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, 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, 2021 , please see our Annual Report on Form 10-K for the fiscal year endedJanuary 31, 2021 filed onMarch 30, 2021 . In our fiscal year endedJanuary 31, 2021 , we derived approximately 51% and 49% of our subscription services revenues and 49% and 51% of our total revenues from our Veeva Commercial Cloud solutions and Veeva Vault solutions, respectively. For the three months endedApril 30, 2021 , we derived approximately 49% and 51% of our subscription services revenues and 47% and 53% 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. We also offer certain of our Veeva Vault solutions to industries outside the life sciences industry primarily inNorth America andEurope . For our fiscal years endedJanuary 31, 2021 , 2020, and 2019, our total revenues were$1,465 million ,$1,104 million and$862 million , respectively, representing year-over-year growth in total revenues of 33% in our fiscal year endedJanuary 31, 2021 and 28% in our fiscal year endedJanuary 31, 2020 . For our fiscal years endedJanuary 31, 2021 , 2020, and 2019, our subscription services revenues were$1,179 million ,$896 million , and$694 million , respectively, representing year-over-year growth in subscription services revenues of 32% in our fiscal year endedJanuary 31, 2021 , and 29% in our fiscal year endedJanuary 31, 2020 . 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 in the future. We generated net income of$380 million ,$301 million , and$230 million for our fiscal years endedJanuary 31, 2021 , 2020, and 2019, respectively. As ofJanuary 31, 2021 , 2020, and 2019, we served 993, 861, and 719 customers, respectively. As ofJanuary 31, 2021 , 2020, and 2019, we had 432, 390, and 335 Veeva Commercial Cloud customers, respectively, and 852, 715, and 574Veeva Vault customers, respectively. The combined customer counts for Veeva Commercial Cloud and Veeva 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 (including services delivered via Veeva Digital Events),Veeva Nitro, Veeva Andi, Veeva OpenData, Veeva Link, Veeva Network Customer Master, Veeva Crossix, or Veeva Data Cloud. Veeva Vault customers are those customers that have at least one Vault product. Many of our Veeva 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. For the three months endedApril 30, 2021 and 2020, our total revenues were$434 million and$337 million , respectively, representing year-over-year growth in total revenues of 29%. For the three months endedApril 30 , 22Veeva Systems Inc. | Form 10-Q -------------------------------------------------------------------------------- Table of Contents 2021 and 2020, our subscription services revenues were$341 million and$270 million , respectively, representing year-over-year growth in subscription services revenues of 26%. We generated net income of$116 million and$87 million for the three months endedApril 30, 2021 and 2020, 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." 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 and the lifting of restrictions on movement, all of which cannot be predicted with certainty. In response to the COVID-19 outbreak, we shifted most of our customer, employee, and industry events to virtual-only experiences, and we continue to monitor when larger in-person events should resume. We have begun to lift certain employee travel restrictions and plan to open most of ourU.S. offices in July. At the time of this filing, the substantial majority of employees continue to work from home, including employees at our corporate headquarters inPleasanton, California . Many of our customers have implemented travel restrictions and remote work measures, which may limit our ability to sell or provide professional services to them in the future. Certain of our businesses were negatively impacted by COVID-19 in our fiscal year endedJanuary 31, 2021 and that may continue for the foreseeable future. We may also experience requests from customers for lengthened payment terms or less favorable billing terms that could adversely impact our financial performance. Such requests to date have not been significant but may increase in the future. Due to our subscription-based business model, the effect of COVID-19, and any impact to our sales efforts, may not be fully reflected in our results of operations until future periods, if at all. At the same time, COVID-19 has necessitated the adoption of digital communication channels and remote working technology within the life sciences industry at a rapid pace. This transition has accelerated the use and adoption of certain of our applications, including Veeva CRM Engage Meeting and Veeva CRM Approved Email, and that may continue in the future with respect to these and other of our Veeva Commercial Cloud and Veeva Vault solutions that enable remote interactions. 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, 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. 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. We expect life sciences companies to reduce the number of sales representatives that they employ by roughly 10% over the next one to two years, which could negatively impact sales of our solutions, including Veeva CRM and other Commercial Cloud applications in particular, but 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.Veeva Systems Inc. | Form
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Table of Contents 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, 2021 , 2020, and 2019, our subscription services revenue retention rate was 124%, 121%, and 122%, 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, 2021 , subscription services revenues constituted 79% of total revenues and professional services and other revenues constituted 21% 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 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. 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 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 24Veeva Systems Inc. | Form 10-Q -------------------------------------------------------------------------------- Table of Contents order, and as a result, orders for additional end users or additionalVeeva 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 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 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 (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 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."Veeva Systems Inc. | Form 10-Q 25
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Table of Contents 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, allocated overhead, and amortization expense associated with certain 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. 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 one to 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 in the United States and income taxes in certain foreign jurisdictions. See note 8 of the notes to our condensed consolidated financial statements. New Accounting Pronouncements Adopted in Fiscal 2022 Refer to note 1 of the notes to our condensed consolidated financial statements for a full description of the recent accounting pronouncements adopted during the three months endedApril 30, 2021 . 26 Veeva Systems Inc. | Form 10-Q -------------------------------------------------------------------------------- Table of Contents 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
2021 2020
(in thousands)
Consolidated Statements of Comprehensive Income Data:
Revenues:
Subscription services $ 341,119 $ 270,235
Professional services and other 92,454 66,871
Total revenues 433,573 337,106
Cost of revenues(1):
Cost of subscription services 51,217 43,212
Cost of professional services and other 64,919 51,668
Total cost of revenues 116,136 94,880
Gross profit 317,437 242,226
Operating expenses(1):
Research and development 83,226 62,237
Sales and marketing 64,610 55,755
General and administrative 41,155 36,669
Total operating expenses 188,991 154,661
Operating income 128,446 87,565
Other income, net 4,564 3,414
Income before income taxes 133,010 90,979
Provision for income taxes 17,443 4,409
Net income $ 115,567 $ 86,570
(1) Includes stock-based compensation as follows:
Cost of revenues:
Cost of subscription services $ 906 $ 1,019 Cost of professional services and other 7,422 5,074 Research and development
16,837 11,401
Sales and marketing 11,555 8,192
General and administrative 11,769 11,221
Total stock-based compensation $ 48,489 $ 36,907
Revenues
Three months ended April 30,
2021 2020 % Change
(dollars in thousands)
Revenues:
Subscription services $ 341,119 $ 270,235 26%
Professional services and other 92,454 66,871 38%
Total revenues $ 433,573 $ 337,106 29%
Percentage of revenues:
Subscription services 79 % 80 %
Professional services and other 21 20
Total revenues 100 % 100 %
Total revenues for the three months endedApril 30, 2021 increased$96 million , of which$71 million was from growth in subscription services revenues. The increase in subscription services revenues consisted of$45 million of subscription services revenue attributable to Veeva Vault solutions and$26 million of subscription services revenue attributable to Veeva Commercial Cloud solutions. The geographic mix of subscription services revenues was 56%Veeva Systems Inc. | Form
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Table of Contents fromNorth America and 27% fromEurope for the three months endedApril 30, 2021 , as compared to subscription services revenues of 57% fromNorth America and 26% fromEurope for the three months endedApril 30, 2020 . Professional services and other revenues for the three months endedApril 30, 2021 increased$26 million . The increase in professional services revenues was due primarily to new customers requesting implementation and deployment-related professional services, existing customers requesting professional services related to expanding deployments or the deployment of newly purchased solutions, and increased business consulting engagements. The increased demand for professional services and the resulting increase in professional services revenues was weighted heavily towards implementation and deployments of our Veeva Vault solutions, as well as increased demand for our business consulting offering. The geographic mix of professional services and other revenues was 59% fromNorth America and 33% fromEurope for the three months endedApril 30, 2021 , as compared to 63% fromNorth America and 30% fromEurope for the three months endedApril 30, 2020 . Over time, we expect the proportion of our total revenues from professional services to decrease. Costs and Expenses Three months ended April 30, 2021 2020 % Change (dollars in thousands) Cost of revenues: Cost of subscription services$ 51,217 $ 43,212 19% Cost of professional services and other 64,919 51,668 26% Total cost of revenues$ 116,136 $ 94,880 22% Gross margin percentage: Subscription services 85 % 84 % Professional services and other 30 % 23 % Total gross margin percentage 73 % 72 % Gross profit$ 317,437 $ 242,226 31% Cost of revenues for the three months endedApril 30, 2021 increased$21 million , of which$8 million was an increase in cost of subscription services. The increase in cost of subscription services was primarily due to an increase of$3 million in computing infrastructure costs, the vast majority of which was for computing infrastructure provided byAmazon Web Services , and an increase of$2 million in fees paid to salesforce.com, which was driven by an increase in the number of end users of our subscription services. Additionally, there was an increase of$1 million in costs of third-party contractors related to the development of our data products. There was also an increase of$1 million related to data acquisition costs. We expect cost of subscription services to increase in absolute dollars due to increased usage of our subscription services and increased data costs related to our Veeva Data Cloud offering. Cost of professional services and other for the three months endedApril 30, 2021 increased$13 million , due to a$14 million increase in employee compensation-related costs (which includes an increase of$2 million in stock-based compensation) that was partially offset by a$1 million decrease in costs related travel and live events due to COVID-19. The increase in employee compensation-related costs is primarily driven by the increase in headcount during the period. We expect cost of professional services and other to increase in absolute dollars as we add personnel to our global professional services organization. Gross margin for the three months endedApril 30, 2021 and 2020 was 73% and 72%, respectively. The increase compared to the prior period is largely due to the growth in sales of our Veeva Vault solutions, which have higher gross margins as compared to our Veeva Commercial Cloud solutions. 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. 28 Veeva Systems Inc. | Form 10-Q --------------------------------------------------------------------------------
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Research and Development
Three months ended April 30,
2021 2020 % Change
(dollars in thousands)
Research and development $ 83,226 $ 62,237 34%
Percentage of total revenues 19 % 18 %
Research and development expenses for the three months ended April 30, 2021
increased $21 million , due to an increase of $21 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 during the period. The
expansion of our headcount in research and development is to support development
work for the increased number of products that we offer or may offer in the
future.
We expect research and development expenses to increase in absolute dollars and
as a percentage of revenue in the future, primarily due to higher headcount as
we continue to invest in our product offerings.
Sales and Marketing
Three months ended April 30,
2021 2020 % Change
(dollars in thousands)
Sales and marketing 64,610 55,755 16%
Percentage of total revenues 15 % 17 %
Sales and marketing expenses for the three months ended April 30, 2021 increased
$9 million , primarily due to an increase of $12 million in employee
compensation-related costs (which includes an increase of $3 million in
stock-based compensation). The increase in employee compensation-related costs
is primarily driven by the increase in headcount during the period. This was
partially offset by a $3 million decrease in several expense categories related
to COVID-19, such as marketing program spend and travel and entertainment costs.
We expect sales and marketing expenses to continue 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, and our
continued expansion of our sales capacity across all our solutions.
Additionally, we expect travel and entertainment costs to start to increase in
the second half of the fiscal year ending January 31, 2022 .
General and Administrative
Three months ended April 30,
2021 2020 % Change
(dollars in thousands)
General and administrative $ 41,155 $ 36,669 12%
Percentage of total revenues 9 % 11 %
General and administrative expenses for the three months ended April 30, 2021
increased $4 million , primarily due to an increase of $2 million in employee
compensation-related costs (which includes an increase of $1 million in
stock-based compensation). The increase in employee compensation-related costs
is primarily driven by the increase in headcount during the period.
We expect general and administrative expenses to continue to grow in absolute
dollars in the future as a result of employee-related expenses as we increase
our headcount, investments in information technology infrastructure, and
third-party fees, including fees associated with on-going litigation.
Other Income, Net
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Three months ended April 30,
2021 2020 % Change
(dollars in thousands)
Other income, net $ 4,564 $ 3,414 34%
Other income, net for the three months ended April 30, 2021 increased $1
million , primarily due to $4 million of gains in foreign exchange rate activity,
partially offset by a $2 million increase in investment amortization expense and
a $1 million reduction in interest income.
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 changes in foreign currency exchange rates,
particularly changes in the Euro, British Pound Sterling, Japanese Yen 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,
2021 2020 % Change
(dollars in thousands)
Income before income taxes $ 133,010 $ 90,979 46%
Provision for income taxes $ 17,443 $ 4,409 296%
Effective tax rate 13.1 % 4.8 %
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, 2021 and 2020, our effective tax rates were
13.1% and 4.8%, respectively. During the three months ended April 30, 2021 as
compared to the prior year period, our effective tax rate increased primarily
due to the increase in income before income taxes for the period combined with a
decrease in excess tax benefits related to equity compensation. We recognized
such tax benefits in our provision for income taxes of $17 million and $20
million for the three months ended April 30, 2021 and 2020, 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 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.
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•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.
•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.
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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:
Three months ended April 30,
2021 2020
(in thousands)
Operating income on a GAAP basis $ 128,446 $ 87,565
Stock-based compensation expense 48,489 36,907
Amortization of purchased intangibles 4,429 5,215
Operating income on a non-GAAP basis $ 181,364 $ 129,687
Net income on a GAAP basis $ 115,567 $ 86,570
Stock-based compensation expense 48,489 36,907
Amortization of purchased intangibles 4,429 5,215
Income tax effect on non-GAAP adjustments(1) (21,602) (23,542)
Net income on a non-GAAP basis $ 146,883 $ 105,150
Diluted net income per share on a GAAP basis $ 0.71 $ 0.54
Stock-based compensation expense 0.30 0.23
Amortization of purchased intangibles 0.03 0.04
Income tax effect on non-GAAP adjustments(1) (0.13) (0.15)
Diluted net income per share on a non-GAAP basis $ 0.91 $ 0.66
(1) For the three months ended April 30, 2021 and 2020, we used an estimated annual effective non-GAAP
tax rate of 21%
Liquidity and Capital Resources
Three months ended April 30,
2021 2020
(in thousands)
Net cash provided by operating activities $ 478,385 $ 282,172
Net cash used in investing activities (37,949) (48,209)
Net cash provided by financing activities 16,805 9,533
Effect of exchange rate changes on cash and cash equivalents (2,765) 548
Net change in cash and cash equivalents $
454,476
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, 2021 , our cash, cash equivalents, and short-term investments totaled$2.2 billion , of which$48 million represented cash and cash equivalents held outside ofthe United States . 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. 32Veeva Systems Inc. | Form 10-Q -------------------------------------------------------------------------------- Table of Contents 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 marketing program costs. Note that our net income reflects the impact of excess tax benefits related to equity compensation. Net cash provided by operating activities was$478 million for the three months endedApril 30, 2021 compared to$282 million provided by operating activities for the three months endedApril 30, 2020 . The$196 million increase was primarily due to increased sales and the related cash collections. These increases were partially offset by larger operating expenses due to increases in headcount. 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$38 million for the three months endedApril 30, 2021 compared to$48 million used in investment activities for the three months endedApril 30, 2020 . The$10 million decrease in cash used in investing activities was mainly due to the decrease in net purchases of investments. Cash Flows from Financing Activities The cash flows from financing activities relate primarily to stock option exercises. Net cash provided by financing activities was$17 million for the three months endedApril 30, 2021 compared to$10 million provided by financing activities for the three months endedApril 30, 2020 . The$7 million increase in cash provided by financing activities is primarily related to an increase in proceeds from employee stock option exercises resulting from a higher aggregate average exercise price during the period.Veeva Systems Inc. | Form
10-Q 33
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Table of Contents 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$35 million , as ofApril 30, 2021 , that must be made bySeptember 1, 2025 . As ofApril 30, 2021 , the future non-cancelable minimum payments under these commitments were as follows: Payments due by period 1-3 3-5 More than Total Less than 1 year Years Years 5 years (in thousands) Salesforce.com commitments$ 35,390 7,380 - 28,010 - Operating lease obligations 68,057 9,632 22,051 14,768 21,606 Finance lease obligations 96 96 - - - Total$ 103,543 $ 17,108$ 22,051 $ 42,778 $ 21,606 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. 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. 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 endedApril 30, 2021 as compared to the those disclosed in our Annual Report on Form 10-K for the fiscal year endedJanuary 31, 2021 . 34 Veeva Systems Inc. | Form 10-Q
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