Business context and reporting period
Workiva Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2018. Its SaaS platform, Wdesk, serves finance and accounting, audit and internal controls, risk and compliance, and performance reporting markets. The company reported 3,222 customers and 1,287 employees at quarter-end.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $59.1m | $49.4m | $119.0m | $101.3m |
| Subscription and support revenue | $48.8m | $41.0m | $95.3m | $80.5m |
| Gross margin | 72.4% | 71.1% | 72.4% | 71.9% |
| Operating loss | $(21.8)m | $(9.9)m | $(31.3)m | $(15.8)m |
| Net loss | $(21.8)m | $(10.2)m | $(31.4)m | $(16.0)m |
| Net loss per share, diluted | $(0.50) | $(0.25) | $(0.73) | $(0.39) |
| Operating cash flow | $(2.5)m | $4.0m | $(0.8)m | $6.6m |
Q2 revenue grew 19.7%; subscription and support revenue rose 19.2%. Six-month revenue increased 17.5%. Operating expenses grew faster than revenue, increasing 43.7% in Q2 and 32.6% for the six months. General and administrative expense was a major driver, rising 142% in Q2 and 82% in the half-year.
Financial position and liquidity
At June 30, 2018, cash and cash equivalents were $57.5m and marketable securities were $23.2m, totaling $80.7m. Current assets were $133.7m and current liabilities $155.4m. Total liabilities were $199.4m, compared with total assets of $181.7m; stockholders’ deficit was $17.7m. Capital lease and financing obligations totaled approximately $19.0m. No amount was outstanding under the $15.0m credit facility. Management said available cash, operating cash flows, credit-facility availability and potential securities sales should fund operations for at least 12 months.
Deferred revenue was $140.3m in total. The company expects to recognize approximately $118.5m of remaining subscription-contract performance obligations over the next 12 months. Six-month operating cash flow declined from $6.6m provided in 2017 to $0.8m used in 2018; cash and cash equivalents fell $2.8m from year-end.
Material changes and unusual items
- Gross margin improved, but losses widened as operating costs increased. R&D investment continued, and headcount was up 7.7% year over year.
- Q2 and six-month G&A included $5.9m cash-based and $3.6m equity-based compensation under a separation agreement with the former CEO. The company also reported a $6.6m cash payment to the former CEO during Q2.
- Stock-based compensation was $10.5m in Q2 and $16.4m for the first half, versus $4.4m and $8.5m, respectively, in 2017.
- Workiva adopted ASC 606 on January 1, 2018 using the modified retrospective method; prior-year comparisons were not restated. Adoption increased reported first-half net income by $2.1m versus the former standard, mainly from commission-cost deferral, while reducing professional-services revenue by $1.8m. Adoption had no effect on total operating cash flows.
- Revenue retention excluding add-ons was 95.6%, down from 96.1%; including add-ons it was 106.9%, up from 106.0%. Customers increased 10.8% year over year. Annual contract values of at least $100,000 rose to 366 from 275.
Outlook, risks and contingencies
The filing provides no specific numerical revenue or earnings guidance. Management expects continued investment in product development, sales and marketing, professional services and customer success, and expects total operating expenses to continue increasing; it also expects operating losses to continue. Management noted that enterprise-wide sales can involve longer, more complex sales cycles and that quarterly customers are expected to be converted substantially to annual terms over the next nine months.
Key risks include successfully transitioning customers to the next generation of Wdesk, maintaining customer support and retention, keeping pace with technology and managing growth-related costs. The company expects adoption of the new lease standard in 2019 to have a material balance-sheet impact. It reported no pending legal proceedings expected by management to have a material adverse effect. Disclosure controls were assessed as effective, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether subscription growth and retention remain strong, particularly as the next-generation Wdesk transition proceeds.
- Whether operating expenses, especially G&A and stock-based compensation, moderate relative to revenue growth; assess the former CEO separation costs separately from recurring costs.
- Whether operating cash flow improves and the $80.7m cash and securities balance remains adequate given ongoing losses, lease obligations and investment needs.
- How ASC 606 timing effects and the forthcoming lease-standard adoption affect reported revenue, deferred commissions, liabilities and comparability.
- Whether management’s stated liquidity runway remains supportable if growth, cash collections or access to financing differ from expectations.