Veeva Systems Inc. — Q3 FY2016 Form 10-Q
Reporting period: Quarter and nine months ended October 31, 2015. Unless stated otherwise, financial amounts below are in millions of dollars. Veeva provides cloud software and data for the life sciences industry.
Financial performance
| Metric | Three months ended Oct. 31, 2015 | Year-over-year change | Nine months ended Oct. 31, 2015 | Year-over-year change |
|---|---|---|---|---|
| Revenue | $106.9 | +28% | $295.0 | +30% |
| Subscription services revenue | $81.7 | +33% | $225.9 | +36% |
| Professional services and other revenue | $25.2 | +12% | $69.0 | +16% |
| Gross profit / gross margin | $69.9 / 65.4% | Margin up from 63.7% | $192.5 / 65.2% | Margin up from 62.6% |
| Operating income / operating margin | $20.1 / 18.8% | Income roughly flat; margin down from 23.8% | $63.4 / 21.5% | Income +29%; margin down from 21.8% |
| Net income / net margin | $10.5 / 9.8% | +2%; margin down from 12.2% | $36.9 / 12.5% | +36%; margin up from 12.0% |
| Diluted GAAP EPS | $0.07 | Unchanged | $0.25 | Up from $0.19 |
| Cash from operating activities | $19.7 | Down from $34.3 | $76.7 | Up from $69.0 |
Financial position and liquidity
- At October 31, cash and cash equivalents were $108.6 and short-term investments were $230.9, totaling $339.5. The comparable total at January 31, 2015 was $397.9.
- Current assets were $427.3 and current liabilities $136.4. Total assets were $625.0 and stockholders’ equity $474.0.
- The balance sheet reports no debt. Operating cash flow for the nine-month period funded operations, while investing cash flow included acquisition spending and capital expenditures.
- Nine-month investing cash outflow was $110.6, including $126.2 net cash used for acquisitions and $19.0 for property and equipment. Financing cash inflow was $13.1.
Material changes and notable items
- Subscription services rose to 76% of quarterly revenue from 73% a year earlier. Management attributed growth largely to newer orders from existing and new customers; for Q3, 97% of subscription growth excluding Zinc Ahead came from orders placed after October 31, 2014.
- Gross margin improved as subscription revenue represented a larger share of sales and newer Vault, Network and commercial applications had a somewhat higher gross-margin profile. Operating expenses grew faster than quarterly revenue: total operating expenses rose 49% to $49.8, including R&D up 66%, sales and marketing up 43%, and G&A up 37%.
- Stock-based compensation was $6.7 for Q3 and $17.1 for nine months, versus $3.6 and $10.2, respectively, in the prior-year periods. Non-GAAP measures exclude stock compensation and other items; the filing cautions that these measures are not substitutes for GAAP results.
- Veeva acquired Zinc Ahead on September 29, 2015 for approximately $119.6 in cash. The agreement also provides for $10.0 of retention-linked deferred compensation over three years. Zinc Ahead contributed $1.7 of revenue and a $1.5 net loss from September 30 through October 31. The acquisition added $84.3 of goodwill and $42.5 of acquired intangible assets; purchase accounting remained preliminary.
- Veeva also completed the $9.8 QForma CrowdLink acquisition in March 2015. Its results were not material to the consolidated statements.
Outlook, risks and contingencies
- Management expects revenue and subscription revenue growth rates to decline slightly in future periods. It expects operating expenses to rise in absolute dollars and, near term, potentially as a percentage of revenue, with possible pressure on operating margins. No specific numerical forward guidance is provided in the supplied filing text.
- Management cited continued investment in product development, sales and marketing, services, international expansion, infrastructure and Zinc Ahead integration. It believes existing cash, investments and operating cash flows should cover working capital and capital needs for at least 12 months.
- A significant contractual commitment is the Salesforce agreement: at least $424.7 of fees remained payable through September 2025. The commitment schedule lists $425.5 of total purchase commitments, including the Zinc Ahead-related VYRE minimum payments. Operating lease obligations totaled $9.8.
- Key risks include reliance on Veeva CRM and the Salesforce platform, customer renewals and concentrated large-customer revenue, successful adoption of newer products, integration and retention risks following Zinc Ahead, competition, service availability and cybersecurity, life-sciences regulation and privacy requirements, and foreign-exchange exposure. Management reported no material adverse litigation outcome expected; a Section 16(b) action names Veeva as a nominal defendant and seeks disgorgement from other defendants, not damages from Veeva.
- Management stated disclosure controls were effective as of October 31, 2015 and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether subscription growth, customer renewals and expansion across newer products can sustain growth as management anticipates slower growth rates.
- Whether operating-cost growth, stock-based compensation and acquisition-related amortization affect margins and GAAP earnings as Zinc Ahead is integrated.
- How much of the Salesforce minimum commitment is likely to be used in normal operations, and the potential impact of the agreement on margins and liquidity.
- Whether preliminary Zinc Ahead purchase accounting, retention payments and integration deliver the expected commercial benefits without material customer or employee losses.
- Changes in cash and investments, operating cash flow and deferred revenue; management cautions that deferred revenue and calculated billings are not reliable stand-alone indicators of future revenue.
- Developments in the Section 16(b) litigation, foreign-exchange exposure, and security, privacy and regulatory risks.