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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Ladies and gentlemen, thank you for standing by and welcome to the Workiva Q4 2019 Earnings Call. [Operator Instructions] I would now like to hand the conference over to your speaker today, Adam Terese, Director of Investor Relations. Thank you. Please go ahead, sir.
Good afternoon, everyone. Thank you for joining us for Workiva’s fourth quarter 2019 earnings conference call. This afternoon, we will begin with comments from our Chief Executive Officer, Marty Vanderploeg followed by our Chief Financial Officer, Stuart Miller, and then we will 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 February 27. 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 would 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 first 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 to reflect the events that occur after this call. Please refer to the company’s annual report on Form 10-K 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 release.
With that, we will begin by turning the call over to our CEO, Marty Vanderploeg.
Thank you, Adam and thanks to everyone for joining the Workiva fourth quarter and full year 2019 conference call. We are pleased with our fourth quarter and full year 2019 results that beat guidance for revenue, operating loss and loss per share. I am proud of the many accomplishments in 2019. We rolled out the next generation of the Workiva platform. We expanded our global presence. We accelerated investment in our partner ecosystem. We transitioned a majority of our customers to solution-based licensing and we increased investments in markets where we see the most potential for growth.
One of our top priorities this year is upgrading customers to the next generation of our technology which is an end-to-end platform. Our customers now have the power to connect and manage all of their data from initial systems of record to final reports in our secure cloud platform. The new Workiva platform is faster, more open and scalable and feature-rich. It enables customers to connect data from ERP, GRC and CRM platforms, along with other third-party applications and systems of record. Examples include Oracle, SAP, Salesforce, Workday, BlackLine and Tableau. Our ability to integrate with third-party systems and applications is critical to the evolution of our platform. Once the data is connected in the Workiva platform, users can automatically refresh data from multiple sources, which in turn populates the data in spreadsheets, documents and presentations. This enables real-time reporting of all types of performance data.
Our advisory and service partners can combine their domain expertise with our new more open platform to create high value solutions for their clients. We see our partners as a catalyst for growth in 2020. For example, KPMG now leverages the Workiva platform to deliver a unified and streamlined solution for their risk management and regulatory compliance customers. We continue to see broad adoption of our platform. In 2019, 72% of new solutions and new logo bookings came from markets outside SEC or SEDAR. It is important to reiterate all of our solutions are on the same end-to-end platform. In 2019, we were pleased with increased bookings from our growth vectors, EMEA, Wdata and our platform solutions for integrated risk and global statutory reporting. We are also seeing good early demand for the Workiva platform from the U.S. government. We plan to continue to invest in these core growth areas which Stuart will discuss later in the call.
Culture is everything at Workiva and we encourage people to truly support each other work through peer recognition, resource groups and cultural events. Transparency is the backbone of our workplace and we empower employees to voice their feedback through frequent town halls, Q&As of executives, employee surveys and open digital chat channels. Just two days ago, Fortune Magazine named Workiva one of the 100 Best Companies to Work For, for the second consecutive year. We are proud to be joining many of our customers in this prestigious group. Our ability to attract and retain top talent is what makes us successful.
In closing, as we rollout the next generation of the Workiva platform, I am more excited than ever about our future. When I talk to our customers and prospects, they also see the power of the platform, which we believe will fuel our growth in the coming years.
With that, let me turn it over to Stuart Miller, our CFO.
Thank you, Marty. Consistent with comments on previous calls, we are investing in our sales organization to drive revenue growth from EMEA, Wdata and our platform solutions for integrated risk and global statutory reporting. We are encouraged by our progress in bookings and pipeline from our growth vectors and we remain committed to our plan. Our Q4 results and 2020 guidance reflect our investment in these vectors. Our program of converting customer contracts to our solution-based licensing model, or SBL, is approaching successful completion.
At year end 2019, about 82% of subscription value was contracted on our SBL model. The lift in revenue growth from SBL which I have previously estimated at couple of 100 basis points wanes after Q1. We expect bookings from new solutions and new logos, particularly from our growth vectors to drive revenue growth going forward. Our shift to SBL has contributed lasting benefits to our business. SBL has raised deal sizes for both new logos and new solutions. For example, average new logo size increased 32% to $72,000 in fiscal 2019. Unlimited seats per solution have made our platform easier for our customers to administer. SBL has simplified our sales process and internal administration, thereby proving scalability. In addition, SBL has helped expand the number of active users on our platform substantially. In 2019, the number of active users on our platform increased almost 32% from 2018. Expanding our user base has created opportunities for sales of new solutions.
Turning now to our financial review, as always, I will talk about our results and guidance on a non-GAAP basis. Please refer to our press release for a reconciliation of our non-GAAP and GAAP results and guidance. We outperformed our revenue guidance in Q4. We generated total revenue in the fourth quarter of $80.3 million, an increase of 24.6% from Q4 2018.
Breaking out revenue by reporting line items, subscription and support revenue was $56.1 million, up 23% from Q4 2018; new logos, new solutions and conversions to solution-based licensing helped drive strong revenue growth in Q4 2019. 60% of the increase in S&S revenue in Q4 came from existing customers. The balance of the increase came from new customers added in the last 12 months. Professional services revenue was $14.1 million in Q4 2019, an increase of 32.5% from the same quarter last year. A one-time lift of $2.5 million in XBRL services due to a change in an SEC regulation that affected large accelerated filers, accounted for a majority of the growth in professional services revenue in Q4.
Turning to our supplemental metrics, we finished Q4 with 3,510 customers, a net increase of 170 customers from Q4 2018 and a net increase of 56 customers from Q3 2019. Our revenue retention rates remained strong. Our subscription and support revenue retention rate was 94.7% for the fourth quarter of 2019 compared to 96.1% for the same period last year. More than half of the attrition in the quarter came from M&A de-listings and bankruptcies. With add-ons, our subscription and support revenue retention rate improved to 113% in the fourth quarter of 2019 compared to 107.1% in Q4 2018. Our progress with larger subscription contracts continues to be promising. The number of contracts valued at over $100,000 per year totaled 652 in the fourth quarter of 2019, up 47% from Q4 the prior year. The number of contracts valued at over $150,000 totaled 285 customers in the fourth quarter, up 50% from Q4 2018 results.
Moving down the P&L, the gross profit totaled $58.1 million in Q4, up 22.6% from the same quarter a year ago. Consolidated gross margin was 72.3% in the latest quarter versus 73.5% in Q4 2018. Our long-term target for consolidated gross margin continues to be 75%. Breaking out gross profit, subscription and support gross profit totaled $54.6 million equating to a gross margin of 82.6% on S&S revenue, a contraction of 160 basis points compared to Q4 2018. Additional headcount to help upgrade customers to our next generation platform together with higher services costs accounted for the contracted.
Professional services gross profit in the fourth quarter was $3.4 billion equating to a 24.4% gross margin, up $1.4 million from the same period previous year. Research and development expense in Q4 totaled $21.2 million, up 11.3% from Q4 2018 due to higher compensation in cloud services expenses. R&D expense as a percentage of revenue improved 320 basis points in the latest quarter to 26.4% compared to Q4 2018. Our long-term target for R&D expense to revenue continues to be 25%.
Sales and marketing expense for the quarter increased 44.5% from Q4 2018 to $31.1 million reflecting accelerated investments in sales talent, primarily to drive bookings in EMEA integrated risk, global stat reporting and government. General and administrative expenses totaled $10.3 million in Q4, up $3.3 million compared to Q4 2018. G&A expense as a percentage of revenue increased 200 basis points to 12.9% due to higher headcount to support our growth, our long-term target for G&A expense to revenue remains at 10%. Operating loss was $4.6 million in Q4 2019 compared to an operating loss of $300,000 in Q4 2018. Workiva’s operating margin contracted 540 basis points in the latest quarter, which was better than our guidance.
Turning to our balance sheet and cash flow statement, at December 31, 2019, cash, cash equivalents and marketable securities totaled $488 million, an increase of $3.2 million compared to the balance at September 30, 2019. In Q4, 2019, net cash provided from operating activities totaled $2 million compared with cash used of $400,000 in the same quarter a year ago. Remaining performance obligations on subscription contracts continues to vary from deferred revenue as we implement multiyear contracts with annual billing terms for some customers.
Turning to our guidance, for the first quarter of 2020, we expect total revenue to range from $82.8 million to $83.3 million. At the midpoint, we are guiding to a growth rate of 18.7% for total revenue in Q1 2020 compared to Q1 2019. As a reminder, Q1 is seasonally the highpoint for our services revenue in terms of contribution to total revenue. We anticipate that the highest quarterly growth rate for services we will pose this year will be in Q1. Nevertheless, we expect our subscription growth rate to outpace our professional services growth rate. We expect non-GAAP operating loss to range from $7 million to $7.5 million in Q1 2020. For full year 2020, we expect total revenue to range from $341.5 million to $343.5 million. We expect non-GAAP operating loss to range from $36 million to $38 million, reflecting investment in the growth vectors we highlighted earlier. We expect positive operating cash flow for the full year 2020, which would represent our fourth consecutive year of positive cash flow.
Before I close, I want to highlight two items related our full year guidance. First, we expect revenue from professional services to grow at a low single-digit rate for fiscal 2020. When updating your financial models, please note that we posted one-time increases in professional services revenue in Q2 2019 of $1.9 million and in Q4 2019 of $2.5 million that we do not expect to recur in 2020. Second, our revenue guidance assumes strong growth in EMEA in 2020, but it does not assume a surge of demand from new logos seeking to comply with the impending ESEF mandate. We will have better visibility of the demand from that sector later in the year.
We will now take your questions. And operator, we are ready to begin the Q&A session.
Certainly. [Operator Instructions] Your first question comes from the line of Tom Roderick with Stifel. Your line is open.
Gentlemen, thank you for a taking my questions. A nice finish to the year. Marty, let me ask you the first question here and just thinking about some of the components of where you want to spend money next year and how that’s all constructed? In particular, I was hoping you could start with a little bit more detail just on the platform upgrade and moving customers to a modernized platform. What is that going to take with respect to additive R&D heads, professional services bodies? And then the second part of that I guess is in putting that in the context of the guidance, Stuart, as we look at a $36 million to $38 million loss on the year that more than doubles the loss this year with $50 million more in revenue. So perhaps if you could kind of help us think through the components of how much of that additive increase in OpEx goes to R&D versus sales and marketing versus geographic expansion? That will be great. Thank you.
Thanks, Tom. First off, I would say that in terms of moving to the new platform, there is not an increase in R&D cost that’s pretty much behind those. Now, we are moving towards on-boarding our customers and we are well underway in that effort. We did hire some additional customer support people, most of those are already onboard and the bulk of the new spend this year is still our go-to-market is primarily sales and is building out sales teams both in North America and in EMEA. So, that’s where the bulk of the spend is. Stuart, do you want to add anything?
Well, I mean, I agree with that. And so that – and when you see the incremental spend it’s on the sales and marketing line, Tom. There is a little bit of support on G&A, there is little bit on customer success, but as Marty said, we have already hired those people, but we will have a flow-through of full year expense on them.
Got it. That’s helpful. And Stuart just kind of parsing through your comment there in terms of expecting strong EMEA growth, but that seems to be even without with the benefits of the ESEF mandate let me work backwards on that statement just in terms of do you still feel like that can be a really catalyst for the business that regulatory mandate any update in terms of the way that customers in that geography are thinking about their digital transformations and are you hopeful that, that mandate will in fact start to drive and impact your business as you look at the 2021 just talk a little bit more about Europe being able to drive growth because that mandate even really playing a factor this year it sounds like?
Yes. So I think the mandate has played a factor since that it is prompted discussions with customers and has been easier to get meetings as a result of that steering companies in the phase but our success today there has been more about selling our whole platform to larger companies and as I mentioned we are not projecting sort of surge of growth in new logos coming from compliance with ESIP mandate we need to watch how that is going to play out through the rest of the year we are hoping that we are going to share that business but I just wanted the street to know that that’s not based into our forecast.
So hopeful that the mandate plays out but not taking into the forecast so, if it happens we will treat it as upside?
I think that’s right. I mean, we've got - we're experiencing quite a bit quite a bit of success in Europe with the current go to market strategy.
This is Marty. We haven’t really had any indication one way or the other in terms of more or less optimistic we still see that mandate coming looks like it is going to be enforced we are getting lot of incoming calls asking about it and so but those types of things just don’t know so we more or less modeled just based on selling the platform which is going very well so
Got it. Really helpful. I will jump back in the queue. Thank you, gentlemen.
Thanks, Tom.
Your next question comes from the line of Terry Tillman with SunTrust. Your line is open.
Hey, how are you guys? This is actually Nick on for Terry. Can you hear me out there?
We can.
Okay, great. So I guess the first one, I just wanted to ask about the competitive dynamics, has there been any changes comparatively in terms of SEC reporting other use case areas and I guess what are you seeing right now on Europe competition wise?
So we really we haven’t seen any change comparatively really anywhere in the globe and Europe the competitive situation there it is at least ESEF is very similar to what is in the U.S. it is the financial printers and then there are smaller companies that are going to be focused on their home countries so no change there.
For me what I always look for primarily is competition from a platform point of view and we still don’t see any reporting platforms on the horizon.
Got it, okay. That’s helpful. And I guess looking in the 2020 and beyond and also taking account you guys have previously mentioned can you just talk about the driver of the model between new customers and expansion sells comfort?
Did you say 2021 or?
He said 2020.
2020 and beyond?
Well, I think it is going to stay pretty consistent it will be balanced for the most part between new logos and add on sales new logos there is a lot of new logo opportunity obviously overseas and also on the private company space and now that we have launched our new platform with the connectivity there is a lot of opportunity our existing customers I think it is going to stay pretty well balanced.
Okay, that’s helpful. Thanks guys.
Appreciate it.
Your next question comes from the line Chris Merwin with Goldman Sachs. Your line is open.
Alright. Thank you so much for taking my question. I just wanted to ask a bit about billings growth, obviously, revenue should probably in the quarter, billings growth stepped down just a little bit so I was wondering if you could talk a bit about why that was and it is just a fact that we are lapping the impact of solution-based pricing. I'm just curious if there is anything else to call out there?
Hey, Chris, this is Stuart. So as you know, we had record billings for the quarter. And the – it was up about – the current billings were up about 15%. As we called out on the previous – the last November or so, we had pointed out that there have been a surge of conversions in Q4 2018 to SBL. So that’s really what you are seeing is the comparison from the – call it conversion to SBL.
Got it. That makes sense. And just a follow-up on Europe, from an investment standpoint, where are you in particular with adding headcount, I mean, sales headcount that is to try and think about any further hiring there and how that could then impact the pace new logo growth? Thanks.
Well, we are continuing to grow our sales team there. We really don’t disclose exact numbers, but we are still aggressively hiring sales people in Europe.
We made good progress in hiring in the latter half of 2019. And so you will see the full year impact of that. But as Marty said, we are continuing to hire in Europe. It’s such a natural market for us.
Thank you.
Your next question comes from the line of Rob Oliver with Baird. Your line is open.
Hey, gentlemen. Good evening. Thanks for taking my questions. Marty one for you and then Stuart, I had one follow-up for you. Marty, you mentioned Fed government in your prepared remarks as early positive signs there. I can’t remember your exact words, but I know having recently gotten Fed ramp, just curious for anymore color around the Fed opportunity, how that’s shaking out and a color on activity there?
Sure. Yes, I mean, this is a nail in the head. The Fed ramp really enabled us to – the authorization really enabled us to go after that and we hired several really seasoned salespeople and had some good initial success. The pipeline looks good and the deal size is really good. One thing our core team has a lot of experience here is in the government. So we are quite optimistic.
Okay, great. That’s helpful. Thanks, Marty. And then Stuart, yes, sorry, I am going to go back to Europe, so yes – so I mean I think that’s pretty good indicator I guess that you guys aren’t expecting a lot from ESEF really in the numbers this year? And just the risk of beating a dead horse, just wanted to dive in a little bit more on that, I mean, I know you guys have put some sales resources on the ground there and that it sounds like things are going pretty well. I know deal sizes have been moving higher for you guys generally just curious getting that kind of like platform sell traction early on in Europe would seem to be a positive. So I am curious for a little bit more color there and whether there are other maybe outside drivers like as for HANA upgrades or people just thinking about their financials more broadly which are helping to drive interest in Workiva’s platform? Thanks guys.
Thanks, Rob. Yes, I mean, not a lot more color to give other than to say that the ESEF mandate has catalyzed a lot of conversations that otherwise would take us longer to earn and there is real openness to digitization of the office of the CFO. There is certainly a compliance focus among certainly larger European companies that is every bit as sophisticated as the most sophisticated companies in the U.S. ad real appreciation for the power of our platform. So we are quite encouraged.
Yes, this is Marty. Certainly, we have used Europe as a test bed for platform selling. And because of that we have learned a lot of the deal size in Europe has really proven that selling a platform is really a good way to approach our market, in other words, one place to do all of your reporting and compliance activities. And it’s resonating in Europe and obviously we are going to start to do that in the U.S. as well and we are getting underway with that, but just the fact we have launched the new platform and we have direct connectivity now has really enabled platform selling. So that’s really what is forecasted in EMEA this year as opposed to the ESEF which is more of a – on the high end of this platform, so but on the bottom half, it’s more of an application sell.
[Operator Instructions] Your next question comes from the line of Mike Grondahl with Northland Securities. Your line is open.
Yes, thanks guys. Hey, your full growth factors any chance you could kind of link those how you are doing kind of on a relative basis there?
Well, the short answer is no, but I will give some more color I mean we talked a lot about EMEA that is going well integrated risk just having a platform approach there is already we are already seeing good results there selling multiple types of used cases within GRC on our platform and that is really help to tick up the ABS and there is really help to minimize the competition in many ways so Wdata has been really special thing in terms of getting ADS across the board it is head of quite a big role in getting ADS up for all of our new solution sales and then obviously we are going back to our existing customers and getting an uptick there when we put Wdata and so that has been a really good story as well so they are all working out fairly well. I really would say that we are very positive on all of them we continue to invest in all of them.
You have done well over the North America and in Europe that is very promising.
I didn’t mean to leave global staff yes it is doing very well as the other three are.
Got it. With the solution based pricing kind of called out like 82% penetration can that go a lot higher is that kind of top end ceiling?
So that was the number at year end which included some of the contracts that were signed right at 12/31, so I think it is fair to say that we are hopeful to drive that number higher I doubt it will ever be a 100%, Mike, just because of the preferences of customers, certain customers.
Sure. Any thoughts high level just on your acquisition pipeline kind of post the convert, what you are thinking?
Sure. There is nothing that rises to the level of disclosure. Of course, we look at everything. We are continuing to evaluate targets that we were reaching out to as well as ones that are brought to us by our management team and around the world and bankers and consultants and so forth so we have been canvassing quite a few prospects and nothing has reason to that level yet what we are not in real hurry to do something we run where we make an acquisition you never wanted to be the right one that really enhances our platform and has strong business logic behind it we are not interested in doing a deal for deal sake.
Yes, I just wanted to reiterate that. I mean, we are going to – we are looking for potential acquisitions that have a high probability of success and really mess with what we are trying to accomplish strategically. We are hoping we find the right one, but obviously you never know.
Got it. Okay, thanks guys.
Your next question comes from the line of Stan Zlotsky with Morgan Stanley. Your line is open.
Hey guys. Thank you so much for taking my questions and good afternoon. So one from us on just as investors think about the opportunity in the EU right when could they start to see the results show up in actual reported numbers whether it is going to be a billings or that’s probably going to be the leading indicator and what are some of the success milestones that we should be mindful of in engaging the traction that you guys are seeing in Europe?
Well, one thing that might help you stand is for the first time I know we just filed the 10-K today and it is buried in a footnote but for the first time we started to disclose revenue by geography at a high level and so we reported Americas revenue and then non-Americas revenue and most of the revenue outside of the Americas and EMEA and – for us, because it’s early days elsewhere. And so you will see the growth rate in revenue in non-Americas revenue was over 66%. It was like 66.7% if memory serves versus 20% in Americas. So, that’s a new disclosure that should help investors a bit.
Super helpful. Thank you. And then maybe just one more, how are you thinking about partnership specifically as you push deeper into the European opportunity?
This is Marty. I would say that obviously partnerships in EMEA are very important. The real significant change for us is that we are starting to see pull from partners, meaning partners are calling us quite regularly both in the U.S and in EMEA and that’s because now we really feel we have a platform that’s end-to-end that you can connect directly to. So they are going to be a big part of growth in EMEA and also in the U.S., we have to get that engine going, which we have been sort of late to do, but we didn’t want to do it before new platform came out.
Okay. Very helpful guys. Thank you so much.
Thanks, Stan.
Your next question comes from the line of Brian Peterson with Raymond James. Your line is open.
Thanks, guys. Kevin here on for Brian. I think you posted some nice upside on margins this quarter despite some of the investments you have mentioned stepping up in 2020, was there any change in the timing of some of those items that might have been planned for this year, but it maybe got pushed out into 2020?
No, I think most of the margin beat was really as a result of the revenue beat and a lot of the revenue beat was in services. So that’s the – I think that’s the right way to interpret it.
Got it. And then maybe just another one on the partner ecosystem, can you help us frame the percentage of deals that involved the partner in the quarter versus a year ago and maybe how many certified partners do you have now versus same time last year?
I don’t have the number off the top of my head, but our number of partners has increased significantly and we really haven’t disclosed historically what percentage of our bookings come from that so…
But it’s up.
Yes, it’s definitely up.
Got it. Thanks guys.
Thank you.
There are no further questions at this time. Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.