Veeva Systems Inc. — FY2018 Form 10-K
Reporting period: Fiscal year ended January 31, 2018; filed March 29, 2018. Figures below are in U.S. dollars. This annual filing includes fourth-quarter results, but is not a standalone quarterly filing.
Business context
Veeva provides cloud software, data and services, primarily to life sciences companies. Its offerings span commercial CRM and data products and Veeva Vault content-management applications for commercial and R&D workflows. The company reported 625 customers at year-end, up from 517, and employed 2,171 people.
Financial performance and liquidity
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue | $685.6 million | $544.0 million |
| Subscription services revenue | $554.4 million | $434.3 million |
| Professional services and other revenue | $131.1 million | $109.7 million |
| Gross profit / margin | $474.1 million / 69.2% | $370.4 million / 68.1% |
| Operating income / margin | $150.8 million / 22.0% | $108.0 million / 19.8% |
| Net income | $142.0 million | $68.8 million |
| Diluted EPS | $0.92 | $0.47 |
| Operating cash flow | $233.4 million | $144.0 million |
- Revenue grew 26%; subscription revenue grew 28%. Subscription services represented 81% of revenue, versus 80% the prior year.
- Veeva Commercial Cloud contributed 61% of total revenue; Vault subscription revenue grew by $71.6 million year over year, compared with $48.5 million growth in Commercial Cloud subscription revenue.
- Cash and cash equivalents were $320.2 million and short-term investments were $441.8 million at year-end, totaling $762.0 million. Working capital was $693.5 million. The filing reports no outstanding debt in the presented balance sheet.
- Net cash used in investing was $154.7 million, primarily reflecting net purchases of marketable securities and capital spending. Net cash from financing was $20.8 million, mainly from employee option exercises.
- Fourth-quarter revenue was $184.9 million, operating income $34.9 million and net income $33.7 million; the prior-year quarter recorded $150.2 million, $32.5 million and $21.7 million, respectively.
Changes versus the prior year
- Total revenue growth slowed to 26% from 33%; subscription revenue growth slowed to 28% from 37%. Management expects revenue growth rates to decline further.
- Gross margin increased to 69.2% from 68.1%, reflecting a higher subscription-revenue mix and growth in Vault and other products with comparatively higher subscription margins.
- Operating income rose, while operating expenses increased 23% to $323.3 million. R&D spending increased 36% to $132.1 million as the company expanded product development.
- Net income increased substantially, but the comparison was materially affected by tax accounting: adoption of ASU 2016-09 generated $45.8 million of excess stock-compensation tax benefits in FY2018 and lowered the effective tax rate to 10.5% from 37.2%. The Tax Act’s reported current-year impact was described as immaterial and provisional.
- Subscription revenue retention was 121%, down from 127%; this measure includes renewals, customer expansion, product additions and pricing changes.
Outlook, risks and unusual items
- Management expected FY2019 gross margin to increase slightly, supported by Vault growth, while operating expenses were expected to rise in absolute dollars and slightly as a percentage of revenue in the near term. It also anticipated continued investment and revenue growth deceleration; the filing does not provide a clear numerical revenue forecast in the text provided.
- The company was migrating infrastructure to Amazon Web Services, with migration-related duplicate costs expected through the quarter ending July 31, 2019. Salesforce.com remains a key platform and hosting provider for CRM products.
- Veeva had a $500 million minimum-order commitment to Salesforce.com through September 1, 2025. The filing reported $285.8 million of future non-cancelable minimum payments as of January 31, 2018, including possible true-up obligations.
- Material risks include security or service interruptions, reliance on third-party infrastructure and data providers, intensifying competition, customer concentration and renewal/pricing pressure, regulatory and privacy changes including GDPR, and adoption of newer Vault products and expansion outside life sciences. The top 10 customers accounted for 42% of revenue; no single customer exceeded 10%.
- Veeva and IQVIA were litigating trade-secret, antitrust and related claims; Veeva stated it could not meaningfully estimate potential loss, if any. Medidata also asserted claims against Veeva, which the company denied. Legal expenses increased, and management expected significant ongoing litigation-related costs.
- Topic 606 was scheduled for adoption beginning February 1, 2018 using the full retrospective method. It changes revenue timing for certain multiyear contracts and capitalizes and amortizes qualifying sales commissions; the filing provided restated historical examples showing higher revenue and operating income under the new standard.
- The independent auditor gave unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective.
Most important facts for investors to verify
- How revenue growth and subscription retention evolve as Commercial Cloud matures and Vault becomes a larger part of the business.
- The FY2019 effect of Topic 606 on reported revenue, deferred revenue, commissions and operating margins, and how reported results compare with the filing’s adjusted historical figures.
- Whether AWS migration proceeds without service disruption or costs beyond the expected transition period, and whether Salesforce.com commitments remain aligned with CRM usage.
- Developments, potential costs and outcomes in the IQVIA and Medidata litigation, for which the filing provides no estimable loss range.
- The sustainability of FY2018 earnings growth after separating the $45.8 million stock-compensation tax benefit from operating performance.