Business context and reporting period
Veeva Systems Inc. provides cloud software, data, and services, primarily to the life sciences industry. This Form 10-Q covers the quarter and nine months ended October 31, 2017 (fiscal 2018); comparisons are with the corresponding 2016 periods. Subscription services accounted for 81% of revenue in both the quarter and nine-month period.
Financial performance and position
Quarter: Revenue was $176.1 million, up 23% year over year. Subscription revenue was $141.9 million (+25%); professional services and other revenue was $34.2 million (+17%). Gross profit was $122.9 million, with a 69.7% gross margin. Operating income was $41.7 million (23.6% margin); net income was $34.4 million (19.5% margin). Diluted EPS was $0.22, versus $0.15.
Nine months: Revenue was $500.7 million, up 27%. Subscription revenue was $403.6 million (+28%); professional services and other revenue was $97.1 million (+23%). Gross profit was $348.1 million, with a 69.6% gross margin. Operating income was $115.9 million (23.2% margin); net income was $108.3 million (21.6% margin). Diluted EPS was $0.71, versus $0.32.
Cash, liquidity, and debt: At October 31, cash and cash equivalents were $310.8 million and short-term investments were $447.3 million, totaling $758.1 million. Current assets were $846.1 million and current liabilities $214.4 million. No debt is reported in the provided balance sheet. Operating cash flow was $32.2 million for the quarter and $232.0 million for nine months. Investing cash flow was negative $134.4 million and negative $157.2 million, respectively, largely reflecting net purchases of short-term investments. Financing cash flow was $3.7 million and $17.2 million, mainly from option exercises.
Material changes versus prior periods
- Quarterly subscription growth included $17.6 million of incremental Veeva Vault revenue and $10.8 million from Commercial Cloud. For nine months, the respective increases were $52.0 million and $36.7 million. Commercial Cloud represented 62% of total nine-month revenue, down from 68% for fiscal 2017 as Vault expanded.
- Gross margin improved year over year: 69.7% versus 69.2% for the quarter and 69.6% versus 67.7% for nine months. Management attributed improvement to a higher subscription mix and growth in Vault, Network, and newer CRM applications.
- Operating expenses increased 25% for the quarter and 21% for nine months, with headcount and investment in product development contributing. Nine-month operating margin nevertheless rose to 23.2% from 19.2%.
- Net income growth was boosted by the adoption of ASU 2016-09: excess tax benefits from equity compensation reduced income tax expense by $8.6 million in the quarter and $37.3 million for nine months. Effective tax rates were 20.1% and 10.3%, respectively, versus 37.0% and 39.1% in the prior-year periods.
- Cash flow comparisons were affected by the same accounting adoption: it increased operating cash flow and decreased financing cash flow by $8.6 million for the quarter and $37.3 million for nine months. Accounts receivable collections supported operating cash flow, while deferred revenue fell due to renewal-billing timing.
Outlook, commentary, risks, and contingencies
- Management expects revenue and subscription revenue growth rates to decline in future periods. It expects operating expenses to rise in absolute dollars and as a percentage of revenue in the quarter ending January 31, 2018, with a resulting decline in operating margin; fourth-quarter expenses are seasonally highest.
- The migration of more cloud infrastructure to Amazon Web Services is expected to continue through the remainder of fiscal 2018. Management noted increased costs and temporary duplicate infrastructure costs during the transition.
- Management believes available cash, investments, and operating cash flows are sufficient for working capital and capital expenditure needs for at least the next 12 months. The company has $302.9 million of remaining minimum Salesforce purchase commitments through September 2025, including $250 million due after five years; total disclosed purchase commitments and lease obligations were $320.7 million.
- Two significant disputes remain unresolved. IMS alleges trade-secret, false-advertising, and related violations; Veeva’s counterclaims seek more than $200 million in damages and injunctive relief. Medidata alleges breach of employment agreements and trade-secret misappropriation. Veeva disputes the allegations in both matters and says it cannot meaningfully estimate potential losses.
- Other identified risks include customer concentration and renewal dependence, competition and adoption of newer products, reliance on Salesforce and third-party cloud infrastructure, foreign-exchange and interest-rate exposure, privacy and regulatory compliance, and litigation costs. A 100-basis-point rate increase was estimated to reduce investment portfolio market value by $3.4 million.
- Veeva expects to adopt the new revenue standard (Topic 606) on February 1, 2018 using the full retrospective method, subject to system readiness and completion of analysis. Management estimated that applying it to fiscal 2017 would have increased revenue by approximately $6–$7 million and reduced sales and marketing expense by approximately $6–$7 million, primarily due to multi-year contract revenue timing and capitalization of commissions. These are preliminary estimates.
Important facts for investors to verify
- Track subscription growth, renewal and expansion trends, and the contribution of Vault versus Commercial Cloud; management cautions that deferred revenue and calculated billings are not reliable standalone indicators of future revenue.
- Separate underlying earnings and cash generation from the unusually large equity-compensation tax benefits and the cash-flow classification change under ASU 2016-09.
- Monitor operating-margin performance as hiring, seasonal fourth-quarter spending, and infrastructure migration costs increase.
- Review developments, possible financial impacts, and legal-cost trends in the IMS and Medidata matters; loss amounts are not estimable from the filing.
- Assess the remaining Salesforce minimum commitments, infrastructure-provider dependence, and execution of the AWS migration.
- Confirm the final Topic 606 transition method and financial-statement impacts when implementation is completed.