Workiva Inc. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Unaudited consolidated results. Workiva provides Wdesk, a cloud-based enterprise reporting and data management platform.
Financial results
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $44.7 million | $36.3 million | $132.3 million | $105.4 million |
| Subscription and support revenue | $36.2 million | $29.8 million | $104.8 million | $84.2 million |
| Gross profit / gross margin | $32.0 million / 71.5% | $26.5 million / 73.0% | $93.9 million / 71.0% | $76.2 million / 72.3% |
| Operating loss | $(12.7) million | $(14.3) million | $(36.2) million | $(31.9) million |
| Net loss | $(12.9) million | $(14.6) million | $(36.5) million | $(33.1) million |
| Operating cash flow | $2.8 million | $(4.7) million | $(20.3) million | $(16.6) million |
- Q3 revenue grew 23.3% year over year; subscription and support revenue grew 21.5%. Nine-month revenue increased 25.5%, while subscription and support revenue rose 24.5%.
- Q3 diluted loss per share was $0.32, versus $0.37; nine-month loss per share was $0.90, versus $0.83.
- At September 30, cash and cash equivalents were $42.8 million and marketable securities were $11.0 million, or $53.8 million combined. Current assets were $84.1 million versus current liabilities of $89.1 million.
- Capital lease and financing obligations totaled approximately $21.4 million; long-term debt was $73,000. No borrowings were outstanding under the $15 million credit facility.
- Total liabilities were $129.5 million, stockholders’ equity was $0.4 million, and accumulated deficit was $213.4 million. Deferred revenue totaled $78.8 million.
Changes and operating indicators
- Revenue growth moderated versus the comparable period: Q3 total revenue growth was 23.3%, down from 29.9%; subscription revenue growth was 21.5%, down from 25.9%.
- Gross margin declined 1.5 percentage points in Q3 and 1.3 points for the nine-month period, reflecting cost of revenue rising faster than revenue. Professional services costs increased particularly quickly.
- Q3 net loss narrowed year over year, but the nine-month net loss widened. Operating expenses rose 9.5% in Q3 and 20.3% for the nine months.
- Q3 operating cash flow turned positive, mainly reflecting a $13.2 million increase in deferred revenue. Nine-month operating cash outflow increased year over year to $20.3 million.
- Customer count increased to 2,696 from 2,468. Twelve-month subscription revenue retention excluding add-ons declined to 95.0% from 96.4%; including add-ons it improved to 108.7% from 107.7%.
Outlook, risks and other items
- No specific quarterly or full-year revenue or earnings guidance is provided. Management expects operating losses to continue and says future periods may also have negative operating cash flows. It believes cash, customer receipts and the credit facility will fund operations for at least the next 12 months.
- Management expects operating expenses to increase as it invests in sales, marketing, customer success, research and development, and headcount. Employee count was 1,166, up 12.7% year over year.
- Management cited the September annual user conference as a seasonal factor that generally raises Q3 sales and marketing expense. Professional services revenue can be seasonal, often higher around customers’ first-quarter Form 10-K filings.
- Risks include continued losses and cash use, the need for additional capital, competition and execution of the company’s expansion into broader enterprise use cases. The credit facility includes financial and restrictive covenants. Operating lease commitments totaled $22.7 million.
- No pending legal proceeding was identified as expected by management to have a material adverse effect. The filing reported no material changes to previously disclosed risk factors, market-risk exposure, or internal controls.
- The company is evaluating forthcoming accounting standards, including revenue recognition guidance effective for it in 2018; it had not determined its transition method or quantified the impact.
Investor verification points
- Track whether revenue growth and subscription retention stabilize, and whether expansion sales continue to offset customer attrition.
- Assess gross-margin trends and the pace of hiring and operating-expense growth against revenue growth.
- Separate recurring operating cash performance from deferred-revenue timing; review the nine-month cash outflow and liquidity position.
- Monitor the ability to fund operations, credit-facility availability and covenants, and lease and financing obligations.
- Review future filings for formal guidance, changes in risks or litigation, and the expected effects of new accounting standards.