filings.toolsItem 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
62K characters. Original on sec.gov · Markdown
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, 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) through 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, 2024, please see our Annual Report on Form 10-K for the fiscal year ended January 31, 2024 filed on March 25, 2024.
Our industry cloud solutions are grouped into three major product categories—Veeva Development Cloud, Veeva Commercial Cloud, and Veeva Data Cloud. For financial reporting purposes, revenues associated with our Veeva Commercial Cloud, Veeva Data 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, 2024, we derived approximately 52% and 48% of our subscription services revenues and 50% and 50% of our total revenues from our Commercial Solutions and R&D Solutions, respectively. For the six months ended July 31, 2024, we derived approximately 49% and 51% of our subscription services revenues and 47% and 53% 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. We also offer certain of our R&D Solutions to industries outside the life sciences industry primarily in North America and Europe.
For our fiscal years ended January 31, 2024, 2023, and 2022, our total revenues were $2,364 million, $2,155 million, and $1,851 million, respectively, representing year-over-year growth in total revenues of 10% in our fiscal year ended January 31, 2024 and 16% in our fiscal year ended January 31, 2023. For our fiscal years ended January 31, 2024, 2023, and 2022, our subscription services revenues were $1,902 million, $1,733 million, and $1,484 million, respectively, representing year-over-year growth in subscription services revenues of 10% in our fiscal year ended January 31, 2024, and 17% in our fiscal year ended January 31, 2023. We generated net income of $526 million, $488 million, and $427 million for our fiscal years ended January 31, 2024, 2023, and 2022, respectively.
As of January 31, 2024, 2023, and 2022, we served 1,432, 1,388, and 1,205 customers, respectively. As of January 31, 2024, 2023, and 2022, we had 693, 684, and 653 Commercial Solutions customers, respectively, and 1,078, 1,025, and 860 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. 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.
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,
| Veeva Systems Inc. | Form 10-Q | 21 |
configuration, data services, training, and managed services related to our solutions and services related to our Veeva Business Consulting offering. For the six months ended July 31, 2024, subscription services revenues constituted 83% of total revenues and professional services and other revenues constituted 17% 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.
Subscription services revenues are recognized ratably over the respective non-cancellable subscription term because of the continuous transfer of control to the customer. Our master subscription agreements that govern multi-year orders generally include a termination for convenience right for our customers. The amount of revenue recognized from such orders will generally be consistent with the amount invoiced for the relevant term of the order. 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).
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 expansion orders for our Commercial Solutions, because the term of orders for additional end users or applications is commonly less than one year to align to the renewal date of existing Commercial Solutions orders, 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 may 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 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, calculated billings, or normalized billings are accurate indicators of future revenues for any given period of time. We define the term calculated billings for any period to mean revenue for the period plus the change in deferred revenue from the immediately preceding period minus the change in unbilled accounts receivable from the immediately preceding period. We define the term normalized billings for any period to mean calculated billings adjusted for the impact of term changes in renewal business, such as in the timing (for example, changing the renewal date of multiple products to be coterminous) or billing frequency (for example, changing from annual to quarterly billings).
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.
| 22 | Veeva Systems Inc. | Form 10-Q |
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 by cloud software implementation.
Allocated Overhead
We accumulate certain costs such as office rent, utilities, and other facilities costs, information technology, and building depreciation 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 costs, and costs of delivering our data solutions, expenses associated with computer equipment and software, and allocated overhead.
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 our platforms, including adding new features and applications and increasing the functionality and enhancing the ease of use of our cloud-based applications.
Sales and Marketing. Sales and marketing expenses consist primarily of employee-related expenses, sales commissions, marketing program costs, amortization expense associated with purchased intangibles related to our customer contracts, customer relationships and brand development, travel-related expenses and allocated overhead. Marketing program costs include advertising, customer events, corporate communications, brand awareness, and product marketing activities. Sales commissions are costs of obtaining new customer contracts and are capitalized and then amortized over a period of benefit that we have determined to be three years.
General and Administrative. General and administrative expenses consist of employee-related expenses for our executive, finance and accounting, legal, employee success, management information systems personnel, and other administrative employees. In addition, general and administrative expenses include fees related to third-party legal counsel, fees related to third-party accounting, tax and audit services, other corporate expenses, and allocated overhead.
Other Income, Net
Other income, net, consists primarily of interest income, amortization of premiums paid or accretion of discounts on investments, and transaction gains or losses on foreign currency, net of hedging costs.
| Veeva Systems Inc. | Form 10-Q | 23 |
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.
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 July 31, | Six months ended July 31, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Consolidated Statements of Comprehensive Income Data: | |||||||||||||||||||||||
| Revenues: | |||||||||||||||||||||||
| Subscription services | $ | 561,277 | $ | 470,637 | $ | 1,095,232 | $ | 885,183 | |||||||||||||||
| Professional services and other | 114,904 | 119,588 | 231,294 | 231,367 | |||||||||||||||||||
| Total revenues | 676,181 | 590,225 | 1,326,526 | 1,116,550 | |||||||||||||||||||
| Cost of revenues(1): | |||||||||||||||||||||||
| Cost of subscription services | 78,791 | 71,169 | 156,939 | 138,744 | |||||||||||||||||||
| Cost of professional services and other | 91,581 | 97,849 | 187,317 | 196,937 | |||||||||||||||||||
| Total cost of revenues | 170,372 | 169,018 | 344,256 | 335,681 | |||||||||||||||||||
| Gross profit | 505,809 | 421,207 | 982,270 | 780,869 | |||||||||||||||||||
| Operating expenses(1): | |||||||||||||||||||||||
| Research and development | 176,429 | 157,228 | 339,140 | 304,188 | |||||||||||||||||||
| Sales and marketing | 101,528 | 96,995 | 198,829 | 185,498 | |||||||||||||||||||
| General and administrative | 61,365 | 62,935 | 122,642 | 125,604 | |||||||||||||||||||
| Total operating expenses | 339,322 | 317,158 | 660,611 | 615,290 | |||||||||||||||||||
| Operating income | 166,487 | 104,049 | 321,659 | 165,579 | |||||||||||||||||||
| Other income, net | 58,573 | 38,826 | 110,302 | 69,074 | |||||||||||||||||||
| Income before income taxes | 225,060 | 142,875 | 431,961 | 234,653 | |||||||||||||||||||
| Income tax provision (benefit) | 54,019 | 31,247 | 99,256 | (8,496) | |||||||||||||||||||
| Net income | $ | 171,041 | $ | 111,628 | $ | 332,705 | $ | 243,149 | |||||||||||||||
| (1) Includes stock-based compensation as follows: |
| Cost of revenues: | |||||||||||||||||||||||
| Cost of subscription services | $ | 1,642 | $ | 1,748 | $ | 3,196 | $ | 3,253 | |||||||||||||||
| Cost of professional services and other | 13,176 | 14,216 | 25,711 | 26,938 | |||||||||||||||||||
| Research and development | 48,984 | 45,292 | 90,727 | 84,198 | |||||||||||||||||||
| Sales and marketing | 23,671 | 23,489 | 46,714 | 43,624 | |||||||||||||||||||
| General and administrative | 20,903 | 18,150 | 37,939 | 35,601 | |||||||||||||||||||
| Total stock-based compensation | $ | 108,376 | $ | 102,895 | $ | 204,287 | $ | 193,614 | |||||||||||||||
| 24 | Veeva Systems Inc. | Form 10-Q |
Revenues
| Three months ended July 31, | Six months ended July 31, | ||||||||||||||||||||||||||||||||||
| 2024 | 2023 | % Change | 2024 | 2023 | % Change | ||||||||||||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||||||||||||||
| Revenues: | |||||||||||||||||||||||||||||||||||
| Subscription services | $ | 561,277 | $ | 470,637 | 19% | $ | 1,095,232 | $ | 885,183 | 24% | |||||||||||||||||||||||||
| Professional services and other | 114,904 | 119,588 | (4)% | 231,294 | 231,367 | —% | |||||||||||||||||||||||||||||
| Total revenues | $ | 676,181 | $ | 590,225 | 15% | $ | 1,326,526 | $ | 1,116,550 | 19% | |||||||||||||||||||||||||
| Percentage of revenues: | |||||||||||||||||||||||||||||||||||
| Subscription services | 83 | % | 80 | % | 83 | % | 79 | % | |||||||||||||||||||||||||||
| Professional services and other | 17 | 20 | 17 | 21 | |||||||||||||||||||||||||||||||
| Total revenues | 100 | % | 100 | % | 100 | % | 100 | % | |||||||||||||||||||||||||||
Total revenues for the three months ended July 31, 2024 increased $86 million, comprising a $91 million increase in subscription services revenues partially offset by a $5 million decrease in professional services and other revenues.
The increase in subscription services revenues consisted of $62 million of subscription services revenue attributable to R&D Solutions and $28 million of subscription services revenue attributable to Commercial Solutions. The increase in subscription services revenue attributable to R&D Solutions was primarily due to expanding use of Veeva Development Cloud products by both new and existing customers. The increase in subscription services revenue attributable to Commercial Solutions was primarily due to expanding use of our Veeva Commercial Cloud and Veeva Data Cloud products by both new and existing customers and to a lesser extent due to higher prices in connection with our annual inflation adjustment. The geographic mix of subscription services revenues was 59% from North America, 28% from Europe, and 13% from other locations, primarily Asia Pacific, for the three months ended July 31, 2024, as compared to 58% from North America, 27% from Europe, and 15% from other locations, primarily Asia Pacific, for the three months ended July 31, 2023.
Professional services and other revenues for the three months ended July 31, 2024 decreased $5 million. The decrease in professional services revenue was primarily due to a decline in implementation and deployment-related services, partially offset by an increase in business consulting services. The geographic mix of professional services and other revenues was 57% from North America, 36% from Europe, and 7% from other locations, primarily Asia Pacific, for the three months ended July 31, 2024, as compared to 62% from North America, 30% from Europe, and 8% from other locations, primarily Asia Pacific, for the three months ended July 31, 2023.
Total revenues for the six months ended July 31, 2024 increased $210 million, all of which was driven by growth in subscription services revenues.
The increase in subscription services revenues consisted of $160 million of subscription services revenue attributable to R&D Solutions and $50 million of subscription services revenue attributable to Commercial Solutions. The increase in subscription services revenue attributable to R&D solutions was primarily due to expanding use of Veeva Development Cloud products by both new and existing customers. The increase in subscription services revenue attributable to Commercial Solutions was primarily due to expanding use of our Veeva Commercial Cloud and Veeva Data Cloud products by both new and existing customers and to a lesser extent due to higher prices in connection with our annual inflation adjustment. The geographic mix of subscription services revenues was 59% from North America, 28% from Europe, and 13% from other locations, primarily Asia Pacific, for the six months ended July 31, 2024, as compared to 58% from North America, 27% from Europe, and 15% from other locations, primarily Asia Pacific, for the six months ended July 31, 2023.
Professional services and other revenues for the six months ended July 31, 2024 remained relatively consistent as a decline in implementation and deployment-related services during the period was offset by an increase in business consulting services. The geographic mix of professional services and other revenues was 58% from North America, 35% from Europe, and 7% from other locations, primarily Asia Pacific, for the six months ended July 31, 2024, as compared to 62% from North America, 30% from Europe, and 8% from other locations, primarily Asia Pacific, for the six months ended July 31, 2023.
| Veeva Systems Inc. | Form 10-Q | 25 |
Cost of Revenue and Gross Margin
| Three months ended July 31, | Six months ended July 31, | ||||||||||||||||||||||||||||||||||
| 2024 | 2023 | % Change | 2024 | 2023 | % Change | ||||||||||||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||||||||||||||
| Cost of revenues: | |||||||||||||||||||||||||||||||||||
| Cost of subscription services | $ | 78,791 | $ | 71,169 | 11% | $ | 156,939 | $ | 138,744 | 13% | |||||||||||||||||||||||||
| Cost of professional services and other | 91,581 | 97,849 | (6)% | 187,317 | 196,937 | (5)% | |||||||||||||||||||||||||||||
| Total cost of revenues | $ | 170,372 | $ | 169,018 | 1% | $ | 344,256 | $ | 335,681 | 3% | |||||||||||||||||||||||||
| Gross margin percentage: | |||||||||||||||||||||||||||||||||||
| Subscription services | 86 | % | 85 | % | 86 | % | 84 | % | |||||||||||||||||||||||||||
| Professional services and other | 20 | % | 18 | % | 19 | % | 15 | % | |||||||||||||||||||||||||||
| Total gross margin percentage | 75 | % | 71 | % | 74 | % | 70 | % | |||||||||||||||||||||||||||
| Gross profit | $ | 505,809 | $ | 421,207 | 20% | $ | 982,270 | $ | 780,869 | 26% | |||||||||||||||||||||||||
Cost of revenues for the three months ended July 31, 2024 increased $1 million, comprising a $7 million increase related to an increase in cost of subscription services, partially offset by a $6 million decrease in cost of professional services and other. The increase in cost of subscription services was primarily due to an increase of $4 million related to computing infrastructure costs, which was driven by an increase in both the number of end users and the volume of activity by end users of our subscription services. The $6 million decrease in cost of professional services and other was mainly due to a reduction in employee compensation-related costs as headcount decreased.
Cost of revenues for the six months ended July 31, 2024 increased $9 million, comprising an $18 million increase related to an increase in cost of subscription services, partially offset by a $9 million decrease in cost of professional services and other. The increase in cost of subscription services was primarily due to an increase of $10 million related to computing infrastructure costs, which was driven by an increase in both the number of end users and the volume of activity by end users of our subscription services. The $9 million decrease in cost of professional services and other was mainly due to a reduction in employee compensation-related costs as headcount decreased and the use of third-party services in our implementation and deployment-related activities.
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.
Operating Expenses and Operating Margin
Operating expenses include research and development, sales and marketing, and general and administrative expenses. We expect operating expenses to increase in the fiscal year ending January 31, 2025, primarily due to employee compensation-related costs.
Research and Development
| Three months ended July 31, | Six months ended July 31, | ||||||||||||||||||||||||||||||||||
| 2024 | 2023 | % Change | 2024 | 2023 | % Change | ||||||||||||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||||||||||||||
| Research and development | $ | 176,429 | $ | 157,228 | 12% | $ | 339,140 | $ | 304,188 | 11% | |||||||||||||||||||||||||
| Percentage of total revenues | 26 | % | 27 | % | 26 | % | 27 | % | |||||||||||||||||||||||||||
Research and development expenses for the three months ended July 31, 2024 increased $19 million due to an increase of $11 million in employee compensation-related costs and an increase of $8 million in technology and infrastructure costs. The increase in employee compensation-related costs was primarily driven by an increase in headcount and the increase in technology and infrastructure costs was primarily driven by higher hosting fees. The expansion of our headcount in research and development and the increased technology and infrastructure costs were to support development work for the products that we offer or may offer in the future.
Research and development expenses for the six months ended July 31, 2024 increased $35 million due to an increase of $26 million in employee compensation-related costs and an increase of $8 million in technology and infrastructure costs. The increase in employee compensation-related costs was primarily driven by an increase in headcount and the increase in technology and infrastructure costs was primarily driven by higher hosting fees. The
| 26 | Veeva Systems Inc. | Form 10-Q |
expansion of our headcount in research and development and the increased technology and infrastructure costs were to support development work for the 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, 2025, primarily due to employee compensation-related costs as we continue to invest in our product offerings.
Sales and Marketing
| Three months ended July 31, | Six months ended July 31, | ||||||||||||||||||||||||||||||||||
| 2024 | 2023 | % Change | 2024 | 2023 | % Change | ||||||||||||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||||||||||||||
| Sales and marketing | $ | 101,528 | $ | 96,995 | 5% | $ | 198,829 | $ | 185,498 | 7% | |||||||||||||||||||||||||
| Percentage of total revenues | 15 | % | 16 | % | 15 | % | 17 | % | |||||||||||||||||||||||||||
Sales and marketing expenses for the three months ended July 31, 2024 increased $5 million, primarily due to an increase of $3 million in employee compensation-related costs. The increase in employee compensation-related costs was primarily driven by the increase in headcount to support our sales and marketing efforts associated with our product offerings.
Sales and marketing expenses for the six months ended July 31, 2024 increased $13 million, primarily due to an increase of $10 million in employee compensation-related costs. The increase in employee compensation-related costs was primarily driven by the increase in headcount to support our sales and marketing efforts associated with our product offerings.
We expect sales and marketing expenses to increase in the fiscal year ending January 31, 2025, primarily due to employee compensation-related costs and the increase in marketing program costs related to events.
General and Administrative
| Three months ended July 31, | Six months ended July 31, | ||||||||||||||||||||||||||||||||||
| 2024 | 2023 | % Change | 2024 | 2023 | % Change | ||||||||||||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||||||||||||||
| General and administrative | $ | 61,365 | $ | 62,935 | (2)% | $ | 122,642 | $ | 125,604 | (2)% | |||||||||||||||||||||||||
| Percentage of total revenues | 9 | % | 11 | % | 9 | % | 11 | % | |||||||||||||||||||||||||||
General and administrative expenses for the three months ended July 31, 2024 decreased $2 million due to a net reduction in litigation fees, partially offset by an increase in employee compensation-related costs. The increase in employee compensation-related costs was primarily driven by stock-based compensation related to the equity grant to our Chief Executive Officer.
General and administrative expenses for the six months ended July 31, 2024 decreased $3 million due to a net reduction in litigation fees, partially offset by an increase in employee compensation-related costs. The increase in employee compensation-related costs was primarily driven by stock-based compensation related to the equity grant to our Chief Executive Officer.
We expect an increase in general and administrative expenses in the fiscal year ending January 31, 2025, primarily related to the stock-based compensation associated with the equity grant to our Chief Executive Officer.
Other Income, Net
| Three months ended July 31, | Six months ended July 31, | ||||||||||||||||||||||||||||||||||
| 2024 | 2023 | % Change | 2024 | 2023 | % Change | ||||||||||||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||||||||||||||
| Other income, net | $ | 58,573 | $ | 38,826 | 51% | $ | 110,302 | $ | 69,074 | 60% | |||||||||||||||||||||||||
| Veeva Systems Inc. | Form 10-Q | 27 |
Other income, net, for the three and six months ended July 31, 2024 increased $20 million and $41 million, respectively, due to an increase in interest income from higher investment asset balances.
Foreign Currency
We continue to experience fluctuations primarily resulting from the periodic re-measurement of the foreign currencies exposures on the balance sheet. The results of operations and cash flows are also subject to fluctuations in foreign currency exchange rates, particularly in the Euro, Japanese Yen, Canadian Dollar, Great British Pound Sterling, and Chinese Yuan.
Provision for Income Taxes
| Three months ended July 31, | Six months ended July 31, | ||||||||||||||||||||||||||||||||||
| 2024 | 2023 | % Change | 2024 | 2023 | % Change | ||||||||||||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||||||||||||||
| Income before income taxes | $ | 225,060 | $ | 142,875 | 58% | $ | 431,961 | $ | 234,653 | 84% | |||||||||||||||||||||||||
| Income tax provision (benefit) | $ | 54,019 | $ | 31,247 | 73% | $ | 99,256 | $ | (8,496) | (1,268)% | |||||||||||||||||||||||||
| Effective tax rate | 24.0 | % | 21.9 | % | 23.0 | % | (3.6) | % | |||||||||||||||||||||||||||
The provision for income taxes differs from the tax computed at the U.S. federal statutory income tax rate primarily due to state taxes, tax credits, equity compensation, and foreign income subject to taxation in the United States. Future tax rates could be affected by changes in tax laws and regulations or by rulings in tax related litigation, as may be applicable.
During the three and six months ended July 31, 2024, as compared to the same periods in the prior fiscal year, our effective tax rate increased primarily due to the reduced benefit from excess tax benefits related to equity compensation. The decrease in excess tax benefits during the six months ended July 31, 2024 was primarily due to stock option exercises by our Chief Executive Officer in the prior year and none in the current year.
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.
-
Excess tax benefits. Excess tax benefits from employee stock plans are dependent on previously agreed-upon equity grants to our employees, vesting of those grants, stock price, and exercise behavior of our employees, which can fluctuate from quarter to quarter. Because these fluctuations are not directly related to our business operations, we exclude excess tax benefits for our internal management reporting processes. Our management also finds it useful to exclude excess tax benefits when assessing the level of cash provided by operating activities. Given the nature of the excess tax benefits, we believe excluding it allows investors to make meaningful comparisons between our operating cash flows from quarter to quarter and those of other companies.
-
Stock-based compensation expenses. We exclude stock-based compensation expenses primarily because they are non-cash expenses that we exclude from our internal management reporting processes. We also find it useful to exclude these expenses when we assess the appropriate level of various operating expenses and resource allocations when budgeting, planning, and forecasting future periods. Moreover, because of varying available valuation methodologies, subjective assumptions and the variety of award types that companies can use, we believe excluding stock-based compensation expenses allows investors to make meaningful comparisons between our recurring core business operating results and those of other companies.
| 28 | Veeva Systems Inc. | Form 10-Q |
-
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.
-
Litigation settlement. We exclude costs related to the settlement of certain litigation matters because they are non-recurring and outside the ordinary course of business. Because these costs are unrelated to our day-to-day business operations, we believe excluding them enables more consistent evaluation of our operating results.
-
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.
| Veeva Systems Inc. | Form 10-Q | 29 |
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 July 31, | Six months ended July 31, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Net cash provided by operating activities on a GAAP basis | $ | 92,874 | $ | 265,036 | $ | 856,390 | $ | 770,972 | |||||||||||||||
| Excess tax benefits from employee stock plans | (1,141) | (3,211) | (4,262) | (65,300) | |||||||||||||||||||
| Net cash provided by operating activities on a non-GAAP basis | $ | 91,733 | $ | 261,825 | $ | 852,128 | $ | 705,672 | |||||||||||||||
| Net cash used in investing activities on a GAAP basis | $ | (113,842) | $ | (618,930) | $ | (386,220) | $ | (916,324) | |||||||||||||||
| Net cash (used in) provided by financing activities on a GAAP basis | $ | (11,484) | $ | 2,577 | $ | (7,656) | $ | 1,185 | |||||||||||||||
| Operating income on a GAAP basis | $ | 166,487 | $ | 104,049 | $ | 321,659 | $ | 165,579 | |||||||||||||||
| Stock-based compensation expense | 108,376 | 102,895 | 204,287 | 193,614 | |||||||||||||||||||
| Amortization of purchased intangibles | 4,892 | 4,906 | 9,678 | 9,652 | |||||||||||||||||||
| Litigation settlement | — | — | 5,000 | — | |||||||||||||||||||
| Operating income on a non-GAAP basis | $ | 279,755 | $ | 211,850 | $ | 540,624 | $ | 368,845 | |||||||||||||||
| Net income on a GAAP basis | $ | 171,041 | $ | 111,628 | $ | 332,705 | $ | 243,149 | |||||||||||||||
| Stock-based compensation expense | 108,376 | 102,895 | 204,287 | 193,614 | |||||||||||||||||||
| Amortization of purchased intangibles | 4,892 | 4,906 | 9,678 | 9,652 | |||||||||||||||||||
| Litigation settlement | — | — | 5,000 | — | |||||||||||||||||||
| Income tax effect on non-GAAP adjustments(1) | (17,030) | (21,395) | (37,438) | (100,459) | |||||||||||||||||||
| Net income on a non-GAAP basis | $ | 267,279 | $ | 198,034 | $ | 514,232 | $ | 345,956 | |||||||||||||||
| Diluted net income per share on a GAAP basis | $ | 1.04 | $ | 0.68 | $ | 2.02 | $ | 1.49 | |||||||||||||||
| Stock-based compensation expense | 0.66 | 0.63 | 1.24 | 1.19 | |||||||||||||||||||
| Amortization of purchased intangibles | 0.03 | 0.03 | 0.06 | 0.06 | |||||||||||||||||||
| Litigation settlement | — | — | 0.03 | — | |||||||||||||||||||
| Income tax effect on non-GAAP adjustments(1) | (0.11) | (0.13) | (0.22) | (0.62) | |||||||||||||||||||
| Diluted net income per share on a non-GAAP basis | $ | 1.62 | $ | 1.21 | $ | 3.13 | $ | 2.12 | |||||||||||||||
| (1) For the three and six months ended July 31, 2024 and 2023, we used an estimated annual effective non-GAAP tax rate of 21%. | |||||||||||||||||||||||
Liquidity and Capital Resources
| Three months ended July 31, | Six months ended July 31, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Net cash provided by operating activities | $ | 92,874 | $ | 265,036 | $ | 856,390 | $ | 770,972 | |||||||||||||||
| Net cash used in investing activities | (113,842) | (618,930) | (386,220) | (916,324) | |||||||||||||||||||
| Net cash (used in) provided by financing activities | (11,484) | 2,577 | (7,656) | 1,185 | |||||||||||||||||||
| Effect of exchange rate changes on cash and cash equivalents | 5 | 290 | (1,252) | 309 | |||||||||||||||||||
| Net change in cash and cash equivalents | $ | (32,447) | $ | (351,027) | $ | 461,262 | $ | (143,858) | |||||||||||||||
Our principal sources of liquidity continue to be comprised of our existing cash, cash equivalents, and short-term investments, as well as cash flows generated from our operations. As of July 31, 2024, our cash, cash equivalents, and short-term investments totaled $4.9 billion, of which $67 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, 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 July 31, 2024, 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
| 30 | Veeva Systems Inc. | Form 10-Q |
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 Amazon Web Services and Salesforce, Inc.), building infrastructure costs (including leases for office space), fees for third-party legal counsel and accounting services, and data acquisition costs. Note that our net income reflects the impact of excess tax benefits related to equity compensation.
Net cash provided by operating activities was $93 million for the three months ended July 31, 2024 compared to $265 million provided by operating activities for the three months ended July 31, 2023. The $172 million decrease was primarily due to timing of cash paid for income taxes.
Net cash provided by operating activities was $856 million for the six months ended July 31, 2024 compared to $771 million provided by operating activities for the six months ended July 31, 2023. The $85 million increase was primarily due to increased sales and the related cash collections, partially offset by the timing of cash paid for income taxes.
The cash flows from operating activities for the six months ended July 31, 2024 represent a significant portion of the cash flows from operating activities that we expect during our fiscal year ending January 31, 2025. As a result, we expect cash flows from operating activities to be substantially less in future quarterly periods of this fiscal year. In the fiscal year ending January 31, 2025, cash payments for income taxes in relation 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, are expected to reduce our cash flows from operating activities. The requirement may also impact 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 $114 million for the three months ended July 31, 2024 compared to $619 million used in investing activities for the three months ended July 31, 2023. The $505 million decrease in cash used in investing activities was mainly due to the decrease in purchases of short-term investments for the three months ended July 31, 2024, partially offset by the increase in proceeds from maturities and sales of short-term investments.
| Veeva Systems Inc. | Form 10-Q | 31 |
Net cash used in investing activities was $386 million for the six months ended July 31, 2024 compared to $916 million used in investing activities for the six months ended July 31, 2023. The $530 million decrease in cash used in investing activities was mainly due to the decrease in purchases of short-term investments for the six months ended July 31, 2024, partially offset by the increase in proceeds from maturities and sales of short-term investments.
Financing Activities
The cash flows from financing activities relate primarily to stock option exercises offset by taxes paid on behalf of employees related to the net share settlement of RSUs.
Net cash used in financing activities was $11 million for the three months ended July 31, 2024 compared to $3 million provided by financing activities for the three months ended July 31, 2023. The $14 million increase in cash used in financing activities was primarily related to a decrease of $17 million in proceeds from employee stock option exercises, partially offset by a decrease of $3 million of cash used to pay employee taxes related to the net share settlement of RSUs.
Net cash used in financing activities was $8 million for the six months ended July 31, 2024 compared to $1 million provided by financing activities for the six months ended July 31, 2023. The $9 million increase in cash used in financing activities was primarily related to an increase of $5 million of cash used to pay employee taxes related to the net share settlement of RSUs and a decrease of $3 million in proceeds from employee stock option exercises.
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 six months ended July 31, 2024 as compared to the those disclosed in our Annual Report on Form 10-K for the fiscal year ended January 31, 2024.
| 32 | Veeva Systems Inc. | Form 10-Q |
Previous: Item 1. FINANCIAL STATEMENTS. · Next: Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.