Special purpose acquisition companies (SPACs) and initial public offerings (IPOs) have been popular this year, yet there are still over 400 SPACs that have yet to announce a merger target. Along with the IPO boom of the past two years -- 565 deals and counting since the start of 2020 -- the surge in new listings has led to an increasing number of companies that have to report financials and other forms continuously to the SEC.
Workiva (WK 0.86%) specializes in helping companies report and maintain compliance. As the market leader, it could be the primary company publicly-traded entities turn to. If Workiva can capitalize on the current surge in market activity, shareholders will benefit immensely going forward.
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The trusted tool for teamwork
Workiva's software is allowing enterprises to work more efficiently when compiling reports that are often long, time-consuming, and prone to errors. It's critical that numbers are accurate and consistent across an entire 10-K annual filing, for example, which may have dozens of contributors working on it at the same time. Workiva's platform enables collaboration among teams by bringing data and documentation together onto one platform.
Its solutions offer financial reporting for over 350 types of SEC filings, along with IPO paperwork, ESG reporting, and XRBL reporting -- which is becoming more popular because of its transparency and accessibility. The company is also able to help users comply with regulations in the United Kingdom and South Africa. This broad offering likely contributed to Workiva being named the leader among compliance platforms, according to research firm Forrester.
Workiva's winning ways
Workiva's solutions have been adopted by large public companies like Snowflake and Kinder Morgan, while having just 4% revenue churn in the second quarter. In that same period, its net revenue retention rate was 111.6%, while its total customer count grew 12.4% year over year. The number of large customers (those spending over $150,000 annually with the company) grew 46% to 500.
Second-quarter revenue was up 26% year over year to $105.6 million, and gross margin increased over three percentage points to 76.7%. This was primarily due to strong subscription revenue, which rose 29%, while professional services grew just 9%. More companies are shifting to the cloud to remain compliant.
While the company is still reporting a net loss -- $9.5 million in the latest quarter -- its bottom line is moving in the right direction. Its net loss margin improved from negative 23% in the prior-year period to just 9%. And Workiva can subsidize these losses with the $552 million of cash and investments on its balance sheet, along with the $12 million in free cash flow it generated during the quarter.
Lots of opportunity still ahead
On Workiva's second-quarter earnings call, CEO Marty Vanderploeg credited the hot IPO and SPAC market for driving the company's strong performance. There were 250 companies that went public in 2021 by the beginning of August, already exceeding the full-year total for last year. With the IPO market ramping up further, Workiva should continue to benefit from this tailwind. The company also has ambitious international expansion goals -- only 8% of revenue came from outside the U.S. in 2020 -- and considering many international businesses struggle with the same problems U.S. companies do, Workiva cap tap into ripe markets around the world.
However, investors should note this stock is priced at 17 times forward sales estimates, a very expensive valuation for a company expected to grow its top line just 23% this year. It is, however, trading at cheaper multiple than competitors like ServiceNow -- which trades at 23 times sales. Workiva's leadership position should make it a safer play than an up-and-comer in the market, but if the IPO and SPAC craze dies off, the company's growth prospects will suffer.
This risk, although important for investors to consider, would roil the entire market, and the company's leadership position and subscription-based model would offer some stability as well. So long as companies are racing to join the public markets through SPAC and IPO transactions, Workiva is one of the best companies to benefit from this trend, making it a worthy addition to your watchlist.
