Veeva Systems Inc. — Q2 FY2015 Form 10-Q
Reporting period: Quarter and six months ended July 31, 2014; fiscal year ends January 31. Unless otherwise noted, financial amounts are in millions of U.S. dollars.
Business context
Veeva sells cloud software and related services to the life sciences industry. Veeva CRM remained its established core offering; Veeva Vault and Veeva Network were newer products. Management said Vault and Network together exceeded 10% of Q2 revenue and expected their share to grow.
Financial performance
| Metric | Q2 FY2015 | Q2 FY2014 | Six months FY2015 | Six months FY2014 |
|---|---|---|---|---|
| Revenue | $75.7 | $49.6 | $142.4 | $92.4 |
| Subscription revenue | $56.6 | $34.1 | $105.1 | $62.0 |
| Professional services and other | $19.1 | $15.5 | $37.3 | $30.4 |
| Gross profit | $47.5 | $30.4 | $88.3 | $55.5 |
| Operating income | $16.8 | $9.8 | $29.3 | $18.0 |
| Net income | $9.6 | $6.0 | $16.8 | $10.8 |
| Operating cash flow | $16.6 | $7.2 | $34.7 | $20.3 |
- Q2 revenue rose 53% year over year; subscription revenue grew 66%. For the six months, revenue increased 54% and subscription revenue 70%.
- Gross margin was 62.9% in Q2, up from 61.4%; six-month gross margin was 62.0%, up from 60.1%. Operating margin rose to 22.3% from 19.9% in Q2 and to 20.6% from 19.5% for the six months.
- Subscription revenue represented 75% of Q2 revenue, versus 69% a year earlier. Management attributed growth primarily to broader deployments at existing customers, new customers, and adoption of newer products. Most of the Q2 subscription-revenue increase came from orders placed after July 31, 2013.
- Basic and diluted EPS attributable to common stockholders were each $0.07 for Q2, versus $0.05 basic and $0.03 diluted a year earlier. Six-month EPS was $0.13 basic and $0.12 diluted, versus $0.09 and $0.06.
Balance sheet, liquidity and cash flow
- At July 31, cash and cash equivalents were $140.1 and short-term investments were $210.1, totaling $350.2. Current assets were $423.0; current liabilities were $103.3. Deferred revenue was $85.3, up from $67.4 at January 31.
- Total liabilities were $106.9 and stockholders’ equity was $357.4. The filing reports no borrowings or debt balance; debt is not identified as a material funding source.
- Six-month operating cash flow of $34.7 was supported in part by a $17.9 increase in deferred revenue. Investing cash outflow was $210.8, largely reflecting $185.3 of net investment purchases and the headquarters property purchase. Financing cash inflow was $53.7, including $34.5 net proceeds from the follow-on offering.
- Cash and cash equivalents fell by $122.4 during the six months, while cash plus short-term investments increased to $350.2 from $288.1 at January 31, primarily reflecting the conversion of cash into investments and financing proceeds.
- Management said existing cash, investments and operating cash generation should cover working capital and capital expenditure needs for at least the next 12 months.
Changes, outlook and notable items
- Cost of revenue and operating expenses increased with growth and hiring. Stock-based compensation was $3.4 in Q2 and $6.7 for the six months, versus $1.2 and $2.0, respectively, in the prior-year periods.
- The effective tax rate increased to 42.6% for Q2 and 42.5% for the six months, from 38.6% and 37.9%. The filing cites expiration of the federal R&D tax credit and a lower domestic production activities deduction amid increased stock-option activity.
- Management expected operating expenses to grow in absolute dollars and as a percentage of revenue in the near term, potentially modestly reducing operating margin. It also expected professional-services costs to rise as it invested in newer products and geographies. No specific revenue or earnings guidance is provided in the filing.
- On July 22, Veeva bought land and a building for its future Pleasanton headquarters for $24.0; it expected to occupy the site in spring 2015.
- The Salesforce reseller agreement was extended through September 1, 2025, with $500.0 million of minimum order commitments over the term. At July 31, future non-cancellable minimum payments were $486.2, mostly due after five years. Failure to meet specified cumulative order thresholds could require true-up payments.
- Prolifiq litigation alleges patent infringement and trade-secret misappropriation relating to Veeva CRM Approved Email. The court held several asserted patent claims indefinite, but discovery continued and trial was set for May 18, 2015. Veeva said potential losses could not be reasonably estimated.
- Management identified competition, customer renewals and adoption of newer products, rapid growth, data security and service availability, international expansion and foreign-exchange exposure as risks. It also noted dependence on Salesforce for key CRM infrastructure. The company did not hedge foreign-currency exposures.
Key facts for investors to verify
- Whether subscription growth and customer expansion continue, and whether Vault and Network gain adoption without materially weakening margins.
- How the $500.0 million Salesforce minimum commitment compares with expected CRM usage and whether the agreement’s terms or performance create future payment or dependency risks.
- Progress and potential financial exposure in the Prolifiq case, including subsequent court and patent-review developments.
- Whether hiring, stock compensation, public-company costs and headquarters spending affect margins and cash generation as management anticipates.
- Changes in the effective tax rate, customer concentration, renewal and retention trends, and international currency exposure.