Business context and reporting period
Workiva Inc. provides a cloud-based connected reporting and compliance platform. This Form 10-Q covers the quarter and six months ended June 30, 2020; comparisons are with the corresponding 2019 periods. Amounts below are in millions unless otherwise noted.
At quarter-end, 3,512 organizations subscribed to the platform. More than 80% of subscription revenue was priced under solution-based licensing.
Key financial results
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $83.9 | $73.5 | $169.7 | $143.4 |
| Subscription and support revenue | $70.7 | $60.5 | $139.1 | $116.6 |
| Professional services revenue | $13.2 | $13.0 | $30.6 | $26.9 |
| Gross profit / margin | $61.6 / 73.5% | $52.8 / 71.8% | $125.0 / 73.7% | $103.2 / 71.9% |
| Operating loss / margin | $(16.8) / (20.0)% | $(8.4) / (11.6)% | $(25.9) / (15.3)% | $(15.8) / (11.1)% |
| Net loss | $(19.8) | $(8.3) | $(30.3) | $(15.8) |
| Diluted loss per share | $(0.41) | $(0.18) | $(0.63) | $(0.35) |
| Operating cash flow | $7.1 | $18.8 | $11.9 | $23.9 |
At June 30, cash and cash equivalents were $402.1 and marketable securities were $106.5, totaling $508.6. Current assets were $577.7 and current liabilities $233.0. Convertible senior notes had a $345.0 principal balance and $285.0 net carrying amount; they are senior unsecured, bear 1.125% coupon interest, and mature in 2026. Interest expense includes discount and issuance-cost amortization, resulting in a 4.3% effective rate.
Changes versus prior comparable periods
- Q2 revenue grew 14.1% year over year, slower than the 24.3% growth in Q2 2019; first-half growth was 18.3%, versus 20.5% in 2019. Subscription and support revenue grew 16.9% in Q2 and 19.3% for the first half.
- Gross margin improved, but operating and net losses widened as operating expenses rose 28.0% in Q2 and 26.9% year to date. Sales and marketing and general and administrative costs were major contributors.
- Q2 operating cash flow declined to $7.1 from $18.8; first-half operating cash flow fell to $11.9 from $23.9. Management attributed part of the 2020 deferred-revenue decrease to excluding contracts considered to pose higher credit risk related to COVID-19.
- Subscription and support revenue retention was 94.5%, compared with 95.4% a year earlier; including add-ons, it was 107.9%, down from 114.5%. Management cited the winding down of customer conversions to solution-based licensing and COVID-related effects on price increases and solution churn.
- Customers increased 2.7% to 3,512. Customers with annual contract value of at least $100,000 rose to 716 from 558.
Outlook, risks, and unusual items
- Management expects continued investment in talent, technology, sales and marketing, including expansion in EMEA, integrated risk, statutory reporting and Wdata. These investments are expected to increase operating losses before generating incremental revenue. Management noted that the benefit from the solution-based licensing conversion was largely complete by June 30, 2020, requiring other growth drivers to sustain growth.
- Remaining subscription-contract performance obligations were approximately $296.2, of which $194.8 was expected to be recognized over the next 12 months. The filing provides no specific revenue or earnings guidance.
- COVID-19 had negatively affected sales activity, with remote sales and customer purchasing delays. Customers may reduce technology spending, seek concessions or have difficulty paying; effects may appear in future periods. Management said it could not predict the pandemic’s full impact. The 2020 user conference moved to a virtual format.
- Q2 general and administrative expense included $1.2 of cash-based and $4.9 of equity-based compensation under former-executive separation agreements, plus $0.6 of event-cancellation fees. Sales and marketing expense also included certain one-time severance payments. Stock-based compensation totaled $14.9 in Q2 and $24.8 for the first half.
- Management believed available cash, equivalents, marketable securities and operating cash flows would fund operations for at least 12 months, while noting continuing operating losses and possible future negative operating cash flows.
- The company reported no pending legal proceeding expected by management to have a material adverse effect and no material change in contractual obligations. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether COVID-related sales delays, contract concessions and customer credit risk further affect bookings, renewals, deferred revenue and cash collections.
- Whether retention, add-on sales and customer growth stabilize after the licensing-transition benefit has faded.
- Whether expense growth, especially sales and marketing, general and administrative costs and stock-based compensation, converts into durable revenue growth and improved margins.
- The trend in operating cash flow and deferred revenue, including the role of billing and collection timing and higher-credit-risk contract treatment.
- The terms, carrying value and potential dilution implications of the $345.0 million convertible notes; the filing notes that conversion-related shares were anti-dilutive for the periods presented.