Veeva Systems Inc (VEEV) 2017 Q2 法說會逐字稿

Good afternoon. My name is Christine, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Veeva Systems fiscal 2017 second-quarter results conference call.

(Operator Instructions)

Thank you. Rick Lund, Investor Relations Director, you may begin your conference.

Good afternoon and welcome to Veeva's fiscal 2017 second quarter earnings call for the quarter ended July 31, 2016. With me on today's call are Peter Gassner, our Chief Executive Officer; Matt Wallach, our President; and Tim Cabral, our Chief Financial Officer.

During the course of this conference call, we will make forward-looking statements regarding trends, our strategies, and the anticipated performance of the business. These forward-looking statements will be based on management's current views and expectations, and are subject to various risks and uncertainties. Actual results may differ materially.

Please refer to the risks listed in our earnings release, and the risk factors included in our most recent filing on Form 10-Q, which is available on the Company's website at Veeva.com under the investor section, and on the SEC's website at SEC.gov.

Forward-looking statements made during the call are being made as of today, August 30, 2016. If this call is replayed or viewed after today, the information presented during the call may not contain current or accurate information. Veeva disclaims any obligation to update or revise any forward-looking statements.

We will provide guidance on today's call, but will not provide any further guidance or updates on our performance during the quarter, unless we do so in a public forum. On the call we will also discuss certain non-GAAP metrics that we believe aid in the understanding of our financial results. A reconciliation to comparable GAAP metrics can be found in today's earnings release which is available on our website, and as an exhibit to the Form 8-K filed with the SEC just before this call. With that, thank you for joining us, and I will turn it over to Peter.

Thank you, Rick. Good afternoon and thanks, everyone, for joining us today.

On the heels of a great Q1, we've had an outstanding quarter, ahead of our guidance. Total revenue was up 34% year-over-year to $131 million, and subscription revenue grew 40% to $105 million. Non-GAAP operating margin was 28%. In short, we had another quarter of strong growth and profitability. This Q2 outperformance was fueled by strength in every major area of our business, including products, geographies and customers of all sizes. We added a record number of net new customers, and had one of our best quarters of expanding business within our existing customer base.

In the second quarter, we announced four important new applications, two on the Vault side, and two in Commercial Cloud. We are bringing new solutions to market at a faster pace, and with greater efficiency than ever before. This continued product expansion is enabling us to add greater value to our customers, which in turn helps us develop deeper and more strategic relationships. We believe this sets us up very well for a long runway of growth into the future, as we build out our industry cloud for life sciences.

Turning to our quarterly progress by area. On the Vault side, we saw strength in both commercial and R&D. We closed three seven-figure Vault deals, and added 34 new Vault customers. Existing Vault customers expanded at a solid pace as well, and we now have more than 100 customers with multiple Vault applications. That's double the number since this time last year.

Commercial Vault is progressing incredibly well. Zinc and Veeva together is proving to be a winning combination. It's been nearly a year since we acquired Zinc, and I could not be more pleased with the progress. Through rapid alignment, strong execution, and commitment to customer success, we've established a clear leadership position in commercial content management. We're winning more deals than ever, customers are happy, and we are expanding our solutions.

In Q2, we announced Vault PromoMats DAM edition. Slated for December release, this new Vault add-on will bring enterprise digital asset management capabilities to Vault PromoMats, for those with more sophisticated asset management needs. Capabilities will include more robust image and video file handling, larger file sizes, more storage, and the ability to easily configure brand portals. Until now, companies have had to integrate their core medical, legal and regulatory review system with a separate enterprise DAM. We will now offer the only industry-specific solution that combines enterprise digital asset management, with best-in-class medical, legal and regulatory review.

This is strategic for our customers, because it enables content reuse globally, which can speed time to market, and we believe can save a large pharma company up to $50 million a year in content creation costs. Our digital asset management strategy is an important differentiator, and is already making a big impact on the market. In Q2, it was a factor in helping us secure another seven-figure Vault PromoMats deal with a top 10 pharma.

It was a big quarter for our clinical business as well. We had another seven-figure deal with a top 10 pharma company that's standardizing on Vault eTMF globally. This is the seventh top 20 pharma to standardize on Veeva Vault eTMF. It's the first European-based top 20 and we believe it will be a catalyst for further Vault momentum in Europe.

We expanded our clinical market opportunity in Q2, with the announcement of Veeva Vault CTMS for clinical trial management, planned for release in the first quarter of 2017. We believe the market for clinical trial management systems, known as CTMS, is about the same size as the eTMF market, and it's ripe for disruption as customers are looking for alternatives to legacy solutions.

Veeva Vault CTMS is ground-breaking in two ways. To start, it's the first CTMS to be built on a true modern cloud platform. The ease of use, flexibility and openness of the Vault platform are critical to support modern clinical trials, and we believe Veeva is the first to market with these capabilities. In addition, Vault CTMS is the first to be part of an integrated application suite that brings together CTMS, eTMF and Study Startup on a common platform to unify clinical operations.

We feel that our clinical solutions offer breakthrough capabilities, and will be one of the many growth drivers for Veeva over time. This approach to clinical is similar to what we have for regulatory, with our Vault RIM suite, and for quality with Vault QMS and Vault QualityDocs.

Though we only began selling the QMS product in June, we're making great strides. Vault QMS is maturing rapidly, and in Q2, we signed four deals. We believe we are seeing this rapid uptake because our offering unifies quality applications, and because customers want to move to the cloud with a modern platform-based solution.

In CTMS, QMS and many other markets within the life sciences industry, Veeva is the first to market with credible, modern cloud offerings. That might seem surprising, but it underscores just how early we are in the transition from legacy on-premise solutions to industry-specific cloud offerings.

It was also a great quarter for Commercial Cloud. Our strategy of establishing success in core CRM for sales automation, and extending from there to other Commercial Cloud solutions is progressing very well. Expanding beyond core CRM was one of the major themes of Veeva Commercial Summit, which we held this June in Philadelphia.

Having grown to more than 1,200 attendees, Veeva Commercial Summit is easily the largest commercial life sciences event of its kind. This year we had early adopter customers, both large and small, talk about their success with products like Network, Align, Events and OpenData. While it's early innings for many of these products, we anticipate strong adoption over time as customers reach for the benefits of an integrated suite of solutions across multiple regions and divisions.

Turning to some of the specific Q2 highlights for Commercial Cloud. It was an excellent quarter for multi-channel CRM with the top 20 global pharmas. A few of our top 20 pharma customers had major new roll outs, as they progress toward global deployments. In the regional projects, at our last -- at our latest two top 20 pharmas progressed well this quarter, and we are optimistic this success will lead to global and divisional expansion over time.

In SMB, Commercial Cloud momentum was also good. More SMB customers are going with multiple Commercial Cloud solutions right from the start. As with our large enterprise customers, we are also pleased with the progress of current SMB customers, adding new Commercial Cloud applications.

We are also encouraged by the growing demand for our most recently released CRM add-ons. In the second quarter, we closed a number of new Veeva CRM Events Management customers, and existing Events implementation projects progressed well. We now have over 10 Events customers live across six countries.

We are also continuing to see great early momentum with Align. We signed our first US customer in the second quarter. Our global pipeline is growing nicely, and we are pleased to see the global rollout of a key large customer progressing on schedule. We also announced two new Commercial Cloud offerings at Summit, Veeva CRM Engage Meeting planned for late this year and Veeva CRM Engage Webinar planned for mid next year.

These products will empower companies to far more effectively reach and connect to healthcare professionals, and deliver compliant content through digital channels. These solutions have the potential to transform how pharma engage -- engages with healthcare providers, by finally making screen-sharing video calls and webinars easy for doctors and for pharma reps. Due to poor technology and the inherent limitations and compliance risk of siloed systems, this hasn't been possible before. Customer response at Summit was very positive, and we are already working with potential early adopters.

In summary, we had a great second quarter that was highlighted by strong performance across all segments, geographies, and product lines. We are seeing strong demand for our established products, and great interest in new products we are building for the future. We are deepening our strategic relationships with existing customers, as well as adding many new customers. I've never been more optimistic about our future.

I'd like to thank all of our employees for their outstanding efforts and teamwork this quarter. And I'd like to thank our customers for their continued support and partnership. With that, I'll turn the call over to Tim.

Thanks, Peter. Q2 was another quarter of across-the-board outperformance. Total revenue was $131.3 million, up from $98.1 million one year ago, a 34% increase. Subscription revenue was up 40% to $105.2 million, from $75.3 million last year. Subscription revenue benefited from another strong bookings quarter across multiple products and regions, capping our best-ever first half of the year.

Services revenue came in at $26.1 million, up 14% from $22.8 million one year ago. Strength in services was broad-based, but was especially notable in Vault's projects. I expect services revenue to be flat to slightly down on a sequential basis in the second half, as Q3 and Q4 tend to be seasonally slower services revenue quarters due to summer vacation and the holidays.

In discussing the remainder of the income statement, please note that unless otherwise stated, all references to our expenses and operating results are on a non-GAAP basis, and are reconciled to our GAAP results in the earnings press release that was posted just before the call. In Q2, our subscription gross margin was 79.5%, an increase of nearly 70 basis points from a year ago, driven by the faster growth of our Vault products, and our non-CRM Commercial Cloud offerings which have a higher gross margin profile relative to our core [SFA] product.

Services gross margin for the quarter was almost 33%, compared to 31% one year ago, and up meaningfully from 23.5% in Q1. The large sequential swing in this metric was driven by increases in both utilization and demand. I expect services gross margin to return to the mid to high 20%s in the back half of the year, which is more in line with our normal range in the 20%s associated with our target utilization rates. Remember, that our services business can be highly variable, on both the top and bottom lines, so this type of movement in services gross margin can happen from time to time.

Our total gross margin for Q2 was 70%, an increase of nearly 250 basis points from one year ago. This improvement was driven primarily by the increased mix of subscription revenue and the rise in subscription gross margin. Overall, our operating income came in at $36.7 million, a 28% operating margin which was well above the high end of our guide. This result was driven primarily by our revenue outperformance.

In addition, relative to our plan, our early investments on new initiatives have been more efficient than expected. That said, we continue to invest, adding 81 people net in the quarter, finishing at 1,623, up from 1,123 one year ago. The linearity of those hires was weighted towards the back end of the quarter, which also contributed to our outperformance in operating margin.

Net income for the quarter was $22.3 million, compared to $18.2 million last year. Our effective tax rate of about 37% was slightly higher than normal, due to a change in the long-term treatment of one of our foreign subsidiaries, and the associated catch-up from Q1. We expect our effective tax rate to be roughly 36% for the remainder of the year. Our fully diluted net income per share was $0.15, compared to $0.13 for the same quarter last year.

Turning to the balance sheet, deferred revenue was $177 million, compared to $181 million at the end of the first quarter. This resulted in calculated billings of $127 million, which represents 32% growth year-over-year. Our calculated billings total for Q2 was well ahead of our $110 million guidance provided on the last call. Based on the strength of our first half calculated billings performance, we are increasing our full-year calculated billings growth guidance to 25% to 26%, up from roughly 24%.

To give some context, calculated billings was particularly strong in the first half of the year for two reasons. First, our bookings in Q1 and Q2 have been very strong. Second, these bookings came disproportionately from customers with annual billing terms that also have renewal dates in Q1 and Q2, and therefore are not additive to second half billings. This has shifted the seasonality of our renewal base more toward the first half of our fiscal year, with Q3 being our lowest renewal quarter on a dollar basis. As a result, for this fiscal year, calculated billings growth will likely be weighted towards the first half.

These shifts in the seasonality of our renewal base may happen over time. It's important to keep in mind this ultimately has no impact on recognized revenue. Due primarily to the current seasonality of our renewal base, we expect calculated billings to be approximately $100 million in Q3.

Remember, as discussed on prior calls, calculated billings in Q3 of last year benefited from a few one-time items. These items contributed approximately $13 million in that period, and will not recur this year. As was the case with our first-quarter calculated billings growth of 62%, year-over-year quarterly comparisons of this metric are not good indicators of the underlying momentum of the business. Our increase of calculated billings and revenue guidance for the year is the best indication of our strong momentum.

Elsewhere on the balance sheet, we exited Q2 with nearly $480 million in cash and short-term investments, up from $457 million at the end of Q1. This increase was driven by a solid performance in cash from operations, which came in at $12 million. Our expectations for full-year operating cash flow remain consistent with last quarter.

Since our operating cash flows can be volatile quarter to quarter, we look at our cash flow performance on a last 12 month basis. Over the last 12 months, our cash flow from operations was nearly $144 million, up 61% from previous 12-month period. One additional note around cash flow, we are starting to build out additional space in our headquarters building to accommodate our continued growth. I anticipate this phase of the build out to account for roughly $8 million in incremental CapEx, spread out over the course of three to four quarters, starting in late Q3 of this year.

Let me wrap up by sharing our outlook for next quarter and for the rest of the year. For the third quarter, we expect revenue between $134.5 million and $136 million, non-GAAP operating income of $36.5 million to $37.5 million, and non-GAAP net income per share of $0.15 to $0.16 based on a fully diluted share count of approximately 148 million. For the year, we now expect revenue in the range of $525 million to $528 million, an increase from our previous guidance of $516 million to $520 million.

We are increasing our expectation for subscription revenue growth as we now expect it to grow in the mid-30%s range for the full year. For fiscal 2017, we now anticipate non-GAAP operating income of $138 million to $140 million, a margin of roughly 26%. This is an increase in both dollars and margin from our previous guidance of $127 million to $131 million, and a margin of 25%. We are now targeting non-GAAP net income per share of between $0.60 and $0.61 based on a fully diluted share count of approximately 148 million.

Overall, I'm very pleased with the direction of the business. Our execution has been solid in the first half of the year, which leaves me very optimistic about the back half of the year, and for the long-term prospects for Veeva. With that, thanks for joining the call and we'll now turn it over to the operator for questions.

(Operator Instructions)

Ken Wong, Citigroup.

Hi, thanks for taking my question. Tim, if I could, maybe the first question is just related to cash flow. So you guys are keeping that roughly the same, and I believe after Q1, you said that Q1 would be about 85% to 90% of cash flow. And I think you tack on the $12 million from this quarter, that doesn't leave a whole lot for the second half. Am I thinking about that right? Am I missing something in terms of how I'm calculating those numbers?

Yes, Ken, you're right. There is -- as we look at our cash flow, it certainly become -- becoming more increasingly seasonal over the last few years, with Q1 being the peak, and Q4 typically being the lowest, as it relates to cash flow. That guidance that we gave last quarter, and that we reiterated again this quarter, keep in mind, does represent north of 50% growth year over year from a cash flow perspective.

And maybe a quick follow-up on that. I mean, when I think about your cash generation, I mean, your billings seem to be higher than what you guys thought going into the quarter. Seems like you guys are more efficient with the spend. I guess I would have figured the cash flow would have seen an uptick in how you guys are looking at the second half as well?

Yes, when you look at the billings set up as we talked about, or as I said in my prepared remarks, Ken, we talked about the fact that the majority of the growth is going to be in the first half of the year. And that was really driven by the set of deals that we saw in Q1 and Q2, which closed with more annual billing terms, and ones that had actual renewal dates in Q1 and Q2.

So that's one thing to think about, Ken. And I guess the other thing to think about is, as we think about Q4, I think what we're going to see is what we saw last year, which is a majority of that billing happening in the back half of the quarter, which means it will turn into cash flow in Q1. So we expect that seasonal driver to continue into this year.

Got it. Got it. And then, a quick question for Peter. With -- last quarter you guys talked about building out your Vault adjacent markets team. I'm just wondering what the progress is there? And I think one of the other goals was to hopefully get some reference customers. How close are we to possibly seeing some reference customers?

Yes, Ken, for Vault, outside of life sciences, I guess, the high level, it's still early days, but we're making progress. We're very happy with our progress. Progress is coming in two areas. First, we're building out the team of sales and services professionals, and then we're also getting involved in early sales cycles. And we're learning a lot from these early sales cycles, and that will help us as we refine our go-to-market approach going forward. So we're really happy with the progress, and we'll provide a further update on our progress at our end of the year call.

Got it. Thank you very much, guys.

Tom Roderick, Stifel.

Hey, guys. Good afternoon. Thanks for taking my question. So in looking at the Vault business, another great quarter optically, I guess, from looking at 34 new Vault customers. I guess you had three seven-figure deals. I'm curious as you gain more and more traction with existing customers, if these seven-figure deals and mid to large six-figure deals, are they coming more easily? Are you getting more sales efficiency inside those customers for new products, whether it's submissions or quality, add-ons to the core? And are you starting to see larger, sort of rip and replacements of existing footprints of say Documentum and SharePoint out there?

Sure, Tom, this is Matt. I think that optically it does look like it's getting easier, but the reality is every one of these deals is hard. And it took years of building this platform to put ourselves in the position to be able to put up these kinds of numbers, and add so many new customers. Now if I look across the customer base, at the pace at which we are cross-selling or expanding, it does feel like it's increasing. The number of companies that have multiple Vaults has more than doubled year-over-year, and we feel that in sales cycles.

So when we started Vault just a few years ago, there was never a sale cycle for more than one Vault at a time. And so, in addition to the expansion within existing customers, we now see RFPs and sales processes that are looking for total enterprise content management capabilities. And so, that's exciting for us, because we're the only Company that can provide that. So I think the optics are accurate, the progress within existing customers and new customers remains very, very strong.

Great. And just on the concept of selling back to the installed base with a new Vault, did those typically end up being competitive deals where you're in a bake off situation? Or is it contemplated that -- hey, you guys are the lead vendor on eTMF, and therefore that has gone well, and you need to negotiate your way to pricing? How often do those add-on deals end up being competitive situations versus standalone?

Yes, I think generally within smaller customers, we don't have to go through another RFP process. We can close multiple Vault applications, including for things like RIM, registration tracking, QMS without going through an RFP process. Within the largest customers, many of them still have rules that any kind of spend over a certain amount needs to go through an RFP process, so that's still the norm.

Got it. Tim, real quick one for you; you guys usually break out the rough subscription growth for CRM versus Vault and other, can you provide us some tracking on that, or maybe just how you're tracking towards your end of the year goal?

Yes, sure. So when we look at total revenue, non-CRM actually was just over 35% this quarter, which was up from 23% this time last year. And, Tom, what I would say is, this really reflects the diversity of our revenue, and our ability to tackle multiple large markets in parallel; so very happy about both Commercial Cloud and Vault performance there. One thing to add, Tom, there is, as we talked about before, the vast majority of non-CRM is related to Vault.

Got it. And is the subscription mix pretty similar to that total mix?

We haven't broken out subscription mix, typically what we've talked about is growth. And what I'll tell you there is, as you heard in my prepared remarks, we did increase our expectation for subscription revenue for this year from the low 30%s to the mid-30%s. And both CRM and non-CRM are contributing, but what I would say now is we're looking at non-CRM to more than double in subscription revenue year over year.

Great. That's really helpful. Thank you, guys. Nice job.

Sterling Auty, JPMorgan.

Hi, this is Mine Kansu in for Sterling. Thanks for taking my question. I want to ask about the new product launches, and how do you think that's going to be changing the competitive landscape? Like you mentioned the two new Vault products and the Commercial Cloud. I just wanted to get a better sense of -- if you see any change from the competitive landscape for you? Thanks.

Yes, sure. So I'll go through them one at a time, this is Matt. So for CTMS, it really significantly changes the landscape for the eTMF product, because we're the first and only Company to offer an integrated eTMF with CTMS on a single platform and a single cloud platform. So I think that really does have a significant impact. In the PromoMats area, the addition of a PromoMats DAM, I think further extends our market leadership, and makes it harder for someone to try to start a new company and compete with us.

In CRM, it's a really significant differentiator. There's been efforts for the last 15 years, my whole career, to do video calling with physicians. And the technology has really always held companies back. By eliminating all of the barriers with our Veeva CRM Engage family, I think that it's going to be a significant step forward for our customers.

And because our customers have done large Veeva deployments regionally and globally, they'll be able to turn on this new capability globally in a matter of weeks, where with our competitors they would have to cobble something together, and to do it globally would literally take them years. So I think each of these things contributes to the competitive lead that we have, and the competitive moat that we've been digging with technology leadership and good execution.

Thank you.

Kirk Materne, Evercore ISI.

Hi, this is actually Patrick Falzon on for Kirk. Congrats on the quarter. Peter or Matt, I was wondering if you guys have any view on the new Electronic Common Technical Document formatting that the FDA is going to start requiring next spring. Do you think this legislation is having any influence on Vault demand right now, or will it start to influence buying patterns in the next couple of quarters?

Hi, Patrick. This is Matt. So eCTD that you're asking about actually had the impact already. So we're sort of coming out of the additional demand that was created as a result of that. So Vault clearly benefited from that over the past couple of years. The next one that is coming is called IDMP. We think it's going to have a significantly large impact in the submissions in the RIM area. We've already seen projects starting, even though they don't need to be completely in compliance for a couple of years. So I think that is the regulatory roundtable. Every couple of years there's something else that impacts the industry, and as a cloud vendor, we can stay ahead, and be a great partner to our customers.

Great. Thanks. If I could just squeeze one follow-up in. In terms of the seven-figure Vault deals, were those primarily on the commercial side of the businesses, or was that more of a balance between commercial and R&D?

I'll take that one. There was actually one in the commercial, and two in the R&D. One in the commercial, the PromoMat side, that's a brand-new customer for us and on the Vault side. Then we had an eTMF one in Europe, which was great.

That was our first eTMF customer in Europe, and we think that's really good news, to start that reference selling model in Europe. And then also we had one -- the other one was with a Japanese domestic company, a domestic Japanese producer and that was for -- also on the R&D side. And that was a first for us in Japan too, and we're hoping it can create some momentum there in Japan. So it was really a mix across all geographies and areas.

Great. Thanks and congrats again on the quarter.

Thank you.

Karl Keirstead, Deutsche Bank.

Hey, guys. This is Jobin Mathew sitting in for Karl. Great quarter, thanks for taking my question. So I had a couple of questions. The first one is on the new CTMS product. Who do you guys compete with over there? Will you see the likes of Medidata out there in the market or is it more some of the legacy competition that you guys have out there?

And second, on the financials for Tim, I know you mentioned the non-CRM subscription revenue should more than double this year, but what about the CRM subscription revenues? What are your expectations for growth over there -- for that this year? Thanks.

Hey, Jobin, it's Matt. I will take the first of your questions. So competitively -- and I sort of look at our entry into the CTMS market, and the QMS market, and the registrations tracking market, as pretty similar from a competitive standpoint. So in each of these areas, we compete against a pretty broad set of largely smaller companies that are focused just in that one area.

And so, it's sort of a best-of breed approach. And we come, and we're competing with an integrated suite of best-of-breed products, and we're in the cloud, and generally these legacy providers are not. In CTMS specifically, you asked about Medidata. Medidata, this is one of their many products, and it's the first time that we will compete directly with Medidata. But we'll continue to partner well with them as well, because we have a large number of joint customers. It's good for the industry that we continue to work together, and I think that we will coexist for years to come.

And then, Jobin, this is Tim. In terms of the CRM subscription revenue growth, that is implied in our overall subscription revenue growth. It's slightly higher, I would say, but still it roughly is 15%.

Got it. Thanks.

Stan Zlotsky, Morgan Stanley.

Hey, guys. Good afternoon and thank you for taking my question. So just a couple from us. You mentioned on the hiring, that you're still continuing to hire aggressively, although you're seeing some efficiencies around new products. What are these efficiencies, and how is the overall hiring environment that you're seeing out there? And then, I have a quick follow-up for Tim.

The hiring environment, we think it's good. We think it's a great time to invest in people. That's what we outlined at the beginning of the year, there's some shine off the speculative tech bubble, and we are continuing to see that play out. So the hiring environment is good. We are getting more -- lots of inbound interest in Veeva across all areas of the Company and geographies.

In terms of efficiency, really what we're seeing is, at the start of the year, we laid out a plan to invest heavily in the field and in products, to make some new products. We're making those a little bit more efficiently -- I would say slightly more efficiently than we thought through greater leverage of the Vault platform. We're really getting some efficiencies there. Due to the technical construction of the Vault platform, we're able to bring these applications out quickly, and just a little more efficiently than we thought.

Okay, great. And for Tim, what was the FX impact in the quarter on billings and revenue?

Stan, good question. So it was actually fairly immaterial for us. And let me give a little more color there. Obviously, with Brexit happening in the quarter, and the impact that that had on the pound, I would tell you that we are really not exposed to the pound overall. Parts of our business are, but for the most part overall, it's not a big deal. So it didn't have a material impact on our financial performance or billings.

Okay, great. Thank you, guys.

Scott Berg, Needham.

Hi, everyone. Congrats on an impressive quarter. I have two quick questions. First of all, I don't know if Matt or Peter want to take this, but as you look at the quarter and the bookings in the quarter, your mix seemed to be pretty broad-based; a lot of commentary there in terms of outperformance there. But were there any products that skewed in their performance much more than your expectations?

This is Peter, I'll take that one. No, I would really say, it's broad-based. I can't point to a particular product that skewed in terms of our overall bookings. I would say, if you look back over the quarter, one of the real surprising things was again, just launching this QMS product in June, and then already signing four customers. So that's -- I would say, you got to fire on all cylinders to hit that right, and we did. But in terms of at the macro level, whereas our percentage bookings come from? No, there's no -- it's broad-based, broad-based in terms of products and geographies.

Great. And I guess a follow-up for Tim. You guys recorded 70% gross margins on a non-GAAP basis for the first time in the Company's history. I know you're guiding your subscription gross margins a little bit lower in the second half, based on those utilization rates, but that was certainly ahead of our expectations, thinking that 70% hits more next year. As you've been able to reach 70%, and you've seen the mix of business and where bookings are coming from, is there any reason not to believe that you could at some point get to the 75% to maybe 80% gross margin level, given your current product set?

Yes, Scott, what I would say is the guidance that we gave -- excuse me -- guidance is the wrong word, the model that we talked about in our 2020 time frame was a low 70%s gross margin. Inclusive in that, was a little bit over 80% in terms of subscription gross margin. You made a comment that our subscription gross margin might be showing a little bit of decline in the back half. I think what you meant is services gross margin, which is inherent in some of my comments.

Right.

So I think the 72% to 73%, which was the operating model that we talked about in the 2020 time frame, is what you probably want to think about, with subscription gross margin continuing to show increases into the low 80%s.

Great. That's all I have. Thanks for taking my questions.

Thanks, Scott.

Amanda Murphy, William Blair.

Hi, thanks. Good afternoon. I just had a quick follow-up on the Vault side. So obviously, you're gaining a lot of traction there. But I'm just curious given all the pressures in the industry around regulatory dynamics, which you've talked about, and then obviously just in terms of focus on the part of pharma biotech to improve time-to-market and lower costs, et cetera.

I mean, what's your key -- what is the key barrier to adoption at this point, just in terms of getting new customers onboard, and then cross-selling additional apps? I know one of the things, for example, you had talked about was just targeting different points in the organization, in terms of sales touch points? So just curious what you're hearing in terms of pushback, and then any improvement in terms of length of the sales cycle over time?

Hi, Amanda, this is Matt. So I think sales cycles generally have stayed about the same, because it's a pretty structured process once the RFP comes out. So I don't -- I wouldn't actually expect to see big changes there. The one thing is that we do see more deals that we can win without an RFP, although it's not that big outside of the smaller companies.

In terms of the overall dynamics, you kind of nailed the things that are driving it, although there's also this move to the cloud. Right? So many of the small and large pharma CIOs have a cloud-first mentality. So that's another thing in addition to time-to-market and regulatory changes that are driving demand. You asked about the barriers, what -- how could we go faster basically? Markets have a normal cadence. No one ever turned over an entire legacy software market in a year.

And so, it is a multi-stage or a multi-year process. Really every time we launch a new product, we're replacing systems of record that are on-premise or hosted, highly customized systems, custom integrated with lots of other enterprise systems. So this is something that happens at a normal cadence. And these markets turn over every four years, every eight years, depending upon the different market segment.

So I think we're doing the right things, in terms of focusing on the product, focusing on customer success, and continuing to invest in our people and products, to make sure that we can help our customers achieve those objectives of getting time to market faster and staying in compliance with these change in regulations.

Got it. And then, just in terms of potential apps on the Vault side that you could launch going forward, what other areas do you see opportunity? Obviously, you think you've got 10 now at this point? And then also, just on the CRM side, are you still targeting one to two CRM add-ons a year? Thanks.

Yes. So we're not going to comment specifically about new markets. But what I will say is that within life sciences, there's still a lot of opportunity to move legacy applications into the cloud. And thanks for your questions on your birthday, Amanda.

Thanks.

Richard Davis, Canaccord.

Thanks. Is there any commonality, when you see these RFPs, as to where the budget dollars are coming from? And the reason I ask is just, you've seen this I'm sure, some of the large platform firms will sign overarching contracts. And they'll just say, well, fine. If you decommission some component of our software, you're still going to have to pay the full boat and that kind of stuff. And I'm just trying to figure where the budget dollars are coming from? Thanks.

Yes, this is Peter. I think that does depend on the different applications. So it's -- first off, usually for the applications we have, there'll be a discreet budget for those applications. Maybe not necessarily for some of the smaller ones, but for all of the main ones, there's an existing system or process that's doing that. And generally, it will have a distinct budget. Then when you go from there, it will either be on the business side or the IT side. And there's a rough pattern for different applications that's the norm, but it varies company by company.

We haven't seen this pattern in general of -- hey, the budget is an overall basket of lots of applications. So that if we remove one, hey -- that doesn't work, we have to remove them all. In general, we don't see that; it's nice discrete parts, especially when you look at -- in Vault on the R&D side, or on the commercial side. Regulatory, that's a separate set of things from clinical, which is a separate set of things from quality, and they keep their budgets separate.

Got it. That's helpful. Thanks.

Brad Sills, Bank of America.

Hey, guys. Thanks for taking my question. I just had one on Zinc Ahead. Now that it's been almost a year since the acquisition, can you provide a little bit of color on how that's been performing, in both the pipeline, and it sounds like you saw some uptick this quarter in the PromoMats business. How much of that was coming from Zinc Ahead? Just a little color on how Zinc Ahead is performing both in the pipeline and on existing business? Thank you.

Yes, it has been almost a year now since the acquisition. And as you recall, our strategy for the acquisition, Zinc had a competing product with Veeva PromoMats. We are supporting the Zinc product until the year 2020, and we're gradually -- we're moving people on to the PromoMats product which is our go forward product. So overall, progress is exactly according to plan.

We've gotten a lot of domain expertise from the Zinc team, and we're using that to increase our lead in our Vault PromoMats product. Some customers already completed their migration to PromoMats; more are underway. I would say, yes, we're winning more deals now in PromoMats than we have ever before.

Also, when we look at this -- the PromoMats -- the digital asset management edition that we brought out, I don't -- it's not clear that would have been possible without the acquisition of Zinc, because we really brought a lot of domain expertise together, and it was a combination of the Zinc people and the Veeva people that were making this digital asset management solution. So we're really -- we're seeing the synergies that we thought. And both from the financial side, from the intellectual property side, it's really been a good one for us.

Great. Thanks, Peter.

Thank you.

There are no further questions at this time. Mr. Peter Gassner, I turn the call back over to you.

Thank you. It was an outstanding quarter with great progress in Vault and Commercial Cloud. And thanks again to the Veeva team for your outstanding efforts and teamwork, and also to our customers for your continued support and partnership. Thank you for joining us on today's call, and we look forward to seeing many of you at our upcoming Analyst Day at the end of June -- sorry -- September, end of September.

Thank you, ladies and gentlemen. This concludes today's conference call. You may now disconnect.