Veeva Systems Inc (VEEV) 2017 Q3 法說會逐字稿

Good afternoon. My name is Shawntelle and I will be your conference operator today. At this time I would like to welcome everyone to the Veeva Systems FY17 third-quarter results.

(Operator Instructions)

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

Good afternoon and welcome to Veeva's FY17 third-quarter earnings call for the quarter ended October 31, 2016. With me on today's call are Peter Gassner, our Chief Executive Officer; Matthew 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 Investors section, and on the SEC's website at sec.gov. Forward-looking statements made during the call are being made as of today November 22, 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 measures that we believe aid in the understanding of our financial results. A reconciliation to comparable GAAP metrics can be found on 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. I'm pleased to share highlights from yet another strong quarter.

Total revenue was up 34% year over year to $142.8 million, subscription revenue grew 39% to $113.6 million, and non-GAAP operating margin was 33%. As we've seen throughout the year, our outperformance was driven by strength across all areas of the business. We continue to see Vault momentum increase and growing numbers of customers are moving to commercial cloud.

Customers are very successful with Veeva products, and we continue to develop new cloud solutions. This cycle of customer success and new products fueled our strong growth in Q3 and positions us well for the future.

Let me turn to the highlights in Veeva commercial cloud for the quarter. Commercial cloud is an exciting area where Veeva is helping to move the industry forward as companies adapt to new commercial models and unified systems for greater agility and efficiency.

The foundations of Veeva commercial cloud is core CRM for sales automation, where we continue to extend our position as the industry standard. We have multiple significant core CRM projects underway with large pharma companies around the globe. We had a go live with a top 20 pharma in the US this quarter, marking their first go live with Veeva CRM.

We saw strength internationally, as well. Another top 20 expanded into China, representing a seven-figure deal. We had a major purchase and go live in Korea from yet another top 20, making them our largest customer in Korea to date.

We started a significant project for CRM in Japan with another top 20. And a top 50 pharma went live in France. This was their first Veeva CRM project, as well. We also continue to add many new SMB customers around the world.

So, our base in core CRM continues to grow at a healthy pace. This provides a foundation from which customers are moving to a broader suite of commercial cloud solutions.

We saw that play out across many areas of commercial cloud in Q3. We made great progress across multiple segments and geographies, especially with Veeva Network, Veeva Align, Veeva OpenData and Veeva CRM-approved email. And our latest data offering, Veeva KOL data, saw a top 20 pharma become a seven-figure customer by adding data for more therapeutic areas.

In addition to the excellent progress executing on our commercial cloud vision, we are especially pleased with the momentum of our Vault business. In Q3, for the first time, Vault bookings accounted for a little more than half of total bookings in the quarter. This is another exciting milestone for Vault and an indication of the significant opportunity ahead.

We also continue to make great progress in our early work to take Vault outside of life sciences. We will provide an update about this area on our year-end call, as previously discussed.

Diving deeper into Vault, starting with the commercial side, the Zinc acquisition has proven quite successful, and Zinc customer migrations to Vault's PromoMats are progressing very well. The expansion of Vault PromoMats to include enterprise digital asset management capabilities announced last quarter is extending our lead in the market. It was key in our winning the new top 10 pharma announced last quarter.

I'm pleased to say that their first pilot countries have already gone live. The global project is on track and will be a powerful showcase of true end-to-end commercial content solutions.

Turning to Vault for R&D, the broad success of Vault and the major opportunity we have ahead in R&D was especially apparent last month during our third Veeva R&D Summit. Attendance was up more than 50%, and we hosted more than 650 people this year.

It was nice to see so many customers showcasing their success with Vault. There was interest and excitement across all our major suites of clinical, quality and regulatory applications. It was an outstanding event.

In R&D, we now have a total of 10 Vault applications available or announced. Customers are enthused about the Vault vision of integrated suites of high-quality applications all on a common cloud platform. It has been great to see how quickly the industry has moved from asking why Vault four years ago to now asking why not Vault when evaluating new areas.

In quality, the adoption of Vault QualityDocs and Vault QMS is on a fast track, fueled by the need to connect quality work processes and content management. We've added over 80 quality customers in less than four years, including eight customers that have signed on for Vault QMS since the product was released just four months ago.

The regulatory area is also one where there is accelerating interest in Veeva Vault RIM suite of applications. The life sciences industry is making a major move to harmonize their regulatory system globally in the face of organizational and regulatory pressure. We added 9 new regulatory customers in the quarter, and now have nearly 80 regulatory customers in total, with an exceptionally strong pipeline heading into Q4.

We are also investing in a major way in clinical where there is considerable opportunity to move customers from legacy systems to a unified clinical suite on a single modern cloud platform. In less than four years we have added more than 120 customers for our clinical applications.

And during the third quarter we signed another enterprise-wide eTMF deal to a top 20 global pharma. 8 of the top 20 pharmaceutical companies have now standardized on Vault eTMF. This rapid uptake is an indication of the demand and real need for innovation in the clinical area.

Last quarter we announced further expansion into clinical operations with Veeva Vault CTMS for clinical trials management. CTMS is scheduled for availability in April 2017. Customer reception has been extremely positive and early adopter interest is high.

People are looking to Veeva for a unified suite of cloud solutions for clinical operations. In particular, CTMS prospects are excited about the seamless integration between CTMS, eTMF and Study Startup. They also see the benefits of the strong integration, reporting and configuration capabilities of the Vault platform.

In October we announced our entry into a major new application area -- clinical data management -- with two new solutions -- Veeva Vault EDC and Veeva Vault eSource. They are planned for availability in April 2017 and December 2017, respectively.

We believe that Veeva is uniquely positioned to capture market shares as clinical data management is a large and critical area for life sciences. It is ripe for innovation and cloud solutions.

Veeva's clinical data management offerings will be more modern, adaptive and faster than current solutions. The combination of EDC with e-source will be powerful and differentiated. And Veeva will be the only company to deliver these solutions on a single modern cloud-based platform integrated with other clinical solutions including eTMF, CTMS, and steady startup.

Because of the leverage we get from the Vault platform, we have made great progress in developing Vault EDC. In fact, we demoed EDC at the Veeva R&D Summit last month. It surprised many that we were so far along with EDC. Customer feedback from the demo has been very enthusiastic.

Customers want Veeva to innovate in the EDC area. They want to partner with us to create a fresh approach to clinical data management.

Clinical data management is a major market for Veeva. It's an area where we will be making significant investments in the coming years. Our expansion into clinical data management with EDC and eSource increases our addressable market by more than $1 billion.

We will approach the EDC market in the same Veeva way, winning early adopters, making them successful, and then reference selling. Markets take time to transition and we view this as a major long-term play. When we enter new areas we bring innovation to the market and aim for market leadership. That is our plan for clinical data management.

In summary, we believe that we are in the early stages of a large and expanding market opportunity. Life sciences have to move off legacy systems to the cloud. Veeva is well positioned to help the industry make this important transition.

And now Tim will take you through our financial performance.

Thanks, Peter. Q3 was another strong quarter of consistent execution. Total revenue was $142.8 million, up 34% from $106.9 million one year ago. This was nearly $7 million above the high end of our guidance, with a few million of upside from subscription revenue and even more from services revenue.

Before I go through the results in detail, it's worth noting that this quarter saw a number of tailwinds across many line items on the income statement. This resulted in an operating margin well in excess of our guidance and not necessarily indicative of how we see margins playing out in the near term.

For the quarter, subscription revenue was up 39% to $113.6 million from $81.7 million last year. Subscription revenue benefited from another strong bookings quarter, with particular strength in Vault, which, as Peter mentioned, slightly exceeded commercial cloud bookings for the first time ever.

Services revenue came in at $29.2 million, up 16% from $25.2 million one year ago. This performance was well above our expectations due to several factors in the quarter.

First, there was broad-based demand across the product portfolio, but especially with Vault R&D and international CRM projects. This drove record utilization during the quarter. Additionally, we benefited from a fixed-fee milestone payment recognized in the quarter.

I expect services revenue to be down roughly $3 million on a sequential basis in Q4 due to the impact of fewer billable days, which is a normal seasonal pattern for our services business. As a reminder, our services revenue can be highly variable for a number of reasons, so these types of sequential swings may happen from time to time. 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 just posted before the call.

In Q3, our subscription gross margin was 80%, an increase of roughly 100 basis points from a year ago, driven by the faster growth of our Vault products and our non-SFA commercial cloud offerings, which have a higher gross margin profile relative to our core SFA products. Services gross margin for the quarter was over 38% compared to less than 30% one year ago. This result is well above our normal expected range, mostly due to the fact that our services revenue significantly exceeded our expectations, while our cost of services was largely consistent with our plans.

If you adjust for a more sustainable utilization rate, and the milestone payment that I referenced earlier, our services gross margin would have been in the high 20%s for the quarter, which is where I expect it to be in Q4. This is more in line with our normal range in the 20%s that we associate with our target utilization rates. Our total gross margin for Q3 was over 71%, an increase of roughly 400 basis points from one year ago due to the factors I just mentioned.

Overall, our operating income came in at $47.5 million, a 33% operating margin, which was well above the high end of our guidance. This result was driven by several factors, including the meaningful revenue outperformance, unusually high services gross margin, and a hiring quarter that turned out to be back-end loaded.

In the quarter we added 86 people net, finishing at 1,709, up from 1,383 one year ago. Additionally, there were a few items that drove a sequential dip in operating expenses from Q2. There was a reduction in marketing program spend in Q3, given our largest customer event is in Q2. We also saw a lower payroll tax expense, lower third-party services expense in accounting and legal, and a tax credit associated with sales tax.

To put our operating model in perspective for FY17, we entered the year anticipating a full-year operating margin in the 24% to 25% range with a Q4 exit margin at 26% to 27%. While there have been some tailwinds along the way on the expenses side, much of our outperformance to date has been driven by revenue outperformance. We continue to invest aggressively for long-term growth and, as such, we expect operating expenses to grow again in Q4.

As you will see from my guidance, we anticipate exiting the year at an operating margin profile of roughly 28%. This is a better indication of our profitability as compared to the third-quarter results.

Net income for the quarter was $31.7 million compared to $16.9 million last year. Our effective tax rate of about 34% was slightly lower than expected due to a favorable true-up of our FY16 tax returns and the expiration of a prior-period tax reserve. We expect our effective tax rate to be in the mid 30%s in Q4. Our fully diluted net income per share was $0.22 compared to $0.12 for the same quarter last year.

Turning to the balance sheet, deferred revenue was $137 million compared to $177 million at the end of the second quarter. This resulted in calculated billings of $103 million, which was slightly ahead of our guidance due to better than expected sales performance and strong services revenue, but partially offset by lower than expected average invoice duration.

Please note there are numerous factors that make year-over-year comparisons of this metric highly variable on a quarterly basis. As such, we do not believe it is a good indicator of the underlying momentum of our business, and we do not manage to it internally.

The increase in both our calculated billings and revenue guidance for the full fiscal year is the best indication of our strong momentum. To that point, in Q4 we expect calculated billings in the range of $200 million to $205 million, which would imply full-year calculated billings growth of roughly 27%, up from our previous guidance of 25% to 26%.

We exited Q3 with nearly $511 million in cash and short-term investments, up from nearly $480 million at the end of Q2. This increase was driven by solid performance in cash from operations which came in at $25 million. Given this result, we've increased our expectation for full-year operating cash flow to be roughly $130 million to $135 million.

As a reminder, Q4 is typically our trough quarter for operating cash flow given the seasonal patterns of our renewal base, and the fact that a large majority of Q4 invoices will be sent in January. Since our operating cash flow 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 over $150 million, up 100% from the previous 12-month period.

Let me wrap up by sharing our outlook for the fourth quarter. We expect revenue between $145 million and $146 million, which implies $539 million to $540 million for the full year; non-GAAP operating income of $40 million to $41 million, which implies $154 million to $155 million for the full year; and Non-GAAP net income per share of $0.17 based on a fully diluted share count of approximately 148.5 million. For the full year we now expect non-GAAP net income per share of $0.68 based on a fully diluted share count of approximately 147.5 million.

I'd also like to take the opportunity to provide an initial view on next year. While it's still relatively early in the planning process, and we will provide detailed guidance on our Q4 call, at this point we are comfortable providing an initial guide of roughly $650 million in total revenue for FY18. This guidance reinforces the momentum that we have built in the business through the first three quarters of this year, and will be another step toward our 2020 target.

We are also considering a range of spending plans for next year that would result in operating margins between 27% and 29%. This reflects our commitment to investing in our customers success and building out a portfolio of mission-critical products that address major new market opportunities.

With that, thank you for joining us today. And I will turn it over to the operator for questions.

(Operator Instructions)

Bhavan Suri, William Blair.

Congratulations and just a great job there. Just a couple quick questions. The first, you announced a really nice win with ICON. Obviously they are involved with some of the Vault products. Given the relationship the CROs have with the pharmaceutical companies, I'd love to understand, is there a reseller benefit to this?

Do they start acting as a channel partner as they go to do new clinical trials? And what does that trajectory look like? And is that something you could see with other CROs? I'd love to just get some more color on that. Thank you.

Sure. This is Matt. The way that we go to market in clinical today is not with resellers. But, as you know, in the clinical market some of the other companies that operate here do.

With eTMF and CTMS and Study Startup, I think that we remain in the direct model. That seems to be what works for the industry. In EDC, as that business scales, that's something that we would look at, potentially having a different kind of relationship with the CROs. But we haven't declared any strategy there yet.

Okay, great. Then one quick follow up there, CRM growth has been fairly strong despite the penetration into seat count. And you've seen nice adoption there. Just any color on the ARPU growth there, the add-on? Which ones are gaining traction? As you think through that, ultimately let's assume you captured 70%, 80% of the market, what does sustainable growth look there? That would be great, thank you.

As we've said, there is still room to expand the base product. And we saw Peter referred to a few of those big expansions on the call. There is still reason to believe that we will continue to be successful there as we penetrate not just the markets where we have been traditionally strong, but also in emerging markets over time.

Of the add-on products that are doing well -- it actually feels like they are all doing well -- Approved Email had another great quarter, it's now used by over 35% of our customers. CLM continues to be used by more than 80%. And then, while the others are doing well -- Engage for Portals, Events and Align -- there are still only about 5% or less of our customers are using them. So, just a lot of room to grow with those newer add-on products.

And then, the Engage Meeting and Engage Webinar, that we recently announced at our commercial summit in June, I think has the potential to be a really significant growth driver for us, as well. If you think of video calling and your ability to use Skype video or FaceTime, or your mother's or your friends, versus what pharma reps are actually doing in the field, we think there's a big opportunity to increase the efficiency of our customers. So, we remain as confident as we ever have been in our ability to continue to grow that business over time.

Great. Thanks for the color, Matt. And congrats again. Thanks for taking my questions, guys.

Richard Davis, Canaccord.

Great, thanks very much. Matt, you've said in the past that you want to build, or you believe you can build a multi-vertical cloud business. And in that vein, when you step back and think about how you want to build this Company out over the next few years, are there any key things that we as outsiders can think about that would help us understand the direction that you might go there, other than -- oh, it's complicated and it's regulated because that's 80% of the economy, sadly to say? Anyway, thanks very much. If you could help me on that, thanks.

Hi, Richard, this is Peter. I will take that one. In terms of the multi-vertical, we are really focused on the industry side for life sciences. People sometimes forget what a big industry life sciences is, $1.7 trillion industry, growing. We're still really in the early days of building that out. So, that's really our focus.

If you look at what we are trying to do and what we're good at in making a core competency at it, is attacking these multiple large markets simultaneously, building multiple products, selling multiple products, and doing that with a lot of discipline. That's really our focus. We think we're early days and we're going to remain focused on our industry cloud for life sciences.

Got it. Okay, thanks.

Karl Keirstead, Deutsche Bank.

Thanks very much. I've got two for Tim. Tim, first on the operating margin guide of 27% to 29% for next year, that's roughly flat to up from this year despite the investments you're going to have to make to capture that new clinical data management opportunity. So, I just wanted to ask you, is it that those investments aren't too onerous or -- and I suspect this is the case -- the core business operating margins are just really kicking in and enabling you to go after that new opportunity and still keep margins flat? Thank you.

Yes, Karl, thanks for the question. I think it's a combination of the two. And we talked a little bit about this, I think it was in the last call, as it relates to the efficiency we are seeing, given the fact that we have the unified suite in the Vault platform and the ability to invest very efficiently in that area.

And then I think, you are right, the other areas within the business in an industry cloud model were benefiting from the industry cloud model and the efficiency that has from a margin perspective.

Okay. That makes sense. And maybe, this is a related question, but in terms of your OpEx performance, what struck me is your sales and marketing expenses were roughly flat in terms of dollars now for three consecutive quarters despite the growth in the business. Tim, you talked a little bit about some of the one-off reasons why in the third quarter you got good sales and marketing leverage. But just if you could expand on that and help us understand whether there's any unique sources of sales and marketing leverage that are now kicking in.

I wouldn't say there's any new or unique sources, Karl, of sales and marketing leverage. I think when we look at the setup of sales and marketing from a quarter to quarter perspective, there are some things that can create that flattening or lumpiness. And those things, as you know, are commissions, those are large customer events which, as you know, we have our largest customer event in Q2 which took our marketing program spend up in Q2. We didn't have that same type of or size of event in Q3.

So, there's a number of things that could drive the direction of that. But again, back to your original question, I think the underlying industry cloud sales and marketing efficiency that we have seen over the course of a number of years continues to be the primary driver to that sales and marketing model.

Okay, good. Congrats, Tim, on that fantastic OpEx control.

Kirk Materne, Evercore ISI.

Thanks very much and congrats on the quarter. Tim, I have a question around hiring plans. Obviously you guys hired a lot of people at the beginning of this year. Could you give us some thoughts on how you are thinking about FY18 in that regard? More front-end loaded -- is that going to be the way we should be thinking about that going forward?

And then, just secondly, any broader thoughts on M&A as you guys look across your industry and places where you could -- from our angle it's hard to figure out if there is a lot of smaller tuck-in opportunities for you all. I don't know if Matt or Peter want to talk about that, but I'm just curious if we should consider M&A a broader part of use of cash going forward, as well. Thanks.

Let me tackle the headcount question and then I will hand it off to Matt on the M&A side. In terms of head count, as you said, we've continued to invest aggressively from a headcount perspective across a number of the new products and markets as well as the existing set of products we have. So, a very large product portfolio. And as Peter talked about earlier, we're going after multiple large markets in this life sciences industry. So, we will continue to do that.

In terms of the flavor for FY18, we will give a little bit more flavor on that in our next call, Kirk, but I would say, in general, we continue to invest aggressively against what we see as a large market opportunity in front of us. Matt?

In terms of M&A, really no change in our strategy despite what is a pretty significantly growing cash balance. I think we will be opportunistic as things appear. There's a lot for sale in the life sciences space right now, but we're not pursuing anything that is significant.

I think the other thing that is maybe affecting that a little bit is the strength of the Vault platform is becoming more and more clear to us and to our customers. The chances that we buy a small company with a product and keep that product around has probably gone down over time as the Vault platform has looked like a better place for us to expand, particularly within life sciences in the areas that we are competing today. So, the overall strategy of M&A to bolt-on product knowledge and experts and customer relationships, that remains. That really hasn't changed at all.

Great. Thanks, guys. Happy Thanksgiving.

Stan Zlotsky, Morgan Stanley.

Good afternoon and thank you for taking my question. One thing that really stood out to us is the number of exciting go lives from big customers that we heard outside of the US. Is there something specific that is driving this adoption in those geographies?

And then a followup question, what kind of pricing are you seeing for these products in those geographies compared to what you see for the same products within the US? And then I have a quick follow up for Tim.

Actually, there was nothing really extraordinary about the last quarter. As we looked at some of the highlights of the quarter, these stood out maybe a little bit more than they have in the past. But if we had given this kind of color when these big deployments happened outside the US every quarter, we would've been talking about it for the eight or nine or 10 calls.

The thing that was different was maybe the size of one of these deployments in Korea. That was the biggest we had seen. The size of the one in China was very large, but we have a bunch of others. So, nothing really changed there. Some of them were brand-new competitive displacement wins and some of them were just expansions of existing customers doing global projects.

In terms of the pricing, the pricing differential between US, Europe Japan versus these other markets has stayed relatively the same since we really started outside the US. We model generally about one-third less for markets outside of there. There's a little bit of variability whether it's China or Southeast Asia, but that's generally what we have seen in terms of the price differential. And that's on the base CRM product.

Okay, perfect. Thank you. And just for Tim, anything on FX related on billings in the quarter? I know it's usually not much of an impact, but just wanted to double check. Thank you.

Yes, Stan, that continued to be immaterial this quarter.

Perfect. Thank you guys.

Tom Roderick, Stifel.

Gentlemen, happy early Thanksgiving. Thanks for taking my question. Let me throw this first one at Peter and Matt.

I think you have historically done a really nice job of waiting for customers to express pain points before entering a new markets. And in that vein, what is the primary pain point you want investors to understand as they think about where you can solve problems for your customers in the clinical data market, particularly with your EDC and eSource initiatives? And maybe piggybacking on the earlier question, is that an area where you can utilize M&A to accelerate your efforts?

Tom, I'll take that one. In terms of things to understand about clinical data management, I would say, to start off, just to know it's a large and critical area for life sciences. This is a key part of overall clinical trial processes, collecting the clinical data from the patients and managing that data. If you look at EDC and eSource, it's a $1 billion market, it's ripe for innovation.

Now, you asked one question about acquisitions there, and that's whether we would look to use that as a strategy or boosting. Not really, there. I think that we may augment on some things for some particular talent, but the core part of our strategy is really the same. We do it the same as we've done it for other markets.

We assemble the best team of really experienced, the best A team in that area. We build it on the Vault platform. We get a lot of leverage there. We execute in the field, get our early adopters and our customer success, and then we take the long-term view.

In terms of EDC, also, I think it's important to know that we can leverage our existing focus in eTMF and CTMS and Steady Startup all a common platform, because that's very relevant and has to be integrated with EDC.

In terms of clinical data management, it's a good example of how we go into a market. In this market, absolutely customers were asking, they're pulling us into that market. And we won't go into every market customers pull us into because we have to be disciplined in our approach. But when customers are pulling us into a market and we think there is room for innovation, and we think the market is of the right size, then we target it and we go in there. And then we do it right -- assembling the A team. That's how we look at the EC market and also at picking markets in general.

Perfect. Tim, a quick follow up for you. You gave some guidance initially here for FY18. How would you suggest we think about the growth trajectory for services? A similar rate to this year?

Will that continue to slow down just a little bit? Just thinking about the mix in revenue for next year. Any directional guidance you have for us would be great. Thanks.

Tom, I think for now I will keep it at the high level and we will give a little bit more color, as we typically do, in our Q4 call. I will leave it at that.

Okay, fair enough. Thank you, guys. Nice job.

Ken Wong, Citigroup.

A couple of Tim questions on my end. Back to the operating margin range, with 27% to 29%, I can't help but notice in Q4 it's 28%. So, should we expect that we get a dip down from the 28% or even a 27%, and it linearly moves up somewhere in the midpoint of that range? Or is it going to be a more flat trajectory as we think about how to model that out?

I think the one thing you can take into account, Ken, is there is some seasonality from a number of revenue days, that you know from us that Q1 is different than Q2, Q3 and Q4. So, I think that's probably the most simple additional color I would give.

I would say that we wanted to give a little bit of early guidance, and we have done that. We will certainly give more color in our next call 90 days from now.

Okay, that's fair. And then you mentioned shorter invoice duration. Is that a trend that you've been seeing or is that just, again, a one-off Q3 type of occurrence?

Yes, I would say that we actually saw the opposite, and we talked a little bit about that in Q1 and Q2 as we saw the renewal base shift into those quarters and some of the renewals and add-on orders were of longer duration. Q3 is becoming the seasonal low as it relates to our renewal base, Ken, and therefore, when we do see add-on orders that are new ACV or new bookings related, those are very short in duration.

The other thing that is maybe just specific to this Q3, Ken, is that the mix of the new bookings was a little bit more to customers that actually have quarterly billing terms as opposed to annual billing terms. So, it was a combination of those two that drove shorter invoice duration.

I would say the first one you could loosely characterize as seasonal. I would say the second one is just the mix of the particular bookings to the particular customers in this Q3.

Got it. Thanks for the color there.

Scott Berg, Needham.

Hi, everyone. Congrats on a really good quarter. Two quick questions for me. I think both Peter and Tim called out the strength in the Vault business on the R&D side of the ledger here in the quarter. But how should we think about the commercial side of the business?

Obviously we know CRM penetrates are getting a little bit higher. But are there ways to expand or accelerate those revenue growth what you're seeing maybe on both commercial or maybe on some of the other newer CRM products that have been released recently?

Scott, this is Matt. Vault commercial doesn't tend to get a whole lot of airtime on our call, so thank you for calling it out. We had the Zinc acquisition about 14 months ago. The premise was that commercial content was going to be very important as our customers move more into a digital world, and that by acquiring the Zinc business we could combine those teams, our technology experts, their regulatory and content experts, and create something even better for our customers.

So, I'm happy to report that I think the strategy was right, the reasons for the acquisition were right, and I think that we've seen great results, both in terms of a better product. Taking the Veeva product experts together with the deep domain experts from Zinc has created a better product. Our customers have been very pleased, including those that have migrated from the Zinc product to the Vault PromoMats product.

And we've even expanded the breadth of the solution for our largest customers with the addition of digital asset management capabilities, which will, for, really, all of our customers eliminate another system that they would have had to integrate to something like Vault or Zinc in the past. So it's really been very successful. We added more customers there last quarter than maybe I think we ever did in a single quarter before. So, we're really the market leader in commercial content.

The Zinc acquisition feels like a big success. And I think that it's going to continue to be a strategically important part because of the deep integration with CRM and all of the multi-channel investments that we are making and we see the industry making in the future.

Great. Then the one follow up for me would be on the international strength in the quarter that Tim called out in his remarks. How should we view the international strength? Is this still more of a CRM expansion of existing customers, maybe other of those commercial products? Or is the strength there in the quarter reflective of the Vault strength that you are seeing domestically in the business today?

Scott, this is Peter. I think it's both, internationally. I think primarily probably the biggest part of that is the core base CRM expanding internationally as part of global programs or local decisions. But it's also Vault and it's Vault on both sides, on R&D and on the commercial. Particularly on the R&D, it's interesting, we're getting early traction for R&D Vault in Japan, and commercial Vault also in Japan and other regions.

So, it's really a mix of both. It was a great quarter for our international parts of Veeva.

Thanks for taking my questions. That's all I have at the moment.

Sterling Auty, JPMorgan.

Thanks, guys. I wanted to start with the significant upside in subscription revenue. Did any of the go lives for implementations actually happen either earlier in the quarter or even a quarter earlier than you may have expected?

No, Sterling. No, I think nothing unexpected. We have many customers, hundreds of customers now, and 12 products overall. So there's a lot of different subscription revenue points.

But there was nothing, no one thing, that came in early or late that swayed it. It was just overall strength of the business. We had a good bookings quarter, both in Vault and commercial cloud. And I think maybe some of those came in slightly earlier in the quarter than we expected.

Sterling, I think obviously -- this is Tim -- we had three quarters in a row, or actually four if you include Q4 of last year, very strong bookings, which has helped our subscription revenue growth. We're seeing broad-based demand across the portfolio. Vault is clearly one to call out, as Peter and I both did in our prepared remarks.

As of now, Vault actually in the quarter represented one-third of our revenue, which is even up from what we talked about at the analyst day. So, just continued strong performance across the entire portfolio, I think, has driven that subs revenue performance.

And then you made a comment about maybe some additional quarterly billings customers in the quarter. Was there any common thread in terms of the size of those customers or any other commonality that would have driven more quarterly versus annual?

I think, Sterling, for us to mention them, you want to assume that they are amongst our largest customers, if you will. So, really, again, in Q3, or in any quarter, it really depends on the mix of those new bookings.

As you can imagine, in the billings, the biggest component is our underlying renewal base. But the other component that will swing quarter to quarter some movement is the new bookings. And it just happened that in Q3 the new bookings, there was a good percent of it that was going to customers that had quarterly billing.

Again, I'm just curious, out of that new that was choosing quarterly, you are saying that these are bigger customers or bigger companies? I just would've figured maybe they would've been smaller companies maybe and more volume.

Yes, Sterling, I'm sorry. What I meant to say was, the add-on orders to some of our bigger customers that have quarterly billing already were contributing to our bookings in Q3. So, this is not a new customer choosing quarterly over annual. For the most part it was add-on orders to existing arrangements that we have with some of our larger customers that happen to have quarterly billing. Does that make sense?

That makes more sense. And then last question is, looking at the product launches that you've got coming, how should we think about the incremental spend either on infrastructure cost or launch cost, and how they should get layered in from a timing perspective given the April launches and then a launch further later in the year?

I'll take that one. This is Peter. I think the spend for that is not something you really need to plan for. It's all baked into our plan. And there won't be any dramatic spending events. I think in that way it's business as usual for the new products. Nothing out of the normal.

Sterling, the reason for that is because when we launch a new product, we don't try to sell it to the whole world. We focus in on early adopters, we get those early adopters live and happy, and then over time we will sell into additional regions or additional segments of the market. So, there is no big bang for us the day a product becomes available, not from a marketing or sales perspective.

Thank you.

Brian Peterson, Raymond James.

Congratulations on the quarter. Thanks for the question. Tim, a quick one for you, just on the services strength, obviously it's been much stronger than we expected the last few quarters. Just trying to understand, is there anything in particular about these customers, products, international markets that's driving that? And at a certain point will we see that revenue stream step off to the partners over time?

Brian, thanks for the question. We certainly have a very strong ecosystem of partners across all the regions that we work with our customers in. I think over time, over the long run, yes, we will continue to see that, as we've seen the last couple of years.

In terms of the last couple of quarters, I think what you are saying is the continued demand across our product portfolio, and the different opportunities and some of the new deployments that we have across the portfolio. So, I think that's really what's been driving our services revenue outperformance. And obviously in Q3 that materially impacted our services margin.

Got it, understood. Obviously with the Vault (inaudible), I'm just curious, as we look out to next year, is there anything (inaudible)?

Brian, I'm sorry, you're breaking up.

Just trying to get a sense of revenue visibility next year given the booking strength and how that's compared to prior years.

I think the early guidance we gave in this quarter was just that. We will certainly give more guidance, as we've done in the past, after we announce our Q4 results and our call 90 days from now.

Great, thank you.

Brent Bracelin, Pacific Crest Securities.

Good afternoon. Peter, perhaps I'll start with you here. You just spent a lot of time with customers at the Veeva R&D Summit. What did you learn about the appetite within life sciences to spend on modernization projects you think about next year in cloud? What was surprising either from a company-specific standpoint or even an industry standpoint that you learned coming out of the event? And then I have one follow up for Tim.

It was a great event. It was about 650 people. You always are optimistic when you go to an event of that many people, but you never know exactly until at you are at the event how do these people react together. And it was just refreshing again, the optimism, the openness, the sharing with Veeva, and that people are really appreciative of Veeva putting serious effort into software for their specific needs and on a common platform.

So, this feeling that we are doing this together. Veeva is making professional software applications for them. So, that was really a great feeling.

I would say the other one is, we knew there was a lot of interest in the regulatory area, but I think this event really confirmed that. People are really looking at Veeva's regulatory suite, our RIM suite, as pretty groundbreaking and able to accomplish things that they weren't able to accomplish before. I think people are looking at that regulatory area as a way to drive incremental revenue for their companies by being more efficient and effective in their product registrations and their planning.

Those are probably the two big macro level takeaways that I have from the R&D customer summit.

Great, very helpful, thank you. And then, Tim, just last question for me here. You mentioned Vault now one-third of the business from a revenue standpoint. I think you talked about it being now over 50% of bookings for the first time.

As you think about the composition of Vault, how much of that is just Vault maturing and so you're now showing the larger Vault customers, the top 20, now starting to take Vault versus just an increased number of Vault adoption by your existing customers, a multi Vault kind of adoption? What's the key driver as you think about that mix shift?

I will take that one. This is actually Peter. The key drivers are, we have hundreds of customers now, and we have 12 Vault applications. So, it's this breadth of many customers and many applications and many segments of the market, all the way from the SMB to the large enterprise. I said in my remarks, now people are starting to ask why not Vault.

That's why we're getting good win rates and we're getting lots of that back because we have a broader product portfolio than we have had before. And I think we're actually proven on both ends of the market. We are proven that we can -- we have many small customers, even less than 200 employees, using Vault in certain areas and happy about it and telling others.

And then we have many companies where they have in excess of 20,000 employees, and they are happy and live with Vault and referenceable to other similar-sized company. So, we are just meeting a sweet spot where we have the products and the reference customers that meet the needs across multiple touch points.

Very helpful, thank you.

Jesse Hulsing, Goldman Sachs.

Thank you for taking my question, guys. You've had quite a bit of early success with QMS. I'm wondering, as you look to next year and the launch with the new clinical products, how should we think about the curve of those product cycles? Do you expect them to take off like QMS did? Do you expect it to be a slower ramp in that market? What are your thoughts there?

This is Matt. It's a good question, Jesse. QMS certainly is hitting a sweet spot. And it's largely been sold to smaller companies that didn't have a QMS before. So, it's companies getting large enough that they need a QMS.

If they have QualityDocs, these are very short sales cycles. It's a very logical extension for them. But we even had a couple of companies where QMS was the first thing that they had bought from Veeva. So, clearly a lot of success there.

If we look at CTMS, CTMS is so close to eTMF that we may see a similar flurry of activity at the beginning, but I think it would also be with smaller companies. And we're generally going to be looking at smaller companies to be the early adopters. We won't be ready to do a 5,000-user CTMS deployment at a top 10 pharma with the first version.

EDC is a little bit different where it's not as close to eTMF. So, if you look at the more than 120 eTMF customers, the integration to EDC actually generally goes through CTMS -- not exactly, but it's not a terrible way to think about it. And it's a little bit of a different buyer. The CTMS buyer is more like the eTMF buyer, the EDC buyer is a little different. So, that might be a reason why that would go a little bit more slowly.

But that's customer count. If you think in terms of revenue, these are all going to be similar because the focus isn't on revenue when we launch a product. The focus is on getting those early adopters live.

So, I wouldn't worry about modeling how much revenue is there going to be from a Veeva product in its first year because we're not focused on that. We are focused on making sure the product works, making sure the early adopters are happy. And then at the right pace we will start to expand the sales and marketing effort over time.

Got it. That's super helpful. And then you guys touched on M&A earlier, but you do have a lot of cash. You've generated almost $150 million in cash so far this year. And at the same time you're also successfully expanding into new markets while driving leverage. So, I'm wondering what your plans are from a use of cash point of view as you look for it and as the business continues to grow.

Jesse, this is Tim. I think the use of cash explanation really hasn't changed probably over the last 12 months. We continue to work with very large and strategic customers, and want to make sure that we show a strong balance sheet as they partner with us and continue to increase that partnership with us. That's number one.

And I think, as you've seen over the last couple of years, when we can use our cash reserve for strategic M&A, whether that's tuck-in types of opportunities or even an opportunity the size of Zinc, which we did 14 months ago, we have the powder to do that from a cash perspective. So, I think that's the primary thinking around how we will use our cash and/or why we want to continue to have such a strong balance sheet.

Great. Thank you, guys.

Brad Sills, Bank of America Merrill Lynch.

Thanks for taking my question. Just one on the commercial business, just within CRM expansion deals. Could you provide a little color on how that business tracked in terms of new users versus add-on products like territory, alignment, multichannel CRM, just some of the add-ons versus just seat expansion within the core CRM business, please. Thank you.

Sure, Brad. In the quarter I think it was more of the same as what we have seen throughout the year. The majority of incremental revenue came from new users, while there was still growth in each of the add-on products. And I think there is still a few more quarters of that before it switches and we actually get more incremental revenue from the add-on products. But we're certainly on the path to getting to that point.

Got it, great. And then one more, if I may, please. Your sales and marketing leverage has been remarkable as you go into some of these new departments. Is there any one area, whether it's clinical, regulatory or quality, that you'd say -- well, that effort's gone better from a go-to-market standpoint with the salespeople that we have than we might've expected? Or maybe there is some that you feel are a little bit behind from that perspective that you see upside going forward.

None really stick out as you are saying that question. If you look at our salespeople, they generally will come with one area of expertise, clinical quality or regulatory. But the salesperson, him or herself, is just one part of the overall sales process.

We have strategy people that are experts in every one of these specific areas. And, in fact, that's probably why it doesn't stick out that it's one area or another. We have 22 products now, 10 on the commercial side and 12 Vault products. We have people in the Company whose only job is each one of those 22 products.

With that kind of focus, we're able to bring the right people and the right messaging and the right understanding of the customer's problem into each and every meeting. That takes a little bit of the onus off of the salesperson, him or herself, to be the expert in every single thing that we sell.

Great. Thanks, Matt.

Ben Rose, Battle Road Research.

Good afternoon. Matt, a question for you regarding the go-to-market strategy on the clinical side with the addition of EDC and so forth. How large could you see the size of the sales force specifically focused on that set of products grow to perhaps by the end of this coming year?

We generally have not split out the number of quota-carrying sales reps by product. What I would say is we are going to supplement the sales team for clinical data management because there is a different buyer there. But if you follow the Company over time, you will know that doesn't mean 100 salespeople. That might mean dozens over time, but it's not hundreds. So, there's nothing about the Veeva way, the way that we have attacked new markets, that is fundamentally different in clinical data management, even though it's a very large market opportunity.

Okay. Thank you very much.

Rishi Jaluria, JMP Securities.

Hey, guys, thanks for squeezing me in. It's nice to see momentum in the business continue. Two quick ones. First, touching on an earlier question, how has the software spending environment from life sciences and then specifically pharma customers trended over time? And do you maybe see potential for expanding IT budgets from pharma clients given the potential for maybe a less strict than expected regulatory environment going forward/ And then I have one follow up.

The highest level numbers that we have is the IDC and the total IT spending. And that has actually increased $1 billion or more -- I think $3 billion since our IPO. The revenue in pharma and life sciences in general has gone from $1.6 trillion to $1.7 trillion in the last three years, and the R&D spending, I think, has gone from $52 billion to $55 billion. And we feel that.

And the thing that I think we feel the most specifically is the shift in dollars from capital and on premise software and big one-off projects to more of operating expenses, like the subscriptions that we sell. I think if you were to talk to a pharma CFO who is focused on IT expenses, they would probably talk about that shift from capital to operating expenses, or capital and operating dollars.

And then the question of whether this continues, I think that the industry is more dynamic and has changed more rapidly in the last three years that in the last 15 years combined. So, some of these breakthroughs in technology and adaptive clinical trials in genomics, and digital disruption on the commercial side, I think that people know that IT is going to be a more and more strategic part of growing a successful life sciences company over time. So, I wouldn't be surprised if budgets continued to increase as the role of IT becomes less tactical and keeping the lights on and much more strategic, getting products to market faster, and selling and marketing them more efficiently.

Okay that's helpful. And, Tim, a quick one for you -- operating cash flow outperformed this quarter. And I know the dynamics you talked about with operating margins. But it looks like there was also a big benefit from collections on the accounts receivable side. Can you help us understand the dynamics here and how we should be thinking about, from maybe a modeling perspective, cash flow going forward? Thank you.

I think a couple high-level points. Number one, when you look at our underlying renewal base, which is the biggest driver to billings, that is primarily seasonal in Q4 and in early Q1. Billings typically will be the highest in Q4, a little bit of contribution in Q1 from a billings perspective.

From a cash flow perspective -- and you can see that from our performance this year over the first three quarters and in the guidance that I gave for Q4 -- for cash flow Q1 is going to be our largest quarter as long as that underlying renewal base stays where it is today, with Q2 and Q3 being good and Q4 being our trough quarter. So, that's probably the way you want to think about your model from a cash flow perspective.

Okay, got it. Thank you.

There are no further questions at this time. I will now turn the call back over to Peter Gassner.

Thank you, operator. I would like to thank everyone again for joining us today. And a special thanks to the Veeva team for your great commitment and execution, as well as to our customers for their continued support and partnership. We look forward to speaking with you again on our fourth-quarter call. Thank you.

This concludes today's conference call. You may now disconnect.