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." OverviewVeeva 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 ofJanuary 31, 2021 , please see our Annual Report on Form 10-K for the fiscal year endedJanuary 31, 2021 filed onMarch 30, 2021 . In our fiscal year endedJanuary 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 endedOctober 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 inNorth America andEurope . For our fiscal years endedJanuary 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 endedJanuary 31, 2021 and 28% in our fiscal year endedJanuary 31, 2020 . For our fiscal years endedJanuary 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 endedJanuary 31, 2021 , and 29% in our fiscal year endedJanuary 31, 2020 . Please note that our total revenues and subscription services revenues for our fiscal year endedJanuary 31, 2020 only included revenue contribution from the acquired Crossix andPhysicians 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 endedJanuary 31, 2021 , 2020, and 2019, respectively. As ofJanuary 31, 2021 , 2020, and 2019, we served 993, 861, and 719 customers, respectively. As ofJanuary 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 endedOctober 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 endedOctober 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 endedOctober 31, 2021 and 2020, respectively. 22Veeva Systems Inc. | Form 10-Q -------------------------------------------------------------------------------- Table of Contents Prior to the fiscal quarter endedOctober 31, 2021 , we grouped our revenues into two product areas: Commercial Cloud and Vault. During the fiscal quarter endedOctober 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 OnFebruary 1, 2021 , we became aDelaware 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 endedJanuary 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, ifVeeva Systems Inc. | Form
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Table of Contents 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, includingVeeva 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 impactVeeva'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 endedJanuary 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 ourVeeva Business Consulting offering. For the nine months endedOctober 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 24Veeva Systems Inc. | Form 10-Q -------------------------------------------------------------------------------- Table of Contents 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.Veeva Systems Inc. | Form
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Table of Contents 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 andAmazon 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 endedOctober 31, 2021 . 26 Veeva Systems Inc. | Form 10-Q -------------------------------------------------------------------------------- Table of Contents 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
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
(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 endedOctober 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 Veeva Systems Inc. | Form
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Table of Contents attributable to Commercial Solutions. The geographic mix of subscription services revenues was 57% fromNorth America and 27% fromEurope for both of the three month periods endedOctober 31, 2021 andOctober 31, 2020 . Professional services and other revenues for the three months endedOctober 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% fromNorth America and 28% fromEurope for the three months endedOctober 31, 2021 , as compared to 64% fromNorth America and 29% fromEurope for the three months endedOctober 31, 2020 . Total revenues for the nine months endedOctober 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% fromNorth America and 27% fromEurope for the nine months endedOctober 31, 2021 as compared to subscription services revenues of 56% fromNorth America and 26% fromEurope for the nine months endedOctober 31, 2020 . Professional services and other revenues for the nine months endedOctober 31, 2021 increased$65 million . The increase in professional services revenues was due primarily to new customers requesting implementation and deployment related professional services and existing customers requesting professional services related to expanding deployments or the deployment of newly purchased solutions, and, to a lesser extent, professional services revenues associated with our acquired businesses. The increased demand for professional services and the resulting increase in professional services revenues was weighted heavily towards implementation and deployments of our R&D Solutions. The geographic mix of professional services and other revenues was 60% fromNorth America and 31% fromEurope for the nine months endedOctober 31, 2021 as compared to 63% fromNorth America and 30% fromEurope for the nine months endedOctober 31, 2020 . Over time, we expect the proportion of our total revenues from professional services to decrease. Costs and Expenses Three months ended October 31, Nine months ended October 31, 2021 2020 % Change 2021 2020 % Change (dollars in thousands) Cost of revenues: Cost of subscription services$ 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 endedOctober 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 byAmazon 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 endedOctober 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- 28 Veeva Systems Inc. | Form 10-Q -------------------------------------------------------------------------------- Table of Contents 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 endedOctober 31, 2021 and 2020 was 73% in both periods. Cost of revenues for the nine months endedOctober 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 byAmazon 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 endedOctober 31, 2021 increased$40 million , primarily due to a$36 million increase in employee compensation-related costs (includes an increase of$7 million in stock-based compensation). The increase in employee compensation-related costs is primarily driven by the increase in headcount during the period. We expect cost of professional services and other to increase in absolute dollars in the near term as we add personnel to our professional services and business consulting organizations. Additionally, we increased salaries for the majority of our employees by 5% effectiveSeptember 1, 2021 , which will continue to increase our cost of professional services. Gross margin for the nine months endedOctober 31, 2021 and 2020 was 73% and 72%, respectively. The slight increase compared to the prior period is due, in part, to a more favorable sales mix of products and services compared to the prior period. Operating Expenses and Operating Margin Operating expenses include research and development, sales and marketing, and general and administrative expenses. As we continue to invest in our growth through hiring, we expect operating expenses and stock-based compensation to increase in absolute dollars and to slightly increase as a percentage of revenue in the future. Additionally, we increased salaries for the majority of our employees by 5% effectiveSeptember 1, 2021 , which will continue to increase our operating expenses. Research and Development Three months ended October 31, Nine months ended October 31, 2021 2020 % Change 2021 2020 % Change (dollars in thousands) Research and development$ 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 endedOctober 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 endedOctober 31, 2021 increased$64 million , primarily due to an increase of$62 million in employee compensation-related costs (includes an increase of$16 million in stock-based compensation). The increase in employee compensation-related costs is primarily driven by the increase in headcount during the period. The expansion of our headcount in research and development is to support development work for the increased number of products that we offer or may offer in the future. We expect research and development expenses to increase in absolute dollars and as a percentage of revenue in the future, primarily due to higher headcount as we continue to invest in our product offerings. Veeva Systems Inc. | Form
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Table of Contents Sales and Marketing Three months ended October 31, Nine months ended October 31, 2021 2020 % Change 2021 2020 % Change (dollars in thousands) Sales and marketing 72,423 57,982 25%$ 208,822 $ 172,909 21% Percentage of total revenues 15 % 15 % 15 % 16 % Sales and marketing expenses for the three months endedOctober 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 endedOctober 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 endedOctober 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 endedOctober 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)% 30 Veeva Systems Inc. | Form 10-Q
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Table of Contents Other income, net for the three months endedOctober 31, 2021 decreased$3 million , primarily due to an increase of$2 million in foreign currency losses. Other income, net for the nine months endedOctober 31, 2021 decreased$3 million compared to the nine months endedOctober 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 theU.S. federal statutory income tax rate due primarily to state taxes, tax credits, equity compensation, and foreign income subject to taxation inthe 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 inthe United States and abroad. For the three months endedOctober 31, 2021 and 2020, our effective tax rates were 20.7% and 7.4%, respectively. During the three months endedOctober 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 endedOctober 31, 2021 and 2020, respectively. For the nine months endedOctober 31, 2021 and 2020, our effective tax rates were 15.9% and 4.0%, respectively. During the nine months endedOctober 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 endedOctober 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 inthe 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. Veeva Systems Inc. | Form
10-Q 31
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Table of Contents â¢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. â¢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. â¢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 -------------------------------------------------------------------------------- Table of Contents 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
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
Net income under GAAP
$ 105,869 $
96 959
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
Diluted earnings per share under GAAP
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
(1) For the three and nine months ended
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
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
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 ofOctober 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 ofthe United States . Our remaining non-U.S. cash and cash equivalents have been earmarked for indefinite reinvestment in our operations outsidethe United States , thus noU.S. current or deferred taxes have been accrued. We believe ourU.S. sources of cash and liquidity are sufficient to meet our business needs inthe United States and do not expect that we will need to repatriate additional funds we have designated as indefinitely reinvested outsidethe 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 outsidethe United States , such amounts may be subject to certain jurisdictional taxes.Veeva Systems Inc. | Form 10-Q 33
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Table of Contents 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 endedOctober 31, 2021 compared to$95 million provided by operating activities for the three months endedOctober 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 endedOctober 31, 2021 compared to$483 million for the nine months endedOctober 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 endedOctober 31, 2021 represent a significant portion of the cash flows from operating activities that we expect for the remainder of the fiscal year endingJanuary 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 endedOctober 31, 2021 compared to$263 million used in investment activities for the three months endedOctober 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 endedOctober 31, 2021 compared to$355 million for the nine months endedOctober 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. InJune 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 34 Veeva Systems Inc. | Form 10-Q -------------------------------------------------------------------------------- Table of Contents 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 endedOctober 31, 2021 compared to$6 million provided by financing activities for the three months endedOctober 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 endedOctober 31, 2021 compared to$25 million for the nine months endedOctober 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$18 million in proceeds from employee stock option exercises due to increased stock option activity during the period. Commitments Our principal commitments consist of leases for office space and data centers. As ofOctober 31, 2021 , the future non-cancelable minimum payments under these commitments were as follows: Payments due by period 1-3 3-5 More than Total Less than 1 year Years Years 5 years (in thousands) Operating lease obligations 63,257 3,354 22,959 15,816 21,128 Total$ 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 inthe 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 endedOctober 31, 2021 as compared to the those disclosed in our Annual Report on Form 10-K for the fiscal year endedJanuary 31, 2021 . Veeva Systems Inc. | Form 10-Q 35
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