[WK – Workiva] From Point Solution to Platform
Pat Dorsey, founder of Dorsey Asset Management and formerly Director of Equity Research at Morningstar, recently pitched Workiva on the Invest Like the Best podcast (I have transcribed Dorsey’s remarks about WK in today’s Podcast Blurbs). At a high level:
“And what they did is create a product that lets companies do SEC filings much more efficiently than the old way, which was mark up a pdf and send it to RR Donnelley and the Donnelley sends it back to you and then you mark it up and send it back to them…so needless to say, [Workiva] went from 0% to 50% share in 6 years. In fact, the people who do external reporting – they’ve got 80% share of the Fortune 500 right now – people actually won’t go to work for another firm that doesn’t use Workiva…” – (Pat Dorsey on “Invest Like the Best”)
Anyone who has ever toughed it out as a grunt in the nether regions of a deal team has some visceral sense of what it would be like to draft SEC docs. Different copies of documents with unwieldy file names like “Project X_FINAL_FINAL” and then “Project X_FINAL_FINAL_FINAL” flying back and forth through email, the one most burdened with appendages calling itself out as the most recent version; a seemingly endless string of last-minute updates to worksheets that precipitate fresh rounds of copying-and-pasting into Word documents that must then be re-edited to ensure all figures interspersed among the text cohere to the updated exhibits. And then comes the XBRL tagging.
[XBRL, eXtensible Business Reporting Language, is an ornate taxonomy of labels that converts business information into a standardized language that computers can understand and use to communicate with other computers, making it easier for investors and government agencies to compare financial information across companies. Under the hierarchy of tags, a footnote on share-based compensation, for instance, might carry a high level tag relating to the section itself; the table featured within that footnote would be pinned with a subordinate tag, and the line items within that table – options granted, forfeited, or exercised – appended with a different tag still. An XRBL-tagged Inventory footnote might look something like this…
Source: www.xbrlsite.com
…the bottom section is meant for humans and the top section – behind the scenes and littered with tags denoting that such-and-such piece of text relates to inventory cost basis during this time period – is meant for computers. In 2009, the SEC mandated that the submitted filings of publicly traded companies be XBRL tagged.]
Throughout this process, the SEC filer might hire a company like Donnelley Financial Services (ticker: DFIN), with its local teams of accountants and deal managers in major cities, to proof read drafts, advise on XBRL tag selection and review, consult on proxy content, and navigate through various other regulatory filing processes with the aim of submitting accurate documents that are consistent with the SEC’s electronic filing system (EDGAR). Donnelley operates facilities where bankers, lawyers, and other groups working on sensitive transactions can meet in-person to prepare documents, print physical documents, and file with EDGAR. Its engagement with customers is far more labor intensive and consultative than Workiva’s technology based self-service model, and its involvement in the lifecycle of a company’s filing activities – IPOs, debt and secondary equity offerings, insider stock acquisitions/dispositions, M&A transactions, restructurings – is also far more comprehensive. Workiva’s SEC revenue streams are primarily relegated to relatively simpler, recurring compliance type filings, namely 10Ks and Qs [~25%-30% of Donnelley’s revenue comes from compliance filings]. Donnelley wields dominant market share for filings related to IPO and M&A activity, which underpin the high margin transactional fees that account for 30% of its total revenue, and is also the leader in compliance filings for mutual funds and insurance companies, where Workiva’s participation is marginal.
At least one benefit of a consultative, full service approach to XBRL SEC filings seems to be accuracy. Charles Hoffman, author of XBRL for Dummies and considered the progenitor of the language, maintains a blog dedicated to digital financial reporting, in which he regularly assesses the quality of public company XBRL filings (I love that someone cares enough to do this; the internet is amazing). Here are two screen shots.
This one is from November 2017…
…and this is from April 2015:
There are a few things worth noting. First, the percentage of XBRL filings without error has dramatically improved over the last 2-3 years, from 58% in April 2015 to 89% in November 2017. Second, at both points in time, filings submitted by Donnelley Financial Solutions – known as RR Donnelley in April 2015, before the company was split into 3 separate entities – had a much better error free hit rate than those filed through Workiva, which just managed to match the industry average. This disparity comes as no surprise. Donnelley has trained personnel on hand who consult on XBRL tagging and proof read SEC filings. Having gone through some XBRL tagging demonstrations, I can tell you that the process is not very intuitive. You can easily see how someone could get bogged down in the elaborate taxonomy and make mistakes. And yet, Donnelley’s share of XBRL filings has dropped a bit, from 14% to 13%, whereas Workiva’s share has climbed from 29% to 36%. Isolating 10K filings, the relative share shift is even more stark: