Workiva Inc. (WK) Q3 2017 Earnings Report, Transcript and Summary

Good afternoon. My name is Chantal, and I will be your conference operator today. At this time, I would like to welcome everyone to the Third Quarter 2017 Earnings Conference. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session [Operator Instructions]. Thank you. Adam Rogers, Director of Investor Relations, you may begin your conference.

Thank you, and good afternoon everyone, and welcome to Workiva's third 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 is Marty Vanderploeg, President and Chief Operating Officer. A replay of this call will be available until November 14. Information to access the replay is listed in today's press release which is available on our Web site 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 will be making forward-looking statements regarding future events and financial performance, including guidance for our fourth 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 report 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 third quarter 2017 results. Our third quarter results were strong, and we outperformed our guidance for quarterly revenue, operating loss, and loss per share. Total revenue for the quarter was $52.1 million, an increase of 16.5% over the third quarter of 2016. Subscription and support revenue was up 19.3%, and professional services revenue grew 4.5% year-over-year. As a result, we're increasing our full-year 2017 guidance, which Stuart will discuss in more detail later in the call. We continue to sign new customers, and we continue to add more seats across our existing customers' organizations for use cases in finance and accounting, SOX, and internal controls, audit risk compliance and management and performance reporting. We continue to invest in the evolution of our Wdesk platform as a part of a larger ecosystem that includes partnerships and enterprise-wide opportunities where we see great potential for broad-based adoption and growth long-term. To do so, we remain focused on investing in user management, product and feature enhancements, and sales and marketing to capitalize on our expanded TAM. As we mentioned at our analyst day, in September, we believe that our ability to integrate Wdesk with more than 100 cloud, SaaS, and on-premise applications including Oracle ERP Cloud has expanded our TAM to $16.2 billion. Now, I'd like to share a few examples of customer use cases that illustrate the breadth and depth of Wdesk. LegacyTexas Financial Group purchased Wdesk and our consulting services to build balance sheet and income statement variance analysis. A leading risk modeling company is using Wdesk for financial review presentations. A global oil and gas company uses Wdesk for its energy outlook document. The California State Lottery is improving its budgeting and financial reporting processes by using Wdesk to create its comprehensive annual financial report. We continue to see strong demand for Wdesk in SOX and internal controls during the third quarter. Recent SOX customer wins include Chorus Aviation, the J.M. Smucker Company, Newpark Resources, Methode Electronics, and Natus Medical. We continue to see growing demand for Wdesk among private companies for a variety of use cases. New customers include companies in energy, banking, industrial services, and technology. We also remain encouraged by the growth opportunities for Wdesk in performance and management reporting, including FP&A. Customers currently using Wdesk for these types of use cases include Alaska Airlines, Fiat Chrysler Automobiles, Mary Kay, and Utmost Energy Corporation. We continue to gain market share in the SEC compliance market, where Wdesk is considered a best practice. We're also seeing more demand for Wdesk from foreign private issues that use IFRS taxonomy because they'll be required to submit their SEC filings with XBRL tagging starting December 15. We're also proud of the continued recognition that Workiva receives. In September, Workiva won a Gold Stevie Award for Employer of the Year in the large software company category, and last month Workiva won the Sustainability Leadership Award from the Business Intelligence Group. Finally, I'd like to highlight that in September, we held our largest annual user conference to date, attracting nearly 1,700 audit, finance, risk and compliance professionals from over 750 companies. Many of the people listening to this call attended our user conference, and you saw first-hand how much our customers love Wdesk. Our conference helps us maintain our high customer satisfaction rate, and allows us to test new products and features while showcasing a wide range of Wdesk use cases to our current customers and prospects. In summary, our third quarter was strong. Adoption of Wdesk continues to grain 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.

Thanks, Matt. As Matt mentioned, our third quarter results exceeded our expectations. We continue to see positive momentum in the market. I'll begin by reviewing our third quarter results, then comment on our fourth quarter and full-year 2017 financial outlook, and then I'll wrap up with a comment about 2018. So we generated total revenue in the third quarter of $52.1 million, an increase of 16.5% from Q3 last year. Breaking out revenue by reporting line item, subscription and support revenue was $43.2 million, up 19.3% from Q3 2016, 48% of the S&S revenue increase in Q3 came from new customers added in the last 12 months. The remaining 52% of the increase came from deeper penetration of our existing customer base. Professional services revenue was $8.9 million in Q3 2017, an increase of 4.5% from the same quarter last year. Services revenue was about $500,000 higher than we expected in Q3, pulling forward some of the projects we had not expected to complete until Q4. We expect the growth rate of subscription revenue to continue to outpace the growth of services revenue in Q4 2017 and into 2018. Turning to our supplemental metrics, we finished Q3 with 2,991 customers, a net increase of 295 customers from Q3 of 2016, and a net increase of 83 customers from Q2 2017. Our subscription support revenue retention rate excluding add-ons was 96.5% for the month of September 2017, compared with 96.1% in June 2017, and 95% in September 2016. Customers being acquired or ceasing to file SEC reports, accounted for a majority of the revenue attrition, consistent with our experience to date. With add-ons, our subscription support revenue retention rate was 108.6% for the month of September 2017, compared with 106% in June 2017, and 108.7% in September 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 on our non-GAAP and GAAP results. Gross profit was $36.7 million in Q3, up 14.1% from the same quarter a year ago. Gross margin was 70.6% in the latest quarter compared to a gross margin of 72% in Q3, 2016. Breaking out gross profit, subscription support gross profit was $34.9 million, equating to a gross margin of 80.9% on S&S revenue compared to $29.7 million, or an 81.9% gross margin in Q3, 2016. In the latest quarter, we increased headcount and compensation to support initiatives in new markets. Professional services gross profit in third quarter was $1.8 million, equating to a 20.4% gross margin, compared to $2.5 million or a 29.9% gross margin in the same period last year. We increased headcount on our professional services team to support initiatives in new markets and distribution channels. Turning to operating expenses, research and development expenses in Q3 was $16.9 million, an increase of 23.1% from Q3 last year due to increases in compensation, travel, and consulting expenses. R&D expense as a percentage of revenue increased this quarter to 32.5%, compared to 30.7% in Q3 last year, primarily due to increased use of consultants and higher compensation. We continue to invest in our platform. Sales and marketing expense for the quarter increased 5.2% from Q3 last year to $22.9 million. Sales and marketing expense as a percentage of revenue this quarter improved 470 basis points to 44% from 48.7% in Q3 last year. We continue to see benefits from simplification of our sales and marketing organizations. As noted on previous calls, Q3 is the seasonal high-point for marketing expenses due to our annual user conference in September. General and administrative expenses were $6 million in Q3, an increase of 5% compared with $5.7 million in Q3, 2016. G&A expense as a percentage of revenue in the latest quarter declined to 11.6%, an improvement of 120 basis points from Q3, 2016, due to improved operating efficiencies and a partial reduction of our allowance for bad debt. Operating loss was $9.1 million in Q3, 2017, which was consistent with our results in Q3 last year. Workiva's operating margin improved 280 basis points in Q3, 2017, versus the same quarter a year ago, primarily because the growth rate in revenue exceeded the growth rate and headcount. Net loss was $9.4 million for Q3, 2017, compared to the net loss of $9.2 million in Q3 last year. We posted a net loss per share of $0.23 in Q3, 2017, consistent with a net loss per share of the same number year ago. Turning to our balance sheet and statement of cash flows, at September 30, 2017, cash, cash equivalents, and marketable securities totaled $77.8 million, an increase of $4.9 million compared with the balance at June 30, 2017. In Q3, 2017, net cash provided by operating activities was $5.2 million, compared with cash provided of $2.8 million in the same quarter a year ago. At September 30, 2017, total deferred revenue increased $6.2 million from June 30, 2017. Short-term subscription and support deferred revenue increased $7.2 million in Q3, driven by new sales and conversions of renewals from quarterly to longer terms. We continue to make steady progress on converting quarterly contracts to annual contracts. Services deferred revenue remained flat from the prior quarter. Long-term subscription support deferred revenue decreased $1.1 million in Q3. Turning to guidance for the rest of 2017, our guidance on a non-GAAP loss from operations and non-GAAP loss per basic share excludes the impact of stock based compensation. Please refer our press release for a reconciliation of our non-GAAP and GAAP guidance. For the fourth quarter of 2017, we expect total revenue to range from $53 million to $53.4 million, we expect GAAP operating loss to range from $15.6 million to $16 million, non-GAAP operating loss is expected to be in the range of $8.8 million to $9.2 million. Our guidance on Q4 operating loss anticipates incremental investments in technology and talent. We expect operating cash flow to be negative in Q4 due to the timing of the payment of certain annual cash bonuses, which in previous years had been paid in the first quarter. We expect GAAP net loss per share in Q4 to range from $0.38 to $0.39, non-GAAP net loss per share is expected to be in the range of $0.22 to $0.23. Our loss per share guidance assumes 42 million basic and diluted shares outstanding. For the full-year 2017, we expect total revenue to range from $206.4 million to $206.8 million. We expect GAAP operating loss to range from $45.2 million to $45.6 million. Non-GAAP operating loss is expected to be in the range of $25.2 million to $25.6 million. Consistent with previous guidance, we expect to post positive operating cash flow for the full-year 2017. We expect GAAP net loss per share to range from $1.11 to $1.12. And finally, non-GAAP net loss per share is expected to be in the range of $0.63 to $0.64. Our loss per share guidance for the full year assumes $41.6 million basic and diluted shares outstanding. Finally, we intend to provide full guidance on 2018 financial data when we communicate financial results on our fourth quarter. However, I do want to comment briefly on the guidance we plan to give on our 2018 revenue. We're still working through our budgeting process, so my comments today are preliminary. We expect our guidance for total revenue in 2018 to land around the range of current forecasts of seven sell-side equity research analysts who cover Workiva. And we expect subscription revenue to continue to grow faster than revenue from professional services in 2018. 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're ready to begin the Q&A session.

[Operator Instructions] Your first question comes from Tom Roderick with Stifel. Your line is open.

Yes, hi, Matt, Matt VanVliet on for Tom tonight. Thanks for taking my question.

Hi, Matt.

Hi. Obviously the trends in subscription growth, consumer acceleration, and your comments about the deferred revenue very strong, is there any reason to think that the mix of subscription should not continue to go up or I guess to think about that better, should continue to go up in the fourth quarter based on your guidance and sort of the trends so far this year?

So, yes, I think I mentioned on the call that we do expect subscription revenue to continue to grow at a faster pace than professional services. And that's consistent with the guidance. Actually we gave at the time of the IPO that we expected over time for subscription revenue to trend towards 85% of the total from -- it's like 81% now, 80% at the time of the IPO.

All right. And then in terms of some of the new use cases, obviously driving pretty substantial amount of the new bookings here. But what are you seeing the most traction on from existing customers, and is that any different with net new customers?

It's still pretty much a 50-50 in terms of what we in terms of getting new logos as well as getting a lot of demand from our current customers. And we keep that in pretty much a balance, and that's been our experience, and that's continued to be as far as we know.

Sorry I misunderstood the question maybe. But in terms of use cases, what do you feel like is driving some of those non-SEC use case deals. Is it still SOX being sort of the biggest driver or is the portfolio really being broadly used for FP&A, you mentioned, various use cases out there?

Yes, I think it's pretty much broad. Obviously SOX is contributing, but we're also seeing other use cases in management reporting as well as in risk and compliance. And both from public companies as well as the private companies.

Great. And then one last one just quickly, what was the trend over the last, I guess, quarter or two quarters signing more multi-year deals. Was that more just a phenomenon last year or has that continued into this year?

Yes, we really didn't have very many multi-year contracts coming up for renewal this quarter. So that's just the way it was. So most of the activity was just converting quarterly to annually this quarter, but it varies from quarter to quarter as you know.

Great. Thanks for taking my questions.

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

Hi, good afternoon, Matt, Stuart, Marty, and Adam. Can you all hear me okay, I got a lot of background noise, sorry about that.

We can, yes.

Okay. Yes, so my first couple of questions, Stuart, for us is, I was just curious in terms of the timing of the cash bonuses. This year it's going to be the fourth quarter versus the fourth quarter. Could you just help us with what was behind that kind of move? And also, you mentioned headcount in new markets, stepping up some headcount investments. What are those new markets?

Well, let me answer the first part of it before Stuart answers that, Terry, is that because of the holiday season, and for the last two three years we've been seeing from our employees the feedback in terms of to really encouraging the company to provide cash bonuses in December timeframe so that they can use it for holiday season versus in first quarter. So that's why we decided to be able to take some of those bonuses to pay it year-end so that they can -- the ones that obviously who get bonuses can use it for the holiday season. Stuart?

And then the second part of your question, Terry, I think was what new markets was I referencing?

Yes.

It's fairly broad. I mean, it's enterprise, it's partnerships -- that's partnerships is more in the distribution side obviously, but also it's capital markets, so furthering our investments in pursuing the IPO markets, it's IFRS. There are several new initiatives, some of which we'd rather not talk about.

Okay, understood. I guess Matt, I don't know if this is for you or not, but it is a question we ask every quarter seemingly in terms of just where you are in terms of the bigger enterprise-wide deployment. And I know Stuart; you've mentioned that it's really an '18 event. But could you give us a progress update in terms of how some of these opportunities are progressing. And when we look into '18, because you did give an initial, kind of a snapshot on '18 guidance, should we see this more backend loaded or could it be actually linear in terms of some of these monetization opportunities around enterprise [technical difficulty]?

I'll have Marty answer since he hasn't said anything at all. Hi, Marty.

Yes, I mean we're progressing nicely on developing our enterprise products. As we've often talked about, building platform is a complex undertaking. And we release software on a weekly basis, so it's a journey that we're on. And so we expect to see some enterprise deals in '18 for sure. But we really expect to see the bulk of that activity in '19.

Okay. And just my last question, Stuart, you guys have been innovating a lot you see kind of enterprise hardening the platform, and use case development, et cetera. R&D in the percentage of revenue, we've always known it's higher than an average SaaS company, and that's fine, but could we actually see some leverage on the R&D line as we get into '18? It's been kind of creeping up as a percentage of revenue in '17. How do we think about it in '18? Thanks and nice job.

Thanks, Terry. You know, I would like to hold our thoughts on '18 until we are ready to give sort of the full guidance on that. But in the long-run we do hope to get some operating leverage across all of our operating expense lines.

Your next question comes from the line of Brian Peterson with Raymond James. Your line is open.

Hi guys, thanks for taking the question. So Stuart, one for you, so just -- if we think about some of the new deals that you guys are signing in the third quarter versus the prior year, any help on understanding what those ACVs look like, and how has that metric trended over the last few quarters?

Yes, we historically haven't commented on that, but it's really that every quarter there are some outliers, but I'd say that it's been fairly consistent with where we were third quarter last year in terms of the size of the contracts.

Got it. And maybe just a quick update on the SEC market. What's your market share today? Where do you think that could go over the next few years? And then if we're thinking about the IPO market opportunity that you referenced, how big could that possibly be? Thanks, guys.

Yes, so we're excited about the IPO market. We've landed several opportunities there, and we're hopeful that the overall IPO market will be more active in 2018 than it has been. I think 2017 has been good, but it's not been outstanding. In terms of SEC market share, we haven't updated our numbers on that recently. So I would be reluctant to try to guess at what that is right now.

Got it. Thanks Stuart.

Thank you

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

Hi, guys. This is Chris Rochester on for Michael. Thanks for taking my questions. Maybe kind of jumping back to the enterprise opportunity, I know you said it's going to be more 2018-2019 focused. But is there any maybe early feedback you could probably maybe provide coming out of the user conference? I mean, have you sort of heard more from some of your partner channel or anything -- any incremental color there would be great?

Well, it's again -- it's early to say. But certainly the people at the user conference really liked what they saw, liked the concept. And we're seeing activity in the field in terms of curiosity and wanting to know how and when they can use it. So, like I said, we're optimistic, and certainly the customers that have seen it have been -- reacted very favorably.

Okay, that's great. And then maybe one for you, Stuart, could you give an update on maybe how much of your customer base you've converted over to annual billings and sort of how much is left?

Yes, I think we even talk about this in the Q or we updated it in the Q. We've probably got probably 15 to 18 months of that left before substantially all the ones who are going to convert will have converted. And we're hopeful that that will help drive efficiency since we'll be issuing one invoice a year as opposed to four for that large number of customers that we have.

Great. That's all for me. Thanks guys.

Thank you.

Your next question comes from Rob Oliver with Baird. Your line is open.

Great, thanks. This is Matt Lemenager on for Rob. Apologize for the background noise, but I was going to piggyback off of the question Brian asked, but it looks like the ARR per customer accelerated a bit this quarter on a year-over-year growth basis. Maybe it's an easier compare that have been kind of decelerating a little bit. I just didn't know if there had any notable change of customers beginning to adopt multiple products or the ability to cross sell and up sell the metric of ARR per customer accelerated a bit in the quarter?

I don't think there's anything notable to call out there, Matt. I mean, I think that we're making good progress across markets, and I don't think it was a huge deviation. I mean, it's certainly headed in the right direction, which is good.

Yes. The private issuers and the IFRS, I mean what type of -- because I think this is the first time -- maybe we talked about it at the Analyst Day, but the first time that we touched on IFRS, is there any opportunity sizing around that as -- meaningful market, it seems like it would be a meaningful market, so I don't know if there is any sizing around that?

This is Marty. The IFRS filing -- the foreign filers, I think there're about 700-800 of them now, you know, compared to the domestic number of companies that file the SEC, which is…

9,000 total, but…

Yes, there is about -- going concerns is about 6,000 in the U.S. So, it's -- you can sort of size it from there.

That's very helpful. Thank you.

Okay.

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

Hi, guys. This is Hamza Fodderwala in for Stan. I just had a question about Q4 guidance. It looks like the midpoint revenue guidance is buying sequential growth that's below historical seasonality, and also about 200 basis point decline in year-on-year growth, comp-for-comp, that's about seven points easier year-on-year. So, are there any additional, like, layers of conservatism or caution that we should be thinking about going into Q4?

Well, we did raise guidance on revenue growth relative -- for 2017 relative to what we gave you in the last two calls. So, we're running the same process here.

Okay. And then also on customer count, though it stand about 11% year-on-year in Q3, which is in line with Q2 and higher than all of 2016 at 10%. So, could you give us any more color on what's really driving that strength? And maybe some high level on what the mix of SEC versus non-SEC is among the new customers side?

So I think -- as you know, we hold that data point. We do deliver that once a year on what the mix of bookings is between SEC and non-SEC, but you're right, we did have -- the number of customers definitely kicked up, and we were pleased to see that it was diverse, it was public companies, private companies, governments, foreign company. It was very encouraging.

Okay, but any like -- was there like substantial -- would you say it was substantially all like outside of the SEC, or would you say that it was maybe like steady relative to historical years?

I'd say it's relatively steady.

Okay.

In terms of mix…

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

This concludes today's conference call. You may now disconnect.