Veeva Systems Inc. — Q3 FY2020 Form 10-Q
Reporting period: Fiscal third quarter and nine months ended October 31, 2019; fiscal year ends January 31. Veeva provides cloud software, data and related services, primarily to life sciences companies.
Financial performance
| Metric | Q3 FY2020 | Q3 FY2019 | 9M FY2020 | 9M FY2019 |
|---|---|---|---|---|
| Revenue | $280.9m (+25%) | $224.7m | $792.6m (+26%) | $629.9m |
| Subscription revenue | $226.8m (+27%) | $178.2m | $642.2m (+27%) | $503.8m |
| Professional services and other | $54.2m (+16%) | $46.5m | $150.4m (+19%) | $126.1m |
| Gross margin | 73.9% | 72.7% | 73.7% | 71.3% |
| Operating income | $80.8m | $63.1m | $225.8m | $159.9m |
| Operating margin | 28.8% | 28.1% | 28.6% | 25.4% |
| Net income | $82.2m | $64.1m | $234.9m | $158.7m |
| Diluted EPS | $0.52 | $0.41 | $1.49 | $1.02 |
| Operating cash flow | $61.5m | $41.6m | $398.3m | $279.0m |
All amounts are U.S. dollars. Q3 and nine-month net income rose approximately 28% and 48%, respectively. Subscription services were 81% of nine-month revenue. Vault subscription revenue grew faster than Commercial Cloud: nine-month increases were $95.7m and $42.7m, respectively. Gross-margin improvement reflected greater contribution from Vault and newer multichannel CRM products; professional services remained lower-margin.
Financial position and material changes
- At October 31, cash and cash equivalents were $892.6m and short-term investments were $602.4m, totaling about $1.50bn. Total assets were $1.90bn; current assets were $1.66bn and current liabilities $306.9m.
- No borrowings are shown on the balance sheet. Lease liabilities totaled $27.3m ($25.7m operating and $1.7m finance), following adoption of lease accounting in February 2019. Operating lease right-of-use assets were $24.1m.
- Nine-month operating cash flow increased year over year. Cash from operations reflected earnings and collections, partly offset by a $105.6m decrease in deferred revenue due to renewal-billing timing. Investing cash flow was a $61.6m outflow, principally net purchases of short-term investments; financing cash flow was $7.9m inflow, mainly option exercises.
- Stock-based compensation was $78.4m for nine months, up from $56.6m. A new employee equity program introduced in Q1 uses both RSUs and options and contributes to higher compensation expense.
- Deferred revenue was $250.7m versus $356.4m at January 31; management cautions that quarterly deferred revenue and calculated billings are not reliable standalone indicators of business momentum. Contracted subscription revenue remaining to be recognized was approximately $567.5m, of which $418.6m was expected within 12 months.
Outlook, commentary and risks
- Management expects revenue and subscription-revenue growth rates to decline over time. It expects operating expenses to rise in absolute dollars, with possible near-term increases as a percentage of revenue, as it invests in product development, sales, services and headcount.
- Management expected gross margin to decrease slightly in the quarter ending January 31, 2020, citing fewer billable days, the annual field kickoff and acquired businesses; acquisitions are expected to be slightly dilutive to gross margin. It also expected Q4 operating cash flow to be substantially lower than the first nine months because much of the year’s operating cash flow had already occurred.
- After quarter-end, Veeva completed the Crossix acquisition on November 1 for $431.8m cash and Physicians World on November 7 for $41.4m cash. Retention equity awards were valued at approximately $120m and $15m, respectively. Purchase-price allocations were still under evaluation. These transactions materially reduce the cash balance reported at October 31.
- Significant litigation includes IQVIA disputes and Medidata litigation. Veeva said it could not meaningfully estimate potential losses, if any, for certain matters; it believes the IQVIA and Medidata claims lack merit. Veeva’s OpenData/Network counterclaims seek more than $200m in damages, but that amount is not a company liability estimate.
- Veeva had a remaining Salesforce minimum-purchase commitment of $159.8m through September 2025. Other material risks include competition, reliance on third-party hosting and the Salesforce platform, security and privacy obligations, customer renewals, and acquisition integration. Management stated existing resources were sufficient for working capital and capital expenditures for at least 12 months, before considering subsequent acquisition cash payments.
Most important facts for investors to verify
- Whether Vault-led subscription growth and customer renewals sustain growth as management expects growth rates to moderate.
- Post-acquisition cash, integration performance, retention-award expense and the final purchase-price allocations for Crossix and Physicians World.
- How higher stock-based compensation and planned investment affect GAAP margins and dilution; Q3 stock-based compensation was $29.3m.
- Progress and potential financial exposure from IQVIA and Medidata litigation, and the Salesforce platform relationship and remaining minimum commitment.
- Whether deferred-revenue timing, professional-services utilization and the stated Q4 cash-flow and gross-margin outlook develop as management anticipated.