Workiva Inc.
Q2 2019 Earnings Call Transcript

Published: 6 Aug 2019

[Operator:]

Good afternoon. My name is Jessie, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Workiva Inc. Second Quarter 2019 Earnings Conference Call. . Thank you. Adam Rogers, Director of Investor Relations, you may begin your conference.

[Adam Rogers:]

Thank you, and good afternoon, everyone. Welcome to the Workiva Second Quarter 2019 Earnings Conference Call. This afternoon, we'll begin with comments from our Chief Executive Officer, Marty Vanderploeg; followed by our Chief Financial Officer, Stuart Miller. And then we'll turn the call over to questions. Also on the line today is Jill Klindt, Chief Accounting Officer.

[Martin Vanderploeg:]

Thank you, Adam, and thanks to everyone for joining the Workiva Second Quarter 2019 Conference Call. We are proud of our second quarter results, which exceeded guidance for revenue, operating loss and loss per share. Stuart will provide more details later in the call. As we have discussed, this past year, we improved operational efficiencies, focused our growth strategy and invested in key growth opportunities. Based on our success to date, we will continue to increase our investments in our EMEA expansion; global statutory reporting; integrated risk; and Wdata, which includes data prep, APIs and connectors. We are encouraged by our progress in EMEA with our traditional solutions, and we are seeing increased demand for our platform as the ESEF mandate approaches for more than 5,000 companies in the EU. We plan to accelerate our investments and aggressively build out sales and support in EMEA throughout the remainder of 2019 and into 2020 to capture a significant part of this growing market. We also plan to accelerate our investments in global statutory reporting. Our initial go-to-market efforts have validated 3 important factors

[Stuart Miller:]

Thank you, Marty. So we're pleased with the acceleration of revenue growth over the past few quarters, and we are raising guidance on revenue growth for the rest of 2019. We want investors to understand that converting our customers to solution-based licensing, or SBL, has contributed to both our revenue growth rate and revenue retention with add-ons. As we complete conversion of customers to the SBL model later this year, this source of revenue growth will end and create more challenging comparisons in 2020. To meet this challenge, we've been investing in 4 vectors to drive revenue growth in 2020. As Marty said, the 4 major growth vectors are

[Operator:]

. Your first question comes from Eric Lemus with SunTrust Robinson.

[Eric Lemus:]

Looking through the -- some of the notes in the 10-Q, and it looks like you changed your expectations for when you want the transition to solution-based pricing from mid-2020 to now at the end of the year, 2019. So can you just give a little bit of color on why you decided to make that target change for this year? And I guess what do you see as part of the overall uplift with that change in terms of guidance?

[Stuart Miller:]

Yes. So we made really good progress on that on -- in the first and second quarters. We've accelerated into the second quarter because, frankly, customers see so much value from it. And so certainly, a majority of our customer relationships are now on SBL so that's why we changed our outlook on it. In terms of an uplift, I think on the last call, Marty may have said it was sort of 20% to 30%. It depends on where the customer was starting because we try to keep an equalization by solution with customers and some started from different points. One of the things -- sorry, Eric, if I can just interrupt. One of the thing on your -- before we get back to you is I apparently misspoke on the script here and I misread it. We actually -- the number of new customer adds was 1-9-9, 199. I misspoke, I gave a different number. So thank you.

[Martin Vanderploeg:]

I just want to add one thing to your question, and that is keep in mind that, as I've always talked about, the solution-based licensing is really a strategic thing because it will continue to help us not only because our ADS is higher and we compete with companies who, in certain niches, offer similar types of licensing. But also, it allows us to go out and sell more solutions and get the value for a lower number of seats. So it's going to have a long-term impact. I really like as -- like everyone to realize it's a strategic thing that we've done.

[Eric Lemus:]

Yes. Understood. Okay. And then just recently, a press release out about OneCloud OEM agreement with Workiva and receiving some investment. Can you guys just go into a little bit of data on what your expectations are with that partnership?

[Martin Vanderploeg:]

Sure. When I talked about our connectors and APIs and the data prep tool, that has been a really good thing for us, and I'll explain what I mean by that. But first off, every deal that we have, Wdata included in, now only do the customers see a lot more value, the deal size is substantially higher. And so our goal is to connect with as many systems as possible. The more systems we're connected to, the more value the customers get. And we found that this company was really good at connecting with a number of traditionally hired systems to connect to. And so we're embedding some of their technology in our platform to interface with some of the more popular consolidation systems and ERP systems, and it's really accelerated our ability to connect to those systems very efficiently and easy for the end user.

[Operator:]

Your next question comes from Tom Roderick with Stifel.

[Matthew Van Vliet:]

It's Matt Van Vliet on for Tom. I guess touching on the last point about Wdata helping drive deal sizes larger. Wonder if you could give us some color in terms of how that acceleration on large deals had been formulating throughout this year. Are you getting more for some of the newer solution-based pricing? Or are you seeing customers buying more and more modules now or more and more use cases than you were just a couple of years ago?

[Martin Vanderploeg:]

Well, it's a multitiered effect. First off, just going to solution-based licensing has increased the value for a given solution. So therefore, we charge more so that's been a factor, for sure. When we include Wdata, obviously, that's a line item and we see more and more customers seeing that as a large part of the value on our platform. That increases deal size. And then I think the most important and last point is that we're really maturing, starting to mature as a platform company. And we're definitely seeing this in Europe. We go in selling a platform right off the bat instead of selling a single solution. So we go in and say this platform, you can use to do all these different things that you have to report on. And then we -- at that point, we get an initial deal size that's much higher just when we bring on a new logo. So learning -- not only getting the technology up to snuff to be a platform, but also learning how to sell and describe the value of a platform. We're really starting to mature and we're getting good at communicating that.

[Matthew Van Vliet:]

And then as you look at the opportunity in Europe in particular, where are you in terms of being fully sort of ready and having those sales conversations with customers as the regulation comes down in the next year plus? And how confident -- or I guess, where is the security that, that will, in fact, sort of hit the market on time as these things tend to be delayed at times or -- and what we saw with the method side of things of being delayed a full year? I guess how are you approaching that situation? How is some of the early deal flow in the pipeline?

[Martin Vanderploeg:]

Well, first off, every indication is we don't expect it to be delayed. They've already put the taxonomy out. And in fact, when the taxonomy -- the XBRL taxonomy came out, we, all of a sudden, became real to all those companies in the European Union and that's when the interest level ticked up dramatically. Just in terms of our scaling, I think we're on schedule. The way -- we wanted to be fully ready to take the load, both from a sales point of view and providing support, and so we have a ramp pretty well designed for the next 1.5 years to be ready in 2021. And so I think we're doing well there. We've had really good luck hiring salespeople. I've been very happy with that and we -- so I think we're doing very well on hitting the timing mark. But the last thing I will just say is that it's interesting to us that we see a very similar pattern on how companies are responding. The larger companies are taking it very seriously. You see a mixture in the mid-tier and then you see on the lower end, they aren't as focused on it yet. So I think we'll see a very similar process to how the SEC rolled out in the States several years ago.

[Operator:]

Your next question comes from Rob Oliver with Baird.

[Matthew Lemenager:]

It's Matt Lemenager on for Rob. I have one on the 4 growth vectors. Marty, it sounds like so we have solution-based licensing kind going to kind of roll through in 2019. And then in 2020, we have these 4 growth vectors. Would there be any way you could kind of rank those growth vectors in terms of the time line? And like are any going to hit sooner than the others? And just kind of if you could stack rank those in terms of the potential impact and when they could have impact.

[Martin Vanderploeg:]

That's a really tough question for me to answer, frankly. We're seeing really good reception from the marketplace for all 4 of the growth vectors. When we laid these out, I was hopeful that 2 or 3 would hit, and all of them so far have shown really good legs in the marketplace. So we're very, very pleased with the vectors we chose. Obviously, we've been talking about increased investment because we think all 4 of them have a lot of juice. And so we plan to invest in all of them, and I really can't sort of stack rank it. I would say that EMEA is just the most obvious. We're still single-digit revenue there. That's almost the same size the GDP as the U.S., the whole EU. And we've barely scratched the surface in terms of number of logos there. So that's sort of a slam dunk from my point of view. And the other 3, when we actually sit down and figure out revenue potential and all those things, all are really substantial for us, and we've seen great initial -- early days, but great initial reception on all of them.

[Matthew Lemenager:]

Okay. No. I appreciate that. And I was going to ask on the sales cycle in EMEA. And I realize it's early days, we're limited in what we've sold so far. But comparing that to the sales cycles in the U.S. back when it was ramping with SEC, as you go in selling more of a platform, do you expect there's going to be any difference in the sales cycles in EMEA this time around comparing it to kind of the early days of U.S. SEC?

[Martin Vanderploeg:]

Well, it's interesting you asked that. I think the European -- the larger companies in Europe watched what happened in the U.S. quite -- and have studied that. And so the larger companies are approaching us already and were doing deals that are platform deals. Now those are a 6-figure deals and they take -- they do have a longer sales cycle just because they're bigger deals and there's more approvals and things like that. We expect that the -- those deals will be slower but bigger. I also think there'll be a significant part of the market that's transactional that will be much similar to what we did in the SEC because remember, in the SEC days, we did very few 6-figure deals in our first 3 to 4 years. So I think that we're going to see in the mid-market, lower mid-market, smaller company, I think we're going to see a very transactional market that's going to be just like the SEC and will go very fast in many instances. So it's really a bifurcated market. I think we have a good handle on how to approach both ends of that market.

[Operator:]

Your next question comes from Alex Sklar with Raymond James.

[Alexander Sklar:]

Sticking with the solution-based licensing and then the increased investments around connectivity, can you just talk about how user growth has trended for the company, if that has moved over to the SBL plans in terms of what kind of usage are you getting or number of users per enterprise?

[Martin Vanderploeg:]

That's an astute question. Thank you. Yes, it's really ramping. I mean the number of users is growing I don't want to say exponentially, but the slope of the curve is increasing quite dramatically in terms of end users, which is exactly what we want. We want the value of the platform to be visible to as many users in these organizations as possible that create stickiness and then drives demand for other solutions. We're already starting to see the early days of that, too. So as I talked about SBL being so strategic, we're definitely seeing that in the number of users.

[Alexander Sklar:]

Are you able to track in terms of maybe amount of work papers that are kept in your system versus outside systems of record in terms of, I don't know, proof case of that as well?

[Martin Vanderploeg:]

Yes. We do keep track of how many links customers -- all types of things to obviously monitor usage and customer health, that's the reason we monitor those things. And -- but we have -- we also monitor not -- we also -- I can be very careful to say how we -- why we monitor those is solely for customer health and making sure that customers are using the platform to the best that they can. If they don't, we approach them and help them use it better. We have global numbers we watch of how many types of different documents are created and things like that. And we've seen that scale as well. Not as dramatic as users. I think the first cycle has seen more users being brought into each process as opposed to more processes being launched, but also more processes that are also being put on the platform as well. So we monitor that in a global sense.

[Alexander Sklar:]

Got it. And then you mentioned the XBRL mandate helped boost professional services revenue in the quarter. Did that have any impact on logo growth as well or were those customers already with you?

[Stuart Miller:]

Vast majority of those were already customers.

[Operator:]

Your next question comes from Mike Grondahl with Northland Capital.

[Michael Pochucha:]

This is Michael on for Mike. Maybe just the -- you talked about Europe and EMEA but maybe longer term, the opportunity in APAC?

[Martin Vanderploeg:]

Yes. When we started in EMEA, we sort of put a smaller team out there and built some logos, built some references, learned the market, learned the different applications for a platform like this and got a number of logos so we knew it, and then decided to really ramp when the time was right. I would say we're going to do a very similar thing in APAC. We have a small team there that started. We're starting to see some early sales. We're figuring out the market. And when the time is right, we'll accelerate there as well. Obviously, for me, it's a measured investment. We're very measured in our investments. We want to see returns after we invest. And so when we think the time is right to invest, we'll certainly tell everybody. But we are sniffing it out and seeing what's there. And so far, it looks like there's a good opportunity for us.

[Michael Pochucha:]

Okay. And then maybe just on -- it seems like growth is pretty broad-based. Maybe is there any specific channel partners to call out?

[Martin Vanderploeg:]

Well, I would say that the consultancy firms are -- some of the larger ones are definitely starting to show interest and starting to push bookings for us. As I've talked about, we didn't really talk about it much on this call, we said we want to wait another quarter to 2 when we have more solid results to talk about. But partners are going to be a huge part of our strategy moving forward, both in North America and in Europe. And we're seeing good success with some of the larger consultancy firms, household names that we'll talk about later. But it's certainly -- we're in double digits now in terms of bookings that are assisted by partners as a percentage.

[Operator:]

Your next question comes from Stan Zlotsky with Morgan Stanley.

[Stan Zlotsky:]

Maybe just a high-level question, should investors start thinking about Workiva as, hey, this is a company that is now going to be a sustainable 20% grower on a going forward basis? Because I mean I appreciate the guidance that you put out for this quarter and for this year, but just as we look at 2020 and '21, with so many exciting initiatives coming on board and then the 4 growth vectors as well as the regulatory environment being so supportive in EMEA, is that the right way for investors to kind of start thinking about Workiva?

[Stuart Miller:]

Stan, so I think you can infer from our guidance that we expect kind of 20% plus growth in subscription revenue in Q3 and Q4. And then thereafter, it's really too early to forecast. But high teens subscription revenue growth should be reasonable. We aspire to do better than high teens subscription growth, which is why we are investing in these 4 vectors. And we'll keep you updated as appropriate.

[Martin Vanderploeg:]

I would like to just add one comment to that, and that is that it's really interesting. If you look at all the different markets out there, there's a lot of people in the ERP space, all the different system of records. And then in the Business Intelligence, there's a lot of SaaS companies, very, very good, polished companies. And when you look at the space we're in, we're very much alone right now. And that's partially because we're making a market so there's good and bad with that. But we're definitely seeing a large opportunity without a lot of competition right now. Now competition could come. We also believe in measured investment. We're not going to plunge into something and spend a lot of money. And some SaaS companies have had success doing that, having very large negative margins. But we're going to take it at a very measured approach just because we feel that it's the most prudent thing to do and we do see that opportunity based on some of the things you said, Stan, that is certainly there. And it's a much larger market than the size of our company, I'll tell you that.

[Stan Zlotsky:]

For sure. And then just following up on the prior question around the APAC opportunity. Are there any specific regulatory initiatives that we need to -- kind of track sort of in line with what we've been seeing in EMEA?

[Martin Vanderploeg:]

It's interesting. There's over a hundred XBRL mandates around the world now and we're seeing those exponentially increase. We're seeing those in a lot of Asian companies coming on, and so we're monitoring that very carefully. I think XBRL is going to become widespread over the next 5 years, and that puts us in just an excellent position. So we're monitoring that. There's not one that stands out. There's a bunch we're looking at. And so -- and then by the time we get to APAC, it will be a platform sale. We'll go to the large companies, sell a platform that can address a number of different regulatory needs and is well integrated with all of their systems of record and take out that manual Word, Excel process they're all using now. And so it's not any one that's going to get us to where we're consistently a 6-figure dealmaker. It's going to be selling a platform that addresses their needs for a number of different regulatory things, and then we are going to continue to add more and more. So that's sort of how that's going to happen in I think all of the new markets, and we're -- we have a team that does nothing but pay attention to those regulatory changes and what's happening. And in terms of moving to XBRL, that just positions us in an ideal location.

[Stan Zlotsky:]

Okay. Perfect. If I could just sneak in one very quick detail question. Very strong metrics on customers with greater than $100,000 and $150,000, but we noticed that for customers less than 100,000, that for a second sequential quarter it declined. Is that just a function of essentially customers graduating up to those higher tiers, along with just maybe some natural attrition down at the low end? That's it for me.

[Stuart Miller:]

Yes. So I think that we're definitely seeing customers buying new solutions and converting to SBL, which is pushing them into the higher categories. But I would say we've also seen, on the new logos side, we had a 55 net new logos in the quarter, that the size of new logos is -- those initial deals are going up, too, in not just the high end, but at the middle market level. So we're assured by that, particularly as long as the -- when we see growth across the board. I wouldn't read too much into the metric that you quoted.

[Martin Vanderploeg:]

Yes. I think some of it's an artifact. I mean when Europe really comes online, that could totally swing back the other way. It's just hard to predict. But we don't...

[Stuart Miller:]

Swing back the other way in terms of number of new logos.

[Martin Vanderploeg:]

Yes, number of new logos. But I mean, we don't manage the business that way. I mean we're managing it for the highest return. We're going to sell wherever the highest return is in a given quarter, and that means the least amount of friction to get more bookings. So we'll see how that goes, but I don't think it's a real relevant indicator.

[Operator:]

There are no further questions. This concludes today's conference call. You may now disconnect.