Veeva Systems Inc. — Form 10-Q summary
Business context and reporting period. Veeva provides cloud software, data and services primarily to life sciences companies, through Commercial Cloud and Vault. This filing covers the quarter and six months ended July 31, 2020 (fiscal Q2 and first half of fiscal 2021); comparisons below are with the corresponding 2019 periods unless noted. Crossix and Physicians World, acquired in November 2019, are included in reported results.
Financial performance
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Revenue | $353.7m (+33%) | $266.9m | $690.8m (+35%) | $511.7m |
| Subscription services revenue | $283.5m (+30%) | $217.3m | $553.7m (+33%) | $415.4m |
| Professional services and other revenue | $70.2m (+42%) | $49.6m | $137.1m (+42%) | $96.2m |
| Gross profit / margin | $256.5m / 73% | $196.7m / 74% | $498.7m / 72% | $375.9m / 73% |
| Operating income / margin | $90.1m / 25.5% | $73.9m / 27.7% | $177.6m / 25.7% | $145.0m / 28.3% |
| Net income | $93.6m (+18%) | $79.2m | $180.1m (+18%) | $152.7m |
| Diluted EPS | $0.58 | $0.50 | $1.12 | $0.96 |
| Cash from operating activities | $105.3m | $100.5m | $387.5m | $336.8m |
Margins, expenses and unusual items. Subscription gross margin was 85% in Q2 versus 86% a year earlier; professional services gross margin was 23% versus 22%. Management attributed lower total gross margin primarily to acquired businesses’ lower-margin offerings. Operating expenses increased 35% in Q2 to $166.4m, with higher employee costs and stock-based compensation contributing. Stock-based compensation was $49.4m in Q2 and $86.3m for the first half. Q2 GAAP net income included an income tax benefit of $0.6m; the effective tax rate was negative 0.6%, mainly reflecting tax benefits from equity compensation. Non-GAAP diluted EPS was $0.72 in Q2 and $1.38 for the first half; these measures exclude stock compensation and acquired-intangible amortization, among other tax effects.
Liquidity and financial position
- At July 31, 2020, cash and cash equivalents were $795.8m and short-term investments were $699.7m, totaling approximately $1.50bn. Current assets were $1.79bn and current liabilities $501.5m.
- The balance sheet reports no borrowings or other debt; lease liabilities totaled $57.3m, including finance leases.
- First-half operating cash flow rose to $387.5m from $336.8m. Management said first-half cash flow represented a significant portion of expected full-year operating cash flow, and anticipated substantially lower quarterly operating cash flow later in fiscal 2021, partly because Q1 is seasonally strongest.
- Investing activities used $92.1m in the first half, mainly reflecting net purchases of short-term investments. Financing activities provided $18.6m, primarily from employee stock-option exercises.
Changes, outlook and risks
- Vault and Commercial Cloud each contributed $69m of the first-half increase in subscription revenue; Q2 subscription growth included $34m from Vault and $32m from Commercial Cloud. Professional services growth was largely associated with implementation and deployment work, especially for Vault.
- Remaining performance obligations for subscription services were approximately $844m at July 31; about 77% was expected to be recognized in the next 12 months.
- No quantified revenue or earnings guidance is provided in the supplied filing text. Management expects operating expenses and stock-based compensation to rise in the near term, and gross margin to decline in fiscal 2021 due to acquired-business mix, partly offset by growth in higher-margin Vault products. It also expects subscription and professional-services costs to increase in absolute dollars.
- Management said COVID-19 had not materially negatively affected overall operating or financial performance to date, but its future effects were uncertain. Crossix and Physicians World and certain customer segments were already negatively affected. Virtual interactions may support adoption of Engage Meeting and Approved Email, but could also reduce demand for core CRM if customers cut sales-representative headcount. Engage Meeting was being offered free through December 31, 2020.
- Key exposures include competition and customer concentration, reliance on third-party data and cloud infrastructure, and the Salesforce platform agreement. Veeva had met the agreement’s first minimum order commitment and had at least $99m remaining to purchase through September 1, 2025.
- Material litigation includes disputes with IQVIA and Medidata. Outcomes and potential losses or recoveries could not be estimated clearly. IQVIA’s motion for sanctions in the OpenData and Network case remained under consideration; the consolidated Nitro and IQVIA declaratory actions were stayed pending that case. Medidata’s summary-judgment motions were awaiting a ruling.
- Other noted risks include privacy and data-protection regulation, cybersecurity and service disruptions, foreign-exchange and interest-rate exposure, and integration of acquisitions. A 100-basis-point interest-rate increase was estimated to reduce investment-portfolio market value by $6m.
Important facts for investors to verify
- Whether subscription growth and renewals remain strong, and how much reported growth reflects acquired businesses versus organic expansion.
- Whether gross-margin pressure and higher operating expenses develop as management anticipates, including the ongoing effect of stock-based compensation.
- How COVID-19 affects customer spending, professional-services projects, acquired businesses and demand for CRM versus virtual-engagement products.
- Progress and potential financial consequences of the IQVIA and Medidata litigation, and whether the $99m Salesforce commitment is met on schedule.
- Cash-flow seasonality, the quality and maturity profile of the investment portfolio, and any change in liquidity or lease obligations.