Veeva Systems Inc. — Q1 FY2018 Form 10-Q
Reporting period: Three months ended April 30, 2017; comparisons are with the three months ended April 30, 2016 unless otherwise noted. Veeva provides cloud software, data and services primarily to life sciences companies, with expansion into other regulated industries.
Financial performance and liquidity
| Metric | Q1 FY2018 | Q1 FY2017 | Change |
|---|---|---|---|
| Total revenue | $157.9 million | $119.8 million | +32% |
| Subscription revenue | $127.3 million | $96.0 million | +33% |
| Professional services and other revenue | $30.6 million | $23.7 million | +29% |
| Gross profit / margin | $109.0 million / 69% | $78.7 million / 66% | Margin +3 points |
| Operating income / margin | $37.3 million / 23.6% | $17.8 million / 14.8% | Income +110% |
| Net income | $36.0 million | $12.5 million | +188% |
| Diluted EPS | $0.24 | $0.09 | |
| Operating cash flow | $142.2 million | $109.4 million |
- Subscription services made up 81% of revenue. Vault accounted for $16.9 million of the $31.2 million increase in subscription revenue; Commercial Cloud contributed $14.3 million. Commercial Cloud was 64% of total revenue, down from 68% in FY2017 as a whole.
- Gross margin improved with the higher subscription-revenue mix and growth in Vault, Network and newer multichannel applications. Professional services gross margin was 26%, versus 18%.
- Operating expenses were $71.7 million, up 18%; research and development rose 28%, sales and marketing 12%, and general and administrative 12%. Management expects ongoing investment and expense growth, which could pressure operating margin.
- Cash, cash equivalents and short-term investments totaled $663.9 million at April 30, 2017, including $365.7 million cash and equivalents and $298.3 million short-term investments. Current assets were $789.1 million and current liabilities $269.0 million. The balance sheet reports no borrowings.
- Cash from operations included $69.7 million of cash inflow from lower accounts receivable and $24.4 million from higher deferred revenue. Management says Q1 is seasonally the strongest quarter for cash inflows and expects substantially lower operating cash flow in subsequent FY2018 quarters.
Material changes and unusual items
- The 5.0% effective tax rate, compared with 39.1% a year earlier, reflected a $13.9 million discrete excess tax benefit from adopting ASU 2016-09. The benefit reduced the tax rate by approximately 37 percentage points; therefore, reported net-income growth is not solely an indicator of underlying operating performance.
- Operating cash flow was increased by $13.9 million, with a corresponding reduction in financing cash flow, because of the new stock-compensation cash-flow classification. The filing also reports a $0.7 million cumulative-effect increase to opening retained earnings for the forfeiture-accounting election.
- Stock-based compensation was $11.8 million, versus $8.1 million. Non-GAAP diluted EPS was $0.22 versus $0.15; these company-defined measures exclude specified items and should be considered alongside GAAP results.
- Other income, net declined to $0.6 million from $2.7 million, primarily due to prior-year foreign-exchange gains and current-period currency losses.
Outlook, risks and contingencies
- No specific quarterly or full-year revenue or earnings guidance is stated in the supplied filing text. Management expects revenue growth rates to decline over time, subscription revenue to rise as a share of total revenue, and operating expenses to increase as it invests in products, hiring and expansion. It expects at least 12 months of working-capital and capital-expenditure needs to be met from existing liquidity and operating cash generation.
- Management expects about $3.0 million of headquarters-buildout capital expenditures in the next quarter. Salesforce-related minimum purchase commitments total $335.6 million remaining through September 2025; total contract minimums are $500 million. Operating lease obligations were $15.7 million.
- Veeva is defending trade-secret and other claims brought by Quintiles IMS and Medidata, and says it cannot estimate potential losses. Veeva’s IMS counterclaims seek more than $200 million in damages; that amount is a claim, not an awarded recovery. Motions in both matters were pending. G&A expense included increased legal fees, and the company expects further legal costs.
- The IRS notified Veeva of an intended audit of its fiscal 2015 federal return. The company says it believes the return was properly prepared and filed.
- Risks emphasized include dependence on life sciences and Commercial Cloud, competition and adoption of newer products, customer renewals and concentration, security and service availability, international and currency exposure, data privacy regulation, and reliance on Salesforce infrastructure and the Salesforce agreement. A 100-basis-point interest-rate increase was estimated to reduce investment-portfolio market value by $1.9 million.
Important facts for investors to verify
- Underlying earnings and tax outlook excluding the $13.9 million share-based-compensation tax benefit; compare GAAP and non-GAAP measures and their reconciliations.
- Revenue growth, renewals and customer expansion by product, especially whether Vault and newer offerings offset slower growth or maturity in core CRM.
- Cash-flow trends after the seasonally strong first quarter, including the effects of collections, billings and the ASU 2016-09 classification change.
- Developments, costs and potential exposure in the IMS and Medidata litigation, and the status of the IRS audit.
- Salesforce minimum-purchase obligations and infrastructure migration plans, together with any effect on service continuity, margins or liquidity.