Workiva Inc. (WK) — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Financial statements are unaudited. Workiva provides cloud-based connected reporting and compliance software through its Wdesk platform.
Financial performance
Amounts below are in millions of dollars except per-share data and percentages.
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $73.5 | $59.1 | $143.4 | $119.0 |
| Gross profit | $52.8 | $42.8 | $103.2 | $86.2 |
| Gross margin | 71.8% | 72.4% | 71.9% | 72.4% |
| Operating loss | $(8.4) | $(21.8) | $(15.8) | $(31.3) |
| Net loss | $(8.3) | $(21.8) | $(15.8) | $(31.4) |
| Diluted loss per share | $(0.18) | $(0.50) | $(0.35) | $(0.73) |
| Operating cash flow | $18.8 | $(2.5) | $23.9 | $(0.8) |
- Q2 revenue grew 24.3%; subscription and support revenue rose 23.8% to $60.5 million, or 82.3% of revenue. Professional services revenue increased 26.4% to $13.0 million, partly due to XBRL services that management did not expect to continue at the same level in the next two quarters.
- Operating expenses were $61.2 million in Q2, down 5.2% year over year. Research and development and sales and marketing spending increased, while general and administrative expense fell substantially.
- At June 30, cash and cash equivalents were $94.7 million and marketable securities were $42.9 million, totaling $137.6 million. Current assets were $205.4 million versus current liabilities of $204.4 million.
- Balance-sheet financing obligations were $17.8 million, including current and non-current amounts. Operating lease liabilities were recognized following adoption of the new lease standard; the balance sheet showed a $16.5 million right-of-use asset and $22.8 million of lease liabilities. A $15 million credit facility matures in August 2020; a $0.5 million letter of credit reduced availability. The filing does not state a drawn balance.
Changes and business indicators
- Six-month revenue growth accelerated to 20.5% from 17.5% in the prior-year period; subscription and support growth was 22.3% versus 18.4%.
- Gross margin declined 0.6 percentage points in both the quarter and six-month comparison, as professional services costs grew faster than revenue.
- Losses narrowed versus 2018. The comparison benefited from prior-year executive separation costs: Q2 2018 included $5.9 million of cash compensation and $3.6 million of equity compensation for the former CEO, plus a $6.6 million cash payment noted in the cash-flow discussion.
- Operating cash flow improved to $23.9 million for the half-year from a $0.8 million use. Management attributed the 2019 inflow in part to collections, deferred revenue growth, and timing of accrued expenses; it should not be read as equivalent to net income.
- Customers increased to 3,421 from 3,222. Subscription revenue retention was 95.4% excluding add-ons; including add-ons it was 114.5%, up from 106.9%. Customers with annual contract value above $100,000 rose to 558 from 366.
Outlook, risks, and other notable items
- No specific full-year revenue or earnings guidance is provided in the filing. Management expects operating losses to increase in absolute terms and as a percentage of revenue at least through the second half of 2019 as it invests in talent, processes, technology, EMEA expansion, integrated risk, statutory reporting, and Wdata.
- Management expects the growth benefit from converting customers to solution-based licensing to continue through the remainder of 2019, but to wane beginning in Q4. It says new revenue sources will be needed to sustain growth beyond 2019. The solution-based model is expected to cover a substantial majority of subscription revenue by year-end 2019.
- Remaining performance obligations for subscription contracts were approximately $197.7 million; about $160.8 million was expected to be recognized over the next 12 months. This is not the same as a revenue forecast.
- Management believes existing cash, operating cash flows, credit-facility availability, and potential securities issuance are sufficient for at least 12 months, while also noting continued expected operating losses and possible need for additional capital.
- Key risks include execution and returns on growth investments, competition, longer sales cycles for complex enterprise deals, seasonality, and dependence on continued customer growth and retention. The company also entered into non-cancelable cloud-services commitments totaling $5.2 million through fiscal 2022.
- Management reported no pending legal proceeding expected to have a material adverse effect and concluded disclosure controls were effective; it reported no material change in internal control over financial reporting during the quarter.
Investor verification points
- Track subscription growth and retention after the temporary uplift from solution-based licensing conversion fades, particularly from Q4 2019 onward.
- Assess whether gross margin stabilizes as professional-services and cloud infrastructure costs grow, and whether planned investments translate into revenue.
- Separate recurring operating cash generation from working-capital timing, deferred revenue movements, stock-based compensation, and proceeds from option exercises.
- Review credit-facility availability and covenants, lease and financing obligations, and the company’s stated liquidity runway as losses continue.
- Confirm the impact of the 2018 former-CEO separation costs when comparing year-over-year expense and loss trends.