Workiva Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. Workiva provides Wdesk, a cloud-based enterprise reporting and data-management platform, through a SaaS subscription model and professional services.
Financial performance
| Metric | Q2 2016 | Q2 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Revenue | $43.0 million | $34.0 million | $87.6 million | $69.1 million |
| Subscription and support revenue | $35.0 million | $28.1 million | $68.6 million | $54.4 million |
| Professional services revenue | $8.0 million | $5.9 million | $19.0 million | $14.8 million |
| Gross profit / gross margin | $30.4 million / 70.7% | $24.2 million / 71.3% | $61.9 million / 70.7% | $49.7 million / 71.9% |
| Operating loss | $(11.3) million | $(10.6) million | $(23.4) million | $(17.6) million |
| Net loss | $(11.5) million | $(11.0) million | $(23.6) million | $(18.5) million |
| Operating cash flow | $(4.0) million | $(2.6) million | $(23.1) million | $(11.8) million |
Q2 revenue increased 26.6% year over year; first-half revenue rose 26.7%. Subscription and support accounted for 81.3% of Q2 revenue. Q2 basic and diluted loss per share was $0.28, unchanged year over year; first-half loss per share increased to $0.58 from $0.47.
Liquidity, debt and operating indicators
- At June 30, cash and cash equivalents were $39.9 million and marketable securities were $11.0 million, totaling $50.9 million, versus $76.2 million at December 31, 2015.
- Current assets were $77.0 million and current liabilities $79.6 million. Deferred revenue totaled $65.6 million, including current and long-term balances.
- Capital lease and financing obligations totaled approximately $22.0 million; long-term debt was $53,000 plus a $20,000 current portion. No borrowings were outstanding on the $15 million revolving credit facility. The facility matures in August 2018 and requires at least $5 million of cash or unused borrowing capacity.
- Customers numbered 2,622, up from 2,390 a year earlier. Subscription and support revenue retention was 95.1%, down from 96.3%; including add-ons, retention was 110.2%, up from 108.4%.
- Headcount rose 20.1% to 1,178. Stock-based compensation expense was $6.9 million in the first half, compared with $4.8 million a year earlier.
Changes and management commentary
- Revenue growth reflected customer additions and expansion within existing accounts. In the first half, existing customers generated 62.7% of the increase in subscription and support revenue.
- Operating expenses increased 19.9% in Q2 and 26.8% in the first half, driven largely by personnel costs and continued investment in sales, marketing and product development. The first-half operating loss widened despite revenue growth.
- Gross margin declined year over year, notably in the first half, as cost of revenue grew faster than revenue; professional services costs increased 47.2% in the first half.
- First-half operating cash use nearly doubled year over year, to $23.1 million. The company cited its net loss, timing of cash payments including annual bonuses, and increases in receivables and prepaid expenses. Cash flow has seasonal patterns, including first-quarter bonus payments.
- Management expects continued operating losses and negative operating cash flow, but believes cash, customer receipts and credit-facility availability will fund operations for at least the next 12 months. No numerical revenue or earnings guidance was provided.
Risks, contingencies and unusual items
- Operating lease commitments totaled $23.4 million, including $3.5 million due within one year. The company reported no material change in other contractual obligations.
- Management said pending legal matters were not expected to have a material adverse effect; litigation could nevertheless entail costs and divert management resources.
- The company’s stated risks include competitive and rapidly changing markets, execution of growth investments, continued losses and cash burn. Management reported no material change to the risk factors in its 2015 Form 10-K.
- Management assessed disclosure controls as effective at a reasonable assurance level and reported no material change in internal control over financial reporting during the quarter.
- Revenue-recognition guidance under ASC 606 was scheduled to take effect for Workiva in 2018; the company was evaluating its impact and transition method.
Important facts for investors to verify
- Whether revenue growth and customer expansion can continue while operating expenses are growing and gross margins are easing.
- Whether retention excluding add-ons stabilizes, and whether expansion within existing customers sustains the above-100% add-on retention rate.
- Cash-burn trends, the decline in cash and securities, the assumptions behind management’s 12-month liquidity assessment, and actual availability under the revolving facility.
- The effect of stock-based compensation, lease commitments and capital-lease obligations on future expenses and liquidity.
- Any subsequent updates on ASC 606 adoption, litigation, or other risks; this filing provides no numerical full-year guidance.