Veeva Systems Inc. — FY2019 Form 10-K
Reporting period: Fiscal year ended January 31, 2019. The filing also reports unaudited fourth-quarter results for the three months ended January 31, 2019. Veeva sells cloud software, data and professional services primarily to life sciences companies, with a growing Vault business and early expansion into other regulated industries.
Financial performance
| Metric | FY2019 | FY2018 | Change |
|---|---|---|---|
| Total revenue | $862.2 million | $690.6 million | +25% |
| Subscription revenue | $694.5 million | $559.4 million | +24% |
| Professional services and other revenue | $167.7 million | $131.1 million | +28% |
| Gross profit / gross margin | $616.9 million / 71.5% | $479.1 million / 69.4% | Margin +2.1 percentage points |
| Operating income / margin | $222.9 million / 25.8% | $157.9 million / 22.9% | Margin +2.9 percentage points |
| Net income / diluted EPS | $229.8 million / $1.47 | $151.2 million / $0.98 | EPS +50% |
| Operating cash flow | $310.8 million | $233.4 million | +$77.4 million |
At January 31, 2019, cash and cash equivalents were $551.0 million and short-term investments were $539.2 million, totaling approximately $1.09 billion. Working capital was $1.03 billion; total liabilities were $416.0 million and stockholders’ equity was $1.24 billion. The balance sheet does not report debt. Deferred revenue was $356.4 million, up from $266.9 million. The company said existing cash, investments and operating cash flows should cover working capital and capital expenditure needs for at least 12 months.
Fourth quarter: Revenue was $232.3 million, gross profit $167.8 million, operating income $63.0 million, net income $71.2 million and diluted EPS $0.45. Compared with Q4 FY2018, revenue increased from $186.0 million, operating income from $38.5 million, net income from $40.7 million and diluted EPS from $0.26.
Business mix and changes
- Subscription revenue represented 80.5% of FY2019 revenue. Vault generated $299.4 million of subscription revenue, up from $203.0 million; Commercial Cloud generated $395.0 million, up from $356.4 million.
- Vault accounted for $96.4 million of the $135.0 million increase in subscription revenue. Management expects Vault’s share of revenue to continue rising.
- Customer count reached 719, versus 625 a year earlier. Subscription revenue retention was 122%, compared with 121% in FY2018 and 127% in FY2017.
- Gross margin improved as Vault and newer multichannel CRM products, which management says have higher subscription margins than core CRM, grew. Professional services revenue grew, but management expects it to decline as a proportion of total revenue over time.
- Operating expenses rose 23% to $394.1 million. General and administrative expense increased 43%, including higher stock-based compensation and litigation-related legal costs. Stock-based compensation totaled $76.4 million, versus $54.0 million.
Outlook, risks and unusual items
- Management expects revenue and subscription growth rates to decline in future periods. It expects FY2020 gross margin to increase, driven by Vault growth, while operating expenses are expected to rise in absolute dollars and slightly as a percentage of revenue in the near term.
- The FY2019 effective tax rate was 3.7%, down from 8.8%. Management attributed the low rate mainly to the lower U.S. federal tax rate, tax credits and $45.8 million of excess tax benefits from equity compensation; the rate may vary in future periods.
- Veeva adopted Topic 606 using the full retrospective method, adjusting prior-period financial statements. Among other effects, the standard changed revenue timing for some arrangements and required capitalization and amortization of eligible sales commissions.
- Key risks include cybersecurity, privacy and regulatory compliance; competition; customer renewal and concentration; reliance on third-party hosting and Salesforce technology; and execution of newer products and expansion outside life sciences. The top 10 customers contributed 39% of revenue, although no single customer exceeded 10%.
- Veeva had ongoing trade-secret and other litigation with IQVIA and Medidata and could not estimate a range of potential loss. Its counterclaims against IQVIA seek injunctive relief and damages exceeding $200 million; that amount is a claim, not an expected recovery.
- A Salesforce agreement requires minimum purchases of $500 million through September 2025. Veeva had met the first threshold and reported a remaining purchase commitment of $216.4 million at year-end; failure to meet commitments could require true-up payments. The agreement expires September 1, 2025.
- The auditor, KPMG, issued unqualified opinions on the financial statements and internal control over financial reporting. Management also concluded disclosure controls were effective.
Investor verification priorities
- Review the audited statements and Topic 606 reconciliations to understand comparability with previously reported periods.
- Track Vault growth, Commercial Cloud/core CRM concentration, retention, and whether growth deceleration matches management’s expectations.
- Assess the sustainability of margins and earnings after considering stock-based compensation and the unusually low FY2019 tax rate.
- Monitor litigation developments, potential legal expense or exposure, and the remaining Salesforce purchase commitment.
- Check cash-flow conversion, deferred revenue and unbilled receivables trends, and the effect of customer billing terms on reported growth indicators.