Veeva Systems Inc. — Q1 FY2019 Form 10-Q
Reporting period: Three months ended April 30, 2018; comparisons are with the three months ended April 30, 2017. Veeva provides cloud software and data services, primarily to life sciences companies. Unless indicated otherwise, amounts are in U.S. dollars.
Financial performance
| Metric | Q1 FY2019 | Prior-year quarter | Change |
|---|---|---|---|
| Subscription services revenue | $156.0 million | $129.1 million | +21% |
| Professional services and other revenue | $39.5 million | $30.6 million | +29% |
| Total revenue | $195.5 million | $159.8 million | +22% |
| Gross profit / gross margin | $135.4 million / 69.2% | $110.9 million / 69.4% | +22%; margin down 0.2 points |
| Operating income / operating margin | $44.0 million / 22.5% | $38.9 million / 24.3% | +13%; margin down 1.8 points |
| Net income | $44.3 million | $37.0 million | +20% |
| Diluted EPS | $0.29 | $0.24 | +21% |
| Operating cash flow | $150.6 million | $142.2 million | +6% |
Subscription services generated 80% of revenue. Veeva Vault accounted for $18.7 million of subscription revenue growth and Commercial Cloud for $8.2 million. Commercial Cloud contributed approximately 60% of subscription revenue and 56% of total revenue. Professional services growth was weighted toward Vault implementations and deployments.
Balance sheet, cash flow and liquidity
- At April 30, 2018, cash and cash equivalents were $460.2 million and short-term investments were $458.1 million, totaling $918.3 million. Total assets were $1.318 billion and stockholders’ equity was $974.4 million.
- Current assets were $1.103 billion versus current liabilities of $326.2 million. Deferred revenue was $289.6 million.
- The filing reports no debt balance. Management said existing cash, investments and operating cash generation should meet working-capital and capital-expenditure needs for at least the next 12 months.
- Operating cash flow benefited from collections and a $22.7 million increase in deferred revenue; management noted the first fiscal quarter is seasonally strongest for cash inflows and expects cash flow to be substantially lower in subsequent quarters of FY2019.
- Investing activities used $17.6 million, primarily reflecting net purchases of marketable securities. Financing activities provided $7.8 million, principally from employee stock-option exercises.
- Contractual commitments included $268.7 million of minimum payments to Salesforce through September 2025 and $18.8 million of operating lease obligations.
Changes, outlook and notable items
- Operating expenses rose 27% to $91.4 million: R&D increased 31%, sales and marketing 14%, and general and administrative 46%. Stock-based compensation increased to $17.0 million from $11.8 million and was a significant expense.
- Management expects continued investment in personnel, product development, sales capacity and infrastructure; operating expenses are expected to rise in absolute dollars and may increase slightly as a percentage of revenue in the near term. Management expects gross margin to increase slightly in FY2019.
- Management expects revenue and subscription revenue growth rates to decline over time. The filing provides no specific quarterly or full-year revenue or earnings guidance in the supplied text.
- As of April 30, remaining performance obligations for subscription services were approximately $488.6 million, of which $395.2 million was expected to be recognized over the next 12 months.
- Veeva adopted ASC 606 retrospectively on February 1, 2018. The standard changed revenue timing for certain arrangements and required capitalization and amortization of contract-acquisition commissions. Prior-period figures are presented as adjusted; the filing states that the adoption increased prior-year-quarter revenue by $1.9 million and net income by $1.0 million.
- The effective tax rate was 3.9%, down from 6.2%, primarily reflecting the lower federal tax rate under the Tax Act, partly offset by lower excess tax benefits from equity compensation. Management’s Tax Act estimates remained provisional. IRS and employment-tax audit settlements were expected to have immaterial financial-statement effects.
- Material litigation included IQVIA’s trade-secret and related claims and Veeva’s antitrust counterclaims, and Medidata’s claims concerning alleged misuse of confidential information. Veeva said it could not estimate potential losses; it denied the allegations and intended to defend itself. A separate California non-compete case was also pending.
- Key risks include competition and adoption of newer products, customer renewals and concentration, reliance on Salesforce and AWS infrastructure, security and privacy obligations, foreign-exchange and interest-rate exposure, and the Salesforce minimum-spend commitment. Management reported effective disclosure controls as of April 30, 2018.
Important facts for investors to verify
- Whether subscription growth, particularly Vault adoption, can offset the expected moderation in overall growth and Commercial Cloud concentration.
- Whether rising R&D, G&A and stock-based compensation constrain operating-margin improvement despite management’s gross-margin outlook.
- How ASC 606 affects revenue, unbilled receivables, deferred revenue and comparability of future periods; management cautions that deferred revenue and calculated billings may not reliably indicate future revenue.
- The progress and potential financial impact of IQVIA, Medidata and California litigation; the filing does not provide a clear estimate of possible losses.
- Performance and continuity of third-party hosting, and Veeva’s ability to meet Salesforce minimum commitments through 2025.