Workiva Inc. — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015; comparisons are with the corresponding 2014 periods. Workiva sells Wdesk, a cloud-based enterprise reporting and data-management platform on a subscription basis, with related professional services. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance and liquidity
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $36.3 | $27.9 | $105.4 | $82.6 |
| Subscription and support revenue | $29.8 | $23.7 | $84.2 | $66.3 |
| Professional services revenue | $6.4 | $4.2 | $21.2 | $16.3 |
| Gross profit / margin | $26.5 / 73.0% | $19.4 / 69.4% | $76.2 / 72.3% | $58.6 / 71.0% |
| Operating loss / margin | $(14.3) / (39.5)% | $(12.6) / (45.2)% | $(31.9) / (30.2)% | $(27.0) / (32.7)% |
| Net loss | $(14.6) | $(13.4) | $(33.1) | $(28.5) |
| Basic and diluted loss per share | $(0.37) | $(0.42) | $(0.83) | $(0.90) |
| Operating cash flow | $(4.7) | $(4.6) | $(16.6) | $1.1 |
At September 30, 2015, cash and cash equivalents were $69.1 million and marketable securities were $12.7 million, or $81.8 million combined. Current assets were $99.1 million against current liabilities of $77.6 million. Deferred revenue totaled $59.6 million, including $51.0 million current.
Capital lease and financing obligations totaled $23.5 million; long-term debt was $0.1 million. No borrowings were outstanding under the $15 million credit facility, which matures in August 2016; $2.3 million of letters of credit were outstanding. Management said available cash, customer receipts, and facility availability should fund operations for at least 12 months.
Material changes and operating trends
- Revenue grew 29.9% in Q3 and 27.6% for the nine-month period. Subscription and support revenue rose 25.9% and 27.0%, respectively; professional services rose 52.2% and 30.4%.
- Gross margin improved year over year, but operating expenses grew 27.6% in Q3 and 26.2% year to date. Q3 net loss widened by $1.2 million and nine-month net loss by $4.6 million, despite higher revenue.
- Customers increased to 2,468 from 2,176, while full-time headcount rose 9.1% year over year to 1,035. Subscription and support revenue retention was 96.4%, down from 97.3%; retention including add-ons was 107.7%, down from 108.4%.
- Nine-month operating cash flow shifted to a $16.6 million outflow from $1.1 million generated in 2014. Cash and equivalents declined $32.0 million from year-end; investing cash outflow included purchases of marketable securities, so it is not equivalent to capital expenditure. Nine-month capital expenditures were $1.7 million.
Outlook, commentary, risks and unusual items
- No specific revenue, earnings, or margin guidance is provided. Management expects continued operating losses and negative operating cash flows, and plans further investment in sales, marketing, customer success, and product development.
- Revenue growth reflects both new customers and expansion among existing customers. In Q3, 58.8% of subscription revenue growth came from customers acquired after September 30, 2014; for the nine-month period, the comparable contribution was 39.7%.
- Stock-based compensation was $7.9 million for the first nine months, up from $5.5 million. The company also reported $20.9 million of unrecognized option compensation and $6.3 million related to unvested restricted stock.
- The company reported prior material weaknesses in controls over forgivable-loan and government-grant accounting. Management believes remediation measures addressed them and judged disclosure controls effective at quarter-end; it cautioned that future deficiencies cannot be ruled out. No material control changes occurred during the quarter.
- Interest-rate sensitivity analysis estimated that an immediate 100-basis-point increase would reduce portfolio market value by $0.2 million. Management did not expect pending legal matters to have a material adverse effect. No material changes to contractual obligations were reported.
- ASC 606 revenue guidance was deferred to fiscal 2018; Workiva was evaluating its impact and possible early adoption. The filing does not provide a clear quantified impact estimate.
Important facts for investors to verify
- Whether subscription growth and customer expansion can sustain performance as retention measures declined modestly.
- Whether expense growth, ongoing losses, and negative operating cash flow remain consistent with management’s funding assessment and stated investment plans.
- The nature, availability, and covenant conditions of the credit facility, and the timing and cash implications of lease and financing obligations.
- The status of remediation for previously identified material weaknesses and the potential for further control deficiencies.
- The potential effects of ASC 606 adoption and the level of future stock-based compensation and resulting dilution.