Veeva Systems Inc. — FY2016 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended January 31, 2016; it is not a standalone fourth-quarter filing. Veeva provides cloud software and data products for life sciences, led by CRM, regulated content management, master data management, and data services. It served 400 customers at year-end, versus 276 a year earlier.
Financial performance and liquidity
| Metric | FY2016 | FY2015 |
|---|---|---|
| Total revenue | $409.2 million | $313.2 million |
| Subscription revenue | $316.3 million | $233.1 million |
| Professional services and other revenue | $92.9 million | $80.2 million |
| Gross profit / margin | $267.0 million / 65.2% | $197.6 million / 63.0% |
| Operating income / margin | $78.6 million / 19.2% | $70.0 million / 22.4% |
| Net income / diluted EPS | $54.5 million / $0.38 | $40.4 million / $0.28 |
| Operating cash flow | $80.2 million | $67.6 million |
- Revenue increased 31% year over year; subscription revenue grew 36% and professional services and other revenue grew 16%. Subscription services represented 77% of revenue, up from 74%.
- FY2016 cash flows: operating activities provided $80.2 million; investing activities used $96.7 million; financing activities provided $19.4 million. Investing outflows included $126.2 million for acquisitions and $21.2 million for property and equipment, partly offset by net investment maturities.
- At January 31, 2016, cash and equivalents were $132.2 million, short-term investments $214.0 million, working capital $314.7 million, and deferred revenue $157.4 million. The filing reports no borrowings or funded debt.
- Fourth-quarter FY2016 revenue was $114.3 million, operating income $15.2 million, and net income $17.6 million. In Q4 FY2015, the corresponding figures were $87.0 million, $20.7 million, and $13.3 million.
- Non-GAAP diluted EPS was $0.51 versus $0.37; this measure excludes specified items, including stock compensation and acquisition-related amortization and deferred compensation.
Material changes versus prior year
- Revenue growth decelerated to 31% from 49%; subscription revenue growth slowed to 36% from 59%.
- Gross margin improved to 65.2% from 63.0%, while operating margin declined to 19.2% from 22.4% as operating expenses rose 48%, including substantial increases in research and development and sales and marketing.
- Net income increased 35%, while operating cash flow rose 19%. Accounts receivable increased $46.7 million, partly offset by a $39.4 million increase in deferred revenue.
- Veeva acquired Zinc Ahead for approximately $119.9 million in cash and acquired Qforma CrowdLink for approximately $9.8 million. Zinc Ahead contributed $6.7 million of revenue and an $8.0 million net loss from acquisition through fiscal year-end; integration and customer migration remain underway.
Outlook, risks, and unusual items
- Management expects total and subscription revenue growth rates to decline slightly. It expects operating expenses to rise in absolute dollars and as a percentage of revenue near term, potentially reducing operating margin slightly. No numerical FY2017 guidance is provided in this filing.
- Veeva identified CRM concentration as a key exposure: CRM and related multichannel applications generated approximately 74% of FY2016 total revenue. Management expects newer Vault, Network, and data offerings to become a larger share, but their adoption is not assured.
- The Salesforce agreement runs through September 2025 and requires minimum orders of $500 million over its term. Remaining purchase commitments were approximately $410.8 million under that agreement; total disclosed purchase commitments were $411.6 million. The filing warns that unmet minimums could require true-up payments and pressure margins and cash flow.
- Management and the auditor identified a material weakness in controls over review of assumptions and data used to value acquired intangible assets. Management concluded internal control over financial reporting and disclosure controls were ineffective at January 31, 2016; the auditor issued an adverse opinion on internal control effectiveness. The financial statement audit opinion was unqualified, and management reported no identified financial-statement misstatement.
- FY2016 tax expense included acquisition-related tax effects and a $2.3 million research-credit benefit recognized after the credit was extended. The effective tax rate was 30.7%, down from 39.9%.
- Other key risks include security or service disruptions, privacy and regulatory compliance, competition, customer renewals and consolidation in life sciences, foreign-exchange exposure, and the dual-class structure. Class B holders had approximately 84.1% of voting power as of January 31, 2016.
- A Section 16(b) shareholder action against certain investors seeks disgorgement of alleged short-swing trading profits; Veeva is a nominal defendant. The company stated it did not believe pending proceedings would have a material adverse effect.
Most important facts for investors to verify
- Whether CRM renewal and expansion remain strong as the core product is substantially penetrated, and whether newer products sustain adoption and revenue growth.
- Whether operating expenses, stock-based compensation, and acquisition integration costs moderate enough to protect margins as growth slows.
- Progress integrating Zinc Ahead, retaining its customers and employees, and migrating users to Vault PromoMats; also review the acquired-asset valuation and related control remediation.
- Salesforce minimum-order exposure and the terms, timing, and potential cash impact of any true-up obligations.
- Collection and renewal trends, given the increase in accounts receivable and the concentration of revenue among the top ten customers, which contributed 50% of FY2016 revenue.
- Remediation of the material weakness and any subsequent auditor or management assessment of internal controls.