Veeva Systems Inc. — FY2017 Form 10-K
Reporting period: Fiscal year ended January 31, 2017. The filing also reports the quarter ended January 31, 2017; “2016 Q4” in the request refers to that fiscal fourth quarter, not the calendar quarter. Amounts below are U.S. dollars.
Business context
Veeva provides cloud software, data and services primarily to the life sciences industry. Its Commercial Cloud includes CRM and related commercial products; Vault serves content, clinical, regulatory and quality functions. The company was expanding Vault into other regulated industries. It had 517 customers at year-end, up from 400; no customer contributed more than 10% of annual revenue.
Financial performance
| Metric | FY2017 | FY2016 | Change |
|---|---|---|---|
| Total revenue | $544.0 million | $409.2 million | +33% |
| Subscription revenue | $434.3 million | $316.3 million | +37% |
| Professional services and other | $109.7 million | $92.9 million | +18% |
| Gross profit / margin | $370.4 million / 68.1% | $267.0 million / 65.2% | Margin +2.9 points |
| Operating income / margin | $108.0 million / 19.8% | $78.6 million / 19.2% | Margin +0.6 points |
| Net income / margin | $68.8 million / 12.6% | $54.5 million / 13.3% | Net income +26%; margin down |
| Diluted EPS | $0.47 | $0.38 | +24% |
| Operating cash flow | $144.0 million | $80.2 million | +$63.9 million |
FY2017 cash flow from investing was an outflow of $96.7 million and financing provided $38.0 million. Year-end cash and cash equivalents were $217.6 million, short-term investments $301.3 million, and working capital $465.1 million. Total liabilities were $264.7 million; the balance sheet reports no borrowings. Cash, cash equivalents and short-term investments totaled $518.9 million. Stock-based compensation was $40.8 million, up from $24.3 million.
For the fiscal fourth quarter ended January 31, 2017, revenue was $150.2 million, operating income $32.5 million and net income $21.7 million. In the corresponding prior-year quarter, those figures were $114.3 million, $15.2 million and $17.6 million, respectively.
Material changes versus prior year
- Subscription revenue grew faster than professional services revenue and increased to 79.8% of total revenue from 77.3%; total revenue growth accelerated to 33% from 31%.
- Gross margin rose to 68.1% from 65.2%, primarily as subscription revenue became a larger share of revenue and subscription margins improved.
- Operating expenses increased 39% to $262.4 million, with R&D up 47% and sales and marketing up 44%, reflecting hiring and product investment.
- Net income grew, but net margin decreased from 13.3% to 12.6%; the effective tax rate rose to 37.2% from 30.7%, partly because the prior year included a Zinc Ahead-related tax benefit.
- Operating cash flow increased substantially, with higher deferred revenue contributing to cash generation. Year-end deferred revenue increased to $213.6 million from $157.4 million.
- FY2017 included a full year of Zinc Ahead revenue, versus only part of the prior year. The acquisition added deferred compensation expense of $2.8 million in FY2017.
Outlook, risks and unusual items
- Management expects total and subscription revenue growth rates to decline in future periods. It expects operating expenses to keep increasing as it invests in product development, sales, services and international expansion; this may pressure operating margin. The filing provides no specific numerical revenue or earnings guidance.
- Commercial Cloud represented approximately 68% of FY2017 total revenue; management notes substantial penetration of its core CRM market and dependence on adoption of newer Vault, data and related products for continued growth.
- Veeva must meet a $500 million minimum order commitment to salesforce.com through September 2025. At January 31, 2017, at least $351.4 million remained payable under the commitment; failure to meet specified cumulative thresholds could require true-up payments. Salesforce also provides platform and hosting services for parts of Veeva CRM.
- A May 2016 salesforce.com outage affected 38 CRM customers, causing up to 21 hours of unavailability; customer credits issued were immaterial. Reliance on third-party hosting, security and service continuity remains a risk.
- Significant litigation was pending with Quintiles IMS, including its trade-secret and other claims and Veeva’s counterclaims seeking more than $200 million in damages and injunctive relief. Veeva said it could not estimate a loss range. Medidata also brought trade-secret and employment-related claims; the company’s motion to compel arbitration was pending. The filing describes additional litigation and defense-cost risks.
- Other risks include customer concentration (top ten customers generated 45% of revenue), competition, regulatory and privacy changes including GDPR, foreign exchange exposure, and dependence on renewals and customer expansion. The company reported a 127% subscription revenue retention rate for FY2017.
- Salesforce minimum purchase commitments and operating leases totaled $364.3 million in disclosed future commitments, including $351.4 million of purchase commitments and $12.9 million of lease obligations.
- Management and the auditor concluded internal control over financial reporting was effective; the financial statements received an unqualified audit opinion.
Most important facts to verify
- Whether subscription growth and customer expansion can offset anticipated deceleration and the maturity of core CRM penetration.
- How much of future growth comes from Vault and newer offerings, including adoption beyond life sciences and conversion of Zinc Ahead customers.
- The schedule and economics of the salesforce.com commitment, remaining minimum purchases, and available alternatives to its platform.
- Developments, potential costs and business effects of the Quintiles IMS and Medidata litigation; the filing does not provide a clear estimate of possible losses.
- Cash-flow sustainability, the effect of deferred revenue and billing timing, and the impact of rising operating costs and stock-based compensation on margins.
- Exposure to privacy, cybersecurity, service outages, currency movements and changes in life sciences regulation.