Veeva Systems Inc. — Form 10-Q summary
Business context and reporting period
Veeva provides cloud software, data and services primarily to the life sciences industry, including Commercial Cloud and Vault solutions. This filing reports the second quarter and six months ended July 31, 2018; the fiscal year ends January 31. Prior-year comparisons were adjusted for adoption of the revenue recognition standard, Topic 606.
Financial performance
| Metric | Three months ended July 31, 2018 | Year-over-year | Six months ended July 31, 2018 | Year-over-year |
|---|---|---|---|---|
| Total revenue | $209.6 million | +25% | $405.2 million | +24% |
| Subscription revenue | $169.6 million | +25% | $325.6 million | +23% |
| Professional services and other | $40.0 million | +24% | $79.6 million | +27% |
| Gross profit / margin | $150.4 million / 71.7% | Margin: 69.9% prior year | $285.8 million / 70.5% | Margin: 69.7% prior year |
| Operating income / margin | $52.8 million / 25.2% | $38.1 million / 22.7% prior year | $96.8 million / 23.8% | $76.9 million / 23.5% prior year |
| Net income / diluted EPS | $50.3 million / $0.32 | $38.6 million / $0.25 prior year | $94.6 million / $0.61 | $75.6 million / $0.49 prior year |
| Operating cash flow | $86.8 million | $57.6 million prior year | $237.4 million | $199.8 million prior year |
Vault subscription revenue was $71.7 million in the quarter, up from $48.1 million; Commercial Cloud subscription revenue was $97.9 million, up from $87.4 million. Management attributed gross-margin improvement mainly to the higher share of Vault subscription revenue. Stock-based compensation was $19.7 million for the quarter, versus $13.4 million a year earlier.
Liquidity, balance sheet and cash flow
At July 31, 2018, cash and cash equivalents were $511.7 million and short-term investments were $498.7 million, totaling approximately $1.01 billion. Current assets were $1.15 billion and current liabilities $294.7 million. Total liabilities were $314.2 million; the filing reports no borrowings or debt balance. Stockholders’ equity was $1.05 billion.
Six-month investing cash outflow was $58.3 million, mainly net purchases of short-term investments; financing cash inflow was $14.9 million, largely from employee option exercises. Operating cash flow benefited from collections, including a $112.7 million decrease in accounts receivable. Management noted that the first half included the majority of operating cash flow expected for fiscal 2019 and anticipates substantially lower operating cash flow in the third and fourth quarters.
Changes, outlook and material risks
- Revenue growth was broad-based, with subscription revenue remaining about 81% of quarterly revenue. Management expects subscription services to become a larger proportion over time and expects future revenue growth rates to decline.
- Management expects fiscal 2019 gross margin to increase slightly, citing Vault growth, reduced duplicate infrastructure costs and a lower expected professional-services share. It expects operating expenses to continue rising in absolute dollars, with near-term investment potentially pressuring operating margins.
- Topic 606 adoption changed revenue, unbilled receivable and deferred-cost accounting. Sales commissions are now generally capitalized and amortized over a three-year benefit period; prior-period figures shown were adjusted. Deferred revenue and calculated billings may not reliably indicate future revenue, particularly given quarterly billing and multi-year contracts.
- Cash, cash equivalents and short-term investments held outside the U.S. totaled $67.2 million and were designated indefinitely reinvested abroad. Management stated existing liquidity and operating cash generation should cover working capital and capital needs for at least 12 months.
- Key exposure includes competition and adoption of newer Vault products, customer renewals and concentration, cybersecurity and service disruptions, reliance on Salesforce and other infrastructure providers, foreign-exchange and interest-rate movements, and evolving privacy and life-sciences regulations.
- Veeva faces IQVIA litigation and counterclaims, Medidata litigation, and a California non-compete matter. Outcomes are uncertain; the company said it could not meaningfully estimate potential losses. It also had at least $251.6 million of remaining Salesforce minimum-payment obligations through September 2025.
- The filing gives no specific numeric revenue or earnings guidance. The 100-basis-point interest-rate sensitivity disclosed for the investment portfolio was a $3.4 million change in market value.
Important facts for investors to verify
- Whether Vault growth and customer adoption continue to offset slower growth in the mature Commercial Cloud/CRM business.
- Whether the company achieves the expected slight gross-margin improvement while expanding headcount and operating spend.
- How operating cash flow develops after the unusually strong first half and as deferred revenue and receivables fluctuate.
- Developments and potential costs in the IQVIA, Medidata and California litigation, for which losses were not estimable.
- Progress against Salesforce minimum commitments and any changes to reliance on third-party hosting and platform providers.
- Effects of Topic 606, the Tax Act and evolving data-protection rules on reported revenue, taxes, cash flows and compliance costs.