Veeva Systems Inc. — Q3 FY2019 Form 10-Q
Reporting period: Three and nine months ended October 31, 2018; fiscal year ends January 31. Financial amounts below are in U.S. dollars. Prior-year comparisons are adjusted for the company’s retrospective adoption of Topic 606 and other accounting standards.
Business context and financial results
Veeva provides cloud software, data and services primarily to life sciences companies. Its product areas are Commercial Cloud and Vault. Management is investing in new products, broader customer deployments and expansion into industries beyond life sciences.
| Metric | Q3 FY2019 | Q3 FY2018 | Change |
|---|---|---|---|
| Total revenue | $224.7 million | $177.0 million | 27% |
| Subscription revenue | $178.2 million | $142.8 million | 25% |
| Professional services and other | $46.5 million | $34.2 million | 36% |
| Gross profit / gross margin | $163.4 million / 72.7% | $123.8 million / 69.9% | Margin up 2.8 percentage points |
| Operating income / operating margin | $63.1 million / 28.1% | $42.5 million / 24.0% | Margin up 4.1 percentage points |
| Net income / diluted EPS | $64.1 million / $0.41 | $34.9 million / $0.23 | |
| Operating cash flow | $41.6 million | $32.2 million |
For the nine months, revenue was $629.9 million, up 25%; subscription revenue was $503.8 million, up 24%; operating income was $159.9 million; net income was $158.7 million; and operating cash flow was $279.0 million. Nine-month diluted EPS was $1.02, compared with $0.72.
- Q3 subscription revenue was $99.9 million from Commercial Cloud and $78.3 million from Vault. Vault subscription revenue grew 51% year over year, compared with 10% for Commercial Cloud.
- In the nine-month period, subscription revenue was approximately 58% Commercial Cloud and 42% Vault; management said Commercial Cloud represented about 54% of total revenue.
- Q3 stock-based compensation was $19.9 million, versus $14.0 million a year earlier. General and administrative expense increased 47%, partly due to higher stock compensation and litigation-related legal fees.
Balance sheet, liquidity and commitments
At October 31, 2018, cash and cash equivalents were $467.6 million and short-term investments were $584.3 million, totaling approximately $1.05 billion. Current assets were $1.18 billion and current liabilities were $236.7 million. Total liabilities were $259.0 million and stockholders’ equity was $1.14 billion. The balance sheet presents no borrowing balance; the filing describes operations as primarily funded by operating cash flow.
Cash, cash equivalents and short-term investments increased from $762.0 million at January 31, 2018. The nine-month cash flow statement reports $147.5 million net increase in cash, cash equivalents and restricted cash; investing cash use was $147.7 million, primarily net purchases of investments. Management said existing liquidity and operating cash generation should cover working capital and capital expenditure needs for at least the next 12 months.
Contractual commitments included $234.2 million of minimum payments to Salesforce through September 2025, including $228.3 million due after five years, and $19.4 million of operating lease obligations. The Salesforce agreement carries minimum order thresholds and potential true-up payments.
Changes, outlook, risks and unusual items
- Revenue growth was broad, with Vault subscription and implementation activity a major contributor. Professional services grew faster than subscriptions, but management expects professional services to decline as a proportion of revenue over time.
- Gross margin improved, mainly because Vault subscription growth carries higher margins than Commercial Cloud. Management expected gross margin to decrease slightly in the quarter ending January 31, 2019, due primarily to lower professional-services utilization around holidays and the annual field kickoff.
- Management expects operating expenses to rise as it hires and invests in R&D, sales and marketing, services and infrastructure. It also expects operating cash flow in Q4 FY2019 to be substantially below the first nine months, which it said comprise the vast majority of the fiscal year’s expected operating cash flow. The filing states that revenue growth is expected to decline over time; it provides no clear numerical full-year revenue or earnings guidance in the supplied text.
- Topic 606 was adopted effective February 1, 2018 using full retrospective application. It changed the timing of some revenue recognition and required qualifying customer acquisition commissions to be capitalized and amortized over a three-year benefit period. Comparisons in the filing are adjusted accordingly.
- The Q3 effective tax rate was 5.3%, versus 20.4% a year earlier, reflecting the lower federal rate under the Tax Act, R&D credits and excess tax benefits from equity compensation. Management expected to recognize an additional tax-credit benefit in Q4; Tax Act estimates remained subject to change.
- Material litigation remains unresolved. In the IQVIA case, the court denied IQVIA’s motion to dismiss Veeva’s antitrust counterclaims; discovery was underway and Veeva could not estimate any potential loss. Medidata litigation was also in discovery, with no trial date stated. Veeva said it believed both opponents’ claims lacked merit.
- Key business risks include competition and adoption of newer products, customer renewals and concentration, cybersecurity and data privacy, dependence on third-party hosting and Salesforce for CRM, foreign-exchange exposure, and the costs and uncertainty of litigation. A 100-basis-point interest-rate increase was estimated to reduce investment portfolio market value by $3.4 million.
Important facts for investors to verify
- Whether Vault’s faster growth and margin contribution continue, and whether Commercial Cloud renewals and expansion remain strong.
- Q4 and full-year performance against management’s qualitative expectations, especially the anticipated gross-margin dip and substantially lower Q4 operating cash flow.
- Progress and potential financial impact of the IQVIA, Medidata and California non-compete proceedings; the filing gives no estimable loss range for the principal cases.
- Salesforce minimum commitments and whether usage will satisfy the contractual thresholds without significant true-up payments.
- The effects of stock-based compensation, the Tax Act and Topic 606 on reported profitability and comparability; review GAAP results alongside the company’s non-GAAP measures.