Workiva Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Workiva sells a cloud-based connected reporting and compliance platform; over 80% of subscription revenue was priced under solution-based licensing. Figures are unaudited and in U.S. dollars.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $88.1 million | $74.2 million | $257.8 million | $217.6 million |
| Subscription and support revenue | $75.9 million | $63.0 million | $214.9 million | $179.6 million |
| Gross profit / margin | $66.2 million / 75.2% | $52.4 million / 70.7% | $191.2 million / 74.2% | $155.7 million / 71.5% |
| Operating loss | $7.0 million | $15.5 million | $32.9 million | $31.2 million |
| Net loss | $10.5 million | $16.1 million | $40.8 million | $31.8 million |
| Operating cash flow | $7.8 million | $4.7 million | $19.7 million | $28.6 million |
- Q3 revenue grew 18.8% year over year; nine-month revenue grew 18.4%. Subscription and support revenue grew 20.4% and 19.6%, respectively.
- Q3 operating and net losses narrowed year over year. For the nine-month period, operating loss increased modestly and net loss widened, primarily reflecting higher interest expense on the convertible notes and increased operating expenses.
- Cash, cash equivalents and marketable securities totaled $523.9 million at September 30, 2020. Current assets were $609.4 million and current liabilities $251.2 million.
- Convertible senior notes had $345.0 million principal, a $287.2 million net carrying amount and a 1.125% coupon; they mature in 2026. Their reported fair value was $338.9 million.
Material changes and operating indicators
- Revenue growth moderated versus 2019: Q3 growth was 18.8% versus 21.9%, and nine-month growth was 18.4% versus 21.0%.
- Gross margin improved in both periods. Q3 operating expenses rose 7.7%, less than revenue growth; nine-month operating expenses rose 19.9%.
- Customer count reached 3,583, up from 3,454. Subscription and support revenue retention was 94.9%, versus 94.5%; including add-ons, it was 110.0%, down from 112.8%. Management attributed the decline in add-on retention partly to the winding down of customer conversions to solution-based licensing and COVID-related effects on pricing and solution churn.
- Customers with annual contract value of at least $100,000 increased to 785 from 611. Management said customers and prospects delayed some purchasing decisions, while bookings recovered in Q3.
- Nine-month operating cash flow declined to $19.7 million from $28.6 million. The company reported $35.4 million of stock-based compensation for the period.
Outlook, commentary and risks
- The filing provides no formal revenue or earnings guidance. Remaining performance obligations for subscription contracts were approximately $339.5 million; about $213.7 million was expected to be recognized over the next 12 months.
- Management expected to continue investing in talent, technology, sales and marketing, including expansion in EMEA, integrated risk, statutory reporting and Wdata. It warned these investments may create operating losses before generating incremental revenue and that new growth sources will be needed as the benefit of licensing conversions wanes.
- Management said current cash and cash equivalents and operating cash flows should fund operations for at least 12 months, while noting expected continued operating losses and possible future negative operating cash flow.
- COVID-19 risks include delayed purchasing, reduced customer technology spending, contract concessions, longer sales cycles and delayed regulatory mandates. Remote work and virtual events reduced expenses by approximately $11.9 million in the first nine months compared with the prior year; the annual user conference was moved online.
- Unusual items included severance and separation-agreement compensation: Q3 included $0.3 million cash-based and $0.6 million stock-based compensation; the nine-month period included $1.5 million cash-based and $5.5 million equity-based compensation. Management reported no pending litigation expected to have a material adverse effect and no material change in contractual obligations.
Key facts for investors to verify
- Whether subscription growth and add-on retention stabilize after the licensing-conversion benefit fades.
- Whether COVID-19 effects on sales cycles, renewals, customer spending and regulatory deadlines materially affect future results.
- Whether continued hiring and investment can support growth while narrowing losses and maintaining cash generation.
- The terms, carrying value, fair value and potential dilution of the $345.0 million convertible notes; approximately 4.3 million conversion shares were excluded from diluted loss per share as anti-dilutive.
- How much of the $339.5 million remaining performance obligations converts to revenue on the expected schedule, and how seasonality affects quarterly results and cash flows.