Veeva Systems Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2017, three months ended April 30, 2016. Unless otherwise stated, amounts are in U.S. dollars.
Business context
Veeva provides cloud software and data solutions primarily to life sciences companies. Subscription services accounted for 80% of quarterly revenue. Veeva CRM remained a major business, while the company was expanding Vault, Network, data offerings and newer CRM applications. It also planned to offer certain Vault applications to regulated industries adjacent to life sciences.
Financial performance and liquidity
| Metric | Q1 FY2017 | Q1 FY2016 | Change |
|---|---|---|---|
| Total revenue | $119.8 million | $89.9 million | +33% |
| Subscription revenue | $96.0 million | $68.9 million | +39% |
| Professional services and other revenue | $23.7 million | $21.0 million | +13% |
| Gross profit / gross margin | $78.7 million / 65.6% | $57.9 million / 64.4% | Margin +1.2 percentage points |
| Operating income / margin | $17.8 million / 14.8% | $20.9 million / 23.3% | Income declined |
| Net income / net margin | $12.5 million / 10.4% | $13.0 million / 14.4% | Income declined |
| Diluted EPS | $0.09 | $0.09 | Flat |
| Operating cash flow | $109.4 million | $41.8 million | Increased |
Revenue growth reflected customer expansion and new customer activity; management attributed 92% of the increase in subscription revenue to orders placed after April 30, 2015, including Zinc Ahead. Subscription revenue rose to 80% of revenue from 77%, supporting higher overall gross margin. Operating expenses rose 64% to $60.9 million, led by research and development (+70%) and sales and marketing (+72%), contributing to lower operating and net margins. Stock-based compensation was $8.1 million, up from $4.8 million.
Operating cash flow benefited substantially from a $63.2 million reduction in accounts receivable and a $23.4 million increase in deferred revenue, alongside noncash expenses. Management said the quarter included most operating cash flow expected for the remainder of FY2017 and anticipated minimal operating cash flow in subsequent quarters. Investing cash flow was positive $0.1 million; financing cash flow was positive $4.2 million.
At April 30, 2016, cash and cash equivalents were $245.9 million and short-term investments were $211.5 million, totaling $457.4 million. Total assets were $751.8 million and total liabilities $221.2 million. The filing reports no debt balance. Management believed available cash, investments and operating cash generation would meet working-capital and capital-expenditure needs for at least 12 months.
Material changes and notable items
- Operating income fell 15% year over year despite 33% revenue growth; operating margin contracted from 23.3% to 14.8%, primarily as the company increased staffing and growth investment.
- Other income rose to $2.7 million from $0.8 million, primarily reflecting a $1.8 million increase in foreign currency gains. The company does not currently hedge foreign currency exposures.
- The effective tax rate declined to 39.1% from 40.1%, mainly due to the permanent reenactment of the U.S. research and development tax credit.
- Veeva completed its $119.9 million all-cash Zinc Ahead acquisition in September 2015. It expects to migrate Zinc Ahead customers to Vault PromoMats; $9.6 million of employee-related consideration is treated as deferred compensation, subject to continued employment.
- Veeva reported a material weakness in controls over review of inputs used to value acquired intangible assets. Management said the financial statements fairly present the periods shown and described remediation efforts; disclosure controls were assessed as ineffective.
- A May 2016 Salesforce service outage affected 38 Veeva CRM customers for up to 21 hours. Veeva said service credits were not expected to be material to the quarter ending July 31, 2016, but disclosed possible loss of up to four hours of transactional data for certain customers.
- Commitments included at least $396.7 million of remaining fees under the Salesforce agreement, which has $500 million of minimum order commitments through September 2025, and $12.6 million in operating lease obligations. Total disclosed purchase commitments and lease obligations were $410.1 million.
Outlook, risks and contingencies
Management expected revenue growth rates to decline slightly over time and operating expenses to continue rising as it invests in product development, sales, services, international expansion and infrastructure; these investments could pressure operating margins. It expected subscription costs to rise in absolute dollars near term and professional-services costs to increase as personnel are added. No specific numeric revenue or earnings guidance is provided in the supplied filing text.
Key risks include reliance on life sciences customers and the Salesforce platform, competitive pressure and customer renewal or expansion trends, execution and retention risks integrating Zinc Ahead, service availability and data security, foreign-exchange volatility, complex privacy and regulatory requirements, and the disclosed material weakness. The filing describes a Section 16(b) shareholder action seeking alleged short-swing trading profits from third parties; Veeva is named as a nominal defendant and does not face a damages claim in that action. Management did not identify legal proceedings expected to have a material adverse effect, while noting outcomes cannot be assured.
Veeva’s non-GAAP net income was $21.2 million versus $17.1 million in the prior-year quarter, and non-GAAP diluted EPS was $0.15 versus $0.12. These measures exclude, among other items, stock-based compensation, acquired-intangible amortization and Zinc Ahead deferred compensation; they supplement, and are not substitutes for, GAAP results.
Key facts for investors to verify
- Whether subscription growth and customer expansion continue, and how much growth comes from CRM versus newer Vault, Network and data products.
- Whether rising operating expenses, stock compensation and acquisition-related amortization continue to weigh on GAAP operating margins and earnings.
- How much of the quarter’s unusually strong operating cash flow was timing-related, given management’s expectation of minimal cash flow in later FY2017 quarters.
- Progress and independent validation of remediation for the acquired-intangible valuation control weakness.
- Customer impact, any service-credit claims and any confirmed transactional data loss associated with the May Salesforce outage.
- Ability to meet Salesforce minimum commitments and integrate Zinc Ahead while retaining its customers and employees.