Workiva Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; comparisons are with Q1 2019 unless otherwise noted. Workiva provides a subscription-based connected reporting and compliance platform. Results are unaudited.
Key financial results
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Total revenue | $85.8 million | $70.0 million | +22.6% |
| Subscription and support revenue | $68.4 million | $56.1 million | +21.8% |
| Professional services revenue | $17.4 million | $13.8 million | +26.0% |
| Gross profit / gross margin | $63.4 million / 73.9% | $50.4 million / 72.1% | Margin +1.8 percentage points |
| Operating loss / operating margin | $(9.2) million / (10.7)% | $(7.3) million / (10.5)% | Loss widened |
| Net loss | $(10.6) million | $(7.5) million | Loss widened |
| Basic and diluted loss per share | $(0.22) | $(0.17) | |
| Cash provided by operating activities | $4.7 million | $5.1 million |
- Operating expenses rose 25.6% to $72.6 million, led by sales and marketing (+42.4%); that expense increase reflected higher compensation and benefits, stock-based compensation, consulting and recruiting. Gross margin improved as cost of revenue grew more slowly than revenue.
- Cash, cash equivalents and marketable securities totaled $496.0 million at March 31, 2020. Cash and cash equivalents were $393.4 million; marketable securities were $102.6 million. Cash and equivalents increased $11.7 million during the quarter.
- Convertible senior notes had $345.0 million principal outstanding and a net carrying amount of $282.8 million. The notes are unsecured, bear 1.125% annual interest and mature in 2026. Q1 interest expense was $3.6 million, including $2.2 million of debt discount and issuance-cost amortization.
- Current assets were $565.2 million and current liabilities $222.0 million. Deferred revenue totaled $204.0 million, down from $206.2 million at year-end 2019.
Business trends and changes
- Subscription growth reflected demand and pricing across SEC reporting, global statutory reporting, risk and controls, and financial and managerial reporting. Professional services growth reflected inline XBRL migration, setup and consulting, and organic XBRL services growth.
- Customers increased 4.2% to 3,507. Customers with annual contract value above $100,000 rose to 670 from 493; those above $150,000 rose to 308 from 207.
- Subscription and support revenue retention was 94.5%, down from 95.7%; including add-ons, retention was 110.9%, versus 110.7%. Management said customer acquisitions or cessation of SEC filings accounted for just under half of latest-quarter revenue attrition.
- More than 75% of subscription revenue was priced under solution-based licensing. Management said the growth benefit from converting customers to this model began to wane in Q4 2019, requiring new sources of growth.
- Operating cash flow was slightly lower year over year. It included a $14.3 million reduction in accounts receivable, while cash outflows included decreases in accrued expenses and other liabilities and deferred revenue. Deferred revenue was affected in part by amounts excluded for contracts presenting higher credit risk related to COVID-19.
Outlook, risks and notable items
- The filing provides no specific revenue or earnings guidance. Management expected continued operating losses and potentially negative operating cash flow, but believed available liquidity and operating cash flows would fund operations for at least the next 12 months.
- Management planned continued investment in talent, processes, technology, sales and marketing, and expansion areas including EMEA, integrated risk, statutory reporting and Wdata. It warned these investments could increase losses before generating incremental revenue, and may not sustain growth.
- COVID-19 had negatively affected sales activities, with substantially all sales conducted remotely and some customers and prospects delaying purchasing decisions. The company could not yet quantify the effects on customer acquisition, retention or upselling; reduced spending, delayed payments, contract renegotiations and concessions could affect future results. The platform remained operational and services continued.
- The annual user conference was canceled as an in-person event and replaced with digital events. The filing notes that Q1 professional services revenue is seasonally higher around customers’ Form 10-K filings and that quarterly results may fluctuate.
- Remaining performance obligations for subscription contracts were approximately $269.2 million at March 31, 2020, with $187.4 million expected to be recognized over the next 12 months; these amounts are not presented as a revenue forecast.
- No material pending litigation or changes in contractual obligations were reported. Management stated disclosure controls were effective and there was no material change in internal control over financial reporting.
- After quarter-end, the company approved a consulting arrangement for a retiring executive and accelerated vesting of 75,281 restricted stock units; a separate 25,997-unit award was to be canceled.
Important facts for investors to verify
- Whether COVID-19-related sales delays, customer credit risk and potential concessions affected subsequent bookings, renewals, collections and deferred revenue.
- Whether subscription growth and retention can be sustained as the prior conversion-to-solution-based licensing benefit wanes.
- Whether continued hiring and investment translate into revenue growth, given rising operating expenses and widening net losses.
- The relationship between reported cash generation and working-capital movements, including deferred revenue and accrued liabilities.
- The potential dilution and cash obligations associated with the $345.0 million convertible notes, including their conversion and settlement terms.