SPSC - Workiva: Leveraging Competitive Advantage In A Regulatory-Focused Landscape

2023-10-02 21:01:07 ET

Summary

• Workiva's platform is a leading cloud platform for integrated reporting, streamlining processes, and ensuring transparency.
• The company's strong financial performance in Q2 2023, with significant revenue growth and improved key metrics, supports its growth potential.
• WK is focused on expanding its workforce and partnering with systems integrators and advisory partners to drive demand and achieve its goal of $1 billion in annual revenue.

Summary

Workiva ( WK ) is committed to advancing transparency in reporting for a better world. In today's business landscape, stakeholders expect heightened action and openness from organizations, making transparency a vital aspect. The Workiva platform, globally acknowledged as a leading cloud platform for integrated reporting, plays a significant role in streamlining processes and ensuring uniformity. It stands as a comprehensive Software-as-a-Service [SaaS] solution, integrating financial reporting, ESG, and GRC within a secure, audit-ready platform. By seamlessly connecting and transforming data from diverse systems, Workiva enables customers to meticulously create, review, and publish data-linked documents and reports, enhancing precision and productivity. The platform's flexibility and scalability empower users to dynamically customize and adapt business processes in real time.

In a landscape marked by heightened regulatory scrutiny and growing demands for transparency, WK's platform is showcasing its competitive edge. These strengths, coupled with a rising interest in the software's adoption before regulatory mandates, are expected to drive sustained subscription growth in the coming years. Furthermore, WK is dedicated to expanding its workforce to achieve its ambitious goal of reaching $1 billion in annual revenue. The company places significant emphasis on the importance of systems integrators and advisory partners, recognizing their pivotal role in stimulating demand for WK's products in the future. WK's recent platform enhancements, unveiled at Amplify, offer advantages for streamlining workflows and capitalizing on cross-selling opportunities. These improvements are noteworthy as they are rooted in the platform's core functionality, with more than 80% of each solution built upon it. Consequently, these developments are expected to facilitate customer acquisition and the expansion of WK into new markets. Given these factors, I recommend a buy rating for WK.

Financials / Valuation

Workiva delivered a solid second quarter result. In the second quarter, the company experienced a significant surge in total revenue, reaching an impressive $155.0 million. This marked an 18% increase compared to the same quarter in 2022. A substantial contributor to this growth was the outstanding performance of subscription and support revenue, which contributed a significant $136.8 million, demonstrating a remarkable 21% year-over-year growth. Conversely, professional services revenue remained relatively stable at $18.3 million, showing consistency with the same quarter in the prior year.

Shifting the focus to gross profit, the second quarter of 2023 was equally promising. GAAP gross profit surged to $115.5 million, representing a notable rise from the $99.3 million recorded during the second quarter of 2022. The GAAP gross margin for this quarter was 74.5%, a marginal dip from the 75.5% reported in the second quarter of the preceding year. On the other hand, the non-GAAP gross profit displayed a robust performance, reaching $117.6 million and marking an impressive 16.6% increase compared to the second quarter of the previous year. However, the non-GAAP gross margin experienced a slight decrease, settling at 75.9% compared to 76.6% in the second quarter of 2022.

In summary, the second quarter of 2023 displayed a promising financial performance for the company, evident in the substantial growth in total revenue and improvements across various key financial metrics. These positive trends are indicative of the company's dedication to growth, efficiency, and overall financial stability.

Based on my view of the business, WK should be able to grow at 24% in FY24. This confidence stems from WK's impressive financial results in the second quarter, which continued the trend of strong double-digit growth. Additionally, the management's projections for FY23 further reinforce this positive outlook, indicating a sustained momentum.

Historically, WK's performance over the past six years provides a solid foundation for my valuation. The company has consistently delivered double-digit growth rates, showing no signs of plateauing. This consistent performance suggests that WK is far from reaching its mature growth stage. In fact, the management's ambitious $1 billion revenue growth target for FY23 underscores the vast potential for further expansion.

Several dynamics underpin WK's consistent and robust revenue growth. The current business environment, characterized by increasing regulatory scrutiny on reporting and a rising demand for transparency, is particularly favorable. With the CSRD requirements set to take effect from 2025, a surge in demand for WK's products is anticipated, providing another boost to its revenue. WK's platform has successfully leveraged this environment, distinguishing itself with its competitive edge. The company's commitment to growing its workforce speaks volumes about its strategic vision. Recognizing the instrumental role that systems integrators and advisory partners play, WK emphasizes collaboration, aiming to fuel the demand for its products even further.

Furthermore, WK's recent innovations, unveiled at Amplify, mark a significant milestone. These enhancements, which draw heavily from the platform's core functionality—with over 80% of each solution anchored in it—promise to streamline workflows and amplify cross-selling opportunities. Such advancements are likely to attract a broader clientele and pave the way for WK's foray into new market territories.

As of now, WK’s forward EV/Revenue stands at 7.6x, surpassing its peers like SPS Commerce ( SPSC ) and Freshworks ( FRSH ), which are trading at a median EV/ Revenue of 5.7x. This higher multiple can be attributed to WK's higher margins in comparison to its peers. WK boasts a gross margin of 75%, higher than the peer median of 67%. Moreover, WK Next Twelve Months [NTM] growth rate of 22% is higher than the peer’s median of 18%. Using WK’s present forward EV/ Revenue, my target price for WK is $112.37. I recommend a buy rating for WK.

Comments

In an environment marked by heightened regulatory momentum surrounding reporting and increasing stakeholder demands for greater transparency, WK's platform is revealing its competitive advantages. These advantages, coupled with the growing interest in pre-regulation adoption of WK's software, are poised to drive sustained subscription growth over the coming years. Furthermore, I anticipate potential tailwinds in the capital markets business as WK reaffirms its ambitious goal of reaching $1 billion in annual revenue. I also see potential upside in the form of enforceable regulatory catalysts impacting adoption. These include the implementation and enforcement of CSRD, recent ESG reporting legislation in California, and the clarification of SEC sustainability reporting rules. Additionally, WK's integration of AI tools into its platform, the commitment to a partner-first program aimed at boosting product adoption and growth, and the strategic hiring of seasoned SVPs to steer the company into its next phase of growth are all positive developments that leave us optimistic about WK's future.

Ms. Iskow envisions WK as a growth-oriented company, emphasizing the importance of leveraging the platform's strengths to expand into the addressable market. WK has set its sights on achieving $1 billion in annual revenue and is committed to expanding its workforce accordingly. The company places significant emphasis on systems integrators and advisory partners, recognizing their pivotal role in generating demand for WK products going forward. WK's preferred growth strategy involves a 50% focus on cross-selling to existing customers and acquiring new logos, given the substantial untapped potential within its current customer base. I believe that WK's mission-critical role in a regulation-driven environment, its best-in-breed offerings, and its commitment to product innovation will continue to fuel robust growth, despite the lengthening of sales cycles and the addition of new approval levels for deals.

“If I might jump in there. I mean, Robert, you know that we're moving from the $500 million to the $1 billion right now just requires more automation, more rigor, more discipline, accountability, performance management all over. So across the board, setting goals, targets, tracking progress, and it's also having the right people in the right roles and leadership ICs. So we're focusing all around on the productivity.” Source: 2Q23 earnings

Over the past six years, WK has witnessed a robust CAGR of 24% in its revenue. During this time, they consistently achieved a growth rate exceeding 20%, with a noteworthy spike to 64% in 2018. This impressive growth underscores WK's product popularity and the firm's competitive edge. Two key factors that drive this advantage are the rising interest in adopting regulations early and the mandate of regulatory requirements, both of which accelerate the demand for WK's offerings. Given the consistent trajectory of their revenue growth, I am confident that WK is on track to hit the $1 billion revenue mark. Furthermore, the company's management has forecasted revenues between $626 million and $628 million for FY23, indicating another year of double-digit growth at 17%. Even after considering this projection, the adjusted CAGR remains at 23%. Given the sustained strong growth, fueled by early adoption of regulations and regulatory-driven demand, I anticipate WK will achieve the $1 billion revenue milestone by 2027.

In order to achieve its revenue goal, the platform continues to make enhancements to its product. This enhancement brings benefits to both workflow improvements and cross-selling opportunities. As over 80% of each solution is based on core platform functionality, WK's recent platform improvements, unveiled at Amplify, are particularly noteworthy. These enhancements include Smart Links, GRC Connections, and Platform-wide support for automated tables of content, private comment support, and various enhancements to existing features. I believe that these enhancements will significantly enhance user satisfaction, productivity, and organizational adoption of the WK product suite. This, in turn, will facilitate customer acquisition and cross-selling to new customers, enabling WK to expand into new markets.

In addition, WK's impressive achievements also serve as encouraging indicators of the company's growth potential in the ESG sector. However, the rate of ESG adoption will be contingent on the timeliness of regulatory implementation, enforcement, and regional variations in stakeholder expectations. While Europe, with the recent passage and increased clarity surrounding CSRD, remains an attractive market for ESG investments, the adoption cycle may extend beyond 5 years due to ongoing developments in reporting standards, XBRL taxonomy, and enforcement mechanisms. In California, recently passed legislation (SB 253 & SB 261) will require climate-related disclosures from public and private companies, depending on revenue thresholds. Additionally, the anticipated update of climate disclosure rules by the SEC later this year has the potential to boost demand for ESG reporting solutions like those offered by WK. However, the timing of this demand may be influenced by the iterative development of regulations over time. Nonetheless, I view non-voluntary adoption, driven by the threat of regulatory enforcement, as an advantage for WK in this evolving landscape.

Risk & conclusion

Over the past six years, as mentioned previously, WK has witnessed a robust CAGR of 24% in its revenue. During this time, they consistently achieved a growth rate exceeding 20%, with a noteworthy spike to 64% in 2018. This impressive growth underscores WK's product popularity and the firm's competitive edge. Two key factors that drive this advantage are the rising interest in adopting regulations early and the mandate of regulatory requirements, both of which accelerate the demand for WK's offerings. Given the consistent trajectory of their revenue growth, I am confident that WK is on track to hit the $1 billion revenue mark. Furthermore, the company's management has forecasted revenues between $626 million and $628 million for FY23, indicating another year of double-digit growth at 17%. Even after considering this projection, the adjusted CAGR remains at 23%. Given the sustained strong growth, fueled by early adoption of regulations and regulatory-driven demand, I anticipate WK will achieve the $1 billion revenue milestone by 2027.

In order to achieve their revenue goal, the platform continues to make enhancements to their product. This enhancement brings benefit to both workflow improvements and cross-selling opportunities. As over 80% of each solution is based on core platform functionality, WK's recent platform improvements, unveiled at Amplify, are particularly noteworthy. These enhancements include Smart Links, GRC Connections and Platform-wide support for automated tables of content, private comment support and various enhancements to existing features. I believe that these enhancements will significantly enhance user satisfaction, productivity, and organizational adoption of the WK product suite. This, in turn, will facilitate customer acquisition and cross-selling to new customers, enabling WK to expand into new markets.

In addition, WK's impressive achievements also serve as encouraging indicators of the company's growth potential in the ESG sector. However, the rate of ESG adoption will be contingent on the timeliness of regulatory implementation, enforcement, and regional variations in stakeholder expectations. While Europe, with the recent passage and increased clarity surrounding CSRD, remains an attractive market for ESG investments, the adoption cycle may extend beyond 5 years due to ongoing developments in reporting standards, XBRL taxonomy, and enforcement mechanisms. In California, recently passed legislation (SB 253 & SB 261) will require climate-related disclosures from public and private companies, depending on revenue thresholds. Additionally, the anticipated update of climate disclosure rules by the SEC later this year has the potential to boost demand for ESG reporting solutions like those offered by WK. However, the timing of this demand may be influenced by the iterative development of regulations over time. Nonetheless, we view non-voluntary adoption, driven by the threat of regulatory enforcement, as an advantage for WK in this evolving landscape.

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