VEEVA SYSTEMS INC. You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our condensed consolidated financial statements and notes thereto appearing elsewhere in this report. In addition to historical condensed 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 report, 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 offerings span cloud software, data, analytics, professional services, and business consulting and are designed to meet the unique needs of our customers and their most strategic business functions-from research and development to commercialization. Our solutions 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. For a more detailed description of our business and products as ofJanuary 31, 2022 , please see our Annual Report on Form 10-K for the fiscal year endedJanuary 31, 2022 filed onMarch 30, 2022 . InApril 2022 we announced that our solutions will be grouped into three major product categories going forward-Veeva Commercial Cloud, Veeva Data Cloud, and Veeva Development Cloud. We also announced that our data offerings previously offered under the Veeva Data Cloud brand are now offered under the Veeva Compass brand. Veeva Data Cloud is now comprised of the following solutions formerly categorized as Commercial Cloud offerings: Veeva Compass, Veeva Link, andVeeva OpenData. For financial reporting purposes, revenues associated with ourVeeva Commercial Cloud, Veeva Data Cloud and Veeva Claims solutions are classified as "Commercial Solutions" revenues, and revenues associated with ourVeeva Development Cloud, Veeva RegulatoryOne, and Veeva QualityOne solutions are classified as "R&D Solutions" revenues. In our fiscal year endedJanuary 31, 2022 , we derived approximately 59% and 41% of our subscription services revenues and 56% and 44% of our total revenues from our Commercial Solutions and R&D Solutions, respectively. For the three months endedApril 30, 2022 , we derived approximately 57% and 43% of our subscription services revenues and 54% and 46% of our total revenues from our Commercial Solutions and R&D Solutions, respectively. The contribution of subscription services revenues and total revenues associated with our R&D Solutions are expected to continue to increase as a percentage of subscription services revenues and total revenues in the future. We also offer certain of our R&D Solutions to industries outside the life sciences industry primarily inNorth America andEurope . For our fiscal years endedJanuary 31, 2022 , 2021, and 2020, our total revenues were$1,851 million ,$1,465 million , and$1,104 million , respectively, representing year-over-year growth in total revenues of 26% in our fiscal year endedJanuary 31, 2022 and 33% in our fiscal year endedJanuary 30, 2021 . For our fiscal years endedJanuary 31, 2022 , 2021, and 2020, our subscription services revenues were$1,484 million ,$1,179 million , and$896 million , respectively, representing year-over-year growth in subscription services revenues of 26% in our fiscal year endedJanuary 31, 2022 , and 32% in our fiscal year endedJanuary 30, 2021 . Please note that our total revenues and subscription services revenues for our fiscal year endedJanuary 31, 2020 only included revenue contribution from the acquired Crossix andPhysicians World businesses in the fourth quarter of that fiscal year. We expect the growth rate of our total revenues and subscription services revenues to decline compared to the prior fiscal year. We generated net income of$427 million ,$380 million , and$301 million for our fiscal years endedJanuary 31, 2022 , 2021, and 2020, respectively.Veeva Systems Inc. | Form 10-Q 21
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As ofJanuary 31, 2022 , 2021, and 2020, we served 1205, 993, and 861 customers, respectively. As ofJanuary 31, 2022 , 2021, and 2020, we had 653, 572, and 523 Commercial Solutions customers, respectively, and 860, 664, and 538 R&D Solutions customers, respectively. These customer count totals are net of customer attrition during each period. The combined customer counts for Commercial Solutions and R&D Solutions exceed the total customer count in each year because some customers subscribe to products in both areas. Commercial Solutions consist of our cloud software, data, and analytics products built specifically to more efficiently and effectively commercialize our customers' products. R&D Solutions consist of our clinical, quality, regulatory, and safety products. Many of our applications for R&D are used by smaller, earlier stage, pre-commercial companies, some of which may not reach the commercialization stage. Thus, the potential number of R&D Solutions customers is higher than the potential number of Commercial Solutions customers. For the three months endedApril 30, 2022 and 2021, our total revenues were$505 million and$434 million , respectively, representing year-over-year growth in total revenues of 16%. For the three months endedApril 30, 2022 and 2021, our subscription services revenues were$403 million and$341 million , respectively, representing year-over-year growth in subscription services revenues of 18%. We generated net income of$100 million and$116 million for the three months endedApril 30, 2022 and 2021, respectively.
Our Conversion to PBC
OnFebruary 1, 2021 , we became aDelaware public benefit corporation (PBC), and we amended our certificate of incorporation to include the following public benefit purpose: "to provide products and services that are intended to help make the industries we serve more productive, and to create high-quality employment opportunities in the communities in which we operate." When making decisions, our directors have a fiduciary duty to balance the financial interests of stockholders, the best interests of other stakeholders materially affected by our conduct (including customers, employees, partners, and the communities in which we operate), and the pursuit of our public benefit purpose. For more information on our conversion to a PBC and associated risks, see "Risk Factors."
The Continuing Impact of the COVID-19 Pandemic
The worldwide outbreak of COVID-19 has had and continues to have a widespread and unpredictable worldwide impact on our business operations, the life sciences industry, healthcare systems, financial markets, and the global economy. While the impact of COVID-19 on our operational and financial performance has not been materially negative to date, the future impact is uncertain and will depend on future developments, including the duration and spread of the outbreak, government responses to the pandemic, the rate of vaccinations, the impact on our customers, the impact on our employees, the extent of further adverse impacts to the economy, and the scale and pace of economic recovery and resumption of normal business activities, including the rollout of COVID-19 vaccines globally, the lifting of restrictions on movement, and the results of outbreaks and variants, all of which cannot be predicted with certainty. Certain impacts of the COVID-19 pandemic and resulting changes in business practice may be enduring over the long term and may result in significant changes in business practice within the technology industry, the life sciences industry, and the world economy generally. For example, while we have resumed certain in-person customer, employee, and industry events, some of our customers continue to have travel and in-person meeting restrictions that limit our ability to conduct business in person and we cannot predict how long such limitations will remain in effect. Further, the extent to which remote work will remain common practice or become increasingly prevalent after the COVID-19 pandemic ends is not certain and may have significant impacts on hiring practices, management practices, expense structures and investments, and other aspects of our business and the businesses of our customers. We have adopted a permanent "Work Anywhere" policy, which generally gives employees the flexibility to work in an office or at home on any given day, with certain job-specific restrictions. We believe this program is beneficial to our business but we have limited experience with the program. Similarly, the extent to which virtual meetings and interactions continue to be used or preferred in lieu of in-person interactions may significantly change business practices for us and our customers, and, in turn, may impact demand for our products and services. For example, if our customers reduce sales representatives in response to an increasing preference for virtual meetings with doctors, demand for our core CRM application may decline. In the quarter endedOctober 31, 2020 , we disclosed that we expected life sciences companies to reduce the number of sales representatives that they employ by roughly 10%. We currently expect most of these reductions to take place during our fiscal year endingJanuary 31, 2023 , with some reductions still occurring in our fiscal year endingJanuary 31, 2024 . Such reductions could negatively impact sales of our solutions, includingVeeva CRM and certain of our other Commercial Solutions, but 22Veeva Systems Inc. | Form 10-Q
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we cannot be certain such reductions will happen or of the timing or magnitude of such reductions. At the same time, demand for our products that enable virtual interactions with doctors and clinical trial participants may increase. We cannot accurately predict how such changes may impactVeeva's results over the long term.
Impacts of the Russian Invasion of
We are closely monitoring the impact of the Russian invasion ofUkraine and its global impacts. While the conflict is still evolving and the outcome remains highly uncertain, we do not believe the Russian invasion will have a material impact on our business and results of operations. We do not currently have office locations or employees inRussia and our revenues from sales to Russian entities were limited. However, if the conflict continues or worsens, leading to greater disruptions and uncertainty within the life sciences industry or global economy, our business and results of operations could be negatively impacted.
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 and business consulting to help ensure customer success; 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, 2022 , 2021, and 2020, our subscription services revenue retention rate was 119%, 124%, 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 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 and services related to ourVeeva Business Consulting offering. For the three months endedApril 30, 2022 , subscription services revenues constituted 80% of total revenues and professional services and other revenues constituted 20% of total revenues. 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 masterVeeva Systems Inc. | Form 10-Q 23
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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. For purposes of determining customers of Veeva 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 recurring known payment obligation as a distinct customer if such entity is not otherwise a customer of ours. For Veeva Crossix, we do not count as distinct customers agencies contracting with us on behalf of brands within life sciences companies. New subscription orders for our core Veeva CRM application generally have a one-year term. If a customer adds end users or additional Commercial Solutions 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 Commercial Solutions will commonly have an initial term of less than one year. Particularly with respect to our R&D Solutions, we have entered into a number of orders with multi-year terms. 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. 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 recognized in accordance with relevant accounting standards, we will accrue an unbilled accounts receivable balance (a contract asset) related to such orders. In the same scenario, the net deferred revenue we would record in connection with such orders will be less because we will be recognizing more revenue than we bill 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 orders for our Commercial Solutions, 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 (contract asset) from the immediately preceding period. 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 personnel to perform our professional services and business consulting engagements with customers. In certain cases, we may utilize third-party subcontractors to perform professional services engagements. 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 and business consulting arrangements are billed on a fixed fee basis and revenues are 24Veeva Systems Inc. | Form 10-Q -------------------------------------------------------------------------------- Table of Contents typically recognized over time as the services are delivered based on time incurred. 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. Our business consulting revenues are affected primarily by our customers' demands for services related to a particular customer success initiative, strategic analysis, or business process change, and not a cloud software implementation.
Allocated Overhead
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."
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, data acquisition and third-party contractor costs related to the development of our data products, expenses associated with computer equipment and software, and allocated overhead. 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, hosted infrastructure costs, and allocated overhead. 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. Marketing program costs include advertising, customer events, corporate communications, brand awareness, and product marketing activities. Sales commissions are costs of obtaining new customer contracts and are capitalized and then amortized over a period of benefit that we have determined to be three years.
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 8 of the notes to our condensed consolidated financial statements.Veeva Systems Inc. | Form
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Recent Accounting Pronouncements
Reference Rate Reform
InMarch 2020 , theFinancial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides accounting relief from the future impact of the cessation of the London Interbank Offered Rate ("LIBOR") by, among other things, providing optional expedients to treat contract modifications resulting from such reference rate reform as a continuation of the existing contract and for hedging relationships to not be de-designated as a result of such changes provided certain criteria are met. The guidance is effective beginning onMarch 12, 2020 , and the amendments apply prospectively throughDecember 31, 2022 . We are currently in the process of incorporating fallback language in negotiated contracts and incorporating non-LIBOR reference rate and/or fallback language in new contracts to prepare for these changes. We do not expect the adoption of ASU 2020-04 to have a material impact on our condensed consolidated financial statements.
Business Combinations
InOctober 2021 , the FASB issued ASU No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which requires contract assets and contract liabilities acquired in a business combination to be recognized and measured in accordance with Topic 606, Revenue from Contracts with Customers, as if the acquirer had originated the contracts. Under current GAAP, such assets and liabilities are recognized by the acquirer at fair value on the acquisition date. The new standard is effective for our fiscal year beginning onFebruary 1, 2023 , with early adoption permitted. We are currently evaluating the accounting, transition, and disclosure requirements of this standard.
Results of Operations
The following tables set forth selected condensed consolidated statements of
operations data and such data as a percentage of total revenues for each of the
periods indicated:
Three months ended
2022 2021
(in thousands)
Consolidated Statements of Comprehensive Income Data:
Revenues:
Subscription services $ 402,632 $ 341,119
Professional services and other 102,470 92,454
Total revenues 505,102 433,573
Cost of revenues(1):
Cost of subscription services 58,953 51,217
Cost of professional services and other 80,562 64,919
Total cost of revenues 139,515 116,136
Gross profit 365,587 317,437
Operating expenses(1):
Research and development 113,475 83,226
Sales and marketing 76,115 64,610
General and administrative 48,325 41,155
Total operating expenses 237,915 188,991
Operating income 127,672 128,446
Other income, net 2,709 4,564
Income before income taxes 130,381 133,010
Provision for income taxes 30,266 17,443
Net income $ 100,115 $ 115,567
(1) Includes stock-based compensation as follows:
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Table of Contents Cost of revenues: Cost of subscription services$ 1,277 $ 906
Cost of professional services and other 9,990 7,422 Research and development
25,823 16,837
Sales and marketing 16,893 11,555
General and administrative 13,151 11,769
Total stock-based compensation $ 67,134 $ 48,489
Revenues
Three months ended April 30,
2022 2021 % Change
(dollars in thousands)
Revenues:
Subscription services $ 402,632 $ 341,119 18%
Professional services and other 102,470 92,454 11%
Total revenues $ 505,102 $ 433,573 16%
Percentage of revenues:
Subscription services 80 % 79 %
Professional services and other 20 21
Total revenues 100 % 100 %
Total revenues for the three months endedApril 30, 2022 increased$72 million , of which$62 million was from growth in subscription services revenues. The increase in subscription services revenues consisted of$42 million of subscription services revenue attributable to R&D Solutions and$20 million of subscription services revenue attributable to Commercial Solutions. The geographic mix of subscription services revenues was 57% fromNorth America , 28% fromEurope , and 15% from other locations, primarilyAsia Pacific , for the three months endedApril 30, 2022 , as compared to 56% fromNorth America , 27% fromEurope , and 17% from other locations, primarilyAsia Pacific , for the three months endedApril 30, 2021 . Professional services and other revenues for the three months endedApril 30, 2022 increased$10 million . The increase was primarily due 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. The increased demand for professional services and the resulting increase in professional services revenues was weighted heavily towards implementation and deployments of our R&D Solutions. Demand for ourVeeva Business Consulting services also contributed to the growth for the period. The geographic mix of professional services and other revenues was 65% fromNorth America , 28% fromEurope , and 7% fromAsia Pacific for the three months endedApril 30, 2022 , as compared to 59% fromNorth America , 33% fromEurope , and 8% fromAsia Pacific for the three months endedApril 30, 2021 .
Over time, we expect the proportion of our total revenues from professional services to decrease.
Costs and Expenses
Note that in response to unusual inflationary pressure and the demand environment for skilled employees, we increased salaries for the majority of our employees by 5% effectiveSeptember 1, 2021 . Further, in light of the labor market conditions and inflationary pressure, our compensation increases in connection with our annual compensation review process, which took place in our fiscal quarter endedApril 30, 2022 , were higher thanVeeva Systems Inc. | Form
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previous years. These compensation changes are likely to increase our employee-related expenses going forward, which impact all of the cost and expense categories discussed below.
Cost of Revenue and Gross Margin
Three months ended April 30,
2022 2021 % Change
(dollars in thousands)
Cost of revenues:
Cost of subscription services $ 58,953 $ 51,217 15%
Cost of professional services and other 80,562 64,919 24%
Total cost of revenues $ 139,515 $ 116,136 20%
Gross margin percentage:
Subscription services 85 % 85 %
Professional services and other 21 % 30 %
Total gross margin percentage 72 % 73 %
Gross profit $ 365,587 $ 317,437 15%
Cost of revenues for the three months ended April 30, 2022 increased $23
million , of which $8 million was an increase in cost of subscription services.
The increase in cost of subscription services was primarily due to increases of
$3 million in computing infrastructure costs, which was driven by an increase in
the number of end users of our subscription services, $2 million in employee
compensation-related costs, and $1 million in third-party contractor costs
related to the development of our data products. We expect cost of subscription
services to increase in absolute dollars in the near term due to increased usage
of our subscription services and increased data costs related to our Veeva
Compass offering.
Cost of professional services and other for the three months ended April 30,
2022 increased $16 million , primarily due to a $13 million increase in employee
compensation-related costs (which includes an increase of $3 million in
stock-based compensation). We expect cost of professional services and other to
increase in absolute dollars in the near term as we add personnel to our global
professional services organization and Veeva Business Consulting , and as a
result of compensation increases as part of our continued investment in our
existing employees.
Gross margin for the three months ended April 30, 2022 and 2021 was 72% and 73%,
respectively. The slight decrease compared to the prior period was due to lower
gross margin for our professional services in the quarter ended April 30, 2022 ,
as compared to the same period in the prior fiscal year.
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, we expect operating expenses and stock-based compensation to
increase in absolute dollars and to slightly increase as a percentage of revenue
in the future.
Research and Development
Three months ended April 30,
2022 2021 % Change
(dollars in thousands)
Research and development $ 113,475 $ 83,226 36%
Percentage of total revenues 22 % 19 %
Research and development expenses for the three months ended April 30, 2022
increased $30 million , primarily due to an increase of $26 million in employee
compensation-related costs (which includes an increase of $9 million in
stock-based compensation) and an increase of $3 million in technology
infrastructure costs. The increase in employee compensation-related costs is
primarily driven by the increase in headcount and total compensation during the
period. The expansion of our headcount and compensation increases in research
and development is to support development work for the increased number of
products that we offer or may offer in the future.
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We expect research and development expenses to increase in absolute dollars in
fiscal 2023, primarily due to compensation increases as part of our investment
in our existing employees, and continued investment in our product offerings.
Sales and Marketing
Three months ended April 30,
2022 2021 % Change
(dollars in thousands)
Sales and marketing 76,115 64,610 18%
Percentage of total revenues 15 % 15 %
Sales and marketing expenses for the three months ended April 30, 2022 increased
$12 million , primarily due to an increase of $11 million in employee
compensation-related costs (which includes an increase of $5 million in
stock-based compensation). The increase in employee compensation-related costs
is primarily driven by the increase in headcount and total compensation during
the period.
We expect sales and marketing expenses to grow in absolute dollars in the
future, primarily due to employee-related expenses as we increase our headcount
to support our sales and marketing efforts associated with our product
offerings, the impact of changes to our sales compensation plans, our continued
expansion of our sales capacity across all our solutions, and as a result of
compensation increases as part of our continued investment in our existing
employees. Additionally, we expect travel and entertainment costs to start to
increase in the fiscal year ending January 31, 2023 .
General and Administrative
Three months ended April 30,
2022 2021 % Change
(dollars in thousands)
General and administrative $ 48,325 $ 41,155 17%
Percentage of total revenues 10 % 9 %
General and administrative expenses for the three months ended April 30, 2022
increased $7 million , primarily due to an increase of $5 million in employee
compensation-related costs (which includes an increase of $1 million in
stock-based compensation) and an increase of $2 million in professional
services. The increase in employee compensation-related costs is primarily
driven by the increase in headcount and total compensation during the period.
We expect general and administrative expenses to continue to grow in absolute
dollars in the future as a result of compensation increases as part of our
continued investment in our existing employees, investments in our information
technology infrastructure, and third-party fees, including fees associated with
on-going litigation.
Other Income, Net
Three months ended April 30,
2022 2021 % Change
(dollars in thousands)
Other income, net $ 2,709 $ 4,564 (41)%
Other income, net, for the three months ended
We continue to experience foreign currency fluctuations primarily due to the
impact resulting from the periodic re-measurement of our foreign currency
balances that are denominated in currencies other than the functional currency
of the entities in which they are recorded. Our results of operations are
subject to fluctuations due to
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changes in foreign currency exchange rates, particularly changes in the Euro,
Japanese Yen, Canadian Dollar, British Pound Sterling, Hungarian Forint, and
Chinese Yuan. We may continue to experience favorable or adverse foreign
currency impacts due to volatility in these currencies.
Provision for Income Taxes
Three months ended April 30,
2022 2021 % Change
(dollars in thousands)
Income before income taxes $ 130,381 $ 133,010 (2)%
Provision for income taxes $ 30,266 $ 17,443 74%
Effective tax rate 23.2 % 13.1 %
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.
For the three months ended April 30, 2022 and 2021, our effective tax rates were
23.2% and 13.1%, respectively. During the three months ended April 30, 2022 as
compared to the prior year period, our effective tax rate increased primarily
due to a reduction in excess tax benefits related to equity compensation. We
recognized excess tax benefits in our provision for income taxes of $5 million
and $17 million for the three months ended April 30, 2022 and 2021,
respectively.
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 inthe 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. •Excess tax benefits. Excess tax benefits from employee stock plans are dependent on previously agreed-upon equity grants to our employees, vesting of those grants, stock price, and exercise behavior of our employees, which can fluctuate from quarter to quarter. Because these fluctuations are not directly related to our business operations, we exclude excess tax benefits for our internal management reporting processes. Our management also finds it useful to exclude excess tax benefits when assessing the level of cash provided by operating activities. Given the nature of the excess tax benefits, we believe excluding it allows investors to make meaningful comparisons between our operating cash flows from quarter to quarter and those of other companies. •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, 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 30Veeva Systems Inc. | Form 10-Q
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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. •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 and purchased intangibles 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.
The following table reconciles the specific items excluded from GAAP metrics in the calculation of non-GAAP metrics for the periods shown below:
Three months ended April 30,
2022 2021
(in thousands)
Net cash provided by operating activities on a GAAP basis 481,027 478,385
Excess tax benefits from employee stock plans (4,907) (17,451)
Net cash provided by operating activities on a non-GAAP basis
Operating income on a GAAP basis$ 127,672 $ 128,446 Stock-based compensation expense 67,134 48,489 Amortization of purchased intangibles 4,746 4,429 Operating income on a non-GAAP basis$ 199,552 $ 181,364 Net income on a GAAP basis$ 100,115 $ 115,567 Stock-based compensation expense 67,134 48,489 Amortization of purchased intangibles 4,746 4,429 Income tax effect on non-GAAP adjustments(1) (12,209) (21,602) Net income on a non-GAAP basis$ 159,786 $ 146,883 Diluted net income per share on a GAAP basis$ 0.62 $ 0.71 Stock-based compensation expense 0.41 0.30 Amortization of purchased intangibles 0.03 0.03 Income tax effect on non-GAAP adjustments(1) (0.07) (0.13) Diluted net income per share on a non-GAAP basis$ 0.99 $ 0.91 (1) For the three months endedApril 30, 2022 and 2021, we used an estimated annual effective non-GAAP tax rate of 21%. Veeva Systems Inc. | Form 10-Q 31
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Liquidity and Capital Resources
Three months ended April 30,
2022 2021
(in thousands)
Net cash provided by operating activities $ 481,027 $ 478,385
Net cash used in investing activities (378,487) (37,949)
Net cash provided by financing activities 1,292 16,805
Effect of exchange rate changes on cash and cash equivalents (1,874) (2,765)
Net change in cash and cash equivalents $
101,958
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. As ofApril 30, 2022 , our cash, cash equivalents, and short-term investments totaled$2.8 billion , of which$68 million represented cash and cash equivalents held outside ofthe United States . Our primary use of cash is payment of our operating costs, which consist primarily of employee-related expenses, such as compensation and benefits, investments in our information technology infrastructure, and general operating expenses for marketing, facilities, and overhead costs. Long-term cash requirements for items other than normal operating expenses could include the following: the acquisition of businesses, software products, or technologies complementary to our business; and capital expenditures, including the purchase and implementation of internal-use software applications. Our non-U.S. cash and cash equivalents have been earmarked for indefinite reinvestment in our operations outsidethe United States , except in certain designated jurisdictions that have an immaterial impact to our financial statements. As ofApril 30, 2022 , we have not recorded any taxes, such as withholding taxes, associated with the foreign earnings that are indefinitely reinvested outside ofthe United States . 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 for those arrangements or for other reasons. 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 data acquisition costs. Note that our net income reflects the impact of excess tax benefits related to equity compensation. Net cash provided by operating activities was$481 million for the three months endedApril 30, 2022 compared to$478 million provided by operating activities for the three months endedApril 30, 2021 . The$3 million increase was 32Veeva Systems Inc. | Form 10-Q
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primarily due to increased sales and the related cash collections. These increases were partially offset by larger operating expenses due to increases in headcount.
The cash flows from operating activities for the three months endedApril 30, 2022 represent a significant portion of the cash flows from operating activities that we expect during our fiscal year endingJanuary 31, 2023 . As a result, we expect cash flows from operating activities to be substantially less in future quarterly periods during this fiscal year. Our future cash flows from operating activities may be materially impacted as a result of the Tax Cuts and Jobs Act of 2017. The Tax Cuts and Jobs Act of 2017 eliminates the option to deduct research and development expenditures currently and requires taxpayers to capitalize and amortize them over five or fifteen years. AlthoughCongress is considering legislation that would defer the requirement to later years, we have no assurance that the provision will be so deferred, repealed or otherwise modified. If the requirement is not modified, it will materially reduce our cash flows beginning in the second quarter of fiscal 2023.
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. Net cash used in investing activities was$378 million for the three months endedApril 30, 2022 compared to$38 million used in investment activities for the three months endedApril 30, 2021 . The$341 million increase in cash used in investing activities was mainly due to the net increase in purchases of investments.
Cash Flows from Financing Activities
The cash flows from financing activities relate primarily to stock option exercises and taxes paid on behalf of employees related to the net share settlement of RSUs. InJune 2021 , we began funding withholding taxes due on employee RSU awards by net share settlement, rather than our previous approach of requiring employees to either sell shares of our Class A common stock or pay the withholding taxes in cash to cover taxes due upon vesting of such awards. Net cash provided by financing activities was$1 million for the three months endedApril 30, 2022 compared to$17 million provided by financing activities for the three months endedApril 30 , 2021.The$16 million decrease is primarily related to$15 million of cash used to pay employee taxes related to the net share settlement of RSUs.
Critical Accounting Policies and Estimates
Our condensed consolidated financial statements are prepared in accordance with generally accepted accounting principles inthe United States (GAAP). In the preparation of these condensed 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.
There have been no material changes to our critical accounting policies and
estimates during the three months ended
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