filings.toolsItem 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
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Item 2. 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 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.”
Overview
Veeva is the leading provider of industry cloud solutions for the global life sciences industry. Our offerings span cloud software, data, analytics, professional services, and business consulting and are designed to meet the unique needs of our customers and their most strategic business functions—from research and development to commercialization. Our solutions help life sciences companies develop and bring products to market faster and more efficiently, market and sell more effectively, and maintain compliance with government regulations. For a more detailed description of our business and products as of January 31, 2023, please see our Annual Report on Form 10-K for the fiscal year ended January 31, 2023 filed on March 30, 2023.
Our solutions are grouped into two major product categories—Veeva Development Cloud and Veeva Commercial Cloud. Solutions formerly categorized as Veeva Data Cloud (Veeva Compass, Veeva Link, and Veeva OpenData) are now part of the Veeva Commercial Cloud offerings. For financial reporting purposes, revenues associated with our Veeva Commercial Cloud and Veeva Claims solutions are classified as “Commercial Solutions” revenues, and revenues associated with our Veeva Development Cloud, Veeva RegulatoryOne, and Veeva QualityOne solutions are classified as “R&D Solutions” revenues.
In our fiscal year ended January 31, 2023, we derived approximately 55% and 45% of our subscription services revenues and 52% and 48% of our total revenues from our Commercial Solutions and R&D Solutions, respectively. For the three months ended April 30, 2023, we derived approximately 58% and 42% of our subscription services revenues and 54% and 46% of our total revenues from our Commercial Solutions and R&D Solutions, respectively. Revenues associated with our R&D Solutions are expected to increase as a percentage of both subscription services revenues and total revenues in the future.
For our fiscal years ended January 31, 2023, 2022, and 2021, our total revenues were $2,155 million, $1,851 million, and $1,465 million, respectively, representing year-over-year growth in total revenues of 16% in our fiscal year ended January 31, 2023 and 26% in our fiscal year ended January 31, 2022. For our fiscal years ended January 31, 2023, 2022, and 2021, our subscription services revenues were $1,733 million, $1,484 million, and $1,179 million, respectively, representing year-over-year growth in subscription services revenues of 17% in our fiscal year ended January 31, 2023, and 26% in our fiscal year ended January 31, 2022. We expect the growth rate of our total revenues and subscription services revenues for the fiscal year ending January 31, 2024 to decline compared to the prior fiscal year. We generated net income of $488 million, $427 million, and $380 million for our fiscal years ended January 31, 2023, 2022, and 2021, respectively.
As of January 31, 2023, 2022, and 2021, we served 1,388, 1,205, and 993 customers, respectively. As of January 31, 2023, 2022, and 2021, we had 684, 653, and 572 Commercial Solutions customers, respectively, and 1,025, 860, and 664 R&D Solutions customers, respectively. These customer count totals are net of customer attrition during each period. The combined customer counts for Commercial Solutions and R&D Solutions exceed the total customer count in each year because some customers subscribe to products in both areas. Commercial Solutions consist of our cloud software, data, and analytics products built specifically to more efficiently and effectively commercialize our customers’ products. R&D Solutions consist of our clinical, quality, regulatory, and safety products. Many of our applications for R&D are used by smaller, earlier stage, pre-commercial companies, some of which may not reach the commercialization stage. Thus, the potential number of R&D Solutions customers is higher than the potential number of Commercial Solutions customers.
For the three months ended April 30, 2023 and 2022, our total revenues were $526 million and 505 million, respectively, representing year-over-year growth in total revenues of 4%. For the three months ended April 30, 2023 and 2022, our subscription services revenues were $415 million and $403 million, respectively, representing year-
| 22 | Veeva Systems Inc. | Form 10-Q |
over-year growth in subscription services revenues of 3%. We generated net income of $132 million and $100 million for the three months ended April 30, 2023 and 2022, respectively.
Our PBC Charter
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 status as a PBC and associated risks, see “Risk Factors.”
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 offering. For the three months ended April 30, 2023, 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 subscription agreements may choose to consolidate their orders under a single master subscription 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 Veeva CRM application generally have a one-year term. If a customer adds end users or additional Commercial Solutions to an existing order for our Veeva CRM application, such additional orders will generally be coterminous with the anniversary date of the Veeva CRM order, and as a result, orders for additional end users or additional Commercial Solutions will commonly have an initial term of less than one year.
| Veeva Systems Inc. | Form 10-Q | 23 |
Particularly with respect to our R&D Solutions, we have entered into a number of orders with multi-year terms. The fees associated with such orders are typically not based on the number of end-users and typically escalate over the term of such orders at a pre-agreed rate to account for, among other factors, implementation and adoption timing and planned increased usage by the customer. When such multi-year orders are non-cancellable (other than for cause), we recognize the total contracted revenue ratably over the multi-year term of the order. For such non-cancellable orders, 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, we accrue an unbilled accounts receivable balance (a contract asset) related to such orders. In the same scenario, the net deferred revenue we would record in connection with such orders will be less because we will be recognizing more revenue than we bill earlier in the term of such multi-year orders. Since February 1, 2023, our master subscription agreements that govern multi-year orders generally include a termination for convenience right for our customers. The addition of termination for convenience rights in such master subscription agreements changes the timing of revenue recognition for orders governed by these master subscription agreements and will reduce our unbilled revenue balance from such orders, as well as reduce our revenue for the fiscal year ending January 31, 2024. Starting in our fiscal year ending January 31, 2025, the amount of revenue recognized from such orders will generally be consistent with the amount invoiced for the relevant term of the order.
Our subscription orders are generally billed at the beginning of the subscription period in annual or quarterly increments, which means the annualized value of such orders may not be completely reflected in deferred revenue at any single point in time. Also, particularly with respect to orders for our Commercial Solutions, because the term of orders for additional end users or applications is commonly less than one year, the annualized value of such orders may not be completely reflected in deferred revenue at any single point in time. We have also agreed from time to time, and may agree in the future, to allow customers to change the renewal dates of their orders to, for example, align more closely with a customer’s annual budget process or to align with the renewal dates of other orders placed by other entities within the same corporate control group, or to change payment terms from annual to quarterly, or vice versa. Such changes typically result in an order of less than one year as necessary to align all orders to the desired renewal date and, thus, may result in a change to deferred revenue compared to 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 normalized billings are accurate indicators of future revenues for any given period of time. We define the term normalized 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, adjusted for the impact of changes in the timing of customer renewals (such as changing the renewal date of multiple products to be coterminous) or changes in billing frequency (such as changing from annual to quarterly billings) during the period.
Subscription services revenues are recognized ratably over the respective non-cancellable subscription term because of the continuous transfer of control to the customer. Historically, our master subscription agreements have generally been non-cancellable during the term, although customers typically have had the right to terminate their agreements for cause in the event of material breach. However, since February 1, 2023, our master subscription agreements that govern multi-year orders generally include a termination for convenience right for our customers. 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.
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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, Inc. and Amazon 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 our data products, expenses associated with computer equipment and software, and allocated overhead. We intend to continue to invest additional resources in our subscription services to enhance our product offerings and increase our delivery capacity.
Cost of professional services and other consists primarily of employee-related expenses associated with providing professional and business consulting services. The cost of providing professional services is significantly higher as a percentage of the related revenues than for our subscription services due to the direct labor costs and costs of third-party subcontractors.
Operating Expenses
Research and Development. Research and development expenses consist primarily of employee-related expenses, third-party consulting fees, hosted infrastructure costs, and allocated overhead. We continue to focus our research and development efforts on adding new features and applications and increasing the functionality and enhancing the ease of use of our cloud-based applications.
Sales and Marketing. Sales and marketing expenses consist primarily of employee-related expenses, sales commissions, marketing program costs, amortization expense associated with purchased intangibles related to our customer contracts, customer relationships and brand development, travel-related expenses and allocated overhead. Marketing program costs include advertising, customer events, corporate communications, brand awareness, and product marketing activities. Sales commissions are costs of obtaining new customer contracts and are capitalized and then amortized over a period of benefit that we have determined to be 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 interest income, amortization of premiums paid on investments, and transaction gains or losses on foreign currency, net of hedging costs.
Provision for Income Taxes
Provision for income taxes consists of federal, state, and local 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.
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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 April 30, | |||||||||||||||||||||||
| 2023 | 2022 | ||||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Consolidated Statements of Comprehensive Income Data: | |||||||||||||||||||||||
| Revenues: | |||||||||||||||||||||||
| Subscription services | $ | 414,546 | $ | 402,632 | |||||||||||||||||||
| Professional services and other | 111,779 | 102,470 | |||||||||||||||||||||
| Total revenues | 526,325 | 505,102 | |||||||||||||||||||||
| Cost of revenues(1): | |||||||||||||||||||||||
| Cost of subscription services | 67,575 | 58,953 | |||||||||||||||||||||
| Cost of professional services and other | 99,088 | 80,562 | |||||||||||||||||||||
| Total cost of revenues | 166,663 | 139,515 | |||||||||||||||||||||
| Gross profit | 359,662 | 365,587 | |||||||||||||||||||||
| Operating expenses(1): | |||||||||||||||||||||||
| Research and development | 146,960 | 113,475 | |||||||||||||||||||||
| Sales and marketing | 88,503 | 76,115 | |||||||||||||||||||||
| General and administrative | 62,669 | 48,325 | |||||||||||||||||||||
| Total operating expenses | 298,132 | 237,915 | |||||||||||||||||||||
| Operating income | 61,530 | 127,672 | |||||||||||||||||||||
| Other income, net | 30,248 | 2,709 | |||||||||||||||||||||
| Income before income taxes | 91,778 | 130,381 | |||||||||||||||||||||
| Provision for income taxes | (39,743) | 30,266 | |||||||||||||||||||||
| Net income | $ | 131,521 | $ | 100,115 | |||||||||||||||||||
| (1) Includes stock-based compensation as follows: |
| Cost of revenues: | |||||||||||||||||||||||
| Cost of subscription services | $ | 1,505 | $ | 1,277 | |||||||||||||||||||
| Cost of professional services and other | 12,722 | 9,990 | |||||||||||||||||||||
| Research and development | 38,906 | 25,823 | |||||||||||||||||||||
| Sales and marketing | 20,135 | 16,893 | |||||||||||||||||||||
| General and administrative | 17,451 | 13,151 | |||||||||||||||||||||
| Total stock-based compensation | $ | 90,719 | $ | 67,134 | |||||||||||||||||||
Revenues
| Three months ended April 30, | |||||||||||||||||||||||||||||||||||
| 2023 | 2022 | % Change | |||||||||||||||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||||||||||||||
| Revenues: | |||||||||||||||||||||||||||||||||||
| Subscription services | $ | 414,546 | $ | 402,632 | 3% | ||||||||||||||||||||||||||||||
| Professional services and other | 111,779 | 102,470 | 9% | ||||||||||||||||||||||||||||||||
| Total revenues | $ | 526,325 | $ | 505,102 | 4% | ||||||||||||||||||||||||||||||
| Percentage of revenues: | |||||||||||||||||||||||||||||||||||
| Subscription services | 79 | % | 80 | % | |||||||||||||||||||||||||||||||
| Professional services and other | 21 | % | 20 | % | |||||||||||||||||||||||||||||||
| Total revenues | 100 | % | 100 | % | |||||||||||||||||||||||||||||||
Total revenues for the three months ended April 30, 2023 increased $21 million, of which $12 million was from growth in subscription services revenues attributable to Commercial Solutions. The growth of subscription services revenue attributable to R&D Solutions was reduced by the addition of termination for convenience rights in master subscription agreements that govern multi-year orders relating to these products. The geographic mix of
| 26 | Veeva Systems Inc. | Form 10-Q |
subscription services revenues was 59% from North America, 26% from Europe, and 15% from other locations, primarily Asia Pacific, for the three months ended April 30, 2023, as compared to 57% from North America, 28% from Europe, and 15% from other locations, primarily Asia Pacific, for the three months ended April 30, 2022.
Since February 1, 2023, our master subscription agreements that govern multi-year orders generally include a termination for convenience right for our customers. In the fiscal year ending January 31, 2024, the addition of termination for convenience rights in such master subscription agreements changes the timing of revenue recognition for such orders governed by these master subscription agreements and will reduce our revenue for the fiscal year. Our contracting terms incorporates an annual inflation adjustment, which will raise the price to each customer upon such customer entering into a new or renewal order form after April 1, 2023 by the lower of 4% or the Consumer Price Index (All Urban Consumer, US City Average, All Items Index) published by the U.S. Bureau of Labor and Statistics for the month of August of the prior calendar year. We do not expect the annual inflation adjustment to have a significant impact to revenue for the fiscal year ending January 31, 2024.
In the quarter ended October 31, 2020, we disclosed that we expected life sciences companies to reduce the number of sales representatives that they employ by roughly 10%. While the majority of these reductions were completed by the end of our fiscal year ended January 31, 2023, we expect additional reductions to take place through the end of our fiscal year ending January 31, 2024. Such reductions could negatively impact sales of our solutions, including Veeva CRM and certain of our other Commercial Solutions, but we cannot be certain such reductions will happen or of the timing or magnitude of such reductions.
Professional services and other revenues for the three months ended April 30, 2023 increased $9 million. The increase was primarily due to new customers requesting implementation and deployment related professional services and existing customers requesting professional services related to expanding deployments or the deployment of newly purchased solutions. The increased demand for professional services and the resulting increase in professional services revenues was weighted heavily towards implementation and deployments of our R&D Solutions. Demand for our business consulting services also contributed to the growth for the period. The geographic mix of professional services and other revenues was 62% from North America, 31% from Europe, and 7% from other locations, primarily Asia Pacific, for the three months ended April 30, 2023, as compared to 65% from North America, 28% from Europe, and 7% from other locations, primarily Asia Pacific, for the three months ended April 30, 2022.
Costs and Expenses
Note that in light of the worldwide labor market conditions and inflationary pressure, our global compensation increases in connection with our annual compensation review process, which took place in the last month of our fiscal quarter ended April 30, 2022, were higher than previous years. These compensation changes increased our employee-related expenses, which impacted all of the cost and expense categories discussed below. The magnitude of global compensation increases taking place during our fiscal quarter ended April 30, 2023, were less than the percentage increases in the previous year.
Cost of Revenue and Gross Margin
| Three months ended April 30, | |||||||||||||||||||||||||||||||||||
| 2023 | 2022 | % Change | |||||||||||||||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||||||||||||||
| Cost of revenues: | |||||||||||||||||||||||||||||||||||
| Cost of subscription services | $ | 67,575 | $ | 58,953 | 15% | ||||||||||||||||||||||||||||||
| Cost of professional services and other | 99,088 | 80,562 | 23% | ||||||||||||||||||||||||||||||||
| Total cost of revenues | $ | 166,663 | $ | 139,515 | 19% | ||||||||||||||||||||||||||||||
| Gross margin percentage: | |||||||||||||||||||||||||||||||||||
| Subscription services | 84 | % | 85 | % | |||||||||||||||||||||||||||||||
| Professional services and other | 11 | % | 21 | % | |||||||||||||||||||||||||||||||
| Total gross margin percentage | 68 | % | 72 | % | |||||||||||||||||||||||||||||||
| Gross profit | $ | 359,662 | $ | 365,587 | (2)% | ||||||||||||||||||||||||||||||
Cost of revenues for the three months ended April 30, 2023 increased $27 million, of which $9 million was related to an increase in cost of subscription services. The increase in cost of subscription services was primarily due to
| Veeva Systems Inc. | Form 10-Q | 27 |
increases of $4 million related to costs of our data products and solutions, $2 million in computing infrastructure costs, and $2 million in employee compensation-related costs.
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 data solutions.
Cost of professional services and other for the three months ended April 30, 2023 increased $19 million, primarily due to a $14 million increase 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. The remaining $5 million increase was due to increased travel and entertainment costs related to resuming in-person events.
We expect cost of professional services and other to increase in absolute dollars in the near term as we continue to add personnel to our global professional services organization.
Gross margin for the three months ended April 30, 2023 and 2022 was 68% and 72%, respectively. The decrease compared to the same period in the prior fiscal year was due to higher employee compensation-related costs and higher travel costs related to in-person events for professional services, as well as the reduction in revenue due to the addition of termination for convenience rights in our master subscription agreements, as discussed in “Components of Results of Operations—Revenues.”
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 the fiscal year ending January 31, 2024. We expect our operating margin to decrease in the fiscal year ending January 31, 2024 due to these increases in operating expenses and the expected reduction in revenue due to the addition of termination for convenience rights in our master subscription agreements, as discussed in “Components of Results of Operations—Revenues.”
Research and Development
| Three months ended April 30, | |||||||||||||||||||||||||||||||||||
| 2023 | 2022 | % Change | |||||||||||||||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||||||||||||||
| Research and development | $ | 146,960 | $ | 113,475 | 30% | ||||||||||||||||||||||||||||||
| Percentage of total revenues | 28 | % | 22 | % | |||||||||||||||||||||||||||||||
Research and development expenses for the three months ended April 30, 2023 increased $33 million, primarily due to an increase of $32 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 headcount increases. The expansion of our headcount in research and development was 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 the fiscal year ending January 31, 2024, primarily due to headcount expansion and continued investment in our product offerings.
Sales and Marketing
| Three months ended April 30, | |||||||||||||||||||||||||||||||||||
| 2023 | 2022 | % Change | |||||||||||||||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||||||||||||||
| Sales and marketing | $ | 88,503 | $ | 76,115 | 16% | ||||||||||||||||||||||||||||||
| Percentage of total revenues | 17 | % | 15 | % | |||||||||||||||||||||||||||||||
Sales and marketing expenses for the three months ended April 30, 2023 increased $12 million, primarily due to an increase of $7 million in employee compensation-related costs (which includes an increase of $3 million in stock-
| 28 | Veeva Systems Inc. | Form 10-Q |
based compensation). The increase in employee compensation-related costs is primarily driven by headcount increases. There was also an increase of $4 million related to marketing program costs as in-person events resumed.
We expect sales and marketing expenses to increase in the fiscal year ending January 31, 2024, primarily due to employee-related expenses as we increase our headcount to support our sales and marketing efforts associated with our product offerings and our continued expansion of our sales capacity across all our solutions. Additionally, we expect travel and entertainment costs to continue increasing for the remainder of the fiscal year ending January 31, 2024 compared to our previous fiscal year.
General and Administrative
| Three months ended April 30, | |||||||||||||||||||||||||||||||||||
| 2023 | 2022 | % Change | |||||||||||||||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||||||||||||||
| General and administrative | $ | 62,669 | $ | 48,325 | 30% | ||||||||||||||||||||||||||||||
| Percentage of total revenues | 12 | % | 10 | % | |||||||||||||||||||||||||||||||
General and administrative expenses for the three months ended April 30, 2023 increased $14 million, primarily due to an increase of $12 million in employee compensation-related costs (which includes an increase of $4 million in stock-based compensation). The increase in employee compensation-related costs is primarily driven by headcount increases.
We expect general and administrative expenses to increase in the fiscal year ending January 31, 2024 as a result of headcount expansion, investments in our information technology infrastructure, and third-party fees, including fees associated with ongoing litigation.
Other Income, Net
| Three months ended April 30, | |||||||||||||||||||||||||||||||||||
| 2023 | 2022 | % Change | |||||||||||||||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||||||||||||||
| Other income, net | $ | 30,248 | $ | 2,709 | 1,017% | ||||||||||||||||||||||||||||||
Other income, net, for the three months ended April 30, 2023 increased $28 million, primarily due to an increase of $23 million in interest income. This increase was primarily due to higher investment asset balances as well as increases in interest rates within our investment portfolio.
We expect other income, net, to continue to increase for the remainder of the fiscal year ending January 31, 2024 primarily as a result of higher interest rates.
Foreign Currency
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, Japanese Yen, Canadian Dollar, British Pound Sterling, Hungarian Forint, Chinese Yuan, Israeli Shekel, and Brazilian Real. We may continue to experience favorable or adverse foreign currency impacts due to volatility in these currencies.
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Provision for Income Taxes
| Three months ended April 30, | |||||||||||||||||||||||||||||||||||
| 2023 | 2022 | % Change | |||||||||||||||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||||||||||||||
| Income before income taxes | $ | 91,778 | $ | 130,381 | (30)% | ||||||||||||||||||||||||||||||
| Income tax (benefit) provision | $ | (39,743) | $ | 30,266 | (231)% | ||||||||||||||||||||||||||||||
| Effective tax rate | (43.3) | % | 23.2 | % | |||||||||||||||||||||||||||||||
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, foreign income subject to taxation in the United States, and foreign derived intangible income tax deduction. 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, 2023 and 2022, our effective tax rates were (43.3)% and 23.2%, respectively. During the three months ended April 30, 2023 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 excess tax benefits in our provision for income taxes of $64 million and $5 million for the three months ended April 30, 2023 and 2022, respectively. The increase in excess tax benefits during the three months ended April 30, 2023 was primarily due to our Chief Executive Officer’s exercise of stock options in connection with a previously announced plan.
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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Excess tax benefits. Excess tax benefits from employee stock plans are dependent on previously agreed-upon equity grants to our employees, vesting of those grants, stock price, and exercise behavior of our employees, which can fluctuate from quarter to quarter. For example, excess tax benefits for the quarters ended January 31 and April 30, 2023 were higher than normal primarily due to our Chief Executive Officer’s exercise of stock options in connection with a previously announced trading plan. Because these fluctuations are not directly related to our business operations, we exclude excess tax benefits for our internal management reporting processes. Our management also finds it useful to exclude excess tax benefits when assessing the level of cash provided by operating activities. Given the nature of the excess tax benefits, we believe excluding it allows investors to make meaningful comparisons between our operating cash flows from quarter to quarter and those of other companies.
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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, 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.
| 30 | Veeva Systems Inc. | Form 10-Q |
Because these costs have already been incurred and cannot be recovered, and are non-cash expenses, we exclude these expenses for internal management reporting processes. We also find it useful to exclude these charges when assessing the appropriate level of various operating expenses and resource allocations when budgeting, planning, and forecasting future periods. Investors should note that the use of intangible assets contributed to our revenues earned during the periods presented and will contribute to our future period revenues as well.
- Income tax effects on the difference between GAAP and non-GAAP costs and expenses. The income tax effects that are excluded relate to the imputed tax impact on the difference between GAAP and non-GAAP costs and expenses due to stock-based compensation and purchased intangibles for GAAP and non-GAAP measures.
Limitations on the Use of Non-GAAP Financial Measures
There are limitations to using non-GAAP financial measures because non-GAAP financial measures are not prepared in accordance with GAAP and may be different from non-GAAP financial measures provided by other companies.
The non-GAAP financial measures are limited in value because they exclude certain items that may have a material impact upon our reported financial results. In addition, they are subject to inherent limitations as they reflect the exercise of judgments by management about which items are adjusted to calculate our non-GAAP financial measures. We compensate for these limitations by analyzing current and future results on a GAAP basis as well as a non-GAAP basis and also by providing GAAP measures in our public disclosures.
Non-GAAP financial measures should not be considered in isolation from, or as a substitute for, financial information prepared in accordance with GAAP. We encourage investors and others to review our financial information in its entirety, not to rely on any single financial measure to evaluate our business, and to view our non-GAAP financial measures in conjunction with the most directly comparable GAAP financial measures.
The following table reconciles the specific items excluded from GAAP metrics in the calculation of non-GAAP metrics for the periods shown below:
| Three months ended April 30, | |||||||||||||||||||||||
| 2023 | 2022 | ||||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Net cash provided by operating activities on a GAAP basis | $ | 505,936 | $ | 481,027 | |||||||||||||||||||
| Excess tax benefits from employee stock plans | (62,089) | (4,907) | |||||||||||||||||||||
| Net cash provided by operating activities on a non-GAAP basis | $ | 443,847 | $ | 476,120 | |||||||||||||||||||
| Net cash used in investing activities on a GAAP basis | $ | (297,394) | $ | (378,487) | |||||||||||||||||||
| Net cash (used in) provided by financing activities on a GAAP basis | $ | (1,392) | $ | 1,292 | |||||||||||||||||||
| Operating income on a GAAP basis | $ | 61,530 | $ | 127,672 | |||||||||||||||||||
| Stock-based compensation expense | 90,719 | 67,134 | |||||||||||||||||||||
| Amortization of purchased intangibles | 4,746 | 4,746 | |||||||||||||||||||||
| Operating income on a non-GAAP basis | $ | 156,995 | $ | 199,552 | |||||||||||||||||||
| Net income on a GAAP basis | $ | 131,521 | $ | 100,115 | |||||||||||||||||||
| Stock-based compensation expense | 90,719 | 67,134 | |||||||||||||||||||||
| Amortization of purchased intangibles | 4,746 | 4,746 | |||||||||||||||||||||
| Income tax effect on non-GAAP adjustments(1) | (79,064) | (12,209) | |||||||||||||||||||||
| Net income on a non-GAAP basis | $ | 147,922 | $ | 159,786 | |||||||||||||||||||
| Diluted net income per share on a GAAP basis | $ | 0.81 | $ | 0.62 | |||||||||||||||||||
| Stock-based compensation expense | 0.56 | 0.41 | |||||||||||||||||||||
| Amortization of purchased intangibles | 0.03 | 0.03 | |||||||||||||||||||||
| Income tax effect on non-GAAP adjustments(1) | (0.49) | (0.07) | |||||||||||||||||||||
| Diluted net income per share on a non-GAAP basis | $ | 0.91 | $ | 0.99 | |||||||||||||||||||
| (1) For the three months ended April 30, 2023 and 2022, we used an estimated annual effective non-GAAP tax rate of 21%. | |||||||||||||||||||||||
| Veeva Systems Inc. | Form 10-Q | 31 |
Liquidity and Capital Resources
| Three months ended April 30, | |||||||||||||||||||||||
| 2023 | 2022 | ||||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Net cash provided by operating activities | $ | 505,936 | $ | 481,027 | |||||||||||||||||||
| Net cash used in investing activities | (297,394) | (378,487) | |||||||||||||||||||||
| Net cash (used in) provided by financing activities | (1,392) | 1,292 | |||||||||||||||||||||
| Effect of exchange rate changes on cash and cash equivalents | 19 | (1,874) | |||||||||||||||||||||
| Net change in cash and cash equivalents | $ | 207,169 | $ | 101,958 | |||||||||||||||||||
Our principal sources of liquidity continue to be comprised of our cash, cash equivalents, and short-term investments, as well as cash flows generated from our operations. As of April 30, 2023, our cash, cash equivalents, and short-term investments totaled $3.6 billion, of which $42 million represented cash and cash equivalents held outside of the United States.
Our primary use of cash is payment of our operating costs, which consist primarily of employee-related expenses, such as compensation and benefits, investments in our information technology infrastructure, and general operating expenses for marketing, facilities, and overhead costs. Long-term cash requirements for items other than normal operating expenses could include the following: the acquisition of businesses, software products, or technologies complementary to our business; and capital expenditures.
Our non-U.S. cash and cash equivalents are not considered indefinitely reinvested outside the United States, except in certain designated jurisdictions. As of April 30, 2023, we have not recorded any taxes, such as withholding taxes, associated with the foreign earnings that are indefinitely reinvested outside of the United States. Under currently enacted tax laws, if we were to choose to repatriate the funds we have designated as indefinitely reinvested outside the United States, such amounts may be subject to certain jurisdictional taxes (e.g., withholding 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 cash deposits are primarily held at financial institutions classified as global systemically important banks, and we maintain sufficient cash at more than one financial institution to meet our operational needs. 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.
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, Inc. and Amazon Web Services), building infrastructure costs (including leases for office space), fees for third-party legal counsel and accounting services, payments to taxing authorities, and data acquisition costs. Note that our net income reflects the impact of excess tax benefits related to equity compensation.
Net cash provided by operating activities was $506 million for the three months ended April 30, 2023 compared to $481 million provided by operating activities for the three months ended April 30, 2022. The $25 million increase was primarily due to increased sales and the related cash collections, partially offset by higher operating expenses due to increases in headcount.
| 32 | Veeva Systems Inc. | Form 10-Q |
The cash flows from operating activities for the three months ended April 30, 2023 represent a significant portion of the cash flows from operating activities that we expect during our fiscal year ending January 31, 2024. As a result, we expect cash flows from operating activities to be substantially less in future quarterly periods of this fiscal year. Moreover, we anticipate our cash flows from operating activities for the fiscal year ending January 31, 2024 to be impacted by tax payments relating to the Tax Cuts and Jobs Act of 2017, which eliminated the option to deduct research and development expenditures and required taxpayers to capitalize and amortize them over five or fifteen years. Our cash flows from operating activities are expected to be reduced by approximately $90 million in the fiscal year ending January 31, 2024. The requirement may also reduce our cash flows from operating activities in future periods, the amounts and specific periods of which we are unable to estimate at this time.
Investing Activities
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 $297 million for the three months ended April 30, 2023 compared to $378 million used in investment activities for the three months ended April 30, 2022. The $81 million decrease in cash used in investing activities was mainly due to the net decrease in purchases of investments for the three months ended April 30, 2023.
Financing Activities
Financing activities relate primarily to stock option exercises and taxes paid on behalf of employees related to the net share settlement of RSUs.
Net cash used in financing activities was $1 million for the three months ended April 30, 2023 compared to $1 million provided by financing activities for the three months ended April 30, 2022. The $2 million change in cash used in financing activities was primarily related to an increase in cash used to pay employee taxes related to the net share settlement of RSUs.
Critical Accounting Policies and Estimates
Our condensed consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States (GAAP). In the preparation of these condensed consolidated financial statements, we are required to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs, and expenses and related disclosures. On an ongoing basis, we evaluate our estimates and assumptions. Our actual results may differ from these estimates under different assumptions or conditions.
There have been no material changes to our critical accounting policies and estimates during the three months ended April 30, 2023 as compared to the those disclosed in our Annual Report on Form 10-K for the fiscal year ended January 31, 2023.
| Veeva Systems Inc. | Form 10-Q | 33 |
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