Veeva Systems Inc. — Form 10-Q Summary
Business context and reporting period
Veeva provides cloud software for the life sciences industry, including Veeva CRM, Veeva Vault and Veeva Network. This unaudited quarterly report covers the three months ended April 30, 2014, the first quarter of fiscal 2015, and compares results with the three months ended April 30, 2013. Unless otherwise indicated, financial amounts below are in U.S. dollars.
Financial performance and liquidity
| Metric | Quarter ended Apr. 30, 2014 | Quarter ended Apr. 30, 2013 | Change |
|---|---|---|---|
| Subscription revenue | $48.5 million | $27.9 million | +74% |
| Professional services and other revenue | $18.2 million | $14.9 million | +23% |
| Total revenue | $66.7 million | $42.8 million | +56% |
| Gross profit / margin | $40.8 million / 61.1% | $25.1 million / 58.6% | Margin +2.5 pts |
| Operating income / margin | $12.6 million / 18.9% | $8.2 million / 19.2% | Margin -0.3 pts |
| Net income / margin | $7.2 million / 10.9% | $4.8 million / 11.4% | Net income +49% |
| Operating cash flow | $18.1 million | $13.0 million | +$5.1 million |
Basic and diluted earnings per share attributable to common stockholders were $0.06 and $0.05, respectively, versus $0.04 and $0.03 a year earlier. The effective tax rate rose to 42.4% from 36.9%, primarily due to expiration of the federal R&D tax credit and a reduced domestic production activities deduction associated with increased stock-option activity.
At April 30, 2014, cash and cash equivalents were $188.9 million and short-term investments were $156.6 million, totaling $345.5 million; total current assets were $418.8 million and current liabilities were $101.2 million. The company reported no borrowings in the presented balance sheet. It said existing cash, investments and operating cash generation should cover working capital and capital expenditure needs for at least 12 months.
Cash and cash equivalents declined $73.6 million during the quarter, principally because of $131.2 million of net purchases of short-term investments. Investing cash outflow was $131.8 million; financing cash inflow was $40.1 million, including $35.0 million of net proceeds from the company’s follow-on offering. Cash flow from operations benefited from net income, stock-based compensation, a $7.5 million increase in deferred revenue and higher accrued expenses.
Material changes versus the prior comparable period
- Subscription revenue grew substantially faster than professional services revenue, rising to 72.7% of total revenue from 65.3%. Management attributed growth to customer expansion, additional users and solutions, and new customers. It said 96% of subscription-revenue growth came from orders placed after April 30, 2013.
- Revenue from Veeva Vault and Veeva Network together exceeded 10% of total revenue in the quarter; the company expected their share to increase. Management noted Veeva CRM and related products had generated about 95% of subscription revenue in fiscal 2014.
- Gross margin improved as subscription services made up a larger revenue share. Operating expenses rose 67% to $28.2 million, reflecting hiring and investment; stock-based compensation increased to $3.3 million from $0.7 million. Net margin declined slightly despite higher net income.
- Short-term investments rose to $156.6 million from $25.6 million at January 31, 2014, reflecting investment of cash balances. The follow-on offering closed March 31: Veeva sold 1.39 million shares and certain stockholders sold 12.41 million shares at $26.35 per share. The company received approximately $35.0 million net; it received no proceeds from selling-stockholder shares.
Outlook, commentary, risks and unusual items
- No quantified revenue or earnings guidance is provided in the supplied filing text. Management expected continued investment in product development, sales and marketing, services and international expansion. It anticipated operating expenses to increase in absolute dollars and near-term operating margin could decline slightly; it also expected subscription revenue mix to rise over time.
- On March 3, 2014, Veeva extended its Salesforce reseller agreement through September 1, 2025 and amended minimum commitments. It must meet $500 million of aggregate orders over the agreement term, with interim and final thresholds; remaining non-cancellable minimum purchase commitments were approximately $496.7 million as of April 30, 2014.
- Prolifiq’s lawsuit alleges patent infringement involving Veeva CRM Approved Email; its April 4, 2014 amended complaint also asserts alleged trade-secret misappropriation. The company said the outcome and any financial impact were uncertain and that potential losses could not be reasonably estimated. The product represented a very minor portion of revenue.
- Other disclosed risks include dependence on Salesforce Platform and third-party data centers; security, privacy and regulatory compliance; customer retention and industry concentration; competition and adoption of newer products; foreign-exchange exposure; and rapid growth and hiring needs. The company did not hedge foreign-currency exposures and said a 100-basis-point interest-rate change would not have a material effect.
- Approximately 88 million shares were expected to become eligible for sale, subject to applicable restrictions, when follow-on offering lock-ups expired on June 16, 2014. The company also disclosed a dual-class structure under which Class B shares carried ten votes per share and holders of those shares held approximately 95.9% of voting power as of April 30.
- The filing reports operating lease obligations of $6.7 million and no material change in internal control over financial reporting during the quarter. Management concluded disclosure controls were effective at a reasonable-assurance level. Veeva did not anticipate paying cash dividends for the foreseeable future.
Important facts for investors to verify
- Whether subscription growth, customer expansion and adoption of Vault and Network continue, and whether the revenue mix supports margins as expected.
- The scale and timing of hiring and stock-based compensation, and their effects on operating margins, dilution and earnings per share.
- Actual usage and economics under the Salesforce agreement, including progress toward its $500 million minimum purchase commitments and exposure to potential true-up payments.
- Developments in the Prolifiq litigation, including any change in claims, potential loss estimates or business impact.
- Cash and investment balances, operating cash generation, customer concentration, and the market effects of shares becoming eligible for sale after lock-up expiration.