Veeva Systems Inc. — Form 10-Q Summary
Business context and reporting period
Veeva provides cloud software, data and services primarily to the life sciences industry, including Commercial Cloud and Vault products. This fiscal second-quarter report covers the three and six months ended July 31, 2017; comparisons are with the corresponding 2016 periods. Dollar amounts below are in millions unless otherwise stated.
Financial performance and liquidity
- Revenue: Q2 revenue was $166.6, up 27% year over year; subscription services revenue was $134.3 (+28%) and professional services and other revenue was $32.2 (+23%). For the first six months, revenue was $324.5 (+29%), including subscription services of $261.6 (+30%).
- Profit and margins: Q2 gross profit was $116.2, with a 69.7% gross margin, versus 67.9% a year earlier. Operating income was $36.9 (22.1% margin), compared with $23.8 (18.1%). Net income was $37.8, versus $13.0; diluted EPS was $0.25, versus $0.09. Six-month net income was $73.9, versus $25.5, and diluted EPS was $0.48, versus $0.17.
- Cash flow: Operating cash flow was $57.6 in Q2 and $199.8 for six months, compared with $11.7 and $121.1, respectively, in 2016. Six-month cash generation benefited from collections, including early collection of July invoices. Adoption of stock-compensation guidance increased reported operating cash flow by $14.8 in Q2 and $28.7 for six months, with corresponding reductions to financing cash flow.
- Cash and liquidity: At July 31, cash and cash equivalents were $409.2 and short-term investments were $315.4, totaling $724.7. Current assets were $833.4 and current liabilities were $255.6. Management said existing cash, investments and operating cash flows should meet working-capital and capital-expenditure needs for at least 12 months.
- Debt and obligations: The balance sheet presents no debt balance. Total liabilities were $269.3, including $222.7 of current deferred revenue. The company disclosed $319.5 of remaining minimum Salesforce purchase commitments through September 2025 and $16.6 of operating lease obligations.
Material changes versus the prior comparable period
- Subscription growth was driven by both Vault and Commercial Cloud. Q2 subscription revenue growth included $17.5 from Vault and $11.6 from Commercial Cloud; first-half growth included $34.5 and $25.9, respectively.
- Subscription services rose to 81% of revenue from 80%. Higher subscription mix and growth in Vault, Network and newer applications helped lift gross margin by about two percentage points in both Q2 and the first half.
- Operating expenses increased 21% in Q2 to $79.3, led by research and development growth of 39%, primarily reflecting higher headcount. Despite this, operating margin improved to 22.1% from 18.1%.
- Reported tax rates fell to 4.8% in Q2 and 4.9% for six months, from 42.3% and 40.8%. The principal driver was $14.8 and $28.7, respectively, of discrete excess tax benefits from adopting ASU 2016-09; these rates should not be read as a normalized tax outlook.
Outlook, commentary, risks and unusual items
- Management expects revenue and subscription revenue growth rates to decline over time. It expects operating expenses to rise in absolute dollars and as a percentage of revenue in the remaining two fiscal-year quarters, reducing operating margin, particularly as seasonal fourth-quarter expenses increase. No specific numeric revenue or earnings guidance is provided in this filing.
- Management expects subscription revenue to become a larger share of revenue. It also anticipates near-term increases in subscription delivery costs and temporary duplicate infrastructure costs during migration of more services to Amazon Web Services.
- Key business risks include competition and adoption of newer products, renewal and expansion of customer subscriptions, reliance on Salesforce technology and minimum purchase commitments, service or security disruptions at third-party infrastructure providers, regulatory and data-privacy requirements, and foreign-currency volatility.
- Two significant disputes remain unresolved. IMS alleges trade-secret misuse and other claims; Veeva’s counterclaims seek more than $200 million in damages and injunctive relief. Medidata’s claims include alleged trade-secret misuse and contract interference; the court denied Veeva’s motion to compel arbitration, and Veeva appealed. Veeva said it could not reasonably estimate potential losses in either matter and disputes the allegations against it.
- Other notable items: Veeva reported $2.8 of realized foreign-currency hedging losses for the first half, while Q2 other income included foreign-currency gains and higher investment income. The filing also says the new revenue standard, effective for Veeva beginning February 1, 2018, may change commission-cost accounting and the timing or allocation of some revenue; the impact was still under evaluation.
Important facts for investors to verify
- Whether subscription growth, retention and adoption of Vault and other newer products can offset expected deceleration in overall growth and maturity in core CRM.
- How much of reported earnings and cash-flow improvement reflects recurring operations versus the discrete stock-compensation tax benefits and timing of customer collections.
- Whether the planned AWS migration proceeds without service disruption or material duplicate infrastructure costs, and how Salesforce commitments compare with actual usage over time.
- Developments, potential costs and outcomes in the IMS and Medidata litigation, for which the company could not estimate a loss range.
- The eventual effects of revenue-standard adoption, rising investment and operating costs, currency movements, and customer renewal or pricing pressure on margins and cash generation.