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Workiva (NYSE:WK) Beats Q2 Sales Targets, Upgrades Full Year Guidance


Full Report / August 03, 2021
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Financial and compliance reporting software company Workiva (NYSE:WK) announced better-than-expected results in the Q2 FY2021 quarter, with revenue up 25.9% year on year to $105.5 million. Workiva made a GAAP loss of $9.51 million, improving on its loss of $19.7 million, in the same quarter last year.

Workiva (WK) Q2 FY2021 Highlights:

  • Revenue: $105.5 million vs analyst estimates of $101.6 million (3.85% beat)
  • EPS (non-GAAP): $0.07 vs analyst estimates of $0.01 ($0.06 beat)
  • Revenue guidance for Q3 2021 is $108.5 million at the midpoint, above analyst estimates of $104 million
  • The company lifted revenue guidance for the full year, from $419 million to $431 million at the midpoint, a 2.86% increase
  • Free cash flow of $11.9 million, up 12.1% from previous quarter
  • Net Revenue Retention Rate: 112%, in line with previous quarter
  • Customers: 3,949, up from 3,800 in previous quarter
  • Gross Margin (GAAP): 76.7%, in line with previous quarter

Founded in 2010, Workiva 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 $83.8 million, to $105.5 million.

Workiva Total Revenue

This quarter, Workiva's quarterly revenue was once again up a very solid 25.9% year on year. But the growth did slow down compared to last quarter, as the revenue increased by just $1.36 million in Q2, compared to $10.3 million in Q1 2021. We'd like to see revenue increase by a greater amount each quarter, but a one-off fluctuation is usually not concerning.

Analysts covering the company are expecting the revenues to grow 14.7% over the next twelve months, although we would expect them to review their estimates once they get to read these results.

Customer Growth

You can see below that Workiva reported 3,949 customers at the end of the quarter, an increase of 149 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 112% in Q2. That means even if they didn't win any new customers, Workiva would have grown its revenue 12% year on year. Trending up over the last year, this 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 76.7% in Q2.

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. Trending up over the last year, 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.

Key Takeaways from Workiva's Q2 Results

With market capitalisation of $6.45 billion Workiva is among smaller companies, but its more than $551.6 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 glad that the revenue guidance for the next quarter exceeded analysts' expectations. Overall, we think this was a strong quarter, that should leave shareholders feeling very positive. The company is flat on the results and currently trades at $128.66 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 Workiva is not a bad business, it probably wouldn't be one of our picks. Its revenue growth has been a little slower. And on top of that, unfortunately its customer acquisition is less efficient than many comparable companies, although customers spend noticeably more each year, which is great to see.

Workiva's price to sales ratio based on the next twelve months is 14.6, suggesting that the market has lower expectations of the business, relative to the high growth tech stocks. 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 it seems that there is a lot of optimism already priced in and we are wondering whether there might be better opportunities elsewhere right now.