Workiva Inc.

Moat: 3/5

Understandability: 3/5

Balance Sheet Health: 4/5

Workiva is a leading provider of cloud-based software solutions for regulatory, financial, and environmental, social, and governance (ESG) reporting.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Workiva operates on a Software-as-a-Service (SaaS) model, where customers pay for subscriptions to gain access to its various platforms. Their offerings help automate data collection, data linking, data analytics, process management, and audit. The platform allows users to create reports in compliance with regulations and with internal policies.

Business Overview

Workiva operates in three broad revenue categories:

  1. Subscription and Support: This revenue stream, the largest for the company, is primarily from recurring subscriptions to their SaaS platform. These contracts vary in term length from one to three years.
  2. Professional Services: Revenue comes from consulting services. They help clients implement their Workiva software, as well as offer training and customization services.
  3. Other revenue: Comprises mostly data licensing.
  • Competitive Landscape: The industry in which Workiva operates is becoming increasingly competitive, with new entrants as well as established software vendors offering similar solutions. They face competition from other cloud-based providers, consulting firms that develop and implement their own solutions, and traditional software vendors that provide on-premise solutions.

In the market, they primarily compete with companies in these groups, each of which are rapidly evolving and gaining adoption. Workiva benefits from this rapid adoption in the market as more and more companies begin to see the value of their platforms but at the same time, increasing competition presents a challenge to their dominance.

  • Differentiating Factors: Workiva’s key advantage is their integrated platform, which combines financial reporting, ESG reporting, governance, risk management and compliance capabilities, and data connectivity into a single solution. This makes it hard to compete with smaller companies that lack a broad offering. They emphasize that their integrated approach eliminates the complexities of using multiple systems and reduces risk and enhances collaboration.

They do seem to have a strong competitive advantage from being a pioneer and leading force in the integrated software sector.

Financial Performance

Here’s a breakdown of Workiva’s financials:

  • Revenue: Revenue has shown impressive growth. The company’s revenue increased 18.9% YoY in Q1 2024 to $165.6 million. Full year 2023 revenue was $592 million.

  • Customer Growth: Workiva has consistently increased its customer base, with customers exceeding 6,000 by the end of 2022 and expanding past 6,600 as of September 30, 2024, and is continuing to grow. The customer retention rate is around 97-98% which highlights the stickiness of their product. However, it also indicates limited growth from new customers.

  • The number of customers using their multi-solution offering grew nearly 40% year-over-year in the most recent quarter.

  • Margins: Margins have been under pressure due to increased operational expenses. However, they have increased efficiency in sales and professional services by improving customer success rates and reducing customer churn, leading to improvements in profitability. Gross margin in 2023 was 75.3%, while operating margin was at 6.6%, showing potential for expansion.

  • Free Cash Flow: They are growing free cash flow steadily and expect positive free cash flows for the year 2024.

  • Balance Sheet: The company’s balance sheet is relatively healthy. The company has low debt but substantial cash holdings, with cash, cash equivalents and marketable securities totaling $577.6 million at year-end 2023. Debt was $454.4 million including 2028 convertible notes that will mature in 2028 (if not converted) with current value of 390.5 million (adjusted for discounts) that will likely be converted to stock.

  • Recent Concerns/Controversies: Some analysts note that subscription revenue growth is slowing (17% this quarter, compared with 20% a year ago) as Workiva approaches the peak of its growth stage. Their net operating loss is also still considerable (30-40 million a quarter) even though it has decreased significantly YoY.

Moat Analysis

Workiva possesses what I would classify as a narrow moat.

  • Intangible Assets: Their platform for financial and regulatory reporting has become an industry standard for some companies, with clients having a hard time moving to other providers. This implies a certain level of brand recognition and trust in their platform. However, newer companies can potentially encroach on this moat if their products become an equal or a better alternative.

  • Switching Costs: Significant switching costs also contribute to the moat. As more businesses are integrated with Workiva’s platform, they are reluctant to switch to competitors given integration requirements, loss of productivity during transition, and potential errors when extracting data. Switching also costs valuable time to the company, as it will have to set up all new pipelines for the data.

  • They are using this to their benefit by adding new products to the current platform, making clients want to use their new services instead of opting to use the platform of a competitor. They have had considerable success with subscription support renewals.

  • Economies of Scale: They also possess a limited scale advantage. They have high barriers to success, with a highly technical product and a lot of regulatory barriers but low barriers to entry, since smaller companies can compete and develop an alternative platform.

Moat Rating: 3/5

Given the considerations above, I’m giving a moat rating of 3 out of 5 to Workiva. While they have a substantial competitive advantage now with integration, the network effect, a strong customer base with high renewal rates, these can be eroded by the fast-moving tech industry and strong competition. Furthermore, having to rely on acquisitions for growth will make the company face larger risks in the future.

Risks to the Moat

Several risks could jeopardize Workiva’s moat and overall business:

  • Disruptive technologies: Since the company relies on its technology, its market position can be threatened by newer, more innovative, or more streamlined technologies that are more attractive to customers. As the software and AI industry are evolving rapidly, more and more players are entering the market and new innovations might quickly make current technology obsolete.

  • Increased competition: With the market for data reporting growing exponentially, new and better options can appear, which would make existing clients switch. Increased competition would put pressure on margins and make their sales decline.

  • Dependence on key employees: The company is reliant on its management team and key employees, and the loss of any of those would cause a disturbance in operations and future strategies. While this is an issue for a lot of companies, Workiva’s management is an important part of its brand.

  • Integration challenges: Their acquisition spree can be hampered by the possibility of failed integration and also the fact that acquired companies can become unprofitable. If they are not careful, mergers and acquisitions can become an avenue for value destruction rather than creating value.

  • Geopolitical conflicts The company is subject to all different kinds of geopolitical turmoil and problems. They might face disruption in their operations from this, and it will also mean that it is impossible to predict if growth is sustainable.

Business Resilience

Workiva does have some strengths in its business model to provide resilience:

  • Recurring Revenue: Its primarily subscription-based revenue provides a predictable and relatively consistent revenue stream. This recurring revenue means that the company’s revenues are less likely to be volatile in uncertain times.

  • Strong Customer Retention: Their high renewal rate of subscribers demonstrates a degree of customer loyalty, which reduces risk during market shifts or recession.

  • Long Customer Contracts: Long contract durations provide a steady flow of revenue.

  • Leading Position in GRC and ESG Reporting: As the clear leader in the integration of GRC and ESG software they have established themselves as a key player in this high demand market, giving them a head start.

Understandability: 3/5

The company’s core business is not particularly hard to understand: they sell a SaaS platform, and clients pay for it. The complexity arises when you dive deeper into the specificities of regulatory and financial reporting as well as all the accounting terms used.

Balance Sheet Health: 4/5

Workiva shows relatively strong financial health, as demonstrated by these factors:

  • High cash and cash equivalent assets.
  • Relatively low long term debt with convertible notes.
  • Low short term debt.

They seem to have the financial position needed to pursue its current strategy but also deal with any unexpected hurdles or potential problems down the line.