Veeva Systems Inc. — Q3 FY2015 Form 10-Q
Reporting period: Three and nine months ended October 31, 2014; interim financial statements are unaudited. Veeva provides cloud software for life sciences, including Veeva CRM, Vault and Network. Amounts below are USD millions unless stated otherwise.
Financial performance
| Metric | Q3 FY2015 | Q3 FY2014 | Nine months FY2015 | Nine months FY2014 |
|---|---|---|---|---|
| Revenue | $83.8 | $55.0 | $226.2 | $147.3 |
| Subscription revenue | $61.4 | $38.9 | $166.5 | $100.9 |
| Professional services and other | $22.4 | $16.0 | $59.7 | $46.4 |
| Gross profit | $53.4 | $33.6 | $141.7 | $89.1 |
| Operating income | $19.9 | $10.0 | $49.3 | $28.0 |
| Net income | $10.3 | $6.5 | $27.1 | $17.4 |
| Operating cash flow | $34.3 | $5.3 | $69.0 | $25.5 |
- Q3 revenue increased 52% year over year; subscription revenue rose 58% and services revenue 40%. For the nine months, revenue increased 54%, led by 65% subscription growth.
- Gross margin was 63.7% in Q3, up from 61.1%; nine-month gross margin was 62.6%, up from 60.4%. Q3 subscription gross margin was 77% and services gross margin 29%.
- Operating margin rose to 23.8% in Q3 from 18.1%; nine-month operating margin was 21.8% versus 19.0%. Q3 diluted EPS was $0.07, compared with $0.05.
- Subscription services were 73% of Q3 revenue and 74% of nine-month revenue, versus 71% and 69% in the comparable periods. Vault and Network together exceeded 15% of Q3 revenue; CRM remained the historically dominant subscription product.
Financial position and liquidity
- At October 31, 2014, cash and cash equivalents were $132.1 and short-term investments $260.7, totaling $392.9, compared with $288.1 at January 31, 2014. Current assets were $449.5; current liabilities were $107.8, including $84.7 of deferred revenue.
- Total assets were $492.6 and stockholders’ equity $381.2. The balance sheet reports no debt.
- Nine-month operating cash flow of $69.0 was supported in part by a $17.3 increase in deferred revenue and a $13.2 decrease in accounts receivable. Investing cash outflow was $262.8, largely net investment purchases of $236.4 and $26.1 of property and equipment. Financing cash inflow was $63.5, including $34.5 from Veeva’s follow-on offering.
- Veeva says existing cash, cash equivalents, investments and operating cash flows should meet working-capital and capital-expenditure needs for at least the next 12 months. It held $13.5 of cash and cash equivalents outside the U.S., designated indefinitely reinvested.
Material changes, outlook and risks
- On July 22, 2014, Veeva bought its future Pleasanton headquarters for $24.0 million and expected to occupy it in spring 2015.
- Management expects operating expenses to increase as it hires and invests in product development, sales, services, international expansion and public-company infrastructure. It anticipates near-term pressure on operating margins; no numerical earnings or revenue guidance is provided in the filing. Management expects subscription revenue to become a larger share of revenue over time.
- The effective tax rate increased to 45.9% in Q3 from 35.5%, and to 43.8% for nine months from 37.0%, primarily due to expiration of the federal R&D tax credit and reduced domestic production activities deductions associated with stock-option activity.
- Other expense was $1.0 in Q3, principally reflecting a $1.3 foreign-currency loss, partly offset by interest income. Management noted exposure to movements in the euro, pound, yen and yuan and had not initiated currency hedging.
- Veeva settled its Prolifiq patent and trade-secret litigation on November 21, 2014. The settlement included a one-time payment and cross-licenses; financial terms were not disclosed, but settlement expense was recorded in Q3 general and administrative expense and acquired-license amounts in other assets. The case was dismissed with prejudice on November 25.
- The amended Salesforce agreement runs through September 1, 2025 and carries $500 million of minimum order commitments. Remaining future minimum payments were $474.8 million at October 31, primarily due after five years. Failure to meet specified thresholds could require true-up payments.
- Key disclosed risks include reliance on Salesforce for CRM platform and hosting services, customer adoption and renewal of newer products, cybersecurity and service availability, competition and life-sciences industry consolidation, foreign-exchange exposure, and execution of rapid growth. Management reported disclosure controls were effective as of October 31 and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether subscription growth and expansion within existing customers can continue, especially for Vault and Network, and how customer retention and renewals evolve.
- The size and accounting treatment of the Prolifiq settlement payment, which the filing does not clearly quantify, and any continuing costs or obligations under the cross-license.
- Salesforce commitment thresholds, the remaining $474.8 million obligation and the effect of platform fees on CRM margins and cash flows.
- Whether investment spending, hiring and the headquarters build-out affect margins or cash generation beyond management’s stated expectations.
- Changes in effective tax rate, foreign-currency exposure and the availability of liquidity, including the treatment of foreign funds designated indefinitely reinvested.