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Workiva (NYSE:WK) Exceeds Q3 Expectations, Stock Jumps 13%


Full Report / November 03, 2021
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Financial and compliance reporting software company Workiva (NYSE:WK) reported Q3 FY2021 results topping analyst expectations, with revenue up 27.9% year on year to $112.6 million. Guidance for next quarter's revenue was surprisingly good, being $117 million at the midpoint, 3.63% above what analysts were expecting. Workiva made a GAAP loss of $6.56 million, improving on its loss of $10.5 million, in the same quarter last year.

Workiva (WK) Q3 FY2021 Highlights:

  • Revenue: $112.6 million vs analyst estimates of $108.3 million (3.99% beat)
  • EPS (non-GAAP): $0.15 vs analyst estimates of -$0.11 ($0.26 beat)
  • Revenue guidance for Q4 2021 is $117 million at the midpoint, above analyst estimates of $112.8 million
  • Free cash flow of $15.5 million, up 30% from previous quarter
  • Net Revenue Retention Rate: 111%, in line with previous quarter
  • Customers: 4,146, up from 3,949 in previous quarter
  • Gross Margin (GAAP): 76.5%, up from 75.1% 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.

Keeping up with the latest financial reporting regulations and standards is difficult and expensive, especially as companies increasingly operate across several geographical regions and that drives the demand for platforms that automate the compliance process.

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 $88 million, to $112.6 million.

Workiva Total Revenue

This quarter, Workiva's quarterly revenue was once again up a very solid 27.9% year on year. On top of that, revenue increased $7.1 million quarter on quarter, a very strong improvement on the $1.36 million increase in Q2 2021, which shows acceleration of growth, and is great to see.

Analysts covering the company are expecting the revenues to grow 17.2% over the next twelve months, although estimates are likely to change post earnings.

Customer Growth

You can see below that Workiva reported 4,146 customers at the end of the quarter, an increase of 197 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 111% in Q3. That means even if they didn't win any new customers, Workiva would have grown its revenue 11% year on year. That is a good retention rate and a proof that Workiva's customers are satisfied with their software and are getting more value from it over time. That is good to see.

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, licences, technical support and other necessary running expenses was at 76.5% in Q3.

Workiva Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.76 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 a pressure from competition to lower prices.

Key Takeaways from Workiva's Q3 Results

With a market capitalization of $7.33 billion Workiva is among smaller companies, but its more than $522.3 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 enjoyed the positive outlook Workiva provided for the next quarter’s revenue. And we were also glad to see the acceleration in customer growth. Overall, we think this was still a really good quarter, that should leave shareholders feeling very positive. The company is up 13% on the results and currently trades at $165 per share.

Is Now The Time?

Workiva may have had a good quarter, but investors should also consider its valuation and business qualities, when assessing the investment opportunity. Although we have other favorites, we understand the arguments that Workiva is not a bad business. Its revenue growth has been solid. And on top of that, its strong gross margins suggest it can operate profitably and sustainably.

The market is certainly expecting long term growth from Workiva given its price to sales ratio based on the next twelve months is 15.4x. There are things to like about Workiva and there's no doubt it is a bit of a market darling, at least for some.

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