Veeva Systems Inc. — Form 10-Q Summary
Reporting period: Three months ended April 30, 2015 (Veeva fiscal first quarter of fiscal 2016). Comparisons are with the three months ended April 30, 2014, unless otherwise noted. Dollar figures are in millions except per-share data.
Business context
Veeva provides cloud-based software and related services for the life sciences industry. Subscription services, including Veeva CRM and newer products such as Vault, Network and OpenData, are its core business; professional services support customer implementation and deployment.
Financial performance
| Metric | Q1 FY2016 | Q1 FY2015 | Change |
|---|---|---|---|
| Total revenue | $89.9 | $66.7 | +35% |
| Subscription revenue | $68.9 | $48.5 | +42% |
| Professional services and other revenue | $21.0 | $18.2 | +16% |
| Gross profit / gross margin | $57.9 / 64.4% | $40.8 / 61.2% | Margin +3.2 percentage points |
| Operating income / operating margin | $20.9 / 23.3% | $12.6 / 18.9% | Margin +4.4 percentage points |
| Net income / net margin | $13.0 / 14.4% | $7.2 / 10.9% | — |
| Diluted GAAP EPS | $0.09 | $0.05 | — |
| Non-GAAP net income / diluted EPS | $17.1 / $0.12 | $10.4 / $0.07 | Company-defined measure |
Subscription services accounted for 76.6% of revenue, up from 72.7%. Management attributed the gross-margin improvement mainly to the greater subscription mix and newer products’ somewhat higher gross-margin profile. Operating expenses rose 31% to $37.0 million; R&D increased 44%, sales and marketing 21%, and G&A 34%. Stock-based compensation was $4.8 million, versus $3.3 million. The effective tax rate was 40.1%, down from 42.4%.
Revenue growth was primarily from new orders placed after April 30, 2014, for expanded deployments at existing customers and new customers. Management attributed 97% of subscription-revenue growth to those orders; renewals and orders placed on or before the comparison date accounted for the remainder. North America revenue was $50.1 million, Europe and other $24.1 million, and Asia Pacific $15.7 million.
Cash flow, liquidity and obligations
- Operating cash flow was $41.8 million, compared with $18.1 million. Management cited customer collections, including a $23.5 million reduction in accounts receivable, and timing of income-tax payments; lower deferred revenue and accrued liabilities partially offset these sources.
- Investing cash outflow was $67.8 million, including $53.1 million of net short-term investment purchases, the $10.0 million Qforma CrowdLink acquisition, and $4.7 million of property and equipment purchases.
- Financing cash inflow was $4.3 million, primarily from $3.2 million in excess tax benefits from employee stock plans and $1.2 million from option exercises. Cash and cash equivalents decreased $21.7 million to $107.6 million.
- Cash, cash equivalents and short-term investments totaled $428.5 million at April 30, 2015, including $15.9 million of cash and cash equivalents held outside the United States. Management said available resources and operating cash flows should cover working capital and capital needs for at least 12 months.
- The balance sheet lists no borrowings or debt. Total liabilities were $139.7 million; current liabilities were $137.1 million, including $111.3 million of deferred revenue. Current assets were $509.8 million.
- Remaining Salesforce minimum purchase commitments were $450.6 million through September 2025; operating lease obligations were $9.4 million. These are contractual commitments, not reported debt.
Material changes, outlook and commentary
- Revenue rose 35%, but management expects total- and subscription-revenue growth rates to decline in future periods. No quantified forward revenue or earnings guidance is provided in the supplied filing text.
- Management expects operating expenses to increase in absolute dollars and, near term, potentially as a percentage of revenue, with a possible slight reduction in operating margin. It also expects subscription and professional-services costs to rise as the business expands.
- Qforma CrowdLink was acquired for $10.0 million cash on March 31, 2015, to support entry into the key opinion leader business. Preliminary allocation included $6.2 million goodwill, $3.3 million identifiable intangible assets and $0.5 million net assets assumed; valuation remained subject to finalization. The acquired business’s results were not material.
- A trademark lawsuit filed by IMS Health-related plaintiffs alleges infringement and related claims over the “OpenKey” name and seeks injunctive relief, unspecified damages and legal fees. Veeva renamed the product “OpenData” on May 26, 2015, intends to defend itself, and said it cannot estimate any potential loss.
- Key risks include reliance on the life sciences sector and CRM, competition and adoption of newer products, customer renewals and concentration, cybersecurity and service availability, foreign-exchange exposure, regulatory and privacy compliance, and reliance on Salesforce. The Salesforce agreement requires $500 million of minimum orders over its term, with potential true-up payments if thresholds are missed.
- Veeva reported no other legal matter it believed would have a material adverse effect, no material change in internal control over financial reporting, and effective disclosure controls as of April 30, 2015.
Most important facts for investors to verify
- Whether subscription growth, customer expansion and renewals can sustain performance as management anticipates slower growth and the core CRM business remains a large revenue source.
- How the $450.6 million remaining Salesforce commitment compares with expected platform usage and whether minimum-order thresholds could trigger true-up payments.
- The outcome and potential costs of the OpenKey trademark litigation, notwithstanding the product-name change; the filing provides no estimable loss range.
- Final purchase accounting and performance of Qforma CrowdLink, including the preliminary goodwill and intangible-asset valuations.
- Whether planned hiring and product investment can be funded while maintaining margins, and whether operating cash flow remains strong after considering collection and billing timing.
- Potential effects of interest-rate and foreign-exchange movements: the filing estimates a 100-basis-point rate increase would reduce investment-portfolio market value by $2.4 million.