Workiva Inc. (WK) Earnings Call Transcript & Summary

Well, I want to thank everybody for being here today for the final session of our Citi Global Technology Conference. I'm Steve Enders, part of the software team here at Citi. And with us, we have Jill Klindt from Workiva, maybe a few hours later than originally planned, but we made it up here.

[indiscernible] delayed, but thank you for working this in.

Yes, of course, we're glad to have you here.

So maybe we can just start off, talk about the Workiva journey over the past 5 years. I think there's been a lot of changes here. So can we talk about that and maybe the biggest areas of investment over the past 5 years?

Yes. So we've actually done -- there's been a lot of change over the last 5 years. We have -- we completely redid our pricing, moved from user-based licensing to solution-based licensing, which was transformative for our business, made it so much easier for us to sell into our existing customers, there was no nickel-and-diming, -- do I add one customer? Is it just the way that they were then, having unlimited users within each individual solution. No limitation to how they felt or they didn't feel like there was any kind of a reason to not just have more people in the process. And what that does is it gets more people into our platform, more data into our platform and makes it much more sticky to the customer. So that was transformative to the way that we priced and grew each individual solution and really gave us a lot more opportunity for upsell within -- across our broad portfolio as well. Another thing that we did within the last 5 years, we completely replatformed. We rolled out all of our customers during COVID in 2020 on to the new platform. It's a much more nimble platform, and it's built on a -- in a way that can -- micro services so that we can make changes more easily and has helped us to be able to build out additional functionality in the platform in ways that we otherwise maybe couldn't have. And it was a perfect time for us to do that as we've come into some additional solutions, we think about ESG and some of the other investments that we've made here even just more recently last year, that was all made easier because of that replatforming. We're very proud of doing that during COVID. Everybody did it remotely. And it's been very well received. And so then -- as I was talking about last year, we made some investments specifically around ESG, not only the go-to-market strategy and actions to build up the sales teams and the marketing programs around that, but also changes within the platform to be able to better support ESG and the mandate and the needs of customers related to their ESG reporting programs. So we've done -- that's probably just barely even scratching the surface of what we've done over the last 5 years, but a lots going on, and we've been very excited about how we've been operating.

Sure. I'm sure there's a lot for us to dig into throughout this session today. Maybe we can talk about Julie taking over as CEO. She was COO before and has a history with the company, but how has the strategy changed? Or what is different now with Julie at the helm?

Well, Julie built our strategy. So there's actually been no change as to how we've moved forward with executing on our growth drivers and with our strategy. She built that. And so what has changed is I think she has a different approach than -- it's an operator approach as opposed to Marty, who is a founder, and engineer and a different -- just a different approach to how you grow the company, and she's brought a lot of structure to the teams and to the way that we operate. And I've really actually been -- I loved it, the way that she has organized the executive leadership team to be more nimble in the way that we're operating, to share data better to really just operate at a higher level, and I think that we'll continue to see that. And then I think that, that has trickled down actually into the rest of the company as well. We've seen, well, next 1.5 weeks she'll be -- we'll all be talking at our -- we have our Amplify User Conference in Nashville and we'll have an Investor Day on Tuesday of that week. And so Julie will be talking about some of the changes that she's made and the new leadership that we brought in. So there's a lot more detail to go into, but we've all been very encouraged by how Julie has leaned into that role and the structure that she's brought to how we operate and it's been a really easy transition, I feel like.

No, that's great to hear. And we're definitely excited to be at the conference and Analyst Day in a couple of weeks here. Maybe we can talk about the big investment initiatives that you've gone under for the past -- you talked about ESG already. But what have kind of been the top 3 areas of focus for the company and the biggest areas that will support growth over the next few years?

So our main -- we have 4 growth drivers that we talk a lot about: and one of them will be our platform, the ability for our customers to use the platform to bring in their financial and nonfinancial data within a controlled environment and just how nimble that is for us. The second one would be our solution portfolio. We have a really broad solution portfolio and we can operate and win throughout that portfolio. So if one has a bad quarter, then we can have that picked up by another area. So it gives us some flexibility in managing business in that way. And then third, we would have our partner ecosystem. We win with partners. When partners are involved in deals, we have higher win rates and higher deal sizes. So we're always happy to have a partner involved because they just make our deals better. And then our last one would be geographic growth and expansion. We talked a lot about Europe and how we're driving forward with growth in Europe, and we want to have 25% to 30% of our global revenue coming from Europe over time, and that will be over the next few years. But we do think that, that's a big way how that we can win in the market.

Okay. It wouldn't be an investor conference, we didn't talk about what's going on in the macro and what's going on in the deal environment today. So I guess what are you seeing within deals are regulatory and compliance focused solutions, sustaining demand? Or has there been kind of any impact to how those deals are progressing through the pipeline?

Yes, we get asked about macro a lot. And Q3 is really tough, and we did keep our guide flat for the full year for revenue because of the uncertainty in the macro. With July and August, you always have lower sales because there's a lot of vacations that are going on. It's pretty slow. You have the majority of your business ended up getting closed in September for the quarter. And what we are seeing is we still see longer deal cycles. If it's a new logo, it's a matter of the security review, getting customers fully ramped with the MSA, and it's just there's a lot more process that we feel like is taking longer from approvals of the budget to just approval of bringing in a new software. There's a lot of cost that comes with bringing in a new vendor. We see it ourselves internally around how do you support that software, how do you build up the teams to be able to really use that? And so there is an extension there. And if it's an existing vendor, if we are -- if it's an existing customer of ours, where their existing vendor, it can still have a longer deal cycle to even upsell an additional solution because they have teams that are strapped for resources and they sometimes have to make a decision between projects as to how they move forward. And so that's another way that we're seeing those extended deal cycles. It's not necessarily, no, we're not going to buy, but we have these other projects that we need to do first because we have limited resources. And so we do see some deal cycles be extended just because of that as well.

Is there any way to maybe quantify how much deal cycles are extending or evolving at this time?

So we think that it's been pretty consistent over the past few quarters. We've talked about this Q4, Q1, Q2 earnings calls. And it's not easy to just pinpoint exactly a number around it, but we are watching really closely to see how that might transition potentially in Q4. We keep hearing about will there be like a clearing of budget, maybe, maybe not. It's not clear to us. And so which is why we again kept the guide flat just to be more prudent as to how we build out the rest of the year.

Sure, sure. Yes. I guess everybody probably hope for a good budget flush to close the year and make all our lives a bit easier here. Maybe shifting gears, I do want to talk a lot about ESG and what's going on in the market today for that. And maybe just to start, from Workiva's end, what has been the biggest areas of investment to make the ESG market a reality? And how much of maybe a shift was it to move the Workiva platform over to capture this ESG opportunity?

So I think a lot of the functionality that was in the platform already was in support of the ESG opportunity. It's bringing financial, nonfinancial data into our system in a way that is easy to layer assurance on top of easily auditable. We already had that platform that was in support of what the ESG reporting needs are. I think that the functionality we added on top of that was the ability for companies to report within different of the frameworks, ESG frameworks and also building out some of the structure around how you report some of that data to different of the agencies that you work with, and there's -- so a lot of it was around that platform and the structure within our platform. We did also build out and invest a lot in how do we market that, specifically to not only new logos, but also to our existing customer base. How do we make sure that we're having a conversation at a minimum with our existing customers so that they know that this is something that we do to bring that awareness so that if they do move forward, I mean we have a lot of conversations that haven't turned into sales yet, but we want to build that awareness so that they know that Workiva is here to help them with their ESG reporting needs if they start to move forward with something.

Sure. When you have those conversations with potential customers, I guess, what is their to ESG or EHS stack look like before they're ready to make an ESG reported purchase decision on Workiva?

It varies pretty widely actually. Some of them already have a more developed ESG reporting process. And so I would say that we -- it runs the gamut. Some companies are not doing anything. They're getting some kind of pressure from stakeholders, whether it would be their Board, investors, employees, that kind of thing, and they want to move forward with something, and we can help them in at the low end of a process to build out a very low-level ESG reporting solution. Oftentimes, for all of these, we will have a partner involved. We want to be partnered first with ESG. So it's also all these partners and these firms that build out ESG businesses around how they can provide services to companies and then we come in as a part of that, how they then perform those services, how they build out that program. And for those, sometimes it can be at the higher end, where there's already a more comprehensive ESG reporting process, and we can come in and help them to upscale that process, bringing in more data from their different systems, whether it be financial data, nonfinancial data and giving them the ability to have their auditors involved in the process more and being able to pull data from the system and build out audit programs within the platform in support of assurance that they might also be wanting to start to build in related to their ESG reporting.

Okay. So maybe if we think about the types of organizations you're going after, who is it that's typically making the purchase decision in making the decision to pick Workiva or some other vendor?

Specifically for ESG?

Yes.

That can sit in a lot of different areas. You sometimes will see it within finance. Sometimes you see it within legal. You can see it within Investor Relations. There's a lot of areas that it fits in and it somewhat depends on where the question comes from in some ways. And so it really does vary pretty widely based on an individual company. And so that can be hard to figure out who do I need to talk to, and that is something that we've worked on a lot to just use our existing relationships within some of those companies to figure out who is doing that reporting or who owns those -- that piece of data, those data points and to be able to go in and have a conversation with them. It's not consistent at all.

I guess in the deals that you've seen, like, is there any way to maybe like think of the pie chart for what that looks like and who's making it? And I guess, are the win rates different for who has that decision-making ability?

I think it's less on who has the decision-making ability and more on what's driving them to want to potentially buy a software. If it's a board-driven request, sometimes budget is less of a concern, and so that can move more quickly. There are sometimes teams that have less budget, and if it's not something that is viewed as a material item for that company, it can be a bit of a harder sell. So I think there, again, it can -- it depends on a lot of factors. This is a very early days as far as companies, ESG reporting, how they're going to manage that, who manages it. But I will say that the more that assurance comes into place, so if we think about Europe and some of the reporting requirements there and having limited assurance and reasonable assurance layered in over time, that will drive it more and more into finance because that's where the audit sits today. And as that happens, those are more often stakeholders that are familiar with the Workiva platform. And so we do think that, that helps to drive towards Workiva as the solution of choice because they are familiar with Workiva in more ways. And because as soon as you layer in assurance on top of some of these reporting programs, it becomes more clear that Workiva can be a better solution for them to help solve that need because it's more auditable because you're tracking changes. You know who is in the system, you have more controls over versions because there is 1 version and you can divvy out the questions if you're working on a questionnaire for one of the agencies. You can divvy out those questions, it's just a more nimble approach to that whole process.

Okay. So as we think about CSRD coming in here and starting for the -- I think its fiscal '24 reporting year, how does that change -- I guess 2 questions: one, how are you thinking about the time line for when Workiva customers would begin to implement their ESG strategies? And I guess, secondarily, it sounds like the type of customer or like the decision-making changes with CSRD because you have the assurance impact. So I guess how should we be thinking about what that means for the ESG opportunity as a result of that?

We do think that CSRD and the additional clarity that they put around what that requirement will be helps to drive business to Workiva, but it will be a long tail of business. This isn't going to be immediately, everybody feels like they need the Workiva platform in order to solve this. For those companies that are required in '25 to report on their '24 results, we think that there will be a good segment of those companies that will just continue to do whatever they're already using today for regulatory reporting. Maybe that's where in Excel, maybe it's more manual process. And they won't be willing at that point to move to a more structured program. Now there will be some companies that we think will move more towards the Workiva platform as a solution of choice because they can see the writing on the wall. They understand what's coming and they want to get ahead of it. And -- so we will see some uptick, we think, into '24, end of '24 related to that first stage of the requirement. But we think that there is a long tail to this as that limited assurance and then reasonable assurance comes into play. And when companies start to realize that you need to upscale that reporting process in order to really build out something that they can pass on to an auditor to review, that is in a structure that is auditable.

Okay. Okay. That makes sense. Last question on ESG here, and then we'll move on to a lot of other interesting topics here. But are the customers you're seeing that have adopted ESG so far, how are they maybe different than the typical Workiva customer that's using just [ SCC ] or other parts of the suite?

So a lot of the customers that have bought ESG so far are existing Workiva customers. So I would say that we have had great success selling into our existing customer base because we're a trusted partner of theirs, we're a trusted relationship, and they already have employees in our platform. And so I would say I don't know if it's -- it could be different teams as we talk about. Sometimes it's a different team that owns that process, but we do sell into our existing base at a higher rate than pulling in new logos for ESG at this time. And we've talked about that, that we've -- some of these early ESG sales have been more heavily into our existing customer base. Now in the U.S., especially, when you have such a large portion of the Fortune 100, 500, 1000 type customers' company as your customers, those are the companies that are more likely to be buying at this point. And so yes, of course, it makes sense that we're selling into that base of customers at a higher rate. We think that over time, then especially as we look into Europe where we're not as -- we don't have as much business there yet. But as we build that out, it will have more new logos as well.

Okay. I guess 1 more question here because that brought something up that I wanted to ask about. You have talked about ESG, I think, being a 2x higher price point or 2x higher ARPU than the rest of it. Is that a function of, as you talked about Fortune 500 customers being more likely to adopt? Or is it distinctly being held up at a higher price point because of the complexity that goes into it?

So I think a lot of it does have to do at this point with those larger customers because the way that we're pricing I mentioned earlier is based on the solution and the value that the customer is getting from that solution. If you have a customer that's a larger company and there's more complexity in their ESG reporting process, they have more people involved, they're reporting under more frameworks, more data points, more sources of data that is a more mature program, more complex and that is driving more value and so that would be at a higher price point, so I do think that there's something to that. Our lower price point has generally been selling into companies that are just looking to take a step forward, and not necessarily with a mature program, they just want to get started, and so that might be at a lower price point.

Okay. All right. That's helpful. Maybe shifting gears, I do want to ask about AI. I know you had press releases that have come out. How should we be thinking about what AI means for Workiva and the monetization potential of AI for the company?

Yes, we're not monetizing yet. And this is another topic that definitely tune into at our Investor Conference that are -- at our User Conference in Nashville here in 1.5 weeks. But what we're doing today is really just making some of the Large Language Models from Microsoft and from Google available to our customers in a very secure environment. So anything that is -- as of that language of that model is not going outside of Workiva. So whereas today, if you would do that more in a public forum that whatever you're asking, whatever information you're putting in there has been set into the model, so we're sectioning that off and keeping that within our platform. And we're working with the companies that have access so far to understand better what might be a good use case. We think that the way that we can drive value to our customers would be to help them streamline processes, just exactly what AI is intended to do, right? Streamline processes, you free up time for more high-value work from your people. You can just -- it's essentially an efficiency measure and a way to allow your people to do more high-level things, taking off some of the manual work, and can we do that within a reporting process? Can you start to build out some more structured base reports potentially? Can you do that within processes potentially? So we're learning a lot and we'll talk a lot about that in 1.5 weeks.

Great to hear. I know we're excited about that. I do want to ask, as CFO, I'm sure that you are looking at how to make the organization more efficient and how you're thinking about utilizing AI yourself to spread across the org. So I guess, can you kind of walk us through how you're thinking about the efficiency gains and maybe where Workiva is utilizing AI internally for -- to maybe drive more margin down the line?

Yes, it absolutely is the way that companies are and should be looking at becoming more efficient and we, as a company, we're talking about moving towards profitability. One of the ways we can do that is to be more efficient with the resources that we have. And reducing the manual work, having AI do a review of transactions and take out some of the manual review that otherwise you might need to do. It can help our developers code more quickly, it can help our customer support teams be more efficient. I think there really is a lot of ways that AI can help a company view more efficient throughout every team, you can come up with examples of this. And we look for ways to do that internally ourselves because -- we are, as I said, we're moving towards profitability in a way that you do that is to be more efficient, and that's definitely something that Julie is also focusing on. And I want those people, I want our people to be focusing on not only the right things, but to work smart. And so if there's a way to reduce the need to hire in the future, and to give a more fulfilling path for our existing employees to be able to do more interesting work, higher level work. I want to do that. I mean, we do use it in different ways throughout the company. And I think that there's ever more that we can keep doing though. I think there's a lot of opportunity there.

Okay. I do want to ask about the margin profile at breakeven or near breakeven this year on operating margin, you talked about 22% target for calendar '27. So, a, what are the key lever points to get there? And I guess, secondarily, how do we think about the glide path to reach that kind of end target you've set up for '27?

Yes, exactly. So we did say for 2023, we're going to be non-GAAP profitable for the second half and then non-GAAP profitable for the full year next year, and you're exactly right that the operating margin goal for 2027 is 22%. The way that we're going to be getting there is to really focus on efficiency, some of the things I was just talking about, maybe that's AI and ways to be more efficient. And maybe it's focusing on stop doing the things that maybe aren't giving us the returns that we want, focusing resources more heavily on areas that we think have a better potential for return. And moving -- being very nimble with that, not waiting to make these decisions. And so I think that Julie has brought a lot of that methodology as she's moved into the CEO role, certainly was there before as she led the [ teens ]. But I think that it's at a higher level, we're really focusing on that as a company. And so I do think that, that's one of the ways that we do that is to just focus on efficiency and focus on growth, and how do we drive that growth in the right way with the resources that we have and then being very careful about how do we add on to -- add additional resources, but it made sense to add additional resources or we use existing teams to be able to drive some of that growth forward. So it is a balance between continuing to focus on growth, but also being more efficient as you do that. And then moving towards specifically on the cadence towards that long-term operating model. It's not going to be linear. We had talked about that already and continue to believe that's the case because it will be focusing on certain areas at different times and how do you make progress throughout all the different teams. But we do stand fully behind that model, and we think that we can achieve it over time.

Okay. I guess as we think about the line items specifically, like what is the most leverage coming from -- sales and marketing as those investments begin to be process that you made on the ESG front, I guess how much more room is there on gross margin? Just maybe if we think about the model, how should we be thinking about that?

Yes. So we've talked a little bit about gross margin, in particular, because we are moving more of those low-margin services to our partners. They can do a better job because they can give a -- they can do more with those customers than what we were doing for that lower margin. And so they can build a business around that. And -- so as we move those services over, there's the ability for us to become more efficient within that services delivery team as we reduce the resources that are doing those services that we're pushing to our partners, so that's 1 thing. And then keep focusing on how can we use our platform and how can the technology drive the way that we support our customers to be more efficient in that customer success team as well. I know that's something that they focus on a lot. And so that would be 1 example. Definitely, efficiency within sales and marketing. How do we build the sales teams to be able to operate more efficiently is something that we've been working on for quite some time. And we'll keep adjusting to achieve those goals. And there's a lot of things that we can keep doing as we expand geographically and as we continue to expand within our solution portfolio. We do have more of an expensive business because it's not 1 solution, it's not 1 thing that we're focusing on. Some of the things that we're doing are more costly. And so making sure that we're making the right decisions there, focusing on the right investments and stopping if something is not working or shifting and making adjustments is really important, and we're going to keep focusing on that.

Okay. That's great to hear. I do want to open up to the room for questions. But before doing that, I want to ask about the recent convert. I think $625 million convert. I guess what was the rationale for doing that? What are your plans for the raise? And I guess, timing wise, why now?

So why now was really opportunistic. We could see that the way that our original convert from 2019 was operating was -- we were -- it was doing very well. We saw that there was an opportunity to keep our -- keep the coupon fairly similar, premium within reasonably similar. And could see that there was a market there and interest there because of a lack of some technology converts more recently. And so did feel like it was the timing made sense from that standpoint. And I wanted to use some of those funds to repurchase some of our original 2019 notes to help reduce the cost of capital and clean up a little bit some potential future dilution. So there was a lot of reasons that we were looking at managing that 2019 notes versus then adding a little bit to the balance sheet for potential future acquisitions as well is something that we're considering. And so it just -- it was opportunistic as to why we did it now. And we really did feel very good about the way that it was -- that it turned out and the terms that we were able to get.

Okay. With the -- well, I guess with you saying that -- I mean, for one, I mean, it seems like a great just arbitrage opportunity, you can go and get 5% from the banks. So why not...

We can. Not a horrible thing because [indiscernible] right now, yes.

As you think about the M&A potential in the marketplace, how is valuation at this time? And I guess, how would you be thinking about what M&A could potentially look like for Workiva?

Yes. The way that we look at M&A right now is we don't necessarily need to buy TAM. We have a lot of unaddressed TAM available to us. We do want to focus on acquisitions that can help us drive growth and achieve our strategy or execute on our strategy more quickly. And so whether that would be within a geography, whether that would be within a solution area or something adjacent to 1 of our solution areas, we're looking at a lot of different options. And valuations are something that we keep a close eye on, depending on the area, especially within ESG, some of those valuations are still pretty strong. And so we're watching that really closely too, but there are -- we've learned a lot with the acquisitions that we've done. We've done 4 so far in company history; 2 of them very small, 1 of them moderately small, and then last year with ParsePort, the largest acquisition that we've done so far. We've learned a lot from it as far as what we know about ourselves, how we would integrate, and so that was a good opportunity, not only did we get a great team and a great company that is helping us with our long-term growth plans within Europe, but we learned a lot from that acquisition. And I think that's important, too, is just knowing how your teams are going to react within that. You don't really know in some ways until you do it, and so we got a lot from that. And so then our ability to do other future acquisitions, I think, is even stronger now because of what we've done so far. And again, focusing on how we can drive additional growth, how we can drive more value, whether that's within any of our growth drivers, whether it's the platform, whether it's solutions, whether it's somehow within the partner ecosystem or geographic growth.

Okay. See if there's any questions in the room right now? And if there's not, then I am going to ask about -- there's a...

So just in your annual report, you mentioned that SEC filings represent the majority of business over the last couple of years, I think, 66% and 70% of new product sales are outside of the SEC channel. Have you ever communicated with investors at what point you might see a transition where SEC becomes a smaller part? Or is there more you can do with SEC filings and regulation there gets more complicated, anything around that?

Yes, sure. So we do continue to sell new SEC deals, and so it has a very long tail for us. We have talked about the SEC as a percentage of our total revenue, S&S revenue has started to be below 50% for SEC. And we are growing at a faster rate, on a smaller scale with our other solutions. So if you think about ESG, it's only been a few -- 6, 7 quarters that we've been selling ESG. So that's a smaller scale, but it's growing faster than an SEC, same with audit and risk and some of our other solutions. And it's -- we actually view that as a strength of the business that we have, this really broad solution portfolio. Like we talked about, it can be expensive to manage that go-to-market, but it really does give us some ability to just have some potential slow quarters for some of those solutions and the others can pick up. We can just be -- we can have a little bit of coverage because of that. So SEC will be and is still a big part of our base business because we're the leader within that market. We feel like we have the best way to solve for the SEC reporting needs and feel like we will continue to be that. But we're doing a lot more that's adjacent to that and reuse that functionality that we've built and what we've learned with that market, and we can translate that into any regulatory reporting needs. And so there's a lot that we keep looking at as to what would be other upcoming regulatory reporting that might need to be -- that we could help with. One would be an example, so private equity reporting here. There was a requirement just 1 week or 2 ago that came out of the SEC. And could we help with that? Absolutely. So that's something that we would look at. There's a lot of different things that we can keep looking at ways that we can serve our customers as far as regulatory reporting needs.

As a follow-up question, just in terms of quota-carrying [ reps] is a dollar of bookings, a dollar of bookings? Or do you guys differentiate between what salespeople are selling like if you're the SEC relationship person, can you cross-sell some of the other products? Or do you bring in someone else and then that would be their sale? Just curious if it's logo or how you guys structure it?

Yes. So we do have account owners that own a customer relationship. And then we do have in certain of our solutions specialists that come in and sell SEC is one of them, ESG is one of them. So you will then have an overlay specialist that will come in, in certain solution areas to help with that sale. And so we do have coverage over some of those.

All right. I do ask, I guess, on sales investment since it came up. Europe has been -- have seen some leadership change, the ParsePort acquisition there. How are you viewing the productivity in that geography at this time? And how are you feeling about the leadership changes since I think it happened about a year ago now?

Yes. So we've seen some leadership changes we talked about last year at our Analyst Day, at our User Conference and we've continued to hire. We had a new sales leader come in there at the beginning of the year. So there's been even some more recent adds to that team. And we're feeling pretty good about how they're building out that team in that business. There's still more to do, but it's going well as far as how they're building the base of what -- how we're going to proceed. Some of the regulatory things that are coming up there are related to CSRD, we think can help drive that over time. But again, that has a long tail. There's a lot of activity going on in Europe that we think over time, we can still -- that's a big area of growth for us.

Okay. All right. Well, I think we're running up against time here. So Jill, I want to thank you so much for being here and everybody in the room for being here as well and really glad that we could have Workiva here.

Yes. Thanks, Steve. Thanks for working this in after the scheduled time...

Yes. Of course, I'd like to think of this as the closing keynote for the conference. So glad we could do that.

Right. Thank you.

All right. Thanks, everybody.