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Workiva Inc (WK) Q1 2019 Earnings Call Transcript

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Workiva Inc  (NYSE: WK)
Q1 2019 Earnings Call
May. 01, 2019, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon. My name is Chris, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Workiva Q1 2019 Earnings Call. (Operator Instructions) Thank you.

Adam Rogers, Director of Investor Relations, you may begin the conference.

J. Adam Rogers -- Director of Investor Relations

Thank you, and good afternoon, everyone. Welcome to Workiva's First 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.

A replay of this call will be available until May 8. Information to access the replay is listed in today's press release, which is available on our website under the Investor Relations section. As a reminder, today's conference call is also being broadcast live via webcast.

Before we begin, I'd like to remind everyone that during today's call, we will be making forward-looking statements regarding future events and financial performance, including guidance for our second quarter and full fiscal year 2019. These forward-looking statements are subject to known and unknown risks and uncertainties. Workiva cautions that these statements are not guarantees of future performance. All forward-looking statements made today reflect our current expectations only, and we undertake no obligation to update any statement that reflect -- or that occur -- to reflect the events that occur after this call. Please refer to the company's annual report on Form 10-K and quarterly report on Form 10-Q for factors that could cause our actual results to differ materially from any forward-looking statements.

Also during the course of today's call, we will refer to certain non-GAAP financial measures. Reconciliations of non-GAAP to GAAP measures and certain additional information are also included in today's earnings press releases.

And with that, we'll begin by turning the call over to our CEO, Marty Vanderploeg.

Martin J. Vanderploeg -- President, Chief Executive Officer and Director

Thank you, Adam, and thanks to everyone for joining the Workiva First Quarter 2019 Conference Call. We are pleased with our first quarter results. We exceeded quarterly guidance for revenue and operating results, and we are raising our full year 2019 revenue guidance, which Stuart will discuss in more detail later in the call.

Since I became CEO over 10 months ago, we have accelerated our revenue growth rate, increased average revenue per customer, increased average deals size -- I'm sorry, increased average new deal size, cut expenses and gained other efficiencies throughout the company and improved our licensing model.

We also examined markets for the most potential growth. And as a result, we have refined our focus and our investments. We are working more closely with partners than ever before. Our technical and advisory service partners enable us to scale more efficiently and deliver higher value to our customers. We are aggressively building more APIs and connectors to improve integrations with ERPs and other third-party systems. APIs and connectors enable our customers to replace manual data transfer and bring larger amounts of data into Wdesk.

These integrations ensure accuracy and transparency throughout the entire reporting process. It is essential that we are tightly integrated with our customers' systems of record and other core enterprise applications. This connectivity increases our stickiness and our footprint in our customers' applications ecosystems, and will remain one of our key areas of investment moving forward.

We continue to invest in global statutory reporting and integrated risk, and we are aggressively expanding our footprint in Europe, including new offices in Frankfurt and Paris, which better position us to attract and support customers in these countries.

I spent some time in Europe last month, and I am pleased by the demand for Wdesk. I met with executives from a wide range of industries, including shipping, telecommunications, semiconductors, banking, mining and pharmaceuticals. And they, like many others, are faced with the same problem. How to report vast amounts of data from their systems of record to regulators and stakeholders on an accurate and efficient way? Wdesk is the only cloud platform that provides trusted data and connected reporting throughout the entire analysis and reporting process from ERP transactional data to final reports.

As I continue to visit with customers and prospects, I am even more confident that Wdesk will be a driving force in data transparency and trusted financial reporting throughout the world.

With that, let me turn it over to Stuart Miller, our CFO.

J. Stuart Miller -- Executive Vice President and Chief Financial Officer

Thank you, Marty. I'll start with our first quarter results, and then I'll comment on our guidance for second quarter and full year 2019. And then, we'll open up the call with your questions.

As always, I'll talk about our results and guidance before stock-based compensation or on a non-GAAP basis. So please refer to our press release for a reconciliation of our non-GAAP and GAAP results and guidance.

So billings increased 25% from Q1 2018 to Q1 2019, using comparable ASC 606 data. We posted records subscription bookings in Q1 relative to other first quarters at Workiva. Billings declined 19% sequentially from Q4 2018 to Q1 2019. Q4 is seasonally the strongest quarter for billings and Q1 is seasonally the weakest, so we expected some decline in this comparison. Also in Q4 2018, we had pulled forward some renewals related to solution-based licensing.

We posted an operating profit in Q1 2019 for the first time. Operating margin improved 720 basis points due mainly to better operating leverage on both the R&D and G&A expense lines. While we are pleased with our progress on operating margin, accelerating growth in subscription revenue remains our #1 priority. We plan to accelerate hiring in the next few quarters to capitalize on attractive opportunities for revenue growth, consistent with Marty's comments. We expect operating expenses, as a percentage of revenue, to rise over the next few quarters. So our guidance on operating loss for full year 2019 remains unchanged on a non-GAAP basis from the last time we gave guidance.

Improvement in operating cash flow remains our second highest priority in financial terms. Even with our stepped-up investments, we expect OCF to improve significantly in 2019 compared to 2018.

So we outperformed our revenue guidance for the quarter. As Marty mentioned, we generated total revenue in the first quarter of nearly $70 million and increase of 16.8% from Q1 2018.

Breaking out revenue by reporting line item. Subscription and support revenue was $56.1 million, up 20.8% from Q1 2018. Deepening our penetration of existing customers with both add-on solutions and conversion to solution-based licensing helped accelerate growth of subscription revenue in Q1 2019. Professional services revenue was $13.8 million in Q1 2019, an increase of 3% from the same quarter in 2018. Growth in revenue from XBRL professional services overcame a decrease in revenue from other services. We expect the revenue growth rate from subscription and support to continue to outpace revenue growth from professional services on an annual basis.

Turning to our supplemental metrics. We finished Q1 with 3,366 customers, a net increase of 247 customers from Q1 2018 and a net increase of 26 customers from Q4 2018.

In Q1 this year, we added fewer new logos than in the comparable quarter last year, as our sales team focused on penetrating existing accounts and concentrating on larger contracts with new logos.

Regarding our retention rates, please recall that through 2018, we calculated revenue retention rates using monthly ASC 605 revenue. Starting with Q1 2019, we are reporting revenue retention rates using quarterly ASC 606 revenue because we now have comparable data. We expect the new quarterly measurement to reduce the variability of this data. Our retention rates continue to be strong. Our subscription and support revenue retention rate was 95.7% for the first quarter of 2019, unchanged from our report the same period a year ago.

With add-ons, our subscription and support revenue retention rate improved to 110.7% for the first quarter of 2019 compared to 105.3% at March 2018.

Our progress with larger subscription contracts is encouraging. The number of contracts valued at over $100,000 a year totaled 493 in the first quarter of 2019, up 47% from Q1 last year.

For annual contract value of $150,000 plus, we had 207 customers in the first quarter, up 37% from Q1 2018 results.

Now moving down to P&L. Gross profit was $51.2 million in Q1, up 17.1% from the same quarter a year ago. Consolidated gross margin was 73.2% in the latest quarter, an improvement of 20 basis points compared to Q1 last year.

Breaking out gross profit. Subscription and support gross profit was $46.7 million, equating to a gross margin of 83.2% on S&S revenue, an improvement of 180 basis points from Q1 2018 due to higher utilization rate and better pricing.

Professional services gross profit for the first quarter was $4.5 million, equating to a 32.7% gross margin, down $1.4 million or 11 percentage points from the same period last year due to investments in additional talent to enhance services and address new markets.

Research and Development expense in Q1 was $20.1 million, up 5.3% from Q1 last year due to higher compensation. R&D expense, as a percentage of revenue, improved 320 basis points this quarter to 28.7% compared to Q1 last year.

Sales and marketing expense for the quarter increased 17.6% from Q1 last year to $23.4 million, in line with revenue growth.

General and administrative expenses totaled $6.8 million in Q1, down $1.5 million compared to Q1 2018. G&A expenses, as a percentage of revenue, improved over 4 percentage points to 9.7%, due primarily to a reduction of expenses for executive compensation, consulting and bad debt.

Operating income was $861,000 in Q1 2019 compared to an operating loss of $3.6 million in Q1 2018.

Turning to our balance sheet and cash flow statement. At March 31, 2019, cash, cash equivalents and marketable securities totaled $114.4 million, an increase of $16.1 million compared with the balance at December 31, 2018. In Q1, 2019, net cash provided from operating activities totaled $5.1 million compared with cash provided at $1.8 million in the same quarter a year ago.

Turning now to guidance. In the second quarter of 2019, we expect total revenue to range from $68.6 million to $69.1 million. Non-GAAP operating loss is expected to be in the range of $4.2 million to $4.7 million. And we expect to post a positive operating cash flow again in Q2 and for the full year 2019. For full year 2019, we are raising guidance for a total revenue to a range of $284 million to $286 million. We expect the growth rate of subscription revenue to continue to outpace the growth rate of services. We expect non-GAAP operating loss to range from $15 million to $17 million, unchanged from our previous guidance. Investing in new talent is necessary to pursue our attractive growth opportunities.

So we're ready to take your questions now. And operator, please begin the Q&A session.

Questions and Answers:

Operator

(Operator Instructions) Your first question comes from Tom Roderick from Stifel. Your line is open.

Tom Roderick -- Stifel -- Analyst

Hey guys. Good afternoon. Thanks for taking my questions. So I guess the thing that jumped out relative to the P&L in the quarter is you've got the subscription growth rate here back above 20%, almost 21% in the quarter. So a lot of the strength we saw from the bookings outperformance last quarter flow into the P&L. Can you just give us some sense as to how we ought to think about the potential for that to stay above 20%? Sounds like you're going to invest more aggressively on OpEx, presumably quite a bit in sales and marketing that will sort of trickle through later in the year. How would you sort of suggest we think about that modeling function for subscription relative to prof serve, which is now down in the low single digits?

J. Stuart Miller -- Executive Vice President and Chief Financial Officer

Thanks, Tom. So as you know, we don't break out our guidance on the 2 revenue streams other than to say we expect subscription growth to outpace services growth. So I do think we are obviously expecting to see good sequential growth in subscription revenue. And it's certainly our hope and our aim to continue to keep the growth rate in that area. And we're making -- you referenced the investments, investments we're making in additional talent, we're expecting to start to show up on the revenue line in 2020.

Tom Roderick -- Stifel -- Analyst

Fair enough. Okay. And then looking at the back to base efforts, you pointed out, and we can see it in the numbers here that your $150,000 ACV customer is up 37%, $100,000 ACV up 47%. So tremendous success with the back to base. How much of that can you ascribe to some of the solution-based pricing? Where are we in the curve to, kind of, push customers into that? And then I guess the other question around that is what sort of pushback are you getting, if any, from customers as you sort of migrate them along to that newer solution-based pricing approach?

J. Stuart Miller -- Executive Vice President and Chief Financial Officer

Yes. So interestingly, we're -- still less than half of our customers are on a revenue basis or on solution-based licensing, but it's going very well. And of the group that graduated to the over $100,000 department, some of those were clearly new, some of those were logos, but the ones who were existing customers who graduated, still less than half of those were related to solution-based licensing. So quite a bit of add-on sales there.

Tom Roderick -- Stifel -- Analyst

I'll jump back in the queue. Thank you guys.

Operator

Your next question is from Eric Lemus with SunTrust. Your line is open.

Eric Lemus -- SunTrust -- Analyst

Hey guys. Nice jump in the quarter. I just want to expand on Tom's last question as far as looking at those customers that did move on to solution-based pricing, is there anything measurable that you guys can talk about as far as the uplift in pricing moving to solution-based pricing from those customers already?

J. Stuart Miller -- Executive Vice President and Chief Financial Officer

So we're definitely getting an uplift and giving them good value for that uplift. And we've had very strong reception from customers. It's easier for them to administer it. It's much more flexible for them to add seats and broaden adoption throughout their own organizations, and frankly, makes their job easier from administrative perspective. We have not commented specifically on a percentage uplift that we're receiving. I mean it differs from customer to customer.

Eric Lemus -- SunTrust -- Analyst

Okay. Great. And then more on the solution-based pricing. One of the advantages that you guys have talked about is just simplifying the sales process. Is there any sort of metric that you guys can give as far as shortened sales cycles or even larger initial deal sizes that you're seeing because of the solution-based pricing?

Martin J. Vanderploeg -- President, Chief Executive Officer and Director

Yes. This is Marty. The -- it's pretty early to tell in terms of cycle time in terms of making sales because there is a lot of interconnection time there. And -- but we definitely have seen an increase in new deal sizes, I alluded to in the opening comments. And again, just so -- we talk a lot -- everyone's talking a lot about solution-based licensing. It's -- it definitely reflects an uptick across our customer base. But for us, it's a every strategic thing.

The most important thing is that it has increased our new deal size. It has simplified the selling process. And we are seeing some examples where the sales cycle time has shortened. But as I said, we don't have a lot of data there yet. And then the last thing is, it just -- it creates so much more exposure for our product across the enterprises, as they add more and more users. So for us, we view it as a very strategic thing contributing to all 3 of those things I mentioned.

Eric Lemus -- SunTrust -- Analyst

Thanks guys. Nice job.

Operator

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

Matt Lemenager -- Baird -- Analyst

Great, Thanks. It's Matt Lemenager on for Rob. So I had one on the new European XBRL mandate, the European Single Electronic Format mandate that's coming January 2021, and just seeing you guys opening the 2 new offices over there. Just wondering is there any sort of customers that are starting to come early ahead of that mandate? Or what are we starting to see with that kind of pending?

Martin J. Vanderploeg -- President, Chief Executive Officer and Director

Well certainly with our larger customers over there, and I would say across sort of the top half of that market we talk about, they are definitely starting to look at how they're going to solve that problem.

We are already getting inquiries on a pretty steady basis just because of our XBRL reputation. So we are starting to see that percolate. Certainly, those offices are partially -- only partially a reflection of that, but that stuff is definitely starting to get on the radar screens of the finance reporting teams in Europe.

Matt Lemenager -- Baird -- Analyst

Got it. And just a quick follow-up on the renewal values. Those picked up nicely this quarter just under 111%. Is that -- how much -- it is hard to know, but how much of that was due to they're now being quarterly versus before it was monthly and with fluctuator. I guess how sustainable is that 111% going forward?

J. Stuart Miller -- Executive Vice President and Chief Financial Officer

Yes. So we do think it will be less volatile for sure. If you did the same calculation on a monthly basis to be comparable to last year, it was actually a bit over 113%. So the -- but we're reporting the 110% because we committed to report the calculation on a quarterly basis going forward.

Matt Lemenager -- Baird -- Analyst

Got it thanks Congrats guys.

Operator

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

Alex Sklar -- Raymond James -- Analyst

Thanks. This is Alex Sklar here for Brian. Sticking with the solutions-based pricing theme here, could you just talk about -- I think you hit on increased number of users, but could you talk about any increased usage from enterprises in terms of how they're using the products after they switch over?

Martin J. Vanderploeg -- President, Chief Executive Officer and Director

Well remember that the solution-based licensing through the use of workspaces, we are bracketing that usage in terms of the use case, meaning if it's for SOX, they can only use it for SOX. If it's for financial -- internal performance reporting, they can only use it for that use case. So we haven't seen it go broaden that sense. Within each workspace though, we've definitely seen an increase in the number of users, of course, which is -- makes it more sticky and we get more visibility throughout the ore which is accomplishing our goals there. So I would say that it's been successful from that point of view just getting more exposure. And we're definitely seeing, as that -- as we see more exposure within the ore, we're getting more inquiries for the other solutions. So we are seeing the effect we want.

Alex Sklar -- Raymond James -- Analyst

Got it. And then maybe, Stuart, following up on your prepared remarks about the logo growth and your customers with over 100,000 ACV growing faster than the overall new logo. Could you just provide some color on what the initial deal sizes looked like for the new logos that were added versus a year ago?

J. Stuart Miller -- Executive Vice President and Chief Financial Officer

Yes. We have not historically disclosed that, but I'll tell you that there's been a very nice steady growth in new deal sizes. Some of that has to do with the move to solution-based licensing, since we're offering more value. But it's up in the -- it's sort of in the north of 30% on the new deal, new logos and some of that -- and quarter-to-quarter that can depend on the mix of new logos because some use cases can be quite large and other use cases are not. So that number can vary quarter-to-quarter, which is one of the reasons why we have not historically disclosed specific numbers around that.

Alex Sklar -- Raymond James -- Analyst

Got it. And maybe just one last one here on the increased hiring. Is this still predominantly a European focus or are you're also looking to ramp some sales people in the U.S. as well?

Martin J. Vanderploeg -- President, Chief Executive Officer and Director

Yes. The -- certainly, a significant portion of that is the European expansion. The initial expansions we started have shown really good results. And so we've decided to accelerate that even more. We're also really doubling down on partnerships and adding folks to help us nurture those partnerships with primarily the larger consultancy firms. And then we've also decided to invest slightly more in R&D to deal with the APIs and the connectors. We differently see building ecosystems around our solution and our solution around other people's solutions and also providing very good connections to their system of record is really a theme we see with other companies in our space. And we see that it definitely is what the customers want and builds that stickiness. So those are really the 3 places. We will add some more sales people in North America too, but the first things I mentioned are the primary uses of that in -- out of these investment.

Alex Sklar -- Raymond James -- Analyst

Thank you.

Operator

Your next question is from Michael Grondahl with Northland Securities. Your line is open.

Michael Grondahl -- Northland Securities -- Analyst

Yeah thanks, Marty and team, congrats on kind of pushing on the accelerator. First question is just if you look at the new win or extension in 1Q, any categories to call out or any, sort of, partnered channels to call out?

Martin J. Vanderploeg -- President, Chief Executive Officer and Director

At this point, I would really say it's been pretty consistent across the board. I would say our partnerships were further ahead on the integrated risk than we are on the other businesses, but I think it's been pretty much across the board.

J. Stuart Miller -- Executive Vice President and Chief Financial Officer

Yes. We had good additions. We had groups contributing, SEC, capital markets, integrated risk, financial close reporting, some of the use cases that are specific to Europe. It was pretty broad-based.

Michael Grondahl -- Northland Securities -- Analyst

Got it. Okay. And then the investment in some sales, firepower and whatnot, is it basically just people to attack the channel partners a little bit more? Or any more detail there just sort of where the dollars are going?

Martin J. Vanderploeg -- President, Chief Executive Officer and Director

Well, as I alluded to, in Europe, it is primarily all of revenue generation activity, meaning salespeople some pre-salespeople and then some delivery folks, that's where a very significant part of the investment is going. And then in terms of -- in North America, it's more about a little more focus on some of our territories and things like that. It's really fine-tuning where we're making the investments.

Michael Grondahl -- Northland Securities -- Analyst

OK thank you.

Operator

And our last question comes from Stan Zlotsky with Morgan Stanley. Your line is open.

Stan Zlotsky -- Morgan Stanley -- Analyst

Perfect. Thank you so much gentlemen. Maybe a high-level question. The expansion into Europe, is there any specific significance in the new offices being opened up in Frankfurt and Paris as opposed to some of the other big hubs that -- where we've seen a lot other -- a number of other software companies also have headquarters?

J. Stuart Miller -- Executive Vice President and Chief Financial Officer

Stan, so as you know, we were in Amsterdam and London, I guess, since 2013 or late 2012, something in that area. So we started there, and we started with the English-speaking countries, and have been there for a while. And so after that, we're really following the size of the market. And as you know, Germany and France are the -- have the biggest GDPs in the EU, which itself is as large as the U.S. GDP itself. It's important culturally to have a local presence there and have, as you know, have sales marketing people who are local, calling on those companies.

Stan Zlotsky -- Morgan Stanley -- Analyst

Got it. Perfect. And then on the new logos, the 26 new logos, obviously, we can see in the net revenue retention rate, you're doing great job of upselling into existing customers. How should we think about the pace of new logo additions as we move through the rest of the year? And I realize you don't guide to but just -- maybe just qualitatively, how should we be thinking about it?

J. Stuart Miller -- Executive Vice President and Chief Financial Officer

Yes. So one data point that might be helpful is, historically, the balance of new subscription revenue has been about 50-50 between new logos and existing customers on upsell and so forth. In this quarter, it tilted toward existing customers, but it only tilted a little bit. It's 52%, 53% existing customers. So don't expect that to change a whole lot going forward. This quarter, there was a pretty good blend of new logos from the different groups, like SEC and Capital Markets, and some of the customer teams to call on private companies and the SOX team and so forth. We don't -- we had a team that was very focused on converting customers to solution-based licensing and focusing on add-on solutions to existing customers. That very well could be the case in Q2 as well. But over time, we don't expect it to be a whole lot different from around 50-50.

Stan Zlotsky -- Morgan Stanley -- Analyst

I was specifically talking about -- more about the -- just the pure count of logos rather than mix of revenue.

Martin J. Vanderploeg -- President, Chief Executive Officer and Director

Well, I -- this is Marty, Stan. I think that -- I really think that we'll see a more consistent with what we've done in the past number as we move forward. Again, it bounces around quite a bit. But in general, I think that we are very focused on just making sure our deal sizes on our new deals are substantial. It just -- it bring so much better discipline to the whole process of onboarding and getting happy customers and seeing -- and providing value to them. So until the organization totally adjusts to, it might be a little lower. But in the long run, I anticipate you'll see similar numbers of new logos added. And that ratio that Stuart talks about that we watch much more than the actual gross number of logos, the bookings, it's still about 50-50 each quarter. That's a number I'm more concerned about.

Stan Zlotsky -- Morgan Stanley -- Analyst

Got it. And last one for me, since the last question at all. But maybe just slightly different way to ask the prior question of within your sales comp plan, do you specifically differentiate between new ACV from new logos versus if the new ACV comes from upselling to existing customers?

J. Stuart Miller -- Executive Vice President and Chief Financial Officer

We don't. It's all a function of incremental revenue. And we're indifferent, whether it's from a new logo or whether it's from an add-on sale.

Stan Zlotsky -- Morgan Stanley -- Analyst

Perfect. All right. Thank you so much guys.

Operator

This concludes the Q&A session and today's call. Thank you for joining, and you may now disconnect.

Duration: 33 minutes

Call participants:

J. Adam Rogers -- Director of Investor Relations

Martin J. Vanderploeg -- President, Chief Executive Officer and Director

J. Stuart Miller -- Executive Vice President and Chief Financial Officer

Tom Roderick -- Stifel -- Analyst

Eric Lemus -- SunTrust -- Analyst

Matt Lemenager -- Baird -- Analyst

Alex Sklar -- Raymond James -- Analyst

Michael Grondahl -- Northland Securities -- Analyst

Stan Zlotsky -- Morgan Stanley -- Analyst

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