VEEVA SYSTEMS INC quarterly report, Q2 FY2016

Veeva Systems Inc. — Form 10-Q Summary

Business context and reporting period

Veeva provides cloud-based software for the life sciences industry. This filing covers the quarter and six months ended July 31, 2015 (fiscal Q2 and first half of fiscal 2016); financial results are compared with the same 2014 periods. Amounts below are in U.S. dollars.

Financial performance and position

MetricThree months ended July 31, 2015Six months ended July 31, 2015
Total revenue$98.1 million, up 30%$188.0 million, up 32%
Subscription revenue$75.3 million, up 33%$144.2 million, up 37%
Professional services and other$22.8 million, up 20%$43.9 million, up 18%
Gross margin65.9%, versus 62.9%65.2%, versus 62.0%
Operating income and margin$22.4 million; 22.9%$43.3 million; 23.0%
Net income and margin$13.4 million; 13.7%$26.4 million; 14.0%
Diluted GAAP EPS$0.09, versus $0.07$0.18, versus $0.12
Operating cash flow$15.2 million, versus $16.6 million$57.0 million, versus $34.7 million

At July 31, cash and cash equivalents were $119.8 million and short-term investments were $318.2 million, totaling $438.0 million. Current assets were $522.8 million and current liabilities $134.4 million. The balance sheet reports no debt. Deferred revenue was $109.5 million, down from $113.0 million at January 31. Total liabilities were $138.0 million and stockholders’ equity $453.6 million.

First-half investing cash outflow was $76.4 million, including $51.2 million of net investment purchases, $14.5 million of property and equipment purchases, and $10.0 million for the Qforma CrowdLink acquisition. Financing provided $9.9 million. Stock-based compensation was $10.4 million for the half year. The company also reported non-GAAP diluted EPS of $0.13 for the quarter and $0.24 for the half year; these measures exclude specified items, including stock-based compensation.

Material changes versus comparable periods

  • Revenue growth was led by subscriptions. In the quarter, management attributed 96% of subscription revenue growth to orders placed after July 31, 2014; for the six-month period, the corresponding share was 69%.
  • Gross margin improved, which management attributed primarily to a higher subscription revenue mix and growth in Vault, Network, OpenData, and newer commercial applications.
  • Operating expenses rose: first-half R&D increased 50%, sales and marketing 26%, and general and administrative expense 29%. Higher staffing was a principal driver.
  • First-half operating cash flow increased year over year, helped by collections and a $25.5 million decrease in accounts receivable; deferred revenue declined by $3.8 million, mainly due to renewal-billing timing.
  • Cash and investments increased to $438.0 million from $397.9 million at January 31, while cash alone decreased by $9.5 million. Property and equipment rose to $44.4 million, reflecting investment in the new headquarters build-out.

Outlook, commentary, risks, and unusual items

  • No specific numerical quarterly or annual guidance is stated in the supplied filing text. Management expects revenue and subscription growth rates to decline in future periods.
  • Management expects continued investment and higher operating expenses, including hiring in R&D, sales and marketing, and professional services. It cautions that this may put near-term pressure on operating margins.
  • Veeva acquired Qforma CrowdLink on March 31 for approximately $9.8 million in cash. Preliminary allocation included $5.8 million of goodwill and $3.3 million of intangible assets; the acquired business’s results were not material.
  • The company has at least $438.0 million of remaining minimum purchase commitments to Salesforce through September 2025, including significant obligations due after five years. Failure to meet contractual thresholds could require true-up payments.
  • IMS trademark litigation over the “OpenKey” name was settled in July 2015 after Veeva renamed the product “OpenData”; the settlement included a nominal one-time payment. A separate shareholder Section 16(b) suit against Criterion Capital names Veeva as nominal defendant; Veeva was investigating the claims, which seek disgorgement from other defendants, not damages from Veeva.
  • Other items affecting comparability include $0.7 million of expense related to early termination of the former headquarters lease and foreign-exchange losses in the quarter. Foreign exchange, security and privacy, regulatory compliance, competition, customer renewals, and Salesforce dependence are among the disclosed risks.
  • One customer represented 17% of accounts receivable at July 31, though no customer exceeded 10% of revenue in the periods presented. The top 10 customers accounted for 52% of quarterly revenue, according to the risk-factor discussion.

Most important facts for investors to verify

  • Whether subscription growth and customer expansions continue, particularly as management expects growth rates to moderate and CRM historically represented most revenue.
  • Renewal and expansion trends, customer concentration, and the significance of the 17% accounts-receivable exposure to one customer.
  • Progress and profitability of newer products, and whether investment-driven expense growth affects margins as management anticipates.
  • Salesforce minimum commitments, future true-up exposure, and the implications of reliance on Salesforce’s platform for CRM.
  • Cash-flow quality and renewal-billing timing: deferred revenue fell, and management cautions that deferred revenue changes are not a reliable standalone indicator of future revenue.
  • Final Qforma purchase accounting and integration results, as the purchase-price allocation was preliminary.