Workiva Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017; comparisons are with the corresponding 2016 periods unless noted. Workiva sells Wdesk, a cloud-based enterprise platform, primarily through subscription contracts. It reported 2,991 customers at quarter-end.
Key financial results
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Total revenue | $52.1 million | $44.7 million | $153.4 million | $132.3 million |
| Subscription and support revenue | $43.2 million | $36.2 million | $123.7 million | $104.8 million |
| Professional services revenue | $8.9 million | $8.5 million | $29.6 million | $27.5 million |
| Gross profit / gross margin | $36.4 million / 69.9% | $32.0 million / 71.5% | $109.2 million / 71.2% | $93.9 million / 71.0% |
| Operating loss | $13.8 million | $12.7 million | $29.6 million | $36.2 million |
| Net loss | $14.1 million | $12.9 million | $30.1 million | $36.5 million |
| Operating cash flow | $5.2 million | $2.8 million | $11.7 million | $(20.3) million |
- Q3 revenue grew 16.5%; subscription and support grew 19.3%, while professional services grew 4.5%. For the first nine months, revenue increased 15.9% and subscription and support increased 18.1%.
- Subscription and support represented 83.0% of Q3 revenue, up from 81.0%. Q3 gross margin declined 1.6 percentage points, while nine-month gross margin improved slightly. Q3 operating loss widened year over year, but the nine-month operating loss narrowed.
- Q3 diluted loss per share was $0.34, versus $0.32; nine-month diluted loss per share was $0.73, versus $0.90.
- At September 30, cash and cash equivalents were $62.7 million and marketable securities were $15.0 million, totaling $77.8 million. Current assets were $111.6 million against current liabilities of $123.8 million. Total liabilities were $170.1 million, and stockholders’ deficit was $14.5 million.
- No balance was outstanding on the $15 million credit facility. The balance sheet reported $19.9 million of capital lease and financing obligations. Deferred revenue totaled approximately $122.4 million.
Changes, performance drivers, and outlook
- Management attributed subscription growth to both new and existing customers. In Q3, 48.2% of the subscription revenue increase came from customers acquired after September 30, 2016; the remainder came from existing customers. Customer count rose 10.9% year over year.
- Revenue retention was 96.5% excluding add-ons, up from 95.0%; including add-ons it was 108.6%, compared with 108.7%. Management cited lengthening and more complex sales cycles as it pursues larger opportunities.
- Operating cash flow improved substantially for the nine-month period, aided by a $24.4 million increase in deferred revenue and other working-capital movements despite continued net losses. Management noted that converting quarterly contracts to annual terms supports operating cash flow.
- Management expects continued operating losses and says future periods may also have negative operating cash flow. It believes available cash, operating cash flows, credit-facility availability and potential shelf offerings will fund operations for at least 12 months. No specific revenue or earnings guidance is provided.
- The company expects continued investment in product development, sales, marketing, professional services and customer success; employee headcount increased 10.1% year over year to 1,284. Q3 cost of revenue rose partly from staffing and compensation, while professional-services utilization was adversely affected by hiring for new markets and channels.
- Seasonality affects professional-services revenue, third-quarter sales and marketing expense (including the September user conference), and first-quarter cash flow due to bonus payments.
Accounting, risks, and contingencies
- Workiva planned to adopt ASC 606 on January 1, 2018 using the modified retrospective method. It expected possible earlier recognition of revenue for some contracts, increased capitalization and longer amortization of contract-acquisition costs, and increases in accounts receivable and deferred revenue. The full impact remained under evaluation.
- The company reported no material changes to previously disclosed risk factors, no material market-risk changes, and no pending legal proceeding it believed would have a material adverse effect. Lease commitments were not materially changed from the 2016 Form 10-K.
- Management cautioned that operating results are not necessarily indicative of full-year results and that forward-looking statements are subject to risks and uncertainties. Disclosure controls were deemed effective; no material change in internal control over financial reporting was reported during the quarter.
Important facts for investors to verify
- Whether subscription growth, customer additions and retention remain strong, particularly given longer and more complex sales cycles.
- Whether gross-margin pressure and continued investment translate into improved operating leverage and a path toward profitability.
- How much of positive operating cash flow depends on deferred-revenue growth and contract-term conversions, and whether this is sustainable.
- The actual financial-statement effects of ASC 606 adoption, including revenue timing, contract-cost capitalization and balance-sheet changes.
- Liquidity relative to ongoing losses, lease and financing obligations, and the August 2018 maturity of the credit facility; the filing notes potential use of a shelf registration statement of up to $250 million.