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, 2022
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 ☒
As of November 30, 2022, there were 140,923,128 shares of the Registrant’s Class A common stock outstanding and 14,765,331 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 on Form 10-Q 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 are based on our current views and expectations and involve known and unknown risks, uncertainties and other factors—including those described in “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and elsewhere in this report—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. Given these uncertainties, you should not place undue reliance on these forward-looking statements.
Any forward-looking statements in this report are made only as of the date of this report. 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,” “Registrant,” “the Company,” “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)
(Unaudited)
| October 31, 2022 | January 31, 2022 | ||||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 865,159 | $ | 1,138,040 | |||||||
| Short-term investments | 2,157,396 | 1,238,064 | |||||||||
Accounts receivable, net of allowance for doubtful accounts of $1,442 and $473, respectively | 242,859 | 631,134 | |||||||||
| Unbilled accounts receivable | 82,085 | 63,266 | |||||||||
| Prepaid expenses and other current assets | 38,986 | 36,679 | |||||||||
| Total current assets | 3,386,485 | 3,107,183 | |||||||||
| Property and equipment, net | 51,135 | 54,495 | |||||||||
| Deferred costs, net | 27,875 | 33,106 | |||||||||
| Lease right-of-use assets | 57,249 | 49,640 | |||||||||
| Goodwill | 439,877 | 439,877 | |||||||||
| Intangible assets, net | 87,382 | 101,940 | |||||||||
| Deferred income taxes | 98,573 | 5,097 | |||||||||
| Other long-term assets | 34,141 | 25,127 | |||||||||
| Total assets | $ | 4,182,717 | $ | 3,816,465 | |||||||
| Liabilities and stockholders’ equity | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | 40,926 | $ | 20,348 | |||||||
| Accrued compensation and benefits | 40,265 | 33,834 | |||||||||
| Accrued expenses and other current liabilities | 32,860 | 36,109 | |||||||||
| Income tax payable | 54,466 | 7,761 | |||||||||
| Deferred revenue | 510,098 | 731,746 | |||||||||
| Lease liabilities | 11,665 | 10,981 | |||||||||
| Total current liabilities | 690,280 | 840,779 | |||||||||
| Deferred income taxes | 1,546 | 2,216 | |||||||||
| Lease liabilities, noncurrent | 50,225 | 43,607 | |||||||||
| Other long-term liabilities | 21,874 | 18,226 | |||||||||
| Total liabilities | 763,925 | 904,828 | |||||||||
| Stockholders’ equity: | |||||||||||
Class A common stock, $0.00001 par value; 800,000,000 shares authorized, 140,866,593 and 139,432,822 issued and outstanding at October 31, 2022 and January 31, 2022, respectively | 2 | 2 | |||||||||
Class B common stock, $0.00001 par value; 190,000,000 shares authorized, 14,765,431 and 14,763,775 issued and outstanding at October 31, 2022 and January 31, 2022, respectively | — | — | |||||||||
| Additional paid-in capital | 1,438,213 | 1,196,547 | |||||||||
| Accumulated other comprehensive loss | (45,642) | (11,958) | |||||||||
| Retained earnings | 2,026,219 | 1,727,046 | |||||||||
| Total stockholders’ equity | 3,418,792 | 2,911,637 | |||||||||
| Total liabilities and stockholders’ equity | $ | 4,182,717 | $ | 3,816,465 | |||||||
See Notes to Condensed Consolidated Financial Statements.
4 | Veeva Systems Inc. | Form 10-Q | ||||
VEEVA SYSTEMS INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands, except per share data)
(Unaudited)
| Three months ended October 31, | Nine months ended October 31, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Revenues: | |||||||||||||||||||||||
| Subscription services | $ | 441,569 | $ | 380,738 | $ | 1,272,850 | $ | 1,088,293 | |||||||||||||||
| Professional services and other | 110,782 | 95,373 | 318,821 | 276,985 | |||||||||||||||||||
| Total revenues | 552,351 | 476,111 | 1,591,671 | 1,365,278 | |||||||||||||||||||
Cost of revenues(1): | |||||||||||||||||||||||
| Cost of subscription services | 65,734 | 59,648 | 188,722 | 164,774 | |||||||||||||||||||
| Cost of professional services and other | 88,173 | 69,916 | 256,369 | 203,023 | |||||||||||||||||||
| Total cost of revenues | 153,907 | 129,564 | 445,091 | 367,797 | |||||||||||||||||||
| Gross profit | 398,444 | 346,547 | 1,146,580 | 997,481 | |||||||||||||||||||
Operating expenses(1): | |||||||||||||||||||||||
| Research and development | 130,257 | 98,635 | 377,740 | 276,760 | |||||||||||||||||||
| Sales and marketing | 93,910 | 72,423 | 259,642 | 208,822 | |||||||||||||||||||
| General and administrative | 52,873 | 42,781 | 159,030 | 126,121 | |||||||||||||||||||
| Total operating expenses | 277,040 | 213,839 | 796,412 | 611,703 | |||||||||||||||||||
| Operating income | 121,404 | 132,708 | 350,168 | 385,778 | |||||||||||||||||||
| Other income, net | 12,458 | 824 | 23,565 | 7,054 | |||||||||||||||||||
| Income before income taxes | 133,862 | 133,532 | 373,733 | 392,832 | |||||||||||||||||||
| Provision for income taxes | 25,405 | 27,663 | 74,560 | 62,538 | |||||||||||||||||||
| Net income | $ | 108,457 | $ | 105,869 | $ | 299,173 | $ | 330,294 | |||||||||||||||
| Net income per share: | |||||||||||||||||||||||
| Basic | $ | 0.70 | $ | 0.69 | $ | 1.93 | $ | 2.16 | |||||||||||||||
| Diluted | $ | 0.67 | $ | 0.65 | $ | 1.84 | $ | 2.03 | |||||||||||||||
| Weighted-average shares used to compute net income per share: | |||||||||||||||||||||||
| Basic | 155,392 | 153,514 | 154,958 | 153,020 | |||||||||||||||||||
| Diluted | 162,295 | 163,034 | 162,189 | 162,663 | |||||||||||||||||||
| Other comprehensive income: | |||||||||||||||||||||||
| Net change in unrealized loss on available-for-sale investments | $ | (17,499) | $ | (2,741) | $ | (30,722) | $ | (4,044) | |||||||||||||||
| Net change in cumulative foreign currency translation loss | (808) | (308) | (2,962) | (2,686) | |||||||||||||||||||
| Comprehensive income | $ | 90,150 | $ | 102,820 | $ | 265,489 | $ | 323,564 | |||||||||||||||
| (1) Includes stock-based compensation as follows: | |||||||||||||||||||||||
| Cost of revenues: | |||||||||||||||||||||||
| Cost of subscription services | $ | 1,636 | $ | 1,292 | $ | 4,606 | $ | 3,514 | |||||||||||||||
| Cost of professional services and other | 13,227 | 9,616 | 37,035 | 26,579 | |||||||||||||||||||
| Research and development | 37,415 | 22,311 | 102,139 | 61,463 | |||||||||||||||||||
| Sales and marketing | 23,576 | 15,102 | 64,500 | 41,772 | |||||||||||||||||||
| General and administrative | 17,333 | 13,724 | 48,083 | 39,591 | |||||||||||||||||||
| Total stock-based compensation | $ | 93,187 | $ | 62,045 | $ | 256,363 | $ | 172,919 | |||||||||||||||
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)
(Unaudited)
| Three months ended October 31, 2022 | Three months ended October 31, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Class A & B common stock | Additional paid-in capital | Retained earnings | Accumulated other comprehensive loss | Total stockholders’ equity | Class A & B common stock | Additional paid-in capital | Retained earnings | Accumulated other comprehensive loss | Total stockholders’ equity | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balances at beginning of period | 155,224,674 | $ | 2 | $ | 1,353,502 | $ | 1,917,762 | $ | (27,335) | $ | 3,243,931 | 153,358,259 | $ | 2 | $ | 1,098,703 | $ | 1,524,081 | $ | (2,689) | $ | 2,620,097 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock upon exercise of stock options | 233,435 | — | 4,575 | — | — | 4,575 | 185,148 | — | 5,368 | — | — | 5,368 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock upon vesting of restricted stock units | 263,447 | — | — | — | — | — | 197,998 | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares withheld related to net share settlement | (89,532) | — | (15,481) | — | — | (15,481) | (68,987) | — | (21,239) | — | — | (21,239) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | 95,617 | — | — | 95,617 | — | — | 62,315 | — | — | 62,315 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Change in other comprehensive loss | — | — | — | — | (18,307) | (18,307) | — | — | — | — | (3,049) | (3,049) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | 108,457 | — | 108,457 | — | — | — | 105,869 | — | 105,869 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balances at end of period | 155,632,024 | $ | 2 | $ | 1,438,213 | $ | 2,026,219 | $ | (45,642) | $ | 3,418,792 | 153,672,418 | $ | 2 | $ | 1,145,147 | $ | 1,629,950 | $ | (5,738) | $ | 2,769,361 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Nine months ended October 31, 2022 | Nine months ended October 31, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Class A & B common stock | Additional paid-in capital | Retained earnings | Accumulated other comprehensive loss | Total stockholders’ equity | Class A & B common stock | Additional paid-in capital | Retained earnings | Accumulated other comprehensive income (loss) | Total stockholders’ equity | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balances at beginning of period | 154,196,597 | $ | 2 | $ | 1,196,547 | $ | 1,727,046 | $ | (11,958) | $ | 2,911,637 | 152,056,808 | $ | 2 | $ | 965,670 | $ | 1,299,656 | $ | 992 | $ | 2,266,320 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock upon exercise of stock options | 978,792 | — | 30,116 | — | — | 30,116 | 1,074,939 | — | 43,310 | — | — | 43,310 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock upon vesting of restricted stock units | 702,297 | — | — | — | — | — | 663,283 | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares withheld related to net share settlement | (245,662) | — | (48,152) | — | — | (48,152) | (122,612) | — | (37,624) | — | — | (37,624) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | 259,702 | — | — | 259,702 | — | — | 173,791 | — | — | 173,791 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Change in other comprehensive loss | — | — | — | — | (33,684) | (33,684) | — | — | — | — | (6,730) | (6,730) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | 299,173 | — | 299,173 | — | — | — | 330,294 | — | 330,294 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balances at end of period | 155,632,024 | $ | 2 | $ | 1,438,213 | $ | 2,026,219 | $ | (45,642) | $ | 3,418,792 | 153,672,418 | $ | 2 | $ | 1,145,147 | $ | 1,629,950 | $ | (5,738) | $ | 2,769,361 | |||||||||||||||||||||||||||||||||||||||||||||||||
See Notes to Condensed Consolidated Financial Statements.
6 | Veeva Systems Inc. | Form 10-Q | ||||
VEEVA SYSTEMS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
| Three months ended October 31, | Nine months ended October 31, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Cash flows from operating activities | |||||||||||||||||||||||
| Net income | $ | 108,457 | $ | 105,869 | $ | 299,173 | $ | 330,294 | |||||||||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||||||||||||||
| Depreciation and amortization | 7,157 | 6,899 | 21,443 | 20,407 | |||||||||||||||||||
| Reduction of operating lease right-of-use assets | 3,094 | 2,855 | 9,062 | 8,556 | |||||||||||||||||||
| (Accretion) amortization of discount on short-term investments | (1,565) | 1,574 | (1,016) | 4,859 | |||||||||||||||||||
| Stock-based compensation | 93,187 | 62,045 | 256,363 | 172,919 | |||||||||||||||||||
| Amortization of deferred costs | 5,378 | 6,597 | 17,107 | 19,426 | |||||||||||||||||||
| Deferred income taxes | (31,056) | (2,021) | (84,369) | 10,174 | |||||||||||||||||||
| Loss (gain) on foreign currency from mark-to-market derivative | 7 | (65) | 1,193 | 368 | |||||||||||||||||||
| Bad debt expense | 1,089 | 58 | 1,210 | 195 | |||||||||||||||||||
| Changes in operating assets and liabilities: | |||||||||||||||||||||||
| Accounts receivable | 69,272 | 72,147 | 387,066 | 352,470 | |||||||||||||||||||
| Unbilled accounts receivable | (4,307) | (16,870) | (18,819) | (20,764) | |||||||||||||||||||
| Deferred costs | (5,376) | (3,353) | (11,876) | (11,445) | |||||||||||||||||||
| Prepaid expenses and other current and long-term assets | 7,326 | 4,407 | (3,750) | 3,278 | |||||||||||||||||||
| Accounts payable | 10,002 | 4,028 | 20,663 | 2,265 | |||||||||||||||||||
| Accrued expenses and other current liabilities | 5,465 | (537) | 2,654 | 8,646 | |||||||||||||||||||
| Income taxes payable | 49,323 | 12,010 | 46,705 | 11,993 | |||||||||||||||||||
| Deferred revenue | (174,544) | (141,083) | (222,013) | (199,042) | |||||||||||||||||||
| Operating lease liabilities | (2,624) | (2,941) | (7,736) | (8,602) | |||||||||||||||||||
| Other long-term liabilities | 2,375 | 1,340 | 4,013 | 4,412 | |||||||||||||||||||
| Net cash provided by operating activities | 142,660 | 112,959 | 717,073 | 710,409 | |||||||||||||||||||
| Cash flows from investing activities | |||||||||||||||||||||||
| Purchases of short-term investments | (710,833) | (256,008) | (1,716,250) | (935,626) | |||||||||||||||||||
| Maturities and sales of short-term investments | 310,713 | 248,093 | 757,434 | 657,062 | |||||||||||||||||||
| Acquisitions, net of cash acquired | — | — | — | (2,133) | |||||||||||||||||||
| Long-term assets | (5,609) | (2,314) | (9,605) | (10,295) | |||||||||||||||||||
| Net cash used in investing activities | (405,729) | (10,229) | (968,421) | (290,992) | |||||||||||||||||||
| Cash flows from financing activities | |||||||||||||||||||||||
| Changes in lease liabilities - finance leases | — | — | — | (384) | |||||||||||||||||||
| Proceeds from exercise of common stock options | 4,575 | 5,368 | 30,116 | 43,310 | |||||||||||||||||||
| Taxes paid related to net share settlement of equity awards | (15,118) | (21,414) | (47,251) | (36,510) | |||||||||||||||||||
| Net cash (used in) provided by financing activities | (10,543) | (16,046) | (17,135) | 6,416 | |||||||||||||||||||
| Effect of exchange rate changes on cash, cash equivalents, and restricted cash | (1,475) | (1,469) | (4,398) | (4,414) | |||||||||||||||||||
| Net change in cash, cash equivalents, and restricted cash | (275,087) | 85,215 | (272,881) | 421,419 | |||||||||||||||||||
| Cash, cash equivalents, and restricted cash at beginning of period | 1,143,431 | 1,067,916 | 1,141,225 | 731,712 | |||||||||||||||||||
| Cash, cash equivalents, and restricted cash at end of period | $ | 868,344 | $ | 1,153,131 | $ | 868,344 | $ | 1,153,131 | |||||||||||||||
| Cash, cash equivalents, and restricted cash at end of period: | |||||||||||||||||||||||
| Cash and cash equivalents | $ | 865,159 | $ | 1,149,946 | $ | 865,159 | $ | 1,149,946 | |||||||||||||||
| Restricted cash included in other long-term assets | 3,185 | 3,185 | 3,185 | 3,185 | |||||||||||||||||||
| Total cash, cash equivalents, and restricted cash at end of period | $ | 868,344 | $ | 1,153,131 | $ | 868,344 | $ | 1,153,131 | |||||||||||||||
| Supplemental disclosures of other cash flow information: | |||||||||||||||||||||||
| Cash paid for income taxes, net of refunds | $ | 2,936 | $ | 14,167 | $ | 110,708 | $ | 34,668 | |||||||||||||||
| Excess tax benefits from employee stock plans | $ | 888 | $ | 10,404 | $ | 5,981 | $ | 45,464 | |||||||||||||||
| Non-cash investing activities: | |||||||||||||||||||||||
| Changes in accounts payable and accrued expenses related to property and equipment purchases | $ | (17) | $ | (223) | $ | (458) | $ | (2,024) | |||||||||||||||
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 offerings span cloud software, data, analytics, professional services, and business consulting and are designed to meet the unique needs of our customers and their most strategic business functions—from research and development (R&D) to commercialization. Our solutions help life sciences companies develop and bring products to market faster and more efficiently, market and sell more effectively, and maintain compliance with government regulations. Our Commercial Solutions help life sciences companies achieve better, more intelligent engagement with healthcare professionals and healthcare organizations across multiple communication channels, and plan and execute more effective media and marketing campaigns. Our R&D Solutions for the clinical, quality, regulatory, and safety functions help life sciences companies streamline their end-to-end product development processes to increase operational efficiency and maintain regulatory compliance throughout the product life cycle. We also bring the benefits of our content and data management solutions to a set of customers outside of life sciences in the consumer product and chemical industries. 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, 2022, filed on March 30, 2022. 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 unaudited condensed consolidated balance sheet as of January 31, 2022 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, 2023 or any other period.
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 determination of the period of benefit for amortization of deferred costs;
•the realizability of deferred income tax assets;
•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 | ||||
Note 2. Short-Term Investments
At October 31, 2022, 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 | $ | 68,951 | $ | — | $ | (233) | $ | 68,718 | |||||||||||||||
| Asset-backed securities | 425,183 | 2 | (8,584) | 416,601 | |||||||||||||||||||
| Commercial paper | 147,822 | — | (1,207) | 146,615 | |||||||||||||||||||
| Corporate notes and bonds | 1,123,950 | 51 | (28,601) | 1,095,400 | |||||||||||||||||||
| Foreign government bonds | 25,714 | 1 | (691) | 25,024 | |||||||||||||||||||
| U.S. agency obligations | 32,992 | 5 | (837) | 32,160 | |||||||||||||||||||
| U.S. treasury securities | 382,388 | — | (9,510) | 372,878 | |||||||||||||||||||
| Total available-for-sale securities | $ | 2,207,000 | $ | 59 | $ | (49,663) | $ | 2,157,396 | |||||||||||||||
At January 31, 2022, 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 | $ | 13,500 | $ | — | $ | (15) | $ | 13,485 | |||||||||||||||
| Asset-backed securities | 191,676 | 45 | (1,432) | 190,289 | |||||||||||||||||||
| Commercial paper | 29,432 | — | (2) | 29,430 | |||||||||||||||||||
| Corporate notes and bonds | 669,489 | 276 | (5,856) | 663,909 | |||||||||||||||||||
| Foreign government bonds | 24,577 | 13 | (179) | 24,411 | |||||||||||||||||||
| U.S. agency obligations | 27,978 | 12 | (254) | 27,736 | |||||||||||||||||||
| U.S. treasury securities | 290,513 | 46 | (1,755) | 288,804 | |||||||||||||||||||
| Total available-for-sale securities | $ | 1,247,165 | $ | 392 | $ | (9,493) | $ | 1,238,064 | |||||||||||||||
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, 2022 | January 31, 2022 | ||||||||||
| Due in one year or less | $ | 874,735 | $ | 457,948 | |||||||
| Due in greater than one year | 1,282,661 | 780,116 | |||||||||
| Total | $ | 2,157,396 | $ | 1,238,064 | |||||||
We have not recorded an allowance for credit losses, as we believe any such losses would be immaterial based on the high credit quality of our investments. We intend to hold our securities to maturity and it is more likely than not that we will hold these securities until recovery of the cost basis.
| Veeva Systems Inc. | Form 10-Q | 9 | ||||
The following table shows the fair values of available-for-sale securities which were in an unrealized loss position, aggregated by investment category, as of October 31, 2022 (in thousands):
| Less than 12 months | 12 months or greater | ||||||||||||||||||||||
| Fair value | Gross unrealized losses | Fair value | Gross unrealized losses | ||||||||||||||||||||
| Certificates of deposits | $ | 63,717 | $ | (233) | $ | — | $ | — | |||||||||||||||
| Asset-backed securities | 335,172 | (5,905) | 67,697 | (2,679) | |||||||||||||||||||
| Commercial paper | 146,615 | (1,207) | — | — | |||||||||||||||||||
| Corporate notes and bonds | 809,703 | (17,598) | 258,113 | (11,003) | |||||||||||||||||||
| Foreign government bonds | 11,222 | (186) | 11,711 | (505) | |||||||||||||||||||
| U.S. agency obligations | 11,931 | (266) | 17,223 | (571) | |||||||||||||||||||
| U.S. treasury securities | 277,077 | (6,320) | 95,803 | (3,190) | |||||||||||||||||||
The following table shows the fair values of available-for-sale securities which were in an unrealized loss position, aggregated by investment category, as of January 31, 2022 (in thousands):
| Less than 12 months | |||||||||||
Fair value | Gross unrealized losses | ||||||||||
| Certificates of deposits | $ | 5,985 | $ | (15) | |||||||
| Asset-backed securities | 177,056 | (1,432) | |||||||||
| Commercial paper | 17,190 | (2) | |||||||||
| Corporate notes and bonds | 571,099 | (5,856) | |||||||||
| Foreign government bonds | 19,594 | (179) | |||||||||
| U.S. agency obligations | 24,725 | (254) | |||||||||
| U.S. treasury securities | 247,509 | (1,756) | |||||||||
Gross unrealized losses of available-for-sale securities held for more than 12 months as of January 31, 2022 were immaterial.
Note 3. Deferred Costs
Deferred costs, which consist of deferred sales commissions, were $28 million and $33 million as of October 31, 2022 and January 31, 2022, respectively. Amortization expense for the deferred costs included in sales and marketing expenses in the condensed consolidated statements of comprehensive income was $5 million and $17 million for the three and nine months ended October 31, 2022, respectively, and $7 million and $19 million for the three and nine months ended October 31, 2021, 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, 2022 | January 31, 2022 | ||||||||||
| Land | $ | 3,040 | $ | 3,040 | |||||||
| Building | 20,984 | 20,984 | |||||||||
| Land improvements and building improvements | 22,392 | 22,392 | |||||||||
| Equipment and computers | 2,125 | 3,581 | |||||||||
| Furniture and fixtures | 14,674 | 15,040 | |||||||||
| Leasehold improvements | 19,200 | 19,002 | |||||||||
| Construction in progress | 130 | 730 | |||||||||
| 82,545 | 84,769 | ||||||||||
| Less accumulated depreciation | (31,410) | (30,274) | |||||||||
| Total property and equipment, net | $ | 51,135 | $ | 54,495 | |||||||
10 | Veeva Systems Inc. | Form 10-Q | ||||
Total depreciation expense was $1 million and $5 million for the three and nine months ended October 31, 2022, respectively, and $2 million and $5 million for the three and nine months ended October 31, 2021, respectively. Land is not depreciated.
Note 5. Goodwill and Intangible Assets
Goodwill was $440 million as of October 31, 2022 and January 31, 2022.
The following schedule presents the details of intangible assets as of October 31, 2022 (dollar amounts in thousands):
| October 31, 2022 | |||||||||||||||||||||||
Gross carrying amount | Accumulated amortization | Net | Remaining useful life (in years) | ||||||||||||||||||||
| Existing technology | $ | 28,580 | $ | (15,351) | $ | 13,229 | 3.2 | ||||||||||||||||
| Customer relationships | 113,157 | (47,404) | 65,753 | 6.3 | |||||||||||||||||||
| Trade name/trademarks | 13,900 | (8,620) | 5,280 | 2.0 | |||||||||||||||||||
| Other intangibles | 21,405 | (18,285) | 3,120 | 3.2 | |||||||||||||||||||
| $ | 177,042 | $ | (89,660) | $ | 87,382 | ||||||||||||||||||
The following schedule presents the details of intangible assets as of January 31, 2022 (dollar amounts in thousands):
| January 31, 2022 | |||||||||||||||||||||||
| Gross carrying amount | Accumulated amortization | Net | Remaining useful life (in years) | ||||||||||||||||||||
| Existing technology | $ | 28,580 | $ | (12,187) | $ | 16,393 | 3.9 | ||||||||||||||||
| Customer relationships | 113,157 | (38,829) | 74,328 | 7.0 | |||||||||||||||||||
| Trade name/trademarks | 13,900 | (6,645) | 7,255 | 2.8 | |||||||||||||||||||
| Other intangibles | 21,405 | (17,441) | 3,964 | 3.8 | |||||||||||||||||||
| $ | 177,042 | $ | (75,102) | $ | 101,940 | ||||||||||||||||||
Amortization expense associated with intangible assets was $5 million and $15 million for the three and nine months ended October 31, 2022, respectively, and $5 million and $14 million for the three and nine months ended October 31, 2021, respectively.
As of October 31, 2022, the estimated amortization expense for intangible assets was as follows (in thousands):
| Fiscal Year | Estimated amortization expense | ||||
| Remaining for 2023 | $ | 4,906 | |||
| 2024 | 19,459 | ||||
| 2025 | 18,557 | ||||
| 2026 | 14,147 | ||||
| 2027 | 8,922 | ||||
| Thereafter | 21,391 | ||||
| Total | $ | 87,382 | |||
| Veeva Systems Inc. | Form 10-Q | 11 | ||||
Note 6. Accrued Expenses
Accrued expenses consisted of the following as of the dates shown (in thousands):
| October 31, 2022 | January 31, 2022 | ||||||||||
| Accrued commissions | $ | 8,006 | $ | 8,556 | |||||||
| Accrued bonus | 3,321 | 4,677 | |||||||||
Accrued vacation (1) | 6,068 | 5,546 | |||||||||
| Payroll tax payable | 14,847 | 9,487 | |||||||||
| Accrued other compensation and benefits | 8,023 | 5,568 | |||||||||
| Total accrued compensation and benefits | $ | 40,265 | $ | 33,834 | |||||||
| Accrued fees payable to Salesforce, Inc. | 6,723 | $ | 6,521 | ||||||||
| Taxes payable | 5,596 | 9,743 | |||||||||
| Accrued third-party professional services subcontractors' fees | 2,409 | 1,961 | |||||||||
| Other accrued expenses | 18,132 | 17,884 | |||||||||
| Total accrued expenses and other current liabilities | $ | 32,860 | $ | 36,109 | |||||||
(1) Represents accrued vacation primarily for international employees. Vacation does not accrue for most U.S. employees. | |||||||||||
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.
12 | Veeva Systems Inc. | Form 10-Q | ||||
The following table presents the fair value hierarchy for financial assets measured at fair value on a recurring basis as of October 31, 2022 (in thousands):
Level 1 | Level 2 | Total | ||||||||||||||||||
| Assets | ||||||||||||||||||||
| Cash equivalents: | ||||||||||||||||||||
| Money market funds | $ | 117,017 | $ | — | $ | 117,017 | ||||||||||||||
| Commercial paper | — | 43,866 | 43,866 | |||||||||||||||||
| Corporate notes and bonds | — | 6,673 | 6,673 | |||||||||||||||||
| Short-term investments: | ||||||||||||||||||||
| Certificates of deposit | — | 68,718 | 68,718 | |||||||||||||||||
| Asset-backed securities | — | 416,601 | 416,601 | |||||||||||||||||
| Commercial paper | — | 146,615 | 146,615 | |||||||||||||||||
| Corporate notes and bonds | — | 1,095,400 | 1,095,400 | |||||||||||||||||
| Foreign government bonds | — | 25,024 | 25,024 | |||||||||||||||||
| U.S. agency obligations | — | 32,160 | 32,160 | |||||||||||||||||
| U.S. treasury securities | — | 372,878 | 372,878 | |||||||||||||||||
| Foreign currency derivative contracts | — | 29 | 29 | |||||||||||||||||
| Total financial assets | $ | 117,017 | $ | 2,207,964 | $ | 2,324,981 | ||||||||||||||
The following table presents the fair value hierarchy for financial assets measured at fair value on a recurring basis as of January 31, 2022 (in thousands):
Level 1 | Level 2 | Total | ||||||||||||||||||
| Assets | ||||||||||||||||||||
| Cash equivalents: | ||||||||||||||||||||
| Money market funds | $ | 428,411 | $ | — | $ | 428,411 | ||||||||||||||
| Corporate notes and bonds | — | 5,853 | 5,853 | |||||||||||||||||
| Asset-backed securities | — | 2,568 | 2,568 | |||||||||||||||||
| Short-term investments: | ||||||||||||||||||||
| Certificates of deposit | — | 13,485 | 13,485 | |||||||||||||||||
| Asset-backed securities | — | 190,289 | 190,289 | |||||||||||||||||
| Commercial paper | — | 29,430 | 29,430 | |||||||||||||||||
| Corporate notes and bonds | — | 663,909 | 663,909 | |||||||||||||||||
| Foreign government bonds | — | 24,411 | 24,411 | |||||||||||||||||
| U.S. agency obligations | — | 27,736 | 27,736 | |||||||||||||||||
| U.S. treasury securities | — | 288,804 | 288,804 | |||||||||||||||||
| Foreign currency derivative contracts | — | 1,222 | 1,222 | |||||||||||||||||
| Total financial assets | $ | 428,411 | $ | 1,247,707 | $ | 1,676,118 | ||||||||||||||
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).
| Veeva Systems Inc. | Form 10-Q | 13 | ||||
Balance Sheet Hedges
We enter into foreign currency forward contracts in order to hedge our foreign currency exposure. These forward contracts are not designated as hedging instruments under applicable accounting guidance, and therefore, we account for them 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 realized foreign currency gains of $2 million and $10 million for the three and nine months ended October 31, 2022, respectively. Recognized realized foreign currency losses were not material for the three and nine months ended October 31, 2021.
The fair value of our outstanding derivative instruments is summarized below (in thousands):
| October 31, 2022 | January 31, 2022 | ||||||||||
| Notional amount of foreign currency derivative contracts | $ | 50,039 | $ | 87,097 | |||||||
| Fair value of foreign currency derivative contracts | 50,685 | 85,876 | |||||||||
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, 2022 | January 31, 2022 | ||||||||||||||
| Derivative Assets | |||||||||||||||||
| Foreign currency derivative contracts | Prepaid expenses and other current assets | $ | 29 | $ | 1,222 | ||||||||||||
| Derivative Liabilities | |||||||||||||||||
| Foreign currency derivative contracts | Accrued expenses | $ | (675) | $ | — | ||||||||||||
Note 8. Income Taxes
For the three months ended October 31, 2022 and 2021, our effective tax rates were 19.0% and 20.7%, respectively. During the three months ended October 31, 2022, as compared to the prior year period, our effective tax rate decreased primarily due an increase in the foreign derived intangible income deduction and a reduced valuation allowance impact within certain jurisdictions. These increases were partially offset by a reduction in excess tax benefits related to equity compensation. We recognized excess tax benefits in our provision for income taxes of $1 million and $10 million for the three months ended October 31, 2022 and 2021, respectively.
For the nine months ended October 31, 2022 and 2021, our effective tax rates were 20.0% and 15.9%, respectively. During the nine months ended October 31, 2022 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 partially offset by an increase in the foreign derived intangible income deduction. We recognized such excess tax benefits in our provision for income taxes of $10 million and $45 million for the nine months ended October 31, 2022 and 2021, respectively.
Note 9. Deferred Revenue, Performance Obligations, and Unbilled Accounts Receivable
Of the beginning deferred revenue balance for the respective periods, we recognized $358 million and $638 million of subscription services revenue during the three and nine months ended October 31, 2022, and $296 million and $535 million for the three and nine months ended October 31, 2021, 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,
14 | Veeva Systems Inc. | Form 10-Q | ||||
“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.
As of October 31, 2022, approximately $1,189 million of revenue is expected to be recognized from remaining performance obligations for subscription services contracts. We expect to recognize revenue on approximately 73% of these remaining performance obligations over the next 12 months, with the balance recognized thereafter.
Unbilled Accounts Receivable
Unbilled accounts receivable consists of (i) a receivable primarily for the revenue recognized for professional services performed but not yet billed, which were $34 million and $28 million as of October 31, 2022 and January 31, 2022, respectively, and (ii) a contract asset primarily for 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, which were $48 million and $36 million as of October 31, 2022 and January 31, 2022, respectively.
Note 10. Leases
We have operating leases for our corporate offices. Our leases have various expiration dates through 2034, 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 each of the three and nine months ended October 31, 2022 and 2021 was immaterial.
For the three months ended October 31, 2022 and 2021, our operating lease expense was $4 million and $3 million, respectively. For the nine months ended October 31, 2022 and 2021, our operating lease expense was $12 million and $10 million, respectively.
Supplemental cash flow information related to leases was as follows (in thousands):
| Nine months ended October 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Cash paid for operating lease liabilities | $ | 11,320 | $ | 10,288 | |||||||
| Operating lease right-of-use assets obtained in exchange for new operating lease liabilities | 13,937 | 2,135 | |||||||||
Supplemental balance sheet information related to leases was as follows:
| October 31, 2022 | January 31, 2022 | ||||||||||
| Weighted Average Remaining Lease Term | 6.8 years | 6.0 years | |||||||||
| Weighted Average Discount Rate | 4.1 | % | 3.7 | % | |||||||
As of October 31, 2022, remaining maturities of operating lease liabilities are as follows (in thousands):
| Fiscal Year | |||||
| Remaining for 2023 | $ | 3,299 | |||
| 2024 | 9,405 | ||||
| 2025 | 11,417 | ||||
| 2026 | 9,499 | ||||
| 2027 | 8,496 | ||||
| Thereafter | 31,474 | ||||
| Total lease payments | 73,590 | ||||
| Less imputed interest | (11,700) | ||||
| Total | $ | 61,890 | |||
| Veeva Systems Inc. | Form 10-Q | 15 | ||||
Note 11. Stockholders’ Equity
Stock Option Activity
A summary of stock option activity for the nine months ended October 31, 2022 is as follows:
Number of shares | Weighted average exercise price | Weighted average remaining contractual term (in years) | Aggregate intrinsic value (in millions) | ||||||||||||||||||||
| Options outstanding at January 31, 2022 | 12,090,522 | $ | 77.89 | 4.6 | $ | 1,964 | |||||||||||||||||
| Options granted | 3,178,165 | 206.35 | |||||||||||||||||||||
| Options exercised | (978,792) | 30.59 | |||||||||||||||||||||
| Options forfeited/cancelled | (362,182) | 208.90 | |||||||||||||||||||||
| Options outstanding at October 31, 2022 | 13,927,713 | $ | 107.17 | 5.2 | $ | 1,084 | |||||||||||||||||
| Options vested and exercisable at October 31, 2022 | 7,527,009 | $ | 50.78 | 2.8 | $ | 913 | |||||||||||||||||
| Options vested and exercisable at October 31, 2022 and expected to vest thereafter | 13,927,713 | $ | 107.17 | 5.2 | $ | 1,084 | |||||||||||||||||
The options granted during the nine months ended October 31, 2022 were predominantly made in connection with our annual performance review cycle. The weighted average grant-date fair value of options granted was $85.55 and $88.49 per option for the three and nine months ended October 31, 2022, respectively.
As of October 31, 2022, there was $380 million in unrecognized compensation cost related to unvested stock options granted under the 2012 Equity Incentive Plan and 2013 Equity Incentive Plan. This cost is expected to be recognized over a weighted average period of 2.7 years.
As of October 31, 2022, 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 $37 million and $165 million for the three and nine months ended October 31, 2022, respectively.
Stock Option Valuation Assumptions
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, | |||||||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||||||||||||||||||||||||||
| Volatility | 39% | - | 40% | 37% | 37% | - | 40% | 37% | - | 39% | ||||||||||||||||||||||||||||||||||||||||
| Expected term (in years) | 6.25 | 6.25 | 6 | - | 7 | 6.25 | ||||||||||||||||||||||||||||||||||||||||||||
| Risk-free interest rate | 2.90% | - | 4.20% | 0.90% | - | 1.30% | 1.90 | % | - | 4.20 | % | 0.68 | % | - | 1.30 | % | ||||||||||||||||||||||||||||||||||
| Dividend yield | —% | —% | —% | —% | ||||||||||||||||||||||||||||||||||||||||||||||
Restricted Stock Units
A summary of restricted stock unit (RSU) activity for the nine months ended October 31, 2022 is as follows:
Unreleased restricted stock units | Weighted average grant date fair value | ||||||||||
| Balance at January 31, 2022 | 619,388 | $ | 175.23 | ||||||||
| RSUs granted | 1,495,425 | 205.95 | |||||||||
| RSUs vested | (702,297) | 197.62 | |||||||||
| RSUs forfeited/cancelled | (84,017) | 199.28 | |||||||||
| Balance at October 31, 2022 | 1,328,499 | 196.43 | |||||||||
16 | Veeva Systems Inc. | Form 10-Q | ||||
As of October 31, 2022, there was a total of $221 million in unrecognized compensation cost related to unvested RSUs. This cost is expected to be recognized over a weighted-average period of approximately 2.2 years. The total intrinsic value of RSUs vested was $45 million and $137 million for the three and nine months ended October 31, 2022, respectively.
Note 12. Net Income per Share
Basic net income per share is computed by dividing net income by the weighted-average number of shares of common stock outstanding during the period.
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.
The computation of 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 net income per share 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, | ||||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||||||||||||||||||||||||||
| Class A | Class B | Class A | Class B | Class A | Class B | Class A | Class B | ||||||||||||||||||||||||||||||||||||||||
| Basic | |||||||||||||||||||||||||||||||||||||||||||||||
| Numerator | |||||||||||||||||||||||||||||||||||||||||||||||
| Net income, basic | $ | 98,151 | $ | 10,306 | $ | 95,691 | $ | 10,178 | $ | 270,666 | $ | 28,507 | $ | 298,379 | $ | 31,915 | |||||||||||||||||||||||||||||||
| Denominator | |||||||||||||||||||||||||||||||||||||||||||||||
| Weighted average shares used in computing net income per share, basic | 140,626 | 14,766 | 138,755 | 14,759 | 140,193 | 14,765 | 138,234 | 14,786 | |||||||||||||||||||||||||||||||||||||||
| Net income per share, basic | $ | 0.70 | $ | 0.70 | $ | 0.69 | $ | 0.69 | $ | 1.93 | $ | 1.93 | $ | 2.16 | $ | 2.16 | |||||||||||||||||||||||||||||||
| Diluted | |||||||||||||||||||||||||||||||||||||||||||||||
| Numerator | |||||||||||||||||||||||||||||||||||||||||||||||
| Net income, basic | $ | 98,151 | $ | 10,306 | $ | 95,691 | $ | 10,178 | $ | 270,666 | $ | 28,507 | $ | 298,379 | $ | 31,915 | |||||||||||||||||||||||||||||||
| Reallocation as a result of conversion of Class B to Class A common stock: | |||||||||||||||||||||||||||||||||||||||||||||||
| Net income, basic | 10,306 | — | 10,178 | — | 28,507 | — | 31,915 | — | |||||||||||||||||||||||||||||||||||||||
| Reallocation of net income to Class B common stock | — | 4,175 | — | 5,588 | — | 12,067 | — | 17,690 | |||||||||||||||||||||||||||||||||||||||
| Net income, diluted | $ | 108,457 | $ | 14,481 | $ | 105,869 | $ | 15,766 | $ | 299,173 | $ | 40,574 | $ | 330,294 | $ | 49,605 | |||||||||||||||||||||||||||||||
| Denominator | |||||||||||||||||||||||||||||||||||||||||||||||
| Number of shares used for basic net income per share computation | 140,626 | 14,766 | 138,755 | 14,759 | 140,193 | 14,765 | 138,234 | 14,786 | |||||||||||||||||||||||||||||||||||||||
| Conversion of Class B to Class A common stock | 14,766 | — | 14,759 | — | 14,765 | — | 14,786 | — | |||||||||||||||||||||||||||||||||||||||
| Effect of potentially dilutive common shares | 6,903 | 6,903 | 9,520 | 9,520 | 7,231 | 7,231 | 9,643 | 9,643 | |||||||||||||||||||||||||||||||||||||||
| Weighted average shares used in computing net income per share, diluted | 162,295 | 21,669 | 163,034 | 24,279 | 162,189 | 21,996 | 162,663 | 24,429 | |||||||||||||||||||||||||||||||||||||||
| Net income per share, diluted | $ | 0.67 | $ | 0.67 | $ | 0.65 | $ | 0.65 | $ | 1.84 | $ | 1.84 | $ | 2.03 | $ | 2.03 | |||||||||||||||||||||||||||||||
Potential common share equivalents excluded where the inclusion would be anti-dilutive are as follows:
| Veeva Systems Inc. | Form 10-Q | 17 | ||||
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)). In the complaint, IQVIA alleges that we 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 denying IQVIA's claims and filed counterclaims. Our counterclaims allege that IQVIA, as the dominant provider of data for life sciences companies, has abused monopoly power 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 increased the difficulty of attempting to switch from IQVIA data 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 October 3, 2018, the court denied IQVIA’s motion to dismiss our antitrust claims.
On February 18, 2020, IQVIA filed a motion for sanctions against Veeva, seeking default judgment and dismissal and, in the alternative, an adverse inference at trial related to discovery disputes. On May 7, 2021, the special master appointed to oversee litigation discovery ruled against IQVIA’s request for default judgment and dismissal and ruled in IQVIA’s favor with respect to certain other matters, including recommending to the trial judge that a permissive adverse inference instruction be issued to the jury with respect to certain documents that were not preserved by Veeva. Should the trial judge accept the recommendation, the jury would be permitted, but not required, to infer that certain evidence not preserved by Veeva would have been unfavorable to Veeva, if the jury first concludes that Veeva controlled the evidence, that the evidence was relevant, and that Veeva should have preserved the evidence. The jury is also likely to be instructed that it may also consider whether the non-preserved evidence was duplicative of other evidence produced by Veeva and whether Veeva’s conduct was reasonable in light of all circumstances. Veeva was also ordered to pay IQVIA’s fees and expenses incurred in connection with portions of its sanctions motion. On June 4, 2021, we appealed the special master’s ruling and IQVIA’s fee award to the federal district court judge.
Fact discovery is largely complete and we expect to complete expert discovery in May 2023. 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 gain or loss, if any, that could result from the OpenData and Network Action, we believe that IQVIA’s claims lack merit and that our counterclaims warrant injunctive relief and monetary damages for Veeva.
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 software 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
18 | Veeva Systems Inc. | Form 10-Q | ||||
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 District of New Jersey (Veeva Systems Inc. v. IQVIA Inc. (No. 2:19-cv-18558)).
On March 24, 2020, we amended our complaint in the Veeva Nitro Action to include allegations of IQVIA’s anticompetitive conduct as to additional Veeva software applications, such as Veeva Andi, Veeva Align, and Veeva Vault MedComms; additional examples of IQVIA’s monopolistic behavior against Veeva Nitro; IQVIA’s unlawful access of Veeva’s proprietary software products; and a request for declaratory relief. IQVIA answered the amended complaint on May 22, 2020.
On August 21, 2020, the District of New Jersey consolidated the Veeva Nitro Action and IQVIA Declaratory Action. Fact discovery is largely complete and we expect to complete expert discovery in May 2023.
While it is not possible at this time to predict with any degree of certainty the ultimate outcome of this action, we believe that our claims warrant injunctive and declaratory relief and monetary damages for Veeva and against IQVIA.
Fee Arrangements Related to the IQVIA Litigation Matters. We have entered into partial contingency fee arrangements with certain law firms representing us in the IQVIA litigations. Pursuant to those arrangements, such law firms are entitled to an agreed portion of any damages we recover from IQVIA or may be entitled to payment of success fees from us based on the achievement of certain outcomes. While it is reasonably possible that we may incur such success fees, we are unable to make an estimate of any such liability and have not accrued any liability related to success fees at this time.
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 amended its complaint twice, asserting the same claims with additional factual allegations, and voluntarily dismissed the Individual Defendants without prejudice. The trial began on July 11, 2022. On July 15, 2022, after four days of jury trial, the court granted Veeva’s motion for judgment as a matter of law, thereby resolving the case in favor of Veeva. Medidata moved for reconsideration of the decision on July 29, 2022, which was denied by the court on August 18, 2022. Medidata filed a notice of its intent to appeal in the Second Circuit Court of Appeals on September 16, 2022, which remains pending, but has not yet filed its appeal.
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 | 19 | ||||
Note 14. Revenues by Product
We group our revenues into two product areas: Commercial Solutions and R&D Solutions. Commercial Solutions revenues consist of revenues from our Veeva Commercial Cloud, Veeva Data Cloud, and Veeva Claims solutions. R&D Solutions consist of revenues from our Veeva Development Cloud, Veeva RegulatoryOne, and Veeva QualityOne solutions.
Total revenues consist of the following (in thousands):
| Three months ended October 31, | Nine months ended October 31, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Subscription services | |||||||||||||||||||||||
| Commercial Solutions | $ | 239,276 | $ | 223,183 | $ | 703,356 | $ | 649,156 | |||||||||||||||
| R&D Solutions | 202,293 | 157,555 | 569,494 | 439,137 | |||||||||||||||||||
| Total subscription services | $ | 441,569 | $ | 380,738 | $ | 1,272,850 | $ | 1,088,293 | |||||||||||||||
| Professional services | |||||||||||||||||||||||
| Commercial Solutions | $ | 45,283 | $ | 41,675 | $ | 133,027 | $ | 124,241 | |||||||||||||||
| R&D Solutions | 65,499 | 53,698 | 185,794 | 152,744 | |||||||||||||||||||
| Total professional services | $ | 110,782 | $ | 95,373 | $ | 318,821 | $ | 276,985 | |||||||||||||||
| Total revenues | $ | 552,351 | $ | 476,111 | $ | 1,591,671 | $ | 1,365,278 | |||||||||||||||
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 our Commercial Solutions and primarily by the estimated location of usage in each geographic area for our R&D Solutions. We measure professional services revenue primarily by the location of the resources performing the professional services.
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, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Revenues by geography | |||||||||||||||||||||||
| North America | $ | 321,860 | $ | 277,165 | $ | 925,589 | $ | 782,590 | |||||||||||||||
| Europe | 152,951 | 128,032 | 441,719 | 376,885 | |||||||||||||||||||
| Asia Pacific | 62,621 | 57,837 | 181,286 | 167,319 | |||||||||||||||||||
| Middle East, Africa, and Latin America | 14,919 | 13,077 | 43,077 | 38,484 | |||||||||||||||||||
| Total revenues | $ | 552,351 | $ | 476,111 | $ | 1,591,671 | $ | 1,365,278 | |||||||||||||||
Long-lived assets by geographic area are as follows as of the periods shown below (in thousands):
| October 31, 2022 | January 31, 2022 | ||||||||||
| Long-lived assets by geography | |||||||||||
| North America | $ | 43,069 | $ | 45,625 | |||||||
| Europe | 5,552 | 6,135 | |||||||||
| Asia Pacific | 902 | 1,335 | |||||||||
| Middle East, Africa, and Latin America | 1,612 | 1,400 | |||||||||
| Total long-lived assets | $ | 51,135 | $ | 54,495 | |||||||
20 | Veeva Systems Inc. | Form 10-Q | ||||
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 offerings span cloud software, data, analytics, professional services, and business consulting and are designed to meet the unique needs of our customers and their most strategic business functions—from research and development to commercialization. Our solutions help life sciences companies develop and bring products to market faster and more efficiently, market and sell more effectively, and maintain compliance with government regulations. For a more detailed description of our business and products as of January 31, 2022, please see our Annual Report on Form 10-K for the fiscal year ended January 31, 2022 filed on March 30, 2022.
In April 2022 we announced that our solutions will be grouped into three major product categories going forward—Veeva Commercial Cloud, Veeva Data Cloud, and Veeva Development Cloud. We also announced that our data offerings previously offered under the Veeva Data Cloud brand are now offered under the Veeva Compass brand. Veeva Data Cloud is now comprised of the following solutions formerly categorized as Commercial Cloud offerings: Veeva Compass, Veeva Link, and Veeva OpenData. For financial reporting purposes, revenues associated with our Veeva Commercial Cloud, Veeva Data Cloud, and Veeva Claims solutions are classified as “Commercial Solutions” revenues, and revenues associated with our Veeva Development Cloud, Veeva RegulatoryOne, and Veeva QualityOne solutions are classified as “R&D Solutions” revenues.
In our fiscal year ended January 31, 2022, we derived approximately 59% and 41% of our subscription services revenues and 56% and 44% of our total revenues from our Commercial Solutions and R&D Solutions, respectively. For the nine months ended October 31, 2022, we derived approximately 55% and 45% of our subscription services revenues and 53% and 47% of our total revenues from our Commercial Solutions and R&D Solutions, respectively. The contribution of subscription services revenues and total revenues associated with our R&D Solutions are expected to continue to increase as a percentage of subscription services revenues and total revenues in the future. We also offer certain of our R&D Solutions to industries outside the life sciences industry primarily in North America and Europe.
For our fiscal years ended January 31, 2022, 2021, and 2020, our total revenues were $1,851 million, $1,465 million, and $1,104 million, respectively, representing year-over-year growth in total revenues of 26% in our fiscal year ended January 31, 2022 and 33% in our fiscal year ended January 30, 2021. For our fiscal years ended January 31, 2022, 2021, and 2020, our subscription services revenues were $1,484 million, $1,179 million, and $896 million, respectively, representing year-over-year growth in subscription services revenues of 26% in our fiscal year ended January 31, 2022, and 32% in our fiscal year ended January 30, 2021. Please note that our total revenues and subscription services revenues for our fiscal year ended January 31, 2020 only included revenue contribution from the acquired Crossix and Physicians World businesses in the fourth quarter of that fiscal year. We expect the growth rate of our total revenues and subscription services revenues to decline compared to the prior fiscal year. We generated net income of $427 million, $380 million, and $301 million for our fiscal years ended January 31, 2022, 2021, and 2020, respectively.
| Veeva Systems Inc. | Form 10-Q | 21 | ||||
As of January 31, 2022, 2021, and 2020, we served 1,205, 993, and 861 customers, respectively. As of January 31, 2022, 2021, and 2020, we had 653, 572, and 523 Commercial Solutions customers, respectively, and 860, 664, and 538 R&D Solutions customers, respectively. These customer count totals are net of customer attrition during each period. The combined customer counts for Commercial Solutions and R&D Solutions exceed the total customer count in each year because some customers subscribe to products in both areas. Commercial Solutions consist of our cloud software, data, and analytics products built specifically to more efficiently and effectively commercialize our customers’ products. R&D Solutions consist of our clinical, quality, regulatory, and safety products. Many of our applications for R&D are used by smaller, earlier stage, pre-commercial companies, some of which may not reach the commercialization stage. Thus, the potential number of R&D Solutions customers is higher than the potential number of Commercial Solutions customers.
For the nine months ended October 31, 2022 and 2021, our total revenues were $1,592 million and $1,365 million, respectively, representing year-over-year growth in total revenues of 17%. For the nine months ended October 31, 2022 and 2021, our subscription services revenues were $1,273 million and $1,088 million, respectively, representing year-over-year growth in subscription services revenues of 17%. We generated net income of $299 million and $330 million for the nine months ended October 31, 2022 and 2021, respectively.
Our Conversion to PBC
On February 1, 2021, we became a Delaware public benefit corporation (PBC), and we amended our certificate of incorporation to include the following public benefit purpose: “to provide products and services that are intended to help make the industries we serve more productive, and to create high-quality employment opportunities in the communities in which we operate.” When making decisions, our directors have a fiduciary duty to balance the financial interests of stockholders, the best interests of other stakeholders materially affected by our conduct (including customers, employees, partners, and the communities in which we operate), and the pursuit of our public benefit purpose. For more information on our conversion to a PBC and associated risks, see “Risk Factors.”
The Continuing Impact of the COVID-19 Pandemic
The worldwide outbreak of COVID-19 has had a widespread impact on our business operations, the life sciences industry, healthcare systems, financial markets, and the global economy. While the impact of COVID-19 on our operational and financial performance has not been materially negative to date, the future impact is uncertain and will depend on future developments, including the duration and spread of outbreaks and variants, government responses, the rate of vaccinations and boosters, the impact on our customers, the impact on our employees, and the extent of further adverse impacts to the economy, all of which cannot be predicted with certainty.
Certain impacts of the COVID-19 pandemic and resulting changes in business practice may be enduring over the long term and may result in significant changes in business practice within the technology industry, the life sciences industry, and the world economy generally. For example, while we have resumed in-person customer, employee, and industry events in most geographies, travel and in-person meeting restrictions that limit our ability to conduct business in person still remain in place in some locations--for example, China--and we cannot predict how long such limitations will remain in effect. Further, the extent to which remote work will remain common practice for our customers and peer companies is not certain and may have significant impacts on hiring practices, management practices, expense structures and investments, and other aspects of their business and ours. We have adopted a permanent “Work Anywhere” policy, which generally gives employees the flexibility to work in an office or at home on any given day, with certain job-specific restrictions. We believe this program is beneficial to our business, but we have limited experience with the program. Similarly, the extent to which virtual meetings and interactions continue to be used or preferred in lieu of in-person interactions may significantly change business practices for us and our customers, and, in turn, may impact demand for our products and services. For example, if our customers reduce sales representatives in response to an increasing preference for virtual meetings with doctors, demand for our core CRM application may decline. In the quarter ended October 31, 2020, we disclosed that we expected life sciences companies to reduce the number of sales representatives that they employ by roughly 10%. We currently expect the majority of these reductions to take place by the end of our fiscal year ending January 31, 2023, with reductions still occurring in our fiscal year ending January 31, 2024. Such reductions could negatively impact sales of our solutions, including Veeva CRM and certain of our other Commercial Solutions, but we cannot be certain such reductions will happen or of the timing or magnitude of such reductions. At the same time, demand for our products that enable virtual interactions with doctors and clinical trial participants may increase. We cannot accurately predict how such changes may impact Veeva's results over the long term.
22 | Veeva Systems Inc. | Form 10-Q | ||||
Impacts of the Russian Invasion of Ukraine
We are closely monitoring the impact of the Russian invasion of Ukraine and its global impacts. While the outcome remains highly uncertain, we have not seen a direct material impact from the Russian invasion to date. We do not currently have office locations or employees in Russia and our revenues from sales to Russian entities were limited. However, if the conflict continues or worsens, leading to greater disruptions and uncertainty within the life sciences industry or global economy, our business and results of operations could be negatively impacted.
Components of Results of Operations
Revenues
We derive our revenues primarily from subscription services fees and professional services fees. Subscription services revenues consist of fees from customers accessing our cloud-based software solutions and fees for our data solutions. Professional services and other revenues consist primarily of fees from implementation services, configuration, data services, training, and managed services related to our solutions and services related to our Veeva Business Consulting offering. For the nine months ended October 31, 2022, subscription services revenues constituted 80% of total revenues and professional services and other revenues constituted 20% of total revenues.
We generally enter into master subscription agreements with our customers and count each distinct master subscription agreement that has not been terminated or expired and that has orders for which we have recognized revenue in the quarter as a distinct customer for purposes of determining our total number of current customers as of the end of that quarter. We generally enter into a single master subscription agreement with each customer, although in some instances, affiliated legal entities within the same corporate family may enter into separate master subscription agreements. Conversely, affiliated legal entities that maintain distinct master subscription agreements may choose to consolidate their orders under a single master subscription agreement, and, in that circumstance, our customer count would decrease. Divisions, subsidiaries, and operating units of our customers often place distinct orders for our subscription services under the same master subscription agreement, and we do not count such distinct orders as new customers for purposes of determining our total customer count. For purposes of determining customers of Veeva Crossix that do not contract under a master subscription agreement, we count each entity that has a statement of work or services agreement and a recurring known payment obligation as a distinct customer if such entity is not otherwise a customer of ours. For Veeva Crossix, we do not count as distinct customers agencies contracting with us on behalf of brands within life sciences companies.
New subscription orders for our core Veeva CRM application generally have a one-year term. If a customer adds end users or additional Commercial Solutions to an existing order for our core Veeva CRM application, such additional orders will generally be coterminous with the anniversary date of the core Veeva CRM order, and as a result, orders for additional end users or additional Commercial Solutions will commonly have an initial term of less than one year.
Particularly with respect to our R&D Solutions, we have entered into a number of orders with multi-year terms, most of which are governed by master subscription agreements that do not allow the customer to terminate the agreement other than for cause. The fees associated with such orders are typically not based on the number of end-users and typically escalate over the term of such orders at a pre-agreed rate to account for, among other factors, implementation and adoption timing and planned increased usage by the customer. When such multi-year orders are non-cancellable (other than for cause), we recognize the total contracted revenue ratably over the multi-year term of the order. When the amounts we are entitled to invoice in any period pursuant to multi-year orders with escalating fees are less than the revenue recognized , we will accrue an unbilled accounts receivable balance (a contract asset) related to such orders. In the same scenario, the net deferred revenue we would record in connection with such orders will be less because we will be recognizing more revenue than we bill earlier in the term of such multi-year orders. However, we recently announced that we plan to include a termination for convenience right for our customers in all of our master subscription agreements that govern multi-year orders. We expect such termination for convenience rights to be in place by February 1, 2023, after which the amount of revenue recognized from multi-year orders will generally be consistent with the amount invoiced for the relevant term of the order.
Our subscription orders are generally billed at the beginning of the subscription period in annual or quarterly increments, which means the annualized value of such orders may not be completely reflected in deferred revenue at any single point in time. Also, particularly with respect to orders for our Commercial Solutions, because the term of orders for additional end users or applications is commonly less than one year, the annualized value of such
| Veeva Systems Inc. | Form 10-Q | 23 | ||||
orders may not be completely reflected in deferred revenue at any single point in time. We have also agreed from time to time, and may agree in the future, to allow customers to change the renewal dates of their orders to, for example, align more closely with a customer’s annual budget process or to align with the renewal dates of other orders placed by other entities within the same corporate control group, or to change payment terms from annual to quarterly, or vice versa. Such changes typically result in an order of less than one year as necessary to align all orders to the desired renewal date and, thus, may result in a lesser increase to deferred revenue than if the adjustment had not occurred. Additionally, changes in renewal dates may change the fiscal quarter in which deferred revenue associated with a particular order is booked. Accordingly, we do not believe that changes on a quarterly basis in deferred revenue, unbilled accounts receivable, or calculated billings, a metric commonly cited by financial analysts, are accurate indicators of future revenues for any given period of time. We define the term calculated billings for any period to mean revenue for the period plus the change in deferred revenue from the immediately preceding period minus the change in unbilled accounts receivable (contract asset) from the immediately preceding period.
Subscription services revenues are recognized ratably over the respective non-cancelable subscription term because of the continuous transfer of control to the customer. Our subscription services agreements are generally non-cancelable during the term, although customers typically have the right to terminate their agreements for cause in the event of material breach. However, as previously described, starting February 1, 2023, we plan to standardize the master subscription agreements that govern multi-year orders to include a termination for convenience right for our customers. Our agreements typically provide that orders will automatically renew unless notice of non-renewal is provided in advance. Subscription services revenues are affected primarily by the number of customers, the scope of the subscription purchased by each customer (for example, the number of end users or other subscription usage metric) and the number of solutions subscribed to by each customer.
We utilize our own personnel to perform our professional services and business consulting engagements with customers. In certain cases, we may utilize third-party subcontractors to perform professional services engagements. The majority of our professional services arrangements are billed on a time and materials basis and revenues are recognized over time based on time incurred and contractually agreed upon rates. Certain professional services and business consulting arrangements are billed on a fixed fee basis and revenues are typically recognized over time as the services are delivered based on time incurred. Data services and training revenues are generally recognized as the services are performed. Professional services revenues are affected primarily by our customers’ demands for implementation services, configuration, data services, training, speakers bureau logistics, and managed services in connection with our solutions. Our business consulting revenues are affected primarily by our customers’ demands for services related to a particular customer success initiative, strategic analysis, or business process change, and not a cloud software implementation.
Allocated Overhead
We accumulate certain costs such as building depreciation, office rent, utilities, and other facilities costs and allocate them across the various departments based on headcount. We refer to these costs as “allocated overhead.”
Cost of Revenues
Cost of subscription services revenues for all of our solutions consists of expenses related to our computing infrastructure provided by third parties, including Salesforce, Inc. and Amazon Web Services, personnel related costs associated with hosting our subscription services and providing support, including our data stewards, data acquisition and third-party contractor costs related to the development of our data products, expenses associated with computer equipment and software, and allocated overhead. We intend to continue to invest additional resources in our subscription services to enhance our product offerings and increase our delivery capacity. We may add or expand computing infrastructure capacity in the future, migrate to new computing infrastructure service providers, make additional investments in the availability and security of our solutions, and make continued investments in data sources.
Cost of professional services and other consists primarily of employee-related expenses associated with providing professional and Veeva Business Consulting services. The cost of providing professional services is significantly higher as a percentage of the related revenues than for our subscription services due to the direct labor costs and costs of third-party subcontractors.
24 | Veeva Systems Inc. | Form 10-Q | ||||
Operating Expenses
Research and Development. Research and development expenses consist primarily of employee-related expenses, third-party consulting fees, hosted infrastructure costs, and allocated overhead. We continue to focus our research and development efforts on adding new features and applications and increasing the functionality and enhancing the ease of use of our cloud-based applications.
Sales and Marketing. Sales and marketing expenses consist primarily of employee-related expenses, sales commissions, marketing program costs, amortization expense associated with purchased intangibles related to our customer contracts, customer relationships and brand development, travel-related expenses and allocated overhead. Marketing program costs include advertising, customer events, corporate communications, brand awareness, and product marketing activities. Sales commissions are costs of obtaining new customer contracts and are capitalized and then amortized over a period of benefit that we have determined to be one to three years.
General and Administrative. General and administrative expenses consist of employee-related expenses for our executive, finance and accounting, legal, employee success, management information systems personnel, and other administrative employees. In addition, general and administrative expenses include fees related to third-party legal counsel, fees related to third-party accounting, tax and audit services, other corporate expenses, and allocated overhead.
Other Income, Net
Other income, net, consists primarily of 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, state, and local income taxes in the United States and income taxes in certain foreign jurisdictions. See note 8 of the notes to our condensed consolidated financial statements.
Recent Accounting Pronouncements
Reference Rate Reform
In March 2020, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides accounting relief from the future impact of the cessation of the London Interbank Offered Rate (LIBOR) by, among other things, providing optional expedients to treat contract modifications resulting from such reference rate reform as a continuation of the existing contract and for hedging relationships to not be de-designated as a result of such changes provided certain criteria are met. The guidance became effective on March 12, 2020, and the amendments apply prospectively through December 31, 2022. We are currently in the process of incorporating fallback language in negotiated contracts and incorporating non-LIBOR reference rate and/or fallback language in new contracts to prepare for these changes. We do not expect the adoption of ASU 2020-04 to have a material impact on our condensed consolidated financial statements.
Business Combinations
In October 2021, the FASB issued ASU No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which requires contract assets and contract liabilities acquired in a business combination to be recognized and measured in accordance with Topic 606, Revenue from Contracts with Customers, as if the acquirer had originated the contracts. Under current GAAP, such assets and liabilities are recognized by the acquirer at fair value on the acquisition date. The new standard is effective for our fiscal year beginning on February 1, 2023, with early adoption permitted. We do not expect the adoption of ASU 2021-08 to have a material impact on our condensed consolidated financial statements.
| Veeva Systems Inc. | Form 10-Q | 25 | ||||
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, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
(in thousands) | |||||||||||||||||||||||
| Consolidated Statements of Comprehensive Income Data: | |||||||||||||||||||||||
| Revenues: | |||||||||||||||||||||||
| Subscription services | $ | 441,569 | $ | 380,738 | $ | 1,272,850 | $ | 1,088,293 | |||||||||||||||
| Professional services and other | 110,782 | 95,373 | 318,821 | 276,985 | |||||||||||||||||||
| Total revenues | 552,351 | 476,111 | 1,591,671 | 1,365,278 | |||||||||||||||||||
Cost of revenues(1): | |||||||||||||||||||||||
| Cost of subscription services | 65,734 | 59,648 | 188,722 | 164,774 | |||||||||||||||||||
| Cost of professional services and other | 88,173 | 69,916 | 256,369 | 203,023 | |||||||||||||||||||
| Total cost of revenues | 153,907 | 129,564 | 445,091 | 367,797 | |||||||||||||||||||
| Gross profit | 398,444 | 346,547 | 1,146,580 | 997,481 | |||||||||||||||||||
Operating expenses(1): | |||||||||||||||||||||||
| Research and development | 130,257 | 98,635 | 377,740 | 276,760 | |||||||||||||||||||
| Sales and marketing | 93,910 | 72,423 | 259,642 | 208,822 | |||||||||||||||||||
| General and administrative | 52,873 | 42,781 | 159,030 | 126,121 | |||||||||||||||||||
| Total operating expenses | 277,040 | 213,839 | 796,412 | 611,703 | |||||||||||||||||||
| Operating income | 121,404 | 132,708 | 350,168 | 385,778 | |||||||||||||||||||
| Other income, net | 12,458 | 824 | 23,565 | 7,054 | |||||||||||||||||||
| Income before income taxes | 133,862 | 133,532 | 373,733 | 392,832 | |||||||||||||||||||
| Provision for income taxes | 25,405 | 27,663 | 74,560 | 62,538 | |||||||||||||||||||
| Net income | $ | 108,457 | $ | 105,869 | $ | 299,173 | $ | 330,294 | |||||||||||||||
| (1) Includes stock-based compensation as follows: | |||||||||||||||||||||||
| Cost of revenues: | |||||||||||||||||||||||
| Cost of subscription services | $ | 1,636 | $ | 1,292 | $ | 4,606 | $ | 3,514 | |||||||||||||||
| Cost of professional services and other | 13,227 | 9,616 | 37,035 | 26,579 | |||||||||||||||||||
| Research and development | 37,415 | 22,311 | 102,139 | 61,463 | |||||||||||||||||||
| Sales and marketing | 23,576 | 15,102 | 64,500 | 41,772 | |||||||||||||||||||
| General and administrative | 17,333 | 13,724 | 48,083 | 39,591 | |||||||||||||||||||
| Total stock-based compensation | $ | 93,187 | $ | 62,045 | $ | 256,363 | $ | 172,919 | |||||||||||||||
Revenues
| Three months ended October 31, | Nine months ended October 31, | ||||||||||||||||||||||||||||||||||
| 2022 | 2021 | % Change | 2022 | 2021 | % Change | ||||||||||||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||||||||||||||
| Revenues: | |||||||||||||||||||||||||||||||||||
| Subscription services | $ | 441,569 | $ | 380,738 | 16% | $ | 1,272,850 | $ | 1,088,293 | 17% | |||||||||||||||||||||||||
| Professional services and other | 110,782 | 95,373 | 16% | 318,821 | 276,985 | 15% | |||||||||||||||||||||||||||||
| Total revenues | $ | 552,351 | $ | 476,111 | 16% | $ | 1,591,671 | $ | 1,365,278 | 17% | |||||||||||||||||||||||||
| Percentage of revenues: | |||||||||||||||||||||||||||||||||||
| Subscription services | 80 | % | 80 | % | 80 | % | 80 | % | |||||||||||||||||||||||||||
| Professional services and other | 20 | 20 | 20 | 20 | |||||||||||||||||||||||||||||||
| Total revenues | 100 | % | 100 | % | 100 | % | 100 | % | |||||||||||||||||||||||||||
Total revenues for the three months ended October 31, 2022 increased $76 million, of which $61 million was from growth in subscription services revenues. The increase in subscription services revenues consisted of $45 million of subscription services revenue attributable to R&D Solutions and $16 million of subscription services revenue attributable to Commercial Solutions. The geographic mix of subscription services revenues was 57% from North
26 | Veeva Systems Inc. | Form 10-Q | ||||
America, 28% from Europe, and 15% from other locations, primarily Asia Pacific, for the three months ended October 31, 2022, as compared to 57% from North America, 27% from Europe, and 16% from other locations, primarily Asia Pacific, for the three months ended October 31, 2021.
Professional services and other revenues for the three months ended October 31, 2022 increased $15 million. The increase was primarily due to new customers requesting implementation and deployment related professional services and existing customers requesting professional services related to expanding deployments or the deployment of newly purchased solutions. The increased demand for professional services and the resulting increase in professional services revenues was weighted heavily towards implementation and deployments of our R&D Solutions. Demand for our Veeva Business Consulting services also contributed to the growth for the period. The geographic mix of professional services and other revenues was 65% from North America, 28% from Europe, and 7% from other locations, primarily Asia Pacific, for the three months ended October 31, 2022, as compared to 63% from North America, 28% from Europe, and 9% from other locations, primarily Asia Pacific, for the three months ended October 31, 2021.
Total revenues for the nine months ended October 31, 2022 increased $226 million, of which $185 million was from growth in subscription services revenues. The increase in subscription services revenues consisted of $130 million of subscription services revenue attributable to R&D Solutions and $54 million of subscription services revenue attributable to Commercial Solutions. The geographic mix of subscription services revenues was 57% from North America, 28% from Europe, and 15% from other locations, primarily Asia Pacific, for the nine months ended October 31, 2022 as compared to subscription services revenues of 57% from North America, 27% from Europe, and 16% from other locations, primarily Asia Pacific, for the nine months ended October 31, 2021.
Professional services and other revenues for the nine months ended October 31, 2022 increased $42 million. The increase was primarily due to new customers requesting implementation and deployment related professional services and existing customers requesting professional services related to expanding deployments or the deployment of newly purchased solutions. The increased demand for professional services and the resulting increase in professional services revenues was weighted heavily towards implementation and deployments of our R&D Solutions. Demand for our Veeva Business Consulting services also contributed to the growth for the period. The geographic mix of professional services and other revenues was 64% from North America, 28% from Europe, and 8% from other locations, primarily Asia Pacific, for the nine months ended October 31, 2022 as compared to 60% from North America, 31% from Europe, and 9% from other locations, primarily Asia Pacific, for the nine months ended October 31, 2021.
While we expect total revenues and subscription revenues to continue to grow for the remainder of the fiscal year ending January 31, 2023, we expect our year-over-year growth to be negatively impacted by foreign currency exchange fluctuations discussed in "Quantitative and Qualitative Disclosures about Market Risk—Foreign currency exchange risk” and as a result of macroeconomic factors, including lower funding and spending levels within segments of our customer base and increased project scrutiny, including budgetary scrutiny, for certain potential projects. Starting February 1, 2023, we plan to standardize the master subscription agreements that govern multi-year orders to include a termination for convenience right for our customers, which may affect the timing of revenue recognition for such orders. This will result in a reduction to revenue during the fiscal year ending January 31, 2024 for multi-year orders that currently do not have termination for convenience rights. We are also updating our contracting terms to incorporate an annual inflation adjustment, which will raise the price to each customer upon such customer entering into a new or renewal order form after April 1, 2023 by the lower of 4% or the Consumer Price Index (All Urban Consumer, US City Average, All Items Index) published by the U.S. Bureau of Labor and Statistics for the month of August of the prior calendar year.
Over time, we expect the proportion of our total revenues from professional services to decrease.
Costs and Expenses
Note that in response to unusual inflationary pressure and the demand environment for skilled employees, we increased salaries for the majority of our employees by 5% effective September 1, 2021. Further, in light of the labor market conditions and inflationary pressure, our compensation increases in connection with our annual compensation review process, which took place in our fiscal quarter ended April 30, 2022, were higher than
| Veeva Systems Inc. | Form 10-Q | 27 | ||||
previous years. These compensation changes are likely to increase our employee-related expenses going forward, which impact all of the cost and expense categories discussed below.
Cost of Revenue and Gross Margin
| Three months ended October 31, | Nine months ended October 31, | ||||||||||||||||||||||||||||||||||
| 2022 | 2021 | % Change | 2022 | 2021 | % Change | ||||||||||||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||||||||||||||
| Cost of revenues: | |||||||||||||||||||||||||||||||||||
| Cost of subscription services | $ | 65,734 | $ | 59,648 | 10% | $ | 188,722 | $ | 164,774 | 15% | |||||||||||||||||||||||||
| Cost of professional services and other | 88,173 | 69,916 | 26% | 256,369 | 203,023 | 26% | |||||||||||||||||||||||||||||
| Total cost of revenues | $ | 153,907 | $ | 129,564 | 19% | $ | 445,091 | $ | 367,797 | 21% | |||||||||||||||||||||||||
| Gross margin percentage: | |||||||||||||||||||||||||||||||||||
| Subscription services | 85 | % | 84 | % | 85 | % | 85 | % | |||||||||||||||||||||||||||
| Professional services and other | 20 | % | 27 | % | 20 | % | 27 | % | |||||||||||||||||||||||||||
| Total gross margin percentage | 72 | % | 73 | % | 72 | % | 73 | % | |||||||||||||||||||||||||||
| Gross profit | $ | 398,444 | $ | 346,547 | 15% | $ | 1,146,580 | $ | 997,481 | 15% | |||||||||||||||||||||||||
Cost of revenues for the three months ended October 31, 2022 increased $24 million, of which $6 million was related to an increase in cost of subscription services. The increase in cost of subscription services was primarily due to increases of $3 million in computing infrastructure costs, which was driven by an increase in the number of end users of our subscription services, and $1 million related to costs for data stewardship.
Cost of revenues for the nine months ended October 31, 2022 increased $77 million, of which $24 million was related to an increase in cost of subscription services. The increase in cost of subscription services was primarily due to increases of $8 million in computing infrastructure costs, which was driven by an increase in the number of end users of our subscription services, $6 million in employee compensation-related costs, $4 million for data costs, and $3 million related to costs for data stewardship.
We expect cost of subscription services to increase in absolute dollars due to increased usage of our subscription services and increased data costs related to our Veeva Compass offering.
Cost of professional services and other for the three months ended October 31, 2022 increased $18 million, primarily due to a $15 million increase in employee compensation-related costs (which includes an increase of $4 million in stock-based compensation). The increase in employee compensation-related costs is primarily driven by the increase in headcount during the period. We expect cost of professional services and other to increase in absolute dollars in the near term as we continue to add personnel to our global professional services organization and Veeva Business Consulting.
Cost of professional services and other for the nine months ended October 31, 2022 increased $53 million, primarily due to an increase of $45 million in employee compensation-related costs (which includes an increase of $10 million in stock-based compensation). The increase in employee compensation-related costs is primarily driven by the increase in headcount during the period.
Gross margin for the three months ended October 31, 2022 and 2021 was 72% and 73%, respectively. The slight decrease compared to the same period in the prior fiscal year was due to lower gross margin for our professional services in the quarter ended October 31, 2022, as compared to the same period in the prior fiscal year.
Gross margin for the nine months ended October 31, 2022 and 2021 was 72% and 73%, respectively. The slight decrease compared to the same period in the prior fiscal year was due to lower gross margin for our professional services in the nine months ended October 31, 2022, as compared to the same period in the prior fiscal year.
Operating Expenses and Operating Margin
Operating expenses include research and development, sales and marketing, and general and administrative expenses. As we continue to invest in our growth through hiring, we expect operating expenses and stock-based compensation to increase in absolute dollars and to slightly increase as a percentage of revenue in the future.
28 | Veeva Systems Inc. | Form 10-Q | ||||
Research and Development
| Three months ended October 31, | Nine months ended October 31, | ||||||||||||||||||||||||||||||||||
| 2022 | 2021 | % Change | 2022 | 2021 | % Change | ||||||||||||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||||||||||||||
| Research and development | $ | 130,257 | $ | 98,635 | 32% | $ | 377,740 | $ | 276,760 | 36% | |||||||||||||||||||||||||
| Percentage of total revenues | 24 | % | 21 | % | 24 | % | 20 | % | |||||||||||||||||||||||||||
Research and development expenses for the three months ended October 31, 2022 increased $32 million, primarily due to an increase of $34 million in employee compensation-related costs (which includes an increase of $15 million in stock-based compensation). This was partially offset by capitalized development costs of $4 million. The increase in employee compensation-related costs is primarily driven by headcount increases. The expansion of our headcount and compensation increases in research and development is to support development work for the increased number of products that we offer or may offer in the future.
Research and development expenses for the nine months ended October 31, 2022 increased $101 million, primarily due to an increase of $96 million in employee compensation-related costs (which includes an increase of $41 million in stock-based compensation). The increase in employee compensation-related costs is primarily driven by headcount increases and the impact of compensation increases for our existing employees. The expansion of our headcount in research and development is to support development work for the increased number of products that we offer or may offer in the future.
We expect research and development expenses to increase in absolute dollars in the fiscal year ending January 31, 2023, primarily due to headcount expansion and continued investment in our product offerings.
Sales and Marketing
| Three months ended October 31, | Nine months ended October 31, | ||||||||||||||||||||||||||||||||||
| 2022 | 2021 | % Change | 2022 | 2021 | % Change | ||||||||||||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||||||||||||||
| Sales and marketing | $ | 93,910 | $ | 72,423 | 30% | $ | 259,642 | $ | 208,822 | 24% | |||||||||||||||||||||||||
| Percentage of total revenues | 17 | % | 15 | % | 16 | % | 15 | % | |||||||||||||||||||||||||||
Sales and marketing expenses for the three months ended October 31, 2022 increased $21 million, primarily due to increases of $13 million in employee compensation-related costs (which includes an increase of $8 million in stock-based compensation) and $7 million in marketing program costs. The increase in employee compensation-related costs is primarily driven by headcount increases and the impact of compensation increases for our existing employees.
Sales and marketing expenses for the nine months ended October 31, 2022 increased $51 million, primarily due to increases of $37 million in employee compensation-related costs (which includes an increase of $23 million in stock-based compensation), $10 million in marketing program costs, and $5 million in travel and entertainment. The increase in employee compensation-related costs is primarily driven by headcount increases and the impact of compensation increases for our existing employees.
We expect sales and marketing expenses to grow in absolute dollars in the future, primarily due to employee-related expenses as we increase our headcount to support our sales and marketing efforts associated with our product offerings and our continued expansion of our sales capacity across all our solutions. Additionally, we expect travel and entertainment costs to continue increasing for the remainder of the fiscal year ending January 31, 2023 compared to our previous fiscal year.
| Veeva Systems Inc. | Form 10-Q | 29 | ||||
General and Administrative
| Three months ended October 31, | Nine months ended October 31, | ||||||||||||||||||||||||||||||||||
| 2022 | 2021 | % Change | 2022 | 2021 | % Change | ||||||||||||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||||||||||||||
| General and administrative | $ | 52,873 | $ | 42,781 | 24% | $ | 159,030 | $ | 126,121 | 26% | |||||||||||||||||||||||||
| Percentage of total revenues | 10 | % | 9 | % | 10 | % | 9 | % | |||||||||||||||||||||||||||
General and administrative expenses for the three months ended October 31, 2022 increased $10 million, primarily due to an increase of $7 million in employee compensation-related costs (which includes an increase of $4 million in stock-based compensation) and an increase of $3 million in fees for third-party legal counsel. The increase in employee compensation-related costs is primarily driven by headcount increases and the impact of compensation increases for our existing employees.
General and administrative expenses for the nine months ended October 31, 2022 increased $33 million, primarily due to an increase of $18 million in employee compensation-related costs (which includes an increase of $8 million in stock-based compensation), $11 million in fees for third-party legal counsel and third-party consultants, and $3 million in technology infrastructure costs. The increase in employee compensation-related costs is primarily driven by headcount increases and the impact of compensation increases for our existing employees.
We expect general and administrative expenses to continue to grow in absolute dollars in the future as a result of headcount expansion, investments in our information technology infrastructure, and third-party fees, including fees associated with ongoing litigation. We also expect general and administrative expenses to increase due to the Company’s obligation for payroll taxes related to our Chief Executive Officer’s planned exercise of his option to purchase our common stock, which we expect to occur between December 5, 2022 and March 8, 2023.
Other Income, Net
| Three months ended October 31, | Nine months ended October 31, | ||||||||||||||||||||||||||||||||||
| 2022 | 2021 | % Change | 2022 | 2021 | % Change | ||||||||||||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||||||||||||||
| Other income, net | $ | 12,458 | $ | 824 | 1,412% | $ | 23,565 | $ | 7,054 | 234% | |||||||||||||||||||||||||
Other income, net, for the three months ended October 31, 2022 increased $12 million, primarily due to an increase of $10 million in interest income.
Other income, net, for the nine months ended October 31, 2022 increased $17 million, primarily due to an increase of $14 million in interest income.
We expect other income, net, to continue to increase for the remainder of the fiscal year ending January 31, 2023 as a result of increasing interest rates.
Foreign Currency
We continue to experience foreign currency fluctuations primarily due to the impact resulting from the periodic re-measurement of our foreign currency balances that are denominated in currencies other than the functional currency of the entities in which they are recorded. Our results of operations are subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the Euro, Japanese Yen, Canadian Dollar, British Pound Sterling, Hungarian Forint, Chinese Yuan, and Brazilian Real. We may continue to experience favorable or adverse foreign currency impacts due to volatility in these currencies.
30 | Veeva Systems Inc. | Form 10-Q | ||||
Provision for Income Taxes
| Three months ended October 31, | Nine months ended October 31, | ||||||||||||||||||||||||||||||||||
| 2022 | 2021 | % Change | 2022 | 2021 | % Change | ||||||||||||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||||||||||||||
| Income before income taxes | $ | 133,862 | $ | 133,532 | —% | $ | 373,733 | $ | 392,832 | (5)% | |||||||||||||||||||||||||
| Provision for income taxes | $ | 25,405 | $ | 27,663 | (8)% | $ | 74,560 | $ | 62,538 | 19% | |||||||||||||||||||||||||
| Effective tax rate | 19.0 | % | 20.7 | % | 20.0 | % | 15.9 | % | |||||||||||||||||||||||||||
The provision for income taxes differs from the tax computed at the U.S. federal statutory income tax rate due primarily to state taxes, tax credits, equity compensation, and foreign income subject to taxation in the United States. Future tax rates could be affected by changes in tax laws and regulations or by rulings in tax related litigation, as may be applicable. We will continue to identify and analyze other applicable changes in tax laws in the United States and abroad.
For the three months ended October 31, 2022 and 2021, our effective tax rates were 19.0% and 20.7%, respectively. During the three months ended October 31, 2022 as compared to the prior year period, our effective tax rate decreased primarily due an increase in the foreign derived intangible income deduction and a reduced valuation allowance impact within certain jurisdictions. These increases were partially offset by a reduction in excess tax benefits related to equity compensation. We recognized excess tax benefits in our provision for income taxes of $1 million and $10 million for the three months ended October 31, 2022 and 2021, respectively.
For the nine months ended October 31, 2022 and 2021, our effective tax rates were 20.0% and 15.9%, respectively. During the nine months ended October 31, 2022 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 partially offset by an increase in the foreign derived intangible income deduction. We recognized such excess tax benefits in our provision for income taxes of $10 million and $45 million for the nine months ended October 31, 2022 and 2021, respectively.
Our Chief Executive Officer's planned exercise of his option to purchase our common stock, which we expect to occur between December 5, 2022 and March 8, 2023, will significantly reduce our effective tax rate for the period in which the exercise occurs.
Non-GAAP Financial Measures
In our public disclosures, we have provided non-GAAP measures, which we define as financial information that has not been prepared in accordance with generally accepted accounting principles in the United States, or GAAP. In addition to our GAAP measures, we use these non-GAAP financial measures internally for budgeting and resource allocation purposes and in analyzing our financial results.
For the reasons set forth below, we believe that excluding the following items provides information that is helpful in understanding our operating results, evaluating our future prospects, comparing our financial results across accounting periods, and comparing our financial results to our peers, many of which provide similar non-GAAP financial measures.
•Excess tax benefits. Excess tax benefits from employee stock plans are dependent on previously agreed-upon equity grants to our employees, vesting of those grants, stock price, and exercise behavior of our employees, which can fluctuate from quarter to quarter. Because these fluctuations are not directly related to our business operations, we exclude excess tax benefits for our internal management reporting processes. Our management also finds it useful to exclude excess tax benefits when assessing the level of cash provided by operating activities. Given the nature of the excess tax benefits, we believe excluding it allows investors to make meaningful comparisons between our operating cash flows from quarter to quarter and those of other companies.
| Veeva Systems Inc. | Form 10-Q | 31 | ||||
•Impact of tax legislation. We exclude the direct cash payments associated with the newly effective tax legislation requiring the capitalization of certain research and development expenses for purposes of calculating non-GAAP operating cash flows. We do not believe the impact resulting from changes in the tax treatment of research and development costs to be indicative of our operating performance, nor does our management consider such impact in assessing the level of cash provided by operating activities. Accordingly, we believe excluding the impact of this change in tax law provides for better evaluation of our current operating performance and comparison to past operating results.
•Stock-based compensation expenses. We exclude stock-based compensation expenses primarily because they are non-cash expenses that we exclude from our internal management reporting processes. We also find it useful to exclude these expenses when we assess the appropriate level of various operating expenses and resource allocations when budgeting, planning, and forecasting future periods. Moreover, because of varying available valuation methodologies, subjective assumptions and the variety of award types that companies can use, we believe excluding stock-based compensation expenses allows investors to make meaningful comparisons between our recurring core business operating results and those of other companies.
•Amortization of purchased intangibles. We incur amortization expense for purchased intangible assets in connection with acquisitions of certain businesses and technologies. Amortization of intangible assets is a non-cash expense and is inconsistent in amount and frequency because it is significantly affected by the timing, size of acquisitions, and the inherent subjective nature of purchase price allocations. Because these costs have already been incurred and cannot be recovered, and are non-cash expenses, we exclude these expenses for internal management reporting processes. We also find it useful to exclude these charges when assessing the appropriate level of various operating expenses and resource allocations when budgeting, planning, and forecasting future periods. Investors should note that the use of intangible assets contributed to our revenues earned during the periods presented and will contribute to our future period revenues as well.
•Income tax effects on the difference between GAAP and non-GAAP costs and expenses. The income tax effects that are excluded relate to the imputed tax impact on the difference between GAAP and non-GAAP costs and expenses due to stock-based compensation and purchased intangibles for GAAP and non-GAAP measures.
Limitations on the Use of Non-GAAP Financial Measures
There are limitations to using non-GAAP financial measures because non-GAAP financial measures are not prepared in accordance with GAAP and may be different from non-GAAP financial measures provided by other companies.
The non-GAAP financial measures are limited in value because they exclude certain items that may have a material impact upon our reported financial results. In addition, they are subject to inherent limitations as they reflect the exercise of judgments by management about which items are adjusted to calculate our non-GAAP financial measures. We compensate for these limitations by analyzing current and future results on a GAAP basis as well as a non-GAAP basis and also by providing GAAP measures in our public disclosures.
Non-GAAP financial measures should not be considered in isolation from, or as a substitute for, financial information prepared in accordance with GAAP. We encourage investors and others to review our financial information in its entirety, not to rely on any single financial measure to evaluate our business, and to view our non-GAAP financial measures in conjunction with the most directly comparable GAAP financial measures.
32 | Veeva Systems Inc. | Form 10-Q | ||||
The following table reconciles the specific items excluded from GAAP metrics in the calculation of non-GAAP metrics for the periods shown below:
Liquidity and Capital Resources
| Three months ended October 31, | Nine months ended October 31, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Net cash provided by operating activities | $ | 142,660 | $ | 112,959 | $ | 717,073 | $ | 710,409 | |||||||||||||||
| Net cash used in investing activities | (405,729) | (10,229) | (968,421) | (290,992) | |||||||||||||||||||
| Net cash (used in) provided by financing activities | (10,543) | (16,046) | (17,135) | 6,416 | |||||||||||||||||||
| Effect of exchange rate changes on cash and cash equivalents | (1,475) | (1,469) | (4,398) | (4,414) | |||||||||||||||||||
| Net change in cash and cash equivalents | $ | (275,087) | $ | 85,215 | $ | (272,881) | $ | 421,419 | |||||||||||||||
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, 2022, our cash, cash equivalents, and short-term investments totaled $3.0 billion, of which $45 million represented cash and cash equivalents held outside of the United States.
Our primary use of cash is payment of our operating costs, which consist primarily of employee-related expenses, such as compensation and benefits, investments in our information technology infrastructure, and general operating expenses for marketing, facilities, and overhead costs. Long-term cash requirements for items other than normal operating expenses could include the following: the acquisition of businesses, software products, or technologies complementary to our business; and capital expenditures, including the purchase and implementation of internal-use software applications.
Our non-U.S. cash and cash equivalents have been earmarked for indefinite reinvestment in our operations outside the United States, except in certain designated jurisdictions that have an immaterial impact to our financial statements. As of October 31, 2022, we have not recorded any taxes, such as withholding taxes, associated with
| Veeva Systems Inc. | Form 10-Q | 33 | ||||
the foreign earnings that are indefinitely reinvested outside of the United States. We believe our U.S. sources of cash and liquidity are sufficient to meet our business needs in the United States and do not expect that we will need to repatriate additional funds we have designated as indefinitely reinvested outside the United States. Under currently enacted tax laws, should our plans change and we were to choose to repatriate some or all of the funds we have designated as indefinitely reinvested outside the United States, such amounts may be subject to certain jurisdictional taxes.
We have financed our operations primarily through cash generated from operations. We believe our existing cash, cash equivalents, and short-term investments generated from operations will be sufficient to meet our working capital and capital expenditure needs over at least the next 12 months. Our future capital requirements will depend on many factors including our growth rate, subscription renewal activity, the timing and extent of spending to support product development efforts, the expansion of sales and marketing activities, the ongoing investments in technology infrastructure, the introduction of new and enhanced solutions, and the continuing market acceptance of our solutions. We may in the future enter into arrangements to acquire or invest in complementary businesses, services and technologies, and intellectual property rights. We may be required to seek additional equity or debt financing for those arrangements or for other reasons. In the event that additional financing is required from outside sources, we 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, Inc. and Amazon Web Services), building infrastructure costs (including leases for office space), fees for third-party legal counsel and accounting services, payments to taxing authorities, and data acquisition costs. Note that our net income reflects the impact of excess tax benefits related to equity compensation.
Net cash provided by operating activities was $143 million for the three months ended October 31, 2022 compared to $113 million provided by operating activities for the three months ended October 31, 2021. The $30 million increase was primarily due to increased sales and the related cash collections, partially offset by higher operating expenses due to increases in headcount.
Net cash provided by operating activities was $717 million for the nine months ended October 31, 2022 compared to $710 million provided by operating activities for the nine months ended October 31, 2021. The $7 million increase was primarily due to increased sales and the related cash collections, partially offset by higher operating expenses due to increases in headcount and higher cash paid for income taxes.
The cash flows from operating activities for the nine months ended October 31, 2022 represent a significant portion of the cash flows from operating activities that we expect during our fiscal year ending January 31, 2023. As a result, we expect cash flows from operating activities to be substantially less in the fourth quarter of this fiscal year.
Our cash flows from operating activities for the nine months ended October 31, 2022 was reduced as a result of certain provisions in the Tax Cuts and Jobs Act of 2017, which eliminated the option to deduct research and development expenditures and required taxpayers to capitalize and amortize them over five or fifteen years. Although Congress is considering legislation that would defer the requirement to later years, we have no assurance that the provision will be so deferred, repealed or otherwise modified.
Cash Flows from Investing Activities
The cash flows from investing activities primarily relate to cash used for the purchase of marketable securities, net of maturities. We also use cash to invest in capital assets to support our growth.
Net cash used in investing activities was $406 million for the three months ended October 31, 2022 compared to $10 million used in investment activities for the three months ended October 31, 2021. The $396 million increase in cash used in investing activities was mainly due to the net increase in purchases of investments for the three months ended October 31, 2022.
34 | Veeva Systems Inc. | Form 10-Q | ||||
Net cash used in investing activities was $968 million for the nine months ended October 31, 2022 compared to $291 million used in investment activities for the nine months ended October 31, 2021. The $677 million increase in cash used in investing activities was mainly due to the net increase in purchases of investments for the nine months ended October 31, 2022.
Cash Flows from Financing Activities
The cash flows from financing activities relate primarily to stock option exercises and taxes paid on behalf of employees related to the net share settlement of RSUs. In June 2021, we began funding withholding taxes due on employee RSU awards by net share settlement, rather than our previous approach of requiring employees to either sell shares of our Class A common stock or pay the withholding taxes in cash to cover taxes due upon vesting of such awards.
Net cash used in financing activities was $11 million for the three months ended October 31, 2022 compared to $16 million used in financing activities for the three months ended October 31, 2021. The $6 million decrease in cash used in financing activities was primarily related to a $6 million decrease in cash used to pay employee taxes related to the net share settlement of RSUs.
Net cash used in financing activities was $17 million for the nine months ended October 31, 2022 compared to $6 million provided by financing activities for the nine months ended October 31, 2021.The $24 million decrease in cash provided by financing activities was primarily related to an increase of $11 million of cash used to pay employee taxes related to the net share settlement of RSUs and a decrease of $13 million in proceeds from employee stock option exercises.
Critical Accounting Policies and Estimates
Our condensed consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States (GAAP). In the preparation of these condensed consolidated financial statements, we are required to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs, and expenses and related disclosures. On an ongoing basis, we evaluate our estimates and assumptions. Our actual results may differ from these estimates under different assumptions or conditions.
There have been no material changes to our critical accounting policies and estimates during the nine months ended October 31, 2022 as compared to the those disclosed in our Annual Report on Form 10-K for the fiscal year ended January 31, 2022.
| Veeva Systems Inc. | Form 10-Q | 35 | ||||
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 Euro, Japanese Yen, Canadian Dollar, British Pound Sterling, Hungarian Forint, Chinese Yuan, and Brazilian Real, and may be adversely affected in the future due to changes in foreign currency exchange rates. For example, changes in exchange rates negatively affected our revenues as expressed in U.S. dollars for the three and nine months ended October 31, 2022, and we expect our revenues as expressed in U.S. dollars to be negatively affected by changes in exchange rates for our fiscal year ending January 31, 2023 as well. Additionally, changes in exchange rates reduced our expenses as expressed in U.S. dollars for the three and nine months ended October 31, 2022, which largely offset the impact to operating income for those periods resulting from changes in exchange rates that reduced revenue as expressed in U.S. dollars. For the three and nine months ended October 31, 2022, about 83% and 83% of our revenue and about 79% and 80% of our expenses were denominated in USD, respectively.
We have also experienced and will continue to experience foreign currency fluctuations due to the periodic re-measurement of monetary account balances that are denominated in currencies other than the functional currency of the entities in which they are recorded and such fluctuations can impact our net income. 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. Realized and unrealized foreign currency losses, primarily resulting from the re-measurement of monetary account balances offset by the foreign currency hedges, were $3 million and $2 million for the three and nine months ended October 31, 2022, respectively. For the three and nine months ended October 31, 2021, we had realized and unrealized foreign currency losses of $1 million and gains of $1 million, respectively.
Interest rate sensitivity
We had cash, cash equivalents and short-term investments totaling $3.0 billion as of October 31, 2022. 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 and other operational activities. 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 $23 million market value reduction in our investment portfolio as of October 31, 2022. An immediate decrease of 100-basis points in interest rates would have increased the market value by $23 million as of October 31, 2022. 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.
36 | Veeva Systems Inc. | Form 10-Q | ||||
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, 2022. 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, 2022, 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, 2022 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.
| Veeva Systems Inc. | Form 10-Q | 37 | ||||
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. In addition to the legal proceedings referenced in note 13, we are involved in the following additional legal proceedings which may be material to our business.
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. Among other things, Medidata and Sparta appealed the superior court’s decisions finding that the case may proceed as to some causes of action, and Veeva cross-appealed the superior court’s ruling that certain causes of action were barred under California law. On March 10, 2022, the California Court of Appeal affirmed the decision of the superior court, ruling that certain of Veeva's claims may proceed and certain of its claims may not. This decision is now final and none of the parties has sought its review.
On October 31, 2019, as to Veeva's claims against IQVIA, the trial court's earlier dismissal was reversed by the court of appeals and the case was reassigned to a new trial court judge. On February 26, 2020, IQVIA answered our complaint. Discovery is proceeding. With the ruling from the California Court of Appeals on the Sparta and Medidata appeals final, the case as to all three defendants is back before the same trial court judge.
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.
38 | Veeva Systems Inc. | Form 10-Q | ||||
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.
Summary of Risk Factors
The below is a summary of principal risks to our business and risks associated with ownership of our stock. It is only a summary. You should read the more detailed discussion of risks set forth below and elsewhere in this report for a more complete discussion of the risks listed below and other risks.
•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 or stop the use of our solutions, and we may incur significant liabilities.
•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.
•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.
•We expect our revenue growth rates to decline in future periods and, as our costs increase, we may not be able to sustain the same level of profitability we have achieved in the past.
•Difficulty attracting and retaining highly skilled employees could adversely affect our business and efforts to attract and retain such employees may increase our expenses.
•Our revenues are relatively concentrated within a small number of key customers, and the loss of one or more of such key customers could cause our revenues to decline.
•Nearly all of our revenues are generated by sales to customers in the life sciences industry, and factors that adversely affect this industry could also adversely affect us.
•Unique and uncertain macroeconomic and geopolitical factors, including as a result of inflationary pressures, currency exchange fluctuations, the Russian invasion of Ukraine, continuing uncertainty surrounding the effects of COVID-19, and rising interest rates may cause instability and volatility in the global financial markets and disruptions within the life sciences industry that may negatively impact our business, our financial results, and our stock price.
•If the third-party providers of healthcare professional and healthcare organization data and prescription drug sales data, such as IQVIA for instance, do not allow our customers to upload and use such data in our solutions, the demand for our solutions may decrease, and our business may be negatively impacted.
•We rely on third-party providers for computing infrastructure, secure network connectivity, and other technology-related services needed to deliver our cloud solutions, and any disruption in the services provided by them could adversely affect our business and subject us to liability.
•We are currently dependent upon Salesforce, Inc.’s platform for our multichannel CRM applications, but we have announced plans to migrate our CRM applications from the Salesforce Platform to our own Veeva Vault Platform. The planned migration could be unsuccessful and could cause business disruptions for customers, lead to the loss of our customers to competitors, and adversely affect our operating results.
•We are currently being sued by third parties for alleged misappropriation of trade secrets. We may suffer damages, which could be significant, or other harm from these lawsuits and we may be sued for infringement or misappropriation of third-party intellectual property in the future.
| Veeva Systems Inc. | Form 10-Q | 39 | ||||
•Our conversion to a PBC may not result in the benefits that we anticipate, requires our directors to balance the interest of stockholders with other interests, and may subject us to legal uncertainty and other risks.
•Until its expiration on October 15, 2023, 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.
Risks Related to Our Business
If our security measures are breached or compromised or unauthorized access to customer data is otherwise obtained, our solutions may be perceived as not being secure, customers may reduce or stop their use of 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, and sensitive proprietary data related to the clinical trial, regulatory submission and sales and marketing processes for medical treatments), personal information of medical professionals, personal information (which may include personal health information) of patients and clinical trial participants, and other sensitive information. For example, Veeva Crossix processes third-party health and non-health data for U.S. patients. Additionally, we maintain and process other confidential, proprietary, and sensitive business information, including personal information relating to our employees and contractors and confidential information relating to our solutions and business. Unauthorized access or other security breaches or incidents, as a result of third-party action (e.g., cyber-attacks, or the introduction into our networks or systems of ransomware or other malware), employee or contractor error or malfeasance, product defect, or otherwise, could result in the loss of information, inappropriate access to or use, unavailability, modification, destruction, or other processing of information, loss of intellectual property, service interruption, service degradation, outages, service level credits, claims, demands, litigation, regulatory investigations and other proceedings, indemnity obligations, damage to our reputation, and other liability. It is possible that our risk of cyber-attack and other sources of security breaches and incidents may be elevated as a result of Russia’s invasion of Ukraine due to an increase in cyber-attack attempts on us, our customers, our partners, or our technology infrastructure providers. 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, our efforts to detect, prevent, and remediate known or unknown security vulnerabilities, including those arising from third-party hardware or software in our supply chain, may be insufficient to prevent security breaches or incidents resulting from such vulnerabilities, and may result in additional direct or indirect costs and liabilities and time of management and technical personnel. We may be required to expend significant capital and financial resources to protect against the foregoing threats and to alleviate problems caused by actual or perceived security breaches or incidents. Additionally, we and our service providers may face difficulties or delays in identifying, remediating, and otherwise responding to any cybersecurity attack or other security breach or incident. Any or all of these circumstances or issues, or the perception that any of them have occurred or are present (including any actual or perceived cyberattacks or other security breaches or incidents), could adversely affect our ability to attract new customers, cause existing customers to elect to not renew their subscriptions, result in reputational damage and harm to our market position, or subject us to third-party claims, demands, and lawsuits, regulatory investigations, proceedings, fines, and penalties, mandatory notifications and disclosures, or other action or liability, which could adversely affect our operating results and financial condition. Our insurance may not be adequate to cover losses associated with such events, and such insurance may not cover all types of costs, expenses, and losses we could incur to respond to and remediate a security breach or incident.
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 Commercial Solutions is IQVIA Holdings Inc., which offers a CRM application built on the Salesforce Platform, various data products, and other applications. Our data and data analytics products, including Veeva OpenData, Veeva Link, Veeva Crossix, and Veeva Compass, compete with IQVIA, Ipsos Group S.A., Definitive Health Corp., and smaller data and data analytics providers. IQVIA, Dassault Systèmes (through its Medidata business line), OpenText Corporation, Oracle Corporation, Honeywell International
40 | Veeva Systems Inc. | Form 10-Q | ||||
Inc., and other smaller application providers offer applications that compete with certain of our Veeva R&D applications. Our Veeva Commercial Cloud and Veeva R&D applications 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 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 business consulting and professional services offerings compete with a range of professional services firms, including, at times, some of our partners. 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.
We recently announced plans to migrate our multichannel CRM applications from the Salesforce Platform to our Veeva Vault Platform, as discussed in more detail below, which could lead to customers choosing competitors that continue to use the Salesforce Platform, or other CRM application providers, over us.
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.
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. 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. For example, we have limited experience selling our Veeva Compass offering for longitudinal patient data, and our MyVeeva for Patients solution that enables remote patient interactions for clinical trials. Also, as discussed in more detail below, we recently announced plans to migrate our multichannel CRM applications from the Salesforce Platform to our Veeva Vault Platform. 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, develop other new solutions, or 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.
Difficulty attracting and retaining highly skilled employees could adversely affect our business and efforts to attract and retain such employees may increase our expenses.
To execute our growth plan, we must attract and retain highly skilled employees. Competition for such employees and potential employees is intense. We have experienced, and expect to continue to experience, difficulty in hiring and retaining employees with the appropriate level of qualifications, and we also have experienced, and expect to continue to experience, intense recruitment of our employees by competitors and other technology companies. These factors have been exacerbated by a general labor market shortage. We believe our customers have faced similar challenges. Staffing difficulties resulting from these labor market factors can negatively impact the timing of projects and the ability to staff projects.
Further, it takes time for newly hired employees to become productive. With respect to sales professionals, for instance, 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 prolonged declines in the
| Veeva Systems Inc. | Form 10-Q | 41 | ||||
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.
In response to unusual inflationary pressure and the demand environment for skilled employees, we increased salaries for the majority of our employees by 5% effective September 1, 2021. Further, in light of the labor market conditions and inflationary pressure discussed above, our compensation increases in connection with our annual compensation review process, which took place in our fiscal quarter ended April 30, 2022, were higher than previous years. These compensation changes have increased our expenses, with full quarter impact starting in our fiscal quarter ended July 31, 2022.
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, 2022, 2021, and 2020, our top 10 customers accounted for 31%, 36%, and 36%, of our total revenues, respectively. We rely on our reputation and recommendations from key customers in order to promote our solutions to potential customers, which we call “reference selling.” The loss of any of our key customers, or a failure of one or more of them to renew or expand user subscriptions for some or all our products, 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 certain or all of their subscription orders. We are also likely to face increasing purchasing scrutiny at the renewal of 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 could be particularly pronounced with respect to our largest customers.
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 delivering, 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 incur the expense of litigation or substantial liability.
We have experienced rapid growth, and if we fail to manage our growth effectively, we may be unable to execute our business plan.
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. As we continue to grow, both organically and through acquisitions, we must effectively integrate, develop, and manage an increasing number of employees, including an increasing number of employees who, pursuant to our “Work Anywhere” policy, do not work from a Veeva office. We may find it challenging to maintain the same level of employee productivity while executing our growth plan, fostering collaboration, and maintaining the beneficial
42 | Veeva Systems Inc. | Form 10-Q | ||||
aspects of our culture, and any such failures could negatively affect our future success, including our ability to attract and retain highly qualified employees and to achieve our business objectives.
Our rapid growth has placed, and will continue to place, a significant strain on our management capabilities, administrative and operational infrastructure, facilities, IT, and other resources. We anticipate that additional investments in our computing infrastructure and facilities 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 time, effort, and expense. 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.
Our plans to migrate our CRM applications from the Salesforce Platform to our own Veeva Vault Platform could cause business disruptions for customers, lead to the loss of our customers to competitors, and adversely affect our operating results.
We currently depend on the Salesforce Platform to deliver our multichannel CRM applications, but we recently announced plans to migrate those applications to our Veeva Vault Platform. We also recently announced that we do not intend to renew our agreement with Salesforce, Inc. for use of the Salesforce Platform. Pursuant to the terms of our agreement, from September 1, 2025 to September 1, 2030, we may not sell applications that utilize the Salesforce Platform to new customers and our sales of applications that utilize the Salesforce Platform to a customer existing at September 1, 2025 may not exceed 150% of the seats in use by each such customer as of September 1, 2025. After September 1, 2030, we will not be able to sell applications that utilize the Salesforce Platform to any customers. We currently intend to make our CRM applications available on the Veeva Vault Platform in 2024 for early adopters and in 2025 for all customers, but we may not be successful in achieving this timeline. All existing CRM customers will be required to migrate to the Veeva Vault Platform by September 1, 2030. The migration of our CRM applications and the migration of existing customers will require time and expense, which may be significant. These migration processes are complex and we cannot be certain that we will be successful or that the Veeva Vault Platform will be ready for migration on our intended timeline or the timeline necessary to support our customers. Further, some existing customers may decide not to migrate to the Veeva Vault Platform and may decide to use a different CRM solution. During the migration period, there may be disruptions in our services or other migration-related problems, whether or not such incidents are our fault, that could subject us to liability or harm our reputation. If we are unsuccessful migrating our multichannel CRM applications to the Veeva Vault Platform, encounter disruptions or other problems in the migration process, or our customers do not migrate to the Veeva Vault Platform in a timely manner, or at all, our business, operating results and brand could be materially and adversely affected.
The continuing impact of COVID-19 may negatively impact our business and our stock price.
The worldwide outbreak of COVID-19 has had a widespread impact on our business operations, the life sciences industry, healthcare systems, financial markets, and the global economy. While the impact of COVID-19 on our operational and financial performance has not been materially negative to date, the future impact is uncertain and will depend on future developments, including the duration and spread of outbreaks and variants, government responses, the rate of vaccinations and boosters, the impact on our customers, the impact on our employees, and the extent of further adverse impacts to the economy, all of which cannot be predicted with certainty.
Certain impacts of the COVID-19 pandemic may be enduring over the long term and may result in significant changes in business practice within the technology industry, the life sciences industry, and the world economy generally. For example, while we have mostly resumed in-person customer, employee, and industry events in most geographies, travel and in-person meeting restrictions that limit our ability to conduct business in person still remain in place in some locations—for example, China—and we cannot predict how long such limitations will remain in effect. Further, the extent to which remote work will remain common practice for our customers and peer companies is not certain and may have significant impacts on hiring practices, management practices, expense structures and investments, and other aspects of their business and ours. We have adopted a permanent “Work Anywhere” policy, which generally gives employees the flexibility to work in an office or at home on any given day, with certain job-specific restrictions. We believe this program is beneficial to our business, but we have limited experience with the program. Similarly, the extent to which virtual meetings and interactions continue to be used or preferred in lieu of
| Veeva Systems Inc. | Form 10-Q | 43 | ||||
in-person interactions may significantly change business practices for us and our customers, and, in turn, may impact demand for our products and services. For example, if our customers reduce sales representatives in response to an increasing preference for virtual meetings with doctors, demand for our core CRM application may decline. In the quarter ended October 31, 2020, we disclosed that we expected life sciences companies to reduce the number of sales representatives that they employ by roughly 10%. We currently expect the majority of these reductions to take place by the end of our fiscal year ending January 31, 2023, with reductions still occurring in our fiscal year ending January 31, 2024. Such reductions could negatively impact sales of our solutions, including Veeva CRM and certain of our other Commercial Solutions, but we cannot be certain such reductions will happen or of the timing or magnitude of such reductions. At the same time, demand for our products that enable virtual interactions with doctors and clinical trial participants may increase. We cannot accurately predict how such changes may impact Veeva's results over the long term.
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. 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 completed.
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;
•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 revenue, licensing, support, or professional services model of the acquired company;
•diversion of management’s attention from other business concerns;
•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;
•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;
•use of substantial portions of our available cash to consummate the acquisition;
•use of resources that are needed in other parts of our business;
•significant changes beyond our control to the worldwide economic environment that could negatively impact our underlying assumptions and expectations for performance of the acquired business; and
•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.
44 | Veeva Systems Inc. | Form 10-Q | ||||
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.
Moreover, a significant portion of the purchase price of companies we acquire may be allocated to acquired intangible assets and goodwill, 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.
Our sales cycles can be long and unpredictable, and our sales efforts require considerable investment of resources. 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 could 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 12 months or longer. Sales cycles for our newer applications or in newer markets or industries are also lengthy and difficult to predict. We spend substantial time, effort, and expense 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 macroeconomic and regulatory environments, the availability of funding in the life sciences industry, the announcement or planned introduction of new solutions by us or our competitors, and the purchasing approval processes of potential customers. For example, since the quarter ended July 31, 2022, we have experienced heightened project scrutiny from certain enterprise customers, which we expect to continue from certain enterprise customers for the remainder of the fiscal year ending January 31, 2023. 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 primary 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, 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 other natural disaster, or catastrophic event such as an actual or threatened public health emergency (e.g., COVID-19), fire, extreme weather event, power loss, telecommunications failure, cyber-attack, war (including the Russian invasion of Ukraine), or terrorist attack, we may be unable to continue our operations at full capacity or at all and may experience system interruptions, reputational harm, delays in our solution development, lengthy interruptions in our services, breaches of data security, loss of key employees, and loss of critical data, all of which could have an adverse effect on our future operating results.
Our core Veeva CRM application has achieved substantial market penetration of pharmaceutical and biotechnology companies. If our efforts to sustain or further increase the use and adoption of our core CRM application do not succeed, the growth of our Commercial Solutions revenues may be negatively impacted.
In our fiscal year ended January 31, 2022, we derived approximately 59% of our subscription services revenues and approximately 56% of our total revenues from our Commercial Solutions. In our fiscal quarter ended October 31, 2022, we derived approximately 55% of our subscription services revenues and approximately 53% of our total revenues from our Commercial Solutions. A significant percentage of our Commercial Solutions subscription services revenues are derived from subscriptions for our core CRM application, and we have realized substantial sales penetration among pharmaceutical and biotechnology companies for our core Veeva CRM application. If we are not able to sell additional user subscriptions for our core CRM application, if we fail to renew existing subscriptions for our core CRM application, or if subscription levels for our core CRM application are reduced at renewal (as a result of reductions in sales representatives that use our solutions, change in demand for our solutions, or for other reasons), the growth of our Commercial Solutions revenues may be negatively impacted. In the quarter ended October 31, 2020, we disclosed that we expected life sciences companies to reduce the number
| Veeva Systems Inc. | Form 10-Q | 45 | ||||
of sales representatives that they employ by roughly 10%. We currently expect the majority of these reductions to take place by the end of our fiscal year ending January 31, 2023, with reductions still occurring in our fiscal year ending January 31, 2024. Such reductions could negatively impact sales of Veeva CRM and certain of our other Commercial Solutions, but we cannot be certain such reductions will happen or of the timing or magnitude of such reductions.
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, in the past several years we have experienced changes to our senior leadership team. 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 and employees or candidates 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.
Our business could be adversely affected if our customers are not satisfied with the professional or technical support services provided by us or our partners.
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, including training our customers’ employees on 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, 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 sufficiently accommodate short-term increases in customer demand for technical support services to our customers’ satisfaction. Increased customer demand for our technical support 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.
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, 2022, customers outside North America accounted for approximately 42% 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 additional 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 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. We do not currently have locations or employees in Russia and our revenues from sales to Russian and Belarus entities is limited. However, some of our customers, particularly large multinational companies, have users of our products in Russia and the affected areas. For example, certain customers have recently reduced their number of end users in Ukraine. If the conflict continues or worsens and customers further curtail or discontinue their operations in Ukraine, Russia or Belarus, we may lose sales and our results of operations could be negatively impacted. We also
46 | Veeva Systems Inc. | Form 10-Q | ||||
historically maintained a small staff and office in Belarus, but we have discontinued our operations there. As noted below, the Russian invasion of Ukraine poses particular risk to certain aspects of our international business.
The risks we face in doing business internationally that could adversely affect our business include:
•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 laws and regulations;
•data privacy and data sovereignty laws which require that customer data be stored and processed in a designated territory;
•difficulties in staffing and managing foreign operations;
•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;
•compliance challenges related to the complexity of multiple, conflicting and changing governmental laws and regulations, including those related to employment, tax, privacy and data protection, and anti-bribery;
•increased financial accounting and reporting burdens and complexities;
•difficulties in repatriating funds without adverse tax consequences or restrictions on the transfer of funds more generally, including as a result of sanctions arising from the Russian invasion of Ukraine, which may limit our ability to receive payment from Russian banks;
•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 diplomatic relations and trade policy, including the status of relations between the United States and other countries, including China, Russia, or Belarus, and the implementation of or changes to trade sanctions, tariffs, and embargoes, including if the United States and other countries were to impose more significant general sanctions against Russia or Belarus in response to the continuing conflict in Ukraine, which could ban the use of our products by companies or users in Russia or Belarus;
•public health crises, such as epidemics and pandemics, including COVID-19; and
•unstable regional and economic political conditions or war in the markets in which we operate, including as a result of the Russian invasion of Ukraine.
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.
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 that 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 we target. 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,
| Veeva Systems Inc. | Form 10-Q | 47 | ||||
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.
Risks Related to the Principal Industry We Serve
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 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, including the extent to which the U.S. government or other governments may establish or negotiate prescription drug prices, has continued to be a topic of discussion by political leaders and regulators in the United States and elsewhere. Significant changes in drug pricing policy or regulation could result in life sciences companies reducing the number of sales representatives that use our products or otherwise reduce demand for our products. For example, the recently enacted Inflation Reduction Act contains a number of significant drug pricing reforms, including provisions designed to limit the prices paid by Medicare for various prescription drugs. It is unclear at this time what, if any, impact this legislation will have on our business or our customers’ businesses. We will continue to evaluate its impact.
•Consolidation of companies within the life sciences industry—Consolidation within the life sciences industry has accelerated in recent years, and this trend could continue. We have in the past, and may in the future, suffer reductions in user subscriptions or non-renewal of customer subscription orders due to industry consolidation. We may not be able to expand sales of our solutions and services to new customers enough to counteract any negative impact of company consolidation on our business. 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 companies consolidate, competition to provide solutions and services will become more intense and establishing relationships with large industry participants will become more important. These industry participants may also try to use their market power to negotiate price reductions for our solutions. If consolidation of our larger 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 revenue from the combined company 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.
•Changes in the funding environment and bankruptcies in the life sciences industry—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. In 2022, there has been a reduction in funding for early-stage life sciences companies, which may result in reduced sales and adversely affect our financial results for the remainder of the fiscal year ending January 31, 2023. Moreover, life sciences companies, and in particular early-stage companies with pre-commercial treatments in clinical trials, may ultimately be unsuccessful and may subsequently declare bankruptcy. If our customers declare bankruptcy or otherwise dissolve, they may terminate their agreements with us or we may not be able to recoup the full payment of fees owed to us.
•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 and patients, 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 such as the impact of COVID-19, could lead to a significant reduction in sales representatives that use our solutions or otherwise change the demand for our solutions. In the quarter ended October 31, 2020, we disclosed that we expected life sciences companies to reduce the number of sales representatives that they employ by roughly 10%. We
48 | Veeva Systems Inc. | Form 10-Q | ||||
currently expect the majority of these reductions to take place by the end of our fiscal year ending January 31, 2023, with reductions still occurring in our fiscal year ending January 31, 2024. Such reductions could negatively impact sales of our solutions, including Veeva CRM and certain of our other Commercial Solutions. We cannot be certain such reductions will happen or of the magnitude of such reductions. 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 geopolitical conditions that impact the life sciences industry, changes in the ability to sell healthcare treatments in certain locations, and the global availability of healthcare treatments provided by the life sciences companies to which we sell—If economic or geopolitical conditions deteriorates, or the ability to market life sciences products or conduct clinical trials in key markets is disrupted, including as a result of the Russian invasion of Ukraine or resulting sanctions, or if the demand for life sciences products globally deteriorates for other reasons, our customers may delay or reduce their IT spending, particularly within the regions impacted by negative economic or geopolitical conditions. For example, it has been reported that a number of significant life sciences companies plan to scale back sales, operations, and investments in Russia, including curtailing sales and marketing and clinical trial activity in Russia. It is also possible that clinical trial activity may be disrupted or delayed in the regions near Ukraine as clinical trial sites deal with the healthcare impact of the Russian invasion of Ukraine.
Any of the above could result in reductions in sales of our solutions, longer sales cycles, reductions in subscription duration and value, slower adoption of new product offerings, 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 these factors and others that affect the life sciences industry generally.
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, requirements regarding drug sample tracking and distribution, requirements regarding system validations, requirements regarding processing of health data, and other laws and regulations. Our customers expect to be able to use our solutions in a manner that is compliant with the regulations to which they are subject. 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.
In addition, many countries and self-regulatory bodies impose requirements regarding payments and transfers of value from life sciences companies to healthcare professionals. 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, with specific exceptions, to report annually to the government information related to certain payments and other transfers of value to physicians. Our solutions and services targeted at life sciences companies, including, for example, Veeva Digital Events, 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.
As we increase the number of products we offer and the number of countries in which we operate, the complexity of adjusting our solutions to comply with legal and regulatory changes will increase. If we are unable to effectively manage this increased complexity 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. Furthermore, we have in the past and may in the future be subject to inspections or audits by government agencies or other regulatory bodies to verify our customers’ compliance with applicable laws, regulations, or GxP principles.
| Veeva Systems Inc. | Form 10-Q | 49 | ||||
Additionally, any failure of our customers to comply with laws and regulations applicable to the functions for which they use our solutions could result in investigations by regulatory authorities, fines, penalties, or claims for substantial damages against our customers that may, in turn, 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 investigations and lawsuits that, even if unsuccessful, could divert our resources and our management’s attention and adversely affect our business and customer relationships, 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, store, and disclose personal data regarding their employees, healthcare professionals, and patients. Patient data may include sensitive health data. In many countries, governmental bodies have adopted or may adopt laws and regulations regarding the collection, use, processing, storage, and disclosure of personal data, making compliance an increasingly complex task.
For example, in the United States, the U.S. Department of Health and Human Services promulgated privacy and security rules under the Health Insurance Portability and Accountability Act of 1996 (HIPAA) that cover protected health information (PHI) by limiting use and disclosure and giving individuals the right to access, amend, and seek accounting of their PHI. Certain of our customers may be either business associates or covered entities under HIPAA, which means we must maintain a HIPAA compliance program. There is also the potential for the U.S. federal government to pass additional data privacy laws.
Several states have signed into law or are intending to enact laws regarding requirements on personal information. For example, under the California Consumer Privacy Act (CCPA) and the California Privacy Rights Act (CPRA), we are generally considered a “service provider” for our software solutions and a “business” for our data and analytics products. These laws, regulations and legislative developments have potentially far-reaching consequences and may require us to modify our data management practices and to incur substantial expense in order to comply.
Veeva Crossix provides analytics derived from de-identified third-party health and consumer data on U.S. residents that life sciences companies use for measurement of their advertising objectives. The PHI processed by Crossix for its measurement services is certified to satisfy HIPAA’s de-identification standard. Certain states have signed into law or are intending to enact laws regarding requirements on de-identified information. There is some uncertainty regarding those laws' conformity with the HIPAA de-identification standards. Compliance with state laws could require additional investment and management attention and may subject us to significant liabilities if we do not comply with new and potentially conflicting regulations.
Under the European General Data Protection Regulation (GDPR), we act as a data controller for our data products, Veeva OpenData and Veeva Link, and a data processor with respect to our software solutions. Regarding data transfer, the European Court of Justice invalidated the EU-U.S. Privacy Shield Framework and we now rely on the EU Standard Contractual Clauses (SCCs), as well as our technical, contractual, and security measures, to ensure that our European customers have the appropriate legal mechanisms in place for their personal data to be accessed within the United States. Management has spent considerable time and resources to respond to customer inquiries as a result of this decision. Additionally, in June 2021, the European Commission issued revised SCCs, which are required to be implemented, and in February 2022, the United Kingdom’s Information Commissioner’s Office issued new standard contractual clauses (the UK SCCs), to support personal data transfers out of the United Kingdom. The United Kingdom’s Parliament approved the UK SCCs for use in March 2022. We are required to take additional steps to legitimize any personal data transfers impacted by these developments, and to engage in contract negotiations with third parties that aid in processing personal data on our behalf, and we may be subject to increased costs of compliance and limitations on our service providers and us.
There is also a trend toward countries enacting data localization or other country specific requirements which could be problematic to cloud software providers. Understanding and implementing country, industry, and customer specific requirements and certifications on top of our internationally recognized security certifications could require additional investment and management attention and may subject us to significant liabilities if we do not comply with applicable requirements. Compliance with global laws and regulations relating to privacy, data protection, and cybersecurity has and will continue to require valuable management and employee time and resources, and any actual or perceived failure to comply with these laws and regulations could include severe penalties and reduce demand for our solutions. Additionally, countries outside of the EU have enacted or are considering enacting similar cross-border data transfer restrictions and laws requiring local data residency. For example, in 2021, China adopted the Personal Information Protection Law (PIPL), together with the Cybersecurity Law (CSL) and the Data Security Law (DSL), which have required and will continue to require significant investment and resources to develop our
50 | Veeva Systems Inc. | Form 10-Q | ||||
position and provide compliant solutions for our customers. Further, the United Kingdom’s exit from the EU, and ongoing developments in the United Kingdom, have created uncertainty with regard to data protection regulation in the United Kingdom. Although the European Commission adopted an adequacy decision for the United Kingdom in June 2021 that allows for the continued flow of personal data from the EU to the United Kingdom, this decision may be revoked or modified and will need to be renewed after four years from the date of adoption.
In addition to government regulations, privacy advocates and other key industry players have established or may establish various new, additional, or different policies or self-regulatory standards, such as the prohibition of third-party cookies and other identifiers in certain digital environments that may place additional burdens or resource constraints on us, limit our ability to collect and use certain data, and limit our ability to generate certain analytics. Our customers may expect us to meet voluntary certifications or adhere to other standards established by third parties. Moreover, the continuing evolution of these standards might cause confusion for our customers and may have an impact on the solutions we offer, including our data products. If we are unable to maintain these certifications or meet these standards, it could reduce demand for our solutions and adversely affect our business and operating results.
Customers expect that our solutions can be used in compliance with applicable data protection and data privacy laws and regulations. The functional and operational requirements and costs of compliance with such laws and regulations may adversely impact our business. Data protection authorities will from time to time review our products and services and their compliance with laws and regulations around the world. Failure to enable our solutions to comply with such laws and regulations could lead to inspections, audits, regulatory investigations and other proceedings, significant fines, penalties, and other relief imposed by government agencies and regulatory bodies, and claims, demands, and litigation by our customers or third parties, which may result in substantial damages and other liabilities. All of these domestic and international legislative and regulatory initiatives could adversely affect our customers’ ability or desire to collect, use, process, store, and disclose personal information and health data using our solutions, or to license data products from us, which could reduce demand for our solutions.
Risks Related to Our Reliance on Third Parties
If the third-party providers of healthcare professional and healthcare organization data and prescription drug sales data do not allow our customers to upload and use such data in our solutions, the demand for our solutions may decrease, and 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 that customers using its healthcare professional or healthcare organization data may upload such data 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 customers from uploading any of its data to Veeva Nitro and Veeva Andi and has denied use of its data with certain other Veeva applications and for certain other use cases. In addition, IQVIA has stated publicly that it will deny all customer requests for use of new IQVIA data types in Veeva applications, including, as examples, real world data, real world evidence, and genomics. 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 third-party data providers, particularly IQVIA, 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 their data in our solutions, our sales efforts, solution implementations, and productive use of our solutions by customers, which have been harmed by such actions in the past, may continue to be harmed. Restrictions on the ability of our customers to use third-party data in our solutions may also decrease demand for our solutions or may cause customers to consider purchasing solutions that are not subject to the same restrictions. If these third-party data limitations persist, our business may be negatively impacted.
We rely on third-party providers—including Salesforce, Inc. and Amazon Web Services—for computing infrastructure, secure network connectivity, and other technology-related services needed to deliver our
| Veeva Systems Inc. | Form 10-Q | 51 | ||||
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. We utilize Amazon Web Services with respect to applications built on the Veeva Vault Platform. Our Veeva CRM application (and certain of our multichannel CRM applications) are built on a platform provided by Salesforce, Inc. that utilizes hosting and computing infrastructure provided by Salesforce, Inc. However, as discussed in more detail above, we intend to migrate our applications built on the Salesforce Platform to our Veeva Vault Platform. We also utilize other computing infrastructure service providers to a lesser extent.
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, 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 could adversely affect the experience of our customers. For example, Salesforce, Inc. and Amazon Web Services have experienced significant service outages in the past and may do so again in the future. Additionally, our failure to manage or react to an increase in customer demand could have an adverse effect on our business. A rapid expansion of our business or an increase in customer demand could affect our service levels or cause our 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 result in lengthy interruptions in our services, damage our customers’ stored files, or result in potential losses of customer data, any of which could adversely affect our reputation. 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.
We are currently dependent upon Salesforce, Inc’s. platform for our multichannel CRM applications, and we are bound by the restrictions of our agreement with Salesforce, Inc., which limits the markets 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, utilize the Salesforce Platform of Salesforce, Inc., and we are currently dependent upon the Salesforce Platform to deliver our CRM application.
However, we recently announced our intent to migrate our applications built on the Salesforce Platform to our Veeva Vault platform and we do not intend to renew our agreement with Salesforce, Inc. when the current term expires on September 1, 2025. After expiration of the current term, our agreement with Salesforce, Inc. includes a wind-down period through September 1, 2030, during which we plan to continue providing the Salesforce Platform as combined with the proprietary aspects of our solutions to our existing customers. During the wind-down period, we may not sell applications that utilize the Salesforce Platform to new customers and our sales of applications that utilize the Salesforce Platform to a customer existing at the time of expiration of the current term may not exceed 150% of the seats in use by each such customer as of September 1, 2025. When the wind-down period ends on September 1, 2030, we will no longer be able to use the Salesforce Platform for our multichannel CRM applications.
Through the expiration of the wind-down period, our agreement with Salesforce, Inc. provides that we can use the Salesforce 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 device industry or products for non-drug departments of pharmaceutical and biotechnology companies. Sales of the Salesforce Platform in combination with our Veeva CRM application to additional industries would require the review and approval of Salesforce, Inc. Our inability to freely sell our Veeva CRM application using the Salesforce Platform outside of drug makers in the pharmaceutical and biotechnology industries may adversely impact our growth. Salesforce, Inc. also has the right to terminate the agreement early in certain circumstances, including in the event of a material breach of the agreement by us, or if Salesforce, Inc. is subjected
52 | Veeva Systems Inc. | Form 10-Q | ||||
to third-party intellectual property infringement claims based on our solutions (except to the extent based on the Salesforce 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, Inc. may terminate the agreement upon notice of not less than 12 months.
For the period through September 1, 2025, our existing agreement provides that Salesforce, Inc., subject to certain exceptions including pre-existing arrangements, 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. During the same period, the agreement also restricts Salesforce, Inc. from competing with us with respect to sales opportunities for sales automation solutions for the pharmaceutical and biotechnology industry unless such competition has been pre-approved by Salesforce Inc.’s senior management based on certain criteria specified in the agreement, and imposes certain limits on Salesforce, Inc. 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 pharmaceutical and biotechnology industry. However, the agreement does not restrict a Salesforce, Inc. customer’s ability (or the ability of Salesforce, Inc. on behalf of a specific Salesforce, Inc. customer) to customize or configure the Salesforce Platform. Moreover, our remedy for a breach of these commitments by Salesforce, Inc. is limited to early termination of the agreement or continue the agreement but be released from our minimum order commitments from the date of Salesforce, Inc.’s breach forward.
After September 1, 2025, Salesforce, Inc. may develop a product that competes directly or indirectly with us or enter into arrangements similar to ours with competitors. Current or potential customers of ours may choose a competitor, such as IQVIA, that uses the Salesforce Platform or build their own custom solutions on the Salesforce Platform rather than buy from us. Any of these events may have a material adverse impact on our business, operating results, and financial condition.
Also, in 2019, Salesforce, Inc. announced a strategic partnership with Alibaba, a Chinese company, through which Alibaba will become the exclusive provider of Salesforce in mainland China, Hong Kong, Macau, and Taiwan. The timeframe and exact parameters of changes to Salesforce, Inc. offerings in the listed regions has not been announced. Our existing agreement with Salesforce, Inc. allows us to sell our CRM solutions to drug makers in the pharmaceutical and biotechnology industries in mainland China, Hong Kong, Macau, and Taiwan, and our right to do so is not impacted by the Alibaba partnership. However, our ability to offer our CRM solutions from data centers located in the listed regions may be limited if Salesforce, Inc. does not operate data centers in the listed regions in the future and we do not contract for such data center services from Alibaba. If our inability to offer our CRM solutions from data centers located in the listed regions negatively impacts the performance of our solutions in those regions or causes legal compliance concerns, or if customers in the listed regions prefer their CRM solutions to be hosted from local data centers, our business may be negatively affected.
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 or security vulnerabilities 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 Salesforce Platform through our agreement with Salesforce, Inc., our solutions incorporate or use certain third-party software and software components obtained under licenses from other companies. We also use third-party software and tools in the development process for our solutions to manage and monitor our computing infrastructure, and to provide professional services and support our customers. For example, our Veeva CRM Engage Meeting application uses a purpose-built partner tool from Zoom Video Communications, Inc., which is critical to the application’s functionality. We anticipate that we will continue to rely on such third-party software and development tools 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. In addition and although we maintain a supplier security evaluation process, if the third-party software we use has errors, security vulnerabilities, or otherwise malfunctions, the functionality of our solutions may be negatively impacted, our customers may experience reduced service levels, and our business may suffer.
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
| Veeva Systems Inc. | Form 10-Q | 53 | ||||
imposes unanticipated conditions or restrictions on our ability to market our solutions. It is possible under the terms of certain open source licenses, if we combine our proprietary software with open source software in a certain manner, that we could be required to release the source code of our proprietary software and make our proprietary software available under open source licenses. 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. In addition to risks related to license requirements, use 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 the use of open source software cannot be eliminated and could adversely affect our business.
Risks Related to Our Financial Performance, How We Contract with Customers, and the Financial Position of Our Business
Our historic growth rates of total revenues and subscription services revenues should not be viewed as indicative of our future performance.
While we have experienced significant revenue growth in prior periods, it is not indicative of our future revenue growth. We expect our longer-term revenue growth rate will decline. In our fiscal years ended January 31, 2022, 2021, and 2020, our total revenues grew by 26%, 33%, and 28% respectively, as compared to total revenues from the prior fiscal years. In our fiscal years ended January 31, 2022, 2021, and 2020, our subscription services revenues grew by 26%, 32%, and 29% respectively, as compared to subscription services revenues from the prior fiscal years. Please note that our total revenues and subscription services revenues for the fiscal year ended January 31, 2020 only included revenue contribution from Crossix and Physicians World in the fourth quarter of that fiscal year. In our fiscal quarter ended October 31, 2022, our total revenues grew by 16% and our subscription services revenues grew by 16% as compared to the same quarterly period in the prior fiscal year. We expect our year-over-year growth to be negatively impacted by foreign currency exchange fluctuations discussed in “Quantitative and Qualitative Disclosures about Market Risk---Foreign currency exchange risk” and as a result of macroeconomic factors, including lower funding levels within segments of our customer base and increased project scrutiny for certain potential projects. Moreover, we recently announced a contracting change in the master subscription agreement for our multi-year orders, which will be effective February 1, 2023, that may affect the timing of revenue recognition for such orders. As a result, our total revenue and subscription services revenue growth rates will be negatively affected in the fiscal year ending January 31, 2024 compared to the prior fiscal year. Our total revenues and subscription services revenue growth rates have declined in the past, and we expect them to decline again in the future. If we are unable to maintain consistent revenue growth, it may adversely impact our profitability and the value of our Class A common stock.
Our results may fluctuate from period to period, which could prevent us from meeting our own guidance or security analyst or investor expectations.
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 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, changes in our guidance, or failure to achieve our guidance or security analyst or investor expectations, even if not materially, could cause the price of our Class A common stock to decline substantially, and our investors could incur substantial losses.
54 | Veeva Systems Inc. | Form 10-Q | ||||
Our subscription agreements with our customers are typically for a term of one year. If our existing customers do not renew their subscriptions, do not buy additional solutions and user subscriptions from us, renew at lower aggregate fee levels, or early terminate their existing agreements, 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. Our customers have no obligation to renew their subscriptions 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 effectiveness of our professional services;
•the strength of our business relationships with our customers;
•the availability, price, performance, and functionality of competing solutions and 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 that may result in reductions in user subscriptions.
For example, in response to inflationary pressures, we are also updating our contracting terms to incorporate an annual inflation adjustment, which will raise the price to each customer upon such customer entering into a new or renewal order form after April 1, 2023 by the lower of 4% or the Consumer Price Index (All Urban Consumer, US City Average, All Items Index) published by the U.S. Bureau of Labor and Statistics for the month of August of the prior calendar year. If this increase results in reduced renewal rates, our business and results of operations will be adversely affected. Further, 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. In addition, customers who have the right to terminate for convenience may terminate subscription agreements prior to the contracted end date. Starting in February 1, 2023, we plan to include a termination for convenience right for our customers in all of our master subscription agreements that govern multi-year orders.
If our customers fail to renew their subscription orders, renew their subscription orders with less favorable terms or at lower fee levels, fail to purchase new solutions, applications, or professional services from us, or early terminate their existing agreements, our revenues may decline or our future revenues may be constrained.
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 additional data acquisition costs associated with our Veeva Compass offering and investment in our product development teams;
•improving the technology infrastructure, scalability, availability, security, and support for our solutions;
•sales and marketing, including expansion of our direct sales organization and global marketing programs;
•expansion of our professional services organization;
•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;
| Veeva Systems Inc. | Form 10-Q | 55 | ||||
•international expansion;
•acquisitions and investments; and
•general operations, IT systems, facilities, and administration, including legal and accounting expenses.
Additionally, in response to unusual inflationary pressure and the demand environment for skilled employees, we increased salaries for the majority of our employees by 5% effective September 1, 2021, which increased our expenses. Further, in light of the labor market conditions and inflationary pressure, our compensation increases in connection with our annual compensation review process, which took place in our fiscal quarter ended April 30, 2022, were higher than previous years. These compensation changes have increased our expenses, with full quarter impact starting in our fiscal quarter ended July 31, 2022. 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.
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. Generally, a customer’s ongoing need for professional services decreases as the implementation and full deployment of our 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 vary from period to period, including the average billable hours worked by our billable professional services personnel, our average 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.
Because we recognize subscription services revenues ratably over the term of an order for our subscription services, it may be difficult to evaluate 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 the non-renewal with revenues from new subscription agreements entered into in the same quarter.
With respect to certain of our software products, we regularly enter into orders with multi-year terms, some of which may have fee structures that ramp over the term of the order. The difference between the fees invoiced in the first year of a multi-year ramping order and the last year of such an order can sometimes be significant. When such multi-year orders are non-cancellable (other than for cause), we recognize the total contracted revenue ratably over the multi-year term of the order. 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. In this scenario, we may also be exposed to impaired contract assets if, for example, a customer terminates a multi-year order with ramping fees for cause. Therefore, our reported revenue in any quarter or year may not correspond to the amounts we are entitled to bill in the same period, and may not be an accurate indication of the actual health of our business at the time revenue is reported.
We recently announced that we plan to include a termination for convenience right for our customers in all of our master subscription agreements that govern multi-year orders. We expect such termination for convenience rights to be in place by February 1, 2023, after which the amount of revenue recognized from multi-year orders will
56 | Veeva Systems Inc. | Form 10-Q | ||||
generally be consistent with the amount invoiced for the relevant term of the order. This would change the timing of revenue recognition for multi-year orders, resulting in an adverse impact to our revenue for the year ending January 31, 2024.
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 Commercial Solutions 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 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 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.
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 or similar transactional taxes in all jurisdictions in which we have sales but no physical presence, based on our determination 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. Such tax assessments, penalties and interest or future requirements, including based on changes in tax laws, 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.
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. 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 these jurisdictions. Tax rates 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 have a material adverse effect on our tax position. Additionally, volatility in our stock price would affect the excess tax benefits from our equity compensation, which may adversely impact our effective tax rate. Forecasting our estimated annual effective tax rate is complex and subject to uncertainty, and there may be material differences
| Veeva Systems Inc. | Form 10-Q | 57 | ||||
between our forecasted and actual tax rates. Moreover, 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 eliminates the option to deduct research and development expenditures currently and requires taxpayers to capitalize and amortize them over five or fifteen years. The requirement reduced our cash from operations in the quarter ended July 31, 2022 and will continue to impact our cash operations. Although Congress may pass legislation that would defer, modify, or repeal the amortization requirement, potentially with retrospective effect, we have no assurance that the provision will be so deferred, repealed or otherwise modified. We made significant judgments and assumptions in the interpretation of this new law and in our calculations reflected in our financial statements. In addition, the current U.S. administration has released various tax legislation proposals. If enacted, these changes could increase our effective tax rate and have an adverse effect on our results of operations. In addition, the Inflation Reduction Act includes provisions that will impose a minimum tax on the book income of certain large corporations and an excise tax on corporate stock repurchases. It is unclear how this legislation will be implemented by the U.S. Department of the Treasury and what, if any, impact it will have on our tax rate. We will continue to evaluate its impact as further information becomes available.
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 Organisation for Economic Co-operation and Development (OECD), 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. For example, on October 8, 2021, the OECD announced an international agreement with more than 130 countries to implement a global minimum effective corporate tax rate of 15% for certain large multinational companies starting in 2023. The agreement also introduced rules that would result in the reallocation of certain taxing rights from multinational companies from their home countries to the markets where they have business activities and earn profits—regardless of physical presence—and could impact certain tax measures in the European Union, such as the Digital Tax Service described below. Certain countries in the European Union, as well as India, have enacted or are proposing various forms of non-income based taxes, such as a Digital Service Tax. Generally, such a tax is based on a percentage of gross revenue associated with digital service transactions. We continue to monitor the developments and tax implications surrounding changes in the global tax environment. 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.
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, Japanese Yen, Canadian Dollar, British Pound Sterling, Hungarian Forint, Chinese Yuan, and Brazilian Real, 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, expenses, and other operating results as expressed in U.S. dollars in the future. For example, changes in exchange rates negatively affected our revenues as expressed in U.S. dollars for the first three quarters of the fiscal year ending January 31, 2023, and we expect our revenues for the fiscal year ending January 31, 2023 as expressed in U.S. dollars to be negatively affected as well. 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 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
58 | Veeva Systems Inc. | Form 10-Q | ||||
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.
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.
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.
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 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 NYSE, the SEC, or other regulatory authorities, which could require additional financial and management resources.
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.
Risks Related to Our Intellectual Property
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, since January 2017, we have been defending against assertions of trade secret misappropriation made by our competitor, IQVIA, as described in note 13 of the notes to our condensed consolidated financial statements and other competitors have asserted similar claims in the past. As competition in our market grows and as we develop new technology products, 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. Such claims and 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 success and ability to compete depend in part upon our intellectual property. As of October 31, 2022, we have filed numerous domestic and foreign patent applications and have been issued 53 U.S. patents and 13 international patents. We also rely on copyright, trade secret and trademark laws, trade secret protection and confidentiality or
| Veeva Systems Inc. | Form 10-Q | 59 | ||||
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 maintain, 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.
Risks Related to Our Status as a Public Benefit Corporation and Ownership of Our Class A Common Stock
Our conversion to a Delaware public benefit corporation may not result in the benefits that we anticipate, requires our directors to balance the interest of stockholders with other interests, and may subject us to legal uncertainty and other risks.
On February 1, 2021, after approval by our stockholders, we became a Delaware public benefit corporation (PBC). There are a very limited number of publicly traded PBCs, we are the first publicly traded company to convert to a PBC, and we are the largest publicly traded company, as measured by revenue or market capitalization, to operate as a PBC. As a PBC, we have unique legal obligations. We are required to adopt and include in our certificate of incorporation a public benefit purpose that is intended to have positive effects on a category of persons, entities or communities other than stockholder financial interest. Our public benefit purpose is to provide products and services that are intended to help make the industries we serve more productive, and to create high-quality employment opportunities in the communities in which we operate. Further, as a PBC, our Board is required to balance our stockholders' pecuniary (financial) interests, the best interests of those materially affected by our conduct, and pursuit of our public benefit purpose. We have identified those materially affected by our conduct (which we refer to as stakeholders) as including our customers, our employees, our partners, and the communities in which we operate.
We believe that operating as a PBC is beneficial to our business and consistent with the long-term interests of stockholders, but the benefits we anticipate from operating as a PBC may not materialize within the timeframe we expect or at all, or there may be negative effects. Further, we may be unable or slow to achieve the public benefits we have identified or we may make balancing determinations that are ultimately harmful to our business or to stockholders, which could adversely affect our reputation, business, financial condition, and results of operations and cause our stock price to decline.
In the event of a conflict between the interests of our stockholders, our stakeholders, and our public benefit purpose, our directors must only make an informed and disinterested decision, and not such that no person of ordinary, sound judgment would approve. Our directors have significant latitude under this standard and there is no guarantee that a conflict would be resolved in favor of our stockholders. This balancing obligation may allow our directors to make decisions that they could not have made pursuant to the fiduciary duties applicable prior to our PBC conversion, and such decisions may not maximize short-term stockholder value. For instance, in a sale of control transaction, our board of directors would be required to consider and balance the factors listed above and might choose to accept an offer that does not maximize short-term stockholder value due to its consideration of other factors.
Further, there is limited legal precedent or guidance regarding how to administer our obligation to balance the interests of stockholders, stakeholders, and the pursuit of our public benefit purpose. While we expect that, in large part, traditional Delaware corporation law principles and the application of those principles in case law—including those related to self-dealing, conflicts of interest, and the application of the business judgment rule—will continue to apply with respect to Delaware PBCs, there is currently limited case law involving PBCs, which may create legal uncertainty or additional litigation risk until additional case law develops. Stockholders of a Delaware PBC (if they, individually or collectively, own at least the lesser of two percent of the company's outstanding shares or shares with a market value of at least $2 million) may file suit to enforce the balancing obligation. Any such lawsuit might be a distraction to our management and board of directors, and could be costly, which may have an adverse impact on our financial condition and results of operations.
60 | Veeva Systems Inc. | Form 10-Q | ||||
As a PBC, we are required to disclose to stockholders a report at least biennially that includes our assessment of our success in achieving our specific public benefit purpose, and we have committed to providing this report annually and making it publicly available. If we are not timely or are unable to provide this report, or if the report is not viewed favorably, our reputation and status as a public benefit corporation may be harmed.
While we do not view the additional reporting obligations of a PBC to be onerous, Delaware’s PBC statute may be amended in the future to require more explicit or burdensome periodic reporting requirements and that could increase our expenses. In addition, if the public perceives that we are not successful in our public benefit purpose, or that our pursuit of our public benefit purpose is having a negative effect on the financial interests of our stockholders, that perception could negatively affect our reputation, which could adversely affect our business and results of operations.
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. Uncertain macroeconomic and geopolitical factors in recent periods, including as a result of the Russian invasion of Ukraine, continuing uncertainty surrounding the effects of COVID-19, and inflationary pressures, has led to volatility in the stock market. As a result, our stock price has declined significantly in recent periods, and we expect the trading price of our Class A common stock will likely continue to be volatile for the foreseeable future. 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;
•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;
•rising interest rates and future monetary policy changes in the United States and globally;
•the operating performance and market value of other comparable companies;
•securities or industry analysts downgrading our Class A common stock or publishing inaccurate or unfavorable research about our business;
•trading activity by directors, executive officers (in particular our Chief Executive Officer who holds a significant portion of our outstanding common stock and a significant number of vested options, 3,333,333 of which options he has announced he expects to exercise and sell prior to March 9, 2023 and up to 1,000,000 of which shares of common stock he expects to donate to a charitable fund that is likely to sell the donated shares prior to December 31, 2023), and other significant stockholders, or the perception in the market that the holders of a large number of shares intend to sell their shares; and
| Veeva Systems Inc. | Form 10-Q | 61 | ||||
•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.
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, 2022, our founder and Chief Executive Officer, Peter Gassner, holds approximately 45.5% of the voting power of our outstanding capital stock and holders of our Class B common stock hold approximately 51.2% of the voting power of our outstanding capital stock in the aggregate. Holders of our Class B common stock collectively control a majority of the combined voting power of our common stock and, assuming no material sales of such shares, will be able to control 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 while the dual class structure is in effect. 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.
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 stockholder 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 stockholder 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 stockholder advisory firms or other third-party ratings agencies critical of our corporate governance practices, capital structure, or other business practices could also adversely affect the value of our Class A common stock. In addition, several stockholder advisory firms have announced their opposition to the use of multiple class structures, and have updated their policies, effective in calendar 2023, to provide for no-vote recommendations against directors of companies with multiple class structures.
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.
Provisions in our certificate of incorporation and 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:
•provide for a dual-class common stock structure until October 15, 2023, which gives our Chief Executive Officer and certain of our holders and their respective affiliates the ability to control the
62 | Veeva Systems Inc. | Form 10-Q | ||||
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 our board of directors to establish the number of directors;
•provide that directors may only be removed 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;
•require our board of directors to consider and balance our stockholders' pecuniary (financial) interests, the best interests of those materially affected by our conduct, and the pursuit of our public benefit purpose, which may, in turn, allow our board of directors to make a decision about a change of control transaction that does not maximize short-term stockholder value;
•prohibit stockholder action by written consent, which requires all stockholder actions to be taken at a meeting of our stockholders;
•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 certificate of incorporation and bylaws provide for exclusive forums for certain 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 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. Our bylaws also provide that, unless we consent in writing to the selection of an alternative forum, the federal district courts of the United States shall be the sole and exclusive forum for any action asserting a claim arising pursuant to the Securities Act, such a provision known as a “Federal Forum Provision.” Any person or entity purchasing or otherwise acquiring any interest in our shares of capital stock shall be deemed to have notice of and consented to these provisions.
These choice of forum provisions 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 or bylaws 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.
| Veeva Systems Inc. | Form 10-Q | 63 | ||||
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.
64 | Veeva Systems Inc. | Form 10-Q | ||||
ITEM 6. EXHIBITS.
Exhibits
| Exhibit Number | Exhibit Description | Incorporated by Reference | Filed | |||||||||||||||||||||||||||||||||||
| Form | File No. | Exhibit | Filing Date | Herewith | ||||||||||||||||||||||||||||||||||
| 3.1 | 8-K | 001-36121 | 3.1 | 6/28/2021 | ||||||||||||||||||||||||||||||||||
| 3.2 | 8-K | 001-36121 | 3.2 | 6/28/2021 | ||||||||||||||||||||||||||||||||||
| 10.1 | X | |||||||||||||||||||||||||||||||||||||
| 31.1 | X | |||||||||||||||||||||||||||||||||||||
| 31.2 | X | |||||||||||||||||||||||||||||||||||||
| 32.1† | X | |||||||||||||||||||||||||||||||||||||
| 32.2† | X | |||||||||||||||||||||||||||||||||||||
| 101.INS | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | |||||||||||||||||||||||||||||||||||||
| 101.SCH | Inline XBRL Taxonomy Schema Linkbase Document. | |||||||||||||||||||||||||||||||||||||
| 101.CAL | Inline XBRL Taxonomy Calculation Linkbase Document. | |||||||||||||||||||||||||||||||||||||
| 101.DEF | Inline XBRL Taxonomy Definition Linkbase Document. | |||||||||||||||||||||||||||||||||||||
| 101.LAB | Inline XBRL Taxonomy Labels Linkbase Document. | |||||||||||||||||||||||||||||||||||||
| 101.PRE | Inline XBRL Taxonomy Presentation Linkbase Document. | |||||||||||||||||||||||||||||||||||||
| Veeva Systems Inc. | Form 10-Q | 65 | ||||
| 104 | Cover Page Interactive Data File - the cover page interactive data is embedded within the Inline XBRL document or included within the Exhibit 101 attachments. | |||||||||||||||||||||||||||||||||||||
† 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.
66 | 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. | |||||||||||
| Dated: | December 7, 2022 | By: | /s/ BRENT BOWMAN | ||||||||
| Brent Bowman Chief Financial Officer (Principal Financial Officer) | |||||||||||
| Dated: | December 7, 2022 | By: | /s/ MICHELE O’CONNOR | ||||||||
| Michele O’Connor Chief Accounting Officer (Principal Accounting Officer) | |||||||||||
| Veeva Systems Inc. | Form 10-Q | 67 | ||||