VEEVA SYSTEMS INC. You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our "Selected Consolidated Financial Data" and our consolidated financial statements and notes thereto appearing elsewhere in this Form 10-K. In addition to historical consolidated financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results could differ materially from those anticipated by these forward-looking statements as a result of many factors. We discuss factors that we believe could cause or contribute to these differences below and elsewhere in this Form 10-K, including those set forth under "Risk Factors" and "Special Note Regarding Forward-Looking Statements." OverviewVeeva is the leading provider of industry cloud solutions for the global life sciences industry. We were founded in 2007 on the premise that industry-specific cloud solutions could best address the operating challenges and regulatory requirements of life sciences companies. Our solutions are designed to meet the unique needs of our customers and their most strategic business functions-from research and development to commercialization. Our solutions are designed to help life sciences companies develop and bring products to market faster and more efficiently, market and sell more effectively, and maintain compliance with government regulations. In our fiscal year endedJanuary 31, 2020 , we derived approximately 52% and 48% of our subscription services revenues and 49% and 51% of our total revenues from our Veeva Commercial Cloud solutions and Veeva Vault solutions, respectively. The contribution of subscription services revenues and total revenues associated with our Veeva Vault solutions are expected to continue to increase as a percentage of subscription services revenues and total revenues in the future. Please note that revenues attributable to our recently acquired businesses will be classified under Veeva Commercial Cloud, which will, therefore, impact the mix of revenues between Veeva Commercial Cloud and Veeva Vault. We also offer certain of our Veeva Vault solutions to three industries outside the life sciences industry primarily inNorth America andEurope . For our fiscal years endedJanuary 31, 2020 , 2019, and 2018, our total revenues were$1,104.1 million ,$862.2 million and$690.6 million , respectively, representing year-over-year growth in total revenues of 28% in fiscal year endedJanuary 31, 2020 and 25% in fiscal year endedJanuary 31, 2019 . For our fiscal years endedJanuary 31, 2020 , 2019, and 2018, our subscription services revenues were$896.3 million ,$694.5 million , and$559.4 million , respectively, representing year-over-year growth in subscription services revenues of 29% in fiscal year endedJanuary 31, 2020 and 24% in fiscal year endedJanuary 31, 2019 . We expect the growth rate of our total revenues and subscription services revenues to decline in the future. We generated net income of$301.1 million ,$229.8 million , and$151.2 million for our fiscal years endedJanuary 31, 2020 , 2019, and 2018, respectively. As ofJanuary 31, 2020 , 2019, and 2018, we served 861, 719, and 625 customers, respectively. As ofJanuary 31, 2020 and 2019, we had 390 and 335Veeva Commercial Cloud customers, respectively, and 715 and 574 Veeva Vault customers, respectively. The combined customer counts for Veeva Commercial Cloud andVeeva Vault exceed the total customer count in each year because some customers subscribe to products in both areas. Veeva Commercial Cloud customers are those customers that have at least one of the following products: Veeva CRM,Veeva CLM, Veeva CRM Approved Email, Veeva CRM Engage, Veeva Align, Veeva CRM Events Management, Veeva Nitro, Veeva Andi, Veeva OpenData, Veeva Oncology Link, or Veeva Network Customer Master. Note that net new customers from Crossix andPhysicians World are included in Veeva Commercial Cloud. Veeva Vault customers are those customers that have at least one Vault product. Many of ourVeeva Vault applications are used by smaller, earlier stage pre-commercial companies, some of which may not reach the commercialization stage. Thus, the potential number of Veeva Vault customers is significantly higher than the potential number of Veeva Commercial Cloud customers. OnNovember 1, 2019 , we completed our acquisition of Crossix, a provider of privacy-safe patient data and analytics. Crossix bringsVeeva additional depth in patient data and data analytics, and we are integrating Crossix with our Veeva CRM and OpenData products. Further, onNovember 7, 2019 , we completed our acquisition ofPhysicians World , a provider of speakers bureau services for healthcare professionals. Acquiring Physicians World makes it easier for our customers to get industry leading cloud software and services from a single vendor. While we expect these acquisitions to support the continued growth of our Commercial Cloud solutions, we may encounter difficulties integrating these businesses and we may not retain existing Crossix andPhysicians World customers and key Crossix andPhysicians World employees to the extent we expect, which could adversely affect our business. For further details on our recently acquired businesses, please refer to note 2 to the notes of our consolidated financial statements. 39Veeva Systems Inc. | Form 10-K --------------------------------------------------------------------------------
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TheWorld Health Organization has declared the outbreak of COVID-19, which began inDecember 2019 , to be a pandemic, and theU.S. federal government has declared it a national emergency. The extent of the impact of COVID-19 on our operational and financial performance will depend on certain developments, including the duration and spread of the outbreak, impact on our customers and our sales cycles, impact on our customer, employee or industry events, and effect on our vendors and partners, all of which are uncertain and cannot be predicted. For example, in response to the COVID-19 outbreak, we have shifted certain of our customer events to virtual-only experiences, and we may be forced to or may deem it advisable to similarly alter, postpone, or cancel entirely additional customer, employee, or industry events in the future. We have also imposed employee travel restrictions and instructed employees in most locations to work from home. Many of our customers have implemented similar measures, which may limit our ability to sell or provide professional services to them. Customers may also delay or cancel purchasing decisions or projects in light of uncertainties to their businesses arising from the COVID-19 outbreak. At this point, the extent to which the COVID-19 outbreak may impact our financial condition or results of operations is uncertain. Due to our subscription-based business model, the effect of the COVID-19 outbreak, and any impact to our sales efforts, may not be fully reflected in our results of operations until future periods, if at all. For a further description of our business and products, see "Business" above. Key Factors Affecting Our Performance Investment in Growth. We have invested and intend to continue to invest aggressively in expanding the breadth and depth of our product portfolio, including through acquisitions. We expect to continue to invest in research and development to expand existing solutions and build new solutions; in sales and marketing to promote our solutions to new and existing customers and in existing and expanded geographies and industries; in professional services to ensure the success of our customers' implementations of our solutions; and in other operational and administrative functions to support our expected growth. We expect that our headcount will increase as a result of these investments. We also expect our total operating expenses will continue to increase over time, which could have a negative impact on our operating margin. Adoption of Our Solutions by Existing and New Customers. Most of our customers initially deploy our solutions to a limited number of end users within a division or geography and may only initially deploy a limited set of our available solutions. Our future growth is dependent upon our existing customers' continued success and their renewals of subscriptions to our solutions, expanded deployment of our solutions within their organizations, and their purchase of subscriptions to additional solutions. Our growth is also dependent on the adoption of our solutions by new customers. Subscription Services Revenue Retention Rate. A key factor to our success is the renewal and expansion of our existing subscription agreements with our customers. We calculate our annual subscription services revenue retention rate for a particular fiscal year by dividing (i) annualized subscription revenue as of the last day of that fiscal year from those customers that were also customers as of the last day of the prior fiscal year by (ii) the annualized subscription revenue from all customers as of the last day of the prior fiscal year. Annualized subscription revenue is calculated by multiplying the daily subscription revenue recognized on the last day of the fiscal year by 365. This calculation includes the impact on our revenues from customer non-renewals, deployments of additional users or decreases in users, deployments of additional solutions or discontinued use of solutions by our customers, and price changes for our solutions. Historically, the impact of price changes on our subscription services revenue retention rate has been minimal. For our fiscal years endedJanuary 31, 2020 , 2019, and 2018, our subscription services revenue retention rate was 121%, 122%, and 121%, respectively. Components of Results of Operations Revenues We derive our revenues primarily from subscription services fees and professional services fees. Subscription services revenues consist of fees from customers accessing our cloud-based software solutions and subscription or license fees for our data solutions. Professional services and other revenues consist primarily of fees from implementation services, configuration, data services, training, and managed services related to our solutions. For our fiscal year endedJanuary 31, 2020 , subscription services revenues constituted 81% of total revenues and professional services and other revenues constituted 19% of total revenues. 40Veeva Systems Inc. | Form 10-K --------------------------------------------------------------------------------
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We generally enter into master subscription agreements with our customers and count each distinct master subscription agreement that has not been terminated or expired and that has orders for which we have recognized revenue in the quarter as a distinct customer for purposes of determining our total number of current customers as of the end of that quarter. We generally enter into a single master subscription agreement with each customer, although in some instances, affiliated legal entities within the same corporate family may enter into separate master subscription agreements. Conversely, affiliated legal entities that maintain distinct master service agreements may choose to consolidate their orders under a single master service agreement, and, in that circumstance, our customer count would decrease. Divisions, subsidiaries, and operating units of our customers often place distinct orders for our subscription services under the same master subscription agreement, and we do not count such distinct orders as new customers for purposes of determining our total customer count. With respect to data services customers that have not purchased one of our software solutions, we count as a distinct customer each party that has a master subscription agreement and a known and recurring payment obligation. For purposes of determining our total customer count, we count each entity that uses a legacy Zinc Ahead product as a distinct customer if such entity is not otherwise a customer of ours. For purposes of determining customers of Crossix that do not contract under a master subscription agreement, we count each entity that has a statement of work or services agreement and a known payment obligation as a distinct customer if such entity is not otherwise a customer of ours. For purposes of determining customers ofPhysicians World , we count each entity for which we recognize services revenue as a distinct customer if such entity is not otherwise a customer of ours. New subscription orders for our core Veeva CRM application generally have a one-year term. If a customer adds end users or additional Veeva Commercial Cloud applications to an existing order for our core Veeva CRM application, such additional orders will generally be coterminous with the anniversary date of the core Veeva CRM order, and as a result, orders for additional end users or additional Veeva Commercial Cloud applications will commonly have an initial term of less than one year. With respect to applications other than our core Veeva CRM application and particularly with respect to our Veeva Vault applications, we have entered into a number of orders that are several years in duration, ranging from two to eight years. The fees associated with such orders are typically not based on the number of end-users and typically escalate over the term of such orders at a pre-agreed rate to account for, among other factors, implementation and adoption timing and planned increased usage by the customer. There are timing differences between billings and revenue recognition with respect to certain of our multi-year orders with escalating fees which will result in fluctuations in deferred revenue and unbilled accounts receivable balances that did not occur prior to our adoption of Topic 606. For instance, when the amounts we are entitled to invoice in any period pursuant to multi-year orders with escalating fees are less than the revenue we are required to recognize pursuant to Topic 606, we will accrue an unbilled accounts receivable balance related to such orders. In the same scenario, the net deferred revenue we would record in connection with such orders will be less than it would have been prior to the adoption of Topic 606 because we will be recognizing more revenue earlier in the term of such multi-year orders. Our subscription orders are generally billed at the beginning of the subscription period in annual or quarterly increments, which means the annualized value of such orders may not be completely reflected in deferred revenue at any single point in time. Also, particularly with respect to our Veeva Commercial Cloud orders, because the term of orders for additional end users or applications is commonly less than one year, the annualized value of such orders may not be completely reflected in deferred revenue at any single point in time. We have also agreed from time to time, and may agree in the future, to allow customers to change the renewal dates of their orders to, for example, align more closely with a customer's annual budget process or to align with the renewal dates of other orders placed by other entities within the same corporate control group, or to change payment terms from annual to quarterly, or vice versa. Such changes typically result in an order of less than one year as necessary to align all orders to the desired renewal date and, thus, may result in a lesser increase to deferred revenue than if the adjustment had not occurred. Additionally, changes in renewal dates may change the fiscal quarter in which deferred revenue associated with a particular order is booked. Accordingly, we do not believe that changes on a quarterly basis in deferred revenue, unbilled accounts receivable, or calculated billings, a metric commonly cited by financial analysts, are accurate indicators of future revenues for any given period of time. We define the term calculated billings for any period to mean revenue for the period plus the change in deferred revenue from the immediately preceding period minus the change in unbilled accounts receivable from the immediately preceding period.Veeva Systems Inc. | Form 10-K 41
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Subscription services revenues are recognized ratably over the respective non-cancelable subscription term because of the continuous transfer of control to the customer. Our subscription services agreements are generally non-cancelable during the term, although customers typically have the right to terminate their agreements for cause in the event of material breach. Our agreements typically provide that orders will automatically renew unless notice of non-renewal is provided in advance. Subscription services revenues are affected primarily by the number of customers, the scope of the subscription purchased by each customer (for example, the number of end users or other subscription usage metric) and the number of solutions subscribed to by each customer. We utilize our own professional services personnel and, in certain cases, third-party subcontractors to perform our professional services engagements with customers. The majority of our professional services arrangements are billed on a time and materials basis and revenues are recognized over time based on time incurred and contractually agreed upon rates. Certain professional services revenues are billed on a fixed fee basis and revenues are typically recognized over time based on the proportion of total services performed. Data services and training revenues are generally recognized as the services are performed. Professional services revenues are affected primarily by our customers' demands for implementation services, configuration, data services, training, speakers bureau logistics, and managed services in connection with our solutions. Allocated Overhead and Equity Compensation We accumulate certain costs such as building depreciation, office rent, utilities, and other facilities costs and allocate them across the various departments based on headcount. We refer to these costs as "allocated overhead." Note that beginning in the fiscal quarter endedApril 30, 2019 , we implemented a new equity compensation program applicable to the vast majority of our employees, which increased stock-based compensation expenses allocated to cost of revenues and operating expenses in absolute dollars and as a percentage of revenue during the fiscal year endedJanuary 31, 2020 . For details of equity granted the year endedJanuary 31, 2020 , refer to note 13 of the notes to our condensed consolidated financial statements. Cost of Revenues Cost of subscription services revenues for all of our solutions consists of expenses related to our computing infrastructure provided by third parties, including salesforce.com andAmazon Web Services , personnel related costs associated with hosting our subscription services and providing support, including our data stewards, expenses associated with computer equipment and software, allocated overhead, and amortization expense associated with purchased intangibles related to our subscription services. We intend to continue to invest additional resources in our subscription services to enhance our product offerings and increase our delivery capacity. We may add or expand computing infrastructure capacity in the future, migrate to new computing infrastructure service providers, make additional investments in the availability and security of our solutions, and make continued investments in data sources. Cost of professional services and other revenues consists primarily of employee-related expenses associated with providing these services. The cost of providing professional services is significantly higher as a percentage of the related revenues than for our subscription services due to the direct labor costs and costs of third-party subcontractors. Operating Expenses Research and Development. Research and development expenses consist primarily of employee-related expenses, third-party consulting fees and hosted infrastructure costs We continue to focus our research and development efforts on adding new features and applications and increasing the functionality and enhancing the ease of use of our cloud-based applications. Sales and Marketing. Sales and marketing expenses consist primarily of employee-related expenses, sales commissions, marketing program costs, amortization expense associated with purchased intangibles related to our customer contracts, customer relationships and brand development, travel-related expenses and allocated overhead. Sales commissions are costs of obtaining customer contracts and are capitalized and then amortized over a period of benefit that we have determined to be three years. 42Veeva Systems Inc. | Form 10-K --------------------------------------------------------------------------------
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General and Administrative. General and administrative expenses consist of employee-related expenses for our executive, finance and accounting, legal, employee success, management information systems personnel, and other administrative employees. In addition, general and administrative expenses include fees related to third-party legal counsel, fees related to third-party accounting, tax and audit services, other corporate expenses, and allocated overhead. Other Income, Net Other income, net consists primarily of transaction gains or losses on foreign currency, net of hedging costs, interest income, and amortization of premiums paid on investments. Provision for Income Taxes Provision for income taxes consists of federal and state income taxes inthe United States and income taxes in certain foreign jurisdictions. See note 10 of the notes to our consolidated financial statements. New Accounting Pronouncements Adopted in Fiscal 2020 Refer to note 1 of the notes to our consolidated financial statements for a full description of the recent accounting pronouncements adopted during the fiscal year endedJanuary 31, 2020 . Recent Accounting Pronouncements Credit Losses InJune 2016 , theFinancial Accounting Standards Board , or FASB, issued ASU 2016-13, including subsequent amendments, regarding "Measurement of Credit Losses on Financial Instruments" (Topic 326), which modifies the accounting methodology for most financial instruments. The guidance establishes a new "expected loss model" that requires entities to estimate current expected credit losses on financial instruments by using all practical and relevant information. Additionally, any expected credit losses are to be reflected as allowances rather than reductions in the amortized cost of available-for-sale debt securities. This guidance is effective for annual reporting periods beginning afterDecember 15, 2019 , including interim periods within that reporting period. We do not expect this standard to have a material impact on our consolidated financial statements. Cloud Computing Arrangements InAugust 2018 , the FASB issued ASU 2018-15, "Intangibles-Goodwill andOther-Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract," which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The standard is effective for interim and annual reporting periods beginning afterDecember 15, 2019 and can be applied either prospectively to implementation costs incurred after the date of adoption or retrospectively to all arrangements. We do not expect this standard to have a material impact on our consolidated financial statements and plan to apply this standard prospectively. Accounting for Income Taxes InDecember 2019 , the FASB issued ASU 2019-12, regarding ASC Topic 740 "Income Taxes," which simplifies certain aspects of accounting for income taxes. The guidance is effective for annual reporting periods beginning afterDecember 15, 2020 , including interim periods within that reporting period. Early adoption is permitted. We are currently evaluating the impact of the adoption of this standard on our consolidated financial statements and do not plan to early adopt.Veeva Systems Inc. | Form 10-K 43
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Results of Operations The following tables set forth selected consolidated statements of operations data and such data as a percentage of total revenues for each of the periods indicated:
Fiscal Year Ended January 31,
2020 2019
(in thousands)
Consolidated Statements of Comprehensive Income Data: Revenues: Subscription services
$ 896,294 $ 694,467 Professional services and other 207,787 167,743 Total revenues 1,104,081 862,210 Cost of revenues(1): Cost of subscription services 136,328 117,009 Cost of professional services and other 167,041 128,272 Total cost of revenues 303,369 245,281 Gross profit 800,712 616,929 Operating expenses(1): Research and development 209,895 158,783 Sales and marketing 190,331 148,867 General and administrative 114,267 86,413 Total operating expenses 514,493 394,063 Operating income 286,219 222,866 Other income, net 27,478 15,777 Income before income taxes 313,697 238,643 Provision for income taxes 12,579 8,811 Net income$ 301,118 $ 229,832 ________________ (1)Includes stock-based compensation as follows: Cost of revenues: Cost of subscription services$ 2,638 $ 1,553
Cost of professional services and other 17,518 10,575 Research and development
37,001 22,138
Sales and marketing 27,537 18,381
General and administrative 31,212 23,778
Total stock-based compensation
Revenues
Fiscal Year Ended January 31,
2020 2019 2020 to 2019
% Change
(dollars in thousands)
Revenues:
Subscription services $ 896,294 $ 694,467 29%Professional services and other 207,787 167,743 24 Total revenues
$ 1,104,081 $ 862,210 28 Percentage of revenues: Subscription services 81 % 81 % Professional services and other 19 19 Total revenues 100 % 100 % 44Veeva Systems Inc. | Form 10-K --------------------------------------------------------------------------------
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Fiscal 2020 Compared to Fiscal 2019. Total revenues increased$241.9 million , of which$201.8 million was from growth in subscription services revenues. The increase in subscription services revenues consisted of$128.3 million of subscription services revenue attributable to Veeva Vault solutions and$73.6 million of subscription services revenue attributable to Veeva Commercial Cloud solutions, which includes the contribution from Crossix. The geographic mix of subscription services revenues was 54% fromNorth America and 27% fromEurope in fiscal year endedJanuary 31, 2020 as compared to subscription services revenues of 54% fromNorth America and 26% fromEurope in fiscal year endedJanuary 31, 2019 . Subscription services revenues were 81% of total revenues for fiscal years endedJanuary 31, 2020 and 2019. Professional services and other revenues increased$40.0 million . The increase in professional services revenues was due primarily to new customers requesting implementation and deployment related professional services and existing customers requesting professional services related to expanding deployments or the deployment of newly purchased solutions, and, to a lesser extent, professional services revenues associated with our recently acquired businesses. The increased demand for professional services and the resulting increase in professional services revenues was weighted heavily towards implementation and deployments of our Veeva Vault solutions. The geographic mix of professional services and other revenues was 60% fromNorth America and 32% fromEurope in fiscal year endedJanuary 31, 2020 as compared to 62% fromNorth America and 27% fromEurope in fiscal year endedJanuary 31, 2019 . Over time, we expect the proportion of our total revenues from professional services to decrease. Costs and Expenses Fiscal Year Ended January 31, 2020 2019 2020 to 2019 % Change (dollars in thousands) Cost of revenues: Cost of subscription services$ 136,328 $ 117,009 17% Cost of professional services and other 167,041 128,272 30 Total cost of revenues$ 303,369 $ 245,281 24 Gross margin percentage: Subscription services 85 % 83 % Professional services and other 20 24 Total gross margin percentage 73 % 72 % Gross profit$ 800,712 $ 616,929 30% Headcount (at period end) 1,417 944 50%
Fiscal 2020 Compared to Fiscal 2019. Cost of revenues increased
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Gross margin for fiscal years endedJanuary 31, 2020 and 2019 was 73% and 72%, respectively. The increase compared to the prior period is largely due to the continued growth of Veeva Vault and our newer multichannel CRM applications that complement Veeva CRM, all of which have higher subscription services gross margins than our core Veeva CRM application. We expect gross margin to decrease in the fiscal year endingJanuary 31, 2021 due to the dilutive impact to gross margin from our recently acquired businesses, which we expect to be partially offset by growth of our Vault products, which have a higher gross margin profile relative to our core CRM product. Operating Expenses and Operating Margin Operating expenses include research and development, sales and marketing, and general and administrative expenses. As we continue to invest in our growth through hiring, and as we realize the full impact of the additional headcount and operating expenses associated with Crossix andPhysicians World , we expect operating expenses to increase in absolute dollars and may slightly increase as a percentage of revenue in the near term. We also expect stock-based compensation expense to increase in absolute dollars and as a percentage of revenue through the fiscal year endingJanuary 31, 2021 due to increased headcount and retention equity awards granted to certain employees associated with the acquisitions inNovember 2019 . Research and Development Fiscal Year Ended January 31, 2020 to 2019 2020 2019 % Change (dollars in thousands)
Research and development
19 % 18 %
Headcount (at period end) 1,114 866 29%
Fiscal 2020 Compared to Fiscal 2019. Research and development expenses increased
Fiscal Year Ended January 31,
2020 to 2019
2020 2019 % Change
(dollars in thousands)
Sales and marketing
17 % 17 %
Headcount (at period end) 656 510 29%
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Fiscal 2020 Compared to Fiscal 2019. Sales and marketing expenses increased$41.5 million , primarily due to an increase of$31.0 million in employee compensation-related costs (includes an increase of$9.2 million in stock-based compensation), which was driven by an 29% increase in headcount. The increase in employee compensation-related costs is primarily driven by the increase in headcount during the period, including added headcount from our recently acquired businesses. In addition, there was an increase of$2.1 million of amortization of purchased intangibles associated with our recently acquired businesses. We expect sales and marketing expenses to continue to grow in absolute dollars in the near term, primarily due to employee-related expenses as we increase our headcount, to support our sales and marketing efforts associated with our newer solutions and our continued expansion of our sales capacity across all our solutions, and as we experience the full impact of additional sales and marketing headcount and expenses associated with our recently acquired businesses. General and Administrative Fiscal Year Ended January 31, 2020 to 2019 2020 2019 % Change (dollars in thousands)
General and administrative
10 % 10 %
Headcount (at period end) 314 233 35%
Fiscal 2020 Compared to Fiscal 2019. General and administrative expenses
increased
Fiscal Year Ended January 31, 2020 to 2019
2020 2019 % Change
(dollars in thousands)
Other income, net $ 27,478 $ 15,777 74%
Fiscal 2020 Compared to Fiscal 2019. Other income, net increased
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Provision for Income Taxes
Fiscal Year Ended January 31,
2020 to 2019
2020 2019 % Change
(dollars in thousands)
Income before income taxes 313,697 238,643 31%
Provision for income taxes 12,579 8,811 43%
Effective tax rate 4.0 % 3.7 %
Our effective tax rate was 4.0% and 3.7% for the years ended January 31, 2020
and 2019, respectively. The provision for income taxes differs from the tax
computed at the U.S. federal statutory income tax rate due primarily to state
taxes, tax credits, equity compensation, and foreign income subject to taxation
in the United States . Future tax rates could be affected by changes in tax laws
and regulations or by rulings in tax related litigation, as may be applicable.
We will continue to identify and analyze other applicable changes in tax laws in
the United States and abroad.
Fiscal 2020 Compared to Fiscal 2019. During the fiscal year ended January 31,
2020 , our effective tax rate increased primarily due to a reduced impact from
excess tax benefits related to equity compensation, partially offset by
increased tax credits. We recognized such tax benefits in our provision for
income taxes of $50.4 million .
Fiscal Year Ended January 31, 2019 and 2018
For a discussion of the year ended January 31, 2019 compared to the year ended
January 31, 2018 , please refer to Part II, Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in our Annual Report
on Form 10-K for the year ended January 31, 2019 .
Non-GAAP Financial Measures
In our public disclosures, we have provided non-GAAP measures, which we define
as financial information that has not been prepared in accordance with generally
accepted accounting principles in the United States , or GAAP. In addition to our
GAAP measures, we use these non-GAAP financial measures internally for budgeting
and resource allocation purposes and in analyzing our financial results.
For the reasons set forth below, we believe that excluding the following items
provides information that is helpful in understanding our operating results,
evaluating our future prospects, comparing our financial results across
accounting periods, and comparing our financial results to our peers, many of
which provide similar non-GAAP financial measures.
• Stock-based compensation expenses. We exclude stock-based compensation
expenses primarily because they are non-cash expenses that we exclude
from our internal management reporting processes. We also find it
useful to exclude these expenses when we assess the appropriate level
of various operating expenses and resource allocations when budgeting,
planning, and forecasting future periods. Moreover, because of varying
available valuation methodologies, subjective assumptions and the
variety of award types that companies can use under FASB ASC Topic 718,
we believe excluding stock-based compensation expenses allows investors
to make meaningful comparisons between our recurring core business
operating results and those of other companies.
• Amortization of purchased intangibles. We incur amortization expense
for purchased intangible assets in connection with acquisitions of
certain businesses and technologies. Amortization of intangible assets
is a non-cash expense and is inconsistent in amount and frequency
because it is significantly affected by the timing, size of
acquisitions, and the inherent subjective nature of purchase price
allocations. Because these costs have already been incurred and cannot
be recovered, and are non-cash expenses, we exclude these expenses for
internal management reporting processes. We also find it useful to
exclude these charges when assessing the appropriate level of various
operating expenses and resource allocations when budgeting, planning
and forecasting future periods. Investors should note that the use of
intangible assets contributed to our revenues earned during the periods
presented and will contribute to our future period revenues as well.
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• Deferred compensation associated with the Zinc Ahead business
acquisition. The Zinc Ahead share purchase agreement, as revised,
called for share purchase consideration to be deferred and paid at a
rate of one-third of the deferred consideration amount per year to
certain former Zinc Ahead employee shareholders and option holders who
remain employed with us on each deferred consideration payment date. In
accordance with GAAP, these payments are being accounted for as
deferred compensation and the expense is recognized over the requisite
service period. We view this deferred compensation expense as an
unusual acquisition cost associated with the Zinc Ahead acquisition and
find it useful to exclude it in order to assess the appropriate level
of various operating expenses to assist in budgeting, planning and
forecasting future periods. We believe excluding this deferred
compensation expense may allow investors to make more meaningful
comparisons between our recurring operating results and those of other
companies.
• Income tax effects on the difference between GAAP and non-GAAP costs
and expenses. The income tax effects that are excluded relate to the
imputed tax impact on the difference between GAAP and non-GAAP costs
and expenses due to stock-based compensation, purchased intangibles,
and deferred compensation associated with the Zinc Ahead business
acquisition for GAAP and non-GAAP measures.
Limitations on the use of Non-GAAP financial measures
There are limitations to using non-GAAP financial measures because non-GAAP
financial measures are not prepared in accordance with GAAP and may be different
from non-GAAP financial measures provided by other companies.
The non-GAAP financial measures are limited in value because they exclude
certain items that may have a material impact upon our reported financial
results. In addition, they are subject to inherent limitations as they reflect
the exercise of judgments by management about which items are adjusted to
calculate our non-GAAP financial measures. We compensate for these limitations
by analyzing current and future results on a GAAP basis as well as a non-GAAP
basis and also by providing GAAP measures in our public disclosures.
Non-GAAP financial measures should not be considered in isolation from, or as a
substitute for, financial information prepared in accordance with GAAP. We
encourage investors and others to review our financial information in its
entirety, not to rely on any single financial measure to evaluate our business,
and to view our non-GAAP financial measures in conjunction with the most
directly comparable GAAP financial measures.
Beginning with the fiscal quarter ended
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The following table reconciles the specific items excluded from GAAP metrics in the calculation of non-GAAP metrics for the periods shown below:
Fiscal year ended January 31,
2020 2019 2018
Operating income on a GAAP basis $ 286,219 $ 222,866 $ 157,929
Stock-based compensation expense 115,906 76,425 54,049
Amortization of purchased intangibles 10,120 6,965 7,790
Deferred compensation associated with Zinc
Ahead acquisition - 343 532
Operating income on a non-GAAP basis $ 412,245 $ 306,599 $ 220,300
Net income on a GAAP basis $ 301,118 $ 229,832 $ 151,177
Stock-based compensation expense 115,906 76,425 54,049
Amortization of purchased intangibles 10,120 6,965 7,790
Deferred compensation associated with Zinc
Ahead acquisition - 343 532
Income tax effect on non-GAAP adjustments(1) (79,763 ) (58,888 ) (65,255 ) Net income on a non-GAAP basis
$ 347,381 $ 254,677 $ 148,293
Diluted net income per share on a GAAP basis
0.73 0.49 0.35
Amortization of purchased intangibles 0.06 0.04 0.05
Deferred compensation associated with Zinc
Ahead acquisition - - -
Income tax effect on non-GAAP adjustments(1) (0.50 ) (0.37 ) (0.42 ) Diluted net income per share on a non-GAAP basis
$ 2.19 $ 1.63 $ 0.97
_______________
(1)For the years ended
Fiscal year ended January 31,
2020 2019 2018
(in thousands)
Net cash provided by operating activities
(516,910 ) (103,869 ) (154,520 )
Net cash provided by financing activities 10,010 25,910 20,773
Effect of exchange rate changes on cash and
cash equivalents (2,856 ) (2,077 ) 3,089
Net change in cash and cash equivalents
Our principal sources of liquidity continue to be comprised of our cash, cash
equivalents and short-term investments, as well as cash flows generated from our
operations. At
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Except for certain foreign jurisdictions, our remaining non-U.S. cash and cash equivalents have been earmarked for indefinite reinvestment in our operations outsidethe United States , thus noU.S. current or deferred taxes have been accrued. We believe ourU.S. sources of cash and liquidity are sufficient to meet our business needs inthe United States and do not expect that we will need to repatriate additional funds we have designated as indefinitely reinvested outsidethe United States . Under currently enacted tax laws, should our plans change and we were to choose to repatriate some or all of the funds we have designated as indefinitely reinvested outsidethe United States , such amounts may be subject to certain jurisdictional taxes. We have financed our operations primarily through cash generated from operations. We believe our existing cash, cash equivalents, and short-term investments generated from operations will be sufficient to meet our working capital and capital expenditure needs over at least the next 12 months. Our future capital requirements will depend on many factors including our growth rate, subscription renewal activity, the timing and extent of spending to support product development efforts, the expansion of sales and marketing activities, the ongoing investments in technology infrastructure, the introduction of new and enhanced solutions, and the continuing market acceptance of our solutions. We may in the future enter into arrangements to acquire or invest in complementary businesses, services and technologies, and intellectual property rights. We may be required to seek additional equity or debt financing. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital when desired, our business, operating results, and financial condition would be adversely affected. Cash Flows from Operating Activities Our largest source of operating cash inflows is cash collections from our customers for subscription services. We also generate significant cash flows from our professional services arrangements. The first quarter of our fiscal year is seasonally the strongest quarter for cash inflows due to the timing of our annual subscription billings and related collections. Our primary uses of cash from operating activities are for employee-related expenditures, expenses related to our computing infrastructure (including salesforce.com and Amazon Web Services), building infrastructure costs (including leases for office space), fees for third-party legal counsel and accounting services, and marketing program costs. Note that our net income reflects the impact of excess tax benefits related to equity compensation. Fiscal 2020 Compared to Fiscal 2019. Net cash provided by operating activities was$437.4 million for the fiscal year endedJanuary 31, 2020 . Our cash provided by operating activities during the fiscal year endedJanuary 31, 2020 primarily reflected our net income of$301.1 million , adjustments for non-cash items of$154.4 million , which was offset by a net decrease in our operating assets and liabilities of$18.2 million . Non-cash charges included$115.9 million of stock-based compensation expense,$19.9 million of depreciation and amortization expense, and$3.3 million of accretion of discounts on short-term investments. The net changes in operating assets and liabilities included an increase of$97.8 million in deferred revenue resulting primarily from increased orders from new and existing customers, which was offset by a decrease of$55.5 million in accounts receivable related to increased collections during the period. Fiscal 2019 Compared to Fiscal 2018. Net cash provided by operating activities was$310.8 million for the fiscal year endedJanuary 31, 2019 . Our cash provided by operating activities during the fiscal year endedJanuary 31, 2019 primarily reflected our net income of$229.8 million , adjustments for non-cash items of$98.4 million , which was offset by a net decrease in our operating assets and liabilities of$17.4 million . Non-cash charges included$76.4 million of stock-based compensation expense,$14.1 million of depreciation and amortization expense, and$2.4 million of amortization of premiums on short-term investments. The net changes in operating assets and liabilities included an increase of$89.4 million in deferred revenue resulting primarily from increased orders from new and existing customers, which was offset by a decrease of$79.0 million in accounts receivable related to the seasonal nature of our billings and the timing of collections. Cash Flows from Investing Activities The cash flows from investing activities primarily relate to cash used for the purchase of marketable securities, net of maturities. We also use cash to invest in capital assets to support our growth. Fiscal 2020 Compared to Fiscal 2019. Net cash used in investing activities was$516.9 million for the fiscal year endedJanuary 31, 2020 resulting primarily from$448.2 million in cash used for the acquisition of Crossix andPhysicians World , net of cash acquired,$64.4 million in net purchases of marketable securities,$3.1 million in purchases of property and equipment to support the growth of our business, and$1.2 million of capitalized internal-use software development costs.Veeva Systems Inc. | Form 10-K 51
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Fiscal 2019 Compared to Fiscal 2018. Net cash used in investing activities was$103.9 million for the fiscal year endedJanuary 31, 2019 resulting primarily from$94.1 million in net purchases of marketable securities,$8.4 million in cash used for purchases of property and equipment to support the growth of our business, and$1.4 million of capitalized internal-use software development costs. Cash Flows from Financing Activities The cash flows from financing activities relate to stock option exercises. Fiscal 2020 Compared to Fiscal 2019. Net cash provided by financing activities was$10.0 million for the fiscal year endedJanuary 31, 2020 primarily related to the proceeds from employee stock option exercises. The decrease was primarily due to a reduction in stock option exercises activity during the period. Fiscal 2019 Compared to Fiscal 2018. Net cash provided by financing activities was$25.9 million for the fiscal year endedJanuary 31, 2019 related to the proceeds from employee stock option exercises. Commitments Our principal commitments consist of obligations for minimum payment commitments to salesforce.com and leases for office space and data centers. OnMarch 3, 2014 , we amended our agreement with salesforce.com. The agreement, as amended, requires that we meet minimum order commitments of$500 million over the term of the agreement, which ends onSeptember 1, 2025 , including "true-up" payments if the orders we place with salesforce.com have not equaled or exceeded the following aggregate amounts within the timeframes indicated: (i)$250 million for the period fromMarch 1, 2014 toSeptember 1, 2020 and (ii) the full amount of$500 million bySeptember 1, 2025 . We have met our first minimum order commitment of$250 million and have a remaining purchase commitment of$140.0 million , as ofJanuary 31, 2020 , that must be made bySeptember 1, 2025 . As ofJanuary 31, 2020 , the future non-cancelable minimum payments under these commitments were as follows: Payments due by period 1-3 3-5 More than Total Less than 1 year Years Years 5 years (in thousands) Salesforce.com commitments$ 140,025 $ 6,525 $ - $ -$ 133,500 Operating lease obligations 62,515 10,722 18,271 12,655 20,867 Finance lease obligations 1,454 1,090 364 - - Total$ 203,994 $ 18,337$ 18,635 $ 12,655 $ 154,367 The amounts in the table above are associated with agreements that are enforceable and legally binding, which specify significant terms including payment terms, related services, and the approximate timing of the transaction. Obligations under agreements that we can cancel without a significant penalty are not included in the table. We anticipate leasing additional office space in various locations around the world to support our growth. In addition, our existing lease agreements often provide us with an option to renew. We expect our future operating lease obligations will increase as we expand our operations. Off-Balance Sheet Arrangements We do not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities that would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. 52Veeva Systems Inc. | Form 10-K --------------------------------------------------------------------------------
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Critical Accounting Policies and Estimates Our consolidated financial statements are prepared in accordance with generally accepted accounting principles inthe United States (GAAP). In the preparation of these consolidated financial statements, we are required to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses and related disclosures. On an ongoing basis, we evaluate our estimates and assumptions. Our actual results may differ from these estimates under different assumptions or conditions. We believe that of our significant accounting policies, which are described in note 1 of the notes to the consolidated financial statements, the following accounting policies involve a greater degree of judgment and complexity. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our consolidated financial condition and results of operations. Revenue Recognition We derive our revenues primarily from subscription services and professional services. Some of our contracts with customers contain multiple performance obligations. The transaction price is allocated to the distinct performance obligations on a relative standalone selling price basis. Significant judgment is sometimes required in developing an estimate of the standalone selling price for each distinct performance obligation based on our overall pricing objectives, market conditions and other factors, including other groupings such as customer type and geography. Business combinations and Valuation ofGoodwill and Acquired Intangible Assets We allocate the purchase price of acquired companies to tangible and intangible assets acquired and liabilities assumed based upon their estimated fair values at the acquisition date. The purchase price allocation process requires management to make significant estimates and assumptions with respect to the valuation of intangible assets. Examples of critical estimates in valuing certain of the intangible assets we have acquired or may acquire in the future include but are not limited to future expected cash flows, future revenue growth, margins, customer retention rates, technology life, royalty rates, expected use of acquired assets, and discount rates. These factors are also considered in determining the useful life of the acquired intangible assets. These estimates are based in part on historical experience, market conditions and information obtained from management of the acquired companies and are inherently uncertain.Goodwill represents the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recorded. Recent Accounting Pronouncements See note 1 of the notes to the consolidated financial statements included in Part II, Item 8, "Consolidated Financial Statements and Supplementary Data" of this Annual Report on Form 10-K, which is incorporated herein by reference for a summary of recent accounting pronouncements.Veeva Systems Inc. | Form 10-K 53
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