Workiva Inc. — FY 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. This is an annual filing; quarterly results below refer to the three months ended December 31, 2017. Workiva sells Wdesk, a cloud-based business-data, reporting, and compliance platform. Subscription and support fees accounted for 81.4% of FY 2017 revenue. The company reported 3,063 customers, including more than 70% of Fortune 500 companies.
Financial performance and liquidity
| Metric | FY 2017 | FY 2016 | Change |
|---|---|---|---|
| Total revenue | $207.9 million | $178.6 million | +16.4% |
| Subscription and support revenue | $169.3 million | $143.1 million | +18.3% |
| Professional services revenue | $38.6 million | $35.5 million | +8.6% |
| Gross profit / margin | $147.6 million / 71.0% | $127.0 million / 71.1% | Margin down 0.1 percentage point |
| Operating loss | $44.3 million | $43.6 million | Loss widened $0.7 million |
| Net loss | $44.4 million | $44.0 million | Loss widened $0.4 million |
| Basic and diluted loss per share | $1.07 | $1.08 | Improved $0.01 |
| Operating cash flow | $5.5 million | $(10.4) million | Improved $15.9 million |
Fourth-quarter revenue was $54.5 million, versus $46.4 million a year earlier; fourth-quarter net loss was $14.3 million, versus $7.5 million. FY 2017 operating expenses rose 12.5% to $191.9 million, led by research and development (+18.7%) and general and administrative (+21.1%). Stock-based compensation was $19.5 million, up from $14.2 million.
At year-end, cash and cash equivalents were $60.3 million, marketable securities were $16.4 million, and total cash, cash equivalents, and securities were $76.7 million. Current assets were $115.3 million and current liabilities $129.3 million; reported working capital excluding deferred revenue and deferred government-grant obligation was $90.9 million. Deferred revenue totaled $127.4 million, including $104.7 million current. The company had no balance outstanding on its $15 million credit facility; it was secured by company assets and matured in August 2018. Capital lease and financing obligations totaled approximately $19.6 million on the balance sheet. Total contractual obligations were $67.2 million, principally financing obligations, operating leases, and cloud-infrastructure commitments.
Material changes and operating indicators
- Revenue growth decelerated to 16.4% from 23.0% in 2016. Subscription and support revenue remained the primary growth driver; most of its dollar increase came from existing customers.
- Customers increased 10.5% to 3,063. Revenue retention excluding add-on seats was 96.0%, up from 95.4%; including add-ons it was 107.6%, slightly above 107.4%.
- Gross margin was nearly unchanged. Subscription and support revenue grew faster than related cost, while professional services growth was slower than subscription growth.
- Operating cash flow turned positive, supported in large part by a $29.4 million increase in deferred revenue. The company continued to report substantial net losses.
- Approximately 92.1% of revenue was attributable to U.S. operations. The largest customer represented less than 1% of revenue.
Outlook, risks, and unusual items
- No specific revenue, earnings, or cash-flow guidance for 2018 is provided in the filing. Management expects continued investment in product development, sales and marketing, professional services, and customer success, and expects total operating expenses to increase. Larger enterprise-wide deals may lengthen sales cycles.
- Workiva expects ongoing operating losses and notes that additional capital could be needed. Management believed available cash, operating cash flows, credit-facility availability, and potential securities offerings would fund operations for at least the next 12 months.
- ASC 606 was adopted January 1, 2018 using the modified retrospective method. The company anticipated earlier recognition of some professional-services revenue and longer deferral of contract-acquisition costs; it expected a $5.3 million adjustment to opening accumulated deficit to capitalize additional contract costs. The filing does not give a clear total transition adjustment. Management did not expect an effect on total operating cash flows.
- The December 2017 Tax Cuts and Jobs Act lowered the federal corporate tax rate and changed international tax rules. Workiva recorded no net financial-statement effect from the year-end remeasurement because its deferred tax assets were fully valuation-allowed; further adjustments could be recorded during 2018.
- Fourth-quarter general and administrative expense included $1.9 million of additional severance-related compensation ($0.4 million cash-based and $1.5 million equity-based).
- Other income included $1.6 million of training-reimbursement-program income. Foreign-currency transactions produced a $0.4 million loss in 2017. Workiva reported no pending legal proceeding that management believed would have a material adverse effect.
- Key risks include persistent losses, slowing revenue growth, competition, longer enterprise sales cycles, dependence on renewals and expansion, cloud-service availability and cybersecurity, data-privacy regulation including GDPR, and reliance on third-party cloud providers. The credit facility has restrictive covenants and requires at least $5 million of cash or unused borrowing capacity.
- Class B shares carried ten votes per share; Class B holders collectively controlled approximately 76% of voting power at year-end. The company does not expect to pay dividends.
Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective at December 31, 2017.
Important facts for investors to verify
- Whether subscription growth, customer expansion, and retention can sustain results as annual growth slows and the company remains unprofitable.
- How much of positive operating cash flow reflects recurring cash generation versus advance customer billings and deferred-revenue growth.
- The final ASC 606 transition adjustment and the effects of new revenue and contract-cost accounting on reported results.
- The credit facility’s status and terms at maturity, liquidity after contractual commitments, and any future financing needs.
- The recurring nature of severance costs, government-program income, and stock-based compensation, as well as the eventual tax impact of the Tax Cuts and Jobs Act.
- Progress in non-SEC use cases and international markets, and exposure to cloud-provider, privacy, security, and regulatory risks.