Workiva (WK)

Financial and compliance reporting software company Workiva (NYSE:WK) reported Q1 CY2025 results topping the market’s revenue expectations, with sales up 17.4% year on year to $206.3 million. The company expects next quarter’s revenue to be around $209 million, close to analysts’ estimates. Its non-GAAP profit of $0.14 per share was 94.9% above analysts’ consensus estimates.

Company Overview

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 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.

A company’s long-term sales performance can indicate its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Over the last three years, Workiva grew its sales at a 18% compounded annual growth rate. Although this growth is acceptable on an absolute basis, it fell slightly short of our standards for the software sector, which enjoys a number of secular tailwinds. Luckily, there are other things to like about Workiva.

This quarter, Workiva reported year-on-year revenue growth of 17.4%, and its $206.3 million of revenue exceeded Wall Street’s estimates by 1.1%. Company management is currently guiding for a 17.7% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 17.2% over the next 12 months, similar to its three-year rate. This projection is healthy and implies the market is forecasting success for its products and services.

While reported revenue for a software company can include low-margin items like implementation fees, annual recurring revenue (ARR) is a sum of the next 12 months of contracted revenue purely from software subscriptions, or the high-margin, predictable revenue streams that make SaaS businesses so valuable.

Workiva’s ARR punched in at $742 million in Q1, and over the last four quarters, its growth was impressive as it averaged 19.5% year-on-year increases. This alternate topline metric grew faster than total sales, which likely means that the recurring portions of the business are growing faster than less predictable, choppier ones such as implementation fees. That could be a good sign for future revenue growth.

Workiva reported 6,385 customers at the end of the quarter, a sequential increase of 80. That’s a little better than last quarter and quite a bit above the typical growth we’ve seen over the previous year. Shareholders should take this as an indication that Workiva has made some recent improvements to its go-to-market strategy and that they are working well for the time being.

The customer acquisition cost (CAC) payback period measures the months a company needs to recoup the money spent on acquiring a new customer. This metric helps assess how quickly a business can break even on its sales and marketing investments.

It’s relatively expensive for Workiva to acquire new customers as its CAC payback period checked in at 73.8 months this quarter. The company’s drawn-out sales cycles partly stem from its focus on enterprise clients who require some degree of customization, resulting in long onboarding periods. The complex integrations are a double-edged sword - while Workiva may not see immediate returns from its sales and marketing investments, it is rewarded with higher switching costs and lifetime value if it can continue meeting its customer’s needs.

One of the best parts about the software-as-a-service business model (and a reason why they trade at high valuation multiples) is that customers typically spend more on a company’s products and services over time.

Workiva’s net revenue retention rate, a key performance metric measuring how much money existing customers from a year ago are spending today, was 110% in Q1. This means Workiva would’ve grown its revenue by 10.4% even if it didn’t win any new customers over the last 12 months.

Workiva has a good net retention rate, proving that customers are satisfied with its software and getting more value from it over time, which is always great to see.

Software is eating the world. It’s one of our favorite business models because once you develop the product, it usually doesn’t cost much to provide it as an ongoing service. These minimal costs can include servers, licenses, and certain personnel.

Workiva’s robust unit economics are better than the broader software industry, an output of its asset-lite business model and pricing power. They also enable the company to fund large investments in new products and sales during periods of rapid growth to achieve outsized profits at scale. As you can see below, it averaged an excellent 76.7% gross margin over the last year. Said differently, roughly $76.75 was left to spend on selling, marketing, and R&D for every $100 in revenue.

This quarter, Workiva’s gross profit margin was 76.6%, in line with the same quarter last year. On a wider time horizon, the company’s full-year margin has remained steady over the past four quarters, suggesting its input costs have been stable and it isn’t under pressure to lower prices.

Many software businesses adjust their profits for stock-based compensation (SBC), but we prioritize GAAP operating margin because SBC is a real expense used to attract and retain engineering and sales talent. This metric shows how much revenue remains after accounting for all core expenses – everything from the cost of goods sold to sales and R&D.

Workiva’s expensive cost structure has contributed to an average operating margin of negative 10.8% over the last year. Unprofitable software companies require extra attention because they spend heaps of money to capture market share. As seen in its historically underwhelming revenue performance, this strategy hasn’t worked well so far, and it’s unclear what would happen if Workiva reeled back its investments. Despite this, Wall Street seems to be optimistic about its growth prospects. We tend to have the same view.

Looking at the trend in its profitability, Workiva’s operating margin might fluctuated slightly but has generally stayed the same over the last year. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability.

In Q1, Workiva generated a negative 12% operating margin. The company's consistent lack of profits raise a flag.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

Workiva has shown mediocre cash profitability over the last year, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 7%, subpar for a software business.

Workiva burned through $8.12 million of cash in Q1, equivalent to a negative 3.9% margin. The company’s cash flow turned negative after being positive in the same quarter last year, but we wouldn’t read too much into the short term because investment needs can be seasonal, causing temporary swings. Long-term trends are more important.

Over the next year, analysts predict Workiva’s cash conversion will improve. Their consensus estimates imply its free cash flow margin of 7% for the last 12 months will increase to 13.5%, it options for capital deployment (investments, share buybacks, etc.).

Workiva reported $767 million of cash and $789.3 million of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $42.38 million of EBITDA over the last 12 months, we view Workiva’s 0.5× net-debt-to-EBITDA ratio as safe. We also see its $24.86 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

It was great to see Workiva grow its customers this quarter. We were also happy its revenue narrowly outperformed Wall Street’s estimates. On the other hand, its EPS guidance for next quarter missed significantly and its net revenue retention decreased. Overall, this was a mixed quarter. The stock remained flat at $74.84 immediately after reporting.

Updated: May 22, 2025 at 10:12 PM EDT

The latest quarterly earnings matters, sure, but we actually think longer-term fundamentals and valuation matter more. Investors should consider all these pieces before deciding whether or not to invest in Workiva.

There are some positives when it comes to Workiva’s fundamentals. Although its revenue growth was a little slower over the last three years and analysts expect growth to slow over the next 12 months, its ARR growth has been splendid, showing it’s securing more long-term contracts and becoming a more predictable business. And while its operating margins are low compared to other software companies, its gross margin suggests it can generate sustainable profits.

Workiva’s price-to-sales ratio based on the next 12 months is 4.2x. Looking at the software space right now, Workiva trades at a compelling valuation. If you believe in the company and its growth potential, now is an opportune time to buy shares.

Wall Street analysts have a consensus one-year price target of $100.12 on the company (compared to the current share price of $67.52), implying they see 48.3% upside in buying Workiva in the short term.

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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