Workiva Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; comparative period is Q1 2014. Workiva provides Wdesk, a cloud-based enterprise reporting and data-management platform on a subscription-based SaaS model. It reported 2,290 customers at quarter-end, up 14.9% year over year.
Financial performance
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Revenue | $35.2 million | $28.1 million |
| Subscription and support revenue | $26.3 million | $20.6 million |
| Professional services revenue | $8.9 million | $7.5 million |
| Gross profit / gross margin | $25.5 million / 72.6% | $20.7 million / 73.5% |
| Operating loss | $7.0 million | $4.3 million |
| Net loss | $7.4 million | $4.6 million |
| Diluted net loss per share | $0.19 | $0.14 |
| Operating cash flow | $(9.2) million | $1.5 million |
| Cash and cash equivalents at period-end | $89.9 million | $17.3 million |
Subscription and support represented 74.7% of Q1 2015 revenue. Operating expenses were $32.4 million, or 92.4% of revenue, versus $25.0 million, or 88.7%, a year earlier. The resulting operating margin declined to (19.8%) from (15.2%); net margin was (21.3%) versus (16.1%).
Material changes and drivers
- Revenue increased 25.0% year over year. Subscription and support revenue rose 27.2%, and professional services revenue rose 18.7%. New customers contributed 65.4% of the subscription-revenue increase; existing customers contributed 34.6%.
- Gross margin decreased 0.9 percentage point as cost of revenue grew 29.4%, faster than revenue, primarily due to higher personnel costs in customer success and professional services.
- Operating expenses increased 30.0%, led by sales and marketing (+31.3%), general and administrative (+59.3%), and research and development (+16.7%). The company cited hiring, marketing activity, public-company-related accounting and insurance costs, and stock compensation among the drivers.
- Subscription revenue retention was 95.9%, down from 97.8%; including add-ons, retention was 105.8%, down from 111.3%. Management attributed weaker add-on growth in part to redirecting account teams toward larger, new use cases.
- Cash used in operations was $9.2 million versus cash provided of $1.5 million. The 2015 outflow included lower deferred revenue and decreases in accrued liabilities, including bonus and IPO-related payments. Management also expects reduced customer incentives for multiyear prepayments to continue to weigh on cash generation.
Liquidity, debt and cash flow
Cash and cash equivalents were $89.9 million at March 31, down $11.2 million from year-end. Investing activities used $1.0 million, mainly for capital expenditures; financing activities used $1.1 million, primarily for IPO issuance costs and capital-lease and debt payments. Capital lease and financing obligations totaled $24.2 million, including $2.0 million current; long-term debt was approximately $0.2 million, including current and noncurrent portions. No borrowings were outstanding under the $15.0 million Silicon Valley Bank facility. The facility matures in August 2016 and has financial and restrictive covenants, including a minimum $5.0 million of cash or unused borrowing capacity. Management said cash, customer receipts, and facility availability should fund operations for at least 12 months.
Outlook, risks and notable items
- No specific revenue or earnings guidance was provided. Management expects continued operating losses and negative operating cash flows, and plans continued investment in sales, marketing, customer success, and product development; operating expenses are expected to increase.
- The company received $313,000 under an Iowa government grant, recorded as a deferred grant obligation pending resolution of contingencies expected in December 2015. Grant accounting and related controls have been prior material-weakness areas.
- Management reported that remediation actions addressed the material weakness related to government-grant accounting and concluded disclosure controls were effective as of March 31, 2015. The filing cautions that prior weaknesses and remediation may not prevent future deficiencies.
- Workiva reported no pending legal proceedings expected by management to have a material adverse effect and no material change in contractual commitments or market-risk exposure. It noted that litigation can still impose costs and divert management resources.
- The company incurred $1.1 million of IPO issuance-cost payments in Q1. The IPO closed in December 2014 and generated approximately $90.4 million in net proceeds; the filing reported no material change to the planned use of proceeds.
Important facts for investors to verify
- Whether revenue growth and customer expansion can offset lower retention metrics and the slower growth in add-on revenue.
- Whether hiring and other operating investments improve growth without further deterioration in losses, margins, and operating cash flow.
- Cash consumption, customer prepayment trends, and continuing access to the credit facility under its covenants.
- Completion and durability of remediation for government-grant accounting controls, including resolution of grant contingencies.
- The effect of the evolving mix of subscription and professional-services offerings on gross margins.