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VEEV > SEC Filings for VEEV > Form 10-Q on 6-Jun-2014All Recent SEC Filings

Show all filings for VEEVA SYSTEMS INC

Form 10-Q for VEEVA SYSTEMS INC


6-Jun-2014

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our condensed consolidated financial statements and notes thereto appearing elsewhere in this report. In addition to historical condensed consolidated financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results could differ materially from those anticipated by these forward-looking statements as a result of many factors. We discuss factors that we believe could cause or contribute to these differences below and elsewhere in this report, including those set forth under "Risk Factors" and "Special Note Regarding Forward-Looking Statements."

Overview

Veeva provides industry-specific, cloud-based software solutions for the life sciences industry, which we refer to as Industry Cloud solutions. Our Industry Cloud solutions enable pharmaceutical and other life sciences companies to realize the benefits of modern cloud-based architectures and mobile applications for their most critical business functions, without compromising industry-specific functionality or regulatory compliance. Our customer relationship management solution, Veeva CRM, and the applications that complement Veeva CRM, enable our customers to increase the productivity and compliance of their sales and marketing functions. Our regulated content management and collaboration solutions, Veeva Vault, enable our customers to manage a range of highly regulated, content-centric processes across the enterprise. Our customer master solution, Veeva Network, which includes our proprietary database of healthcare provider and healthcare organization data, enables our customers to create and maintain accurate customer data.

Veeva CRM was our first commercially available solution and has made up the vast majority of our revenue historically. For instance, in our fiscal year ended January 31, 2014, we derived approximately 95% of our subscription services revenues from our Veeva CRM and Veeva CRM complementary solutions. In the quarter ended April 30, 2014, total revenues associated with our Veeva Vault and Veeva Network solutions, comprised in excess of 10% of our total revenues. The contribution of revenues associated with Veeva Vault and Veeva Network is expected to increase as a percentage of total revenue going forward. However, we have less experience selling Veeva Vault, Veeva Network and our newer commercial applications that complement Veeva CRM. To the extent that these more recently introduced solutions do not achieve significant market acceptance, our business and results of operations may be adversely affected. In particular, certain of our Veeva Vault solutions are offered to segments of the life sciences industry to which we have less experience marketing, including the research and development organizations of life sciences companies and emerging biotechnology companies. We must be successful in marketing to these and other potential newer industry segments. We intend to increase the adoption of our solutions by increasing the size of our sales force. However, the timing and effectiveness of any increase in our sales organization is difficult to predict.

Our solutions are accessed through an internet connection and a web browser, or using our proprietary applications for mobile devices, such as the iPad. We market our solutions and services primarily through our global direct sales force. We currently operate in three principal regions: North America, Europe and Asia Pacific and are expanding our sales and services coverage for the Latin America region. The majority of our revenues from international sales are invoiced from and collected by our U.S. entity and recognized as a component of income before taxes in the United States as opposed to a foreign jurisdiction. However, we measure our revenues by geographic area on the basis of the estimated location of the end users for subscription services revenues and the estimated location of the users for which the services were performed for professional services revenues.

The primary purpose of our professional services organization is to promote customer success and effective deployments of our Industry Cloud solutions. This component of our revenues can be variable period to period depending on a number of factors, including the achievement of milestones in our professional services arrangements, and the requirements, complexity and timing of our customer's implementation projects. Historically, professional services revenues have represented a material portion of our total revenues. For example, professional services revenues were 30% of total revenues in the fiscal year ended January 31, 2014.

For the three months ended April 30, 2014 and 2013, total revenues were $66.7 million and $42.8 million, respectively, representing period-over-period growth of 56%. For the three months ended April 30, 2014 and 2013, our subscription services revenues were $48.5 million and $27.9 million, respectively, representing period-over-period growth of 74%. We generated net income of $7.2 million and $4.8 million for the three months ended April 30, 2014 and 2013, respectively.


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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 Industry Cloud for life sciences. We expect to invest in research and development to expand existing and build new solutions, sales and marketing to promote our solutions to new and existing customers and in existing and expanded geographies, professional services to ensure the success of our customers' implementations of our solutions, and other operational and administrative functions to support our expected growth and new requirements associated with becoming a public company. We anticipate that our headcount will increase as a result of these investments. We expect our total operating expenses will increase over time, and, in some cases, have short-term negative impacts on our net income margin.

Adoption of Our Solutions by Existing and New Customers. Most of our customers initially deploy our solutions to a limited number of 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 renewals of subscriptions to our solutions, deployment of our solutions to additional users around the world, and the purchase of subscriptions to additional solutions. Our growth is also dependent on the adoption of our solutions by new customers. In particular, our Veeva Vault solutions are offered to segments of the life sciences industry to which we have less experience marketing, including the research and development organizations of life sciences companies as well as emerging biotechnology companies, and we must be successful in marketing to these and other potential new segments.

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, 2014, 2013 and 2012, our subscription services revenue retention rate was 166%, 187% and 159%, respectively.

Mix of Subscription and Professional Services Revenues. We believe our investments in professional services have driven customer success and facilitated the further adoption of our solutions by our customers. During the initial period of deployment by a customer, we generally provide a greater amount of configuration, implementation and training than later in the deployment. At the same time, many of our customers have historically purchased subscriptions for only a limited set of their total potential users during their initial deployments. As a result of these factors, the proportion of total revenues for a customer associated with professional services is relatively high during the initial deployment period. Over time, as the need for professional services associated with user deployments decreases and the number of users often increases, we have observed and continue to expect the mix of total revenues to shift more toward subscription services revenues. As a result, we expect the proportion of our total revenues from subscription services to increase over time.

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 Industry Cloud solutions. Professional services revenues consist primarily of fees from implementation services, configuration, training and managed services related to our solutions. For the three months ended April 30, 2014, subscription services revenues constituted 73% of total revenues and professional services and other revenues constituted 27% of total revenues.

New subscription orders typically have a one-year term and automatically renew unless notice of cancellation is provided in advance. If a customer adds users or solutions to an existing order, such additional orders will generally be coterminous with the initial order, and as a result, orders for additional users or solutions will commonly have a term of less than one year. Subscription orders are generally billed at the subscription commencement date in annual or quarterly increments. Because the term of orders for additional users or solutions is commonly less than one year and payment terms may be quarterly, the annualized value of the orders we enter into with our customers will not be completely reflected in deferred revenue at any single point in time. Accordingly, we do not believe that change in deferred revenue is an accurate indicator of future revenues for any given period of time.


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Subscription services revenues are recognized ratably over the order term beginning when the solution has been provisioned to the customer. Our subscription services agreements are generally non-cancellable during the term, although customers typically have the right to terminate their agreements for cause in the event of material breach. Subscription services revenues are affected primarily by the number of customers, the number of users (or other subscription usage metric) at each customer that uses our solutions and the number of solutions subscribed to by each customer.

Our professional services engagements are primarily billed on a time and materials basis and revenues are typically recognized as the services are rendered. Professional services revenues are affected primarily by our customers' demands for implementation services, configuration, training and managed services in connection with our solutions.

Cost of Revenues

Cost of subscription services revenues primarily consists of fees paid to salesforce.com, inc. for our use of the Salesforce Platform and the associated hosting infrastructure and data center operations that are provided by salesforce.com, other third-party expenses related to data center capacity, personnel related costs associated with hosting our subscription services and providing support, operating lease expense associated with computer equipment and software and allocated overhead, amortization expense associated with capitalized internal-use software related to our subscription services and amortization expense associated with purchased intangibles related to our subscription services. Cost of subscription services revenues for our Veeva Vault and Veeva Network solutions do not include fees to salesforce.com because the Salesforce Platform is not used in those solutions. We intend to continue to invest additional resources in our subscription services to broaden our product offerings and increase our delivery capacity. For example, we may open additional data centers, expand our current data centers in the future and continue to make investments in the availability and security of our solutions. The timing of when we incur these additional expenses will affect our cost of revenues in absolute dollars in the affected periods.

Cost of professional services and other revenues consists primarily of employee-related expenses associated with providing these services, including salaries, benefits and stock-based compensation expense, the cost of subcontractors, travel costs and allocated overhead. The cost of providing professional services is significantly higher as a percentage of the related revenues than for our subscription services due to the direct labor costs and costs of subcontractors.

Operating Expenses

We accumulate certain costs such as 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."

Research and Development. Research and development expenses consist primarily of employee-related expenses, third-party consulting fees and allocated overhead. We continue to focus our research and development efforts on adding new features and applications, 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, customer-focused events, travel-related expenses and allocated overhead. Sales commissions and other incremental costs to acquire contracts are expensed as incurred.

General and Administrative. General and administrative expenses consist of employee-related expenses for our executive, finance and accounting, legal, human resources, management information systems personnel and other administrative employees. In addition, general and administrative expenses include legal costs, professional fees, other corporate expenses and allocated overhead.

Other Income (Expense), Net

Other income (expense), net consists primarily of transaction gains or losses on foreign currency, net of interest income and amortization of 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 7 of the notes to our condensed consolidated financial statements.


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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 April 30,
                                                  2014                  2013
                                                        (in thousands)
    Consolidated Statements of Income Data:
    Revenues:
    Subscription services                     $      48,521         $      27,937
    Professional services and other                  18,200                14,851

    Total revenues                                   66,721                42,788

    Cost of revenues(1):
    Cost of subscription services                    12,040                 6,950
    Cost of professional services and other          13,910                10,759

    Total cost of revenues                           25,950                17,709

    Gross profit                                     40,771                25,079

    Operating expenses(1):
    Research and development                          8,992                 5,527
    Sales and marketing                              12,814                 7,662
    General and administrative                        6,408                 3,717

    Total operating expenses                         28,214                16,906

    Operating income                                 12,557                 8,173
    Other expense, net                                  (30 )                (499 )

    Income before income taxes                       12,527                 7,674
    Provision for income taxes                        5,306                 2,829

    Net income                                $       7,221         $       4,845

(1) Includes stock-based compensation as follows:

                                                 Three Months Ended April 30,
                                                   2014                 2013
                                                        (in thousands)
    Cost of revenues:
    Cost of subscription services             $           53       $            3
    Cost of professional services and other              582                   93
    Research and development                             887                  195
    Sales and marketing                                  776                  183
    General and administrative                           958                  261

    Total stock-based compensation            $        3,256       $          735


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                                                 Three Months Ended April 30,
                                                  2014                  2013
    Consolidated Statements of Income Data:
    Revenues:
    Subscription services                              72.7 %                65.3 %
    Professional services and other                    27.3                  34.7

    Total revenues                                    100.0                 100.0

    Cost of revenues:
    Cost of subscription services                      18.0                  16.2
    Cost of professional services and other            20.8                  25.1

    Total cost of revenues                             38.8                  41.3

    Gross profit                                       61.2                  58.7

    Operating expenses:
    Research and development                           13.5                  12.9
    Sales and marketing                                19.2                  17.9
    General and administrative                          9.6                   8.7

    Total operating expenses                           42.3                  39.5

    Operating income                                   18.9                  19.2
    Other expense, net                                   -                   (1.2 )

    Income before income taxes                         18.9                  18.0
    Provision for income taxes                          8.0                   6.6

    Net income                                         10.9 %                11.4 %

                                       Three Months Ended April 30,
                                        2014                  2013            % Change
                                          (dollars in thousands)
  Revenues:
  Subscription services             $      48,521         $      27,937              74 %
  Professional services and other          18,200                14,851              23

  Total revenues                    $      66,721         $      42,788              56

  Percentage of revenues:
  Subscription services                      72.7 %                65.3 %
  Professional services and other            27.3                  34.7

  Total revenues                            100.0 %               100.0 %

Total revenues for the three months ended April 30, 2014 increased $23.9 million from the prior year period, of which $20.6 million was from subscription services revenues and $3.3 million from professional services and other revenues. Subscription services revenues were 73% of total revenues for the three months ended April 30, 2014, compared to 65% of total revenues for the prior year comparable period, reflecting the growth in our subscription services revenues as our customers expanded their use of our solutions across new divisions and geographies, and adopted our newer products.

Four percent of the increase in subscription services revenues was attributable to orders from existing customers that were placed on or prior to April 30, 2013 and the renewal of such orders through April 30, 2014. Ninety-six percent of the increase in subscription services revenues was attributable to new orders placed after April 30, 2013 to deploy our solutions to additional users within our existing customer base and to new users at new customers. New orders from existing customers consisted of expanded use of our solutions within a given customer and the addition of solutions not previously utilized by a given customer. Subscription services revenues from North America, as measured by the estimated location of the end users for


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subscription services, made up 56% of subscription services revenues in the three months ended April 30, 2014 and 64% of subscription services revenues in the three months ended April 30, 2013. This shift in geographic revenue mix was primarily due to the more rapid rate of revenue growth from deployments in both Europe and Asia as compared to North America.

Professional services and other revenues for the three months ended April 30, 2014 increased $3.3 million from the prior year period. Ninety-six percent of the professional services and other revenues was attributable to existing customers that signed agreements with us on or prior to April 30, 2013 and 4% of the professional services and other revenues was attributable to customers that signed agreements with us after April 30, 2013. Professional services revenues from North America, as measured by the estimated location of the user for which the services were performed, made up 57% of professional services revenues in the three months ended April 30, 2014, as compared to 54% in the prior year period.

Cost of Revenues and Gross Profit Percentage



                                                   Three Months Ended April 30,
                                                   2014                   2013              % Change
                                                      (dollars in thousands)
Cost of revenues:
Cost of subscription services                  $      12,040          $       6,950                73 %
Cost of professional services and other               13,910                 10,759                29

Total cost of revenues                         $      25,950          $      17,709                47

Gross margin percentage:
Subscription services                                   75.2 %                 75.1 %
Professional services and other                         23.6                   27.6
Total gross margin percentage                           61.1 %                 58.6 %
Gross profit                                   $      40,771          $      25,079                63 %

Cost of revenues for the three months ended April 30, 2014 increased $8.2 million from the prior year period, of which $5.1 million was related to cost of subscription services. The increase in cost of subscription services was primarily due to an increase of users of our Veeva CRM solution, which drove an increase of $3.7 million in salesforce.com fees combined with a $0.5 million increase in employee compensation-related costs, and a $0.4 million increase in amortization of purchased intangible assets.

We expect cost of subscription services revenues to increase in absolute dollars in the near term and to decrease as a percentage of total subscription services revenues over time with the continued growth in the revenue contribution from Veeva Vault and Veeva Network, as these products have a slightly higher subscription services gross margin than Veeva CRM.

Cost of professional services and other revenues for the three months ended April 30, 2014 increased $3.1 million from the prior year period, primarily due to a $3.1 million increase in employee compensation-related costs, which includes an increase of $0.5 million in stock-based compensation, resulting from a 43% year-over-year increase in the headcount of our professional services team.

We expect cost of professional services and other revenues to increase in absolute dollars in the near term and to increase slightly as a percentage of professional services and other revenues.

Gross profit as a percentage of total revenues for the three months ended April 30, 2014 and 2013 were 61% and 59%, respectively. The increases compared to the prior periods are largely due to an increase in the proportion of total revenues attributable to subscription services revenues, which have higher gross margins than professional services and other revenues, and to a lesser extent due to the increased revenue contribution of our Veeva Vault and Veeva Network solutions, which have a slightly higher subscription services gross margin than Veeva CRM.


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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 though hiring additional headcount and expansion of our headquarters, we expect operating expenses to increase in absolute dollars and as a percentage of revenue in the near term which may result in a slight decrease in our operating margin.

Research and Development



                                     Three Months Ended April 30,
                                      2014                  2013            % Change
                                        (dollars in thousands)
   Research and development       $       8,992         $       5,527              63 %
   Percentage of total revenues            13.5 %                12.9 %

Research and development expenses for the three months ended April 30, 2014 increased $3.5 million from the prior year period, primarily as a result of an increase of $3.3 million in employee compensation-related costs, which includes an increase of $0.7 million in stock-based compensation. The increase in employee compensation-related costs resulted from annual merit increases, a headcount increase of 61% as well as an increase in employer payroll tax expense related to the exercise and subsequent sale of nonqualified stock options after the lock-up expiration.

We expect research and development expenses to increase in absolute dollars in . . .

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