Veeva Systems Inc (VEEV) 2018 Q2 法說會逐字稿

Good afternoon. My name is Julianne, and I will be your conference operator today. At this time, I would like to welcome everyone to the Veeva Systems Second Quarter 2018 Results Conference Call. (Operator Instructions)

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

Good afternoon, and welcome to Veeva's fiscal 2018 second quarter earnings call for the quarter ended July 31, 2017. 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 Investors section and on the SEC's website at sec.gov.

Forward-looking statements made during the call are being made as of today, August 24, 2017. 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 we'll 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, and thanks to everyone for joining us today. I'm pleased to report that we once again delivered a great quarter with revenue and profit above our guidance. Total revenue was $167 million, up 27% year-over-year. Subscription revenue grew 28% and we posted a non-GAAP operating margin of 31%. Q2 was a great quarter in Commercial Cloud and Vault. Within Vault, we had especially strong momentum in clinical.

Let me provide more detail on each of our major growth areas starting with Commercial Cloud. We had a strong performance in Commercial Cloud driven by continued CRM expansions in core CRM and the success of our other Commercial Cloud products. We generated significant CRM bookings in the quarter including 2 top 20 pharmas, who purchased for deployments in the U.S., and another top 20 pharma, who purchased for deployment in Japan. All 3 included core CRM, CLM and Approved Email, consistent with the trend of customers adopting more pieces of Commercial Cloud both upfront and over time.

Veeva CRM is a well-oiled machine. It just keeps getting better and better and it provides a foundation from which customers build out their commercial operations on Veeva.

I'm also very pleased with our progress in the newer areas of Commercial Cloud, including our add-on products. We now have more than 35 customers with either Align, Events Management or both. New customer pipeline is building and existing customers are expanding deployments to new countries and regions. I'm confident we are positioned for long-term leadership with both Events and Align.

In OpenData, we expanded our relationship with a top 10 pharma in China. We also added new customers in the U.S. and Europe. We continued to grow our OpenData offering with the addition of 2 new countries in the quarter. While we are making progress in OpenData and network, the anticompetitive behavior by IMS is slowing the uptake of these products.

We're pursuing the antitrust case we filed against IMS and we expect a trial date in late 2019 or early 2020. We are also focused on making it easier for companies to switch to OpenData. It will take some time for these efforts to play out, but we expect to be the leader over the long term.

Overall, we are very pleased with Commercial Cloud's performance. Customers appreciate our innovation and our continued focus on their success. Customers are consolidating on Veeva as their partner of choice for commercial and they are looking to us to keep them ahead.

Shifting gears to Veeva Vault. It's clear that Vault is becoming a very important platform for life sciences. We have 14 Vault applications and a robust underlying cloud platform that keeps getting better with every release. The discussions we are having with our customers as it relates to Vault are increasingly strategic as they look to us to help them streamline systems and processes across the enterprise. These are exciting times for Vault. We are seeing strength across all the Vault application areas of commercial, medical, regulatory, clinical and quality.

I would like to focus in 2 particular areas: quality and clinical. Growth in quality continues at a remarkable pace. We signed an enterprise live QualityDocs deal with a top 20 pharma in Q2. This is the second top 20 to standardize on QualityDocs enterprise-wide.

We also added 10 new customers for QMS during the quarter and now have a total of 30 QMS customers just a year after the product launched. In enterprise and medium-sized accounts, we are replacing aging client/server systems that just can't keep up. In smaller accounts, we are often replacing a combination of paper and Excel.

With Vault QMS and Vault QualityDocs, customers get a complete quality solution in the cloud integrated together on a common platform. The market is really embracing Veeva in the quality area and we believe we are set up to be the long-term leader in quality in life sciences.

Turning to clinical now. Clinical IT systems for most customers are not in good shape today. Customers use a variety of point solutions, aging systems and disparate platforms. There has been a lack of true innovation in core clinical technology over the past 7 years or so. To give you a sense, the most used clinical trial management system or CTMS is still Siebel CTMS. Siebel is a 20-year-old client/server technology that has seen very little development investment over the past 7 years. There's been a lack of progress in clinical technology across the board. We are now changing that.

Of our current Vault application areas for life sciences, clinical is the largest. We now have EDC, CTMS, eTMF and Study Start-Up, which together, represent roughly half of the Vault opportunity we currently address in life sciences. We are delivering a clinical suite of best-in-class products, all in a common modern cloud platform. This is something the market has long needed. We have been very encouraged by the enthusiastic market response to our clinical suite from customers and partners.

CTMS is off to a great start. We now have 7 CTMS early adopter customers, 5 signed in Q2 and 2 of the 7 are already live. This type of performance for a product just released in April is impressive. It's similar to the exceptional start we saw with QMS. There is significant pent-up demand for a modern cloud CTMS.

EDC is also going well. We have signed our first 2 Vault EDC customers. One is a CRO who will use Vault EDC to run a Phase II oncology study. The second is a sponsor who will use Vault EDC for a Phase II ophthalmology study. Both were competitive wins against established players and both selected Vault because they recognize we are delivering the next generation of EDC. The EDC pipeline is building and we are looking forward to more EDC early adopter customers and getting them live and successful.

eTMF is our most established clinical product. Our leadership in eTMF continues to grow with both new customers and current customers. During the quarter, we had several wins and expansions, which built on the sustained momentum we've seen over the last 12 months. To give you a sense, in just the past year, our eTMF customer count has grown by over 30% and the subscription run rate has grown more than 60%.

Customers are very happy with Vault eTMF and view us as a trusted and strategic partner. They are increasingly looking to us to help them unify their clinical processes. We are seeing this momentum play out across all customer segments from large pharmas, emerging biotechs and medical device customers to contract research organizations. Take CROs for example. CROs are a major user of clinical system as well as key influencers in the market. We now have 40 CRO customers.

Our EDC, CTMS, eTMF and quality offerings all address important needs for them. There's a tremendous opportunity here for Veeva. Therefore, we've established a dedicated sales force to address demand and serve the unique needs of the CRO industry.

Overall, we are very pleased with the great growth we continue to see in Vault. Our new Vault apps are taking off and we are establishing strong leadership positions in clinical, regulatory, quality, medical and commercial. We are in the very early innings of the multibillion-dollar Vault opportunity.

Finally, I wanted to give you a quick update on our initiative to take Vault to other industries. We continued to make good progress with our early adopters. We're adding new customers, creating pipeline and increasing the awareness of QualityOne. The top 5 consumer packaged goods company we mentioned last quarter has already expanded their relationship with Veeva. In Q2, they purchased and started a QualityOne project. This follows the platform project they began in the first quarter. If successful, QualityOne has the potential to become their enterprise standard over time.

We are executing in the Veeva Way, picking the right large strategic markets, delivering cloud solutions that are much better than existing solutions, focusing on customer success with a small set of early adopter customers and then expanding to new customers with reference selling and within customers by adding divisions, regions and applications. Early signs show this is working well as we extend Vault beyond life sciences.

In closing, Q2 was another strong quarter for Veeva with especially good momentum in Vault Clinical. We are expanding our market leadership positions and having early success in large new markets. We have all the pieces in place and the disciplined execution needed to achieve our long-term goal of building a multibillion-dollar enterprise cloud company. I would like to thank our customers and partners for their continued support as well as the Veeva team for all your skill, energy and enthusiasm.

With that, I'll turn it over to Tim to review our financial results in more detail.

Thanks, Peter. Q2 was another quarter of consistent, solid execution. Total revenue was almost $167 million, up from nearly $131 million one year ago, a 27% increase. The biggest contributor to our year-over-year growth was Vault, which represented 38% of total revenue in Q2, an increase of 800 basis points from a year ago. Subscription revenue was up 28% to $134 million from $105 million last year. As we discussed in the past, we believe that subscription revenue is the best top line metric to gauge our performance of our business.

Services revenue was over $32 million, up 23% from $26 million 1 year ago, and up from almost $31 million in Q1. For Q3, we expect services revenue to be roughly flat as compared to Q2 and to decline sequentially in Q4 due to fewer billable days.

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 just over 81%, an increase of almost 200 basis points from a year ago. This was driven primarily 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 SFA products.

In the back half of the year, we expect our subscription gross margin to be relatively flat with Q2 as we will incur some duplicate infrastructure costs associated with our migration to AWS.

Services gross margin for the quarter was over 33%, which is relatively flat from a year ago. Given the growing demand environment for our R&D services, we are aggressively hiring to meet our customers' needs and expect services gross margin to dip into the high 20%s in the back half of the year. This is consistent with our belief that over the long run, our services gross margins should be in the 20%s.

Our total gross margin for Q2 was 72%, an increase of about 200 basis points from 1 year ago. This improvement was driven primarily by the rise in subscription gross margin. Our operating income was over $52 million, a 31% operating margin. Across the company, we added 110 people net in the quarter, finishing at 1,984, up from 1,623 1 year ago.

We have an aggressive hiring plan for the back half of the year, which is reflected in the guidance that I will discuss in a moment. Net income for the quarter was $36 million compared to $22 million last year. As a reminder, we've adopted a flat non-GAAP tax rate of 35%, which will not adjust quarterly but we will reevaluate it on an annual basis.

Turning to the balance sheet. Deferred revenue is $223 million compared to $238 million at the end of the first quarter. This resulted in calculated billings of $151 million, which was ahead of our guidance of $145 million. This was a function of both better-than-expected billings duration for the business closed in Q2 and outperformance on the service revenue line.

Please remember that there are numerous factors that make year-over-year comparisons of this metric highly variable on a quarterly basis. Therefore, we do not believe it is a good indicator of the underlying momentum of our business and we do not manage to it internally. Our subscription revenue guidance and calculated billings guidance for the full fiscal year are the best indicators of our momentum.

With that in mind, we now expect calculated billings of approximately $725 million for fiscal '18, an increase from our previous guidance of 20% growth or $720 million.

For Q3, we expect calculated billings in the range of $118 million to $119 million. Consistent with our last 2 calls, we continue to expect that about 35% to 40% of our total calculated billings for the year will come in the fourth quarter, a dynamic we also saw in fiscal '17.

Elsewhere on the balance sheet, we exited Q2 with $725 million in cash and short-term investments, up from $664 million at the end of Q1. This increase was driven by our performance in cash from operations, which came in at almost $58 million. Our operating cash flow benefited from a very strong collections performance in the quarter, including collecting substantially more from July invoices than expected.

As discussed on the last call, this is the first year that we are adopting ASU 2016-09, which changes the accounting treatment of tax benefits associated with our stock-based compensation. For Q2, this benefited operating cash flow by almost $15 million. Excluding that benefit, our operating cash flow for the quarter would've been about $43 million and for the first half, around $171 million. Excluding the excess tax benefit, we expect operating cash flow from the first half to represent substantially all of the operating cash flow for the year.

Let me wrap up by sharing our outlook for next quarter and the rest of the year. For the third quarter, we expect revenue between $171 million and $172 million, non-GAAP operating income of $50 million to $51 million and non-GAAP net income per share of $0.21 to $0.22 based on a fully diluted share count of approximately 154.5 million.

For the year, we now expect revenue in the range of $672 million to $674 million, an increase from our previous guidance of $665 million to $669 million. We continue to expect subscription revenue growth to be more than 25% for the full year. For fiscal '18, we now anticipate non-GAAP operating income of $200 million to $202 million, a margin of roughly 30%. This is an increase in both dollars and margin from our previous guidance of $191 million to $195 million and a margin of 29%. Lastly, we expect non-GAAP net income per share of between $0.86 and $0.87 based on a fully diluted share count of approximately 154.5 million.

When combining our increased full year non-GAAP operating margin guidance, with our roughly 29.5% margin guidance for Q3, it means our implied Q4 operating margin assumption is roughly 27%. To put this in context, please remember that Q4 is our highest quarter for certain expenses, and therefore, the Q4 margin level applied by our guidance should be thought of as seasonal in nature.

To conclude, I'm very happy with the performance in the quarter. We continue to improve our position as a strategic technology partner to the life sciences industry and we have multiple early-stage growth initiatives in big markets that are showing tremendous promise.

Thank you for joining us on the call today. I will now turn it over to the operator for questions.

(Operator Instructions) Your first question comes from the line of Bhavan Suri from William Blair.

Nice job there in billings and certainly the business there. I guess I just wanted to touch first on clinical. Peter, you brought it up. You've been gaining really strong momentum with eTMF, the intra-quarter announcement, even the customers added there. I guess how much is the fact that the buyer of CTMS is the same as the buyer of eTMF? And sort of is CTMS doing well on its own outside of selling into the eTMF base? Just some color on sort of how those 2 are interacting and growing and the benefit of having a strong eTMF base?

Bhavan, this is Peter. Yes, it's a very related buyer and especially when it's in a quite small company, you may say it's almost exactly the same buyer. As it gets to be a big company, maybe it's a bit of a different buyer but it's a very related buyer. So that's certainly going to help us a lot with CTMS as we go forward. And probably what will help us more is that the eTMF product and the CTMS product are all built on the common Vault Platform. So when we show that to the CTMS buyer, it's something they've never seen before, that it's wow, this is an integrated system rather than 2 disparate systems. So I think product-wise, it's probably helping us the most, but it certainly helps that it's a very closely related buyer to eTMF.

Got it. Got it. And then one follow-up for me. You look at OpenData, KOL and the CRM data, essentially the best CRM data in the landscape there in the world. And now you look at some of the EDC customers. I guess I'd love to get -- sort of Peter, not today but sort of 3, 5 years out, as you think about AI and machine learning and the data you've got, sort of the applicable use cases there that sort of make this a bigger moat for you guys. Just some thoughts on how you're thinking about that.

There's different types of data. CRM and the CRM activity data, that's something we know very well and we have a lot of CRM customers. EDC, we're, of course, just getting into. Any time you collect a large corpus of data, you can utilize that going forward to make new data on. I think it'll be particularly most relevant actually in the commercial area. I think we can utilize that going forward. It's not something that we're doing today, but we certainly have plans to do that.

Your next question comes from the line of Richard Davis from Canaccord.

Well, anyone who's been around a while knows after hours is not a place for reflective fundamental analysis. I mean, so one of the things -- so we did our pre-channel checks. Everything sounded good and then your commentary today. I mean, I guess the question that I got an inbound from a couple investors. And you have a lot of shots on goal, so I mean given that, I mean, just maybe reiterate to some degree. You don't have to go through the whole thing again, but is there any reason why you should not be able to grow this business at least 20% for the next several years? I mean, I guess if that happened, would you just move margins up even higher or something? Or how do you kind of think of those puts and takes?

Richard, so we're really not giving guidance beyond this year. Of course, we have -- we're still ahead of our targets for our 2020 $1 billion revenue run rate, and we have our long-term targets of building a multibillion-dollar company. That hasn't changed. And I like the word you used about shots on goal. We usually say the term planting seeds for growth, and that's what we've done. I'm really proud of what we've done here over the last year.

So you look at this clinical area. This is a huge area. We just got our first 2 customers, but it's hard to get your first 2 customers. You really have to have a product that's compelling and we do. So now there's a ton of customers to sell it to. CTMS, very large market. We just have 7 customers. I don't know exactly the number of potential customers in CTMS, but it's probably in the area of 700, not 7. So -- and then we actually have new applications we could build on Vault too and then we have the whole outside of life sciences.

So yes, I'm confident -- although we're not going to give guidance and specific growth rates beyond this year, I'm confident we're on a path to grow this company into a multibillion-dollar company in the Veeva Way, which means a good profit margin also as we're growing.

So I'll take that as a nuanced probably. How about that?

Yes, Richard. Everybody's welcome to take anything how they want. But yes, we have lots of shots on goal. I'm going to start using your words, and that's important, right? If you have an innovation engine, that's something we've been really working on over the last 5, 6, 7 years as a company. To build a big company, you need lots of shots on goal. So I feel we're in good shape. We just got to execute.

Your next question comes from the line of Brent Bracelin from KeyBanc Capital Markets.

A handful of questions here for Peter. I wanted to start with the Commercial Cloud side. I think you talked about 3 new deals with top 20 pharma customers. I assume those are expansion deals. Or were there some new customer wins that you are referencing here? And then could you more broadly just frame the opportunity in Commercial Cloud with -- given that's the most mature product? How much more room is there to expand your footprint?

Okay. Probably Matt and I will take this thing together. In terms of the 3 deals, those are expansions of existing customers that we had an existing relationship so they're expanding into new divisions, in some cases, and countries. In terms of the opportunity ahead, in Commercial Cloud, Matt, do you want to take that one?

Sure. Yes, so I can start with the top line penetration of base CRM. So we're a bit over 2/3 now as we expected. If you go through the add-on products, CLM is up near 80% still. And as Peter mentioned in his prepared remarks, Approved Email is becoming more and more of a normal thing. We're at about 40% of our CRM customers have that now. And then the newer ones Events, Align and Engage are all below 10% penetration. So that's a focus of ours. We have success there. We know the products work and we see a path to long-term success there and becoming the market leader in each of those areas.

And then Network and OpenData, while -- yes, I mean, the competitive environment has been tough there. You can argue whether it's been fair or unfair. We continue to add customers and there's still a big market there, and it's still an important adjacency to the CRM business, and we think that together, our CRM business with CRM add-ons, with OpenData and Network, is better than taking -- so what do you say, it's better than the sum of the parts. The whole is better than the sum of the parts. So still plenty of room to go with these add-on products with Network and OpenData and we're committed to being the leader in each of these markets over the long term.

Very helpful color. Second question for Peter here. I know you mentioned some kind of anticompetitive behavior by one of your competitors, I think IMS. Can you just walk through what part of the business do you think is most at risk or slower to be adopted? Is it just OpenData and Network that some of the competitive -- anticompetitive actions out there are challenging the business? Or is it broader -- a part of the portfolio we should be nervous about relative to competition?

It's a good question. This is very specific. The anticompetitive behavior by IMS is specific to Network and OpenData. It doesn't relate to Vault. It doesn't relate to CRM. So it's very contained there. And we have a plan to work through that, which involves in the courts the antitrust lawsuit, which will take its time, and then focusing on customer success with our existing Network and OpenData customers, really refining the product and making it easier for customers to switch to OpenData because that's the key. If the customers don't use the IMS data, then we don't have a problem.

Got it. Got it. Very clear there. And then last question for you here. I mean, you talked about creating a dedicated sales team to go after the CROs. You have 40 today. Maybe you just walk us through the opportunity -- the CRO opportunity, what's your kind of general penetration today in CROs? And what's the opportunity that encouraged you to go out and create a dedicated team to go after it?

Sure. Yes, this is Matt, and it's a good question because the CROs are important, especially as we continue to have a broader suite of clinical products. So the 40 number doesn't represent the penetration within those companies. So I would say while 40 is a good number, given where we are, and it's a good time to increase our investment there with a dedicated sales team, within those 40, for many of them, we're just scratching the surface. And the CRO market has been really dynamic. Not only are they buying each other. They're starting to buy companies that would help them get into commercial and so it's a really good time for us to partner deeply with those companies and maybe even more -- maybe even beyond more than just clinical with some of them. So I think it's very early in terms of penetration in CROs. There are I think a couple hundred CROs that we could sell to, but the penetration within the large ones is still very small.

Got it. Very helpful. And then, Tim, for you, as we just think about the profile of this business, you certainly have pretty impressive op margins now. I think, what, 4 consecutive quarters of north of 30% operating margins and average subscription kind of growth rate north of 30%. As we think about the level of investments, the scope of the opportunity, obviously, there's going to be some additional legal fees. How should we start to think about what that appropriate op margin profile should be in order for you to kind of sustain multiple shots on goal, if you will?

Yes. I think if you think about 2 time periods, Brent, so if you think about the back half of the year, you heard in my guidance, we are -- we'll see a little bit of margin compression in Q3 and Q4. Now the Q4 one, I would hang primarily on seasonal expenses that you've seen in the past here at Veeva. So in the back half of the year, it's probably a little bit less than what we did in Q2 but that still drives to a full year of about 30% operating margin, which, to your point, we look at as a great performance. The other data set is the model that we set out for the 2020 time frame. And I look at that model and I think that is an appropriate model to think about in terms of our ability to continue to invest in new initiatives like we are today but even for future seeds and shots on goal as Peter and Richard talked about, Brent. So those are the 2 number sets that I would think about.

Your next question comes from the line of Stan Zlotsky from Morgan Stanley.

So going back to the EDC, so it's really great to hear you sign your first 2 customers. Maybe just walk us through how you pick up these customers in EDC. I would presume that a customer who has maybe tens or maybe even possibly hundreds of trials going on, they're not going to stop a trial to put in a new EDC system. So is it just a matter of as trials start up, that becomes an opportunity for you to come in with an EDC product? And then I have a follow-up.

Yes. So that, you're exactly right. When a customer starts a trial with a particular EDC system, they're going to continue with that. They're not going to change. So our opportunities come when they have new trials. And it's important to know that the set of customers that we can sell to with our EDC product is probably the most broad set of customers we've had so far. It can be very small CROs up to -- all the way up to top 20 pharma companies. So we get multiple bites at the apple and then -- because there's always trials starting.

Then if you look at, for example, these first 2 customers, both of which are small customers, EDC customers, one in CRO and one in -- a sponsor in ophthalmology, what really enthused them is being part of the next generation. And particularly actually in the oncology trial, which is a Phase II trial, it is a very complex trial involving multiple drugs and multiple pathways that that trial could go, and they were really enthused about the flexibility in Vault.

So that's how you grow the business. You start working with your early customers. You start noticing and you start evolving the product and your message. And if you look over the last 10 years, that's how Veeva has built the business. Get the customers, listen. Work incredibly quickly with them, evolve the product. That's why I'm so excited about EDC because it's just perfect for us. We get multiple chances to get customers learn from them and just grow from there. And if we can evolve our product faster than the market is used to seeing products evolve, we'll do very well.

Now and that's just EDC all on its own. But when we have a whole suite of products, it help us because -- meaning in the clinical area, also in the regulatory and the quality area, it really amplifies the effect of EDC because we get -- basically, we get higher up into the accounts and we can be more strategic and we can get our messages across well.

Got it. And then maybe one for Matt. Around the sales force, how has the productivity of the sales force trended? And maybe just some qualitative commentary on sales cycles. Have you seen anything relative changed, unchanged? Or is there some changes that you want to highlight?

Yes, so as we talked about these lots of shots on goal, another shout-out to Richard, as if none of us ever heard that before, Richard, but it was a good one, we have products in different stages of their maturity. And so it's hard and we don't really even try to put like a single sales productivity number out there. There's a brand-new CRO sales team. That's going to have a different number. There's a brand-new sales team going outside of life sciences. There's people that are working on CTMS and EDC deals, where we can really only sell to a specific number of companies because we're only trying to get early adopters right now. We're not trying to get as many as possible. And then we have more mature products with commanding market share. So it's hard to just kind of put a number on sales productivity.

Now in terms of sales cycles, I do think that they're getting shorter. We see more and more shorter sales cycles for add-on products and shorter sales cycles for new customers, where the people came from existing customers. And so to be specific, a company launching their first drug and they're standing up a sales force, it would almost be impossible for that company to not have people that have used Veeva before. And very often, we win those deals without an RFP now.

And the same thing for an existing Vault customer who's looking to expand in another area. Because of the success of Vault in the first area, we can win an additional area without an RFP. And if you eliminate the RFP, you can really dramatically speed the sales cycle. And I think we feel that around the world. Now it doesn't mean we don't have competition. I mean our competitors are out there all the time, but I definitely think there's a large number of faster sales cycles today than there was just a couple of years ago.

And last one on FX, did you guys see any FX headwind, tailwind in the quarter. Figure I'll get the whole management team involved.

Yes, Stan, this is Tim. It was a little bit of a tailwind but not material.

Your next question comes from the line of Tom Roderick from Stifel.

So Peter, a quarter ago, you talked about, first, a pretty meaningful win in QualityOne outside of life sciences with your top 5 CPG. This quarter now you're talking about an expansion with that same customer. Would love it if you could go into a little bit more detail about what that expansion was, how it came to be. And then more broadly, what are you doing in that product set to staff up the customer success teams to drive different use cases across larger organizations? And what are those existing customer success stories doing to kind of drive lead gen in other verticals?

Okay. Now Tom, we're very quite early outside of life sciences so we have a relatively small set of early adopter customers. But as you mentioned, some of them are big. You mentioned the top 5 CPG, but actually I guess it was in Q4. We talked about the 2 large chemical companies, top 30 chemical companies that are doing their initial projects on Vault as well and one of them is actually a top 5 chemical company.

So we're in there with these very, very large companies and it's always an initial project. It's initial project. And the terms of the CPG company, it was initial -- it was actually a platform project around managing a part of their product development process in the CPG area. Then word started spreading that, hey, basically the Veeva product is good and the Veeva people are good. So that starts spreading around and it caught the attention of their quality group, quality management group. And so now we have an initial project going on, a pilot project in a few of their manufacturing areas.

Now that could expand -- if it goes well, we hope that could expand to be their major quality system for all of their manufacturing areas. So that's definitely going to be a large deal, multiple 7-figures type of deal. So that's really what's going on.

Now if you get into why, why is it? What's really attracting them? It's the quality of the software platform and the people. But specifically in the QualityOne, it's the externalization of 2 things. It's externalization to involve your suppliers in your quality processes and the idea that you can have your quality work processes, your quality management system as well as your quality documentation system all in one system. They've never seen that before. They've got fragmented systems and, in a lot of cases, faxes and paper with the suppliers.

So I could run down the list. I know one that the team just talked to this week was an industrial products manufacturer. A medium-size $1 billion industrial products manufacturer, European company, we're selling into their U.S. division. They have a lot of suppliers to collaborate with around the quality of their product. They can't do it today. It's email, faxes, paper and multiple systems. And when they saw QualityOne, wow, that's good. Now okay that's a $1 billion company. It takes some time then to purchase things and grow the business. But I hope that gives you a flavor of what's going on outside of life sciences.

Yes, that's excellent. Quick follow-up here just in terms of some longer-term targets but you guys seem well on your way to your 2020 $1 billion target. You've noted repeatedly here that Vault is well ahead of plan. Can you just talk a little bit more about what some of these headwinds within OpenData and Network do relative to some of the anticompetitive positioning going on out there? Does that change the shape of how we ought to think about the composition of the business in 2020? And any updated thoughts you can share with us relative to commercial versus Vault in that longer-term outlook?

Yes, Tom, this is Tim. As you remember, when we set the 2020 goal, it was a couple of years ago and we talked about them again last year, the Commercial Cloud business was roughly targeted to be a $600 million business in that time frame, so in 2020. Given the performance this year and specifically the subscription revenue growth rate that we reiterated in my prepared remarks, we are still on track to size the business of that $600 million in the 2020 time frame. What I would also say, and you just -- you talked a little bit about the shape of the $1 billion, as we are ahead of that, I think when we get there, given that Vault is driving primarily the amount ahead, I think the mix may be a little bit different than the 60-40 we originally talked about 2 years ago.

Your next question comes from the line of Jesse Hulsing from Goldman Sachs.

It sounds like CTMS and EDC are off to a pretty good start. I'm wondering, Matt, how are early deal sizes trending versus Quality at the same stage? And I guess when you look longer term as these product lines mature, what do you think the opportunity is for CTMS and EDC in a given customer versus Quality?

Yes. Thanks, Jesse. So I think if you look at like the early QMS deals versus the early CTMS deals, they're pretty similar. It would be very unusual for us to have 7-figure deals the first couple of quarters of having a product out in the market and we don't. So they're generally smaller companies or they're smaller projects within larger companies. But I think they are similarly sized.

EDC is actually probably right in that range, although we have a smaller number of examples so far. And EDC is the one of those 3 that's actually quite a bit bigger, not only because there's so many companies that we can sell it to but it's sold by the number of sites within a trial. And for a large trial, it's a large purchase for a company and it's so critically important to running those trials properly.

So we've talked about EDC as a $1 billion market. We think that's easily supported and we've seen that even in the field so far. The companies are expecting to spend a lot on that. They've been spending a lot on that for many years. And so that's bigger than CTMS and QMS, but those are significant -- for sizable pharma companies, med device companies, those are 7-figure deals and sometimes multiple 7-figure. So we think of each of those as big markets but we do think of EDC as the largest of all of them.

Yes. And in those CTMS and EDC wins this last quarter, were those competitive versus the Medidata, I suppose, or anyone else? Or were those kind of sole-source situations that you were able to close?

Yes, so I think probably without exception, they were competitive. I don't know that we competed against Medidata in every single one. I do know that we competed against them in the EDC ones, and not just Medidata. But if we look at the 2 EDC early adopters, the people at those companies and those companies had experience with all the major players in their past, and I think that was a big reason why they were looking for something different.

In CTMS, I know a couple of them were directly competitive. And again, those people have experience with the legacy systems that have been on the market for a long time. So we got really encouraged because the feedback is it's like wow, there's finally some innovation here. This product is beautiful. These things are integrated on a single platform, and that excitement that we get from customers and prospects is infectious. It probably started with us, but then we show the product and we get it back.

Yes, if I could just add a little there. The interesting color is that the CTMS customers, I think all of them were eTMF customers because we have a lot of eTMF customers. And if you have our eTMF and then you see the combined CTMS and eTMF together, there's basically no way you're going with another CTMS. It's just illogical, right? A unified system is so much better.

Now on EDC, it's interesting, those 2 customers had no other Veeva products. EDC was the very first product that they bought. Now why is that? These were smaller customers and the EDC just happened to be their highest priority. Now they knew about the other Veeva products and they are thinking about those but EDC happened to be their first purchase with us. So I think EDC is going to kind of stand on its own of its merits and things like that, better EDC. And I think CTMS just has an unfair advantage because it's so much better to have a good eTMF and a CTMS together that it's sort of -- it's the only offering like that in the market.

Your next question comes from the line of Ken Wong from Citigroup.

Tim, first, I guess I wanted to touch a little bit on your commentary around just staffing up on the services side. Should we expect that kind of with the growth and capacity there, that the growth rate of services should start to kind of pick up in the back half and next year? Well, I guess not back half, you already commented on that, but in the next year?

So what I would think about there, Ken, is as we think about service as we've talked about in the past, it is a very lumpy business, whether that's when projects come in. What the duration of those projects are. Sometimes we'll see some fixed milestone types of projects. So from a quarter-to-quarter basis, I think it's hard to figure out the pattern in our services revenue line. What I would say, though is we are staffing up today because we do see that demand from an R&D perspective. So we're staffing up for some growth, although I'm not giving specific guidance to next year and again, staffing up for customer success. So that's the way I think about the services staffing that we talked about in the prepared remarks, Ken.

Got it. And then on QualityOne, you guys had talked about growing that sales force more aggressively. Kind of any update on kind of where that stands? And in terms of customer growth there, I mean, you guys talked about expanding within the consumer products group -- sorry, consumer packaged goods company. Any new customers to call out?

We did add some new customers in the quarter but we're not going to break out the specific numbers. I think what we're most enthused about is just the conversations that are starting, the word that's getting out. I mentioned that industrial goods company. There's another large multibillion-dollar industrial controls company we're talking to, a multi-billion-dollar health services company we're talking to. So the discussions that are starting, it's really not about the number of customers at this time. It's about the types of divisions we're expanding to and the types of discussions we're having.

Your next question comes from the line of Brian Peterson from Raymond James.

So wanted to hit on the eTMF stat you gave in the press release just with the 31% customer growth and then the 66% growth in subscription revenue. I'm curious how much of that uplift in the subscription revenue is coming from the clinical side versus those customers potentially looking at other Vault products?

Yes, so that specifically is just Vault eTMF and so that's only the clinical document management application.

Wow. Okay, great. That's a good stat. And maybe just one quick follow-up for Tim. I'm not going to let you go without asking a services question. But as you think about more of the suite deals that you're implementing, how should we think about the dollar-for-dollar intensity of services revenue versus subscription over time?

Brian, good question. So I do think when we think about the business overall, we think about the business, the industry cloud model as being both the best products on the best modern cloud technology platform as well as the best people that have pattern recognition and are sort of the pollinators of best practice across the industry. So I think our customers look at both of those when they look to Veeva to partner with. So I think over time, you'll still see -- over the long run, you'll still see a service revenue contribution as being fairly material. Today, it's sort of in the very high teens. I think over time, that'll come down as our subscription revenue base continues to grow, but I still think it is a material contribution given the industry cloud model and the desire of our customers really to work with our people and really optimize their experience with the product.

And it's going to depend product to product. I would say, there's generally always -- not all the time, but the far majority of times, there are services attachment when we would sell a new product or an existing product into a new division and the percentage of services as it relates to subscription is going to depend from product to product to product. So for example, I would expect the CTMS services attachment rate to be higher than the eTMF attachment rate because CTMS is kind of a hub and has to deal with a lot of integration. So it's just going to depend from product to product.

Your next question comes from the line of Scott Berg from Needham.

Most of my questions have already been asked, but the one I wanted to follow up on was within your EDC pipeline, commentary seems pretty strong in terms of pipelines building. I guess I was surprised in the quarter that one of your first 2 customers signed was a CRO versus a direct deal with a life sciences customer. But how should we think about those -- that pipeline composition moving forward? Is it more heavily weighted towards these outsourced organizations? Or do we think it should expect to be more weighted towards direct life science customers?

I think that's going to change a bit over time. I think it's both. I think it's a little -- possibly a little heavily weighted towards the CROs right now in the early days because the fact is when you're just getting going in the early adopter phase, you're more likely to have a smaller company, a very nimble company evaluate you very quickly and then go forward. There are more small CROs than there are small pharma companies. And in fact, many small companies will outsource that type of thing completely to a CRO. Now as we get more mature and get more discussions with the large pharma, that's going to weight back to the sponsors because still the largest EDC opportunities are in the top 20 pharma. Even though there are large CRO organizations, you have more opportunities in these top 20 pharma.

Your next question comes from Kirk Materne from Evercore ISI.

This is actually Tom Mao calling on -- calling for Kirk. So as you move outside of life sciences, do your partners become more important in your go-to-market strategy? And what are you doing on that front to improve your partner relationships?

I would say as it relates to partners outside of life sciences versus inside of life sciences, I think it's actually similar importance. Partner's important inside of life sciences and outside of life sciences. I think we'll have actually similar services attachment rates, especially in the early days with QualityOne. We really want to be very close with our customers. So I would -- if we looked a year ago, I think we wouldn't have had quite that clarity. That's one of the learnings that we've had now that it's actually going to be a very similar partner landscape outside of life sciences versus inside of life sciences, of course, with probably different partners, right? Because we're going after different industries.

Now I would say that there's one thing that's different though, and that is that when we first started in life sciences, we didn't have any partners, right? No one had ever heard of us. The products were brand new, and we had to earn a lot of customers before large systems integrators wanted to work with us. It is different as we go outside of life sciences, where there's a lot of interest from both large and small systems integrators to work with us, and that's one of the things we're working through, but that does feel different, that kind of the partner demand is already there because they've seen our ability to grow within a market and to make customers successful.

Your last question comes from Brad Sills from Bank of America Merrill Lynch.

Just one on -- outside life sciences. You mentioned some new wins there. Just curious if you could comment on which subverticals there you're seeing traction either new wins or pipelines. You mentioned oil and gas, food and beverage. I know you've had CPG wins. Just any commentary on where you might be seeing more traction.

I think certainly the CPG is a strong area and continues to be. Chemicals and chemical-related things are good, also things that are adjacent to life sciences, highly regulated services. And I would say, especially in the last quarter or so, early indications of good interest in manufacturers, general complex, multi-divisional, industrial manufacturers, and that's where this notion of the supplier, the [extent] supplier integration and collaboration around quality, that's probably been the biggest learning in the last quarter, increased interest from these diverse industrial manufacturers.

There are no further questions at this time. I will now turn the call over to Peter Gassner for his closing remarks.

Thank you. It was another great quarter for Veeva. Thanks as always to everyone at Veeva for your hard work and your dedication in making it happen, and thanks to our customers for your continued support and partnership. We appreciate you all joining us on the call today and look forward to seeing many of you at our upcoming Analyst Day in October. Thank you.

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