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Workiva's (NYSE:WK) Posts Q3 Sales In Line With Estimates But Guidance Underwhelms


Full Report / November 02, 2022
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Financial and compliance reporting software company Workiva (NYSE:WK) reported results in line with analyst expectations in Q3 FY2022 quarter, with revenue up 17.8% year on year to $132.8 million. However, guidance for the next quarter was less impressive, coming in at $139.4 million at the midpoint, being 1.32% below analyst estimates. Workiva made a GAAP loss of $29.6 million, down on its loss of $6.56 million, in the same quarter last year.

Workiva (WK) Q3 FY2022 Highlights:

  • Revenue: $132.8 million vs analyst estimates of $132.5 million (small beat)
  • EPS (non-GAAP): -$0.15 vs analyst estimates of -$0.26
  • Revenue guidance for Q4 2022 is $139.4 million at the midpoint, below analyst estimates of $141.2 million
  • Free cash flow of $3.83 million, down 52.1% from previous quarter
  • Net Revenue Retention Rate: 107%, in line with previous quarter
  • Customers: 5,541, up from 5,381 in previous quarter
  • Gross Margin (GAAP): 75.5%, down from 76.5% 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 two years, growing from quarterly revenue of $88 million in Q3 FY2020, to $132.8 million.

Workiva Total Revenue

This quarter, Workiva's quarterly revenue was once again up 17.8% year on year. But the growth did slow down compared to last quarter, as the revenue increased by just $1.3 million in Q3, compared to $1.87 million in Q2 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 15.4% year on year to $139.4 million, slowing down from the 28.7% 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 17.4% over the next twelve months.

Customer Growth

You can see below that Workiva reported 5,541 customers at the end of the quarter, an increase of 160 on last quarter. That is a little slower customer growth than what we are used to seeing lately, suggesting that the customer acquisition momentum is slowing a little bit.

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 107% in Q3. That means even if they didn't win any new customers, Workiva would have grown its revenue 7% 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 75.5% in Q3.

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 $3.83 million in Q3, down 75.3% year on year.

Workiva Free Cash Flow

Workiva has generated $18.5 million in free cash flow over the last twelve months, a decent 3.6% 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 Q3 Results

With a market capitalization of $3.89 billion Workiva is among smaller companies, but its more than $433 million in cash and positive free cash flow over the last twelve months give us confidence that Workiva has the resources it needs to pursue a high growth business strategy.

This quarter's results were mostly in line with Wall St's expectations. On the other hand, it was unfortunate to see that the revenue guidance missed analysts' expectations and there was a slowdown in customer growth. Overall, it seems to us that this was a complicated quarter for Workiva. The company is down 3% on the results and currently trades at $65.77 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 Workiva is not a bad business, it probably wouldn't be one of our picks. Its revenue growth has been solid, though we don't expect it to maintain historical growth rates.

The market is certainly expecting long term growth from Workiva given its price to sales ratio based on the next twelve months is 6.0x. We can find things to like about Workiva and there's no doubt it is a bit of a market darling, at least for some. But we are wondering whether there might be better opportunities elsewhere right now.

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