filings.toolsItem 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
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Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated financial statements and notes thereto appearing elsewhere in this report. In addition to historical consolidated financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties, and assumptions. Our actual results could differ materially from those anticipated by these forward-looking statements as a result of many factors. We discuss factors that we believe could cause or contribute to these differences below and elsewhere in this report, including those set forth under “Risk Factors” and “Special Note Regarding Forward-Looking Statements.”
Overview
Veeva is the leading provider of industry cloud solutions for the global life sciences industry. We were founded in 2007 on the premise that industry-specific cloud solutions could best address the operating challenges and regulatory requirements of life sciences companies. Our solutions span cloud software, data, and business consulting and are designed to meet the unique needs of our customers and their most strategic business functions—from research and development (R&D) 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.
In our fiscal year ended January 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 fiscal year ended January 31, 2020, we derived approximately 52% and 48% of our subscription services revenues and 49% and 51% of our total revenues from our Veeva Commercial Cloud solutions and Veeva Vault solutions, respectively. The contribution of subscription services revenues and total revenues associated with our Veeva Vault solutions are expected to continue to increase as a percentage of subscription services revenues and total revenues in the future. Please note that revenues attributable to our Crossix and Physicians World businesses, which we acquired in November 2019, are classified under Veeva Commercial Cloud and impacted the mix of revenues between Veeva Commercial Cloud and Veeva Vault. We also offer certain of our Veeva Vault solutions to three industries outside the life sciences industry primarily in North America and Europe.
For our fiscal years ended January 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 ended January 31, 2021, and 28% in our fiscal year ended January 31, 2020. For our fiscal years ended January 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 ended January 31, 2021, and 29% in our fiscal year ended January 31, 2020. Please note that our total revenues and subscription services revenues for our fiscal year ended January 31, 2020 only included revenue contribution from the acquired Crossix and Physicians 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 ended January 31, 2021, 2020, and 2019, respectively.
| 38 | Veeva Systems Inc. | Form 10-K |
As of January 31, 2021, 2020, and 2019, we served 993, 861, and 719, customers, respectively. As of January 31, 2021, 2020, and 2019, we had 432, 390 and 335 Veeva Commercial Cloud customers, respectively, and 852, 715, and 574 Veeva 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.
On November 1, 2019, we completed our acquisition of Crossix, a provider of privacy-safe patient data and data analytics. Crossix brings Veeva additional depth in patient data and data analytics. Crossix's existing data analytics offerings are complementary to our existing Commercial Cloud offerings, and we are utilizing the Crossix Data Platform to build Veeva Data Cloud, our longitudinal patient and prescriber data offering. Further, on November 7, 2019, we completed our acquisition of Physicians World, a provider of speakers bureau services for healthcare professionals. Acquiring Physicians World makes it easier for our customers to get industry leading cloud software and services from a single vendor. We consider these businesses fully integrated into Veeva as of January 31, 2021.
Recent Development
On February 1, 2021, we became a Delaware 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 “Business” and “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 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, 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 for our fiscal year ending January 31, 2021. We will continue to monitor events related to the pandemic and plan to continue the same approach for our fiscal year ending January 31, 2022. We have also implemented employee travel restrictions and, as of the time of this filing, for many of our U.S. offices, including our corporate headquarters in Pleasanton, California, we have recommended that most employees work from home and the substantial majority of employees continue to do so. Many of our customers have implemented similar measures, which may limit our ability to sell or provide professional services to them over time. Customers may delay or cancel purchasing decisions or professional services projects in light of uncertainties to their businesses arising from COVID-19 or may renew their subscriptions at lower levels. In our fiscal year ended January 31, 2021, our recently acquired Crossix and Physicians World businesses were negatively impacted by COVID-19, and sales to certain other customer segments were and may continue to be negatively impacted as well, including sales to cosmetics companies. 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.
| Veeva Systems Inc. | Form 10-K | 39 |
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. For instance, from March 2020 until December 31, 2020, we allowed customers to use Veeva CRM Engage Meeting free of charge to facilitate the ability for life sciences personnel to meet remotely with healthcare professionals. A significant number of customers adopted and began use of Veeva CRM Engage Meeting for the first time during this period, and we observed a dramatic increase in the volume of virtual meetings with healthcare professionals via Veeva CRM Engage Meeting over the same time period. At the end of the free use period, we saw very high conversion rates to paid subscriptions by the customers who were using Veeva Engage Meeting without charge during the free use period.
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 impact Veeva's results over the long term.
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.
| 40 | Veeva Systems Inc. | Form 10-K |
Historically, the impact of price changes on our subscription services revenue retention rate has been minimal. For our fiscal years ended January 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 our Veeva Business Consulting offerings. For the fiscal year ended January 31, 2021, subscription services revenues constituted 81% of total revenues and professional services and other revenues constituted 19% 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.
New subscription orders for our core Veeva CRM application generally have a one-year term. If a customer adds end users or additional Veeva Commercial Cloud applications to an existing order for our core Veeva CRM application, such additional orders will generally be coterminous with the anniversary date of the core Veeva CRM order, and as a result, orders for additional end users or additional Veeva Commercial Cloud applications will commonly have an initial term of less than one year.
With respect to applications other than our core Veeva CRM application and particularly with respect to our Veeva Vault applications, we have entered into a number of orders 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
| Veeva Systems Inc. | Form 10-K | 41 |
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.”
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 and Amazon Web Services, personnel related costs associated with hosting our subscription services and providing support, including our data stewards, data acquisition costs, 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
| 42 | Veeva Systems Inc. | Form 10-K |
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 in the United States and income taxes in certain foreign jurisdictions. See note 9 of the notes to our consolidated financial statements.
New Accounting Pronouncements Adopted in Fiscal 2021
Refer to note 1 of the notes to our consolidated financial statements for a full description of the recent accounting pronouncements adopted during the fiscal year ended January 31, 2021.
| Veeva Systems Inc. | Form 10-K | 43 |
Results of Operations
The following tables set forth selected consolidated statements of operations data and such data as a percentage of total revenues for each of the periods indicated:
| Fiscal year ended January 31, | |||||||||||||||||||||||
| 2021 | 2020 | ||||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Consolidated Statements of Comprehensive Income Data: | |||||||||||||||||||||||
| Revenues: | |||||||||||||||||||||||
| Subscription services | $ | 1,179,486 | $ | 896,294 | |||||||||||||||||||
| Professional services and other | 285,583 | 207,787 | |||||||||||||||||||||
| Total revenues | 1,465,069 | 1,104,081 | |||||||||||||||||||||
| Cost of revenues(1): | |||||||||||||||||||||||
| Cost of subscription services | 184,589 | 136,328 | |||||||||||||||||||||
| Cost of professional services and other | 224,339 | 167,041 | |||||||||||||||||||||
| Total cost of revenues | 408,928 | 303,369 | |||||||||||||||||||||
| Gross profit | 1,056,141 | 800,712 | |||||||||||||||||||||
| Operating expenses(1): | |||||||||||||||||||||||
| Research and development | 294,220 | 209,895 | |||||||||||||||||||||
| Sales and marketing | 235,014 | 190,331 | |||||||||||||||||||||
| General and administrative | 149,113 | 114,267 | |||||||||||||||||||||
| Total operating expenses | 678,347 | 514,493 | |||||||||||||||||||||
| Operating income | 377,794 | 286,219 | |||||||||||||||||||||
| Other income, net | 16,199 | 27,478 | |||||||||||||||||||||
| Income before income taxes | 393,993 | 313,697 | |||||||||||||||||||||
| Provision for income taxes | 13,995 | 12,579 | |||||||||||||||||||||
| Net income | $ | 379,998 | $ | 301,118 |
| (1) Includes stock-based compensation as follows: | |||||||||||||||||||||||
| Cost of revenues: | |||||||||||||||||||||||
| Cost of subscription services | $ | 4,840 | $ | 2,638 | |||||||||||||||||||
| Cost of professional services and other | 27,698 | 17,518 | |||||||||||||||||||||
| Research and development | 63,541 | 37,001 | |||||||||||||||||||||
| Sales and marketing | 40,574 | 27,537 | |||||||||||||||||||||
| General and administrative | 48,348 | 31,212 | |||||||||||||||||||||
| Total stock-based compensation | $ | 185,001 | $ | 115,906 | |||||||||||||||||||
Fiscal Year Ended January 31, 2021 and 2020
The following is a discussion of our results of operations for the year ended January 31, 2021 compared to the year ended January 31, 2020. For a discussion of our results of operations for the year ended January 31, 2020 compared to the year ended January 31, 2019, please refer to Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended January 31, 2020, which is hereby incorporated by reference.
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Revenues
| Fiscal year ended January 31, | |||||||||||||||||||||||||||||||||||
| 2021 | 2020 | % Change | |||||||||||||||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||||||||||||||
| Revenues: | |||||||||||||||||||||||||||||||||||
| Subscription services | $ | 1,179,486 | $ | 896,294 | 32% | ||||||||||||||||||||||||||||||
| Professional services and other | 285,583 | 207,787 | 37% | ||||||||||||||||||||||||||||||||
| Total revenues | $ | 1,465,069 | $ | 1,104,081 | 33% | ||||||||||||||||||||||||||||||
| Percentage of revenues: | |||||||||||||||||||||||||||||||||||
| Subscription services | 81 | % | 81 | % | |||||||||||||||||||||||||||||||
| Professional services and other | 19 | 19 | |||||||||||||||||||||||||||||||||
| Total revenues | 100 | % | 100 | % | |||||||||||||||||||||||||||||||
Total revenues for the fiscal year ended January 31, 2021 increased $361 million, of which $283 million was from growth in subscription services revenues. The increase in subscription services revenues consisted of $152 million of subscription services revenue attributable to Veeva Vault solutions and $131 million of subscription services revenue attributable to Veeva Commercial Cloud solutions, which includes the full year contribution from Veeva Crossix. The geographic mix of subscription services revenues was 56% from North America and 27% from Europe for the fiscal year ended January 31, 2021 as compared to subscription services revenues of 54% from North America and 27% from Europe for the fiscal year ended January 31, 2020.
Professional services and other revenues for the fiscal year ended January 31, 2021 increased $78 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, and, to a lesser extent, professional services revenues associated with our acquired Veeva Crossix and Physicians World businesses, which only contributed to revenue in the fourth quarter of the fiscal year ended January 31, 2020. The increased demand for professional services and the resulting increase in professional services revenues was weighted heavily towards implementation and deployments of our Veeva Vault solutions. The geographic mix of professional services and other revenues was 62% from North America and 30% from Europe for the fiscal year ended January 31, 2021 as compared to 60% from North America and 32% from Europe for the fiscal year ended January 31, 2020.
Over time, we expect the proportion of our total revenues from professional services to decrease.
Costs and Expenses
| Fiscal year ended January 31, | |||||||||||||||||||||||||||||||||||
| 2021 | 2020 | % Change | |||||||||||||||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||||||||||||||
| Cost of revenues: | |||||||||||||||||||||||||||||||||||
| Cost of subscription services | $ | 184,589 | $ | 136,328 | 35% | ||||||||||||||||||||||||||||||
| Cost of professional services and other | 224,339 | 167,041 | 34% | ||||||||||||||||||||||||||||||||
| Total cost of revenues | $ | 408,928 | $ | 303,369 | 35% | ||||||||||||||||||||||||||||||
| Gross margin percentage: | |||||||||||||||||||||||||||||||||||
| Subscription services | 84 | % | 85 | % | |||||||||||||||||||||||||||||||
| Professional services and other | 21 | % | 20 | % | |||||||||||||||||||||||||||||||
| Total gross margin percentage | 72 | % | 73 | % | |||||||||||||||||||||||||||||||
| Gross profit | $ | 1,056,141 | $ | 800,712 | 32% | ||||||||||||||||||||||||||||||
Cost of revenues for the fiscal year ended January 31, 2021 increased $106 million, of which $48 million was related to cost of subscription services. The increase in cost of subscription services included an increase of $14 million in data acquisition costs related to the Veeva Data Cloud product offering. There was also an increase of $9 million in employee compensation-related costs (which includes an increase of $2 million in stock-based compensation) and was primarily driven by the increase in headcount during the period and the full year impact of the headcount from the acquired Crossix business. Finally, there was an increase of $7 million in fees paid to salesforce.com, driven by an increase in the number of end users of our subscription services, and an increase of
| Veeva Systems Inc. | Form 10-K | 45 |
$9 million in other computing infrastructure costs, the vast majority of which was for computing infrastructure provided by Amazon Web Services. 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 Data Cloud offering.
Cost of professional services and other for the fiscal year ended January 31, 2021 increased $57 million, primarily due to a $55 million increase in employee compensation-related costs (which includes an increase of $10 million in stock-based compensation). The increase in employee compensation-related costs is primarily driven by the increase in headcount during the period and the full year impact of the headcount from the acquired Physicians World business. 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.
Gross margin for the fiscal years ended January 31, 2021 and 2020 was 72% and 73%, respectively. The decrease compared to the prior period is largely due to the products and services of our acquired Crossix and Physicians World businesses, which have lower gross margins than many of our other products and services.
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 to increase in absolute dollars and may increase as a percentage of revenue in the future.
Research and Development
| Fiscal year ended January 31, | |||||||||||||||||||||||||||||||||||
| 2021 | 2020 | % Change | |||||||||||||||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||||||||||||||
| Research and development | $ | 294,220 | $ | 209,895 | 40% | ||||||||||||||||||||||||||||||
| Percentage of total revenues | 20 | % | 19 | % | |||||||||||||||||||||||||||||||
Research and development expenses for the fiscal year ended January 31, 2021 increased $84 million, primarily due to an increase of $71 million in employee compensation-related costs (which includes an increase of $27 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 may increase 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
| Fiscal year ended January 31, | |||||||||||||||||||||||||||||||||||
| 2021 | 2020 | % Change | |||||||||||||||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||||||||||||||
| Sales and marketing | $ | 235,014 | $ | 190,331 | 23% | ||||||||||||||||||||||||||||||
| Percentage of total revenues | 16 | % | 17 | % | |||||||||||||||||||||||||||||||
Sales and marketing expenses for the fiscal year ended January 31, 2021 increased $45 million, primarily due to an increase of $44 million in employee compensation-related costs (which includes an increase of $13 million in stock-based compensation). The increase in employee compensation-related costs is primarily driven by the increase in headcount during the period. There was an additional increase of $7 million in amortization of purchased intangibles related to our acquired Crossix and Physicians World businesses. These increases were partially offset by a $10 million decrease in travel and entertainment costs primarily related to travel and meeting restrictions associated with COVID-19.
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
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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
| Fiscal year ended January 31, | |||||||||||||||||||||||||||||||||||
| 2021 | 2020 | % Change | |||||||||||||||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||||||||||||||
| General and administrative | $ | 149,113 | $ | 114,267 | 30% | ||||||||||||||||||||||||||||||
| Percentage of total revenues | 10 | % | 10 | % | |||||||||||||||||||||||||||||||
General and administrative expenses for the fiscal year ended January 31, 2021 increased $35 million, primarily due to an increase of $31 million in employee compensation-related costs (which includes an increase of $17 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
| Fiscal year ended January 31, | |||||||||||||||||||||||||||||||||||
| 2021 | 2020 | % Change | |||||||||||||||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||||||||||||||
| Other income, net | $ | 16,199 | $ | 27,478 | (41)% | ||||||||||||||||||||||||||||||
Other income, net, for the fiscal year ended January 31, 2021 decreased $11 million, primarily due to a $9 million reduction in interest income, net, reflecting the lower interest rates on short-term investments.
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
| Fiscal year ended January 31, | |||||||||||||||||||||||||||||||||||
| 2021 | 2020 | % Change | |||||||||||||||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||||||||||||||
| Income before income taxes | $ | 393,993 | $ | 313,697 | 26% | ||||||||||||||||||||||||||||||
| Provision for income taxes | $ | 13,995 | $ | 12,579 | 11% | ||||||||||||||||||||||||||||||
| Effective tax rate | 3.6 | % | 4.0 | % | |||||||||||||||||||||||||||||||
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 the deduction for foreign derived intangible income. 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.
| Veeva Systems Inc. | Form 10-K | 47 |
For the fiscal years ended January 31, 2021 and 2020, our effective tax rates were 3.6% and 4.0%, respectively. During the fiscal year ended January 31, 2021 as compared to the prior year period, our effective tax rate decreased primarily due to the increase in excess tax benefits related to equity compensation. We recognized such tax benefits in our provision for income taxes of $81 million and $50 million for the fiscal years ended January 31, 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.
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Amortization of purchased intangibles. We incur amortization expense for purchased intangible assets in connection with acquisitions of certain businesses and technologies. Amortization of intangible assets is a non-cash expense and is inconsistent in amount and frequency because it is significantly affected by the timing, size of acquisitions, and the inherent subjective nature of purchase price allocations. Because these costs have already been incurred and cannot be recovered, and are non-cash expenses, we exclude these expenses for internal management reporting processes. We also find it useful to exclude these charges when assessing the appropriate level of various operating expenses and resource allocations when budgeting, planning, and forecasting future periods. Investors should note that the use of intangible assets contributed to our revenues earned during the periods presented and will contribute to our future period revenues as well.
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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.
| 48 | Veeva Systems Inc. | Form 10-K |
The following table reconciles the specific items excluded from GAAP metrics in the calculation of non-GAAP metrics for the periods shown below:
| Fiscal year ended January 31, | |||||||||||||||||||||||
| 2021 | 2020 | ||||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Operating income on a GAAP basis | $ | 377,794 | $ | 286,219 | |||||||||||||||||||
| Stock-based compensation expense | 185,001 | 115,906 | |||||||||||||||||||||
| Amortization of purchased intangibles | 20,007 | 10,120 | |||||||||||||||||||||
| Operating income on a non-GAAP basis | $ | 582,802 | $ | 412,245 | |||||||||||||||||||
| Net income on a GAAP basis | $ | 379,998 | $ | 301,118 | |||||||||||||||||||
| Stock-based compensation expense | 185,001 | 115,906 | |||||||||||||||||||||
| Amortization of purchased intangibles | 20,007 | 10,120 | |||||||||||||||||||||
| Income tax effect on non-GAAP adjustments(1) | (111,795) | (79,763) | |||||||||||||||||||||
| Net income on a non-GAAP basis | $ | 473,211 | $ | 347,381 | |||||||||||||||||||
| Diluted net income per share on a GAAP basis | $ | 2.36 | $ | 1.90 | |||||||||||||||||||
| Stock-based compensation expense | 1.15 | 0.73 | |||||||||||||||||||||
| Amortization of purchased intangibles | 0.12 | 0.06 | |||||||||||||||||||||
| Income tax effect on non-GAAP adjustments(1) | (0.69) | (0.50) | |||||||||||||||||||||
| Diluted net income per share on a non-GAAP basis | $ | 2.94 | $ | 2.19 | |||||||||||||||||||
| (1) For the fiscal years ended January 31, 2021 and 2020, we used an estimated annual effective non-GAAP tax rate of 21% | |||||||||||||||||||||||
Liquidity and Capital Resources
| Fiscal year ended January 31, | |||||||||||||||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||||||||
| Net cash provided by operating activities | $ | 551,246 | $ | 437,375 | $ | 310,827 | |||||||||||||||||||||||
| Net cash used in investing activities | (333,634) | (516,910) | (103,869) | ||||||||||||||||||||||||||
| Net cash provided by financing activities | 33,818 | 10,010 | 25,910 | ||||||||||||||||||||||||||
| Effect of exchange rate changes on cash and cash equivalents | 484 | (2,856) | (2,077) | ||||||||||||||||||||||||||
| Net change in cash and cash equivalents | $ | 251,914 | $ | (72,381) | $ | 230,791 | |||||||||||||||||||||||
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 of January 31, 2021, our cash, cash equivalents, and short-term investments totaled $1,664 million, of which $59 million represented cash and cash equivalents held outside of the United States.
Our remaining non-U.S. cash and cash equivalents have been earmarked for indefinite reinvestment in our operations outside the United States, except in certain designated jurisdictions that have an immaterial impact to our financial statements. As of January 31, 2021, we have not recorded any taxes, such as withholding taxes, associated with the foreign earnings that are indefinitely reinvested outside of the United States. We believe our U.S. sources of cash and liquidity are sufficient to meet our business needs in the United States and do not expect that we will need to repatriate additional funds we have designated as indefinitely reinvested outside the 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 outside the 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
| Veeva Systems Inc. | Form 10-K | 49 |
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.
The following is a discussion of our cash flows for the year ended January 31, 2021 compared to the year ended January 31, 2020. For a discussion of our cash flows for the year ended January 31, 2020 compared to the year ended January 31, 2019, please refer to Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended January 31, 2020, which is hereby incorporated by reference.
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, data acquisition costs, 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 $551 million for the fiscal year ended January 31, 2021 compared to $437 million provided by operating activities for the fiscal year ended January 31, 2020. The $114 million increase in operating cash flow was primarily due to net income for the period of $380 million driven by increased sales and the related impact to deferred revenue, partially offset by cash collections and the related impact to accounts receivable. Additionally, operating cash flow benefited from a non-cash adjustment for stock-based compensation.
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 $334 million for the fiscal year ended January 31, 2021 compared to $517 million used in investing activities for the fiscal year ended January 31, 2020. The $183 million decrease in cash used in investing activities was mainly due to our prior year investments in Crossix and Physicians World acquisitions, partially offset by the nature and timing of purchases of short-term investments in excess of maturities.
Cash Flows from Financing Activities
The cash flows from financing activities relate primarily to stock option exercises.
Net cash provided by financing activities was $34 million for the fiscal year ended January 31, 2021 compared to $10 million provided by financing activities for the fiscal year ended January 31, 2020. The $24 million increase in cash provided by financing activities is primarily related to an increase in proceeds from employee stock option exercises resulting from both an increase in stock option exercise volume and a higher aggregate average exercise price during the period.
Commitments
Our principal commitments consist of obligations for minimum payment commitments to salesforce.com, and leases for office space and data centers. On March 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 on September 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 from March 1, 2014 to September 1, 2020 and (ii) the full amount of $500 million by September 1, 2025. We met our first minimum order commitment of $250 million and have a remaining purchase commitment of $57 million, as of January 31, 2021, that must be made by September 1, 2025.
| 50 | Veeva Systems Inc. | Form 10-K |
As of January 31, 2021, the future non-cancelable minimum payments under these commitments were as follows:
| Payments due by period | |||||||||||||||||||||||||||||
| Total | Less than 1 year | 1-3 Years | 3-5 Years | More than 5 years | |||||||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||||||||
| Salesforce.com commitments | $ | 57,119 | $ | — | $ | — | $ | 57,119 | $ | — | |||||||||||||||||||
| Operating lease obligations | 71,504 | 12,887 | 22,365 | 14,676 | 21,576 | ||||||||||||||||||||||||
| Finance lease obligations | 380 | 380 | — | — | — | ||||||||||||||||||||||||
| Total | $ | 129,003 | $ | 13,267 | $ | 22,365 | $ | 71,795 | $ | 21,576 | |||||||||||||||||||
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 consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States (GAAP). In the preparation of these consolidated financial statements, we are required to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses, and related disclosures. On an ongoing basis, we evaluate our estimates and assumptions. Our actual results may differ from these estimates under different assumptions or conditions.
We believe that of our significant accounting policies, which are described in note 1 of the notes to the consolidated financial statements, the following accounting policies involve a greater degree of judgment and complexity. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our consolidated financial condition and results of operations.
Revenue Recognition
We derive our revenues primarily from subscription services and professional services. Some of our contracts with customers contain multiple performance obligations. The transaction price is allocated to the distinct performance obligations on a relative standalone selling price basis. Significant judgment is sometimes required in developing an estimate of the standalone selling price for each distinct performance obligation based on our overall pricing objectives, market conditions, and other factors, including other groupings such as customer type and geography.
Business Combinations and Valuation of Goodwill and Acquired Intangible Assets
We allocate the purchase price of acquired companies to tangible and intangible assets acquired and liabilities assumed based upon their estimated fair values at the acquisition date. The purchase price allocation process requires management to make significant estimates and assumptions with respect to the valuation of intangible assets. Examples of critical estimates in valuing certain of the intangible assets we have acquired or may acquire in the future include but are not limited to future expected cash flows, future revenue growth, margins, customer retention rates, technology life, royalty rates, expected use of acquired assets, and discount rates. These factors are also considered in determining the useful life of the acquired intangible assets. These estimates are based in part on historical experience, market conditions and information obtained from management of the acquired companies and are inherently uncertain. Goodwill represents the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recorded.
| Veeva Systems Inc. | Form 10-K | 51 |
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