Workiva: Time To Move Faster (NYSE:WK)

Via SeekingAlpha.com

Workiva (NYSE:WK) plays in the financial management space that favors platform owners expanding their total addressable market by evolving their solutions. Workiva is more focused on its international expansion strategy. The financial management space offers a lot of opportunities to drive average revenue per customer. Workiva needs to innovate fast. It needs to abandon the reassurance provided by its large total addressable market (TAM).

Source: Accounting today

Demand (Rating: Neutral)

Market opportunity

Workiva addresses the FC (finance close) and risk compliance space. The adoption of cloud-based financial close automation solutions is expected to keep growing. The risk compliance space is also growing due to the creation of new financial regulations. The FC space is valued at $18B.

Potential

Workiva’s growth factor will be driven by a combination of its attractive retention rate, upsell, global expansion strategy, and new customers. Revenue growth is expected to slow to the mid-teens range. This is due to M&As and bankruptcies, reducing the pool of companies using financial management tools.

In the near term, Workiva’s growth factor will struggle to improve its valuation.

Business/Financials (Rating: Neutral)

Products

Connect: For SEC, tax, and regulatory reporting. This helps to centralize reporting.

Automate: For internal audit management, SOX compliance, policy and procedure management, and enterprise risk management.

We’ve seen a big improvement in collaboration with our external auditors. They can now see our changes and have greater confidence in our controls because everything is linked.

Financial transformation: For management reporting, integrated financial planning, and regulatory reporting. This unifies structured and unstructured data from any origin.

Financials

Source: Author (using data from Seeking Alpha)

Workiva is investing in improving its growth factor. Expanding into EMEA will expose it to more customers. With new customers driving roughly 50% of subscription revenue, the impact on margin improvement will be felt. Workiva has a positive operating cash flow. A decrease in future revenue collection has impacted deferred revenue. I expect OCF (operating cash flow) to be impacted as well. Management didn’t give full-year guidance during the last earnings. Given the volatility of deferred revenue and billings, it’s ideal that management only gave Q2 guide. Workiva is guiding for 11% revenue growth this quarter. This is a deceleration from the number reported the previous year. Though, it’s reassuring to know WK has enough cash on its balance sheet to fund its operations if things become worse.

Macro/Competitors (Rating: Neutral)

Competitors: Workiva has a healthy partnership with players in the FC and GRC space. It also partners with players like Anaplan (NYSE:PLAN) in the sales and business planning niche. This is ideal because financial management projects are complex, and no vendor can succeed much in isolation.

Workiva is a leader in the FC space alongside Blackline (NASDAQ:BL) and Oracle (NYSE:ORCL). Workiva wins on the depth of its penetration. It commands 50% of the SEC XBRL market cloud service, according to Gartner. Most customers use Workiva for financial disclosure. Competitors have evolved to add AI (artificial intelligence) and RPA (robotic process automation) capabilities and are often adopted for more FC use cases. This explains the logic to explore suitable acquisition targets to beef up its capabilities. Its recent partnerships suggest it might delay big acquisitions in favor of integrating with other financial planning tools to give its customers a robust offering.

Macro

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Workiva is expanding beyond North America. It has a target to derive ~25% of its revenue in EMEA. New financial regulations in the EU have created a market for FC and GRC players to help companies with their financial and risk management tasks.

Investors/Valuation (Rating: Neutral)

Source: Author (using data from Seeking Alpha)

Investors

Workiva has rebounded after the COVID-19 induced selloff. Analysts have an average price target of $47 and a CY’20 revenue growth estimate of 14%. A weak expectation of its growth factor.

Valuation

Workiva’s lack of profitability means it will be valued for growth. A growth deceleration weakens its momentum factor. Its positive operating cash flow is attractive, and its huge cash position strengthens its value factor.

Source: Author

The table above provides a fast way to understand the valuation of cloud stocks. Workiva plays in the G&A spend bucket. This means it’s a productivity tool. Productivity tools drive business efficiency. The ideal product strategy for productivity tools is to ensure they integrate with other solutions. They should also be extended as platforms. This will allow customers to give feedback on new use cases that can lead to their possible expansion into other verticals. This will also ensure they are recommended to potential customers by system integrators. Workiva does most of these already. To test the efficiency of its go-to-market evolution, we can compare its growth metrics with its peers. Both Blackline and Workiva have a net retention rate of ~110%. Anaplan’s net expansion rate sits at 117%. Unlike the net retention rate metric, the expansion rate doesn’t include the effect of churn. This means Workiva and Blackline need to keep investing in strengthening their growth factor to rapidly expand their platform capabilities. It appears Workiva is content with its current TAM. The full potential of its growth factor won’t be unlocked if it doesn’t evolve its platform. Platform evolution is about being the first to use customer demand data to drive business intelligence. Fast innovators expanding their TAM and capabilities typically enjoy better multiple expansion.

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Risks

Workiva’s biggest risk factor is macro related. Expanding into Europe adds some execution risk. The investment in mastering new markets means margins might be tough to model in the short term.

Conclusion (Overall Rating: Hold)

Workiva’s growth factor relies on new initiatives that are still in the works. Margins can benefit from investments to grow ACV (annual contract value). Workiva needs to demonstrate that it can expand its TAM into adjacent verticals to optimize its growth factor. Until it demonstrates the full capabilities of its platform, the company’s valuation will remain range-bound.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.