Workiva Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Workiva provides cloud-based connected reporting and compliance software through its Wdesk platform. Financial amounts below are in millions, except per-share data.
Financial performance and liquidity
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $74.2 | $60.9 | $217.6 | $179.9 |
| Subscription and support revenue | $63.0 | $51.3 | $179.6 | $146.6 |
| Gross profit / margin | $52.4 / 70.7% | $45.2 / 74.2% | $155.7 / 71.5% | $131.4 / 73.1% |
| Operating loss | $(15.5) | $(10.7) | $(31.2) | $(42.0) |
| Net loss | $(16.1) | $(11.0) | $(31.8) | $(42.4) |
| Net loss per share, diluted | $(0.34) | $(0.25) | $(0.69) | $(0.98) |
| Cash from operating activities | $4.7 | $7.6 | $28.6 | $6.8 |
Q3 revenue grew 21.9% year over year; subscription and support revenue rose 22.8% and represented 85.0% of revenue. For the first nine months, revenue increased 21.0%. At September 30, cash, cash equivalents and marketable securities totaled $484.8; current assets were $550.9 and current liabilities $209.8. The company reported $345.0 principal amount of 1.125% convertible senior notes due 2026, carried at $278.4 net of discount and issuance costs. The notes’ disclosed fair value was $314.2.
Material changes versus the prior period
- Q3 net loss widened by $5.1, despite higher revenue, as expenses increased. Nine-month net loss narrowed by $10.5, primarily against a prior-year period that included a $6.6 cash payment to the former CEO.
- Q3 gross margin declined 3.5 percentage points, as cost of revenue rose 38.9%, faster than revenue growth. Management cited higher compensation, cloud infrastructure, consulting and stock-based compensation costs.
- Q3 sales and marketing expense rose 37.1%, including costs for increased staffing, marketing activity and the annual user conference. Nine-month sales and marketing expense rose 28.6%.
- Operating cash flow improved to $28.6 for the first nine months from $6.8 a year earlier. Cash rose substantially following the August notes issuance; financing activities provided $362.0 in the nine-month period, including $335.9 net proceeds from the notes.
- Workiva adopted ASC 842 leases accounting on January 1, 2019, recognizing operating lease right-of-use assets and liabilities. The company said adoption materially affected the balance sheet but did not affect operations or total operating cash flows.
Outlook, commentary and risks
- Management said conversion of existing customers to solution-based licensing supported subscription growth and improved retention including add-ons; it expects that benefit to wane beginning in Q4 2019 and says new growth sources will be needed beyond 2019.
- Management expects investment in talent, processes and technology—including EMEA, integrated risk, statutory reporting and Wdata—to increase operating losses in absolute terms and as a percentage of revenue at least through Q4 2019, before potential incremental revenue contributions after 2019.
- The company reported 3,454 customers, including more than 75% of Fortune 500 companies. Subscription and support retention was 94.5% excluding add-ons and 112.8% including add-ons, versus 95.9% and 104.7%, respectively, a year earlier. Customers with annual contract value of at least $100,000 increased to 611 from 398.
- Remaining subscription performance obligations were approximately $212.9, with $162.6 expected to be recognized within 12 months. This is not presented as formal revenue guidance.
- Management believes available liquidity and operating cash flow are sufficient to fund operations for at least 12 months, while expecting continued operating losses. Risks include execution and returns on growth investments, possible cash or share settlement and dilution from convertible notes, debt service and refinancing capacity, and potential limits on use of net operating losses.
- The notes carry conditional conversion and fundamental-change repurchase provisions; holders could require cash repurchase in specified circumstances. At quarter-end, conversion conditions were not met. The filing reports no pending legal proceeding expected by management to have a material adverse effect.
- Q3 professional services revenue included $0.9 of certain XBRL services management did not expect to continue in the next quarter. Professional services and sales and marketing expenses are subject to seasonality.
Important facts for investors to verify
- Whether solution-based licensing conversions and customer expansion can sustain subscription growth after the anticipated waning of conversion benefits.
- Whether gross margins stabilize as cloud, staffing and service delivery costs rise, and whether growth investments deliver revenue sufficient to offset higher operating expenses.
- Cash generation excluding financing proceeds, including the effects of deferred revenue, collections, deferred commissions and stock-based compensation.
- The convertible notes’ future conversion, cash-settlement, dilution and interest-cost implications; reported interest expense includes noncash amortization of discount and issuance costs.
- Retention definitions and trends, particularly the divergence between retention excluding add-ons and retention including add-ons.
- Execution of the stated investment plans and any changes to liquidity, debt obligations, legal matters or accounting estimates in subsequent filings.