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Workiva (NYSE:WK) Exceeds Q2 Expectations But Quarterly Guidance Underwhelms


Full Report / August 09, 2022
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Financial and compliance reporting software company Workiva (NYSE:WK) reported results ahead of analyst expectations in the Q2 FY2022 quarter, with revenue up 24.5% year on year to $131.5 million. Guidance for the full year also exceeded estimates, however the guidance for the next quarter was less impressive, coming in at $132.5 million, 0.66% below analyst estimates. Workiva made a GAAP loss of $28.8 million, down on its loss of $9.51 million, in the same quarter last year.

Workiva (WK) Q2 FY2022 Highlights:

  • Revenue: $131.5 million vs analyst estimates of $126 million (4.36% beat)
  • EPS (non-GAAP): -$0.17 vs analyst estimates of -$0.26
  • Revenue guidance for Q3 2022 is $132.5 million at the midpoint, below analyst estimates of $133.4 million
  • The company reconfirmed revenue guidance for the full year, at $535 million at the midpoint
  • Free cash flow of $8.01 million, up from negative free cash flow of $1.46 million in previous quarter
  • Net Revenue Retention Rate: 108%, in line with previous quarter
  • Customers: 5,381 (including approximately 850 ParsePort ESEF customers), up from 4,408 in previous quarter
  • Gross Margin (GAAP): 75.4%, down from 76.7% same quarter last year

Founded in 2010, Workiva (NYSE:WK) offers software as a service product that makes financial and compliance reporting easier, especially for publicly traded corporations.

The platform automatically gathers and updates data from various internal company sources like accounting software or spreadsheets and joins it together in the cloud, removing the need for accounting teams to do it manually. Workiva users can then connect the data directly to financial, regulatory, and performance reports and presentations and know that they are always using the correct, approved and most up-to-date, version of it. Workiva's target market is enterprises and big institutions that have large volumes of data distributed across various sources and a lot of reporting requirements at the same time.

The demand for software platforms that automate compliances processes is rising as keeping up with the latest financial reporting regulations and standards is difficult and expensive, especially as companies increasingly operate across several geographical regions with varying rules.

Other providers of financial management software solutions include Blackline (NASDAQ:BL), and Oracle (NYSE:ORCL).

Sales Growth

As you can see below, Workiva's revenue growth has been strong over the last year, growing from quarterly revenue of $105.5 million, to $131.5 million.

Workiva Total Revenue

This quarter, Workiva's quarterly revenue was once again up a very solid 24.5% year on year. But the growth did slow down compared to last quarter, as the revenue increased by just $1.87 million in Q2, compared to $8.89 million in Q1 2022. We'd like to see revenue increase by a greater amount each quarter, but a one-off fluctuation is usually not concerning.

Guidance for the next quarter indicates Workiva is expecting revenue to grow 17.5% year on year to $132.5 million, slowing down from the 27.9% year-over-year increase in revenue the company had recorded in the same quarter last year. Ahead of the earnings results the analysts covering the company were estimating sales to grow 17.8% over the next twelve months.

Customer Growth

You can see below that Workiva reported 5,381 customers (including approximately 850 ParsePort ESEF customers) at the end of the quarter, an increase of 973 on last quarter. That is quite a bit better customer growth than last quarter and quite a bit above the typical customer growth we have seen lately, demonstrating that the business itself has good sales momentum. We've no doubt shareholders will take this as an indication that the company's go-to-market strategy is working very well.

Workiva Customers

Product Success

One of the best things about software as a service businesses (and a reason why they trade at such high multiples) is that customers tend to spend more with the company over time.

Workiva Net Revenue Retention Rate

Workiva's net revenue retention rate, an important measure of how much customers from a year ago were spending at the end of the quarter, was at 108% in Q2. That means even if they didn't win any new customers, Workiva would have grown its revenue 8% year on year. Despite it going down over the last year this is still a decent retention rate and it shows us that not only Workiva's customers stick around but at least some of them get increasing value from its software over time.

Profitability

What makes the software as a service business so attractive is that once the software is developed, it typically shouldn't cost much to provide it as an ongoing service to customers. Workiva's gross profit margin, an important metric measuring how much money there is left after paying for servers, licenses, technical support and other necessary running expenses was at 75.4% in Q2.

Workiva Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.75 left to spend on developing new products, marketing & sales and the general administrative overhead. This is a good gross margin that allows companies like Workiva to fund large investments in product and sales during periods of rapid growth and be profitable when they reach maturity. It is good to see that the gross margin is staying stable which indicates that Workiva is doing a good job controlling costs and is not under pressure from competition to lower prices.

Cash Is King

If you follow StockStory for a while, you know that we put an emphasis on cash flow. Why, you ask? We believe that in the end cash is king, as you can't use accounting profits to pay the bills. Workiva's free cash flow came in at $8.01 million in Q2, down 32.9% year on year.

Workiva Free Cash Flow

Workiva has generated $30.2 million in free cash flow over the last twelve months, a decent 6.11% of revenues. This FCF margin is a result of Workiva asset lite business model, and provides it with optionality and decent amount of cash to invest in the business.

Key Takeaways from Workiva's Q2 Results

With a market capitalization of $3.75 billion Workiva is among smaller companies, but its more than $428.9 million in cash and positive free cash flow over the last twelve months put it in a very strong position to invest in growth.

We were very impressed by Workiva’s very strong acceleration in customer growth this quarter. And we were also excited to see that it outperformed Wall St’s revenue expectations. On the other hand, it was unfortunate to see that the revenue guidance for the next quarter missed analysts' expectations and the revenue retention rate deteriorated a little. Zooming out, we think this was still a decent, albeit mixed, quarter, showing the company is staying on target. The company is flat on the results and currently trades at $68.52 per share.

Is Now The Time?

When considering Workiva, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. Although we have other favorites, we understand the arguments that Workiva is not a bad business. We would expect growth rates to moderate from here, but its revenue growth has been solid, over the last two years. And on top of that, its strong gross margins suggest it can operate profitably and sustainably.

Workiva's price to sales ratio based on the next twelve months is 6.2x, suggesting that the market is expecting more moderate growth, relative to the hottest tech stocks. We don't really see a big opportunity in the stock at the moment, but in the end beauty is in the eye of the beholder. And if you like the company, it seems that Workiva doesn't trade at a completely unreasonable price point.

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