a reconciliation of our non-GAAP and GAAP results. Gross profit was $35.4 million in Q2, up 15.4% from the same quarter a year ago. Gross margin was 71.6% in the latest quarter compared to a gross margin of 71.3% in Q2 2016. Now breaking out gross profit. Subscription and support gross profit was $33.4 million, equating to a gross margin of 81.5% on S&S revenue compared to $28.1 million or an 80.2% gross margin in Q2 last year. Professional Services gross profit in the second quarter was $2 million, equating to a 23.6% gross margin compared to $2.6 million or a 32.3% gross margin in the same period last year. Turning to operating expenses. Research and development expense in Q2 was $15.8 million, an increase of 17.3% from Q2 last year due to increases in compensation, travel and consulting expenses. R&D expenses as a percentage of revenue increased this quarter to 31.9% compared to 31.2% in Q2 last year. Sales and marketing expense in the quarter declined 1.5% from Q2 last year to $19.1 million. Sales and marketing expense as a percentage of revenue in this quarter improved 640 basis points to 38.7% from 45.1% in Q2 last year. We continue to see benefits from simplification of our sales and marketing organizations. General and administrative expenses were $6 million in Q2, an increase of 5.9% compared with $5.7 million in Q2 2016. G&A expense as a percentage of revenue in the latest quarter declined to 12.1%, an improvement of 110 basis points from Q2 2016 due to improving operating efficiencies. Operating loss was $5.5 million in Q2 2017 compared to an operating loss of $7.8 million in the same period last year. Workiva's operating margin improved 7.1 percentage points in Q2 2017 versus the same quarter a year ago, primarily because the growth rate in revenue exceeded the growth rate in headcount. Net loss was $5.8 million for Q2 2017 compared to net loss of $8 million in Q2 2016. We posted a net loss per share of $0.14 in Q2 2017 compared to a net loss per share of $0.20 in the same quarter a year ago. Turning to our balance sheet and statement of cash flows. At June 30, 2017, cash, cash equivalents and marketable securities totaled $72.9 million, an increase of $8.2 million compared with the balance at March 31, 2017. In the second quarter, net cash provided by operating activities was $4 million compared with a net use of cash of $4 million in the same quarter a year ago. At June 30, 2017, total deferred revenue increased $14.6 million from March 31, 2017. Short term subscription and support deferred revenue increased $12.2 million in Q2, driven by new sales and conversion of renewals from quarterly to longer terms. We continue to make steady progress on converting quarterly contracts to annual contracts. Services deferred revenue increased $800,000 during the quarter and long term subscription and support deferred revenue increased $1.6 million from Q2, primarily due to customer contract renewals for multi-year terms. Turning to our guidance for 2017. Our guidance on non-GAAP loss from operations and non-GAAP loss per share -- basic share 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 third quarter of 2017, we expect total revenue to range from $50.4 million to $50.8 million. We expect GAAP operating loss to range from $16.4 million to $16.8 million. Non-GAAP operating loss is expected to be in the range of $11.8 million to $12.2 million. As a reminder, Q3 is the seasonal high point for marketing expenses. We host our annual tech user conference in September and we recognize the majority of the expenses at this conference in Q3. We expect GAAP net loss per share to range from $0.40 to $0.41. Non-GAAP net loss per share is expected to be in the range of $0.29 to $0.30. Our loss per share guidance assumes 42 million basic and diluted shares outstanding. We're raising guidance modestly for the full year 2017 as follows, we expect total revenue to range from $205 million to $206 million; we expect GAAP operating loss to range from $42.7 million to $43.7 million; non-GAAP operating loss is expected to be in the range of $25 million to $26 million. Our third quarter and full year guidance on operating loss anticipate incremental investments in technology and talent. For the second half and full year 2017, we continue to expect operating cash flow to be positive. We expect GAAP net loss per share to range from $1.04 to $1.06. Finally, non-GAAP net loss per share is expected to be in the range of $0.62 to $0.64. Our loss per share guidance for the full year assumes 41.7 million basic and diluted shares outstanding. So to wrap up, Workiva posted another strong quarter. We're pleased with the progress we're making on cash flow and operating margin. 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 will now take your questions. Operator, we're ready to begin the Q&A session.

[Operator Instructions]. Your first question comes from the line of Tom Roderick from Stifel.

This is Matt Van Vliet on for Tom today. I guess, first off, looking at the strong cross-sell upsell opportunities that you've had with existing customers and you highlighted that the increase was primarily from non-SEC sales into those existing customers. So what do you think you've done over the last couple of years in terms of improving the product and making strategic sales, I guess, training and organizational changes, to help drive that as the primary upside?

Well, I mean, our focus has always been last 2, 3 years and we've talked about this is that we've always looked at Wdesk as a platform strategy to make sure that we're reaching beyond the compliance side of the business as we get up -- quite a bit of demand from the customers. So that really allowed us to really make sure that Wdesk was ready from a platform point of view. That means there's a lot of things we have to consider to make sure that user management is in shape and from a technology point of view, that we can respond to a wide usage of the platform which we've done that and as we also look at the -- our sales organization, we wanted to make not only they were sufficient, but also had a lot of skills to be able to sell it -- at the enterprise-level. So we have all -- done all that, but it's a journey that is still continuing. We're not done with that, but we're definitely making a lot of progress in the right direction. But the other thing that we're excited about is that, we really do, truly see quite a bit of demand from our current customers and they really help us along to make sure that we're able to cross-sell in different parts of the organization. But at the end of the day, you still have to go and don't assume that just because you can sell it to one part of the organization, you still have to provide the respect and the necessary information and understand the usage when you go to different part of the organization. So it's one of those things that we continue to work on, to make sure that we have the right people to make sure the platform continuously improving, make sure that we have the type of integration that we've announced to make sure that our customers can pull in various types of data, unstructured data, that they work with. So it's an ongoing, pretty comprehensive effort from every direction to be able to serve our enterprise customers.

And then I have a follow-up on the progress of converting customers to annual or even multi-year contracts. Where do you feel like you are in that process? Any kind of statistics that you could share with us would be helpful to understand that whole process? And then also, what are -- what kind of discount levels are you offering to have the multi-year renewals for some of these customers?

So on the first point, I think, we've disclosed in the 10-Q that we think we will be through the vast majority of the convergence of quarterly to annual in the next 18 months. It's gone very well. As you know, we're a little bit of an outlier having as many contracts as we did on a quarterly basis, annual terms absolutely standard in for B2B, SaaS. So it's just -- it's going to make us look more like other B2B, SaaS companies. In terms of multi-year, we offer very modest discounts for multi-year. The -- it's really interesting. It's really driven more by customer interest than it is by our incentivizing and certainly, that was the case in the last quarter. I mean, very well a single-digit kind of incentives. From our perspective it improves efficiency, because we're not issuing -- we're not having to issue invoices every year. We get somebody on a multi-year, then it's onetime. So that helps efficiency, but it's not worth paying a lot for.

Your next question comes from the line of Rob Oliver with Baird.

This is Matt Lemenager on for Rob today. I got a question on the operating expenses. You've been very prudent about monitoring the operating expenses, driving margins. The sales and marketing expense was down year-over-year for the third straight quarter. Part of this has been a partner strategy. We've seen kind of an accelerated cadence of press releases around partnerships. Can you talk about which partnerships are most significant in helping drive top line and then that leverage you're seeing on the sales and marketing line?

Yes. I think right now what we really -- from a distribution point of view, we've always wanted to focus to make sure that we have the right skills and as we get into different channels in terms of enterprise and SEC. And I think we've talked about that we, with the new sales leadership, we got into more regional way of looking at things. That allowed us to create efficiency and then, obviously, we started pretty aggressively to start working on the partnership probs. And that's again an ongoing program and -- that we're very excited about. We have very good relationships and we have good potential with every single partner that we have. We do not really comment on individual partnership performance. But overall, we believe that our partnership strategy is part of important distribution strategy that we'll continue to nurture.

That's great. And on the headcount, it looks like it was up 1% year-over-year in the second quarter. And just looking at the second half outlook. Does that assume a similar hiring cadence to what we saw in the first half? Stuart, I think you mentioned something about increased investments in technology and talent? I didn't know where you were looking at hiring and where the -- if there would be a step up in the second half?

Yes. I mean, I think we definitely are stepping up our hiring to take advantage of some pretty interesting opportunities. And that's, really, across the board. It's in development. It's in sales, particularly enterprise and partnerships. And in also sort of traditional account management direct sales and also in services and in customer support. So I do think, you'll see a bit higher level of growth in headcount and that's reflected in the guidance on operating margin.

Great. And if I could squeeze one more and I realize, you probably don't want to give too many specifics ahead of time, but is there any preview of what we can maybe expect to see or learn at the Analyst Day or user conference in September? Maybe the new or updated metrics or anything to kind of preview the Analyst Day?

Well, I mean, it's -- we welcome you guys to come out there and we will not waste your time. I think, we'll talk about our platform strategy and we'll give you a good insight of how we think about what we're doing with our platform and technology. And you'll also get a chance to be able to walk around and in different parts to be able to get hands-on information about what we're doing for the future.

But in terms of -- on the finance and accounting side, we will have review of -- which we'll broadcast, of the impact and the C66, the change in revenue recognition, how it affects us. But it's mainly going to be about strategy and product and customers.

Your next question comes from the line of Terry Tillman with SunTrust Robinson.

This is Courtney Sanders [ph] on for Terry. What kind of ability do you guys have into IPO activity. And how is your business turning around IPO work on the SEC reporting side?

Yes. Courtney, so we're seeing an acceleration of the activity on the IPO side. I mean, that's a business that we started to invest in, in earnest last year. And we're seeing a pretty good tick up in filings, some of which are draft registration statements and it's a growth market for us. And we've really -- I think we've impressed a lot of law firms and investment banks at how efficient Wdesk is in the production of the S-1 and how much time and effort they -- and money that they can save by using our -- by our application.

The next question comes from the line of Michael Nemeroff with Crédit Suisse.

This is Alex on for Michael. So I tuned in a little late and apologies if you've answered this already. But can you comment on the progress you've made and traction you're seeing as you target and pivot towards large enterprisewide deals?

I don’t know if I'll call it pivot. I think we've had the aspiration and based on the demand and based on the way that we've always envisioned the Wdesk as a BM platform. And we've definitely made a lot of progress in terms of hiring the right skills and right type of distribution folks and we're feeling really good about that. And we have a lot of demand that we're working on. The sales cycle's, obviously, longer as you can imagine. But we believe that we're on the right track, we're making good progress and we're really seeing the demand that's coming from our current customers and even some new potential customers as well.

Consistent with our comments as on previous calls, none of that's built into 2017. That's a -- we're looking forward to that as a 2018 event, if it pans out.

When it pans out.

When it pans out, I'm sorry.

Great. Just one more on the sales force productivity. Just kind of curious, of the newer cohorts of salespeople you've been hiring, how is the productivity tracking relative to your internal expectations?

Very well.

Your next question comes from the line of Michael Grondahl with Northland Securities.

First, have your seen or noticed any change in the sales cycle out there?

Well, I mean, obviously, the enterprise-level sales cycles, in general, we will always expect that they'd be longer and it will be longer. So you know, it's -- depending on the deal size, as it gets bigger, as you know, it takes longer from a sales cycle point of view. So that's always. But we're assuming that and we're planning on that and -- so yes, there is -- they dependent on the deal size. If it's a deal that's in the smaller range, then the sales cycle is shorter. If it's a larger range it's -- sales cycle is longer.

Yes and from what I've seen, the sales cycle seems to have gotten a little shorter and as you see -- and it's stabilized and slightly improving on SOX and on the regulatory side.

Yes.

That's helpful. I figured, just as you're out in the marketplace, more and more people are having success. Maybe for the average deal is coming in a little bit. And then, in the prepared remarks you talked a little bit about sort of increasing data process and integrations within companies. Can you give an example or two of how you are doing that? And kind of how it's paying off for you?

You know this is a really good subject, as Stuart gets really excited about it. He looks at it from a CFO point of view and so forth. So I'm going to let Stuart talk to that.

I mean, the vision here is pretty compelling to CFOs. It certainly impressed me when I first saw it which is -- imagine looking at a spreadsheet with a pulldown menu and being able to click on your ERP, it's Oracle or SAP or Netsuite or Intacct or whatever as well as -- and draw that data into the spreadsheet as well as other data sources, such as CRM systems and HCM systems. That would allow you to do budgeting and forecasting and presentations, both internally and externally. Because a lot of that data in those structured systems are sort of hard to access and if you can pull them into our unstructured workspace and present them in precisely the way you'd like to, it's -- that's a must-have for CFOs.

Got it. And maybe just lastly -- on the competitive front, anything new or different out there?

Marty, do you want to talk about the competitive side? So I'll have you talk.

Sure. We're not seeing any competition that's building a generalized platform like we're for the CFO office, as Stuart talked about. In some of the use case areas where our platform is being used for, we see competitors traditional on-premise and we see some new cloud competitors, but we have yet to see anybody developing a platform remotely similar to ours.

In the last quarter, we did see IBM exit disclosure management with the sale of Cognos and Clarity.

Your next question comes from the line of Stan Zlotsky with Morgan Stanley.

This is Hamza Fodderwala in for Stan. So I just wanted to get a sort of sense or any high-level color you could provide on what sort of contribution you guys saw from a booking or sales perspective from non-SEC products this quarter and if you're still, sort of, on track as per expectations to do, I think, 50% this year?

Yes. So as you know, we comment on that once a year, right at the beginning of the year. So that's sort of a next February thing. But as we indicated in the script, the substantial majority of the add-on sales, we're selling non-SEC solutions receipts to existing customers and we're very pleased with that progress.

Got it. And then, I'm sorry if I missed it, but did you guys give a headcount number in the beginning of the call?

We don't quote that, but it's in the Q, isn't it? It's not in the Q? No. It's once a year in the K. That's it. Okay. So we didn't. I don't think it's in there.

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