Veeva Systems Inc. — Q3 FY2017 Form 10-Q
Reporting period: Quarter and nine months ended October 31, 2016; fiscal year ends January 31. Amounts below are in U.S. dollars. Veeva provides industry cloud software and data solutions, primarily to life sciences companies.
Financial performance
| Metric | Q3 FY2017 | Q3 FY2016 | Nine months FY2017 | Nine months FY2016 |
|---|---|---|---|---|
| Subscription revenue | $113.6 million | $81.7 million | $314.8 million | $225.9 million |
| Professional services and other revenue | $29.2 million | $25.2 million | $79.1 million | $69.0 million |
| Total revenue | $142.8 million | $106.9 million | $393.9 million | $295.0 million |
| Gross profit / margin | $98.9 million / 69.2% | $69.9 million / 65.4% | $266.7 million / 67.7% | $192.5 million / 65.2% |
| Operating income / margin | $33.8 million / 23.6% | $20.1 million / 18.8% | $75.4 million / 19.2% | $63.4 million / 21.5% |
| Net income | $21.6 million | $10.5 million | $47.1 million | $36.9 million |
| Diluted EPS | $0.15 | $0.07 | $0.32 | $0.25 |
| Operating cash flow | $25.0 million | $19.7 million | $146.1 million | $76.7 million |
- Q3 total revenue grew 34% year over year; subscription revenue rose 39%, while professional services and other revenue rose 16%. Subscription services represented about 80% of revenue, versus 76% a year earlier.
- Nine-month revenue grew 34%; subscription revenue grew 39%. Management attributed subscription growth mainly to orders placed after October 31, 2015, including Zinc Ahead, and expanded deployments and additional products sold to existing customers.
- Q3 gross margin improved to 69.2%, helped by a greater subscription mix, growth in Vault, Network and newer CRM applications, and unusually high professional-services gross profit. Management said the quarter’s professional-services margin was not expected to recur. Nine-month operating margin declined from 21.5% to 19.2% as operating expenses grew 48%, faster than revenue.
Liquidity, balance sheet and cash flows
- At October 31, 2016, cash and cash equivalents were $206.1 million and short-term investments were $304.7 million, totaling $510.8 million. Current assets were $589.8 million and current liabilities $167.6 million. No borrowings or debt are reported on the presented balance sheet.
- Cash and short-term investments increased from $346.2 million at January 31, 2016. Nine-month operating cash flow of $146.1 million was partly offset by $96.5 million of investing outflows, primarily net investment purchases, and included $24.2 million of financing inflows.
- Management said operating cash flow for the first nine months included the vast majority expected for the remainder of the fiscal year, and anticipated minimal operating cash flow in Q4 due to billing and collection seasonality. It expected $7–8 million of headquarters-related capital expenditures over the next three quarters.
- Management believed available cash, investments and operating cash generation would meet working-capital and capital-expenditure needs for at least 12 months. Of the liquidity total, $21.6 million of cash and equivalents was held outside the U.S. and designated indefinitely reinvested.
Changes, outlook and notable risks
- Growth in revenue and earnings was strong year over year, but research and development and sales and marketing spending rose substantially as Veeva expanded product development, sales capacity and headcount. Management expected operating expenses to continue increasing and said this could pressure margins; it also expected revenue growth rates to decline over time.
- Management expected subscription services to become a larger share of revenue and said subscription margins could benefit as Vault and other higher-margin offerings grow. It also expected subscription-service costs and professional-services costs to rise in absolute dollars.
- The filing provides no specific numerical revenue or earnings guidance for the next quarter or full year. Management cautioned that deferred revenue and calculated billings are not reliable stand-alone indicators of future revenue because billing frequency, coterminus orders and renewal-date changes affect them.
- Veeva’s Salesforce agreement requires at least $500 million of aggregate orders through September 2025. Remaining minimum commitments were $367.1 million, including potential true-up payments; the filing lists $5.2 million due within one year and $361.9 million due after three years.
- A May 2016 Salesforce outage affected 38 Veeva CRM customers for up to 21 hours. The company reported immaterial service credits claimed and issued, and did not expect material future claims; it disclosed that some customers may have had up to four hours of transactional data not restored.
- Key risks include dependence on Salesforce for core CRM hosting and platform functionality, competition and customer renewal/expansion, security and service availability, regulation and data privacy, foreign exchange exposure, and successful adoption and integration of newer products and Zinc Ahead. A 100-basis-point increase in interest rates was estimated to reduce investment-portfolio market value by $2.3 million.
- The company disclosed a shareholder Section 16(b) action seeking alleged short-swing trading profits from third parties; the court had not ruled on a motion to dismiss. Management did not believe the company was party to proceedings expected to have a material adverse effect. The May 2016 material weakness in controls over acquired-intangible valuation inputs was reported as remediated by July 31, 2016; disclosure controls were deemed effective at October 31.
- In September 2016, Veeva entered into product and internal-use arrangements with Zoom Video Communications. Fees were described as immaterial; Veeva disclosed board relationships with Zoom and said the arrangements were reviewed and approved by its Audit Committee.
Investor verification points
- Track subscription growth, renewal and expansion trends, and the shift in revenue mix toward Vault, Network, data products and other offerings beyond core CRM.
- Assess whether gross-margin improvement is sustainable given management’s warning that Q3 professional-services margins were unusually high, and monitor expense growth against revenue growth.
- Review operating cash-flow seasonality, deferred-revenue movements and the timing of customer billings; do not treat deferred revenue or calculated billings as direct revenue forecasts.
- Monitor the Salesforce minimum-spend commitment, platform dependence, service reliability and any customer claims or data-restoration impacts from the May outage.
- Follow Zinc Ahead customer conversion and integration, the outcome of the pending litigation, and execution of international privacy, regulatory and security requirements.