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, 2021, please see our Annual Report on Form 10-K for
the fiscal year ended January 31, 2021 filed on March 30, 2021.
In our fiscal year ended January 31, 2021, we derived approximately 63% and 37%
of our subscription services revenues and 61% and 39% of our total revenues from
our Commercial Solutions and R&D Solutions, respectively. For the nine months
ended October 31, 2021, we derived approximately 60% and 40% of our subscription
services revenues and 57% and 43% 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, 2021, 2020, and 2019, our total revenues
were $1,465 million, $1,104 million, and $862 million, respectively,
representing year-over-year growth in total revenues of 33% in our fiscal year
ended January 31, 2021 and 28% in our fiscal year ended January 31, 2020. For
our fiscal years ended January 31, 2021, 2020, and 2019, our subscription
services revenues were $1,179 million, $896 million, and $694 million,
respectively, representing year-over-year growth in subscription services
revenues of 32% in our fiscal year ended January 31, 2021, and 29% in our fiscal
year ended January 31, 2020. Please note that our total revenues and
subscription services revenues for our fiscal year ended January 31, 2020 only
included revenue contribution from the acquired Crossix and Physicians World
businesses in the fourth quarter of that fiscal year. We expect the growth rate
of our total revenues and subscription services revenues to decline in the
future. We generated net income of $380 million, $301 million, and $230 million
for our fiscal years ended January 31, 2021, 2020, and 2019, respectively.
As of January 31, 2021, 2020, and 2019, we served 993, 861, and 719 customers,
respectively. As of January 31, 2021, 2020, and 2019, we had 572, 523, and 454
Commercial Solutions customers, respectively, and 664, 538, and 423 R&D
Solutions customers, respectively. 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, 2021 and 2020, our total revenues were
$1,365 million and $1,068 million, respectively, representing year-over-year
growth in total revenues of 28%. For the nine months ended October 31, 2021 and
2020, our subscription services revenues were $1,088 million and $857 million,
respectively, representing year-over-year growth in subscription services
revenues of 27%. We generated net income of $330 million and $277 million for
the nine months ended October 31, 2021 and 2020, respectively.
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Prior to the fiscal quarter ended October 31, 2021, we grouped our revenues into
two product areas: Commercial Cloud and Vault. During the fiscal quarter ended
October 31, 2021, we changed the product areas under which we group revenues to
Commercial Solutions and R&D Solutions to better align with how we manage our
business and to reflect the principal functions served by our products.
Specifically, revenues attributable to Vault PromoMats and Vault MedComms,
applications used for commercial operations, are now reflected in Commercial
Solutions. Prior period revenue balances have been adjusted to reflect the
current period presentation of our product areas. There were no changes to the
aggregate amounts reported within our condensed consolidated statements of
comprehensive income.
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."
Impact of the COVID-19 Pandemic
The worldwide outbreak of COVID-19 has had and continues to have a widespread
and unpredictable worldwide impact on our business operations, the life sciences
industry, healthcare systems, financial markets, and the global economy. While
the impact of COVID-19 on our operational and financial performance has not been
materially negative to date, the future impact is uncertain and will depend on
future developments, including the duration and spread of the outbreak,
government responses to the pandemic, the rate of vaccinations, the impact on
our customers, the impact on our employees, the extent of further adverse
impacts to the economy, and the scale and pace of economic recovery and
resumption of normal business activities, including the rollout of COVID-19
vaccines, the lifting of restrictions on movement, and the results of outbreaks
and variants, all of which cannot be predicted with certainty.
In response to the COVID-19 outbreak, we shifted most of our customer, employee,
and industry events to virtual-only experiences. We have also adopted a "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. Many
of our customers continue to have travel restrictions and remote work measures,
which may limit our ability to sell or provide professional services to them in
the future. We continue to monitor and evaluate the impact of COVID-19 on our
business, including when larger in-person events should resume.
Certain of our businesses were negatively impacted by COVID-19 in our fiscal
year ended January 31, 2021, and certain of our businesses may be negatively
impacted by COVID-19 in the future. We may also experience requests from
customers for lengthened payment terms or less favorable billing terms that
could adversely impact our financial performance. Such requests to date have not
been significant but may increase in the future. Due to our subscription-based
business model, the effect of COVID-19, and any impact to our sales efforts, may
not be fully reflected in our results of operations until future periods, if at
all.
At the same time, COVID-19 has necessitated the adoption of digital
communication channels and remote working technology within the life sciences
industry at a rapid pace. This transition has accelerated the use and adoption
of certain of our applications, including Veeva CRM Engage Meeting and Veeva CRM
Approved Email, and that may continue in the future with respect to these and
other of our Commercial Solutions and R&D Solutions that enable remote
interactions.
Certain impacts of the COVID-19 pandemic and resulting changes in business
practice may be enduring over the long term and may result in significant
changes in business practice within the technology industry, the life sciences
industry, and the world economy generally. For example, the extent to which
remote work will remain common practice or become increasingly prevalent after
the COVID-19 pandemic ends is not certain and may have significant impacts on
hiring practices, management practices, expense structures and investments, and
other aspects of our business and the businesses of our customers. Similarly,
the extent to which virtual meetings and interactions continue to be used or
preferred in lieu of in-person interactions may significantly change business
practices for us and our customers, and, in turn, may impact demand for our
products and services. For example, if
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our customers reduce sales representatives in response to an increasing
preference for virtual meetings with doctors, demand for our core CRM
application may decline. We expect life sciences companies to reduce the number
of sales representatives that they employ by roughly 10% over the next one to
two years, which could negatively impact sales of our solutions, including Veeva
CRM and 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.
Key Factors Affecting Our Performance
Investment in Growth. We have invested and intend to continue to invest
aggressively in expanding the breadth and depth of our product portfolio,
including through acquisitions. We expect to continue to invest in research and
development to expand existing solutions and build new solutions; in sales and
marketing to promote our solutions to new and existing customers and in existing
and expanded geographies and industries; in professional services and business
consulting to help ensure customer success; and in other operational and
administrative functions to support our expected growth. We expect that our
headcount will increase as a result of these investments. We also expect our
total operating expenses will continue to increase over time, which could have a
negative impact on our operating margin.
Adoption of Our Solutions by Existing and New Customers. Most of our customers
initially deploy our solutions to a limited number of end users within a
division or geography and may only initially deploy a limited set of our
available solutions. Our future growth is dependent upon our existing customers'
continued success and their renewals of subscriptions to our solutions, expanded
deployment of our solutions within their organizations, and their purchase of
subscriptions to additional solutions. Our growth is also dependent on the
adoption of our solutions by new customers.
Subscription Services Revenue Retention Rate. A key factor to our success is the
renewal and expansion of our existing subscription agreements with our
customers. We calculate our annual subscription services revenue retention rate
for a particular fiscal year by dividing (i) annualized subscription revenue as
of the last day of that fiscal year from those customers that were also
customers as of the last day of the prior fiscal year by (ii) the annualized
subscription revenue from all customers as of the last day of the prior fiscal
year. Annualized subscription revenue is calculated by multiplying the daily
subscription revenue recognized on the last day of the fiscal year by 365. This
calculation includes the impact on our revenues from customer non-renewals,
deployments of additional users or decreases in users, deployments of additional
solutions or discontinued use of solutions by our customers, and price changes
for our solutions. Historically, the impact of price changes on our subscription
services revenue retention rate has been minimal. For our fiscal years ended
January 31, 2021, 2020, and 2019, our subscription services revenue retention
rate was 124%, 121%, and 122%, respectively.
Components of Results of Operations
Revenues
We derive our revenues primarily from subscription services fees and
professional services fees. Subscription services revenues consist of fees from
customers accessing our cloud-based software solutions and fees for our data
solutions. Professional services and other revenues consist primarily of fees
from implementation services, configuration, data services, training, and
managed services related to our solutions and services related to our Veeva
Business Consulting offering. For the nine months ended October 31, 2021,
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 service agreements may choose to
consolidate their orders under a single master service agreement, and, in that
circumstance, our customer count would decrease. Divisions, subsidiaries, and
operating units of our customers often place distinct orders for our
subscription services under the same master subscription agreement, and we do
not count such distinct orders as new customers for purposes of determining our
total customer count. For purposes of determining
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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. The fees associated with such orders are typically
not based on the number of end-users and typically escalate over the term of
such orders at a pre-agreed rate to account for, among other factors,
implementation and adoption timing and planned increased usage by the customer.
There are timing differences between billings and revenue recognition with
respect to certain of our multi-year orders with escalating fees which will
result in fluctuations in deferred revenue and unbilled accounts receivable
balances. For instance, when the amounts we are entitled to invoice in any
period pursuant to multi-year orders with escalating fees are less than the
revenue recognized in accordance with relevant accounting standards, we will
accrue an unbilled accounts receivable balance (a contract asset) related to
such orders. In the same scenario, the net deferred revenue we would record in
connection with such orders will be less because we will be recognizing more
revenue earlier in the term of such multi-year orders.
Our subscription orders are generally billed at the beginning of the
subscription period in annual or quarterly increments, which means the
annualized value of such orders may not be completely reflected in deferred
revenue at any single point in time. Also, particularly with respect to orders
for our Commercial Solutions, because the term of orders for additional end
users or applications is commonly less than one year, the annualized value of
such orders may not be completely reflected in deferred revenue at any single
point in time. We have also agreed from time to time, and may agree in the
future, to allow customers to change the renewal dates of their orders to, for
example, align more closely with a customer's annual budget process or to align
with the renewal dates of other orders placed by other entities within the same
corporate control group, or to change payment terms from annual to quarterly, or
vice versa. Such changes typically result in an order of less than one year as
necessary to align all orders to the desired renewal date and, thus, may result
in a 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. Our
agreements typically provide that orders will automatically renew unless notice
of non-renewal is provided in advance. Subscription services revenues are
affected primarily by the number of customers, the scope of the subscription
purchased by each customer (for example, the number of end users or other
subscription usage metric) and the number of solutions subscribed to by each
customer.
We utilize our own personnel to perform our professional services and business
consulting engagements with customers. In certain cases, we may utilize
third-party subcontractors to perform professional services engagements. The
majority of our professional services arrangements are billed on a time and
materials basis and revenues are recognized over time based on time incurred and
contractually agreed upon rates. Certain professional services and business
consulting arrangements are billed on a fixed fee basis and revenues are
typically recognized over time as the services are delivered based on time
incurred. Data services and training revenues are generally recognized as the
services are performed. Professional services revenues are affected primarily by
our customers' demands for implementation services, configuration, data
services, training, speakers bureau logistics, and managed services in
connection with our solutions. Our business consulting revenues are affected
primarily by our customers' demands for services related to a particular
customer success initiative, strategic analysis, or business process change, and
not a cloud software implementation.
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Allocated Overhead
We accumulate certain costs such as building depreciation, office rent,
utilities, and other facilities costs and allocate them across the various
departments based on headcount. We refer to these costs as "allocated overhead."
Cost of Revenues
Cost of subscription services revenues for all of our solutions consists of
expenses related to our computing infrastructure provided by third parties,
including salesforce.com 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, allocated overhead, and amortization expense
associated with certain purchased intangibles related to our subscription
services. We intend to continue to invest additional resources in our
subscription services to enhance our product offerings and increase our delivery
capacity. We may add or expand computing infrastructure capacity in the future,
migrate to new computing infrastructure service providers, make additional
investments in the availability and security of our solutions, and make
continued investments in data sources.
Cost of professional services and other revenues consists primarily of
employee-related expenses associated with providing these services. The cost of
providing professional services is significantly higher as a percentage of the
related revenues than for our subscription services due to the direct labor
costs and costs of third-party subcontractors.
Operating Expenses
Research and Development. Research and development expenses consist primarily of
employee-related expenses, third-party consulting fees, 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 and state income taxes in the
United States and income taxes in certain foreign jurisdictions. See   note 8
of the notes to our condensed consolidated financial statements.
New Accounting Pronouncements Adopted in Fiscal 2022
Refer to   note 1   of the notes to our condensed consolidated financial
statements for a full description of the recent accounting pronouncements
adopted during the nine months ended October 31, 2021.
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Results of Operations
The following tables set forth selected condensed consolidated statements of
operations data and such data as a percentage of total revenues for each of the
periods indicated:
                                                        Three months ended October 31,             Nine months ended October 31,
                                                           2021                2020                   2021                   2020

                                                                                       (in thousands)

Data from the consolidated statements of comprehensive income: Revenues: subscription services

                                  $  380,738          

$ 302,938 $ 1,088,293 $ 856,675
Professional and other services

                            95,373             74,581                    276,985             211,633
Total revenues                                            476,111            377,519                  1,365,278           1,068,308
Cost of revenues(1):
Cost of subscription services                              59,648             45,845                    164,774             132,457
Cost of professional services and other                    69,916             57,152                    203,023             162,624
Total cost of revenues                                    129,564            102,997                    367,797             295,081
Gross profit                                              346,547            274,522                    997,481             773,227
Operating expenses(1):
Research and development                                   98,635             79,992                    276,760             212,282
Sales and marketing                                        72,423             57,982                    208,822             172,909
General and administrative                                 42,781             35,243                    126,121             109,085
Total operating expenses                                  213,839            173,217                    611,703             494,276
Operating income                                          132,708            101,305                    385,778             278,951
Other income, net                                             824              3,455                      7,054               9,750
Income before income taxes                                133,532            104,760                    392,832             288,701
Provision for income taxes                                 27,663              7,801                     62,538              11,621
Net income                                             $  105,869         

$ 96,959 $ 330,294 $ 277,080
(1) Includes stock-based compensation as follows:


Cost of revenues:
Cost of subscription services             $  1,292      $  1,149      $   3,514      $   3,700
Cost of professional services and other      9,616         7,510         26,579         19,902
Research and development                    22,311        17,685         61,463         45,523
Sales and marketing                         15,102        10,711         41,772         30,089
General and administrative                  13,724        11,918         39,591         36,032
Total stock-based compensation            $ 62,045      $ 48,973      $ 172,919      $ 135,246


Revenues
                                       Three months ended October 31,                                    Nine months ended October 31,
                                           2021                  2020             % Change                 2021                    2020              % Change

                                                                                       (dollars in thousands)

Income:

Subscription services               $      380,738           $ 302,938               26%            $     1,088,293           $   856,675               

27%

Professional services and other             95,373              74,581               28%                    276,985               211,633               31%
Total revenues                      $      476,111           $ 377,519               26%            $     1,365,278           $ 1,068,308               28%
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, 2021 increased $99
million, of which $78 million was from growth in subscription services revenues.
The increase in subscription services revenues consisted of $44 million of
subscription services revenue attributable to R&D Solutions and $33 million of
subscription services revenue
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attributable to Commercial Solutions. The geographic mix of subscription
services revenues was 57% from North America and 27% from Europe for both of the
three month periods ended October 31, 2021 and October 31, 2020.
Professional services and other revenues for the three months ended October 31,
2021 increased $21 million. The increase in professional services revenues was
due primarily to new customers requesting implementation and deployment-related
professional services, existing customers requesting professional services
related to expanding deployments or the deployment of newly purchased solutions,
and increased business consulting engagements. 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. The geographic mix of professional services and other revenues was
63% from North America and 28% from Europe for the three months ended
October 31, 2021, as compared to 64% from North America and 29% from Europe for
the three months ended October 31, 2020.
Total revenues for the nine months ended October 31, 2021 increased $297
million, of which $232 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 $102
million of subscription services revenue attributable to Commercial Solutions.
The geographic mix of subscription services revenues was 57% from North America
and 27% from Europe for the nine months ended October 31, 2021 as compared to
subscription services revenues of 56% from North America and 26% from Europe for
the nine months ended October 31, 2020.
Professional services and other revenues for the nine months ended October 31,
2021 increased $65 million. The increase in professional services revenues was
due primarily to new customers requesting implementation and deployment related
professional services and existing customers requesting professional services
related to expanding deployments or the deployment of newly purchased solutions,
and, to a lesser extent, professional services revenues associated with our
acquired businesses. 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. The geographic mix
of professional services and other revenues was 60% from North America and 31%
from Europe for the nine months ended October 31, 2021 as compared to 63% from
North America and 30% from Europe for the nine months ended October 31, 2020.
Over time, we expect the proportion of our total revenues from professional
services to decrease.
Costs and Expenses
                                       Three months ended October 31,                                   Nine months ended October 31,
                                           2021                  2020             % Change                 2021                  2020             % Change

                                                                                     (dollars in thousands)
Cost of revenues:
Cost of subscription services       $       59,648           $  45,845               30%            $      164,774           $ 132,457              

24%

Cost of professional services and
other                                       69,916              57,152               22%                   203,023             162,624               25%
Total cost of revenues              $      129,564           $ 102,997               26%            $      367,797           $ 295,081               25%
Gross margin percentage:
Subscription services                           84   %              85  %                                       85   %              85  %
Professional services and other                 27   %              23  %                                       27   %              23  %
Total gross margin percentage                   73   %              73  %                                       73   %              72  %
Gross profit                        $      346,547           $ 274,522               26%            $      997,481           $ 773,227               29%


Cost of revenues for the three months ended October 31, 2021 increased $27
million, of which $14 million was an increase in cost of subscription services.
The increase in cost of subscription services was primarily due to an increase
of $5 million in computing infrastructure costs, the vast majority of which was
for computing infrastructure provided by Amazon Web Services, and an increase of
$1 million in fees paid to salesforce.com, which was driven by an increase in
the number of end users of our subscription services. Additionally, there was an
increase of $4 million related to data acquisition costs and an increase of
$1 million in costs of third-party contractors related to the development of our
data products.
Cost of professional services and other for the three months ended October 31,
2021 increased $13 million, due to a $11 million increase in employee
compensation-related costs (which includes an increase of $2 million in stock-
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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, 2021 and 2020 was 73% in
both periods.
Cost of revenues for the nine months ended October 31, 2021 increased $73
million, of which $32 million was related to cost of subscription services. The
increase in cost of subscription services was primarily due to an increase of
$12 million in computing infrastructure costs, the vast majority of which was
for computing infrastructure provided by Amazon Web Services, and an increase of
$4 million in fees paid to salesforce.com, which was driven by an increase in
the number of end users of our subscription services. Additionally, there was
also an increase of $7 million related to data acquisition costs and an increase
of $5 million in costs of third-party contractors related to the development of
our data products. We expect cost of subscription services revenues to increase
in absolute dollars in the near term due to increased usage of our subscription
services and increased data costs related to our Veeva Data Cloud offering.
Cost of professional services and other for the nine months ended October 31,
2021 increased $40 million, primarily due to a $36 million increase in employee
compensation-related costs (includes an increase of $7 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 add personnel to our professional services and business consulting
organizations. Additionally, we increased salaries for the majority of our
employees by 5% effective September 1, 2021, which will continue to increase our
cost of professional services.
Gross margin for the nine months ended October 31, 2021 and 2020 was 73% and
72%, respectively. The slight increase compared to the prior period is due, in
part, to a more favorable sales mix of products and services compared to the
prior period.
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. Additionally, we increased salaries for the majority of our
employees by 5% effective September 1, 2021, which will continue to increase our
operating expenses.
Research and Development
                                           Three months ended October 31,                                   Nine months ended October 31,
                                               2021                 2020             % Change                2021                   2020               % Change

                                                                                          (dollars in thousands)
Research and development                $       98,635           $ 79,992               23%                  276,760                212,282               30%
Percentage of total revenues                        21   %             21  %                                      20  %                  20  %


Research and development expenses for the three months ended October 31, 2021
increased $19 million, due to an increase of $19 million in employee
compensation-related costs (which includes an increase of $5 million in
stock-based compensation). The increase in employee compensation-related costs
is primarily driven by the increase in headcount during the period. The
expansion of our headcount in research and development is to support development
work for the increased number of products that we offer or may offer in the
future.
Research and development expenses for the nine months ended October 31, 2021
increased $64 million, primarily due to an increase of $62 million in employee
compensation-related costs (includes an increase of $16 million in stock-based
compensation). The increase in employee compensation-related costs is primarily
driven by the increase in headcount during the period. The expansion of our
headcount in research and development is to support development work for the
increased number of products that we offer or may offer in the future.
We expect research and development expenses to increase in absolute dollars and
as a percentage of revenue in the future, primarily due to higher headcount as
we continue to invest in our product offerings.
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Sales and Marketing
                                      Three months ended October 31,                                   Nine months ended October 31,
                                        2021                  2020               % Change                 2021                  2020             % Change

                                                                                    (dollars in thousands)
Sales and marketing                      72,423                57,982               25%            $      208,822           $ 172,909               21%
Percentage of total revenues                 15  %                 15  %                                       15   %              16  %


Sales and marketing expenses for the three months ended October 31, 2021
increased $14 million, primarily due to an increase of $13 million in employee
compensation-related costs (which includes an increase of $4 million in
stock-based compensation). The increase in employee compensation-related costs
is primarily driven by the increase in headcount during the period.
Sales and marketing expenses for the nine months ended October 31, 2021
increased $36 million, primarily due to an increase of $37 million in employee
compensation-related costs (includes an increase of $12 million in stock-based
compensation). The increase in employee compensation-related costs is primarily
driven by the increase in headcount during the period. This was partially offset
by a $4 million decrease in marketing program costs and a $1 million decrease in
travel and entertainment costs primarily related to travel and meeting
restrictions associated with COVID-19.
We expect sales and marketing expenses to continue 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 the impact of changes to our sales compensation plans.
General and Administrative
                                                   Three months ended October 31,                                   Nine months ended October 31,
                                                       2021                 2020             % Change                2021                   2020               % Change

                                                                                                  (dollars in thousands)
General and administrative                      $       42,781           $ 35,243               21%                  126,121                109,085               16%
Percentage of total revenues                                 9   %              9  %                                       9  %                  10  %


General and administrative expenses for the three months ended October 31, 2021
increased $8 million, primarily due to an increase of $4 million in employee
compensation-related costs (which includes an increase of $2 million in
stock-based compensation). The increase in employee compensation-related costs
is primarily driven by the increase in headcount during the period.
Additionally, there were increases in costs related to sales tax and technology
infrastructure of $1 million each.
General and administrative expenses for the nine months ended October 31, 2021
increased $17 million, primarily due to an increase of $10 million in employee
compensation-related costs (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. Additionally, there were
increases in costs related to professional fees, sales tax, and technology
infrastructure of $2 million each.
We expect general and administrative expenses to continue to grow in absolute
dollars in the future as a result of employee-related expenses as we increase
our headcount, investments in our information technology infrastructure, and
third-party fees, including fees associated with on-going litigation.
Other Income, Net
                                         Three months ended October 31,                                     Nine months ended October 31,
                                              2021                2020            % Change               2021                           2020              % Change

                                                                                           (dollars in thousands)
Other income, net                       $         824          $ 3,455              (76)%               7,054                            9,750              (28)%


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Other income, net for the three months ended October 31, 2021 decreased $3
million, primarily due to an increase of $2 million in foreign currency losses.
Other income, net for the nine months ended October 31, 2021 decreased $3
million compared to the nine months ended October 31, 2020, primarily due to the
$3 million increase in accretion of discounts on short-term investments.
We continue to experience foreign currency fluctuations primarily due to the
impact resulting from the periodic re-measurement of our foreign currency
balances that are denominated in currencies other than the functional currency
of the entities in which they are recorded. Our results of operations are
subject to fluctuations due to changes in foreign currency exchange rates,
particularly changes in the Euro, British Pound Sterling, Japanese Yen, Chinese
Yuan, and Canadian Dollar. We may continue to experience favorable or adverse
foreign currency impacts due to volatility in these currencies.
Provision for Income Taxes
                                     Three months ended October 31,                                   Nine months ended October 31,
                                         2021                  2020             % Change                 2021                  2020             % Change

                                                                                   (dollars in thousands)
Income before income taxes        $      133,532           $ 104,760               27%            $      392,832           $ 288,701               36%
Provision for income taxes        $       27,663           $   7,801              255%            $       62,538           $  11,621              438%
Effective tax rate                          20.7   %             7.4  %                                     15.9   %             4.0  %


The provision for income taxes differs from the tax computed at the U.S. federal
statutory income tax rate due primarily to state taxes, tax credits, equity
compensation, and 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, 2021 and 2020, our effective tax rates
were 20.7% and 7.4%, respectively. During the three months ended October 31,
2021 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 and an increase in valuation allowance within certain
jurisdictions. We recognized such tax benefits in our provision for income taxes
of $10 million and $17 million for the three months ended October 31, 2021 and
2020, respectively.
For the nine months ended October 31, 2021 and 2020, our effective tax rates
were 15.9% and 4.0%, respectively. During the nine months ended October 31, 2021
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 and an
increase in valuation allowance within certain jurisdictions. We recognized such
tax benefits in our provision for income taxes of $45 million and $59 million
for the nine months ended October 31, 2021 and 2020, respectively.
Non-GAAP Financial Measures
In our public disclosures, we have provided non-GAAP measures, which we define
as financial information that has not been prepared in accordance with generally
accepted accounting principles in the United States, or GAAP. In addition to our
GAAP measures, we use these non-GAAP financial measures internally for budgeting
and resource allocation purposes and in analyzing our financial results.
For the reasons set forth below, we believe that excluding the following items
provides information that is helpful in understanding our operating results,
evaluating our future prospects, comparing our financial results across
accounting periods, and comparing our financial results to our peers, many of
which provide similar non-GAAP financial measures.
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•Stock-based compensation expenses. We exclude stock-based compensation expenses
primarily because they are non-cash expenses that we exclude from our internal
management reporting processes. We also find it useful to exclude these expenses
when we assess the appropriate level of various operating expenses and resource
allocations when budgeting, planning, and forecasting future periods. Moreover,
because of varying available valuation methodologies, subjective assumptions and
the variety of award types that companies can use under FASB ASC Topic 718, we
believe excluding stock-based compensation expenses allows investors to make
meaningful comparisons between our recurring core business operating results and
those of other companies.
•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.
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The following table reconciles the specific items excluded from GAAP metrics in
the calculation of non-GAAP metrics for the periods shown below:
                                                   Three months ended October 31,             Nine months ended October 31,
                                                       2021                2020                  2021                  2020

                                                                                 (in thousands)
Operating income on a GAAP basis                  $   132,708          $ 

101 305 $ 385,778 $ 278,951
Stock-based compensation expense

                       62,045             48,973                  172,919            135,246
Amortization of purchased intangibles                   4,694              5,256                   13,701             15,437
Operating income on a non-GAAP basis              $   199,447          $ 

155,534 $ 572,398 $ 429,634
Net income under GAAP

                        $   105,869          $  

96 959 $ 330,294 $ 277,080
Stock-based compensation expense

                       62,045             48,973                  172,919            135,246
Amortization of purchased intangibles                   4,694              5,256                   13,701             15,437

Tax effect on non-GAAP adjustments (1) (14,394) (25,587)

                 (59,147)           (80,650)
Net income on a non-GAAP basis                    $   158,214          $ 

125,601 $ 457,767 $ 347,113
Diluted earnings per share under GAAP $ 0.65 $ 0.60 $ 2.03 $ 1.73
Stock-based compensation expense

                         0.38               0.30                     1.06               0.84
Amortization of purchased intangibles                    0.03               0.03                     0.08               0.10
Income tax effect on non-GAAP adjustments(1)            (0.09)             (0.15)                   (0.36)             (0.51)

Diluted earnings per share on a non-GAAP basis $ 0.97 $ 0.78 $ 2.81 $ 2.16
(1) For the three and nine months ended October 31, 2021 and 2020, we used an estimated non-GAAP annual effective tax rate of 21%.

Liquidity and capital resources

                                                     Three months ended October 31,               Nine months ended October 31,
                                                        2021                  2020                   2021                  2020

                                                                                   (in thousands)
Net cash provided by operating activities        $       112,959          $ 

95,403 $ 710,409 $ 482,895
Net cash used in investing activities

                    (10,229)           (262,586)                (290,992)          (354,727)
Net cash (used in) provided by financing
activities                                               (16,046)              6,265                    6,416             24,825
Effect of exchange rate changes on cash and cash
equivalents                                               (1,469)               (599)                  (4,414)             2,683

Net change in cash and cash equivalents $ 85,215 (161,517) $ $ 421,419 $ 155,676


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, 2021, our cash, cash equivalents, and
short-term investments totaled $2.4 billion, of which $50 million represented
cash and cash equivalents held outside of the United States.
Our remaining non-U.S. cash and cash equivalents have been earmarked for
indefinite reinvestment in our operations outside the United States, thus no
U.S. current or deferred taxes have been accrued. We believe our U.S. sources of
cash and liquidity are sufficient to meet our business needs in the United
States and do not expect that we will need to repatriate additional funds we
have designated as indefinitely reinvested outside the United States. Under
currently enacted tax laws, should our plans change and we were to choose to
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.
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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 revenue
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.com and Amazon Web
Services), building infrastructure costs (including leases for office space),
fees for third-party legal counsel and accounting services, and data acquisition
costs. Note that our net income reflects the impact of excess tax benefits
related to equity compensation.
Net cash provided by operating activities was $113 million for the three months
ended October 31, 2021 compared to $95 million provided by operating activities
for the three months ended October 31, 2020. The $18 million increase was
primarily due to increased sales and the related cash collections. These
increases were partially offset by larger operating expenses due to increases in
headcount.
Net cash provided by operating activities was $710 million for the nine months
ended October 31, 2021 compared to $483 million for the nine months ended
October 31, 2020. The increase in operating cash flow was primarily due to
increased sales and the related cash collections. These increases were partially
offset by larger operating expenses due to increases in headcount.
The cash flows from operating activities for the nine months ended October 31,
2021 represent a significant portion of the cash flows from operating activities
that we expect for the remainder of the fiscal year ending January 31, 2022. As
a result, we expect cash flows from operating activities to be substantially
less in future quarterly periods during this fiscal year.
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 $10 million for the three months ended
October 31, 2021 compared to $263 million used in investment activities for the
three months ended October 31, 2020. The $252 million decrease in cash used in
investing activities was mainly due to the decrease in net purchases of
investments.
Net cash used in investing activities was $291 million for the nine months ended
October 31, 2021 compared to $355 million for the nine months ended October 31,
2020. The $64 million decrease in cash used in investing activities was mainly
due to the decrease in net purchases of investments.
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
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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 $16 million for the three months ended
October 31, 2021 compared to $6 million provided by financing activities for the
three months ended October 31, 2020. The $22 million change is primarily related
to $21 million of cash used to pay employee taxes related to the net share
settlement of RSUs.
Net cash provided by financing activities was $6 million for the nine months
ended October 31, 2021 compared to $25 million for the nine months ended
October 31, 2020. The $18 million decrease is primarily related to $37 million
of cash used to pay employee taxes related to the net share settlement of RSUs,
partially offset by an increase of $18 million in proceeds from employee stock
option exercises due to increased stock option activity during the period.
Commitments
Our principal commitments consist of leases for office space and data centers.
As of October 31, 2021, the future non-cancelable minimum payments under these
commitments were as follows:
                                                         Payments due by period
                                                                      1-3           3-5         More than
                                Total        Less than 1 year        Years         Years         5 years

                                                             (in thousands)
Operating lease obligations     63,257                  3,354        22,959        15,816         21,128
Total                         $ 63,257      $           3,354      $ 22,959      $ 15,816      $  21,128


The amounts in the table above are associated with agreements that are
enforceable and legally binding, which specify significant terms including
payment terms, related services, and the approximate timing of the transaction.
Obligations under agreements that we can cancel without a significant penalty
are not included in the table.
Off-Balance Sheet Arrangements
We do not have any relationships with unconsolidated organizations or financial
partnerships, such as structured finance or special purpose entities, that would
have been established for the purpose of facilitating off-balance sheet
arrangements or other contractually narrow or limited purposes.
Critical Accounting Policies and Estimates
Our 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, 2021 as compared to the those
disclosed in our Annual Report on Form 10-K for the fiscal year ended
January 31, 2021.
                                                  Veeva Systems Inc. | Form 10-Q   35

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