Workiva Inc. (WK) Earnings Call Transcript & Summary

All right. Good morning, everybody. My name is Stan Zlotsky from the Morgan Stanley software research team. And with me, I have the pleasure of hosting the Workiva team: Jill, CFO; and Mike, the Head of Corp Dev and IR. Ladies and gentlemen, how are you doing?

We're doing well. Thanks for having us. We're really excited to be here.

Great to be in person.

Thank you. I know it's very exciting to be in person. And bummer that Marty wasn't feeling well, but we'll definitely miss him, but maybe next time.

Of course.

So thank you so much. Before we get started, Quick disclosures, research disclosures. For important disclosures, please read the Morgan Stanley research disclosure website at www.morganstanley.com/researchclosures. And if you have any questions, please reach out to your Morgan Stanley representative.

So maybe just to kick things off, if we look back at 2021, right, where do you think Workiva has really executed well? And where do you feel like you exceeded your own internal expectations?

So we have -- we were really pleased about our performance in 2021. We exceeded on guidance, both revenue and operating profit. We continue to expand across our solution portfolio. We released a couple of new solutions, FERC in ESG, which had some really great addition to our business in 2021. We've expanded our partner network further. We've had great growth in execution in EMEA and early days in APAC. And we, overall, are just very pleased with the way that it set the stage for 2022 and going forward across the board.

Got it. And while there's definitely a lot of momentum right now that you guys are being on the ESG side of the business, right? Can you maybe just dig into that part. What's really prompting the level of adoption? Because it feels like it came on very quickly, right? I mean everybody was talking about and talking about it, but it feels like for you guys over the last 2 quarters, it really just stepped up materially.

Definitely. We were feeling it from our existing customer base, especially to start with. They already have a lot of people and data in our platform. And so could see how -- as they were coming up with additional ESG reporting needs, it seemed like a natural fit, and so we were able to start to sell into some existing customers, and that's a lot of the upside that we saw in Q1 -- sorry, Q3 and Q4 was to existing customers, and we were selling into new logos as well. But that was definitely a driver of that. And I don't know, Mike, if you want to hit on even some of the ESG stories overall.

Yes, I think external factors you know I have been talking to a lot of investors of you can do your own channel checks on this, right, talk to leaders in advisory firms, and we had a press release with PWC in December, PWC doesn't normally do press releases they -- on record of the number of people that are hiring in that space. You go look at -- KPMG is another example where this time last year, they didn't have a dedicated practice owner. Now there's a dedicated practice and practice owner. So we see the advisory firms doing it. You see with other software companies. There are other large software companies that are now talking about the environment or Team Earth or whatever it might be, they're in different spaces than we are in, but it's a lot of momentum there, and that's just happened in the last several quarters. We are seeing things from the SEC, for example. If you can go on their site, you'll find a couple of comment letters that were written last year. If you go out on the site, now you actually see Elizabeth Warren, for example, prompting Mr. Gensler on the time of adoption of additional disclosures. So we believe that there will be some additional disclosures at some point here from the SEC, and that has people looking at things. I think what's also interesting in North America is we're also seeing it driven by fund-flow in the supply chain, right? This is about getting new investment or additional investment. There are certain criteria that a lot of large funds will have around ESG moving forward as well as us as a company. Our customers ask us to fill our vendor assessments. We have to put ESG data in there now. That's all of a sudden started happening, Mark, which means we would then ask our vendors who then ask their vendors, who then after their vendors and there's kind of a flywheel effect that we're seeing in and around that.

Is there something specific within just a core Workiva product that makes it particularly applicable to handling the complexity of ESG?

We feel like, yes, it's the way that we can pull data from so many different sources, pulling it from not only financial systems, HRIS systems, but your procurement systems, carbon accounting systems and all of that information that can come into the platform and in a very controlled way be pulled together into various types of reports. And along the way, you're able to collaborate really nicely in the cloud, no matter where your people are throughout the world. And so what that brings to a company is this controlled environment, auditable environment, very secure environment to put all of this information in and use it throughout all the different sources or the uses of that information. And we think that it's a really nice fit, which is why we feel like it's why we've been moving forward with investments here and why we think that we have some really early success in sales in Q3 and Q4.

Is ESG a phenomenon more in the maybe like U.S. and Europe or is that also something that you're seeing more broadly? Obviously, you guys have been -- you're talking about how you're going more into APAC, Japan. Is that a topic of discussion in those regions as well?

Yes. It's global. So some of Mike's comments that it's all of this demand is not necessarily just one geography. The way that we see it come to fruition in North America, it's more around the fund flow and the different participating in commerce in that cycle. In EMEA, they've been more ahead of the curve and focusing on ESG is more of a regulatory requirement. It's been more expected there earlier on, but we definitely see it in APAC as well. There's no lack of interest in an ESG product or the topic because it is that they're relying on their vendors that are global, and it's -- there's no way to really escape it in the global economy, I think.

Got it. So maybe just shifting on the competitive side of the ESG debate. As much as you guys sort of have really, really strong dominant market share and SEC reporting in the U.S., right? And you're making really good progress with XBRL reporting in Europe and all the mandates there. But what about on the ESG side of the business, right? What are some of the competitive offerings that you guys see come up in conversations with customers on that side?

Do you want to...

Yes I mean I think it's somewhere to what we saw, I mean even early days in some of the financial reporting areas where right now, it is Word and Excel and unstructured things. There are some smaller companies that have, in the last 10 years, been selling some CSR type of solutions, Corporate Sustainability Reporting. Most of those companies are fairly small. We do see a couple of other larger things. Most of the smaller ones are now being acquired by larger companies and will something happen there. ESG itself is kind of breaking up into different swim lanes. So you have carbon accounting systems, which is sort these systems of record for carbon data due to a lot of calculations, similar to having ERP systems, you're going to have transactional systems in around ESG. We see systems that are focused more on the workflow in this and other areas. When it comes to the pure reporting side of things, we don't really see a pure competitor, right? So we're looking at doing data aggregation and document assembly similar to what we do for financial reporting, taking data from multiple systems of record. And we look at the same ecosystem kind of evolving in non-financial reporting or ESG, which is multiple systems of record, aggregation, create documents, dispose documents, and we see that same pattern happening.

Got it. Well, I mean, certainly, the ESG side of the business certainly sounds like it's taken off well. Just maybe to wrap up the discussion on this particular point. How are you thinking about your plans for ESG for 2023? Is there anything -- I realize you guys don't disclose on your -- break it out or anything. But how are you thinking about this part of the business for the year? Where are you making the big investments coming into 2022?

So we're making -- the largest investments are around sales and marketing. So hiring in the ESG team, the overlay team, also marketing programs around ESG. So we are investing in raising our profile. If a company is looking for ESG reporting, we want to make sure that we're right there in the mix. And so that's a piece of the spend. There are some investments that we're making on the platform. And we're constantly improving and adding value to the platform, but specifically around ESG. We're looking at some different workflow functionality to make it easier to -- these are teams that often have not worked together so much in the past. And so making it easy for them to move data and move process and collaborate. We're also adding an additional connector functionality. There's going to be a lot of different data sources. Some of the ones that Mike was talking about that are in the same space that we want to make sure that we can build out some great data connectors to these systems. And also just really thinking about not only those connectors, but how can we work with our partner network. And so building out the partner enablement and the partner relationships that we have around ESG and that helps to drive our product forward. But that's -- those are the main areas that we're focusing on around ESG.

So actually, you brought up an interesting point. So for the sales team for ESG, you're specifically doing an overlay strategy?

Correct.

Why overlay rather than just really dedicated teams just as does it have to do with the fact that ESG kind of sits on top of the broader Workiva platform?

Yes. And actually, we do overlay teams throughout our solutions. So it's a common sales motion for us. It is more -- it often comes off easier and if you have somebody that's very highly knowledgeable on the topic, and it's hard to be that across our large solution portfolio. We have so many things that we're doing. It's very difficult to be a master of all. And so for us, it really does make sense to have this overlay team that can come in and do a really concise conversation, have a concise conversation with that customer, speak their language and bring that picture to the table of what we can do for them. So yes, that's how we operate across our solutions. So we have an overlay team for SEC. It's the same thing in a lot of the other solution areas.

Okay. Perfect. Switching gears slightly. Obviously, with everything that's going on in the markets right now, a lot of -- meaning I'm looking at my own IPO pipeline. A lot of companies are pushing the time lines. What's the impact that you guys are seeing in the capital markets side of your business? And how did that go into your -- the calculus essentially you're doing for your 2022 guidance?

So we know that we can't control that market. And we are always a light touch in how we guide. How that's built into our forecast and into our guidance. It was a big part of our upside throughout 2021 because we had that same approach. We were definitely forecasting lower than what we were ending up. And so we think that it will be -- we're already finding that it's lower. That doesn't mean there aren't companies that are not signing up and preparing. They aren't ready to pull a trigger that we're seeing. But you do have companies that are getting ready. And it takes some amount of time to do that prep work. And so we still do get -- we're still seeing some business. But you're right, it's a lot slower. But we feel very confident in the guidance that's appropriately conservative around capital markets as a whole. Oddly enough, the 2021, since there were so many new companies that became public, we will -- we're continuing to be encouraged by SEC, and we don't pick all of them up the first time around as they become public and start to do their regular Ks and Qs, and we do think we pick up a lot of that business after the fact. So we still have a tail for that into 2022 that we're encouraged by.

Well, I think the important piece on the capital market side is it's not necessarily that you guys are specifically levered to just the actual IPO day, right? I think the important piece to note is you're still -- as the company signs up for Workiva product, you're still making money regardless of when the actual IPO date. Is that a good way to characterize it?

Correct. Yes.

Got it. Okay.

I think even post, right? So we believe that there's a lot of companies that went public last year that may end up making a different decision on their long-term SEC filing solution. We tend to pick up our fair share of those companies a year or 2 after they go public.

Got it. Okay. All right. So moving on to the ESEF mandate out in Europe. Can you just give us a quick update on how that's growing? Obviously, there's been a lot of talk from your side around the ESG product. But how is the ESEF doing? What's the latest as far as the time lines there from the regulatory perspective? And how are you thinking about building out your sales organization there?

Yes. I can start on that and then kick it over to Mike, but we've been really pleased with how it's been going. It's -- as expected, we are not picking up the entirety of the market. There's a lot of companies that have made decisions that have gone with more point solutions, but we have -- we've learned a lot, and we've gotten a good amount of customers, and we think that, over time, that standard becomes more complex. And as you look for -- as it's a more complex process, companies are going to be looking for a more sophisticated solution meeting to actually rework and reengineer that reporting process to make it more auditable to make it -- have it in a more collaborative way. And so we think that we continue to pick up a lot of that business over time. And so we're -- we feel like we're doing what we need to, and we're feeling like the teams that we're building there are learning a lot and making progress. And then as it relates to the market, I can let, Mike...

Yes. I mean just a regulatory, I mean, there's 24 countries plus that are for year-end 2021 are filing the results now. So there is -- people are going through that year 1 process right now as part of their filings. The U.K. is a little delayed, and we believe the U.K. is about potentially about 20% of that market. They passed a resolution or some sort of item that basically said you could delay 6 months as part of that. So we think there's still some decisions to be made in the U.K. market, which is a healthy part of the logos potentially that we gather there. What's happened in year 1 is a lot of companies, similar to what happened with SEC is a lot of companies purchased a solution that all they do is an XBRL conversion of their final financial report. And we believe that, that may change over time as people kind of go through the pain of the first year process. We oftentimes talked about it right in 2010 when Workiva first came to market with our SEC solution. There was a point solution in the market then that did -- had about 3,000-plus clients, and that company doesn't exist anymore, right? So the point solution is part of the evolution of a process like this, and we think we're in a really good, long durable demand to gain our share over time.

Got it. Are there, other than the U.K. mandate, any other kind of time lines that we need to -- our investors need to be mindful of as far as what are the next forcing functions for adoption?

Yes. So I think 2 things to look at, right? One is there's additional requirements in the second year, [indiscernible] something called block tagging, so the disclosure becomes more sophisticated in year 2, right? So will the current solutions have the longevity there, right? Second piece to look at is some countries have actually extended out the frequency of disclosure. So kind of look at country-by-country mandate, even though it's kind of an umbrella EU initiative, there is some variability country by country. So for example, I believe Denmark is requiring quarterly reporting not just annual. So I think look at where things are by country and how that might evolve, so that could also put more onus on organizations to have higher requirements.

Got it. So just to put dates on it. So when our -- the year 2 would be the beginning?

Year-end results 2022.

So going in to 2023? Yes. Got it.

And though it sounds like those requirements are just more complex -- so the ability of a company to kind of get away "with using a less sophisticated point solution" just kind of diminishes.

Depending on the evolution of Setpoint solutions? Yes. Got it. So maybe just more broadly, right, beyond just the EU. You guys have also been moving into APAC. How are you guys doing there? And how are you thinking about it for 2022?

So APAC for us is really heavily partner-driven and we've been doing a really great job in developing those relationships. We've got a great base team there, a really phenomenal leader. And they've been -- they've been making good progress, good hiring. We are continuing to invest there. We're investing in the sales and marketing teams, the support teams, our server capabilities locally and localization of the platform. So platform work for character recognition. And so there's a lot of work that we're putting into the product to be ready for us to continue to move forward in APAC. So it's very early days there, very early days. But we think it's going to be a great market for us.

So how far away are you from actually having a localized product that's applicable for APAC?

So we're working on it now and looking at how we can continue to expand. And so there's a lot that's been done already, but there's just more work that we'll be doing here over the next year or 2.

Yes. I mean we are selling product today, right? In Hong Kong, in Australia, in Singapore and other places. And we have historically been able to handle as part of the data and document assembly part of it, multiple languages right now, it's just really getting purpose-built around UI and all aspects of the product for different language.

Exactly.

But you're selling it, but the UI is still in English essentially, I'm guessing.

Yes. Again, Workiva product isn't UI-intensive, I would say it's more menu items, but yes, I would say those final touches making sure that it truly looks like a product for in country.

Got it. So do you have dates in mind for when like the true localization like the front end is going to be in the local languages?

We don't have specific dates, but we are working to roll that out. It won't be the stay, we have everything. So it will be over time. So it will be continue to roll out.

Yes. So for those that are not familiar with the Workiva story, right? We do not have a version of our software. We release software daily, right? So it's not like we have to wait for that next release cycle for these changes. They'll just roll in as they get completed.

Got it. Well, Mike, actually, I wanted to ask you a question. You've joined Workiva. How long has it been 8 months?

No, I've been at Workiva actually for 7 years.

In the role?

So I'm new to the role but yes I'm not your typical -- maybe IR guy, I actually ran the marketing team for several years, I ran the partner team for a number of years, been involved in the product strategy of the company since I had joined.

Got it. So the piece I wanted to actually dig into the corp dev piece. How are you thinking about corp dev moving forward as far as Build Buy pieces of building out the Workiva portfolio?

Yes, it's a great question. I mean like all companies, we look at Build Buy partner as part of our overall mix of things, right? We did do 3 acquisitions last year. So really our first 3 acquisitions of the size as a company we did last year. First one is an interesting one right was a company called OneCloud that we purchased, where we originally partnered with this company, OEM, their product. But as part of that partnership, we did an investment in the company. And that was the partner maybe buy and then ended up buying. We did 2 smaller tuck-in acquisitions that we looked at that were really strategic to what we're doing. One was around audit templates, a company called AuditNet, another company called Mark V Systems, which was the open source RL XBRL validation engine that we purchased that company. So those are very strategic and I think they're kind of define kind of how we look at M&A. We are looking for things that will accelerate our strategy that are very in line with expanding platform capabilities and maybe we'll look at something that accelerates in the region or certain solution area or there, but it's really more accelerators on there that it just makes sense for us to go faster because we can acquire something than buy or than build it.

So just as far as your go-to-market motion, right, how do you think about partnering, especially like as you are really doing much more of the international growth, right? How are you thinking about partnerships versus buying partners that are maybe in geographies versus maybe technological partnerships? Like how are you thinking about all of those factors?

Yes. So I mean a couple of things to break down on partners. First off, on the technology partners, right? It's important for us to have an ecosystem of partners because we're trying to leverage the investments that a lot of our clients have made in these other point solutions that are systems of record. Workiva is a system reporting. Supply of really interesting data, systems of record data, creates demand for our platform. So having those ecosystems of partners, leveraging our OneCloud acquisition on the connectors to be on the systems is all part of that. You're seeing that with ESG right now. For example, we partnered with a company called Persefoni. That's a carbon accounting system, system of record that we're now going to bring that data in. So that's incredibly important as part of our value proposition. As far as acquiring something that might be an adjacent space, obviously, we will consider if it makes sense only if it really helps accelerate our strategy. As far as those other firms, those are primarily firms that are delivering services. And our goal as a company is not to be a service provider. So we look to have more partner services done on our platform than we have in the past. And that builds a really interesting ecosystem because those companies look to fill out their teams, right? They're built on billable service hours. As they can bring in and utilize their teams more, they will bring us more deals. So sourcing deals in that ecosystem really helps spin things up in a really good way for us and creating more demand, getting to higher deal sizes and giving this great network of people, thousands of people out there really working on our behalf.

So maybe just taking a more holistic view on your partner ecosystem, right? You as a company have made quite tremendous changes to your platform, right, the actual product that really has enabled you to have a much more robust partner strategy compared to 4 or 5 years ago. So as you think about moving forward, right? What are the puts and takes of having this very strong technology partnerships that really leverage the Workiva platform moving forward. And how are you thinking about those technology partnerships as a way to really accelerate the growth strategy -- the growth story for Workiva?

I mean I think one area is around finance transformation, for example, right, finance transformation, we're going to play in that broader deployment of how the global adviser groups go after having the connectivity to large ERP providers like an Oracle SAP and all the way down to more point solutions, all creates a broader project for those advisory firms. So for us, I think it's well-participating in that broader trend around transforming business processes and having both the advisory firm and the technology firm really helps play into that. That then leads into, for us, the cross-sell and upsell, right? Solve one problem. The advisory firm likes to be in the 3 to 5 years. And we've seen this. We talked about on our earnings call a couple of quarters ago where a large insurance company went from 1 solution to 4 solutions in a very rapid amount of time. And that was really driven by a partner who then brings along all that cross-sell opportunity on the platform.

Got it. So we'll open up the floor to questions in a second. But just wanted to come back to Jill. 2021 was obviously a very strong year of growth and now heading into 2022, you provided initially your initial 2022 guidance for growth and operating margins. Just on the operating margin side, obviously, you're making a lot of investments right now. But just the approach to operating margins into this year, is there anything different? Or is it just you're thinking about as we see revenue upside go through the year, that's how we should expect some of the trickle through to operating margins going forward?

I think that's a good way to think of it. It's that we are looking to invest now for future consistent growth. We want to be a company that has that durable low to mid-20% growth. And we've made good progress even to date. And when we guided originally for 2021, we only guided to about 16.5% revenue growth. And now for 2022, we're guiding to about 20% to 20.5%. And we think that, that's as a result of some of the investments that we've made before. And so we think that we'll continue to improve that long-term picture and the investments that we're making are -- I talked about some of it around the ESG and that's similar throughout the company. We think that those will end up paying off here in the next few years and bring some of that additional improvement in the bottom line as well.

Okay. Awesome. Let's see if there are any questions from the audience. I'll just throw out. So we have one more question as we're getting to the end of our session here. Going back to growth, right? And 2021, you guys saw very strong net new logo additions. How should we be thinking about new logos moving forward into 2022, even beyond?

So a lot of that new logo growth was capital markets and SEC in the U.S. There was just a lot of that activity. But as we look at international growth, we do see a lot of new logo opportunity in EMEA and in APAC because we are new to those, newer to those markets, and we're more likely to have a heavier swing towards new logos now. We do think though that ESG could potentially bring us to customers that otherwise might not have considered us if they're not public, it does open the door to potentially a wider swath of customers that are non-public and looking to expand their ESG reporting capabilities. So while we don't guide towards it, but we do think that we'll continue to increase and improve and bring in new logos because we like to focus on land and expand and first we got a land. So we're going to..

Step one, land.

Exactly.

Understood. All right, guys. Well, this has been a great discussion. Thank you again, both for your time today, and I hope you have a great rest of your conference.

Yes. Thanks, Stan.

Thank you.

Thanks.