Workiva Inc. (WK) Earnings Call Transcript & Summary

All right. Good afternoon, everybody, and thank you so much for joining us. My name is Stan Zlotsky from the Morgan Stanley software research team. And with me this afternoon, I have the pleasure of hosting Stuart Miller, CFO of Workiva. How are you, Stuart?

Fine, Stan. Thanks for inviting us.

Always a pleasure. So before we get started, please note that all important disclosures, including personal disclosures, holding disclosures and Morgan Stanley disclosures appear in the Morgan Stanley public website at www.morganstanley.com/researchdisclosures or at the registration desk. So...

So let me take a minute and just introduce Jill Klindt, who's our Senior Vice President and Chief Accounting Officer, is with me today, but chose to sit out there instead of on stage. So here we go.

If she going to keep us honest?

Absolutely.

All right. That's good. Somebody will.

So Stuart, to kick us off, right? Two years ago, you guys really fundamentally changed Workiva, right? You introduced the new solution-based pricing. And maybe could you walk us through the transition and where are we -- where we are today with solution-based licensing?

Sure. So we really started that -- we're really just talking about our pricing model. We went from a seat-based pricing model to solution-based pricing model, which I would say is significant, but maybe not as transformative as our new platform. But in any case, so we started that in the third quarter of 2018. And I think we commented on the last call, which was in February, that we were about, on a contract value basis, about 82% done at 12/31/2019. So it wasn't a linear progression from the third quarter of 2018 through the fourth quarter of 2019, but we're substantially through it now. There's a little bit of cleanup left to do.

Got it. And when you think about this new model rate, one of the things that it did was it really removed a lot of friction from adopting Workiva products. What has -- what was that friction, right, that was removed?

Yes. So it's basically -- it simplified the sales process because instead of having salespeople spending time working with customers talking about the types of seats they wanted to purchase and how many seats they should purchase and documenting that in an order and then changing the order over time, we are now providing unlimited number of seats per solution when we market about 16 solutions. And so it reduced the number of variables in the discussion with the customer. And so ultimately, we think that's a pretty good thing. And certainly, the customers appreciate it.

Got it. And in terms of the actual -- the financial benefits, right, I mean, that you've seen from the program, from an ability to really better monetize your customers, what have been some of the positive proof points?

So one of the positive points was that we increased the number of active users on our platform. I think it was up about 32% year-over-year. So it's -- the number of active users went up to about 134,000 as of the year-end. And that's significant because that creates a warm base for add-on sales of other solutions. That's a lasting benefit. The second one is just a happier customer because they've got less administrative challenges on making changes. They want to make everybody an administrator, they can do that. They have freedom within the platform and total control over it, and so a happier customer. And then third, it certainly raised the average price point, both for new logos and for add-on sales. And so those are continuing benefits of the new platform -- of the new pricing model.

And as much as you removed a lot of the friction, would it be fair to say that as a result, the -- some of the newly hired sales reps, are you actually seeing maybe that they're ramping a little bit faster because they're going to have to really grind it out as much?

Yes. I mean it remains to be seen. We hired -- started hiring, as you know, quite a few more sales reps towards the end of Q3, many of them were deployed in Europe. And certainly, they appreciate the simplicity of the model. Probably a little early to say whether they're getting up to speed faster, but it should speed up the conversation with the customers. And as you know, enterprise sales, you can have a user who wants the product very much, but you still have to get through procurement and security and sort of senior review.

Got it. Well, you mentioned Europe just now, and that's kind of -- that's the next frontier for Workiva. And the reason being that there's 5,300 or so issuers in Europe that will -- by the end of 2020, there's a mandate that they're going to have to file electronically. How are you thinking about this opportunity today?

Yes. So we've been in Europe since 2012-ish, although it was through -- mainly through our offices in Amsterdam and London, and we had some customers over there. I think that at the end of Q3 2019, I guess, we disclosed, we had about 180 European customers. And to your point, the 5,300 customers that have to -- companies that have to choose a vendor to address this regulatory mandate, presented a really irresistible opportunity for us. We've been looking for a catalyst to accelerate our investment in Europe. And so the European securities market authority, ESMA, took that decision at the end of February, beginning of March last year. And we took that as the item that would catalyze these meetings. Because getting the first meeting and getting the right people to the meeting is really an important starting point. And so we have focused, to your point, to your question, we have split on the public market side. Of the 5,300, we bifurcated that between 2,000 largest customer -- companies who, we believe, behave a lot like companies in North America and APAC in the way that they're approaching digitization of the office of the CFO and their openness to the power of our platform. And then the bottom 3,300 customers, which has got a lot -- companies, which has a lot of middle market focus. And it's been our experience that the larger companies are a little more forward-thinking about how they're going to comply and are more open to a discussion about the platform. It remains to be seen when the 3,300 or so companies are going to be buying software to subscribing to software to address this mandate. We expect many of them to be kind of more price sensitive and more focused on kind of checking the box, at least at the low end, checking the box on the compliance side, not as focused as, say, the top 2,000 are. We think about improving their visibility with their data and complying.

Got it. And the way you think about as a company about this opportunity in Europe, has that changed at all over the last like 6 to 9 months as far as how immediate of an opportunity this could be?

So we've been getting really good traction. I think for the first time -- as you know, Stan, for the first time, we started to disclose publicly through our 10-K the revenue geographically. And so if you look at that footnote in the K, it says that our non-Americas revenue grew 66.7% in 2019 versus 2018. And most of that vast majority of the non-Americas was really EMEA, and in most of those sales were to the largest 2,000. I mean there's some middle market sales in there, but it tends to be the larger companies. They got it to the 180 logos at the end of the third quarter. And we're landing bigger, and we have a land and expand model, as most of you know, and we're landing bigger in Europe. We're landing at about $125,000 a year price point. And that implies that customers are -- those customers are buying probably 2 solutions from us, 2 out of the 16. So we're quite encouraged by that and helped us go ahead and accelerate the investment there. We told the Street that our forecast or our guidance for 2020 did not take into account any assumption about a big pop in the number of new logos from Europe as a result of the ESMA mandate. It's a little bit early to call. We'll have more to say about that later in the year when that comes into focus, but we know they've got to do something. And we think we're very well positioned. I mean Workiva is the #1 XBRL company in North America, we're actually probably in the world right now. And so it's a natural market for us.

Why the caution in including that in guidance for the year? Is that something about the timing of it that's not certain?

Yes. So it could be that the company -- we're doing pretty well with selling the platform to the larger companies. To the smaller companies, it's not clear where they're going to buy. They might buy in -- some might buy in the third quarter. They might buy in the fourth quarter. If they buy in the fourth quarter, and it's later in the year, then that's not going to really drive revenue. It might drive billings and bookings, but it might not -- it's not going to drive revenue. So it could be kind of a last-minute thing with them. We'll see. We just thought if there's any surprise, we prefer it to be positive.

Well, so the larger customers, right, the larger potential customers, right? In as much as they wouldn't be able to buy at the end of Q4, hoping that they're going to be able to somehow get everything lined up by the time that they have to report. Would Q3 be the time when we should be looking for, like, success metrics around this and show up in maybe like billings?

Well, perhaps, but our system -- our platform in terms of ESMA is -- or the ESEF mandate is analogous to sort of the work space that we've created for SEC, where there's an XBRL tagging capability, there's the ability to file with the government. The set up there is really not very challenging. It can easily be, for a particular customer, can easily be done in a couple of days. So there's no integration, there's no scripting, there's no programming, it's really document setup. And so we would prefer that they not all show up in the last day of December, and we'll encourage them to set up earlier. And certainly, the bigger companies are going to want to take some time to set their documents, but it wouldn't surprise me if the sales of that particular work space are more concentrated in the fourth and first quarter. But we could be wrong. It could happen earlier, but we'll -- it's just too early to tell.

If the sales are showing up in Q4 and Q1 or third quarter and Q4?

Yes, Q4 and Q1. It's possible that some of them would come in Q3. But again, there's really no integration, there's no -- its setup is pretty trivial.

Got it. Got it. That makes sense. And you've talked in the past about the EMEA business really getting to -- potentially getting to about 30% of your overall company over time. How long do you think it will take for you guys to get there from the 5 or so percent of the business that it is today?

Yes. So it's a good question. I mean we're optimistic about reaching that goal. The timing is uncertain, so I don't think I've got a specific answer for you. We're -- I will say that we have plans to have 25% of our quota-carrying salesman build -- sorry, sellers in Europe by the end of the year -- by the end of 2020. We're a long way there. So that will tell you that our confidence that we're going to be in the ballpark of what you're talking about.

Got it. That certainly makes a lot of sense. Maybe shifting gears back to the U.S., right? And you recently received federal certification -- FedRAMP certification in the U.S. And when you look at that certification, has -- in the past, has that prevented you from selling into some government verticals?

So we got FedRAMP certification at the moderate level in October, which was a pretty big milestone for us. We had FedRAMP light several months before, actually a year before. And by getting FedRAMP moderate, we could now address -- we can now address 80% of the information types that are available to workers in the federal government. So the federal government employs 2.1 million civilians. Most of those civilians working for the federal government are white collar workers. I mean there certainly are some blue collar workers, but plenty of white collar workers. And the experience that we've had today, it's sort of less than 1% of our revenue in 2019. And we expect that over time, that can be 5% to 8% of our revenue. We're just beginning to sell to sort of the alphabet soup of the cabinet. But you think about each of these departments in the federal government produce budgets and produce reports that they make to the OMB and up through the bureaucracy. And they can benefit as much as any corporation can from the linking and the audit trail, and they're very compliance-minded there.

Got it. Going back to the SEC product, right? You -- as much as you have the core SEC product, and now you have 16 other products in your broader portfolio that can really go after a myriad of different use cases. Of the remaining -- of the 16 products, right, outside of SEC -- sorry, 15 products outside of SEC, which of those products do you feel like is gaining the most traction?

Well, so the most common add-on for us is in management reporting and we think that can be enhanced by Wdata, which I guess we can discuss later. But the integrated risk is also a great driver. So we used to call that SOX. But it's now a broader concept. And we have 4 entries in that integrated risk space, which the market sometimes calls GRC, governance, risk and compliance. So we've got Sarbanes-Oxley audit management, which is a newer solution, policies and procedures and enterprise risk management, and sales there have grew very nicely in 2019. We've got a nice pipeline this year. It's both direct to customers and also through partnerships. The most significant partnership on the integrated risk side is with KPMG, who white labels our platform for managed services in the SOX compliance space. So those are two. I think another one I would call out would be global statutory reporting, which is a solution that we found customers were already using Wdesk for. And so we decided to send a team out to talk to customers who were using it and look over their shoulder and see if we could package that as a separate solution. And so we have fielded a team that's focused on that. And as the name would imply, it is global. And it's a very painful manual process for a lot of companies. So that one is going well, too. And then, of course, we have EMEA. So those are sort of the main growth drivers for us right now.

Well, that brings us to Wdata, right? And Wdata is one of your newer products, and it's really a combination of data prep tools and connectors and APIs. When you think about the types of customers who'd be using Wdata, is it meaningfully different from the -- from your core customer cohort? Or is it something just iteration of the...

So, so far, and it's still early days with Wdata. But so far, it tends to be the largest, most sophisticated companies, sophisticated in the sense that employing technology and really seeing the value of an end-to-end solution. The value prop is very straightforward. A lot of these companies have invested tens of millions of dollars in their ERP systems. And yet when they want to go report data out of that, they export to -- into Excel and manipulate it and then e-mail it around and they lose control over the provenance of -- and the security around those numbers. And it's sort of natural that bigger companies are more attuned to the kind of risks that are involved. Banks are more attuned to that risk. But we're expecting to see that follow sort of a typical adoption curve. It's interesting. There are other companies that are approaching the data integrity issue. They're not all focused on financials. We're not entirely focused on financials because we connect with Salesforce and ADP and some others, but they're approaching it through the IT department. We're approaching it primarily through the business user who will bring in the IT department.

Got it. Maybe just sticking with the Wdata for a second. How do you guys price the Wdata product?

So right now, it's priced at about 30% of the solution that it's tied to. And so that means we can sell Wdata multiple times to the same customers. So if they have multiple solutions, they can buy that product for each solution.

So if they have SEC and they attach Wdata, 30%. If they have...

Management reporting...

Management reporting, it's...

It's not the most common one, too. Yes.

So that -- the release of Wdata should hypothetically drive very strong potentially could drive very strong net revenue retention rates within existing customers.

We hope so.

Well, so maybe shifting to some of the more mundane numbers questions, right? So maybe just taking -- net revenue retention is one, right? That was a big benefit that you guys saw from a subscription-based licensing in 2019 as far as uplift in net revenue retention. How are you thinking about net revenue retention heading into 2020 and what are the drivers do you think that you need to really activate in order to sustain it about at the 110%-plus?

Yes. So the factors that go into that net revenue retention are add-on solutions, for sure. price increases, SBL, which is maybe a declining factor, and then you subtract out solution churn. So if a company had 3 solutions, and they churned on one, that come out of that mix. And so the main drivers of it going forward are the add-on sales that we talk about. So Wdata, global stat reporting, and then the whole panoply of the 16 solutions that we're selling, we're marketing to different customers. We definitely got a lift from SBL last year, and that begins to wane in the second quarter of this year, but there's still a little bit to go on that.

Got it. And so as far as you're thinking for 2020, you guys think you can try -- you can sustain the 110%-plus?

So we don't give guidance on that number. It really falls out of our efforts. And so I prefer not to break ground today and start giving guidance on it.

Fair enough. We'll -- I'll try to keep everybody out of trouble. So we'll open up the floor to questions in a second, but maybe I'll throw one out there first. So looking at 2020, right? You guys had a very nice 22% growth in 2019. Coming into 2020, you gave us the revenue guidance. And then within the margin side, it implies about 700 or so basis points of operating margin declines. How are you thinking about your -- maybe more broadly, framework of revenue growth versus margin expansion?

Yes. So that margin contraction is entirely discretionary. And it was deliberately to go after the growth vectors, particularly EMEA, but the other ones as well. And the sales team that we began -- the sales -- additional sales people, we began hiring at the end of the third quarter last year. And then really the full the cost of that showed up in the fourth quarter, where sales and marketing was 40% on a non-GAAP basis of revenue, takes that group 6 to 9 months to become productive. And so we're hopeful that we'll see that productivity showing up on time. It's -- we're fortunate to have enough years of experience with retaining customers and the granularity of our platform is pretty predictable at this stage. And we're hopeful that, that predictability continues with the new salespeople that we hired. But it's simply a timing difference of making the investment, which we have to do through the P&L, unfortunately, to get the growth benefit. We could well have not decided not to do that growth, and we would continue to show margin improvement, which we did, as you know, in the first and second quarter last year. But with this regulatory mandate coming down in Europe, it seemed to us to be irresistible to go after it.

So is it fair to, as far as investors calibrating their models for '21, to start seeing operating margin expansion in that year?

Well, we certainly hope so. I haven't given any guidance on 2021. But certainly, that opportunity is there.

Let's stick with the guidance.

One other -- I mean it's always something we're going to talk about that. I would say that another factor that maybe the Street hasn't focused on as much in terms of margins is that we're moving customers to -- still moving customers to our new platform. A lot of customers have already moved over on our spreadsheet, which is our next-generation spreadsheet, where our task this year is to complete the migration on our text editor and on our presentation software. And as a result of that, we've got -- we've made some pretty big investments in headcount. It shows up on -- above the cost of revenue line that it might be temporary, more temporary requiring not as much investment in the future there.

Got it. Very natural area of leverage potentially. Let's see if there are any questions in the audience? No? That's great. I'll just keep on rolling along. So going back to 2019. And one of the areas that was -- that, in my mind, was really a highlight was your traction with larger customers, right? Customers with -- crossing the $100,000 ACV threshold, grew 47%. Within the customers that are now above $100,000, right, how much -- and what the traction that you saw in 2019, how much of that crossing of the threshold was you simply landing with larger customers versus existing customers pushing across that $100,000 threshold?

Yes. So I don't think we've given that guidance with that data before, and I don't have it at my fingertips. But because we're landing bigger in Europe and certainly landing over the $100,000 mark in Europe with a lot of those accounts, that was a big contributor. But also add-on sales in the U.S. was definitely a big contributor there. More broadly, if you go back sort of 2016, '17 and '18, historically, about 50% of our incremental subscription revenue was coming from new logos and 50% from existing customers. In 2019, that mix shifted a little bit, in large part due to SBL, to more of 60% with existing and 40% with new logos. We do think that's going to be shifting back to kind of 50-50, but we'll see.

Got it. And maybe just to wrap it up, last one. So how do you think about this greater than $100,000 ACV cohort heading into 2020? I'm not looking for guidance, but just...

Yes. So as you know, that number was up, what, 47% in the fourth quarter and over $150,000 was up 50%. It partly as a matter of the math, we should continue to do well there because our average subscription revenue customer is like in the 70s. And so just -- and we have 3,510 customers. And so we're on a good part of the curve there.

Great. Well, Stuart, I think this is a great place for us to stop. Thank you so much for your time today.

Thanks, Stan.