0001564590-18-022767.txt : 20180906 0001564590-18-022767.hdr.sgml : 20180906 20180906164143 ACCESSION NUMBER: 0001564590-18-022767 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 80 CONFORMED PERIOD OF REPORT: 20180731 FILED AS OF DATE: 20180906 DATE AS OF CHANGE: 20180906 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VEEVA SYSTEMS INC CENTRAL INDEX KEY: 0001393052 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 208235463 FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-36121 FILM NUMBER: 181057974 BUSINESS ADDRESS: STREET 1: 4280 HACIENDA DRIVE CITY: PLEASANTON STATE: CA ZIP: 94588 BUSINESS PHONE: 925-452-6500 MAIL ADDRESS: STREET 1: 4280 HACIENDA DRIVE CITY: PLEASANTON STATE: CA ZIP: 94588 FORMER COMPANY: FORMER CONFORMED NAME: VERTICALS ONDEMAND INC DATE OF NAME CHANGE: 20070313 10-Q 1 veev-10q_20180731.htm 10-Q veev-10q_20180731.htm

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended July 31, 2018

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             .

Commission File Number: 001-36121

 

Veeva Systems Inc.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

20-8235463

(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer

Identification No.)

 

4280 Hacienda Drive

Pleasanton, California

 

94588

(Address of principal executive offices)

 

(Zip Code)

 

(Registrant’s telephone number, including area code) (925) 452-6500

(Former name, former address and former fiscal year, if changed since last report) N/A

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

(Do not check if a smaller reporting company)

  

Smaller reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

As of August 31, 2018, there were 121,826,207 shares of the Registrant’s Class A common stock outstanding and 22,683,180 shares of the Registrant’s Class B common stock outstanding.

 

 

 

 

Veeva Systems Inc. | Form 10-Q


VEEVA SYSTEMS INC.

FORM 10-Q

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION

4

 

Item 1.

 

Financial Statements.

4

 

 

Condensed Consolidated Balance Sheets

4

 

 

Condensed Consolidated Statements of Comprehensive Income

5

 

 

Condensed Consolidated Statements of Cash Flows

6

 

 

Notes to Condensed Consolidated Financial Statements

7

 

 

Note 1. Summary of Business and Significant Accounting Policies

7

 

 

Note 2. Short-Term Investments

13

 

 

Note 3. Deferred Costs

14

 

 

Note 4. Property and Equipment, Net

14

 

 

Note 5. Intangible Assets

15

 

 

Note 6. Accrued Expenses

16

 

 

Note 7. Fair Value Measurements

16

 

 

Note 8. Income Taxes

18

 

 

Note 9. Deferred Revenue and Performance Obligations

19

 

 

Note 10. Stockholders’ Equity

19

 

 

Note 11. Net Income per Share Attributable to Common Stockholders

20

 

 

Note 12. Commitments and Contingencies

23

 

 

Note 13. Revenues by Product

24

 

 

Note 14. Information about Geographic Areas

25

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

26

 

 

Overview

26

 

 

Key Factors Affecting Our Performance

27

 

 

Components of Results of Operations

27

 

 

Results of Operations

31

 

 

Operating Expenses and Operating Margin

34

 

 

Non-GAAP Financial Measures

37

 

 

Liquidity and Capital Resources

39

 

 

Commitments

41

 

 

Off-Balance Sheet Arrangements

41

 

 

Critical Accounting Policies and Estimates

41

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

43

Item 4.

 

Controls and Procedures.

44

 

PART II. OTHER INFORMATION

45

 

Item 1.

 

Legal Proceedings

45

Item 1A

 

Risk Factors

46

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

69

Item 3.

 

Defaults Upon Senior Securities

69

Item 4.

 

Mine Safety Disclosures

69

Item 5.

 

Other Information

69

Item 6.

 

Exhibits

70

 

SIGNATURES

71

 

 

 

2   Veeva Systems Inc. | Form 10-Q


Table of Contents

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements that are based on our beliefs and assumptions and on information currently available to us. Forward-looking statements include information concerning our possible or assumed future results of operations and expenses, business strategies and plans, trends, market sizing, competitive position, industry environment, potential growth opportunities and product capabilities, among other things. Forward-looking statements include all statements that are not historical facts and, in some cases, can be identified by terms such as “aim,” “anticipates,” “believes,” “could,” “estimates,” “expects,” “goal,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “seeks,” “should,” “strive,” “will,” “would” or similar expressions and the negatives of those terms.

Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements, including those described in “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and elsewhere in this report. Given these uncertainties, you should not place undue reliance on these forward-looking statements.

Any forward-looking statement made by us in this report speaks only as of the date on which it is made. Except as required by law, we disclaim any obligation to update these forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.

As used in this report, the terms “Veeva,” the “Company,” “Registrant,” “we,” “us,” and “our” mean Veeva Systems Inc. and its subsidiaries unless the context indicates otherwise.

 

 

 

Veeva Systems Inc. | Form 10-Q   3


Table of Contents

 

PART I. FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS.

VEEVA SYSTEMS INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except number of shares and par value)

 

 

 

July 31,

 

 

January 31,

 

 

 

2018

 

 

2018

 

 

 

 

 

 

 

*As adjusted

 

 

 

(Unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

511,735

 

 

$

320,183

 

Short-term investments

 

 

498,690

 

 

 

441,779

 

Accounts receivable, net of allowance for doubtful accounts of $461 and $345,

   respectively

 

 

111,795

 

 

 

224,668

 

Unbilled accounts receivable

 

 

14,777

 

 

 

13,348

 

Prepaid expenses and other current assets

 

 

15,361

 

 

 

12,443

 

Total current assets

 

 

1,152,358

 

 

 

1,012,421

 

Property and equipment, net

 

 

50,705

 

 

 

52,284

 

Deferred costs, net

 

 

28,126

 

 

 

30,306

 

Goodwill

 

 

95,804

 

 

 

95,804

 

Intangible assets, net

 

 

27,854

 

 

 

31,490

 

Deferred income taxes, noncurrent

 

 

3,468

 

 

 

2,222

 

Other long-term assets

 

 

6,277

 

 

 

5,806

 

Total assets

 

$

1,364,592

 

 

$

1,230,333

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

7,661

 

 

$

6,944

 

Accrued compensation and benefits

 

 

14,113

 

 

 

17,054

 

Accrued expenses and other current liabilities

 

 

11,989

 

 

 

13,152

 

Income tax payable

 

 

1,725

 

 

 

2,080

 

Deferred revenue

 

 

259,170

 

 

 

266,939

 

Total current liabilities

 

 

294,658

 

 

 

306,169

 

Deferred income taxes, noncurrent

 

 

12,309

 

 

 

10,949

 

Other long-term liabilities

 

 

7,249

 

 

 

6,977

 

Total liabilities

 

 

314,216

 

 

 

324,095

 

Commitments and contingencies (Note 12)

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Class A common stock, $0.00001 par value; 800,000,000 shares authorized,

   121,412,763 and 117,246,735 issued and outstanding at July 31, 2018 and

   January 31, 2018, respectively

 

 

1

 

 

 

1

 

Class B common stock, $0.00001 par value; 190,000,000 shares authorized,

   22,731,725 and 24,822,661 issued and outstanding at July 31, 2018 and January 31, 2018,

   respectively

 

 

 

 

 

 

Additional paid-in capital

 

 

566,533

 

 

 

515,272

 

Accumulated other comprehensive income

 

 

(119

)

 

 

1,600

 

Retained earnings

 

 

483,961

 

 

 

389,365

 

Total stockholders’ equity

 

 

1,050,376

 

 

 

906,238

 

Total liabilities and stockholders’ equity

 

$

1,364,592

 

 

$

1,230,333

 

 

 

 

See Notes to Condensed Consolidated Financial Statements.

 

 

*

See note 1 of the notes to the condensed consolidated financial statements for a summary of adjustments.

4   Veeva Systems Inc. | Form 10-Q


Table of Contents

 

VEEVA SYSTEMS INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands, except per share data)

 

 

 

Three months ended

July 31,

 

 

Six months ended

July 31,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

 

 

 

 

 

*As adjusted

 

 

 

 

 

 

*As adjusted

 

 

 

(Unaudited)

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Subscription services

 

$

169,592

 

 

$

135,550

 

 

$

325,595

 

 

$

264,681

 

Professional services and other

 

 

40,017

 

 

 

32,245

 

 

 

79,561

 

 

 

62,886

 

Total revenues

 

 

209,609

 

 

 

167,795

 

 

 

405,156

 

 

 

327,567

 

Cost of revenues(1):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of subscription services

 

 

29,146

 

 

 

26,800

 

 

 

59,059

 

 

 

52,938

 

Cost of professional services and other

 

 

30,080

 

 

 

23,600

 

 

 

60,322

 

 

 

46,339

 

Total cost of revenues

 

 

59,226

 

 

 

50,400

 

 

 

119,381

 

 

 

99,277

 

Gross profit

 

 

150,383

 

 

 

117,395

 

 

 

285,775

 

 

 

228,290

 

Operating expenses(1):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

38,826

 

 

 

32,678

 

 

 

76,023

 

 

 

60,989

 

Sales and marketing

 

 

38,222

 

 

 

32,070

 

 

 

72,607

 

 

 

62,211

 

General and administrative

 

 

20,517

 

 

 

14,580

 

 

 

40,371

 

 

 

28,160

 

Total operating expenses

 

 

97,565

 

 

 

79,328

 

 

 

189,001

 

 

 

151,360

 

Operating income

 

 

52,818

 

 

 

38,067

 

 

 

96,774

 

 

 

76,930

 

Other income, net

 

 

3,342

 

 

 

2,858

 

 

 

5,481

 

 

 

3,449

 

Income before income taxes

 

 

56,160

 

 

 

40,925

 

 

 

102,255

 

 

 

80,379

 

Provision for income taxes

 

 

5,874

 

 

 

2,323

 

 

 

7,659

 

 

 

4,781

 

Net income

 

$

50,286

 

 

$

38,602

 

 

$

94,596

 

 

$

75,598

 

Net income attributable to Class A and Class B common

   stockholders, basic and diluted

 

$

50,286

 

 

$

38,602

 

 

$

94,596

 

 

$

75,598

 

Net income per share attributable to Class A and Class B common

   stockholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.35

 

 

$

0.28

 

 

$

0.66

 

 

$

0.54

 

Diluted

 

$

0.32

 

 

$

0.25

 

 

$

0.61

 

 

$

0.49

 

Weighted-average shares used to compute net income per share

   attributable to Class A and Class B common stockholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

143,748

 

 

 

140,010

 

 

 

143,271

 

 

 

139,351

 

Diluted

 

 

155,416

 

 

 

153,778

 

 

 

155,227

 

 

 

153,301

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net change in unrealized losses on available-for-sale investments

 

$

357

 

 

$

34

 

 

$

662

 

 

$

(72

)

Net change in cumulative foreign currency translation gain (loss)

 

 

(1,572

)

 

 

327

 

 

 

(2,381

)

 

 

1,232

 

Comprehensive income

 

$

49,071

 

 

$

38,963

 

 

$

92,877

 

 

$

76,758

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

Includes stock-based compensation as follows:

 

Cost of revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of subscription services

 

$

416

 

 

$

376

 

 

$

761

 

 

$

718

 

Cost of professional services and other

 

 

2,657

 

 

 

2,133

 

 

 

4,985

 

 

 

3,822

 

Research and development

 

 

5,795

 

 

 

4,349

 

 

 

10,462

 

 

 

8,151

 

Sales and marketing

 

 

4,830

 

 

 

4,173

 

 

 

8,918

 

 

 

8,020

 

General and administrative

 

 

6,020

 

 

 

2,349

 

 

 

11,603

 

 

 

4,457

 

Total stock-based compensation

 

$

19,718

 

 

$

13,380

 

 

$

36,729

 

 

$

25,168

 

 

 

 

 

 

 

 

 

 

 

 

See Notes to Condensed Consolidated Financial Statements.

 

 

*

See note 1 of the notes to the condensed consolidated financial statements for a summary of adjustments.

 

Veeva Systems Inc. | Form 10-Q   5


Table of Contents

 

VEEVA SYSTEMS INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

 

 

Three months ended

July 31,

 

 

Six months ended

July 31,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

 

 

 

 

 

* As adjusted

 

 

 

 

 

 

* As adjusted

 

 

 

(Unaudited)

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

50,286

 

 

$

38,602

 

 

$

94,596

 

 

$

75,598

 

Adjustments to reconcile net income to net cash provided by

   operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

3,498

 

 

 

3,571

 

 

 

7,094

 

 

 

7,020

 

Amortization of premiums (accretion of discount) on short-term

   investments

 

 

(353

)

 

 

386

 

 

 

(532

)

 

 

842

 

Stock-based compensation

 

 

19,718

 

 

 

13,380

 

 

 

36,729

 

 

 

25,168

 

Amortization of deferred costs

 

 

4,583

 

 

 

4,087

 

 

 

9,102

 

 

 

8,135

 

Deferred income taxes

 

 

868

 

 

 

(296

)

 

 

818

 

 

 

(943

)

(Gain) Loss on foreign currency from market-to-market derivative

 

 

(186

)

 

 

204

 

 

 

(163

)

 

 

253

 

Bad debt expense (recovery)

 

 

(58

)

 

 

(198

)

 

 

178

 

 

 

(206

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

 

43,103

 

 

 

16,345

 

 

 

112,695

 

 

 

87,149

 

Unbilled accounts receivable

 

 

2,858

 

 

 

7,453

 

 

 

(1,429

)

 

 

(479

)

Deferred costs

 

 

(3,371

)

 

 

(4,046

)

 

 

(6,922

)

 

 

(7,763

)

Income taxes

 

 

1,992

 

 

 

483

 

 

 

(504

)

 

 

(2,062

)

Prepaid expenses and other current and long-term assets

 

 

(2,796

)

 

 

331

 

 

 

(3,509

)

 

 

(1,160

)

Accounts payable

 

 

(1,443

)

 

 

700

 

 

 

538

 

 

 

244

 

Accrued expenses and other current liabilities

 

 

(1,540

)

 

 

(361

)

 

 

(4,104

)

 

 

544

 

Deferred revenue

 

 

(30,406

)

 

 

(24,250

)

 

 

(7,756

)

 

 

5,161

 

Other long-term liabilities

 

 

60

 

 

 

1,215

 

 

 

567

 

 

 

2,266

 

Net cash provided by operating activities

 

 

86,813

 

 

 

57,606

 

 

 

237,398

 

 

 

199,767

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchases of short-term investments

 

 

(181,069

)

 

 

(87,202

)

 

 

(374,231

)

 

 

(143,451

)

Maturities and sales of short-term investments

 

 

141,266

 

 

 

69,681

 

 

 

317,810

 

 

 

128,377

 

Purchases of property and equipment

 

 

(686

)

 

 

(2,535

)

 

 

(1,395

)

 

 

(6,495

)

Capitalized internal-use software development costs

 

 

(284

)

 

 

(242

)

 

 

(514

)

 

 

(1,033

)

Net cash used in investing activities

 

 

(40,773

)

 

 

(20,298

)

 

 

(58,330

)

 

 

(22,602

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Proceeds from exercise of common stock options

 

 

7,022

 

 

 

6,131

 

 

 

14,861

 

 

 

13,416

 

Net cash provided by financing activities

 

 

7,022

 

 

 

6,131

 

 

 

14,861

 

 

 

13,416

 

Effect of exchange rate changes on cash, cash equivalents, and restricted

   cash

 

 

(1,565

)

 

 

327

 

 

 

(2,376

)

 

 

1,240

 

Net change in cash, cash equivalents, and restricted cash

 

 

51,497

 

 

 

43,766

 

 

 

191,553

 

 

 

191,821

 

Cash, cash equivalents, and restricted cash at beginning of period

 

 

461,443

 

 

 

366,662

 

 

 

321,387

 

 

 

218,607

 

Cash, cash equivalents, and restricted cash at end of period

 

$

512,940

 

 

$

410,428

 

 

$

512,940

 

 

$

410,428

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash, cash equivalents, and restricted cash at end of period:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

511,735

 

 

$

409,226

 

 

$

511,735

 

 

$

409,226

 

Restricted cash included in other long-term assets

 

 

1,205

 

 

 

1,202

 

 

 

1,205

 

 

 

1,202

 

Total cash, cash equivalents, and restricted cash at end of period

 

$

512,940

 

 

$

410,428

 

 

$

512,940

 

 

$

410,428

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Supplemental disclosures of other cash flow information:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash paid for income taxes, net of refunds

 

$

6,455

 

 

$

1,780

 

 

$

10,571

 

 

$

6,036

 

Excess tax benefits from employee stock plans

 

$

9,347

 

 

$

14,765

 

 

$

19,026

 

 

$

28,675

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in accounts payable and accrued expenses

   related to property and equipment purchases

 

$

80

 

 

$

465

 

 

$

179

 

 

$

(121

)

Vesting of early exercised stock options

 

$

 

 

$

 

 

$

 

 

$

1

 

 

 

 

 

 

See Notes to Condensed Consolidated Financial Statements.

 

 

*

See note 1 of the notes to the condensed consolidated financial statements for a summary of adjustments. 

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VEEVA SYSTEMS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 1. Summary of Business and Significant Accounting Policies

Description of Business

Veeva is a 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 products are designed to meet the unique needs of our customers and their most strategic business functions—from research and development (R&D) to commercialization. Our products address a broad range of needs—including multichannel customer relationship management (CRM), content management, master data management, and data regarding healthcare professionals and organizations. Veeva is also offering its regulated content management solutions to a new set of customers in process and discrete manufacturing, consumer packaged goods, and highly regulated services industries. Our fiscal year end is January 31.

 

Principles of Consolidation and Basis of Presentation

These unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (GAAP) and applicable rules and regulations of the Securities and Exchange Commission (SEC) regarding interim financial reporting and include the accounts of our wholly-owned subsidiaries after elimination of intercompany accounts and transactions. Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Therefore, these condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in Veeva’s Annual Report on Form 10-K for the fiscal year ended January 31, 2018, filed on March 29, 2018. Except for the accounting policies for revenue recognition, unbilled accounts receivable, and deferred costs that were updated as a result of adopting ASU 2014-09, “Revenue from Contracts with Customers” (Topic 606), there have been no changes to our significant accounting policies described in the annual report that have had a material impact on our condensed consolidated financial statements and related notes.

The condensed consolidated balance sheet as of January 31, 2018 included herein was derived from the audited financial statements as of that date. These unaudited condensed consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the financial position, results of operations, our comprehensive income and cash flows for the interim periods, but are not necessarily indicative of the results of operations to be anticipated for the full fiscal year ending January 31, 2019 or any other period.

Effective February 1, 2018, we adopted the requirements of Topic 606, ASU 2016-18, “Statement of Cash Flows, Restricted Cash,” and ASU 2018-02, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income,” as discussed in this note. All amounts and disclosures set forth in this Form 10-Q for previously reported periods have also been updated to comply with the new standards, as indicated by the “as adjusted” tables in this footnote.

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with GAAP requires us to make estimates, judgments and assumptions that affect the condensed consolidated financial statements and the notes thereto. These estimates are based on information available as of the date of the condensed consolidated financial statements. On a regular basis, management evaluates these estimates and assumptions. Significant items subject to such estimates and assumptions include, but are not limited to:

 

the standalone selling price for each distinct performance obligation included in customer contracts with multiple performance obligations;

 

the period of benefit for deferred costs;

 

the collectibility of our accounts receivable;

 

the fair value of assets acquired and liabilities assumed for business combinations;

 

the valuation of short-term investments and the determination of other-than-temporary impairments;

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the realizability of deferred income tax assets and liabilities;

 

the fair value of our stock-based awards; and

 

the capitalization and estimated useful life of internal-use software development costs.

As future events cannot be determined with precision, actual results could differ significantly from those estimates.

 

Revenue Recognition

We derive our revenues primarily from subscription services and professional services. Subscription services revenues consist of fees from customers accessing our cloud-based software solutions and subscription or license fees for our data solutions. Professional services and other revenues consist primarily of fees from implementation services, configuration, data services, training and managed services related to our solutions. Revenues are recognized when control of these services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those services.

We determine revenue recognition through the following steps:

 

Identification of the contract, or contracts, with a customer;

 

Identification of the performance obligations in the contract;

 

Determination of the transaction price;

 

Allocation of the transaction price to the performance obligations in the contract; and

 

Recognition of revenue when, or as, we satisfy a performance obligation.

Our subscription services agreements are generally non-cancelable during the term, although customers typically have the right to terminate their agreements for cause in the event of material breach.

Subscription Services Revenues

Subscription services revenues are recognized ratably over the respective non-cancelable subscription term because of the continuous transfer of control to the customer. Our subscription arrangements are considered service contracts, and the customer does not have the right to take possession of the software.

Professional Services and Other Revenues

The majority of our professional services arrangements are recognized on a time and materials basis. Professional services revenues recognized on a time and materials basis are measured monthly based on time incurred and contractually agreed upon rates. Certain professional services revenues are based on fixed fee arrangements and revenues are recognized as services are rendered. Data services and training revenues are generally recognized as the services are performed.  

Contracts with Multiple Performance Obligations

Some of our contracts with customers contain multiple performance obligations. For these contracts, we account for individual performance obligations separately when they are distinct. The transaction price is allocated to the separate performance obligations on a relative standalone selling price basis. We determine the standalone selling prices based on our overall pricing objectives, taking into consideration market conditions and other factors, including other groupings such as customer type and geography.

Unbilled Accounts Receivable

Unbilled accounts receivable is a contract asset related to the delivery of our subscription services and professional services for which the related billings will occur in a future period. Unbilled accounts receivable consists of (i) revenue recognized for professional services performed but not yet billed and (ii) revenue recognized from non-cancelable, multi-year orders in which fees increase annually but for which we are not contractually able to invoice until a future period.

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Deferred Costs

Deferred costs include sales commissions associated with obtaining a contract with a customer. These costs are deferred and then amortized over a period of benefit that we have determined to be three years. We determined the period of benefit by taking into consideration our customer contracts, our technology and other factors. Amortization expense is included in sales and marketing expenses in the accompanying condensed consolidated statements of operations.

Deferred Revenue

Deferred revenue includes amounts billed to customers for which the revenue recognition criteria have not been met. Deferred revenue primarily consists of billings or payments received in advance of revenue recognition from our subscription services and, to a lesser extent, professional services and other revenues described above. Deferred revenue is recognized as we satisfy our performance obligations. We generally invoice our customers in annual or quarterly installments for subscription services. Accordingly, the deferred revenue balance does not generally represent the total contract value of a subscription arrangement. Deferred revenue that will be recognized during the succeeding 12-month period is recorded as current deferred revenue and the remaining portion is recorded as noncurrent, which is included in other long-term liabilities on the condensed consolidated balance sheet.

Certain Risks and Concentrations of Credit Risk

Our revenues are derived from subscription services, professional services and other services delivered primarily to the life sciences industry. We operate in markets that are highly competitive and rapidly changing. Significant technological changes, shifting customer needs, the emergence of competitive products or services with new capabilities and other factors could negatively impact our operating results.

Our financial instruments that potentially subject us to concentration of credit risk consist primarily of cash and cash equivalents, short-term investments and trade accounts receivable. Our cash equivalents and short-term investments are held by established financial institutions. We have established guidelines relative to credit ratings, diversification and maturities that seek to maintain safety and liquidity. Deposits in these financial institutions may significantly exceed federally insured limits.

We do not require collateral from our customers and generally require payment within 30 to 60 days of billing. We periodically evaluate the collectibility of our accounts receivable and provide an allowance for doubtful accounts as necessary, based on historical experience. Historically, losses related to lack of collectibility have not been material.

The following customers individually exceeded 10% of total accounts receivable as of the dates shown:  

 

 

July 31,

 

January 31,

 

 

2018

 

2018

 

Customer 1

*

 

18%

 

Customer 2

*

 

13%

 

 

 

 

 

*

Does not exceed 10%.

No single customer represented over 10% of total revenues in the condensed consolidated statements of comprehensive income for the three and six months ended July 31, 2018 and 2017.

 

 


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New Accounting Pronouncements Adopted in Fiscal 2019

Income Taxes

In March 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2018-05, “Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118.” This standard amends ASC 740, Income Taxes, to provide accounting guidance for the tax effects of the Tax Act pursuant to Staff Accounting Bulletin No. 118, which allows companies to complete the accounting under ASC 740 within a one-year measurement period from the Tax Act enactment date. This standard is effective upon issuance. We have applied the guidance in ASU 2018-05 (see note 8 of the notes to our condensed consolidated financial statements).

Stranded Tax Effects in Accumulated Other Comprehensive Income

In February 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2018-02, "Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income." This update allows reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017 (Tax Act).

ASU 2018-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those years. We early adopted this standard effective February 1, 2018. The impact on our condensed consolidated financial statements was immaterial.

Restricted Cash

In November 2016, the FASB issued ASU 2016-18, “Statement of Cash, Restricted Cash,” which requires that amounts generally described as restricted cash or restricted cash equivalents be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This standard is effective for our interim and annual reporting periods beginning after December 15, 2017. We adopted ASU 2016-18 retrospectively, effective February 1, 2018. As a result of including restricted cash with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts presented on the condensed consolidated statement of cash flows, the impact on net cash flows for the three and six months ended July 31, 2018 was immaterial.

Financial Instruments

In January 2016, the FASB issued ASU 2016-01, “Financial Instruments.” ASU 2016-01, among other things, requires equity investments, with certain exceptions, to be measured at fair value with changes in fair value recognized in net income and clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. This standard is effective for our interim and annual reporting periods beginning after December 15, 2017. We adopted ASU 2016-01 effective February 1, 2018. There was no impact to our condensed consolidated financial statements.

Revenue Recognition

In May 2014, the FASB issued Topic 606. This guidance outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model requires revenue to be recognized when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. Topic 606 supersedes the existing revenue recognition guidance in “Revenue Recognition (Topic 605)”.

We have adopted the requirements of the new standard as of February 1, 2018, utilizing the full retrospective transition method. Adoption of the new standard resulted in changes to our accounting policies for revenue recognition, unbilled accounts receivable, and deferred costs as detailed above in our description of Revenue Recognition. We applied a practical expedient provided by the new standard and are not disclosing the amount of consideration allocated to the remaining performance obligations for all reporting periods presented before the date of the initial application.


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The impact of adoption included the deferral of costs to obtain customer contracts, which is comprised of commissions on our subscription services arrangements. Such costs were expensed as incurred under Topic 605, whereas under Topic 606, they are generally capitalized and amortized over the costs’ associated term of economic benefit. We have determined that the term of economic benefit of our costs to obtain customer contracts is three years.

Revenue for the majority of our subscription services customer contracts will continue to be recognized over time because of the continuous transfer of control to the customer; however, there is some impact to revenue primarily driven by (i) accounting for non-cancelable multi-year contracts, (ii) the removal of the current limitation on contingent revenue, which may result in revenue being recognized earlier for certain contracts, and (iii) allocation of revenue from subscription services to professional services.

We adjusted our condensed consolidated financial statements from amounts previously reported to reflect the adoption of Topic 606, ASU 2016-18, or ASU 2018-02. Select impacted condensed consolidated balance sheet line items, which reflect the adoption of the new standards are as follows (in thousands):

 

 

 

January 31, 2018

 

 

 

As Reported

 

 

Adjustments

 

 

As adjusted

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable(1)

 

$

233,731

 

 

 

(9,063

)

a

$

224,668

 

Unbilled accounts receivable(1)

 

 

 

 

 

13,348

 

a

 

13,348

 

Deferred costs, net

 

 

 

 

 

30,306

 

a

 

30,306

 

Deferred income taxes, non-current

 

 

3,490

 

 

 

(1,268

)

a

 

2,222

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

Deferred revenue

 

$

275,446

 

 

$

(8,507

)

a

$

266,939

 

Deferred income taxes, non-current

 

 

3,828

 

 

 

7,121

 

a

 

10,949

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated other comprehensive income

 

$

1,404

 

 

$

196

 

b

$

1,600

 

Retained earnings

 

 

354,850

 

 

 

34,515

 

a, b

 

389,365

 

 

 

 

 

 

(1)

Unbilled accounts receivable was previously included in Accounts receivable before the adoption of Topic 606.

a

Adjusted to reflect the adoption of ASU 2014-09, “Revenue from Contracts with Customers (Topic 606).

 

b

Adjusted to reflect the adoption of ASU 2018-02, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.”

 

Select unaudited condensed consolidated statement of comprehensive income line items, which reflect the adoption of the new standards are as follows (in thousands):

 

 

 

Three months ended July 31, 2017

 

 

 

As Reported

 

 

Adjustments

 

 

As adjusted

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

Subscription services

 

$

134,340

 

 

$

1,210

 

a

$

135,550

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

 

32,017

 

 

 

53

 

a

 

32,070

 

Operating income

 

 

36,898

 

 

 

1,169

 

a

 

38,067

 

Provision for income taxes

 

 

1,912

 

 

 

411

 

a

 

2,323

 

Net income

 

$

37,844

 

 

$

758

 

a

$

38,602

 

Net income per share attributable to Class A and Class B common

   stockholders:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.27

 

 

$

0.01

 

a

$

0.28

 

Diluted

 

$

0.25

 

 

$

 

a

$

0.25

 

 

 

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Six months ended July 31, 2017

 

 

 

As Reported

 

 

Adjustments

 

 

As adjusted

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

Subscription services

 

$

261,617

 

 

$

3,064

 

a

$

264,681

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

 

61,827

 

 

 

384

 

a

 

62,211

 

Operating income

 

 

74,237

 

 

 

2,693

 

a

 

76,930

 

Provision for income taxes

 

 

3,819

 

 

 

962

 

a

 

4,781

 

Net income

 

$

73,867

 

 

$

1,731

 

a

$

75,598

 

Net income per share attributable to Class A and Class B common

   stockholders: