Workiva Inc. — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing also provides unaudited quarterly results, including the quarter ended December 31, 2019.
Business context
Workiva sells a cloud-based connected reporting and compliance platform, including data integration and preparation capabilities through Wdata. It serves companies, government agencies and educational institutions through subscriptions and professional services. At year-end, 3,510 organizations subscribed, including nearly 75% of Fortune 500 companies. About 96% of revenue was attributed to the United States.
Key financial metrics
| Metric | FY 2019 | FY 2018 |
|---|---|---|
| Total revenue | $297.9 million | $244.3 million |
| Subscription and support revenue | $245.8 million | $200.4 million |
| Professional services revenue | $52.1 million | $44.0 million |
| Gross profit / gross margin | $212.9 million / 71.5% | $178.5 million / 73.0% |
| Operating loss | $45.7 million | $49.8 million |
| Net loss | $48.1 million | $50.1 million |
| Operating cash flow | $30.6 million | $6.4 million |
Revenue grew 21.9% year over year; subscription and support made up 82.5% of revenue. Operating margin was negative 15.3%, compared with negative 20.5% in 2018. Net loss per share was $1.04, versus $1.15. Stock-based compensation was $35.8 million, up from $30.8 million.
Liquidity and debt: Cash and cash equivalents were $381.7 million and marketable securities were $106.2 million, totaling $488.0 million at year-end. Working capital excluding deferred revenue was $512.9 million. The company issued $345.0 million of 1.125% convertible senior notes due 2026, receiving $335.9 million net proceeds; the notes’ net carrying amount was $280.6 million. Operating cash flow benefited in part from a $32.0 million increase in deferred revenue and non-cash stock compensation.
Q4 snapshot: Revenue was $80.3 million, compared with $64.4 million in Q4 2018; net loss was $16.3 million, compared with $7.7 million.
Material changes versus prior period
- Revenue growth accelerated to 21.9% from 17.5%; subscription and support revenue grew 22.6%.
- Gross margin declined 1.5 percentage points, as total cost of revenue rose 29.1%, faster than revenue.
- Sales and marketing expense increased 33.2% to $120.3 million, reflecting hiring and increased sales, partnership and international investment. R&D rose 10.2% to $89.9 million.
- G&A fell 14.1% to $48.4 million, partly because 2018 included $9.5 million in cash- and equity-based separation compensation for the former CEO.
- Revenue retention excluding add-ons declined to 94.7% from 96.1%; retention including add-ons increased to 113.0% from 107.1%. Management said the solution-based licensing conversion helped growth and expansion in 2019, but its benefit began to wane in Q4.
- Operating cash flow rose to $30.6 million. Investing cash outflow increased to $90.1 million, primarily reflecting purchases of marketable securities; financing cash flow included the convertible-note proceeds.
Outlook, risks and unusual items
Management provided no quantified revenue or earnings guidance in the supplied filing text. It plans continued investment in EMEA, global statutory reporting, integrated risk, Wdata and U.S. federal government opportunities. Management expects these investments to increase operating losses before they generate incremental revenue and said new growth sources will be needed to sustain growth as the licensing-conversion benefit fades. It also noted that enterprise-wide deals may lengthen sales cycles.
- Profitability: Workiva has incurred annual net losses since inception and expects further operating losses while investing in growth.
- Execution and retention: Growth depends on new customer acquisition, renewals, expansion and successful adoption of newer platform capabilities; retention excluding add-ons weakened.
- Technology and data risk: Service outages, security incidents, privacy-law compliance and reliance on Amazon Web Services, Google Cloud Platform and other third parties could affect customers and results.
- Convertible notes: Conversion or a fundamental change could require cash payments; conversion may dilute shareholders. The notes carry a 4.3% effective interest rate for accounting purposes despite a 1.125% coupon.
- Other commitments: Contractual obligations totaled $464.8 million, including note payments, leases, financing obligations and other commitments. No currently pending legal proceeding was expected by management to have a material adverse effect.
- Accounting and controls: Workiva adopted lease accounting standard ASC 842 in 2019, recognizing operating lease right-of-use assets and liabilities. The auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether subscription growth and customer expansion can offset the waning benefit from solution-based licensing conversions.
- Trends in retention excluding add-ons, gross margin and professional-services costs as the customer base grows.
- Cash generation excluding deferred-revenue movements, and the company’s ability to fund continued investment while operating at a loss.
- The notes’ conversion terms, potential dilution or cash settlement exposure, and total future debt service.
- Progress and returns from international, statutory reporting, integrated risk, Wdata and federal-government initiatives.
- Any subsequent guidance, developments in privacy and regulatory requirements, and changes in security or third-party hosting risks.