Veeva Systems Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended October 31, 2020; comparisons are to the same 2019 periods. Veeva provides cloud software, data, and services primarily to the life sciences industry. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $377.5 million (+34%) | $280.9 million | $1,068.3 million (+35%) | $792.6 million |
| Subscription revenue | $302.9 million (+34%) | $226.8 million | $856.7 million (+33%) | $642.2 million |
| Professional services and other | $74.6 million (+38%) | $54.2 million | $211.6 million (+41%) | $150.4 million |
| Gross profit / gross margin | $274.5 million / 73% | $207.6 million / 74% | $773.2 million / 72% | $583.5 million / 74% |
| Operating income / margin | $101.3 million / 26.8% | $80.8 million / 28.8% | $279.0 million / 26.1% | $225.8 million / 28.5% |
| Net income | $97.0 million | $82.2 million | $277.1 million | $234.9 million |
| Diluted EPS | $0.60 | $0.52 | $1.73 | $1.49 |
| Operating cash flow | $95.4 million | $61.5 million | $482.9 million | $398.3 million |
Financial position and liquidity
- At October 31, cash and cash equivalents were $634.3 million and short-term investments were $956.2 million, totaling approximately $1.59 billion. Current assets were $1.85 billion against current liabilities of $417.4 million.
- Total liabilities were $477.3 million; the filing reports no borrowing debt. Lease liabilities totaled approximately $59.0 million for operating leases and $0.6 million for finance leases.
- Nine-month investing cash outflow was $354.7 million, principally reflecting net purchases of short-term investments. Financing cash inflow was $24.8 million, primarily from stock-option exercises.
- Management said existing cash, cash equivalents, short-term investments, and operating cash generation should cover working capital and capital expenditure needs for at least the next 12 months. It also cautioned that operating cash flow should be substantially lower in the quarter ending January 31, 2021, because much of the expected fiscal-year cash flow had already occurred.
Changes and drivers
- Growth came from both product groups. Q3 subscription revenue increased by $39 million for Vault and $37 million for Commercial Cloud, with the latter including Crossix. For the nine-month period, the respective increases were $108 million and $106 million.
- Professional-services growth was driven mainly by implementation and deployment work, particularly for Vault solutions. Management expects professional services to decline as a proportion of total revenue over time.
- Gross margin fell year over year, which management attributed largely to acquired businesses having lower margins than Veeva’s core offerings. Operating expenses rose substantially, including increased research and development headcount and stock-based compensation.
- Stock-based compensation was $49.0 million in Q3 and $135.2 million for the nine months, versus $29.3 million and $78.4 million, respectively, in the prior-year periods. Nine-month GAAP net income increased about 18%, while reported operating margin decreased.
- Other income fell to $3.5 million in Q3 and $9.8 million for the nine months, mainly due to lower interest rates and investment amortization. Effective tax rates were 7.4% for Q3 and 4.0% for the nine months, reduced in part by excess tax benefits from equity compensation.
Outlook, risks, and contingencies
- Management expects continued investment and higher absolute operating expenses; it said near-term operating expenses could rise slightly as a percentage of revenue. It also expects subscription-service costs to increase with usage and data costs, and professional-services costs to rise with staffing.
- The filing provides no clear numerical company revenue or earnings forecast. It reports approximately $772 million of remaining performance obligations for subscription contracts at October 31, 2020, with about 73% expected to be recognized over the following 12 months.
- COVID-19 effects were mixed and uncertain. Remote-work and virtual-engagement products saw increased adoption, while Crossix and Physicians World and some customer segments were negatively affected. Veeva offered CRM Engage Meeting free through December 31, 2020 and said some users might discontinue afterward. Management also noted on its December 1 earnings call an expectation that life sciences companies could reduce sales-representative numbers by roughly 10% over the coming year, potentially pressuring CRM demand.
- Veeva completed its Crossix and Physicians World acquisitions in November 2019. Integration, employee and customer retention, and COVID-related impacts on those businesses remain risks. Management described its proposed conversion to a Delaware public benefit corporation, subject to a January 13, 2021 stockholder meeting.
- Material litigation includes disputes with IQVIA and Medidata. IQVIA’s motion for sanctions in the OpenData and Network action was pending after an October 2020 hearing; related Nitro actions were stayed pending that case. The Medidata parties were awaiting rulings on cross-motions for summary judgment. The filing says outcomes and potential losses cannot be meaningfully estimated.
- Other notable exposures include a remaining $78.3 million minimum commitment to Salesforce due by September 2025, reliance on third-party cloud and data providers, cybersecurity and privacy compliance, foreign-exchange and interest-rate risk, and competitive pressure. A 100-basis-point rate increase was estimated to reduce investment-portfolio market value by $11 million.
Key facts for investors to verify
- Whether subscription growth and remaining performance obligations convert to revenue as expected, while accounting for deferred revenue and unbilled receivables.
- Whether growth in Vault and newer products offsets potential Commercial Cloud and CRM pressure, including any reduction in life-sciences sales representatives.
- How acquisition-related costs, lower-margin acquired operations, and rising stock-based compensation affect GAAP margins and earnings.
- Developments in the IQVIA and Medidata litigation, and any resulting costs or business restrictions.
- COVID-19 effects on customers, professional-services demand, Crossix and Physicians World, and paid adoption after the Engage Meeting free period.
- Progress on the proposed public benefit corporation conversion and the company’s dependence on Salesforce, cloud infrastructure, and third-party data providers.