Workiva Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. Workiva provides Wdesk, a cloud-based software platform for finance, audit, risk, compliance, and reporting. Results are unaudited; financial amounts below are in millions unless stated otherwise.
Key financial results
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $60.9 | $52.1 | $179.9 | $153.4 |
| Subscription and support revenue | $51.3 | $43.2 | $146.6 | $123.7 |
| Gross profit / margin | $45.2 / 74.2% | $36.4 / 69.9% | $131.4 / 73.1% | $109.2 / 71.2% |
| Operating loss | $(10.7) | $(13.8) | $(42.0) | $(29.6) |
| Net loss | $(11.0) | $(14.1) | $(42.4) | $(30.1) |
| Net loss per share | $(0.25) | $(0.34) | $(0.98) | $(0.73) |
| Cash from operating activities | $7.6 | $5.2 | $6.8 | $11.7 |
Q3 revenue rose 16.9% year over year; nine-month revenue rose 17.3%. Subscription and support revenue grew 18.7% in Q3 and 18.5% year to date. Subscription and support made up 84.3% of Q3 revenue. Q3 gross margin improved, while nine-month net loss widened year over year.
Balance sheet and liquidity
- At September 30, cash and cash equivalents were $71.8 million and marketable securities were $25.1 million, totaling $97.0 million.
- Current assets were $150.7 million and current liabilities $169.0 million. Deferred revenue was $149.1 million in total, including $128.4 million current.
- Capital lease and financing obligations totaled $18.7 million. No borrowings were outstanding under the $15 million credit facility, which matures in August 2020.
- Operating lease commitments totaled $27.5 million. Stockholders’ deficit was $12.3 million.
- Nine-month investing cash use was $9.6 million; financing cash inflow was $14.4 million, principally from stock option exercises and employee stock purchases.
Material changes and notable items
- Q3 operating loss narrowed to $10.7 million from $13.8 million, helped by revenue growth and gross-margin improvement. Nine-month operating expenses increased 24.9%, faster than revenue growth of 17.3%.
- General and administrative expense rose 65.7% for the nine-month period. It included $5.9 million cash-based and $3.6 million equity-based compensation under the former CEO’s separation agreement; Workiva also reported a $6.6 million cash payment related to the agreement.
- Stock-based compensation increased to $23.3 million for the nine months from $13.2 million a year earlier.
- Workiva adopted ASC 606 on January 1, 2018 using the modified retrospective method. For the first nine months, adoption increased reported professional services revenue by $2.3 million and reduced reported net loss by $3.4 million versus the prior standard; it did not affect total operating cash flow. Comparatives were not restated.
- Customer count increased to 3,289 from 2,991. Subscription and support revenue retention excluding add-ons was 95.9%, down from 96.5%; including add-ons it was 104.7%, down from 108.6%. The company reported 398 customers with ACV above $100,000.
Outlook, risks, and contingencies
- Management expects operating expenses to continue increasing and anticipates future operating losses. It said available liquidity, operating cash flows, credit availability, and potential securities offerings should fund operations for at least the next 12 months. No specific quarterly or annual revenue or earnings guidance is provided.
- Management identified the transition to the next generation of Wdesk as a risk: execution problems, customer difficulties, or inadequate support could affect retention and growth. Larger, more complex enterprise deals may also lengthen sales cycles.
- Workiva expects the new lease accounting standard, to be adopted January 1, 2019, to have a material balance-sheet impact. It was still evaluating the effect of the expected credit-loss standard and cloud-computing implementation-cost guidance.
- Management said pending litigation was not expected to have a material adverse effect. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting reported for the quarter.
Most important facts for investors to verify
- Whether subscription growth and customer expansion can persist as reported retention measures have declined year over year.
- Whether improving gross margin and Q3 operating performance can offset continued expense growth and ongoing losses.
- The recurring versus one-time nature of increased general and administrative costs, particularly CEO separation costs and stock-based compensation.
- How ASC 606 affects period-to-period revenue, deferred revenue, commissions, and reported losses; reported 2018 results are not directly comparable without adjustment.
- Whether $97.0 million of cash and marketable securities, together with operating cash generation, remains adequate given the working-capital deficit, lease commitments, and expected continuing losses.