VEEVA SYSTEMS INC - Quarter Report: 2019 October (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________________________________________________________________
FORM 10-Q
____________________________________________________________________________________
(Mark One)
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended October 31, 2019
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission File Number: 001-36121
____________________________________________________________________________________
Veeva Systems Inc.
(Exact name of registrant as specified in its charter)
____________________________________________________________________________________
Delaware | 20-8235463 | |
(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) | |
4280 Hacienda Drive
Pleasanton, California, 94588
(Address of principal executive offices)
(Registrant’s telephone number, including area code) (925) 452-6500
(Former name, former address and former fiscal year, if changed since last report) N/A
____________________________________________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol | Name of each exchange on which registered | ||
Class A Common Stock, par value $0.00001 per share | VEEV | The New York Stock Exchange | ||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☒ | Accelerated filer | ☐ |
Non-accelerated filer | ☐ | Smaller reporting company | ☐ |
Emerging growth company | ☐ | ||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ☒ No ☐
As of November 30, 2019, there were 132,212,846 shares of the Registrant’s Class A common stock outstanding and 16,373,842 shares of the Registrant’s Class B common stock outstanding.
VEEVA SYSTEMS INC.
FORM 10-Q
TABLE OF CONTENTS
2 | Veeva Systems Inc. | Form 10-Q |
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements that are based on our beliefs and assumptions and on information currently available to us. Forward-looking statements include information concerning our possible or assumed future results of operations and expenses, business strategies and plans, trends, market sizing, competitive position, industry environment, potential growth opportunities and product capabilities, among other things. Forward-looking statements include all statements that are not historical facts and, in some cases, can be identified by terms such as “aim,” “anticipates,” “believes,” “could,” “estimates,” “expects,” “goal,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “seeks,” “should,” “strive,” “will,” “would,” or similar expressions and the negatives of those terms.
Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements, including those described in “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and elsewhere in this report. Given these uncertainties, you should not place undue reliance on these forward-looking statements.
Any forward-looking statement made by us in this report speaks only as of the date on which it is made. Except as required by law, we disclaim any obligation to update these forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.
As used in this report, the terms “Veeva,” the “Company,” “Registrant,” “we,” “us,” and “our” mean Veeva Systems Inc. and its subsidiaries unless the context indicates otherwise.
Veeva Systems Inc. | Form 10-Q | 3 |
PART I. FINANCIAL INFORMATION
ITEM 1. | FINANCIAL STATEMENTS. |
VEEVA SYSTEMS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except number of shares and par value)
October 31, 2019 | January 31, 2019 | ||||||
(Unaudited) | |||||||
Assets | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 892,581 | $ | 550,971 | |||
Short-term investments | 602,407 | 539,190 | |||||
Accounts receivable, net of allowance for doubtful accounts of $367 and $468, respectively | 116,874 | 303,465 | |||||
Unbilled accounts receivable | 30,899 | 18,122 | |||||
Prepaid expenses and other current assets | 15,360 | 21,666 | |||||
Total current assets | 1,658,121 | 1,433,414 | |||||
Property and equipment, net(1) | 53,290 | 54,966 | |||||
Deferred costs, net | 29,873 | 30,869 | |||||
Lease right-of-use assets(1) | 24,055 | — | |||||
Goodwill | 95,804 | 95,804 | |||||
Intangible assets, net | 19,948 | 24,521 | |||||
Deferred income taxes, noncurrent | 6,455 | 5,938 | |||||
Other long-term assets | 12,895 | 8,254 | |||||
Total assets | $ | 1,900,441 | $ | 1,653,766 | |||
Liabilities and stockholders’ equity | |||||||
Current liabilities: | |||||||
Accounts payable | $ | 9,914 | $ | 9,110 | |||
Accrued compensation and benefits | 15,977 | 15,324 | |||||
Accrued expenses and other current liabilities | 15,707 | 16,145 | |||||
Income tax payable | 7,195 | 4,086 | |||||
Deferred revenue | 250,674 | 356,357 | |||||
Lease liabilities(1) | 7,430 | — | |||||
Total current liabilities | 306,897 | 401,022 | |||||
Deferred income taxes, noncurrent | 9,042 | 6,095 | |||||
Lease liabilities, noncurrent(1) | 19,882 | — | |||||
Other long-term liabilities | 6,055 | 8,900 | |||||
Total liabilities | 341,876 | 416,017 | |||||
Commitments and contingencies (Note 13) | |||||||
Stockholders’ equity: | |||||||
Class A common stock, $0.00001 par value; 800,000,000 shares authorized, 131,955,372 and 125,980,019 issued and outstanding at October 31, 2019 and January 31, 2019, respectively | 1 | 1 | |||||
Class B common stock, $0.00001 par value; 190,000,000 shares authorized, 16,405,449 and 20,210,060 issued and outstanding at October 31, 2019 and January 31, 2019, respectively | — | — | |||||
Additional paid-in capital | 704,915 | 617,623 | |||||
Accumulated other comprehensive income | 173 | 928 | |||||
Retained earnings(1) | 853,476 | 619,197 | |||||
Total stockholders’ equity | 1,558,565 | 1,237,749 | |||||
Total liabilities and stockholders’ equity | $ | 1,900,441 | $ | 1,653,766 | |||
See Notes to Condensed Consolidated Financial Statements.
_________________________________________________________
(1) | We adopted Accounting Standards Update (ASU) 2016-02, “Leases” (Topic 842) using the modified retrospective method as of February 1, 2019 and elected the transition option that allows us not to restate the comparative periods in our financial statements in the year of adoption. |
4 | Veeva Systems Inc. | Form 10-Q |
VEEVA SYSTEMS INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands, except per share data)
Three months ended October 31, | Nine months ended October 31, | ||||||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||||||
(Unaudited) | |||||||||||||||
Revenues: | |||||||||||||||
Subscription services | $ | 226,760 | $ | 178,214 | $ | 642,187 | $ | 503,809 | |||||||
Professional services and other | 54,161 | 46,517 | 150,386 | 126,078 | |||||||||||
Total revenues | 280,921 | 224,731 | 792,573 | 629,887 | |||||||||||
Cost of revenues(1): | |||||||||||||||
Cost of subscription services | 31,964 | 28,335 | 93,822 | 87,394 | |||||||||||
Cost of professional services and other | 41,365 | 33,039 | 115,228 | 93,361 | |||||||||||
Total cost of revenues | 73,329 | 61,374 | 209,050 | 180,755 | |||||||||||
Gross profit | 207,592 | 163,357 | 583,523 | 449,132 | |||||||||||
Operating expenses(1): | |||||||||||||||
Research and development | 52,575 | 40,001 | 148,694 | 116,024 | |||||||||||
Sales and marketing | 45,524 | 37,699 | 130,962 | 110,306 | |||||||||||
General and administrative | 28,693 | 22,563 | 78,042 | 62,934 | |||||||||||
Total operating expenses | 126,792 | 100,263 | 357,698 | 289,264 | |||||||||||
Operating income | 80,800 | 63,094 | 225,825 | 159,868 | |||||||||||
Other income, net | 9,141 | 4,606 | 22,634 | 10,087 | |||||||||||
Income before income taxes | 89,941 | 67,700 | 248,459 | 169,955 | |||||||||||
Provision for income taxes | 7,696 | 3,615 | 13,523 | 11,274 | |||||||||||
Net income | $ | 82,245 | $ | 64,085 | $ | 234,936 | $ | 158,681 | |||||||
Net income, basic and diluted | $ | 82,245 | $ | 64,085 | $ | 234,936 | $ | 158,681 | |||||||
Net income per share: | |||||||||||||||
Basic | $ | 0.56 | $ | 0.44 | $ | 1.59 | $ | 1.10 | |||||||
Diluted | $ | 0.52 | $ | 0.41 | $ | 1.49 | $ | 1.02 | |||||||
Weighted-average shares used to compute net income per share: | |||||||||||||||
Basic | 148,157 | 144,737 | 147,467 | 143,765 | |||||||||||
Diluted | 158,750 | 156,025 | 158,124 | 155,706 | |||||||||||
Other comprehensive income: | |||||||||||||||
Net change in unrealized gain on available-for-sale investments | $ | 753 | $ | 33 | $ | 2,176 | $ | 695 | |||||||
Net change in cumulative foreign currency translation loss | (487 | ) | (1,153 | ) | (2,931 | ) | (3,534 | ) | |||||||
Comprehensive income | $ | 82,511 | $ | 62,965 | $ | 234,181 | $ | 155,842 | |||||||
_________________________________________________________
(1) | Includes stock-based compensation as follows: |
Cost of revenues: | |||||||||||||||
Cost of subscription services | $ | 560 | $ | 405 | $ | 1,528 | $ | 1,166 | |||||||
Cost of professional services and other | 4,825 | 2,782 | 12,261 | 7,767 | |||||||||||
Research and development | 9,899 | 5,820 | 25,732 | 16,282 | |||||||||||
Sales and marketing | 6,882 | 4,825 | 19,207 | 13,743 | |||||||||||
General and administrative | 7,155 | 6,086 | 19,719 | 17,689 | |||||||||||
Total stock-based compensation | $ | 29,321 | $ | 19,918 | $ | 78,447 | $ | 56,647 | |||||||
See Notes to Condensed Consolidated Financial Statements.
Veeva Systems Inc. | Form 10-Q | 5 |
VEEVA SYSTEMS INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands, except share data)
Three months ended October 31, 2019 | Three months ended October 31, 2018 | ||||||||||||||||||||||||||||||||||||||||||||
Class A & B common stock | Additional paid-in capital | Retained earnings | Accumulated other comprehensive income | Total stockholders’ equity | Class A & B common stock | Additional paid-in capital | Retained earnings | Accumulated other comprehensive income | Total stockholders’ equity | ||||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||
(Unaudited) | |||||||||||||||||||||||||||||||||||||||||||||
Balances at beginning of period | 147,848,634 | $ | 1 | $ | 673,878 | $ | 771,231 | $ | (93 | ) | $ | 1,445,017 | 144,144,488 | $ | 1 | $ | 566,533 | $ | 483,961 | $ | (119 | ) | $ | 1,050,376 | |||||||||||||||||||||
Cumulative effect adjustment for Topic 842 adoption(1) | — | $ | — | $ | — | $ | — | $ | — | — | — | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||||||||||||
Issuance of common stock upon exercise of stock options | 211,154 | — | 1,588 | — | — | 1,588 | 599,655 | — | 4,923 | — | — | $ | 4,923 | ||||||||||||||||||||||||||||||||
Issuance of common stock upon vesting of restricted stock units | 301,033 | — | — | — | — | — | 324,274 | — | — | — | — | $ | — | ||||||||||||||||||||||||||||||||
Stock-based compensation expense | — | — | 29,449 | — | — | 29,449 | — | — | 20,041 | — | — | $ | 20,041 | ||||||||||||||||||||||||||||||||
Other comprehensive income | — | — | — | — | 266 | 266 | — | — | — | — | (1,120 | ) | $ | (1,120 | ) | ||||||||||||||||||||||||||||||
Net income | — | — | — | 82,245 | — | 82,245 | — | — | — | 64,085 | — | $ | 64,085 | ||||||||||||||||||||||||||||||||
Balances at end of period | 148,360,821 | $ | 1 | $ | 704,915 | $ | 853,476 | $ | 173 | $ | 1,558,565 | 145,068,417 | $ | 1 | $ | 591,497 | $ | 548,046 | $ | (1,239 | ) | $ | 1,138,305 | ||||||||||||||||||||||
Nine months ended October 31, 2019 | Nine months ended October 31, 2018 | ||||||||||||||||||||||||||||||||||||||||||||
Class A & B common stock | Additional paid-in capital | Retained earnings | Accumulated other comprehensive income | Total stockholders’ equity | Class A & B common stock | Additional paid-in capital | Retained earnings | Accumulated other comprehensive income | Total stockholders’ equity | ||||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||
(Unaudited) | |||||||||||||||||||||||||||||||||||||||||||||
Balances at beginning of period | 146,190,079 | $ | 1 | $ | 617,623 | $ | 619,197 | $ | 928 | $ | 1,237,749 | 142,069,396 | $ | 1 | $ | 515,272 | $ | 389,365 | $ | 1,600 | $ | 906,238 | |||||||||||||||||||||||
Cumulative effect adjustment for Topic 842 adoption(1) | — | $ | — | $ | — | $ | (657 | ) | $ | — | (657 | ) | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||||||
Issuance of common stock upon exercise of stock options | 1,225,746 | — | 8,503 | — | — | 8,503 | 2,012,604 | — | 19,293 | — | — | $ | 19,293 | ||||||||||||||||||||||||||||||||
Issuance of common stock upon vesting of restricted stock units | 944,996 | — | — | — | — | — | 986,417 | — | — | — | — | $ | — | ||||||||||||||||||||||||||||||||
Stock-based compensation expense | — | — | 78,789 | — | — | 78,789 | — | — | 56,932 | — | — | $ | 56,932 | ||||||||||||||||||||||||||||||||
Other comprehensive income | — | — | — | — | (755 | ) | (755 | ) | — | — | — | — | (2,839 | ) | $ | (2,839 | ) | ||||||||||||||||||||||||||||
Net income | — | — | — | 234,936 | — | 234,936 | — | — | — | 158,681 | — | $ | 158,681 | ||||||||||||||||||||||||||||||||
Balances at end of period | 148,360,821 | $ | 1 | $ | 704,915 | $ | 853,476 | $ | 173 | $ | 1,558,565 | 145,068,417 | $ | 1 | $ | 591,497 | $ | 548,046 | $ | (1,239 | ) | $ | 1,138,305 | ||||||||||||||||||||||
See Notes to Condensed Consolidated Financial Statements.
_________________________________________________________
(1) | We adopted ASU 2016-02, “Leases” (Topic 842) using the modified retrospective method as of February 1, 2019 and elected the transition option that allows us not to restate the comparative periods in our financial statements in the year of adoption. |
6 | Veeva Systems Inc. | Form 10-Q |
VEEVA SYSTEMS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Three months ended October 31, | Nine months ended October 31, | ||||||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||||||
(Unaudited) | |||||||||||||||
Cash flows from operating activities | |||||||||||||||
Net income | $ | 82,245 | $ | 64,085 | $ | 234,936 | $ | 158,681 | |||||||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||||||
Depreciation and amortization | 5,643 | 3,383 | 16,642 | 10,477 | |||||||||||
Accretion of discount on short-term investments | (722 | ) | (848 | ) | (2,996 | ) | (1,380 | ) | |||||||
Stock-based compensation | 29,321 | 19,918 | 78,447 | 56,647 | |||||||||||
Amortization of deferred costs | 4,832 | 4,595 | 14,524 | 13,697 | |||||||||||
Deferred income taxes | 432 | 1,824 | 1,771 | 2,642 | |||||||||||
Gain on foreign currency from mark-to-market derivative | (74 | ) | (19 | ) | (112 | ) | (182 | ) | |||||||
Bad debt expense (recovery) | 270 | 84 | (42 | ) | 262 | ||||||||||
Changes in operating assets and liabilities: | |||||||||||||||
Accounts receivable | 28,319 | 21,658 | 186,633 | 134,353 | |||||||||||
Unbilled accounts receivable | (9,515 | ) | (5,212 | ) | (12,777 | ) | (6,641 | ) | |||||||
Deferred costs | (4,500 | ) | (4,504 | ) | (13,528 | ) | (11,426 | ) | |||||||
Income taxes payable | 3,909 | 1,029 | 4,858 | 525 | |||||||||||
Prepaid expenses and other current and long-term assets | 5,610 | (6,018 | ) | 1,513 | (9,527 | ) | |||||||||
Accounts payable | 1,253 | 2,982 | 1,216 | 3,520 | |||||||||||
Accrued expenses and other current liabilities | (1,682 | ) | 406 | 231 | (3,698 | ) | |||||||||
Deferred revenue | (78,326 | ) | (62,860 | ) | (105,637 | ) | (70,616 | ) | |||||||
Lease liabilities | (1,625 | ) | — | (5,143 | ) | — | |||||||||
Other long-term liabilities | (3,886 | ) | 1,053 | (2,270 | ) | 1,620 | |||||||||
Net cash provided by operating activities | 61,504 | 41,556 | 398,266 | 278,954 | |||||||||||
Cash flows from investing activities | |||||||||||||||
Purchases of short-term investments | (190,695 | ) | (214,839 | ) | (628,784 | ) | (589,070 | ) | |||||||
Maturities and sales of short-term investments | 194,661 | 130,137 | 571,398 | 447,947 | |||||||||||
Purchases of property and equipment | (881 | ) | (4,163 | ) | (3,167 | ) | (5,558 | ) | |||||||
Capitalized internal-use software development costs | (356 | ) | (495 | ) | (1,061 | ) | (1,009 | ) | |||||||
Net cash provided by (used in) investing activities | 2,729 | (89,360 | ) | (61,614 | ) | (147,690 | ) | ||||||||
Cash flows from financing activities | |||||||||||||||
Reduction of lease liabilities - finance leases | (241 | ) | — | (729 | ) | — | |||||||||
Proceeds from exercise of common stock options | 1,607 | 4,867 | 8,618 | 19,728 | |||||||||||
Net cash provided by financing activities | 1,366 | 4,867 | 7,889 | 19,728 | |||||||||||
Effect of exchange rate changes on cash, cash equivalents, and restricted cash | (487 | ) | (1,154 | ) | (2,931 | ) | (3,530 | ) | |||||||
Net change in cash, cash equivalents, and restricted cash | 65,112 | (44,091 | ) | 341,610 | 147,462 | ||||||||||
Cash, cash equivalents, and restricted cash at beginning of period | 828,676 | 512,940 | 552,178 | 321,387 | |||||||||||
Cash, cash equivalents, and restricted cash at end of period | $ | 893,788 | $ | 468,849 | $ | 893,788 | $ | 468,849 | |||||||
Cash, cash equivalents, and restricted cash at end of period: | |||||||||||||||
Cash and cash equivalents | $ | 892,581 | $ | 467,643 | $ | 892,581 | $ | 467,643 | |||||||
Restricted cash included in other long-term assets | 1,207 | 1,206 | 1,207 | 1,206 | |||||||||||
Total cash, cash equivalents, and restricted cash at end of period | $ | 893,788 | $ | 468,849 | $ | 893,788 | $ | 468,849 | |||||||
Supplemental disclosures of other cash flow information: | |||||||||||||||
Cash paid for income taxes, net of refunds | $ | 1,739 | $ | 6,697 | $ | 5,004 | $ | 17,268 | |||||||
Excess tax benefits from employee stock plans | $ | 8,931 | $ | 12,006 | $ | 39,509 | $ | 31,032 | |||||||
Non-cash investing and financing activities: | |||||||||||||||
Changes in accounts payable and accrued expenses related to property and equipment purchases | $ | 109 | $ | 314 | $ | (428 | ) | $ | 493 | ||||||
See Notes to Condensed Consolidated Financial Statements.
Veeva Systems Inc. | Form 10-Q | 7 |
VEEVA SYSTEMS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Summary of Business and Significant Accounting Policies
Description of Business
Veeva is the leading provider of industry cloud solutions for the global life sciences industry. We were founded in 2007 on the premise that industry-specific cloud solutions could best address the operating challenges and regulatory requirements of life sciences companies. Our solutions are designed to meet the unique needs of our customers and their most strategic business functions—from research and development (R&D) to commercialization. Our solutions are designed to 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. Veeva is also offering its content and data management solutions to companies in other regulated industries, primarily consumer packaged goods, chemicals, and cosmetics. Our fiscal year end is January 31.
Principles of Consolidation and Basis of Presentation
These unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (GAAP) and applicable rules and regulations of the Securities and Exchange Commission (SEC) regarding interim financial reporting and include the accounts of our wholly-owned subsidiaries after elimination of intercompany accounts and transactions. Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Therefore, these condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in our Annual Report on Form 10-K for the fiscal year ended January 31, 2019, filed on March 28, 2019. There have been no changes to our significant accounting policies described in the annual report that have had a material impact on our condensed consolidated financial statements and related notes.
The condensed consolidated balance sheet as of January 31, 2019 included herein was derived from the audited financial statements as of that date. These unaudited condensed consolidated financial statements reflect all normal recurring adjustments necessary to present fairly our financial position, results of operations, comprehensive income, and cash flows for the interim periods but are not necessarily indicative of the results of operations to be anticipated for the full fiscal year ending January 31, 2020 or any other period.
Effective February 1, 2019, we adopted the requirements of ASU 2016-02, “Leases” (Topic 842) as discussed in this note.
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with GAAP requires us to make estimates, judgments and assumptions that affect the condensed consolidated financial statements and the notes thereto. These estimates are based on information available as of the date of the condensed consolidated financial statements. On a regular basis, management evaluates these estimates and assumptions. Items subject to such estimates and assumptions include, but are not limited to:
• | the standalone selling price for each distinct performance obligation included in customer contracts with multiple performance obligations; |
• | the valuation of short-term investments and the determination of other-than-temporary impairments; |
• | the realizability of deferred income tax assets and liabilities; and |
• | the fair value of our stock-based awards. |
As future events cannot be determined with precision, actual results could differ significantly from those estimates.
8 | Veeva Systems Inc. | Form 10-Q |
Revenue Recognition
We derive our revenues primarily from subscription services and professional services. Subscription services revenues consist of fees from customers accessing our cloud-based software solutions and subscription or license 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. Revenues are recognized when control of these services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those services.
We determine revenue recognition through the following steps:
• | Identification of the contract, or contracts, with a customer; |
• | Identification of the performance obligations in the contract; |
• | Determination of the transaction price; |
• | Allocation of the transaction price to the performance obligations in the contract; and |
• | Recognition of revenue when, or as, we satisfy a performance obligation. |
Our subscription services agreements are generally non-cancelable during the term, although customers typically have the right to terminate their agreements for cause in the event of material breach.
Subscription Services Revenues
Subscription services revenues are recognized ratably over the respective non-cancelable subscription term because of the continuous transfer of control to the customer. Our subscription arrangements are considered service contracts, and the customer does not have the right to take possession of the software.
Professional Services and Other Revenues
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 revenues are billed on a fixed fee basis and revenues are typically recognized over time based on the proportion of total services performed. Data services and training revenues are generally recognized as the services are performed.
Contracts with Multiple Performance Obligations
Some of our contracts with customers contain multiple performance obligations. For these contracts, we account for individual performance obligations separately when they are distinct. The transaction price is allocated to the separate performance obligations on a relative standalone selling price basis. We determine the standalone selling prices based on our overall pricing objectives, taking into consideration market conditions and other factors, including other groupings such as customer type and geography.
Unbilled Accounts Receivable
Unbilled accounts receivable is a contract asset related to the delivery of our subscription services and professional services for which the related billings will occur in a future period. Unbilled accounts receivable consists of (i) revenue recognized for professional services performed but not yet billed and (ii) revenue recognized from non-cancelable, multi-year orders in which fees increase annually but for which we are not contractually able to invoice until a future period.
Deferred Costs
Deferred costs include sales commissions associated with obtaining a contract with a customer. These costs are deferred and then amortized over a period of benefit that we have determined to be three years. We determined the period of benefit by taking into consideration our customer contracts, our technology and other factors. Amortization expense is included in sales and marketing expenses in the accompanying condensed consolidated statements of operations.
Veeva Systems Inc. | Form 10-Q | 9 |
Deferred Revenue
Deferred revenue is a contract liability primarily related to billings or payments received in advance of revenue recognition from our subscription services and, to a lesser extent, professional services and other revenues described above. Deferred revenue is recognized as revenue as we satisfy our performance obligations. We generally invoice our customers in annual or quarterly installments for subscription services. Accordingly, the deferred revenue balance does not generally represent the total contract value of a subscription arrangement. Revenue that will be recognized during the succeeding 12-month period is recorded as current deferred revenue and the remaining portion is recorded as noncurrent, which is included in other long-term liabilities on the condensed consolidated balance sheet.
Certain Risks and Concentrations of Credit Risk
Our revenues are derived from subscription services, professional services and other services delivered primarily to the life sciences industry. We operate in markets that are highly competitive and rapidly changing. Significant technological changes, shifting customer needs, the emergence of competitive products or services with new capabilities, and other factors could negatively impact our operating results.
Our financial instruments that potentially subject us to concentration of credit risk consist primarily of cash and cash equivalents, short-term investments and trade accounts receivable. Our cash equivalents and short-term investments are held by established financial institutions. We have established guidelines relative to credit ratings, diversification and maturities that seek to maintain safety and liquidity. Deposits in these financial institutions may significantly exceed federally insured limits.
We do not require collateral from our customers and generally require payment within 30 days to 60 days of billing. We periodically evaluate the collectibility of our accounts receivable and provide an allowance for doubtful accounts as necessary, based on historical experience. Historically, losses related to lack of collectibility have not been material.
The following customers individually exceeded 10% of total accounts receivable as of the dates shown:
October 31, 2019 | January 31, 2019 | |
Customer 1 | * | 17% |
Customer 2 | * | 10% |
_________________________________________________________
* | Does not exceed 10%. |
No single customer represented over 10% of total revenues in the condensed consolidated statements of comprehensive income for the three and nine months ended October 31, 2019 and 2018.
New Accounting Pronouncements Adopted in Fiscal 2020
Statement of Stockholders’ Equity
In August 2018, the SEC adopted the final rule under SEC Release No. 33-10532, Disclosure Update and Simplification, amending certain disclosure requirements that have become redundant, duplicative, overlapping, outdated or superseded. In addition, the amendments expanded the disclosure requirements on the analysis of stockholders' equity for interim financial statements. Under the amendments, an analysis of changes in each caption of stockholders' equity presented in the balance sheet must be provided in a note or separate statement. The analysis should present a reconciliation of the beginning balance to the ending balance of each period for which a statement of comprehensive income is required to be filed. The final rule was effective November 5, 2018. As required by the SEC, we are presenting this analysis in this Form 10-Q for the three and nine months ended October 31, 2019 and 2018.
10 | Veeva Systems Inc. | Form 10-Q |
Leases
In February 2016, the FASB issued Topic 842, which requires lessees to record most leases on their balance sheets but recognize the expenses on their statements of comprehensive income in a manner similar to current accounting rules. Topic 842 states that a lessee should recognize a lease liability for the obligation to make lease payments and a right-of-use (ROU) asset for the right to use the underlying asset for the lease term. The updated guidance is effective for interim and annual periods beginning after December 15, 2018, and early adoption is permitted. We have adopted this new standard in the first quarter of fiscal 2020 on February 1, 2019 using the effective date as our date of initial application. We adopted Topic 842 using the modified retrospective method as of February 1, 2019 with an immaterial amount of cumulative effect adjustment recorded to our retained earnings as of February 1, 2019. Consequently, financial information will not be updated and the disclosures required under the new standard will not be provided for dates and periods before February 1, 2019.
The new standard provides a number of optional practical expedients in transition. We elected the ‘package of practical expedients,’ which permits us not to reassess under the new standard our prior conclusions about lease identification, lease classification, and initial direct costs. The new standard also provides practical expedients for an entity’s ongoing accounting. We have elected the short-term lease recognition exemption for all of our leases. This means, for those leases that qualify, we will not recognize ROU assets or lease liabilities, and this includes not recognizing ROU assets or lease liabilities for existing short-term leases of those assets in transition. We did not apply the practical expedient for our office leases, which would have allowed us to combine lease and non-lease components for all of our office leases. However, we have applied the practical expedient for equipment leases, which has allowed us to combine lease and non-lease components for all of our equipment leases.
The most significant impact was the recognition of ROU assets and lease liabilities on our balance sheet. Adoption of Topic 842 had no material impact to our condensed consolidated statement of comprehensive income and no material impact to cash provided by or used in operating, financing or investing activities on our condensed consolidated statement of cash flows.
Intangibles and Goodwill
In January 2017, the FASB issued ASU No. 2017-04, “Intangibles—Goodwill and Other: Simplifying the Test for Goodwill Impairment” (Topic 350), which eliminates Step 2 from the goodwill impairment test. Under Topic 350, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax-deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. Topic 350 is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019, and early adoption is permitted for impairment tests performed on testing dates after January 1, 2017. Topic 350 is to be applied on a prospective basis. We early adopted this new standard during the fiscal quarter ended October 31, 2019, and it did not have an impact on our consolidated financial statements.
Fair Value Measurement
In August 2018, the FASB issued ASU No. 2018-13, “Fair Value Measurement: Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement” (Topic 820), which modifies the disclosure requirements on fair value measurements. The ASU removes the requirement to disclose: the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy; the policy for timing of transfers between levels; and the valuation processes for Level 3 fair value measurements. The standard is effective for interim and annual periods beginning after December 15, 2019, and early adoption is permitted. We early adopted this new standard during the fiscal quarter ended July 31, 2019. Because we do not have such transfers or Level 3 financial assets, this standard does not apply to our current disclosures, and it did not impact our previously reported financial statements for periods ended on or prior to July 31, 2019.
Veeva Systems Inc. | Form 10-Q | 11 |
Note 2. Short-Term Investments
At October 31, 2019, short-term investments consisted of the following (in thousands):
Amortized cost | Gross unrealized gains | Gross unrealized losses | Estimated fair value | ||||||||||||
Available-for-sale securities: | |||||||||||||||
Certificates of deposits | $ | 3,500 | $ | 5 | $ | — | $ | 3,505 | |||||||
Asset-backed securities | 84,092 | 262 | (6 | ) | 84,348 | ||||||||||
Commercial paper | 24,604 | 4 | (2 | ) | 24,606 | ||||||||||
Corporate notes and bonds | 218,314 | 1,437 | (26 | ) | 219,725 | ||||||||||
Foreign government bonds | 1,500 | — | — | 1,500 | |||||||||||
U.S. agency obligations | 3,000 | — | — | 3,000 | |||||||||||
U.S. treasury securities | 265,123 | 616 | (16 | ) | 265,723 | ||||||||||
Total available-for-sale securities | $ | 600,133 | $ | 2,324 | $ | (50 | ) | $ | 602,407 | ||||||
At January 31, 2019, short-term investments consisted of the following (in thousands):
Amortized cost | Gross unrealized gains | Gross unrealized losses | Estimated fair value | ||||||||||||
Available-for-sale securities: | |||||||||||||||
Certificates of deposits | $ | 6,001 | $ | 10 | $ | (1 | ) | $ | 6,010 | ||||||
Asset-backed securities | 78,682 | 13 | (300 | ) | 78,395 | ||||||||||
Commercial paper | 9,118 | 1 | (2 | ) | 9,117 | ||||||||||
Corporate notes and bonds | 185,409 | 178 | (457 | ) | 185,130 | ||||||||||
Foreign government bonds | 1,502 | — | (11 | ) | 1,491 | ||||||||||
U.S. agency obligations | 15,912 | 2 | (2 | ) | 15,912 | ||||||||||
U.S. treasury securities | 243,119 | 78 | (62 | ) | 243,135 | ||||||||||
Total available-for-sale securities | $ | 539,743 | $ | 282 | $ | (835 | ) | $ | 539,190 | ||||||
The following table summarizes the estimated fair value of our short-term investments, designated as available-for-sale and classified by the contractual maturity date of the securities as of the dates shown (in thousands):
October 31, 2019 | January 31, 2019 | ||||||
Due in one year or less | $ | 351,301 | $ | 377,858 | |||
Due in greater than one year | 251,106 | 161,332 | |||||
Total | $ | 602,407 | $ | 539,190 | |||
We have certain available-for-sale securities in a gross unrealized loss position, some of which have been in that position for more than 12 months. We review our debt securities classified as short-term investments on a regular basis to evaluate whether or not any security has experienced an other-than-temporary decline in fair value. We consider factors such as the length of time and extent to which the market value has been less than the cost, our financial position and near-term prospects and our intent to sell, or whether it is more likely than not we will be required to sell the investment before recovery of the investment’s amortized-cost basis. If we determine that an other-than-temporary decline exists in one of these securities, we would write down the respective investment to fair value. For debt securities, the portion of the write-down related to credit loss would be recognized as other income, net in our condensed consolidated statements of comprehensive income. Any portion not related to credit loss would be included in accumulated other comprehensive income. There were no impairments considered other-than-temporary as of October 31, 2019 and January 31, 2019.
The following table shows the fair values of these available-for-sale securities, some of which have been in a gross unrealized loss position for more than 12 months, aggregated by investment category as of October 31, 2019 (in thousands):
12 | Veeva Systems Inc. | Form 10-Q |
Fair value | Gross unrealized losses | ||||||
Asset-backed securities | $ | 9,545 | $ | (6 | ) | ||
Commercial paper | 10,561 | (2 | ) | ||||
Corporate notes and bonds | 27,851 | (26 | ) | ||||
U.S. treasury securities | 33,093 | (16 | ) | ||||
The following table shows the fair values of these available-for-sale securities, some of which have been in a gross unrealized loss position for more than 12 months, aggregated by investment category as of January 31, 2019 (in thousands):
Fair value | Gross unrealized losses | ||||||
Certificates of deposits | $ | 999 | $ | (1 | ) | ||
Asset-backed securities | 69,131 | (300 | ) | ||||
Commercial paper | 7,155 | (2 | ) | ||||
Corporate notes and bonds | 121,006 | (457 | ) | ||||
Foreign government bonds | 1,490 | (11 | ) | ||||
U.S. agency obligations | 14,928 | (2 | ) | ||||
U.S. treasury securities | 130,785 | (62 | ) | ||||
Note 3. Deferred Costs
Deferred costs, which consist of deferred sales commissions, were $29.9 million and $30.9 million as of October 31, 2019 and January 31, 2019, respectively. For the three and nine months ended October 31, 2019, amortization expense for the deferred costs was $4.8 million and $14.5 million, respectively. For the three and nine months ended October 31, 2018, amortization expense for the deferred costs was $4.6 million and $13.7 million, respectively. There have been no impairment losses recorded in relation to the costs capitalized for any period presented.
Note 4. Property and Equipment, Net
Property and equipment, net consists of the following as of the dates shown (in thousands):
October 31, 2019 | January 31, 2019 | ||||||
Land | $ | 3,040 | $ | 3,040 | |||
Building | 20,984 | 20,984 | |||||
Land improvements and building improvements | 22,392 | 20,911 | |||||
Equipment and computers | 8,494 | 7,945 | |||||
Furniture and fixtures | 11,484 | 11,230 | |||||
Leasehold improvements | 7,679 | 6,790 | |||||
Construction in progress | 257 | 330 | |||||
74,330 | 71,230 | ||||||
Less accumulated depreciation | (21,040 | ) | (16,264 | ) | |||
Total property and equipment, net | $ | 53,290 | $ | 54,966 | |||
Total depreciation expense was $2.1 million and $6.2 million for the three and nine months ended October 31, 2019, respectively, and $1.5 million and $4.7 million for the three and nine months ended October 31, 2018. Land is not depreciated.
Veeva Systems Inc. | Form 10-Q | 13 |
Note 5. Intangible Assets
The following schedule presents the details of intangible assets as of October 31, 2019 (dollar amounts in thousands):
October 31, 2019 | ||||||||||||
Gross carrying amount | Accumulated amortization | Net | Remaining useful life (in years) | |||||||||
Existing technology | $ | 3,880 | $ | (3,863 | ) | 17 | 0.4 | |||||
Database | 4,939 | (4,789 | ) | 150 | 0.4 | |||||||
Customer contracts and relationships | 33,643 | (14,829 | ) | 18,814 | 5.9 | |||||||
Software | 10,867 | (9,900 | ) | 967 | 0.4 | |||||||
$ | 53,329 | $ | (33,381 | ) | 19,948 | |||||||
The following schedule presents the details of intangible assets as of January 31, 2019 (dollar amounts in thousands):
January 31, 2019 | ||||||||||||
Gross carrying amount | Accumulated amortization | Net | Remaining useful life (in years) | |||||||||
Existing technology | $ | 3,880 | $ | (3,834 | ) | 46 | 1.2 | |||||
Database | 4,939 | (4,521 | ) | 418 | 1.2 | |||||||
Customer contracts and relationships | 33,643 | (12,350 | ) | 21,293 | 6.6 | |||||||
Software | 10,867 | (8,156 | ) | 2,711 | 1.2 | |||||||
Brand | 1,141 | (1,088 | ) | 53 | 0.2 | |||||||
$ | 54,470 | $ | (29,949 | ) | 24,521 | |||||||
Amortization expense associated with intangible assets was $1.5 million and $4.6 million for the three and nine months ended October 31, 2019, respectively, and $1.7 million and $5.3 million for the three and nine months ended October 31, 2018.
The estimated amortization expense for intangible assets, for the next five years and thereafter is as follows as of October 31, 2019 (in thousands):
Period | Estimated amortization expense | |||
Remaining for Fiscal 2020 | $ | 1,489 | ||
Fiscal 2021 | 3,629 | |||
Fiscal 2022 | 3,182 | |||
Fiscal 2023 | 3,182 | |||
Fiscal 2024 | 3,182 | |||
Thereafter | 5,284 | |||
Total | $ | 19,948 | ||
14 | Veeva Systems Inc. | Form 10-Q |
Note 6. Accrued Expenses
Accrued expenses consisted of the following as of the dates shown (in thousands):
October 31, 2019 | January 31, 2019 | ||||||
Accrued commissions | $ | 1,236 | $ | 2,633 | |||
Accrued bonus | 3,773 | 2,848 | |||||
Accrued vacation | 3,830 | 3,110 | |||||
Payroll tax payable | 5,648 | 1,971 | |||||
Accrued other compensation and benefits | 1,490 | 4,762 | |||||
Total accrued compensation and benefits | $ | 15,977 | $ | 15,324 | |||
Accrued fees payable to salesforce.com | 5,655 | 5,242 | |||||
Accrued third-party professional services subcontractors' fees | 1,387 | 1,619 | |||||
Taxes payable | 3,338 | 2,805 | |||||
Other accrued expenses | 5,327 | 6,479 | |||||
Total accrued expenses and other current liabilities | $ | 15,707 | $ | 16,145 | |||
Note 7. Fair Value Measurements
The carrying amounts of accounts receivable and other current assets, accounts payable and accrued liabilities approximate their fair value due to their short-term nature.
Financial assets and liabilities recorded at fair value in the condensed consolidated financial statements are categorized based upon the level of judgment associated with the inputs used to measure their fair value. Hierarchical levels, which are directly related to the amount of subjectivity associated with the inputs to the valuation of these assets or liabilities are as follows:
Level 1—Observable inputs, such as quoted prices in active markets for identical assets or liabilities.
Level 2—Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
Financial assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement requires management to make judgments and considers factors specific to the asset or liability.
Veeva Systems Inc. | Form 10-Q | 15 |
The following table presents the fair value hierarchy for financial assets measured at fair value on a recurring basis as of October 31, 2019 (in thousands):
Level 1 | Level 2 | Total | |||||||||
Assets | |||||||||||
Cash equivalents: | |||||||||||
Money market funds | $ | 30,707 | $ | — | $ | 30,707 | |||||
Corporate notes and bonds | — | 1,544 | 1,544 | ||||||||
Short-term investments: | |||||||||||
Certificates of deposits | — | 3,505 | 3,505 | ||||||||
Asset-backed securities | — | 84,348 | 84,348 | ||||||||
Commercial paper | — | 24,606 | 24,606 | ||||||||
Corporate notes and bonds | — | 219,725 | 219,725 | ||||||||
Foreign government bonds | — | 1,500 | 1,500 | ||||||||
U.S. agency obligations | — | 3,000 | 3,000 | ||||||||
U.S. treasury securities | — | 265,723 | 265,723 | ||||||||
Foreign currency derivative contracts | — | 59 | 59 | ||||||||
Total | $ | 30,707 | $ | 604,010 | $ | 634,717 | |||||
Liabilities | |||||||||||
Foreign currency derivative contracts | — | 35 | 35 | ||||||||
Total | $ | — | $ | 35 | $ | 35 | |||||
The following table presents the fair value hierarchy for financial assets measured at fair value on a recurring basis as of January 31, 2019 (in thousands):
Level 1 | Level 2 | Total | |||||||||
Assets | |||||||||||
Cash equivalents: | |||||||||||
Money market funds | $ | 39,168 | $ | — | $ | 39,168 | |||||
Corporate notes and bonds | — | 1,034 | 1,034 | ||||||||
U.S. treasury securities | — | 41,505 | 41,505 | ||||||||
Short-term investments: | |||||||||||
Certificates of deposits | — | 6,010 | 6,010 | ||||||||
Asset-backed securities | — | 78,395 | 78,395 | ||||||||
Commercial paper | — | 9,117 | 9,117 | ||||||||
Corporate notes and bonds | — | 185,130 | 185,130 | ||||||||
Foreign government bonds | — | 1,491 | 1,491 | ||||||||
U.S. agency obligations | — | 15,912 | 15,912 | ||||||||
U.S. treasury securities | — | 243,135 | 243,135 | ||||||||
Total | $ | 39,168 | $ | 581,729 | $ | 620,897 | |||||
Liabilities | |||||||||||
Foreign currency derivative contracts | — | 88 | 88 | ||||||||
Total | $ | — | $ | 88 | $ | 88 | |||||
We determine the fair value of our security holdings based on pricing from our service providers and market prices from industry-standard independent data providers. The valuation techniques used to measure the fair value of financial instruments having Level 2 inputs were derived from non-binding consensus prices that are corroborated by observable market data or quoted market prices for similar instruments. Such market prices may be quoted prices in active markets for identical assets (Level 1 inputs) or pricing determined using inputs other than quoted prices that are observable either directly or indirectly (Level 2 inputs). We perform procedures to ensure that appropriate fair values are recorded such as comparing prices obtained from other sources.
16 | Veeva Systems Inc. | Form 10-Q |
Balance Sheet Hedges
We enter into foreign currency forward contracts (the “Forward Contracts”) in order to hedge our foreign currency exposure. A foreign currency forward contract is a commitment to deliver a certain amount of currency at a certain price on a specific date in the future. By entering into Forward Contracts and holding them to maturity, we are locked into a future currency exchange rate in an amount equal to and for the terms of the Forward Contracts. We account for derivative instruments at fair value with changes in the fair value recorded as a component of other income, net in our condensed consolidated statements of comprehensive income. Cash flows from such forward contracts are classified as operating activities. We recognized immaterial realized foreign currency gains and losses during the three and nine months ended October 31, 2019, respectively, on hedging. Immaterial realized foreign currency losses and gains on hedging were recognized during the three and nine months ended October 31, 2018, respectively.
The fair value of our outstanding derivative instruments is summarized below (in thousands):
October 31, 2019 | January 31, 2019 | ||||||
Notional amount of foreign currency derivative contracts | $ | (3,913 | ) | $ | (5,112 | ) | |
Fair value of foreign currency derivative contracts | (3,937 | ) | (5,024 | ) | |||
Details on outstanding balance sheet hedges are presented below as of the date shown below (in thousands):
Derivatives not designated as hedging instruments | Balance sheet location | October 31, 2019 | January 31, 2019 | ||||||
Derivative Assets | |||||||||
Foreign currency derivative contracts | Prepaid expenses and other current assets | $ | 59 | $ | — | ||||
Derivative Liabilities | |||||||||
Foreign currency derivative contracts | Accrued expenses | $ | 35 | $ | 88 | ||||
Note 8. Income Taxes
For the three months ended October 31, 2019 and 2018, our effective tax rates were 8.6% and 5.3%, respectively. During the three months ended October 31, 2019 as compared to the prior year period, our effective tax rate increased primarily due to the reduction in excess tax benefits related to equity compensation. We recognized such excess tax benefits in our provision for income taxes of $8.9 million and $12.0 million for the three months ended October 31, 2019 and 2018, respectively.
For the nine months ended October 31, 2019 and 2018, our effective tax rates were 5.4% and 6.6%, respectively. During the nine months ended October 31, 2019 as compared to the prior year period, our effective tax rate decreased primarily due to an increase in excess tax benefits related to equity compensation. We recognized such excess tax benefits in our provision for income taxes of $39.5 million and $31.0 million for the nine months ended October 31, 2019 and 2018, respectively.
Note 9. Deferred Revenue and Performance Obligations
Of the beginning deferred revenue balance for the respective periods, we recognized $178.2 million and $311.2 million of subscription services revenue during the three and nine months ended October 31, 2019, respectively, and $142.7 million and $240.4 million during the three and nine months ended October 31, 2018, respectively. Professional services revenue recognized in the same periods from deferred revenue balances at the beginning of the respective periods was immaterial.
Transaction Price Allocated to the Remaining Performance Obligations
Transaction price allocated to the remaining performance obligations represents contracted revenue that has not yet been recognized, which includes deferred revenue and non-cancelable amounts that will be invoiced and recognized as revenues in future periods. We applied the practical expedient in accordance with ASU 2014-09, “Revenue from Contracts with Customers” (Topic 606) to exclude the amounts related to professional services contracts as these contracts generally have a remaining duration of one year or less. Revenue from remaining performance obligations for professional services contracts as of October 31, 2019 was immaterial.
Veeva Systems Inc. | Form 10-Q | 17 |
As of October 31, 2019, approximately $567.5 million of revenue is expected to be recognized from remaining performance obligations for subscription services contracts. We expect to recognize revenue on approximately $418.6 million of these remaining performance obligations over the next 12 months, with the balance recognized thereafter.
Note 10. Leases
We have operating and finance leases for corporate offices, data centers, and certain equipment. Our leases have various expiration dates through 2029, some of which include options to extend the leases for up to nine years. Additionally, we are the sublessor for certain office space. Our sublease income for the three and nine months ended October 31, 2019 was immaterial.
Lease right-of-use assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. We use an estimate of our discount rate based on the information available at the lease commencement date in determining the present value of lease payments, unless the implicit rate is readily determinable. For leases which commenced prior to our adoption of Topic 842, we used the discount rate on February 1, 2019. The lease right-of-use assets also include any lease payments made and exclude lease incentives such as tenant improvement allowances. Options to extend the lease term are included in the lease term when it is reasonably certain that we will exercise the extension option.
Our operating leases typically include non-lease components such as common-area maintenance costs. We have elected to exclude non-lease components from lease payments for the purpose of calculating lease right-of-use assets and liabilities. Non-lease components that are not fixed are expensed as incurred as variable lease payments.
Leases with a term of one year or less are not recognized on our consolidated balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term.
For the three and nine months ended October 31, 2019, our operating lease expense was $1.8 million and $5.0 million, respectively. Our finance lease expense was immaterial and $1.0 million for the three and nine months ended October 31, 2019, respectively.
Supplemental cash flow information related to leases was as follows (in thousands):
Nine months ended October 31, 2019 | |||
Cash paid for amounts included in the measurement of lease liabilities: | |||
Operating cash flows from operating leases | $ | 5,131 | |
Right-of-use assets obtained in exchange for lease obligations: | |||
Operating leases | $ | 11,656 | |
18 | Veeva Systems Inc. | Form 10-Q |
Supplemental balance sheet information related to leases was as follows (in thousands, except lease term and discount rate):
As of October 31, 2019 | |||
Operating Leases | |||
Lease right-of-use-assets | $ | 24,055 | |
Lease liabilities | $ | 6,401 | |
Lease liabilities, noncurrent | 19,261 | ||
Total operating lease liabilities | $ | 25,662 | |
Finance Leases | |||
Property and equipment, at cost | $ | 1,738 | |
Accumulated depreciation | (978 | ) | |
Property and equipment, net | $ | 760 | |
Lease liabilities | $ | 1,029 | |
Lease liabilities, noncurrent | 621 | ||
Total finance lease liabilities | $ | 1,650 | |
Weighted Average Remaining Lease Term | |||
Operating leases | 5.2 years | ||
Finance leases | 1.6 years | ||
Weighted Average Discount Rate | |||
Operating leases | 4.3 | % | |
Finance leases | 4.3 | % | |
Maturities of lease liabilities were as follows (in thousands):
Period | Operating leases | Finance leases | |||||
Remaining for Fiscal 2020 | $ | 1,787 | $ | 269 | |||
Fiscal 2021 | 7,178 | 1,076 | |||||
Fiscal 2022 | 6,109 | 359 | |||||
Fiscal 2023 | 4,119 | — | |||||
Fiscal 2024 | 3,208 | — | |||||
Thereafter | 6,365 | — | |||||
Total lease payments | 28,766 | 1,704 | |||||
Less imputed interest | (3,104 | ) | (54 | ) | |||
Total | $ | 25,662 | $ | 1,650 | |||
Future minimum lease payments under non-cancelable operating leases as of January 31, 2019 under ASC 840 were as follows (in thousands):
Period | Operating leases | ||
Fiscal 2020 | $ | 5,079 | |
Fiscal 2021 | 4,843 | ||
Fiscal 2022 | 4,063 | ||
Fiscal 2023 | 2,534 | ||
Fiscal 2024 | 1,884 | ||
Thereafter | 1,495 | ||
Total | $ | 19,898 | |
As of October 31, 2019, we have additional operating leases, primarily for office leases, that have not yet commenced of $3.3 million. These operating leases will commence during the fiscal year ending January 31, 2021 with lease terms of less than one year to five years.
Veeva Systems Inc. | Form 10-Q | 19 |
Note 11. Stockholders’ Equity
Beginning in the fiscal quarter ended April 30, 2019, we implemented a new equity compensation program applicable to the vast majority of our employees but not applicable to our Chief Executive Officer (CEO). Prior to the adoption of the new equity compensation program, at the time of hire, our employees received a grant of RSUs that vested quarterly over four years and received additional equity from time to time thereafter. Under the new equity compensation program, the vast majority of our employees are granted both RSUs, which typically vest over a one-year period, and stock options, which typically vest over a four-year period.
Stock Option Activity
A summary of stock option activity for the nine months ended October 31, 2019 is as follows:
Number of shares | Weighted average exercise price | Weighted average remaining contractual term (in years) | Aggregate intrinsic value | |||||||||
Options outstanding at January 31, 2019 | 12,961,397 | $ | 19.43 | 5.4 | $ | 1,161,695,032 | ||||||
Options granted | 1,475,355 | |||||||||||
Options exercised | (1,225,746 | ) | ||||||||||
Options forfeited/cancelled | (318,028 | ) | ||||||||||
Options outstanding at October 31, 2019 | 12,892,978 | $ | 33.25 | 5.2 | $ | 1,401,940,929 | ||||||
Options vested and exercisable at October 31, 2019 | 6,704,980 | $ | 5.96 | 3.4 | $ | 911,013,694 | ||||||
Options vested and exercisable at October 31, 2019 and expected to vest thereafter | 12,892,978 | $ | 33.25 | 5.2 | $ | 1,401,940,929 | ||||||
During the three and nine months ended October 31, 2019, we granted 120,010 and 1,475,355 stock options, respectively, under the 2013 Equity Incentive Plan (2013 EIP). The options granted during the nine months ended October 31, 2019 reflects grants predominantly made in connection with our annual performance review cycle. The weighted average grant-date fair value of options granted was $64.07 and $59.00 for the three and nine months ended October 31, 2019, respectively.
As of October 31, 2019, there was $147.9 million in unrecognized compensation cost related to unvested stock options granted under the 2007 Stock Plan, 2012 Equity Incentive Plan and 2013 EIP. This cost is expected to be recognized over a weighted average period of 3.8 years.
As of October 31, 2019, we had authorized and unissued shares of common stock sufficient to satisfy exercises of stock options.
The total intrinsic value of options exercised was approximately $31.1 million and $166.9 million for the three and nine months ended October 31, 2019, respectively.
Restricted Stock Units
A summary of restricted stock unit (RSU) activity for the nine months ended October 31, 2019 is as follows:
Unreleased restricted stock units | Weighted average grant date fair value | |||||
Balance at January 31, 2019 | 2,359,132 | $ | 54.73 | |||
RSUs granted | 278,053 | 138.22 | ||||
RSUs vested | (945,117 | ) | 54.42 | |||
RSUs forfeited/cancelled | (163,375 | ) | 59.59 | |||
Balance at October 31, 2019 | 1,528,693 | $ | 69.59 | |||
During the three months ended October 31, 2019, we granted 51,995 RSUs under the 2013 EIP with a weighted-average grant date fair value of $150.53. During the nine months ended October 31, 2019, we granted 278,053 RSUs under the 2013 EIP with a weighted-average grant date fair value of $138.22.
20 | Veeva Systems Inc. | Form 10-Q |
As of October 31, 2019, there was a total of $94.9 million in unrecognized compensation cost related to unvested RSUs. This cost is expected to be recognized over a weighted-average period of approximately 1.8 years. The total intrinsic value of RSUs vested was $48.0 million and $136.0 million for the three and nine months ended October 31, 2019, respectively.
Stock-Based Compensation
Compensation expense related to share-based transactions, including equity awards to employees and non-employee directors, is measured and recognized in the condensed consolidated financial statements based on fair value. The grant date fair value of each option award is estimated on the grant date using the Monte Carlo simulation or Black-Scholes option-pricing model. The stock-based compensation expense is recognized using a straight-line basis over the requisite service periods of the awards, which is generally four to nine years. For RSUs, the grant date fair value is based on the closing price of our common stock on the grant date.
Our option-pricing model requires the input of subjective assumptions, including the fair value of the underlying common stock, the expected term of the option, the expected volatility of the price of our common stock, risk-free interest rates, and the expected dividend yield of our common stock. The assumptions used in our option-pricing model represent management’s best estimates. These estimates involve inherent uncertainties and the application of management’s judgment. If factors change and different assumptions are used, our stock-based compensation expense could be materially different in the future.
The following table presents the weighted-average assumptions used to estimate the grant date fair value of options granted during the periods presented:
Three months ended October 31, | Nine months ended October 31, | ||||||
2019 | 2018 | 2019 | 2018 | ||||
Volatility | 41% | —% | 41% | 41% | |||
Expected term (in years) | 6.25 | — | 5.75 - 6.35 | 6.35 | |||
Risk-free interest rate | 1.39% - 1.64% | —% | 1.39% - 2.52% | 2.73% | |||
Dividend yield | —% | —% | —% | —% | |||
During the fiscal year ended January 31, 2018, we granted 2,838,635 stock options to our CEO. The stock option award is made up of five separate tranches. The first tranche vests over time, while the remaining four tranches vest based on certain stock price targets (market conditions). The grant date fair values of each tranche were calculated using a Monte Carlo simulation model. We have based our expected term on the historical stock activity behavior of our CEO. The following table provides the assumptions used in the Monte Carlo simulation for each tranche granted:
Volatility | 41 | % |
Expected term (in years) | 10.00 | |
Risk-free interest rate | 2.53 | % |
Dividend yield | — | % |
For the periods presented, we capitalized an immaterial amount of stock-based compensation as part of our internal-use software capitalization.
Note 12. Net Income per Share
Basic net income per share is computed by dividing the net income by the weighted-average number of shares of common stock outstanding during the period. Unvested shares of common stock resulting from the early exercises of stock options are excluded from the calculation of the weighted-average shares of common stock until they vest as they are subject to repurchase until they are vested.
Diluted net income per share is computed by dividing net income by the weighted-average shares outstanding, including potentially dilutive shares of common equivalents outstanding during the period. The dilutive effect of potential shares of common stock are determined using the treasury stock method.
Veeva Systems Inc. | Form 10-Q | 21 |
The computation of the fully diluted net income per share of Class A common stock assumes the conversion from Class B common stock, while the fully diluted net income per share of Class B common stock does not assume the conversion of those shares.
The numerators and denominators of the basic and diluted EPS computations for our common stock are calculated as follows (in thousands, except per share data):
Three months ended October 31, | Nine months ended October 31, | ||||||||||||||||||||||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||||||||||||||||||||||
Class A | Class B | Class A | Class B | Class A | Class B | Class A | Class B | ||||||||||||||||||||||||
Basic | |||||||||||||||||||||||||||||||
Numerator | |||||||||||||||||||||||||||||||
Net income, basic | $ | 73,120 | $ | 9,125 | $ | 54,592 | $ | 9,493 | $ | 206,862 | $ | 28,074 | $ | 133,568 | $ | 25,113 | |||||||||||||||
Denominator | |||||||||||||||||||||||||||||||
Weighted average shares used in computing net income per share, basic | 131,720 | 16,437 | 123,297 | 21,440 | 129,845 | 17,622 | 121,013 | 22,752 | |||||||||||||||||||||||
Net income per share, basic | $ | 0.56 | $ | 0.56 | $ | 0.44 | $ | 0.44 | $ | 1.59 | $ | 1.59 | $ | 1.10 | $ | 1.10 | |||||||||||||||
Diluted | |||||||||||||||||||||||||||||||
Numerator | |||||||||||||||||||||||||||||||
Net income, basic | $ | 73,120 | $ | 9,125 | $ | 54,592 | $ | 9,493 | $ | 206,862 | $ | 28,074 | $ | 133,568 | $ | 25,113 | |||||||||||||||
Reallocation as a result of conversion of Class B to Class A common stock: | |||||||||||||||||||||||||||||||
Net income, basic | 9,125 | — | 9,493 | — | 28,074 | — | 25,113 | — | |||||||||||||||||||||||
Reallocation of net income to Class B common stock | — | 4,879 | — | 3,950 | — | 13,942 | — | 10,243 | |||||||||||||||||||||||
Net income, diluted | $ | 82,245 | $ | 14,004 | $ | 64,085 | $ | 13,443 | $ | 234,936 | $ | 42,016 | $ | 158,681 | $ | 35,356 | |||||||||||||||
Denominator | |||||||||||||||||||||||||||||||
Number of shares used for basic EPS computation | 131,720 | 16,437 | 123,297 | 21,440 | 129,845 | 17,622 | 121,013 | 22,752 | |||||||||||||||||||||||
Conversion of Class B to Class A common stock | 16,437 | — | 21,440 | — | 17,622 | — | 22,752 | — | |||||||||||||||||||||||
Effect of potentially dilutive common shares | 10,593 | 10,593 | 11,288 | 11,288 | 10,657 | 10,657 | 11,941 | 11,941 | |||||||||||||||||||||||
Weighted average shares used in computing net income per share, diluted | 158,750 | 27,030 | 156,025 | 32,728 | 158,124 | 28,279 | 155,706 | 34,693 | |||||||||||||||||||||||
Net income per share, diluted | $ | 0.52 | $ | 0.52 | $ | 0.41 | $ | 0.41 | $ | 1.49 | $ | 1.49 | $ | 1.02 | $ | 1.02 | |||||||||||||||
Potential common share equivalents excluded where the inclusion would be anti-dilutive are as follows:
Three months ended October 31, | Nine months ended October 31, | ||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||
Options and awards to purchase shares not included in the computation of diluted net income per share because their inclusion would be anti-dilutive | 1,362,085 | 3,066,006 | 1,037,362 | 3,065,009 | |||||||
22 | Veeva Systems Inc. | Form 10-Q |
Note 13. Commitments and Contingencies
Litigation
IQVIA Litigation Matters.
Veeva OpenData and Veeva Network Action.
On January 10, 2017, IQVIA Inc. (formerly Quintiles IMS Incorporated) and IMS Software Services, Ltd. (collectively, “IQVIA”) filed a complaint against us in the U.S. District Court for the District of New Jersey (IQVIA Inc. v. Veeva Systems Inc. (No. 2:17-cv-00177)) (“OpenData and Network Action”). In the complaint, IQVIA alleges that we have used unauthorized access to proprietary IQVIA data to improve our software and data products and that our software is designed to steal IQVIA trade secrets. IQVIA further alleges that we have intentionally gained unauthorized access to IQVIA proprietary information to gain an unfair advantage in marketing our products and that we have made false statements concerning IQVIA’s conduct and our data security capabilities. IQVIA asserts claims under both federal and state misappropriation of trade secret laws, federal false advertising law, and common law claims for unjust enrichment, tortious interference, and unfair trade practices. The complaint seeks declaratory and injunctive relief and unspecified monetary damages.
On March 13, 2017, we filed our answer and counterclaims in the OpenData and Network Action. Our counterclaims allege that IQVIA has abused monopoly power as the dominant provider of data products for life sciences companies to exclude Veeva OpenData and Veeva Network from their respective markets. The counterclaims allege that IQVIA has engaged in various tactics to prevent customers from using our applications and has deliberately raised costs and difficulty for customers attempting to switch from IQVIA to our data products. As amended, our counterclaims assert federal and state antitrust claims, as well as claims under California’s Unfair Practices Act and common law claims for intentional interference with contractual relations, intentional interference with prospective economic advantage, and negligent misrepresentation. The counterclaims seek injunctive relief, monetary damages exceeding $200 million, and attorneys’ fees.
On May 3, 2017, in lieu of filing an answer, IQVIA filed a motion to dismiss our counterclaims. On October 3, 2018, the court denied IQVIA’s motion to dismiss and allowed our antitrust claims to proceed. In addition, on December 3, 2018, we filed an amended answer and counterclaims. IQVIA filed its answer and affirmative defenses on December 21, 2018.
There are no motions currently pending in the OpenData and Network Action that have the potential to end the case prior to trial. Discovery in that case is currently in process. Although no trial date has been set, we expect, based on the current case schedule, that trial could take place in 2021 or 2022.
While it is not possible at this time to predict with any degree of certainty the ultimate outcome of this action, and we are unable to make a meaningful estimate of the amount or range of loss, if any, that could result from any unfavorable outcome, we believe that IQVIA’s claims lack merit.
Veeva Nitro Action.
On July 17, 2019, IQVIA filed a lawsuit in the U.S. District Court for the District of New Jersey (IQVIA Inc. v. Veeva Systems Inc. (No. 2:19-cv-15517)) (“IQVIA Declaratory Action”) seeking a declaratory judgment that IQVIA is not liable to Veeva for disallowing use of IQVIA’s data products in Veeva Nitro or any later-introduced Veeva SaaS products. The IQVIA Declaratory Action does not seek any monetary relief.
On July 18, 2019, we filed a lawsuit against IQVIA in the U.S. District Court for the Northern District of California (Veeva Systems Inc. v. IQVIA Inc. (No. 3:19-cv-04137)) (“Veeva Nitro Action”), alleging that IQVIA engaged in anticompetitive conduct as to Veeva Nitro. Our complaint asserts federal and state antitrust claims, as well as claims under California’s Unfair Competition Law and common law claims for intentional interference with contractual relations and intentional interference with prospective economic advantage. The complaint seeks injunctive relief and monetary damages. IQVIA filed its answer and affirmative defenses on September 5, 2019.
On September 26, 2019, the Northern District of California transferred the Veeva Nitro Action to the U.S. District Court for the District of New Jersey. On October 1, 2019, we filed a notice of our intent to withdraw the motion to dismiss or transfer the IQVIA Declaratory Action that we had filed in the District of New Jersey.
There are no motions currently pending in the IQVIA Declaratory Action or the Veeva Nitro Action that have the potential to end the cases. The court has not yet held a scheduling conference to set the case management schedule.
Veeva Systems Inc. | Form 10-Q | 23 |
While it is not possible at this time to predict with any degree of certainty the ultimate outcome of these two actions, we believe that our claims warrant injunctive relief and monetary damages for Veeva and against IQVIA.
Medidata Litigation Matter.
On January 26, 2017, Medidata Solutions, Inc. filed a complaint in the U.S. District Court for the Southern District of New York (Medidata Solutions, Inc. v. Veeva Systems Inc. et al. (No. 1:17-cv-00589)) against us and five individual Veeva employees who previously worked for Medidata (“Individual Employees”). The complaint alleged that we induced and conspired with the Individual Employees to breach their employment agreements, including non-compete and confidentiality provisions, and to misappropriate Medidata’s confidential and trade secret information. The complaint sought declaratory and injunctive relief, unspecified monetary damages, and attorneys’ fees. Medidata has since amended its complaint twice, asserting the same claims with additional factual allegations, and has voluntarily dismissed the Individual Defendants without prejudice.
After Veeva's motion to dismiss was denied, Veeva filed its answer on December 10, 2018.
There are no motions currently pending in the Medidata case that have the potential to end the case prior to trial. Discovery in the Medidata litigation is currently in process and no trial date has been set.
While it is not possible at this time to predict with any degree of certainty the ultimate outcome of this action, and we are unable to make a meaningful estimate of the amount or range of loss, if any, that could result from any unfavorable outcome, we believe that Medidata’s claims lack merit.
Other Litigation Matters
From time to time, we may be involved in other legal proceedings and subject to claims incident to the ordinary course of business. Although the results of such legal proceedings and claims cannot be predicted with certainty, we believe we are not currently a party to any other legal proceedings, the outcome of which, if determined adversely to us, would individually or taken together have a material adverse effect on our business, operating results, cash flows or financial position. Regardless of the outcome, such proceedings can have an adverse impact on us because of defense and settlement costs, diversion of resources and other factors, and there can be no assurances that favorable outcomes will be obtained.
Liabilities for loss contingencies arising from claims, assessments, litigation, fines and penalties, and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment or remediation can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred.
Value-Added Reseller Agreement
We have a value-added reseller agreement with salesforce.com, inc. for our use of the Salesforce1 Platform in combination with our developed technology to deliver certain of our multichannel CRM applications, including hosting infrastructure and data center operations provided by salesforce.com. The agreement, as amended, requires that we meet minimum order commitments of $500 million over the term of the agreement, which ends on September 1, 2025, including “true-up” payments if the orders we place with salesforce.com have not equaled or exceeded the following aggregate amounts within the timeframes indicated: (i) $250 million for the period from March 1, 2014 to September 1, 2020 and (ii) the full amount of $500 million by September 1, 2025. We have met our first minimum order requirement commitment of $250 million, and as of October 31, 2019, we remained obligated to pay fees of at least $159.8 million prior to September 1, 2025 in connection with this agreement.
Note 14. Revenues by Product
Our industry cloud solutions are grouped into two key product areas—Veeva Commercial Cloud and Veeva Vault. Veeva Commercial Cloud is a suite of multichannel CRM applications, territory allocation and alignment applications, master data management applications, customer reference and key opinion leader data, and data services. Veeva Vault is a unified suite of cloud-based, enterprise content and data management applications.
24 | Veeva Systems Inc. | Form 10-Q |
Total revenues consist of the following (in thousands):
Three months ended October 31, | Nine months ended October 31, | ||||||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||||||
Subscription services | |||||||||||||||
Veeva Commercial Cloud | $ | 115,201 | $ | 99,906 | 333,591 | $ | 290,944 | ||||||||
Veeva Vault(1) | 111,559 | 78,308 | 308,596 | 212,865 | |||||||||||
Total subscription services | $ | 226,760 | $ | 178,214 | $ | 642,187 | $ | 503,809 | |||||||
Professional services | |||||||||||||||
Veeva Commercial Cloud | $ | 18,589 | $ | 16,212 | 52,381 | $ | 47,143 | ||||||||
Veeva Vault(1) | 35,572 | 30,305 | 98,005 | 78,935 | |||||||||||
Total professional services | $ | 54,161 | $ | 46,517 | $ | 150,386 | $ | 126,078 | |||||||
Total revenues | $ | 280,921 | $ | 224,731 | $ | 792,573 | $ | 629,887 | |||||||
_________________________________________________________
(1) | Veeva Vault revenues includes revenue from legacy Zinc Ahead products. |
Note 15. Information about Geographic Areas
We track and allocate revenues by principal geographic area rather than by individual country, which makes it impractical to disclose revenues for the United States or other specific foreign countries. We measure subscription services revenue primarily by the estimated location of the end users in each geographic area for Veeva Commercial Cloud and primarily by the estimated location of usage in each geographic area for Veeva Vault. We measure professional services revenue primarily by the location of the resources performing the professional services. Beginning with the fiscal quarter ended October 31, 2019, certain revenues by geographic areas have been reclassified. Prior periods have been adjusted to reflect this change, and the effect of this change is not material for any period previously presented.
Total revenues by geographic area were as follows for the periods shown below (in thousands):
Three months ended October 31, | Nine months ended October 31, | ||||||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||||||
Revenues by geography | |||||||||||||||
North America | $ | 153,005 | $ | 126,262 | $ | 430,441 | $ | 352,697 | |||||||
Europe | 79,832 | 59,371 | 226,026 | 164,943 | |||||||||||
Asia Pacific | 39,057 | 31,880 | 110,560 | 91,532 | |||||||||||
Rest of world(1) | 9,027 | 7,218 | 25,546 | 20,715 | |||||||||||
Total revenues | $ | 280,921 | $ | 224,731 | $ | 792,573 | $ | 629,887 | |||||||
_________________________________________________________
(1) | Middle East, Africa, and Latin America |
Long-lived assets by geographic area are as follows as of the periods shown below (in thousands):
October 31, | January 31, | ||||||
2019 | 2019 | ||||||
Long-lived assets by geography | |||||||
North America | $ | 49,500 | $ | 51,748 | |||
Europe and rest of world | 2,299 | 1,783 | |||||
Asia Pacific | 1,491 | 1,435 | |||||
Total long-lived assets | $ | 53,290 | $ | 54,966 | |||
Veeva Systems Inc. | Form 10-Q | 25 |
Note 16. Subsequent Events
On November 1, 2019, we completed our acquisition of Crossix Solutions Inc., a provider of privacy-safe patient data and analytics, in exchange for total cash consideration of $431.8 million, which includes the impact of adjustments to purchase price associated with the cash and net working capital of the acquired entity at close. In addition, we granted certain Crossix employees equity retention awards valued at approximately $120 million in the aggregate. We are currently evaluating the purchase price allocation for this transaction. It is not practicable to disclose the preliminary purchase price allocation, given the short period of time between the acquisition date and the issuance of these condensed consolidated financial statements.
On November 7, 2019, we completed our acquisition of Physicians World LLC, a provider of speakers bureau services for healthcare professionals, in exchange for total cash consideration of $41.4 million, which includes the impact of adjustments to purchase price associated with the cash and net working capital of the acquired entity at close. In addition, we granted certain Physicians World employees equity retention awards valued at approximately $15 million in the aggregate. We are currently evaluating the purchase price allocation for this transaction. It is not practicable to disclose the preliminary purchase price allocation, given the short period of time between the acquisition date and the issuance of these condensed consolidated financial statements.
Veeva Systems Inc. | Form 10-Q | 26 |
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. We were founded in 2007 on the premise that industry-specific cloud solutions could best address the operating challenges and regulatory requirements of life sciences companies. Our solutions are designed to meet the unique needs of our customers and their most strategic business functions—from research and development to commercialization. Our solutions are designed to help life sciences companies develop and bring products to market faster and more efficiently, market and sell more effectively, and maintain compliance with government regulations.
In our fiscal year ended January 31, 2019, we derived approximately 57% and 53% of our subscription services and total revenues, respectively, from our Veeva Commercial Cloud solutions. In our fiscal year ended January 31, 2019, we derived approximately 43% and 47% of our subscription services and total revenues, respectively, from our Veeva Vault solutions. For the nine months ended October 31, 2019, we derived approximately 52% and 49% of our subscription services revenues and total revenues, respectively, from our Veeva Commercial Cloud solutions. For the nine months ended October 31, 2019, we derived approximately 48% and 51% of our subscription services revenues and total revenues, respectively, from our Veeva Vault solutions. The contribution of subscription services revenues and total revenues associated with our Veeva Vault solutions are expected to continue to increase as a percentage of subscription services revenues and total revenues in the future. Please note that revenues attributable to our recently acquired businesses will be classified under Veeva Commercial Cloud, which will, therefore, impact the mix of revenues between Veeva Commercial Cloud and Veeva Vault. We also offer certain of our Veeva Vault solutions to industries outside the life sciences industry, primarily consumer packaged goods, chemicals, and cosmetics and primarily in North America and Europe.
For our fiscal years ended January 31, 2019, 2018, and 2017, our total revenues were $862.2 million, $690.6 million, and $550.5 million, respectively, representing year-over-year growth in total revenues of 25% in fiscal year ended January 31, 2019 and 25% in fiscal year ended January 31, 2018. For our fiscal years ended January 31, 2019, 2018, and 2017, our subscription services revenues were $694.5 million, $559.4 million, and $440.8 million, respectively, representing year-over-year growth in subscription services revenues of 24% in fiscal year ended January 31, 2019 and 27% in fiscal year ended January 31, 2018. We expect the growth rate of our total revenues and subscription services revenues to decline in the future. We generated net income of $229.8 million, $151.2 million, and $77.6 million for our fiscal years ended January 31, 2019, 2018, and 2017, respectively.
As of January 31, 2019, 2018, and 2017, we served 719, 625, and 517 customers, respectively. As of January 31, 2019 and 2018, we had 335 and 311 Veeva Commercial Cloud customers, respectively, and 574 and 449 Veeva Vault customers, respectively. The combined customer counts for Veeva Commercial Cloud and Veeva Vault exceed the total customer count in each year because some customers subscribe to products in both areas. Veeva Commercial Cloud customers are those customers that have at least one of the following products: Veeva CRM, Veeva CLM, Veeva CRM Approved Email, Veeva CRM Engage, Veeva Align, Veeva CRM Events Management, Veeva OpenData, Veeva Oncology Link, Veeva Network Customer Master or Veeva Network Product Master. Veeva Vault customers are those customers that have at least one Vault product. Many of our Veeva Vault applications are used by smaller, earlier stage pre-commercial companies, some of which may not reach the commercialization stage. Thus, the potential number of Veeva Vault customers is significantly higher than the potential number of Veeva Commercial Cloud customers.
For the nine months ended October 31, 2019 and 2018, our total revenues were $792.6 million and $629.9 million, respectively, representing period-over-period growth in total revenues of 26%. For the nine months ended October 31, 2019 and 2018, our subscription services revenues were $642.2 million and $503.8 million, respectively,
Veeva Systems Inc. | Form 10-Q | 27 |
representing period-over-period growth in subscription services revenues of 27%. We generated net income of $234.9 million and $158.7 million for the nine months ended October 31, 2019 and 2018, respectively.
Key Factors Affecting Our Performance
Investment in Growth. We have invested and intend to continue to invest aggressively in expanding the breadth and depth of our product portfolio, including through acquisitions. We expect to continue to invest in research and development, to expand existing solutions and build new solutions; in sales and marketing, to promote our solutions to new and existing customers and in existing and expanded geographies and industries; in professional services to ensure the success of our customers’ implementations of our solutions; and in other operational and administrative functions to support our expected growth. We expect that our headcount will increase as a result of these investments. We also expect our total operating expenses will continue to increase over time, which could have a negative impact on our operating margin.
Adoption of Our Solutions by Existing and New Customers. Most of our customers initially deploy our solutions to a limited number of end users within a division or geography and may only initially deploy a limited set of our available solutions. Our future growth is dependent upon our existing customers’ continued success and their renewals of subscriptions to our solutions, expanded deployment of our solutions within their organizations, and their purchase of subscriptions to additional solutions. Our growth is also dependent on the adoption of our solutions by new customers.
Subscription Services Revenue Retention Rate. A key factor to our success is the renewal and expansion of our existing subscription agreements with our customers. We calculate our annual subscription services revenue retention rate for a particular fiscal year by dividing (i) annualized subscription revenue as of the last day of that fiscal year from those customers that were also customers as of the last day of the prior fiscal year by (ii) the annualized subscription revenue from all customers as of the last day of the prior fiscal year. Annualized subscription revenue is calculated by multiplying the daily subscription revenue recognized on the last day of the fiscal year by 365. This calculation includes the impact on our revenues from customer non-renewals, deployments of additional users or decreases in users, deployments of additional solutions or discontinued use of solutions by our customers, and price changes for our solutions. Historically, the impact of price changes on our subscription services revenue retention rate has been minimal. For our fiscal years ended January 31, 2019, 2018, and 2017, our subscription services revenue retention rate was 122%, 121%, and 127%, respectively.
Components of Results of Operations
Revenues
We derive our revenues primarily from subscription services fees and professional services fees. Subscription services revenues consist of fees from customers accessing our cloud-based software solutions and subscription or license 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. For the nine months ended October 31, 2019, subscription services revenues constituted 81% of total revenues and professional services and other revenues constituted 19% of total revenues.
We enter into master subscription agreements with our customers and count each distinct master subscription agreement that has not been terminated or expired and that has orders for which we have recognized revenue in the quarter as a distinct customer for purposes of determining our total number of current customers as of the end of that quarter. We generally enter into a single master subscription agreement with each customer, although in some instances, affiliated legal entities within the same corporate family may enter into separate master subscription agreements. Conversely, affiliated legal entities that maintain distinct master service agreements may choose to consolidate their orders under a single master service agreement, and, in that circumstance, our customer count would decrease. Divisions, subsidiaries and operating units of our customers often place distinct orders for our subscription services under the same master subscription agreement, and we do not count such distinct orders as new customers for purposes of determining our total customer count. With respect to data services customers that have not purchased one of our software solutions, we count as a distinct customer each party that has a master subscription agreement and a known and recurring payment obligation. For purposes of determining our total customer count, we count each entity that uses a legacy Zinc Ahead product as a distinct customer if such entity is not otherwise a customer of ours.
28 | Veeva Systems Inc. | Form 10-Q |
New subscription orders for our core Veeva CRM application generally have a one-year term. If a customer adds end users or additional Veeva Commercial Cloud applications to an existing order for our core Veeva CRM application, such additional orders will generally be coterminus with the anniversary date of the core Veeva CRM order, and as a result, orders for additional end users or additional Veeva Commercial Cloud applications will commonly have an initial term of less than one year.
With respect to applications other than our core Veeva CRM application and particularly with respect to our Veeva Vault applications, we have entered into a number of orders that are several years in duration, ranging from two to eight years. 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. Pursuant to Topic 606, timing differences between billings and revenue recognition with respect to our multi-year orders with escalating fees will result in fluctuations in deferred revenue and unbilled accounts receivable balances that did not occur prior to our adoption of Topic 606. For instance, when the amounts we are entitled to invoice in any period pursuant to multi-year orders with escalating fees are less than the revenue we are required to recognize pursuant to Topic 606, we will accrue an unbilled accounts receivable balance related to such orders. In the same scenario, the net deferred revenue we would record in connection with such orders will be less than it would have been prior to the adoption of Topic 606 because we will be recognizing more revenue earlier in the term of such multi-year orders.
Our subscription orders are generally billed at the beginning of the subscription period in annual or quarterly increments, which means the annualized value of such orders may not be completely reflected in deferred revenue at any single point in time. Also, particularly with respect to our Veeva Commercial Cloud orders, because the term of orders for additional end users or applications is commonly less than one year, the annualized value of such orders may not be completely reflected in deferred revenue at any single point in time. We have also agreed from time to time, and may agree in the future, to allow customers to change the renewal dates of their orders to, for example, align more closely with a customer’s annual budget process or to align with the renewal dates of other orders placed by other entities within the same corporate control group, or to change payment terms from annual to quarterly, or vice versa. Such changes typically result in an order of less than one year as necessary to align all orders to the desired renewal date and, thus, may result in a lesser increase to deferred revenue than if the adjustment had not occurred. Additionally, changes in renewal dates may change the fiscal quarter in which deferred revenue associated with a particular order is booked. Accordingly, we do not believe that changes on a quarterly basis in deferred revenue, unbilled accounts receivable, or calculated billings, a metric commonly cited by financial analysts, are accurate indicators of future revenues for any given period of time. Please note that since the adoption of Topic 606, 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.
Subscription services revenues are recognized ratably over the respective non-cancelable subscription term because of the continuous transfer of control to the customer. Our subscription services agreements are generally non-cancelable during the term, although customers typically have the right to terminate their agreements for cause in the event of material breach. Our agreements typically provide that orders will automatically renew unless notice of non-renewal is provided in advance. Subscription services revenues are affected primarily by the number of customers, the scope of the subscription purchased by each customer (for example, the number of end users or other subscription usage metric) and the number of solutions subscribed to by each customer.
We utilize our own professional services personnel and, in certain cases, third-party subcontractors to perform our professional services engagements with customers. 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 revenues are billed on a fixed fee basis and revenues are typically recognized over time based on the proportion of total services performed. 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, and managed services in connection with our solutions.
Allocated Overhead and Equity Compensation
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.” Note that beginning in the fiscal quarter ended April 30, 2019, we implemented a new equity compensation program
Veeva Systems Inc. | Form 10-Q | 29 |
applicable to the vast majority of our employees, which will increase stock-based compensation expenses allocated to cost of revenues and operating expenses in absolute dollars and as a percentage of revenue during the fiscal year ending January 31, 2020. For details of equity granted the nine months ended October 31, 2019, refer to note 11 of the notes to our condensed consolidated financial statements.
Cost of Revenues
Cost of subscription services revenues for all of our solutions consists of expenses related to our computing infrastructure provided by third parties, including salesforce.com and Amazon Web Services, personnel-related costs associated with hosting our subscription services and providing support, including our data stewards, operating lease expenses associated with computer equipment and software, allocated overhead, amortization expense associated with capitalized internal-use software related to our subscription services, and amortization expense associated with purchased intangibles related to our subscription services. Cost of subscription services revenues for Veeva CRM and certain of our multichannel customer relationship management applications includes fees paid to salesforce.com for our use of the Salesforce1 Platform and the associated hosting infrastructure and data center operations that are provided by salesforce.com. We intend to continue to invest additional resources in our subscription services to enhance our product offerings and increase our delivery capacity. We may add or expand computing infrastructure capacity in the future, migrate to new computing infrastructure service providers, and make additional investments in the availability and security of our solutions.
Cost of professional services and other revenues consists primarily of employee-related expenses associated with providing these services, including salaries, benefits and stock-based compensation expense, the cost of third-party subcontractors, travel costs and allocated overhead. 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, offset by any internal-use software development costs capitalized during the same period. 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, amortization expense associated with capitalized sales commissions, sales commissions that do not qualify for capitalization, 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. Sales commissions are costs of obtaining customer contracts and are capitalized and then amortized over a period of benefit that we have determined to be three years. Certain program costs are expensed as incurred.
General and Administrative. General and administrative expenses consist of employee-related expenses for our executive, finance and accounting, legal, employee success, management information systems personnel, and other administrative employees. In addition, general and administrative expenses include fees related to third-party legal counsel, fees related to third-party accounting, tax and audit services, other corporate expenses, and allocated overhead.
Other Income, Net
Other income, net consists primarily of transaction gains or losses on foreign currency, net of hedging costs, interest income, and amortization of premiums paid on investments.
Provision for Income Taxes
Provision for income taxes consists of federal and state income taxes in the United States and income taxes in certain foreign jurisdictions. See note 8 of the notes to our condensed consolidated financial statements.
30 | Veeva Systems Inc. | Form 10-Q |
New Accounting Pronouncements Adopted in Fiscal 2019
Refer to note 1 of the notes to our condensed consolidated financial statements for a full description of the recent accounting pronouncements adopted during the fiscal year ending January 31, 2020.
Recent Accounting Pronouncements
Cloud Computing Arrangements
In August 2018, the FASB issued ASU No. 2018-15, “Intangibles-Goodwill and Other-Internal-Use Software: Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract” (Topic 350-40), which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The standard is effective for interim and annual reporting periods beginning after December 15, 2019 and can be applied either prospectively to implementation costs incurred after the date of adoption or retrospectively to all arrangements. Early adoption is permitted. We will adopt this standard on a prospective basis as of February 1, 2020, and the impact of our adoption of this standard on our condensed consolidated financial statements will largely depend on the magnitude of implementation costs incurred in our cloud computing arrangements beginning February 1, 2020.
Credit Losses
In June 2016, the Financial Accounting Standards Board, or FASB, issued ASU 2016-13, including subsequent amendments, regarding “Measurement of Credit Losses on Financial Instruments” (Topic 326), which modifies the accounting methodology for most financial instruments. The guidance establishes a new “expected loss model” that requires entities to estimate current expected credit losses on financial instruments by using all practical and relevant information. Additionally, any expected credit losses are to be reflected as allowances rather than reductions in the amortized cost of available-for-sale debt securities. This guidance is effective for annual reporting periods beginning after December 15, 2019, including interim periods within that reporting period. Early adoption is permitted. We do not expect this standard to have a material impact on our consolidated financial statements and do not plan to early adopt.
Veeva Systems Inc. | Form 10-Q | 31 |
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 October 31, | Nine months ended October 31, | ||||||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||||||
(in thousands) | |||||||||||||||
Consolidated Statements of Comprehensive Income Data: | |||||||||||||||
Revenues: | |||||||||||||||
Subscription services | $ | 226,760 | $ | 178,214 | $ | 642,187 | $ | 503,809 | |||||||
Professional services and other | 54,161 | 46,517 | 150,386 | 126,078 | |||||||||||
Total revenues | 280,921 | 224,731 | 792,573 | 629,887 | |||||||||||
Cost of revenues(1): | |||||||||||||||
Cost of subscription services | 31,964 | 28,335 | 93,822 | 87,394 | |||||||||||
Cost of professional services and other | 41,365 | 33,039 | 115,228 | 93,361 | |||||||||||
Total cost of revenues | 73,329 | 61,374 | 209,050 | 180,755 | |||||||||||
Gross profit | 207,592 | 163,357 | 583,523 | 449,132 | |||||||||||
Operating expenses(1): | |||||||||||||||
Research and development | 52,575 | 40,001 | 148,694 | 116,024 | |||||||||||
Sales and marketing | 45,524 | 37,699 | 130,962 | 110,306 | |||||||||||
General and administrative | 28,693 | 22,563 | 78,042 | 62,934 | |||||||||||
Total operating expenses | 126,792 | 100,263 | 357,698 | 289,264 | |||||||||||
Operating income | 80,800 | 63,094 | 225,825 | 159,868 | |||||||||||
Other income, net | 9,141 | 4,606 | 22,634 | 10,087 | |||||||||||
Income before income taxes | 89,941 | 67,700 | 248,459 | 169,955 | |||||||||||
Provision for income taxes | 7,696 | 3,615 | 13,523 | 11,274 | |||||||||||
Net income | 82,245 | 64,085 | 234,936 | 158,681 | |||||||||||
________________________________________
(1) | Includes stock-based compensation as follows: |
Cost of revenues: | |||||||||||||||
Cost of subscription services | $ | 560 | $ | 405 | $ | 1,528 | $ | 1,166 | |||||||
Cost of professional services and other | 4,825 | 2,782 | 12,261 | 7,767 | |||||||||||
Research and development | 9,899 | 5,820 | 25,732 | 16,282 | |||||||||||
Sales and marketing | 6,882 | 4,825 | 19,207 | 13,743 | |||||||||||
General and administrative | 7,155 | 6,086 | 19,719 | 17,689 | |||||||||||
Total stock-based compensation | $ | 29,321 | $ | 19,918 | $ | 78,447 | $ | 56,647 | |||||||
32 | Veeva Systems Inc. | Form 10-Q |
Three months ended October 31, | Nine months ended October 31, | ||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||
Consolidated Statements of Comprehensive Income Data: | |||||||||||
Revenues: | |||||||||||
Subscription services | 80.7 | % | 79.3 | % | 81.0 | % | 80.0 | % | |||
Professional services and other | 19.3 | 20.7 | 19.0 | 20.0 | |||||||
Total revenues | 100.0 | 100.0 | 100.0 | 100.0 | |||||||
Cost of revenues: | |||||||||||
Cost of subscription services | 11.4 | 12.6 | 11.8 | 13.9 | |||||||
Cost of professional services and other | 14.7 | 14.7 | 14.5 | 14.8 | |||||||
Total cost of revenues | 26.1 | 27.3 | 26.3 | 28.7 | |||||||
Gross profit | 73.9 | 72.7 | 73.7 | 71.3 | |||||||
Operating expenses: | |||||||||||
Research and development | 18.7 | 17.8 | 18.8 | 18.4 | |||||||
Sales and marketing | 16.2 | 16.8 | 16.5 | 17.5 | |||||||
General and administrative | 10.2 | 10.0 | 9.8 | 10.0 | |||||||
Total operating expenses | 45.1 | 44.6 | 45.1 | 45.9 | |||||||
Operating income | 28.8 | 28.1 | 28.6 | 25.4 | |||||||
Other income, net | 3.3 | 2.0 | 2.9 | 1.6 | |||||||
Income before income taxes | 32.1 | 30.1 | 31.5 | 27.0 | |||||||
Provision for income taxes | 2.7 | 1.6 | 1.7 | 1.8 | |||||||
Net income | 29.4 | % | 28.5 | % | 29.8 | % | 25.2 | % | |||
Revenues
Three months ended October 31, | Nine months ended October 31, | ||||||||||||||||||
2019 | 2018 | % Change | 2019 | 2018 | % Change | ||||||||||||||
(dollars in thousands) | |||||||||||||||||||
Revenues: | |||||||||||||||||||
Subscription services | $ | 226,760 | $ | 178,214 | 27% | $ | 642,187 | $ | 503,809 | 27% | |||||||||
Professional services and other | 54,161 | 46,517 | 16 | 150,386 | 126,078 | 19 | |||||||||||||
Total revenues | $ | 280,921 | $ | 224,731 | 25 | $ | 792,573 | $ | 629,887 | 26 | |||||||||
Percentage of revenues: | |||||||||||||||||||
Subscription services | 81 | % | 79 | % | 81 | % | 80 | % | |||||||||||
Professional services and other | 19 | 21 | 19 | 20 | |||||||||||||||
Total revenues | 100 | % | 100 | % | 100 | % | 100 | % | |||||||||||
Total revenues for the three months ended October 31, 2019 increased $56.2 million, of which $48.5 million was from growth in subscription services revenues. The increase in subscription services revenues consisted of $33.2 million of subscription services revenue attributable to Veeva Vault solutions and $15.3 million of subscription services revenue attributable to Veeva Commercial Cloud solutions. The geographic mix of subscription services revenues was 53% from North America and 28% from Europe for the three months ended October 31, 2019 as compared to subscription services revenues of 54% from North America and 26% from Europe for the three months ended October 31, 2018. Subscription services revenues were 81% of total revenues for the three months ended October 31, 2019, compared to 79% of total revenues for the three months ended October 31, 2018.
Professional services and other revenues for the three months ended October 31, 2019 increased $7.6 million. The increase in professional services revenues was due primarily 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 Veeva Vault solutions. The geographic mix of professional services and other revenues was 59% from North America and 32% from Europe for the three months ended October 31, 2019 as compared to 64% from North America and 27% from Europe for the three months ended October 31, 2018.
Veeva Systems Inc. | Form 10-Q | 33 |
Total revenues for the nine months ended October 31, 2019 increased $162.7 million, of which $138.4 million was from growth in subscription services revenues. The increase in subscription services revenues consisted of $95.7 million of subscription services revenue attributable to Veeva Vault solutions and $42.7 million of subscription services revenue attributable to Veeva Commercial Cloud solutions. The geographic mix of subscription services revenues was 53% from North America and 28% from Europe for the nine months ended October 31, 2019 as compared to subscription services revenues of 54% from North America and 26% from Europe for the nine months ended October 31, 2018. Subscription services revenues were 81% of total revenues for the nine months ended October 31, 2019, compared to 80% of total revenues for the nine months ended October 31, 2018.
Professional services and other revenues for the nine months ended October 31, 2019 increased $24.3 million. The increase in professional services revenues was due primarily 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 Veeva Vault solutions. The geographic mix of professional services and other revenues was 59% from North America and 32% from Europe for the October 31, 2019 as compared to 63% from North America and 27% from Europe for the nine months ended October 31, 2018. Over time, we expect the proportion of our total revenues from professional services to continue to decrease.
Cost of Revenues and Gross Profit
Three months ended October 31, | Nine months ended October 31, | ||||||||||||||||||
2019 | 2018 | % Change | 2019 | 2018 | % Change | ||||||||||||||
(dollars in thousands) | |||||||||||||||||||
Cost of revenues: | |||||||||||||||||||
Cost of subscription services | $ | 31,964 | $ | 28,335 | 13% | $ | 93,822 | $ | 87,394 | 7% | |||||||||
Cost of professional services and other | 41,365 | 33,039 | 25 | 115,228 | 93,361 | 23 | |||||||||||||
Total cost of revenues | $ | 73,329 | $ | 61,374 | 19 | $ | 209,050 | $ | 180,755 | 16 | |||||||||
Gross margin percentage: | |||||||||||||||||||
Subscription services | 86 | % | 84 | % | 85 | % | 83 | % | |||||||||||
Professional services and other | 24 | 29 | 23 | 26 | |||||||||||||||
Total gross margin percentage | 74 | % | 73 | % | 74 | % | 71 | % | |||||||||||
Gross profit | $ | 207,592 | $ | 163,357 | 27% | $ | 583,523 | $ | 449,132 | 30% | |||||||||
Cost of revenues for the three months ended October 31, 2019 increased $12.0 million, of which $3.6 million was related to cost of subscription services. The increase in cost of subscription services was primarily due to an increase in the number of end users of our subscription services, which drove an increase of $1.9 million in fees paid to salesforce.com. There was an additional increase of $0.6 million in computing infrastructure costs not related to salesforce.com, and an additional increase of $0.5 million in employee compensation-related costs (includes an increase of $0.2 million in stock-based compensation).
Cost of professional services and other for the three months ended October 31, 2019 increased $8.3 million, primarily due to a $7.4 million increase in employee compensation-related costs (includes an increase of $2.0 million in stock-based compensation). The increase in employee compensation-related costs is primarily driven by the increase in headcount during the period.
Gross margin for the three months ended October 31, 2019 and 2018 was 74% and 73%, respectively. The increase compared to the prior period is largely due to the continued growth of Veeva Vault and our newer multichannel CRM applications that complement Veeva CRM, all of which have higher subscription services gross margins than our core Veeva CRM application.
Cost of revenues for the nine months ended October 31, 2019 increased $28.3 million, of which $6.4 million was related to cost of subscription services. The increase in cost of subscription services was primarily due to an increase in the number of end users of our subscription services, which drove an increase of $5.3 million in fees paid to salesforce.com. There was an additional increase of $1.3 million in employee compensation-related costs (includes an increase of $0.4 million in stock-based compensation). This was offset by a decrease in computing infrastructure costs of $1.4 million due to the elimination of duplicate server costs during the period. We expect cost of subscription services to increase in absolute dollars in the near term due to increased usage of our subscription services.
34 | Veeva Systems Inc. | Form 10-Q |
Cost of professional services and other for the nine months ended October 31, 2019 increased $21.9 million, primarily due to a $18.9 million increase in employee compensation-related costs (includes an increase of $4.5 million in stock-based compensation). The increase in employee compensation-related costs is primarily driven by the increase in headcount during the period. We expect cost of professional services and other to increase in absolute dollars and as a percentage of revenue in the near term as we add personnel to our global professional services organization and due to the impact of our new equity compensation program described above.
Gross margin for the nine months ended October 31, 2019 and 2018 was 74% and 71%, respectively. The increase compared to the prior period is largely due to the continued growth of Veeva Vault and our newer multichannel CRM applications that complement Veeva CRM, all of which have higher subscription services gross margins than our core Veeva CRM application.
We expect gross margin to slightly decrease in the fiscal quarter ending January 31, 2020, primarily due to lower professional services utilization as there are fewer billable days in the quarter due to holidays and our annual field kickoff event and due to the impact from our recently acquired businesses. In the future, we expect the recently acquired businesses to have a slightly dilutive impact to our gross margin.
Operating Expenses and Operating Margin
Operating expenses include research and development, sales and marketing, and general and administrative expenses. As we continue to invest in our growth through hiring, we expect operating expenses to increase in absolute dollars and may slightly increase as a percentage of revenue in the near term. We also expect stock-based compensation expense to increase in absolute dollars and as a percentage of revenue through the fiscal year ending January 31, 2020 due, in part, to our new equity compensation program described above as well as retention equity awards granted to certain employees associated with the acquisitions in November 2019.
Research and Development
Three months ended October 31, | Nine months ended October 31, | ||||||||||||||||||
2019 | 2018 | % Change | 2019 | 2018 | % Change | ||||||||||||||
(dollars in thousands) | |||||||||||||||||||
Research and development | $ | 52,575 | $ | 40,001 | 31% | $ | 148,694 | $ | 116,024 | 28% | |||||||||
Percentage of total revenues | 19 | % | 18 | % | 19 | % | 18 | % | |||||||||||
Research and development expenses for the three months ended October 31, 2019 increased $12.6 million, primarily due to an increase of $9.7 million in employee compensation-related costs (includes an increase of $4.1 million in stock-based compensation) resulting from increased headcount during the period. The expansion of our headcount in research and development is to support development work for the increased number of products that we offer or may offer in the future. Additionally, there was an increase of $1.1 million in costs for increased computing infrastructure requirements in our research and development organization.
Research and development expenses for the nine months ended October 31, 2019 increased $32.7 million, primarily due to an increase of $24.5 million in employee compensation-related costs (includes an increase of $9.5 million in stock-based compensation) resulting from increased headcount during the period. The expansion of our headcount in this area is to support the increased number of products that we offer or may offer in the future. Additionally, there was an increase of $3.3 million in costs for increased computing infrastructure requirements in our research and development organization.
We expect research and development expenses to increase in absolute dollars and may increase as a percentage of revenue in the near term, primarily due to higher headcount, including increased headcount associated with our recently acquired businesses, as we continue to invest in our solutions and develop new technologies.
Veeva Systems Inc. | Form 10-Q | 35 |
Sales and Marketing
Three months ended October 31, | Nine months ended October 31, | ||||||||||||||||||
2019 | 2018 | % Change | 2019 | 2018 | % Change | ||||||||||||||
(dollars in thousands) | |||||||||||||||||||
Sales and marketing | $ | 45,524 | $ | 37,699 | 21% | $ | 130,962 | $ | 110,306 | 19% | |||||||||
Percentage of total revenues | 16 | % | 17 | % | 17 | % | 18 | % | |||||||||||
Sales and marketing expenses for the three months ended October 31, 2019 increased $7.8 million, primarily due to an increase of $5.5 million in employee compensation-related costs (includes an increase of $2.1 million in stock-based compensation) and an increase of $1.5 million in marketing program costs. The overall increase in employee compensation-related costs was primarily driven by increase in headcount during the period.
Sales and marketing expenses for the nine months ended October 31, 2019 increased $20.7 million, primarily due to an increase of $15.2 million in employee compensation-related costs (includes an increase of $5.5 million in stock-based compensation) and an increase of $2.6 million in marketing program costs. The overall increase in employee compensation-related costs was primarily driven by an increase in headcount during the period.
We expect sales and marketing expenses to continue to grow in absolute dollars in the near term, primarily due to employee-related expenses as we increase our headcount, including increased headcount associated with our recent acquisitions, to support our sales and marketing efforts associated with our newer solutions and our continued expansion of our sales capacity across all our solutions.
General and Administrative
Three months ended October 31, | Nine months ended October 31, | ||||||||||||||||||
2019 | 2018 | % Change | 2019 | 2018 | % Change | ||||||||||||||
(dollars in thousands) | |||||||||||||||||||
General and administrative | $ | 28,693 | $ | 22,563 | 27% | $ | 78,042 | $ | 62,934 | 24% | |||||||||
Percentage of total revenues | 10 | % | 10 | % | 10 | % | 10 | % | |||||||||||
General and administrative expenses for the three months ended October 31, 2019 increased $6.1 million, primarily due to an increase of $2.3 million in employee compensation-related costs (includes an increase of $1.1 million in stock-based compensation) and an increase of $2.2 million in legal fees related to litigation activity during the period. The overall increase in employee compensation-related costs was primarily driven by increase in headcount during the period. There was an additional increase of $0.5 million in program costs related to recruiting activities.
General and administrative expenses for the nine months ended October 31, 2019 increased $15.1 million, primarily due to an increase of $6.6 million in legal fees related to litigation activity during the period and an increase of $5.3 million in employee compensation-related costs (includes an increase of $2.0 million in stock-based compensation). The overall increase in employee compensation-related costs was primarily driven by increase in headcount during the period. There was an additional increase of $0.7 million in program costs related to recruiting activities.
We expect general and administrative expenses to continue to grow in absolute dollars in the near term as we continue to invest in our business and infrastructure and in connection with our recently acquired businesses. Such business and infrastructure costs include increases in third-party fees, particularly in relation to the matters described in note 13 of the notes to our condensed consolidated financial statements, and headcount in our finance, legal, and employee success functions.
36 | Veeva Systems Inc. | Form 10-Q |
Other Income, Net
Three months ended October 31, | Nine months ended October 31, | ||||||||||||||||||
2019 | 2018 | % Change | 2019 | 2018 | % Change | ||||||||||||||
(dollars in thousands) | |||||||||||||||||||
Other income, net | $ | 9,141 | $ | 4,606 | 98% | $ | 22,634 | $ | 10,087 | 124% | |||||||||
Other income, net for the three months ended October 31, 2019 increased $4.5 million, primarily due to an increase in interest and other income of $2.9 million driven by higher cash and cash equivalent balances. In addition, there was a net foreign currency gain of $1.9 million from the prior period, which includes gains and losses from foreign currency exposures partially offset by hedge positions.
Other income, net for the nine months ended October 31, 2019 increased $12.5 million, primarily due to an increase in interest and other income of $9.1 million driven by higher cash and cash equivalent balances. In addition, there was a net foreign currency gain of $1.9 million from the prior period, which includes gains and losses from foreign currency exposures partially offset by hedge positions. There was also an increase of $1.5 million in accretion of investments.
We continue to experience foreign currency fluctuations primarily due to the impact resulting from the periodic re-measurement of our foreign currency balances that are denominated in currencies other than the functional currency of the entities in which they are recorded. Our results of operations are subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the Euro, British Pound Sterling, Japanese Yen and Chinese Yuan. We may continue to experience favorable or adverse foreign currency impacts due to volatility in these currencies.
Provision for Income Taxes
Three months ended October 31, | Nine months ended October 31, | ||||||||||||||||||
2019 | 2018 | % Change | 2019 | 2018 | % Change | ||||||||||||||
(dollars in thousands) | |||||||||||||||||||
Income before income taxes | $ | 89,941 | $ | 67,700 | 33% | $ | 248,459 | $ | 169,955 | 46% | |||||||||
Provision for income taxes | 7,696 | 3,615 | 113% | 13,523 | 11,274 | 20% | |||||||||||||
Effective tax rate | 8.6 | % | 5.3 | % | 5.4 | % | 6.6 | % | |||||||||||
The provision for income taxes differs from the tax computed at the U.S. federal statutory income tax rate due primarily to state taxes, tax credits, equity compensation, and foreign income subject to taxation in the United States. Future tax rates could be affected by changes in tax laws and regulations or by rulings in tax related litigation, as may be applicable.
For the three months ended October 31, 2019 and 2018, our effective tax rates were 8.6% and 5.3%, respectively. During the three months ended October 31, 2019 as compared to the prior year period, our effective tax rate increased primarily due to a reduction in excess tax benefits related to equity compensation. We recognized such excess tax benefits in our provision for income taxes of $8.9 million and $12.0 million for the three months ended October 31, 2019 and 2018, respectively.
For the nine months ended October 31, 2019 and 2018, our effective tax rates were 5.4% and 6.6%, respectively. During the nine months ended October 31, 2019 as compared to the prior year period, our effective tax rate decreased primarily due to an increase in excess tax benefits related to equity compensation. We recognized such excess tax benefits in our provision for income taxes of $39.5 million and $31.0 million for the nine months ended October 31, 2019 and 2018, respectively.
Non-GAAP Financial Measures
In our public disclosures, we have provided non-GAAP measures, which we define as financial information that has not been prepared in accordance with generally accepted accounting principles in the United States, or GAAP. In addition to our GAAP measures, we use these non-GAAP measures internally for budgeting and resource allocation purposes and in analyzing our financial results.
Veeva Systems Inc. | Form 10-Q | 37 |
For the reasons set forth below, we believe that excluding the following items from our non-GAAP financial measures 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.
• | Stock-based compensation expenses. We exclude stock-based compensation expenses primarily because they are non-cash expenses that we exclude from our internal management reporting processes. We also find it useful to exclude these expenses when we assess the appropriate level of various operating expenses and resource allocations when budgeting, planning, and forecasting future periods. Moreover, because of varying available valuation methodologies, subjective assumptions and the variety of award types that companies can use under FASB ASC Topic 718, we believe excluding stock-based compensation expenses allows investors to make meaningful comparisons between our recurring core business operating results and those of other companies. |
• | Amortization of purchased intangibles. We incur amortization expense for purchased intangible assets in connection with acquisitions of certain businesses and technologies. Amortization of intangible assets is a non-cash expense and is inconsistent in amount and frequency because it is significantly affected by the timing, size of acquisitions, and the inherent subjective nature of purchase price allocations. Because these costs have already been incurred and cannot be recovered, and are non-cash expenses, we exclude these expenses for internal management reporting processes. We also find it useful to exclude these charges when assessing the appropriate level of various operating expenses and resource allocations when budgeting, planning, and forecasting future periods. Investors should note that the use of intangible assets contributed to our revenues earned during the periods presented and will contribute to our future period revenues as well. |
• | Deferred compensation associated with the Zinc Ahead acquisition. The Zinc Ahead share purchase agreement, as revised, called for share purchase consideration to be deferred and paid at a rate of one-third of the deferred consideration amount per year to certain former Zinc Ahead employee shareholders and option holders who remain employed with us on each deferred consideration payment date. In accordance with GAAP, these payments are being accounted for as deferred compensation and the expense is recognized over the requisite service period. We view this deferred compensation expense as an unusual acquisition cost associated with the Zinc Ahead acquisition and find it useful to exclude it in order to assess the appropriate level of various operating expenses to assist in budgeting, planning and forecasting future periods. We believe excluding this deferred compensation expense may allow investors to make more meaningful comparisons between our recurring operating results and those of other companies. |
• | 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, purchased intangibles, and deferred compensation associated with the Zinc Ahead acquisition 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.
38 | Veeva Systems Inc. | Form 10-Q |
Beginning with the fiscal quarter ended April 30, 2019, we no longer exclude the effects of capitalization of internal-use software development expenses and the subsequent amortization of the capitalized expenses in its non-GAAP financial measures. Prior periods have been adjusted to reflect this change, and the effect of this change is not material for any period previously presented.
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 October 31, | Nine months ended October 31, | ||||||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||||||
Operating income on a GAAP basis | $ | 80,800 | $ | 63,094 | $ | 225,825 | $ | 159,868 | |||||||
Stock-based compensation expense | 29,321 | 19,918 | 78,447 | 56,647 | |||||||||||
Amortization of purchased intangibles | 1,490 | 1,667 | 4,573 | 5,298 | |||||||||||
Deferred compensation associated with Zinc Ahead acquisition | — | 85 | — | 343 | |||||||||||
Operating income on a non-GAAP basis | $ | 111,611 | $ | 84,764 | $ | 308,845 | $ | 222,156 | |||||||
Net income on a GAAP basis | $ | 82,245 | $ | 64,085 | $ | 234,936 | $ | 158,681 | |||||||
Stock-based compensation expense | 29,321 | 19,918 | 78,447 | 56,647 | |||||||||||
Amortization of purchased intangibles | 1,490 | 1,667 | 4,573 | 5,298 | |||||||||||
Deferred compensation associated with Zinc Ahead acquisition | — | 85 | — | 343 | |||||||||||
Income tax effect on non-GAAP adjustments(1) | (17,662 | ) | (15,153 | ) | (56,088 | ) | (37,497 | ) | |||||||
Net income on a non-GAAP basis | $ | 95,394 | $ | 70,602 | $ | 261,868 | $ | 183,472 | |||||||
Diluted net income per share on a GAAP basis | $ | 0.52 | $ | 0.41 | $ | 1.49 | $ | 1.02 | |||||||
Stock-based compensation expense | 0.18 | 0.13 | 0.50 | 0.36 | |||||||||||
Amortization of purchased intangibles | 0.01 | 0.01 | 0.02 | 0.03 | |||||||||||
Deferred compensation associated with Zinc Ahead acquisition | — | — | — | — | |||||||||||
Income tax effect on non-GAAP adjustments(1) | (0.11 | ) | (0.10 | ) | (0.35 | ) | (0.23 | ) | |||||||
Diluted net income per share on a non-GAAP basis | $ | 0.60 | $ | 0.45 | $ | 1.66 | $ | 1.18 | |||||||
_________________________________________________________
(1) | For the three and nine months ended October 31, 2019 and 2018, we used an estimated annual effective non-GAAP tax rate of 21.0%. |
Liquidity and Capital Resources
Three months ended October 31, | Nine months ended October 31, | ||||||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||||||
(in thousands) | |||||||||||||||
Net cash provided by operating activities | $ | 61,504 | $ | 41,556 | $ | 398,266 | $ | 278,954 | |||||||
Net cash provided by (used in) investing activities | 2,729 | (89,360 | ) | (61,614 | ) | (147,690 | ) | ||||||||
Net cash provided by financing activities | 1,366 | 4,867 | 7,889 | 19,728 | |||||||||||
Effect of exchange rate changes on cash and cash equivalents | (487 | ) | (1,154 | ) | (2,931 | ) | (3,530 | ) | |||||||
Net change in cash and cash equivalents | $ | 65,112 | $ | (44,091 | ) | $ | 341,610 | $ | 147,462 | ||||||
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 October 31, 2019, our cash, cash equivalents, and short-term investments totaled $1.5 billion, of which $30.8 million represented cash and cash equivalents held outside of the United States. On November 1, 2019, we completed our acquisition of Crossix Solutions Inc. in exchange for total cash consideration of $431.8 million, which includes the impact of adjustments to purchase price associated with the cash and net working capital of the acquired entity at close, and on November 7, 2019, we completed our acquisition of Physicians World LLC in exchange for total cash consideration of $41.4 million, which includes the impact of adjustments to purchase price associated with the cash and net working capital of the acquired entity at close. Except for certain foreign jurisdictions, our remaining non-U.S. cash and cash equivalents have been earmarked for indefinite reinvestment in our operations outside the United States, thus no U.S. current or deferred taxes have been accrued. We believe our U.S. sources of cash and liquidity are sufficient to meet our business needs in the United States and do not expect that we will need to repatriate additional funds we have designated as indefinitely reinvested outside the United States. Under currently enacted tax laws, should our plans change and we were to choose to
Veeva Systems Inc. | Form 10-Q | 39 |
repatriate some or all of the funds we have designated as indefinitely reinvested outside the United States, such amounts may be subject to certain jurisdictional taxes.
We have financed our operations primarily through cash generated from operations. We believe our existing cash, cash equivalents, and short-term investments generated from operations will be sufficient to meet our working capital and capital expenditure needs over at least the next 12 months. Our future capital requirements will depend on many factors including our growth rate, subscription renewal activity, the timing and extent of spending to support product development efforts, the expansion of sales and marketing activities, the ongoing investments in technology infrastructure, the introduction of new and enhanced solutions, and the continuing market acceptance of our solutions. We may in the future enter into arrangements to acquire or invest in complementary businesses, services and technologies, and intellectual property rights. We may be required to seek additional equity or debt financing. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital when desired, our business, operating results, and financial condition would be adversely affected.
Cash Flows from Operating Activities
Our largest source of operating cash inflows is cash collections from our customers for subscription services. We also generate significant cash flows from our professional services arrangements. The first quarter of our fiscal year is seasonally the strongest quarter for cash inflows due to the timing of our annual subscription billings and related collections. Our primary uses of cash from operating activities are for employee-related expenditures, expenses related to our computing infrastructure (including salesforce.com and Amazon Web Services), third-party professional services costs, employee travel costs, fees for third-party legal counsel and accounting services, and leases for office space.
Net cash provided by operating activities was $61.5 million for the three months ended October 31, 2019. Our cash provided by operating activities during the three months ended October 31, 2019 primarily reflected our net income of $82.2 million, adjustments for non-cash items of $39.7 million, and a net decrease in our operating assets and liabilities of $60.4 million. Non-cash charges included $29.3 million of stock-based compensation expense and $5.6 million of depreciation and amortization expense. The net changes in operating assets and liabilities included a $78.3 million decrease in deferred revenue due to the timing of renewal billings and a $28.3 million decrease in accounts receivable which was primarily driven by increased collections during the period.
Net cash provided by operating activities was $398.3 million for the nine months ended October 31, 2019. Our cash provided by operating activities during the nine months ended October 31, 2019 primarily reflected our net income of $234.9 million, adjustments for non-cash items of $108.2 million, and a net increase in our operating assets and liabilities of $55.1 million. Non-cash charges included $78.4 million of stock-based compensation expense and $16.6 million of depreciation and amortization expense. The net changes in operating assets and liabilities included a $105.6 million decrease in deferred revenue due to the timing of renewal billings and a $186.6 million decrease in accounts receivable which was primarily driven by increased collections during the period.
The cash flows from operating activities for the nine months ended October 31, 2019 represent the vast majority of the cash flows from operating activities that we expect for the remainder of the fiscal year ending January 31, 2020. As a result, we expect cash flows from operating activities to be substantially less in the fiscal quarter ending January 31, 2020.
Cash Flows from Investing Activities
The cash flows from investing activities primarily relate to cash used for the purchase of marketable securities, net of maturities. We also use cash to invest in capital assets to support our growth.
Net cash provided by investing activities was $2.7 million for the three months ended October 31, 2019 resulting primarily from $4.0 million in net maturities and sales of marketable securities and $0.9 million in purchases of property and equipment to support the growth of our business.
Net cash used in investing activities was $61.6 million for the nine months ended October 31, 2019 resulting primarily from $57.4 million in net purchases of marketable securities and $3.2 million in purchases of property and equipment to support the growth of our business.
40 | Veeva Systems Inc. | Form 10-Q |
We expect our cash flows from investing activities for the fiscal quarter ending January 31, 2020 to include cash used for our recent acquisitions of businesses.
Cash Flows from Financing Activities
The cash flows from financing activities relate to stock option exercises.
Net cash provided by financing activities was $1.4 million and $7.9 million for the three and nine months ended October 31, 2019, respectively, primarily related to the proceeds from employee stock option exercises.
Commitments
Our principal commitments consist of obligations for minimum payment commitments to salesforce.com and leases for office space and data centers. On March 3, 2014, we amended our agreement with salesforce.com. The agreement, as amended, requires that we meet minimum order commitments of $500 million over the term of the agreement, which ends on September 1, 2025, including “true-up” payments if the orders we place with salesforce.com have not equaled or exceeded the following aggregate amounts within the timeframes indicated: (i) $250 million for the period from March 1, 2014 to September 1, 2020 and (ii) the full amount of $500 million by September 1, 2025. We have met our first minimum order commitment of $250 million and have a remaining purchase commitment of $159.8 million, as of October 31, 2019, that must be made by September 1, 2025.
As of October 31, 2019, the future non-cancelable minimum payments under these commitments were as follows:
Payments due by period | |||||||||||||||||||
Total | Less than 1 year | 1-3 Years | 3-5 Years | More than 5 years | |||||||||||||||
(in thousands) | |||||||||||||||||||
Salesforce.com commitments | $ | 159,776 | $ | 6,551 | — | — | $ | 153,225 | |||||||||||
Operating lease obligations | 28,766 | 1,787 | 13,287 | 7,327 | 6,365 | ||||||||||||||
Finance lease obligations | 1,704 | 269 | 1,435 | — | — | ||||||||||||||
Total | $ | 190,246 | $ | 8,607 | $ | 14,722 | $ | 7,327 | $ | 159,590 | |||||||||
The amounts in the table above are associated with agreements that are enforceable and legally binding, which specify significant terms including payment terms, related services, and the approximate timing of the transaction. Obligations under agreements that we can cancel without a significant penalty are not included in the table.
We anticipate leasing additional office space in various locations around the world to support our growth. In addition, our existing lease agreements often provide us with an option to renew. We expect our future operating lease obligations will increase as we expand our operations.
Off-Balance Sheet Arrangements
We do not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities that would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
Critical Accounting Policies and Estimates
Our condensed consolidated financial statements are prepared in accordance with generally accepted accounting principles 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 October 31, 2019 as compared to the those disclosed in our Form 10-K for the fiscal year ended January 31, 2019.
Veeva Systems Inc. | Form 10-Q | 41 |
Revenue Recognition
For a description of our application of GAAP to our revenue recognition, see note 1 of the notes to our condensed consolidated financial statements.
42 | Veeva Systems Inc. | Form 10-Q |
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. |
Foreign currency exchange risk
Our results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the British Pound Sterling, Euro, Japanese Yen, and Chinese Yuan, and may be adversely affected in the future due to changes in foreign currency exchange rates. We continue to experience foreign currency fluctuations primarily due to 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. Changes in exchange rates may negatively affect our revenues and other operating results as expressed in U.S. dollars. For the three months ended October 31, 2019, we had foreign currency gains of $1.4 million. We had immaterial foreign currency losses for the nine months ended October 31, 2019. For the three and nine months ended October 31, 2018, we had foreign currency losses of $0.5 million and $1.9 million, respectively.
We have experienced and will continue to experience fluctuations in our net income as a result of gains or losses related to revaluing certain current asset and current liability balances that are denominated in currencies other than the functional currency of the entities in which they are recorded. We engage in the hedging of our foreign currency transactions as described in note 7 of the notes to our condensed consolidated financial statements and may, in the future, hedge selected significant transactions or net monetary exposure positions denominated in currencies other than the U.S. dollar.
Interest rate sensitivity
We had cash, cash equivalents and short-term investments totaling $1.5 billion as of October 31, 2019. This amount was held primarily in demand deposit accounts, money market funds, U.S. treasury securities and agency obligations, corporate notes and bonds, asset-backed securities, commercial paper, foreign government bonds, and agency mortgage-backed securities. The cash and cash equivalents are held for working capital purposes. We do not enter into investments for trading or speculative purposes.
Our cash equivalents and our portfolio of marketable securities are subject to market risk due to changes in interest rates, which could affect our results of operations. Fixed rate securities may have their market value adversely affected due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fluctuate due to changes in interest rates or we may suffer losses in principal if we are forced to sell securities that decline in market value due to changes in interest rates. However, because we classify our marketable securities as “available for sale,” no gains or losses are recognized due to changes in interest rates unless such securities are sold prior to maturity or declines in fair value are determined to be other-than-temporary. Our fixed-income portfolio is subject to interest rate risk.
An immediate increase of 100-basis points in interest rates would have resulted in a $4.5 million market value reduction in our investment portfolio as of October 31, 2019. An immediate decrease of 100-basis points in interest rates would have increased the market value by $4.5 million as of October 31, 2019. This estimate is based on a sensitivity model that measures market value changes when changes in interest rates occur. Fluctuations in the value of our investment securities caused by a change in interest rates (gains or losses on the carrying value) are recorded in other comprehensive income, and are realized only if we sell the underlying securities.
Veeva Systems Inc. | Form 10-Q | 43 |
ITEM 4. | CONTROLS AND PROCEDURES. |
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of October 31, 2019. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (Exchange Act), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported, within the time periods specified in the Securities and Exchange Commission’s (SEC) rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.
Based on our management’s evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of October 31, 2019, our disclosure controls and procedures were designed at a reasonable assurance level and were effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the fiscal quarter ended October 31, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
Our management, including our Chief Executive Officer and Chief Financial Officer, do not expect that our disclosure controls or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been or would be detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
44 | Veeva Systems Inc. | Form 10-Q |
PART II. OTHER INFORMATION
ITEM 1. | LEGAL PROCEEDINGS. |
From time to time, we may be involved in legal proceedings and subject to claims incident to the ordinary course of business. For information regarding certain current legal proceedings, see note 13 of the notes to our condensed consolidated financial statements, which is incorporated herein by reference.
California Non-Compete Matter.
On July 17, 2017, we filed a complaint in the Superior Court of the State of California in the County of Alameda against Medidata, IQVIA, and Sparta Systems, Inc. (Veeva Systems Inc. v. Medidata Solutions, Inc., Quintiles IMS Incorporated, IMS Software Services, LTD., and Sparta Systems, Inc., Case No. RG17868081). Our lawsuit seeks declaratory and injunctive relief concerning the use of non-compete, confidentiality, and non-disparagement agreements by these companies. Since the original complaint was filed, there has been extensive motion practice. Medidata and Sparta have since appealed the superior court’s decisions finding that the case may proceed, and Veeva has cross-appealed. On October 31, 2019, as to Veeva's claims against IQVIA, the trial court's earlier dismissal was reversed and the case was reassigned to a new trial court judge. The court of appeals has not ruled on the appeals concerning the claims against Medidata and Sparta.
Although the results of legal proceedings and claims cannot be predicted with certainty, we believe we are not currently a party to any other legal proceedings, the outcome of which, if determined adversely to us, would individually or taken together have a material adverse effect on our business, operating results, cash flows, or financial position. Regardless of the outcome, such proceedings can have an adverse impact on us because of defense and settlement costs, diversion of resources and other factors, and there can be no assurances that favorable outcomes will be obtained.
Other Litigation Matters
From time to time, we may be involved in other legal proceedings and subject to claims incident to the ordinary course of business. Although the results of such legal proceedings and claims cannot be predicted with certainty, we believe we are not currently a party to any other legal proceedings, the outcome of which, if determined adversely to us, would individually or taken together have a material adverse effect on our business, operating results, cash flows, or financial position. Regardless of the outcome, such proceedings can have an adverse impact on us because of defense and settlement costs, diversion of resources and other factors, and there can be no assurances that favorable outcomes will be obtained.
Veeva Systems Inc. | Form 10-Q | 45 |
ITEM 1A. | RISK FACTORS. |
Investing in our Class A common stock involves a high degree of risk. You should consider carefully the risks and uncertainties described below and in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” together with all of the other information in this report, including our condensed consolidated financial statements and related notes, before investing in our Class A common stock. The risks and uncertainties described below are not the only ones we face. If any of the following risks actually occurs, our business, financial condition, results of operations, and prospects could be materially and adversely affected. In that event, the price of our Class A common stock could decline and you could lose part or all of your investment.
Risks Related to Our Business and Industry
If our security measures are breached or unauthorized access to customer data is otherwise obtained, our solutions may be perceived as not being secure, customers may reduce the use of or stop using our solutions, and we may incur significant liabilities.
Our solutions involve the storage and transmission of our customers’ proprietary information, including personal or identifying information regarding their employees and the medical professionals whom their sales personnel contact, sensitive proprietary data related to the regulatory submission process for new medical treatments, and other sensitive information, which may include personal health information. In addition, Crossix Solutions, which we acquired in November 2019, provides technology that processes third-party health and non-health data for U.S. patients. As a result, unauthorized access or security breaches as a result of third-party action, employee error, product defect, malfeasance, or otherwise could result in the loss of information, inappropriate use of or access to information, service interruption, service degradation, outages, service level credits, litigation, indemnity obligations, damage to our reputation, and other liability. While we maintain and continue to improve our security measures, we may be unable to adequately anticipate security threats or to implement adequate preventative measures, in part, because the techniques used to obtain unauthorized access or sabotage systems change frequently and generally are not identified until they are launched against a target. Moreover, the detection, prevention, and remediation of known or unknown securities vulnerabilities, including those arising from third-party hardware or software, may result in additional direct or indirect costs and management time. Any or all of these issues could adversely affect our ability to attract new customers, cause existing customers to elect to not renew their subscriptions, result in reputational damage, or subject us to third-party lawsuits, regulatory fines, mandatory disclosures, or other action or liability, which could adversely affect our operating results. Our insurance may not be adequate to cover losses associated with such events, and in any case, such insurance may not cover all of the types of costs, expenses, and losses we could incur to respond to and remediate a security breach. A security breach of another significant provider of cloud-based solutions may also negatively impact the demand for our solutions.
We expect the future growth rate of our revenues to decline.
In our fiscal years ended January 31, 2017, 2018, and 2019, our total revenues grew by 35%, 25%, and 25% respectively, as compared to total revenues from the prior fiscal years. In our fiscal years ended January 31, 2017, 2018, and 2019, our subscription revenues grew by 39%, 27%, and 24% respectively, as compared to subscription revenues from the prior fiscal years. Please note that our total revenues and subscription revenues for the fiscal year ended January 31, 2017 included, for the first time, a full year of revenue contribution from the Zinc Ahead business, which we acquired in the third quarter of the fiscal year ended January 31, 2016. In our fiscal quarter ended October 31, 2019, our total revenues grew by 25% as compared to the same quarterly period last year. We expect the growth rate of our total revenues and subscription revenues to decline in future periods, which may adversely impact the value of our Class A common stock.
46 | Veeva Systems Inc. | Form 10-Q |
Our results may fluctuate from period to period, which could prevent us from meeting security analyst or investor expectations or our own guidance and could cause the price of our Class A common stock to decline substantially.
Our results of operations, including our revenues, gross margin, operating margin, profitability, cash flows, calculated billings, and deferred revenue, as well as other metrics we may report, may vary from period to period for a variety of reasons, including those listed elsewhere in this “Risk Factors” section, and period-to-period comparisons of our operating results may not be meaningful. Accordingly, our quarterly results should not be relied upon as an indication of future performance. Additionally, from time to time, we issue guidance and provide commentary regarding our expectations for certain future financial results, including revenues, gross margin, operating margin, profitability, cash flows, calculated billings, deferred revenue, and other metrics on both a near-term and long-term basis. Our guidance is based upon a number of assumptions and estimates that are subject to significant business, economic, and competitive uncertainties that are beyond our control and are based upon assumptions about future business and accounting decisions that may change or be wrong. Our guidance may prove to be incorrect, and actual results may differ from our guidance. Fluctuations in our results or failure to achieve security analyst or investor expectations or our guidance, even if not materially, could cause the price of our Class A common stock to decline substantially, and our investors could incur substantial losses.
The markets in which we participate are highly competitive, and if we do not compete effectively, our business and operating results could be adversely affected.
The markets for our solutions are highly competitive. In new sales cycles within our largest product categories, we generally compete with other cloud-based solutions from providers that make applications geared toward the life sciences industry. The principal such competitor for our Veeva Commercial Cloud applications is IQVIA Inc. (which offers a CRM application built on the Salesforce1 Platform, various data products, and other applications). While no single vendor offers products that compete with all of our Veeva Vault applications, IQVIA, Medidata Solutions, Inc.(recently acquired by Dassault Systèmes), OpenText Corporation, Oracle Corporation, and other smaller application providers offer applications that compete with certain of our Veeva Vault applications. Our Commercial Cloud and Veeva Vault application suites also compete to replace client server-based legacy solutions offered by companies such as Oracle, Microsoft Corporation, and other smaller application providers. Our customers may also choose to use horizontal cloud-based applications or platforms that are not life sciences specific—such as Box.com, Amazon Web Services, or Microsoft—for certain of the functions our applications provide. Our data products compete with IQVIA and other smaller data providers. Our professional services offerings compete with a range of professional services firms. With the introduction of new technologies, we expect competition to intensify in the future, and we may face competition from new market entrants as well.
Some of our actual and potential competitors have advantages over us, such as longer operating histories, significantly greater financial, technical, marketing or other resources, stronger brand and business recognition, larger intellectual property portfolios, and agreements with a broader set of system integrators and other partners. We also continue to be subject to litigation from our competitors; for example, as disclosed elsewhere in this report, we are in active litigation with IQVIA and Medidata.
If our competitors’ products, services or technologies become more accepted than our solutions, if they are successful in bringing their products or services to market earlier than we are, if their products or services are more technologically capable than ours, or if customers replace our solutions with custom-built software, then our revenues could be adversely affected. Pricing pressures and increased competition could result in reduced sales, reduced margins, losses or a failure to maintain or improve our competitive market position, any of which could adversely affect our business. For all of these reasons, we may not be able to compete favorably against our current and future competitors.
Veeva Systems Inc. | Form 10-Q | 47 |
If our newer solutions are not successfully adopted by new and existing customers, the growth rate of our revenues and operating results will be adversely affected.
Our continued growth and profitability will depend on our ability to successfully develop and sell new solutions, including solutions we introduced relatively recently and have limited experience selling. It is uncertain whether these newer solutions will continue to grow as a percentage of revenues at a pace significant enough to support our expected overall growth. In addition, we have limited experience selling our products to companies outside the life sciences industry, and we cannot be certain that we will be successful with respect to newer solutions and markets. It may take us significant time, and we may incur significant expense, to effectively market and sell these solutions or to develop other new solutions and make enhancements to our existing solutions. If our newer solutions do not continue to gain traction in the market, or other solutions that we may develop and introduce in the future do not achieve market acceptance in a timely manner, the growth rate of our revenues and operating results will be adversely affected.
Our revenues are relatively concentrated within a small number of key customers, and the loss of one or more of such key customers, or their failure to renew or expand user subscriptions, could slow the growth rate of our revenues or cause our revenues to decline.
In our fiscal years ended January 31, 2017, 2018, and 2019, our top 10 customers accounted for 45%, 42%, and 39% of our total revenues, respectively. We rely on our reputation and recommendations from key customers in order to promote our solutions to potential customers. The loss of any of our key customers, or a failure of one or more of them to renew or expand user subscriptions, could have a significant impact on the growth rate of our revenues, our reputation, and our ability to obtain new customers. In the event of an acquisition of one of our customers or a business combination between two of our customers, we have in the past and may in the future suffer reductions in user subscriptions or non-renewal of their subscription orders. We are also likely to face increasing purchasing scrutiny at the renewal of these large customer subscription orders, which may result in reductions in user subscriptions or increased pricing pressure. The business impact of any of these negative events is particularly pronounced with respect to our largest customers.
The majority of our subscription agreements with our customers are for a term of one year. If our existing customers do not renew their subscriptions annually, or do not buy additional solutions and user subscriptions from us, or renew at lower aggregate fee levels, our business and operating results will suffer.
We derive a significant portion of our revenues from the renewal of existing subscription orders. The majority of our customers’ orders for subscription services have one-year terms. However, more recently and with respect to solutions other than our core sales automation solution and particularly with respect to certain of our Vault applications, we have entered into a number of orders with terms of up to eight years. Our customers have no obligation to renew their subscriptions for our solutions after their orders expire. Thus, securing the renewal of our subscription orders and selling additional solutions and user subscriptions is critical to our future operating results. Factors that may affect the renewal rate for our solutions and our ability to sell additional solutions and user subscriptions include:
• | the price, performance, and functionality of our solutions; |
• | the availability, price, performance, and functionality of competing solutions and services; |
• | the effectiveness of our professional services; |
• | our ability to develop complementary solutions, applications, and services; |
• | the stability, performance, and security of our hosting infrastructure and hosting services; and |
• | the business environment of our customers and, in particular, acquisitions of or business combinations between our customers or other business developments may result in reductions in user subscriptions. |
In addition, our customers may negotiate terms less advantageous to us upon renewal, which could reduce our revenues from these customers. As a customer’s total spend on Veeva solutions increases, we expect purchasing scrutiny at renewal to increase as well, which may result in reductions in user subscriptions or increased pricing pressure. Other factors that are not within our control may contribute to a reduction in our subscription services revenues. For instance, our customers may reduce their number of sales representatives, which would result in a corresponding reduction in the number of user subscriptions needed for some of our solutions and thus a lower aggregate renewal fee, or our customers may discontinue clinical trials for which our solutions are being used. If our customers fail to renew their subscription orders, renew their subscription orders with less favorable terms or at lower fee levels or fail to purchase new solutions, applications, or professional services from us, our revenues may decline or our future revenues may be constrained.
48 | Veeva Systems Inc. | Form 10-Q |
We rely on third-party providers—including salesforce.com and Amazon Web Services—for computing infrastructure, secure network connectivity, and other technology-related services needed to deliver our cloud solutions. Any disruption in the services provided by such third-party providers could adversely affect our business and subject us to liability.
Our solutions are hosted from and use computing infrastructure provided by third parties, including salesforce.com with respect to Veeva CRM and certain of our multichannel CRM applications, Amazon Web Services with respect to Veeva Vault applications, Veeva Network applications, and certain other Veeva Commercial Cloud applications, and to a lesser extent, other computing infrastructure service providers.
We do not own or control the operation of the third-party facilities or equipment used to provide the services described above. Our computing infrastructure service providers have no obligation to renew their agreements with us on commercially reasonable terms or at all. If we are unable to renew these agreements on commercially reasonable terms, or if one of our computing infrastructure service providers is acquired, we may be required to transition to a new provider and we may incur significant costs and possible service interruption in connection with doing so. In addition, such service providers could decide to close their facilities or change or suspend their service offerings without adequate notice to us. Moreover, any financial difficulties, such as bankruptcy, faced by such service providers may have negative effects on our business, the nature and extent of which are difficult to predict. Since we cannot easily switch computing infrastructure service providers, any disruption with respect to our current providers would impact our operations and our business could be adversely impacted.
Problems faced by our computing infrastructure service providers, including those operated by salesforce.com or Amazon Web Services, could adversely affect the experience of our customers. For example, salesforce.com and Amazon Web Services have experienced significant service outages and may do so again in the future. Additionally, if we fail to manage or react to an increase in demand sufficiently, this could have an adverse effect on our business. For example, a rapid expansion of our business could affect our service levels or cause such systems to fail. Our agreements with third-party computing infrastructure service providers may not entitle us to corresponding service level credits to those we offer to our customers. Any changes in third-party service levels at our computing infrastructure service providers or any related disruptions or performance problems with our solutions could adversely affect our reputation and may damage our customers’ stored files, result in lengthy interruptions in our services, or result in potential losses of customer data. Interruptions in our services might reduce our revenues, cause us to issue refunds to customers for prepaid and unused subscriptions, subject us to service level credit claims and potential liability, or adversely affect our renewal rates.
An inability to attract and retain highly skilled employees could adversely affect our business.
To execute our growth plan, we must attract and retain highly qualified employees. Competition for these employees is intense, especially with respect to sales and marketing personnel and engineers with high levels of experience in enterprise software and internet-related services. We have, from time to time, experienced, and we expect to continue to experience, difficulty in hiring and retaining employees with the appropriate level of qualifications. With respect to sales professionals, even if we are successful in attracting highly qualified personnel, it may take six to nine months or longer before they are fully trained and productive. Many of the companies with which we compete for experienced employees have greater resources than we have and may offer compensation packages that are perceived to be better than ours. For example, we offer equity awards to a substantial majority of our job candidates and existing employees as part of their overall compensation package. If the perceived value of our equity awards declines, including as a result of declines in the market price of our Class A common stock or changes in perception about our future prospects, it may adversely affect our ability to recruit and retain highly skilled employees. Additionally, changes in our compensation structure may be negatively received by employees and result in attrition or cause difficulty in the recruiting process. If we fail to attract new employees or fail to retain and motivate our current employees, our business and future growth prospects could be adversely affected.
As our costs increase, we may not be able to sustain the level of profitability we have achieved in the past.
We expect our future expenses to increase as we continue to invest in and grow our business. We expect to incur significant future expenditures related to:
• | developing new solutions and enhancing our existing solutions (including adapting certain of our Veeva Vault applications for companies outside the life sciences industry); |
• | improving the technology infrastructure, scalability, availability, security, and support for our solutions; |
Veeva Systems Inc. | Form 10-Q | 49 |
• | expanding and deepening our relationships with our existing customer base, including expenditures related to increasing the adoption of our solutions by the R&D departments of life sciences companies; |
• | sales and marketing, including expansion of our direct sales organization and global marketing programs; |
• | expansion of our professional services organization; |
• | employee compensation, including stock-based compensation; |
• | pending, threatened, or future legal proceedings, certain of which are described in Part II, Item 1. “Legal Proceedings” and note 13 of the notes to our condensed consolidated financial statements, and which we expect to continue to result in significant expense for the foreseeable future; |
• | international expansion; |
• | acquisitions and investments; and |
• | general operations, IT systems, and administration, including legal and accounting expenses related to being a public company. |
If our efforts to increase revenues and manage our expenses are not successful, or if we incur costs, damages, fines, settlements, or judgments as a result of other risks and uncertainties described in this report, we may not be able to sustain or increase our historical levels of profitability.
Defects or disruptions in our solutions could result in diminished demand for our solutions, a reduction in our revenues, and subject us to substantial liability.
We have from time to time found defects in our solutions, and new defects may be detected in the future. In addition, we have experienced, and may in the future experience, service disruptions, degradations, outages, and other performance problems. These types of problems may be caused by a variety of factors, including human or software errors, viruses, cyber-attacks, fraud, spikes in customer usage, problems associated with our third-party computing infrastructure and network providers, infrastructure changes, and denial of service issues. Service disruptions may result from errors we make in delivery, configuring, or hosting our solutions, or designing, installing, expanding, or maintaining our computing infrastructure. In some instances, we may not be able to identify the cause or causes of these performance problems within an acceptable period of time. It is also possible that such problems could result in losses of customer data.
Since our customers use our solutions for important aspects of their business, any errors, defects, disruptions, service degradations, or other performance problems with our solutions could hurt our reputation and may damage our customers’ businesses. If that occurs, our customers may delay or withhold payment to us, cancel their agreements with us, elect not to renew, or make service credit claims, warranty claims, or other claims against us, and we could lose future sales. The occurrence of any of these events could result in diminishing demand for our solutions, a reduction of our revenues, an increase in our bad debt expense or in collection cycles for accounts receivable, or could require us to increase our warranty provisions or incur the expense of litigation or substantial liability.
50 | Veeva Systems Inc. | Form 10-Q |
If the third-party providers of healthcare reference data and prescription drug sales data do not allow our customers to upload and use such data in our solutions, our business may be negatively impacted.
Many of our customers license healthcare professional and healthcare organization data and data regarding the sales of prescription drugs from third parties such as IQVIA. In order for our customers to upload such data to the Veeva CRM, Veeva Network Customer Master, Veeva Nitro, and other Veeva applications, such third-party data providers typically must consent to such uploads and often require that we enter into agreements regarding our obligations with respect to such data, which include confidentiality obligations and intellectual property rights with respect to such third-party data. We have experienced delays and difficulties in our negotiations with such third-party data providers in the past, and we expect to experience difficulties in the future. For instance, IQVIA currently will not consent to its healthcare professional or healthcare organization data being uploaded to Veeva Network Customer Master and this has negatively affected sales and customer adoption of Veeva Network Customer Master. To date, IQVIA has also restricted the uploading of IQVIA data to Veeva Nitro and certain other Veeva applications. Similarly, sales and customer adoption of Veeva OpenData has been negatively impacted by certain restrictions on the use of IQVIA data during customer transitions from IQVIA data to Veeva OpenData. If such third-party data providers do not consent to the uploading and use of their data in our solutions, delay consent, or fail to offer reasonable conditions for the upload and use of such data in our solutions, our sales efforts, solution implementations and productive use of our solutions by customers may be harmed, and our business, in turn, may be negatively impacted.
We have experienced rapid growth, and if we fail to manage our growth effectively, we may be unable to execute our business plan.
Since we were founded, we have experienced rapid growth and expansion of our operations. Our revenues, customer count, product and service offerings, countries of operation, facilities, and computing infrastructure needs have all increased significantly, and we expect them to increase in the future. We have also experienced rapid growth in our employee base, and as we continue to grow, we must effectively integrate, develop, and motivate a large number of new employees, while executing our growth plan and maintaining the beneficial aspects of our culture. Our rapid growth has placed, and will continue to place, a significant strain on our management capabilities, administrative and operational infrastructure, facilities and other resources. We anticipate that additional investments in our facilities and computing infrastructure will be required to scale our operations. To effectively manage growth, we must continue to: improve our key business applications, processes, and computing infrastructure; enhance information and communication systems; and ensure that our policies and procedures evolve to reflect our current operations and are appropriately communicated to and observed by employees. These enhancements and improvements will require additional investments and allocation of valuable management and employee time and resources. Failure to effectively manage growth could result in difficulty or delays in deploying our solutions, declines in quality or customer satisfaction, increases in costs, difficulties in introducing new features or other operational difficulties, and any of these difficulties could adversely impact our business performance and results of operations.
Nearly all of our revenues are generated by sales to customers in the life sciences industry, and factors that adversely affect this industry, including mergers within the life sciences industry or regulatory changes, could also adversely affect us.
Nearly all of our sales are to customers in the life sciences industry. Demand for our solutions could be affected by factors that adversely affect the life sciences industry, including:
• | The changing regulatory environment of the life sciences industry—Changes in regulations could negatively impact the business environment for our life sciences customers. Healthcare laws and regulations are rapidly evolving and may change significantly in the future. In particular, legislation or regulatory changes regarding the pricing of drugs and other healthcare treatments sold by life sciences companies has continued to be a topic of discussion by political leaders and regulators in the United States and elsewhere. |
Veeva Systems Inc. | Form 10-Q | 51 |
• | The consolidation of companies or bankruptcies within the life sciences industry—Consolidation within the life sciences industry has accelerated in recent years, and this trend could continue. We may lose customers due to industry consolidation, and we may not be able to expand sales of our solutions and services to new customers to replace lost customers. In addition, new companies that result from such consolidation may decide that our solutions are no longer needed because of their own internal processes or alternative solutions. As these entities consolidate, competition to provide solutions and services to industry participants will become more intense and the importance of establishing relationships with large industry participants will become greater. These industry participants may try to use their market power to negotiate price reductions for our solutions. If consolidation of our larger current customers occurs, the combined company may represent a larger percentage of business for us and, as a result, we are likely to rely more significantly on the combined company’s revenues to continue to achieve growth. In addition, if large life sciences companies merge, it would have the potential to reduce per unit pricing for our solutions for the merged companies or to reduce demand for one or more of our solutions as a result of potential personnel reductions over time. Additionally, our customers with potential treatments in clinical trials may be unsuccessful and may subsequently declare bankruptcy. |
• | Changes in market conditions and practices within the life sciences industry—The expiration of key patents, the implications of precision medicine treatments, changes in the practices of prescribing physicians, changes with respect to payer relationships, the policies and preferences of healthcare professionals and healthcare organizations with respect to the sales and marketing efforts of life sciences companies, changes in the regulation of the sales and marketing efforts and pricing practices of life sciences companies, and other factors could lead to a significant reduction in sales representatives that use our solutions or otherwise change the demand for our solutions. Changes in public perception regarding the practices of the life sciences industry may result in political pressure to increase the regulation of life sciences companies in one or more of the areas described above, which may negatively impact demand for our solutions. |
• | Changes in global economic conditions and changes in the global availability of healthcare treatments provided by the life sciences companies to which we sell—Our business depends on the overall economic health of our existing and prospective customers. The purchase of our solutions may involve a significant commitment of capital and other resources. If economic conditions, including the ability to market life sciences products in key markets or the demand for life sciences products globally deteriorates, many of our customers may delay or reduce their IT spending. This could result in reductions in sales of our solutions, longer sales cycles, reductions in subscription duration and value, slower adoption of new technologies, and increased price competition. |
Accordingly, our operating results and our ability to efficiently provide our solutions to life sciences companies and to grow or maintain our customer base could be adversely affected as a result of factors that affect the life sciences industry generally.
Our revenues and gross margin from professional services fees are volatile and may not increase from quarter to quarter or at all.
We derive a significant portion of our revenue from professional services fees. Our professional services revenues fluctuate from quarter to quarter as a result of the requirements, complexity, and timing of our customers’ implementation projects in our professional services arrangements. Generally, a customer’s ongoing need for professional services decreases as the implementation and full deployment of such solutions is completed. Our customers may also choose to use third parties rather than us for certain professional services related to our solutions. As a result of these and other factors, our professional services revenues may not increase on a quarterly basis in the future or at all. Additionally, the gross margin generated from professional services fees fluctuates based on a number of factors which may be variable from period to period, including the average billable hours worked by our billable professional services personnel, our hourly rates for professional services and the margin on professional services subcontracted to our third-party systems integrator partners. As a result of these and other factors, the gross margin from our professional services may not increase on a quarterly basis in the future or at all.
52 | Veeva Systems Inc. | Form 10-Q |
We have been and may in the future be sued by third parties for alleged infringement of their proprietary rights or misappropriation of intellectual property and we may suffer damages or other harm from such proceedings.
There is considerable patent and other intellectual property development activity in our industry. Our competitors, as well as a number of other entities and individuals, including so-called non-practicing entities, or NPEs, may own or claim to own intellectual property relating to our solutions. From time to time, third parties may claim that we are infringing upon their intellectual property rights or that we have misappropriated their intellectual property. For example, in 2014, we settled a lawsuit with Prolifiq Software, Inc. in exchange for a license to certain asserted patents, and, since January 2017, we have been defending against assertions of trade secret misappropriation made by our competitors, Medidata and IQVIA, as described in note 13 of the notes to our condensed consolidated financial statements. As competition in our market grows, the possibility of patent infringement and other intellectual property claims against us increases. In the future, we expect others to claim that our solutions and underlying technology infringe or violate their intellectual property rights. We may be unaware of the intellectual property rights that others may claim cover some or all of our technology or services. Any claims or litigation have caused and in the future could cause us to incur significant expenses and, if successfully asserted against us, could require that we pay substantial damages or ongoing royalty payments, prevent us from offering our services, or require that we comply with other unfavorable terms. We may also be obligated to indemnify our customers or business partners or pay substantial settlement costs, including royalty payments, in connection with any such claim or litigation and to obtain licenses, modify applications or refund fees, which could be costly. Any litigation regarding our intellectual property could be costly and time-consuming and divert the attention of our management and key personnel from our business operations even if we were to ultimately prevail in such litigation.
Our solutions address heavily regulated functions within the life sciences industry, and failure to comply with applicable laws and regulations could lessen the demand for our solutions or subject us to significant claims and losses.
Our customers use our solutions for business activities that are subject to a complex regime of global laws and regulations, including requirements for maintenance of electronic records and electronic signatures (as set forth in 21 CFR Part 11, EU Annex 11, and Japan PFSB Notification No. 0401022), requirements regarding drug sample tracking and distribution (as set forth in 21 CFR Part 203, EU Directive 201/83/EC Article 96), requirements regarding system validations (as set forth in 21 CFR Part 802.75 and 21 CFR Part 211.68), and other laws and regulations. Our solutions are expected to be capable of use by our customers in compliance with such laws and regulations. Our efforts to provide solutions that comply with such laws and regulations are time-consuming and costly and include validation procedures that may delay the release of new versions of our solutions. As these laws and regulations change over time, we may find it difficult to adjust our solutions to comply with such changes. For example, on June 23, 2016, the United Kingdom held a referendum in which voters approved an exit from the European Union, commonly referred to as “Brexit.” Since a significant proportion of the regulatory framework in the United Kingdom is derived from EU directives and regulations, Brexit could materially affect the regulatory regime applicable to our customers with operations in the United Kingdom. The British Parliament is currently reviewing the withdrawal agreement and regulatory framework. If a compromise related to data use is achieved, then data may flow as normal between the United Kingdom’s departure from the European Union and the end of the transition period currently scheduled to end on December 31, 2020. However, if a compromise is not met by October 31, 2019, there will be uncertainty about the legality of certain data transfers between the European Union and the United Kingdom. Such uncertainty could have a negative effect on international organizations generally, and specifically on life sciences and technology industries who seek to continue data transfers to the United Kingdom.
In addition, there has been a recent trend of increased foreign, federal, and state regulation of payments and transfers of value provided to healthcare professionals or entities. For example, our current and prospective customers may be required to comply with the U.S. federal legislation commonly referred to as the Physician Payments Sunshine Act, enacted as part of the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, and its implementing regulations (Sunshine Act). The Sunshine Act requires certain manufacturers of drugs, devices, biologics and medical supplies that are reimbursable under Medicare, Medicaid, or the Children’s Health Insurance Program, with specific exceptions, to report annually to the government information related to certain payments and other transfers of value to physicians (defined to include doctors, dentists, optometrists, podiatrists and chiropractors) and teaching hospitals, as well as ownership and investment interests held by the physicians described above and their immediate family members. Our solutions and services targeted at life sciences companies, including, for example, those offered by Physician’s World following our November 2019 acquisition, are used by our customers to assist with their reporting obligations under the Sunshine Act. If our solutions and services fail to assist our customers to meet such reporting obligations in a timely and accurate manner, demand for our solutions could decrease, which could adversely affect our business.
Veeva Systems Inc. | Form 10-Q | 53 |
As we increase the number of products we offer and the number of countries in which we offer solutions, the complexity of adjusting our solutions to comply with legal and regulatory changes will increase. If we are unable to effectively manage this increase or if we are not able to provide solutions that can be used in compliance with applicable laws and regulations, customers may be unwilling to use our solutions and any such non-compliance could result in the termination of our customer agreements or claims arising from such agreements with our customers.
Additionally, any failure of our customers to comply with laws and regulations applicable to the functions for which our solutions are used could result in fines, penalties or claims for substantial damages against our customers that may harm our business or reputation. If such failure were allegedly caused by our solutions or services, our customers may make a claim for damages against us, regardless of our responsibility for the failure. We may be subject to lawsuits that, even if unsuccessful, could divert our resources and our management’s attention and adversely affect our business, and our insurance coverage may not be sufficient to cover such claims against us.
Increasingly complex data protection and privacy regulations are burdensome, may reduce demand for our solutions, and non-compliance may impose significant liabilities.
Our customers use our solutions to collect, use, process, and store personal data or identifying information regarding their employees and the medical professionals with whom our customers have contact, and, potentially, personal data (including potentially sensitive data such as health information) regarding patients maintained by our customers pursuant to clinical, operational, or compliance processes. In these situations, we act as a data processor. We also collect and sell a database, via our Veeva OpenData and Veeva Oncology Link solutions, for which we are a data controller. In addition, Crossix Solutions, which we acquired in November 2019, provides technology that processes third-party health and non-health data for U.S. patients to generate analytics that are sold to customers. In many countries, national and local governmental bodies have adopted, are considering adopting, or may adopt laws and regulations regarding the collection, use, processing, storage, and disclosure of personal information obtained from individuals, making compliance a complex task.
For example, in the United States, the U.S. Department of Health and Human Services promulgated patient privacy rules under the Health Insurance Portability and Accountability Act of 1996 (HIPAA), that protect medical records and other personal health information by limiting their use and disclosure, giving individuals the right to access, amend, and seek accounting of their own health information and limiting most use and disclosures of health information to the minimum amount reasonably necessary to accomplish the intended purposes. Certain of our customers may be either business associates or covered entities under HIPAA.
We are a data controller and data processor under European General Data Protection Regulation (GDPR), which went into effect on May 25, 2018 and replaced EU Data Protection Directive 95/46/EC. Compliance with GDPR has and will continue to require valuable management and employee time and resources, and failure to comply with GDPR could include severe penalties and could reduce demand for our solutions.
In addition, we have self-certified under the EU-U.S. and Swiss-U.S. Privacy Shields, and we routinely utilize the EU Standard Contractual Clauses, often also referred to as Model Clauses, to ensure that our European customers have adequate assurance of our technical and organization controls on privacy. However, the Privacy Shield programs and the Model Clauses are currently under review by the European Court of Justice. There is also a trend toward countries enacting data localization requirements which are not particularly compatible with the cloud computing model. For example, Russia's localization law (Federal Law No. 242-FZ) requires that the source of data for Russian nationals collected on Russian territory must be stored in Russia. We are also monitoring the impact of China’s cyber security law and its related implementation rules, which are not yet finalized. Depending on the final enacted implementation rules, localization of certain types of data and restrictions on cross-border transfers may apply.
In addition, California enacted the California Consumer Privacy Act of 2018, which will take effect on January 1, 2020, and which will broadly define personal information, give California residents expanded privacy rights and protections and provide for civil penalties for violations. The effects of this legislation are potentially far-reaching and may require us to modify our data management practices and to incur substantial expense in an effort to comply.
Customers expect that our solutions can be used in compliance with such laws and regulations. The functional and operational requirements and costs of compliance with such laws and regulations may adversely impact our business, and failure to enable our solutions to comply with such laws and regulations could lead to significant fines and penalties imposed by regulators, as well as claims by our customers or third parties. Additionally, all of these domestic and international legislative and regulatory initiatives could adversely affect our customers’ ability or desire
54 | Veeva Systems Inc. | Form 10-Q |
to collect, use, process, and store personal or health-related information using our solutions or to license data products from us, which could reduce demand for our solutions.
We may acquire other companies or technologies, which could divert our management’s attention, result in additional dilution to our stockholders and otherwise disrupt our operations and adversely affect our operating results.
We have in the past acquired and may in the future seek to acquire or invest in businesses, solutions or technologies that we believe could complement or expand our solutions, enhance our technical capabilities or otherwise offer growth opportunities. For example, in November 2019, we acquired Crossix Solutions, a provider of privacy-safe patient data and analytics, and Physicians World, a provider of speakers bureau services for healthcare professionals. The pursuit of potential acquisitions may divert the attention of management and cause us to incur various expenses in identifying, investigating, and pursuing suitable acquisitions, whether or not they are consummated.
We have limited experience in acquiring other businesses. We may not be able to successfully integrate the acquired personnel, operations, and technologies, or effectively manage the combined business following the acquisition. We also may not achieve the anticipated benefits from the acquired business due to a number of factors, including:
• | inability to integrate or benefit from acquired technologies or services in a profitable manner; |
• | costs, liabilities, or accounting charges associated with the acquisition; |
• | difficulty integrating the privacy, data security, and accounting systems, operations, and personnel of the acquired business; |
• | problems arising from differences in applicable accounting standards or practices of the acquired business (for instance, non-U.S. businesses may not be accustomed to preparing their financial statements in accordance with U.S. GAAP) or difficulty identifying and correcting deficiencies in the internal controls over financial reporting of the acquired business; |
• | difficulties and additional expenses associated with supporting legacy products and hosting infrastructure of the acquired business; |
• | difficulty converting the customers of the acquired business onto our solutions and contract terms, including due to disparities in the revenues, licensing, support, or professional services model of the acquired company; |
• | diversion of management’s attention from other business concerns; |
• | adverse effects to business relationships with our existing business partners and customers as a result of the acquisition; |
• | difficulty in retaining key personnel of the acquired business; |
• | the possibility of investigation by, or the failure to obtain required approvals from, governmental authorities on a timely basis, if at all, under various regulatory schemes, including competition laws, which could, among other things, delay or prevent us from completing a transaction, subject the transaction to divestiture after the fact or otherwise restrict our ability to realize the expected financial or strategic goals of the acquisition; |
• | use of resources that are needed in other parts of our business; and |
• | use of substantial portions of our available cash to consummate the acquisition. |
In addition, a significant portion of the purchase price of companies we acquire may be allocated to acquired goodwill and other intangible assets, which we must assess for impairment at least annually. In the future, if our acquisitions do not yield expected returns, we may be required to take charges to our operating results based on this impairment assessment process, which could adversely affect our results of operations. Acquisitions may also result in purchase accounting adjustments, write-offs or restructuring charges, which may negatively affect our results.
Acquisitions could also result in dilutive issuances of equity securities or the incurrence of debt, which could adversely affect our operating results. In addition, if an acquired business fails to meet our expectations, our operating results, business, and financial position may suffer.
Veeva Systems Inc. | Form 10-Q | 55 |
Our sales cycles can be long and unpredictable, and our sales efforts require considerable investment of time and expense. If our sales cycle lengthens or we invest substantial resources pursuing unsuccessful sales opportunities, our operating results and growth would be harmed.
Our sales process entails planning discussions with prospective customers, analyzing their existing solutions and identifying how these potential customers can use and benefit from our solutions. The sales cycle for a new customer, from the time of prospect qualification to the completion of the first sale, may span over 12 months or longer. In particular, we have limited history selling our newer solutions. As a result, our sales cycle for these applications may be lengthy and difficult to predict. In addition, we have only recently begun selling certain of our Veeva Vault solutions to industries outside life sciences. We spend substantial time, effort and money in our sales efforts without any assurance that our efforts will result in the sale of our solutions. In addition, our sales cycle can vary substantially from customer to customer because of various factors, including the discretionary nature of potential customers’ purchasing and budget decisions, the announcement or planned introduction of new solutions by us or our competitors, and the purchasing approval processes of potential customers. If our sales cycle lengthens or we invest substantial resources pursuing unsuccessful sales opportunities, our operating results and growth would be harmed.
Catastrophic events could disrupt our business and adversely affect our operating results.
Our corporate headquarters are located in Pleasanton, California and our third-party hosted computing infrastructure is located in the United States, the European Union, Japan, and South Korea. The west coast of the United States and Japan and South Korea each contain active earthquake zones. Additionally, we rely on our network and third-party infrastructure and enterprise applications, internal technology systems, and our website for our development, marketing, operational support, hosted services, and sales activities. In the event of a major earthquake, hurricane, or catastrophic event such as fire, power loss, telecommunications failure, cyber-attack, war, or terrorist attack, we may be unable to continue our operations and may experience system interruptions, reputational harm, delays in our solution development, lengthy interruptions in our services, breaches of data security, and loss of critical data, all of which could have an adverse effect on our future operating results.
Within Veeva Commercial Cloud, our core Veeva CRM application has achieved substantial penetration within the sales teams of pharmaceutical and biotechnology companies. If our efforts to sustain or further increase the use and adoption of our core CRM application does not succeed, the growth rate of our Veeva Commercial Cloud revenues may be negatively impacted.
In our fiscal year ended January 31, 2019, we derived approximately 57% of our subscription services revenues and approximately 53% of our total revenues from our Veeva Commercial Cloud solutions. In the three months ended October 31, 2019, we derived approximately 51% of our subscription services revenues and approximately 48% of our total revenues from our Veeva Commercial Cloud solutions. A significant percentage of the subscription services revenues for our Veeva Commercial Cloud solutions is derived from subscriptions to our core CRM application. We have, however, realized substantial sales penetration of the available market for our core Veeva CRM application among pharmaceutical and biotechnology companies. If we are not able to sell additional user subscriptions to our core CRM application or if we fail to renew existing subscriptions to our core CRM application, the growth rate of our Veeva Commercial Cloud revenues may be negatively impacted.
Because key and substantial portions of our multichannel CRM applications are built on salesforce.com’s Salesforce1 Platform, we are dependent upon our agreement with salesforce.com to provide these solutions to our customers, and we are bound by the restrictions of this agreement which limits the companies to which we may sell our Veeva CRM solution.
Our Veeva CRM application and certain portions of the multichannel CRM applications that complement our Veeva CRM application are developed on or utilize the Salesforce1 Platform of salesforce.com, and we rely on our agreement with salesforce.com to continue to use the Salesforce1 Platform as combined with the proprietary aspects of our multichannel CRM applications.
Our agreement with salesforce.com expires on September 1, 2025. However, salesforce.com has the right to terminate the agreement in certain circumstances, including in the event of a material breach of the agreement by us, or that salesforce.com is subjected to third-party intellectual property infringement claims based on our solutions (except to the extent based on the Salesforce1 Platform) or our trademarks and we do not remedy such infringement in accordance with the agreement. Also, if we are acquired by specified companies, salesforce.com may terminate the agreement upon notice of not less than 12 months. If salesforce.com terminates our agreement under these
56 | Veeva Systems Inc. | Form 10-Q |
circumstances, our customers will be unable to access Veeva CRM and certain other of our multichannel CRM applications. A termination of the agreement would cause us to incur significant time and expense to acquire rights to, or develop, a replacement CRM platform, and we may not be successful in these efforts. Even if we were to successfully acquire or develop a replacement CRM platform, some customers may decide not to adopt the replacement platform and may decide to use a different CRM solution. If we were unsuccessful in acquiring or developing a replacement CRM platform or acquired or developed a replacement CRM platform that our customers do not adopt, our business, operating results and brand may be adversely affected.
Also, if either party elects not to renew the agreement at the end of its September 1, 2025 term or if the agreement is terminated by us as a result of salesforce.com’s breach, the agreement provides for a five-year wind-down period in which we would be able to continue providing the Salesforce1 Platform as combined with the proprietary aspects of our solutions to our existing customers but would be limited with respect to the number of additional subscriptions we could sell to our existing customers. After the wind-down period, we would no longer be able to use the Salesforce1 Platform.
Our agreement with salesforce.com provides that we can use the Salesforce1 Platform as combined with our proprietary Veeva CRM application to sell sales automation solutions only to drug makers in the pharmaceutical and biotechnology industries for human and animal treatments, which does not include the medical devices industry or products for non-drug departments of pharmaceutical and biotechnology companies. Sales of the Salesforce1 Platform in combination with our Veeva CRM application to additional industries would require the review and approval of salesforce.com. Our inability to freely sell our Veeva CRM application outside of drug makers in the pharmaceutical and biotechnology industries may adversely impact our growth.
While our agreement with salesforce.com, subject to certain exceptions, including pre-existing arrangements, provides that salesforce.com will not position, develop, promote, invest in, or acquire applications directly competitive to the Veeva CRM application for sales automation that directly target drug makers in the pharmaceutical and biotechnology industry, or the pharma/biotech industry, our remedy for a breach of this commitment by salesforce.com would be to terminate the agreement, or continue the agreement but be released from our minimum order commitments from the date of salesforce.com’s breach forward. While our agreement with salesforce.com also restricts salesforce.com from competing with us with respect to sales opportunities for sales automation solutions for the pharma/biotech industry unless such competition has been pre-approved by salesforce.com’s senior management based on certain criteria specified in the agreement, and imposes certain limits on salesforce.com from entering into new arrangements after March 3, 2014 that are similar to ours with other parties with respect to sales automation applications for the pharma/biotech industry, it does not restrict a salesforce.com customer’s ability (or the ability of salesforce.com on behalf of a specific salesforce.com customer) to customize or configure the Salesforce1 Platform, and our remedy for a breach of these restrictions by salesforce.com would be to terminate the agreement, or continue the agreement but be released from our minimum order commitments from the date of salesforce.com’s breach forward. Some current or potential customers of ours may choose to build custom solutions using the Salesforce1 Platform rather than buying our solutions.
Our agreement with salesforce.com imposes significant financial commitments on us which we may not be able to meet and which could negatively impact our financial results and liquidity in the future.
Our Veeva CRM application, and certain portions of the multichannel CRM applications that complement our Veeva CRM application, are developed on and/or utilize the Salesforce1 Platform of salesforce.com. Under our agreement, salesforce.com provides the hosting infrastructure and data center for portions of our multichannel CRM applications, as well as the system administration, configuration, reporting, and other platform level functionality. In exchange, we pay salesforce.com a fee. Our agreement with salesforce.com requires that we meet minimum order commitments of $500 million over the term of the agreement, which ends on September 1, 2025, including “true-up” payments if the orders we place with salesforce.com have not equaled or exceeded the following aggregate amounts within the timeframes indicated: (i) $250 million from March 1, 2014 to September 1, 2020 and (ii) the full amount of $500 million by September 1, 2025. See note 13 of the notes to our condensed consolidated financial statements for more information about our on-going minimum fee obligation to salesforce.com. We have met our first minimum order commitment of $250 million and have a remaining purchase commitment of $159.8 million, as of October 31, 2019, that must be made by September 1, 2025. If we are not able to meet the remaining minimum order commitment, the required true-up payments will negatively impact our margins, cash flows, cash balance and financial condition, and our stock price may decline.
Veeva Systems Inc. | Form 10-Q | 57 |
We employ third-party licensed software and software components for use in or with our solutions, and the inability to maintain these licenses or the presence of errors in the software we license could limit the functionality of our products and result in increased costs or reduced service levels, which would adversely affect our business.
In addition to our employment of the Salesforce1 Platform through our agreement with salesforce.com, our solutions incorporate or utilize certain third-party software and software components obtained under licenses from other companies. We anticipate that we will continue to rely on such third-party software and development tools from third parties in the future. Although we believe that there are commercially reasonable alternatives to the third-party software we currently license, this may not always be the case, or it may be difficult or costly to replace. Our use of additional or alternative third-party software would require us to enter into license agreements with third parties. In addition, if the third-party software we utilize has errors or otherwise malfunctions, the functionality of our solutions may be negatively impacted and our business may suffer.
Because we recognize subscription services revenues ratably over the term of the order for our subscription services, a significant downturn in our business may not be reflected immediately in our operating results, which increases the difficulty of evaluating our future financial performance.
We generally recognize subscription services revenues ratably over the term of an order under our subscription agreements. As a result, a substantial majority of our quarterly subscription services revenues are generated from subscription agreements entered into during prior periods. Consequently, a decline in new subscriptions in any quarter may not affect our results of operations in that quarter but could reduce our revenues in future quarters. Additionally, the timing of renewals or non-renewals of a subscription agreement during any quarter may only affect our financial performance in future quarters. For example, the non-renewal of a subscription agreement late in a quarter will have minimal impact on revenues for that quarter but will reduce our revenues in future quarters. Accordingly, the effect of significant declines in sales and customer acceptance of our solutions may not be reflected in our short-term results of operations, which would make these reported results less indicative of our future financial results. By contrast, a non-renewal occurring early in a quarter may have a significant negative impact on revenues for that quarter and we may not be able to offset a decline in revenues due to non-renewal with revenues from new subscription agreements entered into in the same quarter. In addition, we may be unable to adjust our costs in response to reduced revenues.
Additionally, with respect to certain of our multi-year orders in which fees increase from year to year, Topic 606 may require that the total contracted revenue for the entire multi-year term of the order be recognized ratably in the same amount in each year. As a result, in the initial year of such orders, we will recognize more revenue than the fees we invoice for the same period, and in the last year of such orders, we will recognize less revenue than the fees we invoice for the same period. This treatment may make our reported results less indicative of the actual health of our business at the time revenue is reported and may expose us to impaired unbilled accounts receivable if, for example, a customer terminated an otherwise non-cancelable multi-year contract for cause.
Changes in accounting principles may cause previously unanticipated fluctuations in our financial results, and the implementation of such changes may impact our ability to meet our financial reporting obligations.
We prepare our financial statements in accordance with U.S. GAAP which are subject to interpretation or changes by the Financial Accounting Standards Board, or FASB, the Securities and Exchange Commission, or SEC, and other various bodies formed to promulgate and interpret appropriate accounting principles. New accounting pronouncements and changes in accounting principles have occurred in the past and are expected to occur in the future which may have a significant effect on our financial results. For example, we were required to implement Topic 606 in our fiscal year beginning February 1, 2018. The timing of revenue recognition for certain of our revenue arrangements has been and will likely continue to be impacted by the changes imposed by Topic 606. For instance, with respect to certain of our multi-year orders in which fees increase from year to year, Topic 606 may require that the total contracted revenue for the entire multi-year term of the order be recognized ratably in the same amount in each year. As a result, in the initial year of such orders, we will recognize more revenue than the fees we invoice for the same period, and in the last year of such orders, we will recognize less revenue than the fees we invoice for the same period. Moreover, such multi-year orders could renew at fees greater than the revenue that was recognized in the last year of the order, which could result in fluctuations in our financial results. Any difficulties in implementation of changes in accounting principles, including the ability to modify our accounting systems, could cause us to fail to meet our financial reporting obligations, which could result in regulatory discipline and harm investors’ confidence in us.
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Deferred revenue and change in deferred revenue may not be accurate indicators of our future financial results.
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. Many of our customers, including many of our large customers, are billed on a quarterly basis and therefore a substantial portion of the value of contracts billed on a quarterly basis will not be reflected in our deferred revenue at the end of any given quarter. Also, particularly with respect to our Veeva Commercial Cloud orders, because the term of orders for additional end users or applications is commonly less than one year, the annualized value of such orders may not be completely reflected in deferred revenue at any single point in time. We have also agreed from time to time, and may agree in the future, to allow customers to change the renewal dates of their orders to, for example, align more closely with a customer’s annual budget process or to align with the renewal dates of other orders placed by other entities within the same corporate control group, or to change payment terms from annual to quarterly, or vice versa. Such changes typically result in an order of less than one year as necessary to align all orders to the desired renewal date and, thus, may result in a lesser increase to deferred revenue than if the adjustment had not occurred. Additionally, changes in renewal dates may change the fiscal quarter in which deferred revenue associated with a particular order is booked. Accordingly, we do not believe that changes on a quarterly basis in deferred revenue, unbilled accounts receivable, or calculated billings, a metric commonly cited by financial analysts, are accurate indicators of the underlying momentum of our business or future revenues. We believe that our subscription revenue guidance and calculated billings guidance for the full fiscal year are the best indicators of the momentum of our business or future revenues. Please note that since the adoption of Topic 606, 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. However, many companies that provide cloud-based software report changes in deferred revenue or calculated billings as key operating or financial metrics, and it is possible that analysts or investors may view these metrics as important. Thus, any changes in our deferred revenue balances or deferred revenue trends, or in the future, our unbilled accounts receivable balances or trends, could adversely affect the market price of our Class A common stock.
Sales to customers outside the United States or with international operations expose us to risks inherent in international sales.
In our fiscal quarter ended October 31, 2019, sales to customers outside North America, which is primarily measured by the estimated location of the end users or usage for subscription services revenues and the location of the resources performing the professional services for professional services revenue, accounted for approximately 46% of our total revenues. A key element of our growth strategy is to further expand our international operations and worldwide customer base. Operating in international markets requires significant resources and management attention and subjects us to regulatory, economic and political risks that are different from those in the United States. We have limited operating experience in some international markets, and we cannot assure you that our expansion efforts into other international markets will be successful. Our experience in the United States and other international markets in which we already have a presence may not be relevant to our ability to expand in other emerging markets. Our international expansion efforts may not be successful in creating further demand for our solutions outside of the United States or in effectively selling our solutions in the international markets we enter. In addition, we face risks in doing business internationally that could adversely affect our business, including:
• | the need and expense to localize and adapt our solutions for specific countries, including translation into foreign languages, and ensuring that our solutions enable our customers to comply with local life sciences industry laws and regulations; |
• | data privacy laws which require that customer data be stored and processed in a designated territory; |
• | difficulties in staffing and managing foreign operations, including employee laws and regulations; |
• | different pricing environments, longer sales cycles and longer accounts receivable payment cycles and collections issues; |
• | new and different sources of competition; |
• | weaker protection for intellectual property and other legal rights than in the United States and practical difficulties in enforcing intellectual property and other rights outside of the United States; |
• | laws and business practices favoring local competitors; |
Veeva Systems Inc. | Form 10-Q | 59 |
• | compliance challenges related to the complexity of multiple, conflicting and changing governmental laws and regulations, including employment, tax, privacy and data protection and anti-bribery laws and regulations; |
• | increased financial accounting and reporting burdens and complexities; |
• | restrictions on the transfer of funds; |
• | our ability to repatriate funds from abroad without adverse tax consequences; |
• | adverse tax consequences, including the potential for required withholding taxes; |
• | fluctuations in the exchange rates of foreign currency in which our foreign revenues or expenses may be denominated; |
• | changes in trade relations and trade policy, including the status of trade relations between the United States and China, and the implementation of or changes to trade sanctions, tariffs, and embargos; and |
• | unstable regional and economic political conditions in the markets in which we operate. |
Some of our business partners also have international operations and are subject to the risks described above. Even if we are able to successfully manage the risks of international operations, our business may be adversely affected if our business partners are not able to successfully manage these risks, which could adversely affect our business.
We are subject to governmental export and import controls that could impair our ability to compete in international markets in which our products may not be sold or subject us to liability if we violate the controls.
Our products are subject to U.S. export controls, including the U.S. economic sanctions laws and regulations that prohibit the shipment of certain products and services without the required export authorizations or export to countries, governments, and persons targeted by U.S. sanctions. Under current U.S. export restrictions, our products may not be sold in certain jurisdictions in which certain of our non-U.S. based customers have operations. As a result, such customers may choose to use solutions other than ours. While we take precautions to prevent our products and services from being exported in violation of these laws, we cannot guarantee that the precautions we take will prevent violations of export control and sanctions laws. Violations of U.S. sanctions or export control laws can result in fines or penalties. In the event of criminal knowing and willful violations of these laws, fines and possible incarceration for responsible employees and managers could be imposed.
Changes in our senior management team or other key personnel could have a negative effect on our ability to execute our business strategy.
Our success depends in a large part upon the continued service of our senior management team or other key personnel. In particular, our founder and Chief Executive Officer, Peter P. Gassner, is critical to our vision, strategic direction, culture, products and technology. We do not maintain key-man insurance for Mr. Gassner or any other member of our senior management team. In addition, we have recently announced changes to our senior leadership team. In February 2019, we announced the retirement of Matthew J. Wallach, our President and co-founder, which was effective June 2019.In August 2019, we announced the retirement of our Chief Financial Officer, Timothy S. Cabral, which will take place after his successor is appointed by the Board and is transitioned into the role. We have commenced a search for Mr. Cabral’s successor. In September 2019, Tom Schwenger joined Veeva as President and Chief Operating Officer. Such leadership transitions can be inherently difficult to manage, and an unsuccessful transition may cause disruption to our business. In addition, change in the senior management team may create uncertainty among investors concerning Veeva’s future direction and performance. Any disruption in our operations or uncertainty around our ability to execute could have an adverse effect on our business, financial condition, or results of operations.
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Our business could be adversely affected if our customers are not satisfied with the professional services provided by us or our partners, or with our technical support services.
Our business depends on our ability to satisfy our customers, both with respect to our solutions and the professional services that are performed in connection with the implementation of our solutions. Professional services may be performed by us, by a third party, or by a combination of the two. If a customer is not satisfied with the quality of work performed by us or a third party or with the solutions delivered or professional services performed, then we could incur additional costs to address the situation, we may be required to issue credits or refunds for pre-paid amounts related to unused services, the profitability of that work might be impaired and the customer’s dissatisfaction with our services could damage our ability to expand the number of solutions subscribed to by that customer. Moreover, negative publicity related to our customer relationships, regardless of its accuracy, may further damage our business by affecting our ability to compete for new business with current and prospective customers.
Once our solutions are deployed, our customers depend on our support organization to resolve technical issues relating to our solutions. We may be unable to respond quickly enough to accommodate short-term increases in customer demand for technical support services. Increased customer demand for our services, without corresponding revenues, could increase costs and adversely affect our operating results. In addition, our sales process is highly dependent on the reputation of our solutions and business and on positive recommendations from our existing customers. Any failure to maintain high-quality technical support, or a market perception that we do not maintain high-quality support, could adversely affect our reputation, our ability to sell our solutions to existing and prospective customers, and our business and operating results.
Any failure to protect our intellectual property rights could impair our ability to protect our proprietary technology and our brand.
Our success and ability to compete depend in part upon our intellectual property. As of October 31, 2019, we had filed applications for a number of patents, and we have 22 issued U.S., three Japanese, and two Chinese patents. We also rely on copyright, trade secret and trademark laws, trade secret protection and confidentiality or license agreements with our employees, customers, partners and others to protect our intellectual property rights. However, the steps we take to protect our intellectual property rights may be inadequate.
In order to protect our intellectual property rights, we may be required to spend significant resources to monitor and protect these rights. Litigation brought to protect and enforce our intellectual property rights could be costly, time-consuming and distracting to management and could result in the impairment or loss of portions of our intellectual property. Furthermore, our efforts to enforce our intellectual property rights may be met with defenses, counterclaims and countersuits attacking the validity and enforceability of our intellectual property rights. Negative publicity related to a decision by us to initiate such enforcement actions against a customer or former customer, regardless of its accuracy, may adversely impact our other customer relationships or prospective customer relationships, harm our brand and business and could cause the market price of our Class A common stock to decline. Our failure to secure, protect and enforce our intellectual property rights could adversely affect our brand and our business.
Taxing authorities may successfully assert that we should have collected or in the future should collect sales and use, value added or similar transactional taxes, and we could be subject to liability with respect to past or future sales, which could adversely affect our results of operations.
We do not collect sales and use, value added and similar transactional taxes in all jurisdictions in which we have sales and no physical presence, based on our belief that such taxes are not applicable or that we are not required to collect such taxes with respect to the jurisdiction. Sales and use, value added and similar tax laws and rates vary greatly by jurisdiction. Certain jurisdictions in which we do not collect and remit such taxes may assert that such taxes are applicable, which could result in tax assessments, penalties and interest, and we may be required to collect such taxes in the future. The U.S. Supreme Court’s decision in South Dakota v. Wayfair, Inc. may increase that risk by increasing states’ ability to assert taxing jurisdiction on out-of-state retailers. Such tax assessments, penalties and interest or future requirements may adversely affect our results of operations. We believe that our financial statements reflect adequate reserves to cover such a contingency, but there can be no assurances in that regard.
Veeva Systems Inc. | Form 10-Q | 61 |
Unanticipated changes in our effective tax rate and additional tax liabilities, including as a result of our international operations or implementation of new tax rules, could harm our future results.
We are subject to income taxes in the United States and various foreign jurisdictions (including Australia, Belgium, Brazil, Canada, China, France, Germany, Hungary, India, Israel, Italy, Japan, Mexico, Singapore, South Korea, Spain, Switzerland, Thailand, Ukraine, and the United Kingdom) and our domestic and international tax liabilities are subject to the allocation of expenses in differing jurisdictions and complex transfer pricing regulations administered by taxing authorities in various jurisdictions. Tax rates in the jurisdictions in which we operate may change as a result of factors outside of our control or relevant taxing authorities may disagree with our determinations as to the income and expenses attributable to specific jurisdictions. In addition, changes in tax and trade laws, treaties or regulations, or their interpretation or enforcement, have become more unpredictable and may become more stringent, which could materially adversely affect our tax position. Forecasting our estimated annual effective tax rate is complex and subject to uncertainty, and there may be material differences between our forecasted and actual tax rates. Our effective tax rate could be adversely affected by changes in the mix of earnings and losses in countries with differing statutory tax rates, certain non-deductible expenses, the valuation of deferred tax assets and liabilities, adjustments to income taxes upon finalization of tax returns, changes in allowable tax attributes, decision to repatriate non-U.S. earnings for which we have not previously provided for U.S. taxes, and changes in federal, state or international tax laws and accounting principles. Increases in our effective tax rate would reduce our profitability.
Our tax provision could also be impacted by changes in accounting principles and changes in U.S. federal and state or international tax laws applicable to multinational corporations. For example, the Tax Cuts and Jobs Act of 2017 (Tax Act) significantly changes how the U.S. Department of Treasury imposes income taxes on U.S. corporations. We made significant judgments and assumptions in the interpretation of this new law and in our calculations reflected in our financial statements. The U.S. Department of Treasury, the Internal Revenue Service (IRS), and other standard-setting bodies may issue guidance on how the provisions of the Tax Act will be applied or otherwise administered, and additional accounting guidance or interpretations may be issued in the future that is different from our current interpretation. As a further example, the U.S. Supreme Court’s decision in South Dakota v. Wayfair, Inc. increasing states’ ability to assert taxing jurisdiction on out-of-state retailers could result in certain additional jurisdictions asserting that sales and use and other taxes are applicable, which could result in tax assessments, penalties, and interest, and we may be required to collect such taxes in the future.
In addition, other countries are considering fundamental tax law changes. Any changes in taxing jurisdictions' administrative interpretations, decisions, policies, and positions could also impact our tax liabilities. The overall tax environment has made it increasingly challenging for multinational corporations to operate with certainty about taxation in many jurisdictions. The Organization for Economic Co-operation and Development, which represents a coalition of member countries, is supporting changes to numerous long-standing tax rules, including changes to the practice of shifting profits among affiliated entities located in different tax jurisdictions. The increasingly complex global tax environment could have a material adverse effect on our effective tax rate, results of operations, cash flows, and financial condition.
Finally, we have been and may be in the future subject to income tax audits throughout the world. We believe our income, employment and transactional tax liabilities are reasonably estimated and accounted for in accordance with applicable laws and principles, but an adverse resolution of one or more uncertain tax positions in any period could have a material impact on the results of operations for that period.
62 | Veeva Systems Inc. | Form 10-Q |
Our solutions utilize open source software, and any failure to comply with the terms of one or more of these open source licenses could adversely affect our business.
Our solutions include software covered by open source licenses. The terms of various open source licenses have not been interpreted by U.S. courts, and there is a risk that such licenses could be construed in a manner that imposes unanticipated conditions or restrictions on our ability to market our solutions. By the terms of certain open source licenses, we could be required to release the source code of our proprietary software, and to make our proprietary software available under open source licenses, if we combine our proprietary software with open source software in a certain manner. In the event that portions of our proprietary software are determined to be subject to an open source license, we could be required to publicly release the affected portions of our source code, re-engineer all or a portion of our solutions, or otherwise be limited in the licensing of our solutions, each of which could reduce or eliminate the value of our solutions and services. In addition to risks related to license requirements, usage of open source software can lead to greater risks than use of third-party commercial software, as open source licensors generally do not provide warranties or controls on the origin of the software. Many of the risks associated with usage of open source software cannot be eliminated and could adversely affect our business.
Our estimate of the market size for our solutions we have provided publicly may prove to be inaccurate, and even if the market size is accurate, we cannot assure you our business will serve a significant portion of the market.
Our estimate of the market size for our solutions that we have provided publicly, sometimes referred to as total addressable market (TAM), is subject to significant uncertainty and is based on assumptions and estimates, including our internal analysis and industry experience, which may not prove to be accurate. These estimates are, in part, based upon the size of the general application areas in which our solutions are targeted. Our ability to serve a significant portion of this estimated market is subject to many factors, including our success in implementing our business strategy, which is subject to many risks and uncertainties. For example, in order to address the entire TAM we have identified, we must continue to enhance and add functionality to our existing solutions and introduce new solutions. Accordingly, even if our estimate of the market size is accurate, we cannot assure you that our business will serve a significant portion of this estimated market for our solutions.
Currency exchange fluctuations may negatively impact our financial results.
Some of our international agreements provide for payment denominated in local currencies, and the majority of our local costs are denominated in local currencies. As we continue to expand our operations in countries outside the United States, an increasing proportion of our revenues and expenditures in the future may be denominated in foreign currencies. Fluctuations in the value of the U.S. dollar versus foreign currencies may impact our operating results when translated into U.S. dollars. Thus, our results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the Euro, British Pound Sterling, Japanese Yen, and Chinese Yuan, and may be adversely affected in the future due to changes in foreign currency exchange rates. Changes in exchange rates may negatively affect our revenues and other operating results as expressed in U.S. dollars in the future. For example, uncertainty surrounding the effects and timing of Brexit have caused increased variability in the foreign currency exchange rate of British Pound Sterling. Further, we have experienced and will continue to experience fluctuations in our net income as a result of transaction gains or losses related to revaluing certain current asset and current liability balances that are denominated in currencies other than the functional currency of the entities in which they are recorded.
We initiated a program during our fiscal year ended January 31, 2018 to engage in the hedging of our foreign currency transactions and may, in the future, hedge selected significant transactions or net monetary exposure positions denominated in currencies other than the U.S. dollar. The use of such hedging activities may not offset any or more than a portion of the adverse financial effects of unfavorable movements in foreign exchange rates over the limited time the hedges are in place. Moreover, the use of hedging instruments may introduce additional risks if we are unable to structure effective hedges with such instruments.
Veeva Systems Inc. | Form 10-Q | 63 |
If we are unable to implement and maintain effective internal controls over financial reporting, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our Class A common stock could be adversely affected.
As a public company, we are required to maintain internal controls over financial reporting and to report any material weaknesses in such internal controls. Section 404 of the Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley Act) requires that we evaluate and determine the effectiveness of our internal controls over financial reporting and provide a management report on internal controls over financial reporting. The Sarbanes-Oxley Act also requires that our management report on internal controls over financial reporting be attested to by our independent registered public accounting firm.
Many of the internal controls we have implemented pursuant to the Sarbanes-Oxley Act are process controls with respect to which a material weakness may be found whether or not any error has been identified in our reported financial statements. This may be confusing to investors and result in damage to our reputation, which may harm our business. Additionally, the proper design and assessment of internal controls over financial reporting are subject to varying interpretations, and, as a result, application in practice may evolve over time as new guidance is provided by regulatory and governing bodies and as common practices evolve. This could result in continuing uncertainty regarding the proper design and assessment of internal controls over financial reporting and higher costs necessitated by ongoing revisions to internal controls.
We must continue to monitor and assess our internal control over financial reporting. If in the future we have any material weaknesses, we may not detect errors on a timely basis and our financial statements may be materially misstated. Additionally, if in the future we are unable to comply with the requirements of Section 404 of the Sarbanes-Oxley Act in a timely manner, are unable to assert that our internal controls over financial reporting are effective, identify material weaknesses in our internal controls over financial reporting, or if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal controls over financial reporting, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our Class A common stock could be adversely affected, and we could become subject to investigations by the stock exchange on which our securities are listed, the SEC, or other regulatory authorities, which could require additional financial and management resources.
If we fail to develop widespread brand awareness cost-effectively, our business may suffer.
We believe that developing and maintaining widespread awareness of our brand in a cost-effective manner is critical to achieving widespread acceptance of our solutions, attracting new customers, and generating and maintaining profitability. Currently, our brand may be less recognized by the key decision makers at the potential customers for our newer solutions, and our solutions for companies in industries other than life sciences. Brand promotion activities may not generate customer awareness or increase revenues, and even if they do, any increase in revenues may not offset the expenses we incur in building our brand. If we fail to successfully promote and maintain our brand, or incur substantial expenses attempting to promote and maintain our brand, we may fail to attract or retain customers necessary to realize a sufficient return on our brand-building efforts or to achieve the widespread brand awareness that is critical for broad customer adoption of our solutions.
If the demand for cloud-based solutions declines, particularly in the life sciences industry, our revenues could decrease and our business could be adversely affected.
The continued expansion of cloud-based solutions, particularly in the life sciences industry, depends on a number of factors, including the cost, performance and perceived value associated with cloud-based solutions, as well as the ability of providers of cloud-based solutions to address and maintain security, privacy and unique regulatory requirements or concerns. If we or other cloud-based solution providers experience security incidents, loss of customer data, disruptions in delivery or other problems, the market for cloud-based solutions in the life sciences industry, including our solutions, may be adversely affected. If cloud-based solutions do not continue to achieve more widespread adoption in the life sciences industry, or there is a reduction in demand for cloud-based solutions, our revenues could decrease and our business could be adversely affected.
64 | Veeva Systems Inc. | Form 10-Q |
Risks Related to Our Class A Common Stock
Our Class A common stock price has been and will likely continue to be volatile.
The trading price of our Class A common stock has been and will likely continue to be volatile for the foreseeable future. In addition, the trading prices of the securities of technology companies have been highly volatile. Accordingly, the market price of our Class A common stock is likely to be subject to wide fluctuations in response to numerous factors, many of which are beyond our control. In addition to those risks described in this “Risk Factors” section, other factors could impact the value of our common stock, including:
• | fluctuations in the valuation of companies perceived by investors to be comparable to us, such as high-growth or cloud companies, or in valuation metrics, such as our price to revenues ratio; |
• | overall performance of the stock market; |
• | changes in our financial, operating or other metrics, regardless of whether we consider those metrics as reflective of the current state or long-term prospects of our business, and how those results compare to securities analyst expectations, including whether those results fail to meet, exceed, or significantly exceed securities analyst expectations; |
• | changes in the forward-looking estimates of our financial, operating, or other metrics, how those estimates compare to securities analyst expectations, or changes in recommendations by securities analysts that follow our Class A common stock; |
• | announcements of customer additions and customer cancellations or delays in customer purchases; |
• | the net increase in the number of customers, either independently or as compared to published expectations of industry, financial or other analysts that cover us; |
• | announcements by us or by our competitors of technological innovations, new solutions, enhancements to services, strategic alliances or significant agreements; |
• | announcements by us or by our competitors of mergers or other strategic acquisitions or rumors of such transactions involving us or our competitors; |
• | the economy as a whole and market conditions within our industry and the industries of our customers; |
• | macroeconomic and geopolitical factors and instability and volatility in the global financial markets, including uncertainty surrounding the effects and timing of Brexit; |
• | trading activity by directors, executive officers and significant stockholders, or the perception in the market that the holders of a large number of shares intend to sell their shares; |
• | the operating performance and market value of other comparable companies; |
• | changes in legislation relating to our existing or future solutions; |
• | securities or industry analysts downgrading our Class A common stock or publishing inaccurate or unfavorable research about our business; and |
• | any other factors discussed herein. |
In addition, if the market for technology stocks or the stock market in general experiences uneven investor confidence, the market price of our Class A common stock could decline for reasons unrelated to our business, operating results or financial condition. The market price of our Class A common stock might also decline in reaction to events that affect other companies within, or outside, our industry even if these events do not directly affect us. Some companies that have experienced volatility in the trading price of their stock have been the subject of securities class action litigation. If we are the subject of such litigation, it could result in substantial costs and a diversion of our management’s attention and resources.
Veeva Systems Inc. | Form 10-Q | 65 |
The dual class structure of our common stock has the effect of concentrating voting control with certain individuals and their affiliates, which will limit or preclude the ability of our investors to influence corporate matters and could depress the market value of our Class A common stock.
Our Class B common stock has ten votes per share, and our Class A common stock has one vote per share. As of October 31, 2019, stockholders who hold shares of Class B common stock, including our executive officers and directors and their affiliates, together hold approximately 55.4% of the voting power of our outstanding capital stock. Because of the ten-to-one voting ratio between our Class B common stock and Class A common stock, the holders of our Class B common stock collectively control a substantial majority of the combined voting power of our common stock and, assuming no material sales of such shares, will be able to control all matters submitted to our stockholders for approval until October 15, 2023, including the election of directors, amendments of our organizational documents and any merger, consolidation, sale of all or substantially all of our assets or other major corporate transaction. This concentrated control will limit or preclude our investors’ ability to influence corporate matters for the foreseeable future. In addition, this may prevent or discourage unsolicited acquisition proposals or offers for our capital stock or may adversely affect the market price of our Class A common stock.
Future transfers by holders of Class B common stock will generally result in those shares converting to Class A common stock, subject to limited exceptions, such as certain transfers effected for estate planning purposes. The conversion of Class B common stock to Class A common stock will have the effect, over time, of increasing the relative voting power of those holders of Class B common stock who retain their shares in the long term. If, for example, our executive officers (including our Chief Executive Officer), employees, directors and their affiliates retain a significant portion of their holdings of Class B common stock for an extended period of time, they could, in the future, continue to control a majority of the combined voting power of our Class A common stock and Class B common stock.
In addition, S&P Dow Jones and FTSE Russell have announced changes to their eligibility criteria for inclusion of shares of public companies with multiple classes of stock on certain indices, including the S&P 500. While this has not affected the inclusion of Veeva’s Class A common stock in these indices to date, eligibility criteria of these indices and others may change in the future. In addition, several shareholder advisory firms have announced their opposition to the use of multiple class structures. As a result, the dual class structure of our common stock may prevent the inclusion of our Class A common stock in such indices and may cause shareholder advisory firms to publish negative commentary about our corporate governance practices or otherwise seek to cause us to change our capital structure. Any such exclusion from indices could result in a less active trading market for our Class A common stock. Any actions or publications by shareholder advisory firms critical of our corporate governance practices or capital structure could also adversely affect the value of our Class A common stock.
We have broad discretion in the use of our cash balances and may not use them effectively.
We have broad discretion in the use of our cash balances and may not use them effectively. The failure by our management to apply these funds effectively could adversely affect our business and financial condition. Pending their use, we may invest our cash balances in a manner that does not produce income or that loses value. Our investments may not yield a favorable return to our investors and may negatively impact the price of our Class A common stock.
We do not intend to pay dividends on our capital stock for the foreseeable future, so any returns will be limited to changes in the value of our Class A common stock.
We have never declared or paid any cash dividends on our capital stock. We currently anticipate that we will retain future earnings for the development, operation and expansion of our business and do not anticipate declaring or paying any cash dividends for the foreseeable future. In addition, our ability to pay cash dividends on our capital stock may be prohibited or limited by the terms of any future debt financing arrangement. Any return to stockholders will therefore be limited to the increase, if any, of the price of our Class A common stock.
66 | Veeva Systems Inc. | Form 10-Q |
Future sales and issuances of our common stock or rights to purchase common stock, including pursuant to our equity incentive plans, could result in additional dilution of the percentage ownership of our stockholders and could cause the stock price of our Class A common stock to decline.
In the future, we may sell common stock, convertible securities or other equity securities in one or more transactions at prices and in a manner we determine from time to time. We expect to issue securities to employees and directors pursuant to our equity incentive plans. If we sell common stock, convertible securities or other equity securities in subsequent transactions, or common stock is issued pursuant to equity incentive plans, our investors may be materially diluted. New investors in such subsequent transactions could gain rights, preferences and privileges senior to those of holders of our common stock, including our Class A common.
Sales of a substantial number of shares of our common stock in the public market, or the perception that they might occur, could cause the price of our Class A common stock to decline.
Sales of a substantial number of shares of our Class A common stock in the public market, or the perception that these sales might occur, could cause the market price of our Class A common stock to decline or make it more difficult for you to sell your common stock at a time and price that you deem appropriate and could impair our ability to raise capital through the sale of additional equity securities. We are unable to predict the effect that sales, or the perception that our shares may be available for sale, will have on the prevailing market price of our Class A common stock.
In addition, as of January 31, 2019, we had options outstanding that, if exercised, would result in the issuance of additional shares of Class A or Class B common stock. Our Class B common stock converts into Class A common stock on a one-for-one basis. As of January 31, 2019, we had restricted stock units outstanding which may vest in the future and result in the issuance of additional shares of Class A common stock. Our unexercised stock options and unvested restricted stock units, as of January 31, 2019, are described in note 11 of the notes to our condensed consolidated financial statements. All of the shares of Class A common stock issuable upon the exercise of options (or upon conversion of shares of Class B common stock issued upon the exercise of options) or upon the vesting of restricted stock units have been registered for public resale under the Securities Act of 1933, as amended, or the Securities Act. Accordingly, these shares will be able to be freely sold in the public market upon issuance as permitted by any applicable vesting requirements.
Provisions in our restated certificate of incorporation and amended and restated bylaws and Delaware law might discourage, delay or prevent a change in control of our company or changes in our management and, therefore, depress the market price of our Class A common stock.
Our restated certificate of incorporation and amended and restated bylaws contain provisions that could depress the market price of our Class A common stock by acting to discourage, delay or prevent a change in control of our company or changes in our management that the stockholders of our company may deem advantageous. These provisions among other things:
• | establish a classified board of directors so that not all members of our board are elected at one time; |
• | provide for a dual class common stock structure, which gives our Chief Executive Officer, directors, executive officers, greater than 5% stockholders and their respective affiliates the ability to control the outcome of all matters requiring stockholder approval, even if they own significantly less than a majority of the shares of our outstanding Class A and Class B common stock; |
• | permit the board of directors to establish the number of directors; |
• | provide that directors may only be removed “for cause” and only with the approval of 66 2/3% of our stockholders; |
• | require super-majority voting to amend some provisions in our restated certificate of incorporation and amended and restated bylaws; |
• | authorize the issuance of “blank check” preferred stock that our board of directors could use to implement a stockholder rights plan; |
• | eliminate the ability of our stockholders to call special meetings of stockholders; |
• | prohibit stockholder action by written consent, which requires all stockholder actions to be taken at a meeting of our stockholders; |
Veeva Systems Inc. | Form 10-Q | 67 |
• | provide that the board of directors is expressly authorized to make, alter or repeal our amended and restated bylaws; and |
• | establish advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted upon by stockholders at annual stockholder meetings. |
In addition, Section 203 of the Delaware General Corporation Law may discourage, delay or prevent a change in control of our company. Section 203 imposes certain restrictions on merger, business combinations and other transactions between us and holders of 15% or more of our common stock.
Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware is the exclusive forum for substantially all disputes between us and our stockholders, which could limit our stockholders' ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.
Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware is the exclusive forum for any derivative action or proceeding brought on our behalf, any action asserting a breach of fiduciary duty, any action asserting a claim against us arising pursuant to the Delaware General Corporation Law or any action asserting a claim against us that is governed by the internal affairs doctrine. This choice of forum provision may limit a stockholder's ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees and may discourage these types of lawsuits. Alternatively, if a court were to find the choice of forum provision contained in our certificate of incorporation to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could harm our business, operating results, and financial condition.
68 | Veeva Systems Inc. | Form 10-Q |
ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. |
a) | Sales of Unregistered Securities |
None.
b) | Use of Proceeds from Public Offerings of Common Stock |
None.
c) | Purchases of Equity Securities by the Issuer and Affiliated Purchasers |
None.
ITEM 3. | DEFAULTS UPON SENIOR SECURITIES. |
None.
ITEM 4. | MINE SAFETY DISCLOSURES. |
Not applicable.
ITEM 5. | OTHER INFORMATION. |
None.
Veeva Systems Inc. | Form 10-Q | 69 |
ITEM 6. | EXHIBITS. |
Exhibits
Exhibit Number | Exhibit Description | Incorporated by Reference | ||||||||
Form | File No. | Exhibit | Filing Date | |||||||
2.1 | 8-K | 001-36121 | 2.1 | 9/26/2019 | ||||||
3.1 | 8-K | 001-36121 | 3.1 | 10/22/2013 | ||||||
3.2 | S-1/A | 333-191085 | 3.4 | 10/3/2013 | ||||||
31.1 | ||||||||||
31.2 | ||||||||||
32.1† | ||||||||||
32.2† | ||||||||||
101.INS | XBRL Instance Document. | |||||||||
101.SCH | XBRL Taxonomy Schema Linkbase Document. | |||||||||
101.CAL | XBRL Taxonomy Calculation Linkbase Document. | |||||||||
101.DEF | XBRL Taxonomy Definition Linkbase Document. | |||||||||
101.LAB | XBRL Taxonomy Labels Linkbase Document. | |||||||||
101.PRE | XBRL Taxonomy Presentation Linkbase Document. | |||||||||
104 | 104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). | |||||||||
† | The certifications attached as Exhibit 32.1 and 32.2 that accompany this Quarterly Report on Form 10-Q are not deemed filed with the Securities and Exchange Commission and are not to be incorporated by reference into any filing of Veeva Systems Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Quarterly Report on Form 10-Q, irrespective of any general incorporation language contained in such filing. |
70 | Veeva Systems Inc. | Form 10-Q |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
Veeva Systems Inc. | |
By: | /s/ TIMOTHY S. CABRAL |
Timothy S. Cabral Chief Financial Officer (Principal Financial Officer) | |
Dated: December 5, 2019
By: | /s/ MICHELE O’CONNOR |
Michele O’Connor Chief Accounting Officer (Principal Accounting Officer) | |
Dated: December 5, 2019
Veeva Systems Inc. | Form 10-Q | 71 |