Workiva Inc. — Q2 2017 Form 10-Q
Business context and period. Workiva provides cloud-based SaaS software through its Wdesk platform, serving finance and accounting, audit and internal controls, risk and compliance, and operations. This unaudited filing covers the three and six months ended June 30, 2017; amounts below are in millions unless stated otherwise.
Financial performance and liquidity
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $49.4 | $43.0 | $101.3 | $87.6 |
| Subscription and support revenue | $41.0 | $35.0 | $80.5 | $68.6 |
| Professional services revenue | $8.4 | $8.0 | $20.8 | $19.0 |
| Gross profit / gross margin | $35.1 / 71.1% | $30.4 / 70.7% | $72.8 / 71.9% | $61.9 / 70.7% |
| Operating loss | $(9.9) | $(11.3) | $(15.8) | $(23.4) |
| Net loss | $(10.2) | $(11.5) | $(16.0) | $(23.6) |
| Operating cash flow | $4.0 | $(4.0) | $6.6 | $(23.1) |
- Q2 revenue grew 14.8% year over year; subscription and support revenue rose 17.2%. For the first half, revenue grew 15.7% and subscription and support revenue rose 17.5%.
- Cash, cash equivalents and marketable securities totaled $72.9 at June 30, 2017. Cash and cash equivalents were $60.0; marketable securities were $12.9.
- Current assets were $110.6 versus current liabilities of $112.6. Total liabilities were $160.3; stockholders’ deficit was $6.1.
- Debt was approximately $53,000. Capital lease and financing obligations totaled approximately $20.2, including current and long-term portions. No borrowings were outstanding under the $15.0 million credit facility.
- Deferred revenue totaled $116.3, including $91.9 current and $24.3 long-term.
Material changes versus prior periods
- Q2 revenue growth moderated to 14.8% from 26.6% a year earlier; first-half growth was 15.7% versus 26.7%.
- Net losses narrowed in Q2 and the first half. Q2 gross margin increased 0.4 percentage points; first-half gross margin increased 1.2 points.
- First-half operating cash flow improved to positive $6.6 from negative $23.1, primarily reflecting an $18.5 increase in deferred revenue. Q2 operating cash flow was positive $4.0, compared with negative $4.0.
- Operating expenses increased 7.7% in Q2 and 3.9% in the first half. Research and development increased, while sales and marketing declined slightly in Q2 and 3.5% for the first half. General and administrative expense increased, partly due to stock-based compensation.
- Customers increased to 2,908 from 2,622. Subscription and support revenue retention excluding add-ons improved to 96.1% from 95.1%; including add-ons, it declined to 106.0% from 110.2%.
Outlook, commentary and risks
- Management expects continued operating losses and says future periods may also have negative operating cash flow. It believes cash, operating cash flows and available credit will fund operations for at least the next 12 months.
- Management plans continued investment in product development, infrastructure, sales and marketing, and customer success, and expects operating expenses to increase. Investments may precede related revenue benefits.
- The company reported longer and more complex sales cycles as it pursues larger opportunities. It also cited seasonality: professional-services revenue tends to be higher in Q1, sales and marketing expense in Q3, and bonus payments affect Q1 operating cash flow.
- Workiva expected to adopt ASC 606 on January 1, 2018 using the modified retrospective method. It anticipated earlier recognition for some professional-services and contingent contract revenue, increased capitalization of contract acquisition costs, and corresponding changes to receivables and deferred revenue; its impact analysis was ongoing.
- The $15.0 million credit facility matures in August 2018, is secured by company assets and includes financial and restrictive covenants. Management said it had no amount outstanding at quarter-end and must maintain at least $5.0 million of cash or unused borrowing capacity.
- Management reported no material changes to previously disclosed risk factors, contractual obligations, market-risk exposures or internal controls. It said no pending legal matter was expected to have a material adverse effect, while noting litigation may still entail costs and management distraction.
Important facts for investors to verify
- Whether revenue growth and customer expansion can be sustained as growth rates have slowed and sales cycles lengthened.
- Whether retention including add-ons stabilizes, given its year-over-year decline, and how much future growth comes from existing customers versus new customers.
- How much positive operating cash flow reflects recurring cash generation versus advance customer billings and deferred-revenue growth.
- The trajectory of operating losses and expenses, including the effect of stock-based compensation and planned investment.
- The final financial-statement effects of ASC 606 adoption, and the company’s liquidity and credit-facility position as the August 2018 maturity approaches.