Workiva: A Beneficiary Of Growing Regulations

| About: Workiva (WK)


A leader in the governance, regulation and compliance software solution space looks much better after the re-adjustment of expectations.

Growing regulations and a need for real-time Cloud-based collaboration tools offer strong tailwinds.

Improving fundamentals, strong top line growth and the consolidation underway in the software space offer a strong floor to the stock.

Until last year, Workiva (WK) attracted more than its share of interest from investors, mostly due to the combination of a Cloud-based business model and a changing regulatory environment that was offering strong tailwinds, but now that the broader Cloud space as well as the stock have come back to earth, this might be a good time to take another look at one of the beneficiaries of the growing regulations, especially in the financial industry.

The Cloud space in general is going through a period of increased scrutiny, with investors worried about valuation and growth going forward. For Workiva investors, operating losses and negative cash flows add to those worries, but even with these issues, the business, offering a promise of secular growth and improving fundamentals, is worth taking a closer after the recent correction.

The argument for the Cloud-based platform for enterprises to collaboratively collect, manage, report and analyze data in real-time is easy to make, considering the cost of reporting incorrect, incomplete, or untimely information for enterprises. Well positioned in the governance, risk and compliance (GRC) software solution for finance space, the bearish thesis that the solution is another version of Google Cloud (NASDAQ:GOOG) (NASDAQ:GOOGL) or Microsoft 365 (NASDAQ:MSFT) is misleading, at best. There are hardly any listed pure-plays, limiting the visibility of the name, and competitors consist of either a division of a large corporation like R.R. Donnelley (NASDAQ:RRD) and SAP (NYSE:SAP) or private companies like Merrill Corp. and RDG Filings.

Regulatory environment continues to offer a strong tailwind

Before going public in 2014, the company changed its name from Webfilings, a name that sums up the company's solution as well as the contribution to the financial industry much more appropriately.

As for functionality, simply put, the company's software platform - Wdesk, helps to integrate and manage business data in real time, irrespective of format or location. Shortly after the SEC announced the adoption of an interactive data format standard for financial reporting, in 2009, Workiva entered the market to automate the reporting process for public companies filing annual and quarterly reports with the SEC. Now almost 60% of Fortune 500 companies use the solution.

Going forward, the adoption of XBRL format, which provides a much cleaner data and a faster data flow, by various agencies should continue to provide a decent tailwind to the space as well as the company.

FDIC (Federal Deposit Insurance Corporation) and the SEC already require companies to file financial data using XBRL and are pushing for enhancements to data standards and quality of structured data, which fits well for companies like Workiva that have advanced guidance and validation rules addressing concerns about the accuracy and reliability of XBRL data. The DATA Act (Digital Accountability and Transparency Act), which will push the federal government towards an electronic process using a standardized and open data format, can be a big positive catalyst for the space.

Ready to monetize potential catalysts with smart execution

Even though estimates are calling for 20-24% type of top line growth rate for this year and next, the company is already delivering ahead of those expectations, be it the consolidated revenue that grew almost 27% in the latest quarter or the individual subscription & support and professional services revenues, both of which grew around 23-28% during the latest quarter. No wonder, the company increased the full year guidance.

The developments underway seem to suggest that this momentum may actually pick up the pace going forward, with help from new customers, increased penetration in the existing customer base and growing demand from the non-SEC market. The new customers are growing at a double-digit rate and deepening penetration into the existing customer base is visible from rising average contract values on subscription support revenues and improving revenue retention rate, which was more than 96% excluding add-ons and more than 112% including add-ons.

The SEC market opportunity is well covered and visible in the existing revenue growth, but the large non-SEC opportunity is just starting to flourish. The non­-SEC cases are expected to contribute more than 50% of the subscription bookings for the full year 2016 and some of the drivers for this growth should be the requirements of Sarbanes-Oxley, insurance companies managing the Model Audit Rule compliance process, lottery systems managing the CAFR (comprehensive annual financial report), financial companies using CCAR (comprehensive capital analysis and review) and Dodd­-Frank Act Stress Test, etc.

Expectations finally in check, relative valuation

The expectations from the stock, down 25% YTD and trading near all-time lows, seem to have been reset, even though the performance has continued to improve.

But now that the consolidation in the Cloud-based software space is picking up, the company's leadership in the XBRL space should offer a strong floor to the stock, considering the value of the business as a potential acquisition candidate for various large enterprise software companies.

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The stock is trading at less than 2.5 times expected revenues for the next fiscal year, a significant discount to some of the Cloud-based software deals done over the past few months, as the sheet above shows.

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.