Veeva Systems Inc. — Q1 FY2020 Form 10-Q
Reporting period: Three months ended April 30, 2019; comparisons are with the three months ended April 30, 2018 unless otherwise noted. Veeva provides cloud software and data solutions, primarily to the life sciences industry. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q1 FY2020 | Q1 FY2019 | Change |
|---|---|---|---|
| Total revenue | $244.8 million | $195.5 million | +25% |
| Subscription revenue | $198.1 million | $156.0 million | +27% |
| Professional services and other revenue | $46.6 million | $39.5 million | +18% |
| Gross profit / margin | $179.2 million / 73.2% | $135.4 million / 69.2% | Margin +4.0 percentage points |
| Operating income / margin | $71.2 million / 29.0% | $44.0 million / 22.5% | Margin +6.5 percentage points |
| Net income | $73.4 million | $44.3 million | +66% |
| Diluted EPS | $0.47 | $0.29 | — |
| Operating cash flow | $236.3 million | $150.6 million | — |
- Subscription revenue was about 81% of revenue. Vault subscription revenue increased to $92.3 million from $62.9 million; Commercial Cloud subscription revenue rose to $105.8 million from $93.1 million.
- Cash, cash equivalents and short-term investments totaled $1.330 billion at April 30, 2019, versus $1.090 billion at January 31, 2019. Total current assets were $1.538 billion and current liabilities $412.6 million.
- The filing reports no conventional borrowings. Lease liabilities were $19.3 million on the balance sheet following adoption of the new lease standard; the note discloses $17.1 million of operating and $2.2 million of finance lease liabilities.
- Operating cash flow included a $139.5 million decrease in accounts receivable, primarily reflecting customer collections. Investing cash outflow was $41.5 million, mainly net purchases of marketable securities; financing cash inflow was $3.1 million.
Changes versus the prior comparable period
- Revenue growth was led by subscription services, with Vault subscription revenue increasing faster than Commercial Cloud. Management said Vault and newer multichannel CRM applications, which carry higher subscription gross margins than core CRM, contributed to the increase in overall gross margin.
- Operating expenses rose 18% to $108.1 million: research and development increased 21%, sales and marketing 15%, and general and administrative 18%. Management attributed much of the increase to higher headcount; G&A also reflected increased litigation-related legal fees.
- Other income, net increased to $6.2 million from $2.1 million, primarily because of higher interest and other investment income and increased investment accretion. The effective tax rate rose to 5.0% from 3.9%, primarily due to lower proportional excess tax benefits from equity compensation, partly offset by higher tax credits.
- Cash from operations rose year over year, but management cautioned that Q1 is seasonally the strongest cash-inflow quarter due to annual subscription billings and collections.
Outlook, risks and unusual items
- The filing provides no specific quarterly or full-year revenue or earnings guidance. Management expects revenue and subscription revenue growth rates to decline over time, operating expenses to increase as the company invests in growth, and gross margin to increase in FY2020, primarily from Vault growth. It expects future quarterly operating cash flow in FY2020 to be substantially below Q1.
- A new employee equity compensation program began in the quarter. Management expects stock-based compensation to rise in absolute dollars and as a percentage of revenue during FY2020; total Q1 stock-based compensation was $20.8 million, versus $17.0 million a year earlier.
- Veeva adopted Topic 842 leases on February 1, 2019, recognizing right-of-use assets and lease liabilities. The filing reports no material impact on the income statement or cash flows; the retained-earnings transition adjustment was $0.7 million.
- Two significant disputes remain unresolved. IQVIA alleges trade-secret misappropriation and related claims; Veeva disputes the allegations and asserts counterclaims seeking more than $200 million and injunctive relief. Medidata also alleges trade-secret misappropriation and related claims. Veeva says it cannot meaningfully estimate potential losses in either matter and believes the claims lack merit.
- Veeva had a $198.0 million remaining minimum purchase commitment to Salesforce under an agreement ending September 1, 2025. The agreement supports parts of its CRM offering and carries a $500 million total minimum commitment.
- Key risks include competition and customer renewals, reliance on third-party cloud infrastructure and Salesforce for CRM, cybersecurity and privacy obligations, growth and hiring execution, foreign exchange and interest-rate exposure, and ongoing litigation. Management reported disclosure controls were effective as of April 30, 2019.
Important facts for investors to verify
- Whether Vault subscription growth and improved gross margin continue, and whether higher compensation and operating costs temper margin gains.
- How much of Q1 operating cash flow reflects seasonal billing and collections, and whether subsequent-quarter cash generation normalizes as management expects.
- Developments and potential financial exposure in the IQVIA and Medidata cases, including litigation costs and any material changes to the company’s loss estimates.
- Progress toward the remaining Salesforce minimum purchase commitment and the company’s dependence on Salesforce and other third-party hosting providers.
- Future effects of the employee equity program on stock-based compensation, diluted share count and per-share results.