Veeva Systems Inc. — FY2014 Form 10-K
Business context and reporting period. Veeva provides cloud-based software and related implementation services to life sciences companies, principally through Veeva CRM, Veeva Vault and Veeva Network. This annual report covers the fiscal year ended January 31, 2014; it also reports unaudited results for the quarter ended that date (FY2014 Q4). The company completed its IPO in October 2013.
Financial performance and liquidity
| Metric | FY2014 | FY2013 |
|---|---|---|
| Total revenue | $210.2 million | $129.5 million |
| Subscription revenue | $146.6 million | $73.3 million |
| Professional services and other revenue | $63.5 million | $56.3 million |
| Gross profit / gross margin | $127.5 million / 60.7% | $72.5 million / 56.0% |
| Operating income / margin | $39.3 million / 18.7% | $30.0 million / 23.2% |
| Net income / net margin | $23.6 million / 11.2% | $18.8 million / 14.5% |
| Operating cash flow | $41.8 million | $30.8 million |
| Cash, cash equivalents and short-term investments at year-end | $288.1 million | $46.2 million |
| Working capital at year-end | $267.1 million | $32.6 million |
Revenue grew 62% year over year; subscription revenue grew 100%. Subscription services were about 70% of revenue, up from 57%, and generated a 75% gross margin versus 27% for professional services. The overall gross margin improved as the revenue mix shifted toward subscriptions. Operating expenses rose 108% to $88.2 million, including increased hiring, sales and marketing, product development, public-company costs and stock-based compensation. The effective tax rate was 39%, compared with 35%.
FY2014 Q4 revenue was $62.8 million, including $45.7 million of subscription revenue; operating income was $11.3 million and net income was $6.2 million. In the comparable prior-year quarter, revenue was $39.8 million and net income was $5.7 million.
Cash from operations increased, supported in part by a $28.5 million increase in deferred revenue and a $9.7 million increase in accrued expenses, partly offset by a $19.7 million increase in receivables. The IPO generated $214.5 million of net cash proceeds; financing cash flow was $215.4 million. Investing cash outflow was $26.6 million, including the AdvantageMS acquisition and net purchases of investments. The balance sheet reports no borrowings; total liabilities were $90.2 million, including $67.4 million of deferred revenue. Management said available liquidity and operating cash generation should cover working capital and capital expenditures for at least 12 months.
Material changes versus the prior period
- Subscription revenue more than doubled, while professional services revenue increased 13%; subscription revenue’s share of total revenue rose substantially.
- Gross margin improved by 4.7 percentage points, but operating and net margins declined as expense growth outpaced operating income growth.
- International revenue rose to 41% of total revenue from 35%; Europe and Asia-Pacific grew faster than North America.
- Customer count reached approximately 198, from 134 a year earlier. Subscription revenue retention was 166%, down from 187%, but remained above 100% due to expansions and renewals.
- Headcount increased to 725 from 437. Veeva acquired AdvantageMS for approximately $12.4 million, adding healthcare-provider data capabilities to support Network.
Outlook, commentary and risks
- Management expects revenue growth to slow from recent rates and operating expenses to increase as it invests in R&D, sales, services, international expansion, infrastructure and public-company operations. It expects subscription revenue to become a larger share of sales and professional-services revenue to decline proportionally. No numerical earnings or revenue guidance is provided.
- Veeva identified adoption of newer products, particularly Vault and Network, expansion into research and development buyers, and further customer and international growth as important to its plans. CRM accounted for approximately 95% of FY2014 subscription revenue, creating product concentration risk.
- The Salesforce.com agreement was extended through September 2025 and requires $500 million in minimum orders over the term, with specified interim thresholds and potential true-up payments. Salesforce.com hosts key portions of CRM, creating platform dependence as well as a significant long-term commitment.
- A patent lawsuit brought by Prolifiq alleges infringement involving CRM Approved Email. Three of the five patent claims were dismissed without prejudice; remaining claims and potential financial impact were uncertain and losses could not be reasonably estimated.
- Other highlighted risks include customer concentration (top 10 customers generated 56% of FY2014 revenue), annual subscription renewals, security and service interruptions, competition, regulation and privacy compliance, foreign exchange exposure, and the company’s ability to scale. The company does not hedge currency exposures. Class B shares carry ten votes per share; insiders and affiliates held approximately 98.6% of voting power as of January 31, 2014.
- The filing notes that FY2014 EPS calculations were adjusted after the company’s earlier earnings release. Reported FY2014 EPS was $0.20 basic and $0.15 diluted; the filing described the adjustments as immaterial to the financial statements.
Important facts for investors to verify
- Whether subscription growth and the 166% retention rate persist, and whether newer products materially reduce dependence on CRM.
- The economics and potential true-up exposure under the $500 million Salesforce.com minimum-order commitment.
- Developments in the remaining Prolifiq claims and any resulting costs, restrictions or settlements.
- Whether operating cash generation remains strong as receivables, hiring and investment grow; distinguish recurring cash generation from IPO proceeds.
- The effects of dual-class voting control, stock-based compensation and future share sales on public shareholders.