Veeva Systems Inc. — Q3 FY2014 Form 10-Q
Reporting period: Quarter and nine months ended October 31, 2013; comparisons are with the periods ended October 31, 2012. Amounts are in U.S. dollars; financial statement figures are in millions unless noted.
Business context
Veeva provides cloud-based software for the life sciences industry, including Veeva CRM, Veeva Vault and the newly introduced Veeva Network. The company completed its IPO on October 21, 2013 and acquired healthcare-data provider AdvantageMS in June 2013.
Financial performance and liquidity
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $55.0 | $35.8 | $147.3 | $89.8 |
| Subscription revenue | $38.9 | $20.0 | $100.9 | $49.2 |
| Professional services and other revenue | $16.0 | $15.8 | $46.4 | $40.6 |
| Gross profit | $33.6 | $19.9 | $89.1 | $49.5 |
| Operating income | $10.0 | $8.8 | $28.0 | $20.7 |
| Net income | $6.5 | $5.7 | $17.4 | $13.1 |
| Operating cash flow | $5.3 | $9.7 | $25.5 | $23.8 |
- Q3 revenue rose 54% year over year; subscription revenue grew 95%. Nine-month revenue rose 64%, with subscription revenue up 105%.
- Gross margin was 61.1% in Q3 versus 55.7%; nine-month gross margin was 60.4% versus 55.1%. The higher subscription share, which carries better margins than services, was the principal driver.
- Operating margin declined to 18.1% in Q3 from 24.5%, and to 19.0% for the nine months from 23.0%, as operating expenses expanded. Net margin was 11.8% for both 2013 periods, versus 16.0% in Q3 2012 and 14.5% for the prior-year nine months.
- Cash, cash equivalents and short-term investments totaled $273.4 at October 31, 2013, including $257.1 in cash and equivalents. Total liabilities were $74.6; the balance sheet reports no borrowings or other debt. Management said available liquidity and operating cash generation should cover working-capital and capital-expenditure needs for at least 12 months.
- Nine-month investing cash use was $16.7, including $12.1 for AdvantageMS; financing provided $216.4, primarily from the IPO. Q3 operating cash flow was lower year over year, while nine-month operating cash flow increased modestly.
Material changes and unusual items
- The IPO generated approximately $215.7 million of net cash proceeds received by October 31, before payment of some offering expenses. The offering price was $20 per share. Existing preferred and common shares converted to Class B common stock at the IPO; the company now has dual-class shares.
- Operating expenses increased materially year over year: Q3 research and development rose 83%, sales and marketing 116%, and general and administrative 148%. Management attributed much of the increases to hiring, with additional public-company and marketing costs.
- AdvantageMS was acquired for $10.5 million cash consideration plus a roughly $1.9 million working-capital adjustment. The preliminary allocation included $4.7 million of goodwill and $7.4 million of acquired intangible assets; the acquisition’s operating results were not material.
- Q3 diluted EPS was $0.05 versus $0.03 a year earlier; nine-month diluted EPS was $0.13 versus $0.08. IPO-related conversion of preferred shares and the two-class share structure substantially affect weighted-average share counts and EPS presentation.
Outlook, risks and contingencies
- No specific revenue or earnings guidance was provided. Management expects operating expenses and subscription-service costs to rise in absolute dollars near term, with continued investment in product development, sales, international expansion, hosting and public-company capabilities. It expects subscription revenue to represent a growing proportion of revenue and professional-services mix to decline over time.
- Management identified continued adoption and renewals, expansion into new customer segments, and acceptance of Vault, Approved Email and Network as important growth factors. It also cautioned that revenue growth may slow and investment could pressure margins.
- Veeva depends on Salesforce for key CRM platform and hosting services under an agreement expiring in September 2015, with no automatic renewal. The company had satisfied its minimum fee commitment as of October 31, 2013.
- Prolifiq filed a patent-infringement suit alleging infringement by Veeva CRM Approved Email and seeking unspecified damages, costs and injunctive relief. Veeva said the outcome and potential loss could not be estimated; Approved Email represented a very small portion of revenue.
- Other risks include customer concentration, competition, service availability and security, regulatory and privacy compliance, foreign-currency exposure, and execution of rapid growth. The company said it did not hedge foreign-currency exposures and that a 100-basis-point interest-rate move was not expected to materially affect results.
- Class B shares carry ten votes per share; Class B holders had approximately 98.6% of voting power at October 31. IPO lock-ups were scheduled to expire April 14, 2014, subject to applicable restrictions.
Key facts for investors to verify
- Whether subscription growth and customer expansion continue to offset slower professional-services growth and rising operating costs.
- Renewal, customer concentration and adoption trends, particularly for newer products and international markets.
- Salesforce agreement renewal terms and contingency plans for the CRM platform before September 2015.
- Developments and any financial exposure in the Prolifiq litigation.
- IPO-related dilution, option overhang, dual-class voting control and the effect of lock-up expirations.
- The timing and integration benefits of AdvantageMS, and the final purchase-price allocation.