Veeva Systems Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended July 31, 2019; comparative periods ended July 31, 2018. Veeva provides cloud software and data solutions, principally to the life sciences industry. Figures below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance
| Metric | Q2 FY2020 | Q2 FY2019 | Six months FY2020 | Six months FY2019 |
|---|---|---|---|---|
| Revenue | $266.9 (+27%) | $209.6 | $511.7 (+26%) | $405.2 |
| Subscription services revenue | $217.3 (+28%) | $169.6 | $415.4 (+28%) | $325.6 |
| Professional services and other | $49.6 (+24%) | $40.0 | $96.2 (+21%) | $79.6 |
| Gross profit / margin | $196.7 / 73.7% | $150.4 / 71.7% | $375.9 / 73.5% | $285.8 / 70.5% |
| Operating income / margin | $73.9 / 27.6% | $52.8 / 25.2% | $145.0 / 28.4% | $96.8 / 23.8% |
| Net income / diluted EPS | $79.2 / $0.50 | $50.3 / $0.32 | $152.7 / $0.96 | $94.6 / $0.61 |
| Operating cash flow | $100.5 | $86.8 | $336.8 | $237.4 |
- Subscription services represented about 81% of revenue in Q2. Vault subscription revenue was $104.7 million, up from $71.7 million; Commercial Cloud subscription revenue was $112.6 million, up from $97.9 million. Vault drove most of the subscription revenue increase.
- At July 31, cash and cash equivalents were $827.5 million and short-term investments were $604.7 million, totaling $1.432 billion. Current assets were $1.621 billion versus current liabilities of $382.9 million.
- The filing reports no borrowings; liabilities include operating and finance lease obligations totaling approximately $22.2 million. Total liabilities were $414.8 million, including $329.1 million of current deferred revenue.
Changes, outlook and notable items
- Revenue and earnings increased year over year; gross and operating margins also improved. Management attributed gross-margin improvement largely to growth in Vault and newer multichannel CRM products, which have higher subscription margins than core CRM.
- For the six-month period, Vault accounted for $62.5 million of the $89.8 million increase in subscription revenue; Commercial Cloud accounted for $27.3 million. International markets contributed approximately 46% of Q2 revenue.
- Management expects revenue and subscription growth rates to decline over time, while expecting FY2020 gross margin to increase, primarily from Vault product mix. It expects operating expenses and stock-based compensation to rise as it hires and invests in product development, sales, and services; professional-services costs may rise as a percentage of revenue in the near term. No specific numerical full-year guidance is provided in this filing.
- Six-month operating cash flow benefited from a $158.3 million decrease in accounts receivable, primarily from collections. Management said first-half operating cash flow represents a significant portion of expected FY2020 cash flow and expects substantially less in subsequent quarters.
- A new employee equity compensation program began in the quarter ended April 30, 2019. Q2 stock-based compensation was $28.4 million, versus $19.7 million a year earlier. The Q2 effective tax rate fell to 2.4% from 10.5%, largely due to excess tax benefits from equity compensation.
- Veeva adopted lease accounting Topic 842 on February 1, 2019, recording right-of-use assets and lease liabilities; management said adoption had no material income-statement or cash-flow effect. Approximately $659.0 million of subscription revenue was allocated to remaining performance obligations, with $495.4 million expected to be recognized over the next 12 months.
- Material litigation includes disputes with IQVIA, including Veeva’s antitrust claims and IQVIA’s trade-secret and other claims, and a Medidata trade-secret matter. Veeva said it could not meaningfully estimate possible losses and believes the claims against it lack merit. Litigation activity contributed to higher legal expense.
- The company disclosed the CFO’s planned retirement after a successor is appointed and transitioned; a search was underway. Other cited risks include competition, reliance on Salesforce and other hosting providers, cybersecurity and data privacy, customer renewals, foreign exchange, and regulatory change.
Important facts for investors to verify
- Whether Vault growth and higher subscription margins continue, and how the product mix affects total growth and profitability.
- How much of operating cash flow reflects durable earnings versus collections timing, deferred-revenue movements, and seasonality.
- The effect of the new equity program on stock-based compensation, dilution, and GAAP margins.
- Developments and potential financial exposure in the IQVIA and Medidata litigation, and the remaining $179.2 million Salesforce minimum-purchase commitment through September 2025.
- Execution of the CFO transition, and progress against management’s qualitative outlook for growth, margins, hiring, and expenses.