Veeva Systems Inc (VEEV) 2013 Q4 法說會逐字稿

Good afternoon, and welcome to the Veeva Systems' third-quarter 2013 conference call.

(Operator instructions)

Please note this event is being recorded. I would now like to turn the conference over to Rick Lund, Investor Relations Director. Please go ahead.

Good afternoon, and welcome to Veeva's fiscal third quarter 2014 earnings call for the period ending October 31, 2013. 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 our trends, 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 registration statement on form S1 filed with the SEC on October 15, 2013 which is available on the Company's website at www.veeva.com under the investor section and on the SEC's website at www.SEC.gov.

Forward-looking statements made during the call are being made as of today. 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 will not provide any further guidance or updates on our performance during the quarter, unless we do so in a public forum.

On the call, we will also discuss certain non-GAAP metrics that we believe aid in the understanding of our financial results. A reconciliation to comparable GAAP metrics can be found in today's earnings release, which is available on our website and as an exhibit to the form 8-K filed with the SEC just before this call.

With that, thank you for joining us, and I will turn it over to Peter.

Thanks Rick, and thanks to everyone on the call for joining us today.

I'm pleased to report total revenue for the quarter of $55 million, a 54% increase over the same period last year, and subscription revenue for the quarter of $38.9 million, an increase of 95% over the same period last year. We continue to grow profitably, with Q3 non-GAAP net income of $8.3 million, up from $6 million a year ago.

Our growth and profitability are indicators of the strong demand for our industry cloud solutions. Since this is our first earnings call, I'll take a moment to provide some background and context on our model and market opportunity, along with a few customer highlights from the quarter. I won't name these customers, since they are -- they generally prefer we not cite them in this type of forum.

We founded Veeva on the idea that industry cloud solutions would be the next wave of cloud applications. Many industries require software that is tailored to manage their most strategic business functions. They want to move to the cloud, but they can't use generic, one-size-fits-all cloud offerings. So they are stuck on aging, client/server industry-specific legacy systems.

Veeva provides industry cloud solutions, software, data, and services for the global life sciences industry. Our customers include companies such as Pfizer, Novartis, Lily, and Amgen. Life sciences is one of the world's largest industries at $1.6 trillion, and it's growing at roughly 6%. It's also rapidly changing and under intense competitive and regulatory pressure.

Legacy client/server systems often can't keep up with the pace of business and regulatory change. It's the perfect fit for industry-specific cloud solutions. We are at the very beginning of a major technology replacement cycle with life science companies as they move from client/server systems to the cloud with our industry applications. Our objective is to become the most important technology provider to the life sciences industry by delivering an expanding suite of applications and data in areas of the highest strategic value, and insuring that our customers are successful. Customer success has always been our number one Company value, and has fueled our growth.

Prioritizing customer success is crucial when you're focused on one industry, even more so in one with so many large global players. Word of success or failure quickly gets around. Our customer success oriented approach has allowed us to grow rapidly and profitably. We don't do multi-year transactions to pull in business. Our financial model is not based on one-time megadeals. We engage with a view toward a 10-plus-year customer relationship, based on earning business through successful projects that provide strategic value.

Expansion within our core customer base is one of the most important drivers of our revenue growth, and affords tremendous opportunity. It's not uncommon for customers to ask if we have a solution in a particular area, or if it's on our road map before moving forward. As a trusted partner, they look to us first.

When we have a successful project with one product in one division or geography, the customer will likely deploy more Veeva products to more divisions and geographies. That customer is also likely to recommend our products. Today we deliver 10 major products across three product lines: Veeva CRM for customer relationship management, Veeva Vault for content management, and Veeva Network, our customer master solution. These solutions help companies get drugs to market more quickly, maximize sales of existing products, and maintain compliance with government regulations.

Let me share a few CRM customer examples from the quarter that are representative of how many of our customers purchase and expand their usage of Veeva. One is a longtime customer, and one a new global deal. Roughly two years ago we were selected as the global CRM standard for a Top 50 global pharma company as a result of a few successful pilots. The customer has steadily expanded its use of Veeva to new divisions and geographies ever since. In Q3 it purchased roughly 5,000 CRM subscriptions for users in Asia, Latin America, and Europe. With a significant base of Veeva CRM users globally and a highly strategic relationship, we have great opportunities to continue to sell more add-on products and product lines.

In Q2, we were selected as the global CRM standard for a Top 50 pharma company, and in Q3 the implementation began in earnest. This client's first step into cloud software began with an implementation of Veeva for one division in one geography. The customer now plans to roll out nearly 20,000 CRM users over the course of the next few years, and we anticipate further opportunity beyond the initial CRM program.

In the quarter we also had our very first 1000-plus user deal for Veeva-approved e-mail, a new CRM add-on released in June. It was the result of a pilot with one of our large longstanding CRM customers. They see approved e-mail as a strategic capability to deliver product information in a compliant way, reaching healthcare professionals when and where they need it. The project is in its early stages. So far, they are thrilled with the product's ease of use and the high e-mail open rates. We believe there is great potential to expand beyond these first few thousand approved e-mail users to users in more divisions and geographies.

We also see great progress with our second product line, Veeva Vault, for regulated content management. The market dynamics in content management are similar to what we see in CRM. Companies are struggling with aging inflexible client/server platforms. These outdated systems can't keep up with the changing regulations and the needs of the business. Generic industry, cross-industry cloud products simply do not meet the needed regulatory or functional requirements.

The majority of our Vault applications were released just over a year ago, so we are in the very early innings. We are already seeing good traction in the market and a strong pipeline for Vault. This quarter, the first global implementation of Veeva Vault MedComms went live as a Top 50 pharma customer to replace a custom built application built on Sharepoint that just wasn't keeping up. The project was completed successfully, on time and on budget, and is delivering material efficiency and compliance gains. The customer is now planning more Vault projects.

We are also seeing traction for Vault with non-CRM customers. A pre-commercial biotech firm that started as a small Vault platform customer expanded this quarter, purchasing Veeva Vault ETMF, our electronic trial master file application, to manage clinical trial documents. This move into just one additional application area represented a fourfold increase in subscription revenue. We anticipate additional opportunities to help them manage content in other areas, such as regulatory submissions and quality documentation.

I'll close with an update on our third and newest product line, Veeva Network, released at the end of October. Our vision has always been to provide cloud applications and data. Data is one of the great opportunities you have as an industry cloud provider. When you have a critical mass of customers all from one sector, all together in the cloud, you can deliver unique industry-specific data right in the application. Over time, you gather data sets from across the industry that, once aggregated, are unique and valuable.

Our first data offering, Veeva Network, became generally available for the US and China just a little over a month ago. A complete customer master solution, Veeva Network is a single source of up-to-date customer information. The customers in this case are the doctors, other healthcare professionals, and health care organizations life sciences companies promote their products to. To coordinate and track interactions, while remaining compliant with regulatory and reporting requirements, life sciences companies should maintain a single master record for each customer that includes all the key information, and it's not as simple as names, numbers, and addresses. They must track hospital affiliations, where doctors work on any given day, whether their licenses are up to date, if they can receive drug samples at that location, what specialties they are licensed for, and so on, and the information is constantly changing.

Today to try and get to a single customer master record, companies buy data from many different sources and then configure software tool kits to merge and de-duplicate the data. This process is very difficult and error-prone. Then they still need to integrate the data with their enterprise applications. In all, it's a costly and time-intensive effort. It's highly inefficient, as nearly all companies across the industry are recreating the same wheel. Veeva Network provides the current customer information they need right where they need it, in their CRM system. And because Veeva Network is accessed by -- via the cloud, there's a network effect as updates from across our customer base become part of the master data repository, benefiting everyone. In effect, we are leveraging the power of crowdsourcing for the enterprise.

Veeva Network has been very positively received. Our early adopter program was oversubscribed, and included a range of customers from Top 50 pharma companies to emerging growth companies with fewer than 500 employees. So it's a new offering. We already have Veeva Network implementations underway in the US and China, and a solid pipeline of future business. In all, we are very pleased with our results for the quarter, and the continued opportunities to move life sciences companies from legacy applications to the cloud.

With that, I will now turn the call over to Tim Cabral, our CFO.

Thanks, Peter.

We are pleased with this quarter's results, which reflect a unique combination of strong top line growth, continued profitability and positive cash flow. Before going into our quarterly results, I will provide a little color on our operating model for those who may be new to Veeva.

Industry cloud has some distinct benefits. Our industry focus has allowed us to build deep relationships with our customers, and they view us as a strategic partner. Understanding their biggest challenges and highest priorities helps us know what to build, allowing for more focused R&D spending and an expanded portfolio of products that are more likely to meet their needs. This results in growing customer lifetime value as customers expand their use of our solutions and generates higher levels of success and referenceability. This dynamic lowers customer acquisition costs and drives more efficient sales and marketing.

Let me now discuss how our revenue model works. Our total revenues include subscription services revenues and professional services revenues, which we will refer to as subscription revenue and services revenue respectively. Our subscription revenue is generated by selling annual subscriptions to our cloud solutions. Revenue is recognized ratably over the length of the contract.

Our orders with new customers and renewal orders are typically one year in length. However, as our customers add more users across new divisions and geographies, we make these add-on orders coterminous with the customer's current renewal date. This means that we initially build these add-on orders for a period that is less than 12 months.

Our services revenue is generated from the professional services that we provide to our customers to help them implement and use our solutions successfully. Services revenue is recognized upon delivery and is billed monthly in arrears. The primary objective of our services business is to promote customer success and is not a focus for revenue growth. This portion of our business can be variable, with some projects requiring less of our services than others. Additionally, our ecosystem of service partners, companies like Accenture, Deloitte, and Cognizant have continued to expand their Veeva practices over time.

Now let me turn to the results for this quarter. Total revenue was $55 million, up from $35.8 million one year ago, a 54% increase. This quarter we benefited from a few deals forecasted for Q4 that came in early. Subscription revenue was up 95% to $38.9 million from $20 million last year. Services revenue was $16 million, up modestly from $15.8 million year over year.

In terms of geographic mix, approximately 60% of our total revenue came from North America and 40% came from outside North America, based upon the location of users. International revenue has been growing as a percentage of total revenue, and we expect that trend to continue as the industry we serve is global.

As we move down 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 in the tables from our press release, which is posted on our website and filed with the SEC. Our subscription gross margin was 76.6%, up from 74.2% a year ago.

Fees for the salesforce.com platform make up the substantial majority of the cost of subscription revenue for our base CRM products. These fees include the cost of the data center infrastructure and the cost of the technology platform, which is normally reflected in R&D expenses for companies that build their own platform. You will see the same accounting treatment with other companies, as the use of platform as a service becomes more common.

Gross margins are slightly higher on our CRM add-on products, like CLM and approved e-mail, and on our other product lines Vault and Network, which were built on our own platforms. Over time as these products account for a growing percentage of subscription revenue, we expect our overall subscription gross margin to inch up.

Services gross margin was 27.5% compared to 32.6% one year ago. While you will see variability in our services gross margins, our target utilization rates will generally produce gross margins in the 20%s. Overall, our gross margin was 62.3% compared to 55.8% last year. The biggest driver of our gross margin improvement is an increase in subscription revenue as a percentage of total revenues, a trend we anticipate will continue.

Turning to operating expenses, we continue to make investments to support our rapid growth. Our total operating expenses are up almost 100% from one year ago, at $21.8 million versus $11 million.

Sales and marketing expenses were $10.9 million, or 19.9% of revenue, versus $5.3 million last year. We added sales capacity for our newer R&D-focused solutions and expanded our international sales capacity across all product lines. That investment in our sales team will continue in the near term, and you may see sales and marketing as a percent of revenue increase slightly in future quarters.

R&D expense was essentially flat from Q2 at $6.2 million, or 11.2% of revenue, and up from $3.5 million one year ago. We continue to hire developers and invest in our product lines. However, the expense was flat quarter over quarter, largely due to an almost $720,000 benefit from the capitalization of internal use software, primarily due to the release of Veeva Network. Without that adjustment, R&D expense would have been $6.9 million and about 13% of revenue. We don't expect to capitalize any internal use software expenses in Q4.

G&A expense was $4.7 million, or 8.5% of revenue, compared to $2.2 million in Q3 of last year. We added G&A headcount in anticipation of becoming a public company, and will continue to invest as the business grows. Overall, our operating margin was 22.7% versus 25% for the same period last year. Net income was $8.3 million, compared to $6 million last year. Our fully diluted net income per share was $0.06.

Turning to the balance sheet, we exited the quarter with $273.4 million in cash, cash equivalents, and short-term investments with no debt. This includes proceeds from our IPO of about $216 million. During the quarter, we generated cash from operations of $5.3 million and have generated $32.5 million in cash from operations over the trailing 12 months. Our deferred revenue grew to $53.5 million from $48.3 million in the previous quarter, supported by strong billings.

While it is common practice to derive a calculated billings metric using total revenue plus change in deferred revenue as an indicator of future revenue growth, in our case that metric is not always a reliable indicator. There are three important reasons why. First, while most of our customers are billed annually, some are billed quarterly, including some of our largest customers. Second, a proportion of new business in a given quarter attributable to add-on orders varies significantly. As I mentioned earlier, add-on orders are coterminous with the customer's current renewal date. If the proportion of add-on orders in a given quarter is comparatively high, or the average stub period particularly short, the calculated billings number in that quarter will be lower.

A third point is that there is billings seasonality in our renewals across our customer base. Currently, in each of the first and second fiscal quarters, approximately 25% of our subscription revenue base is billed. Third quarter is slightly lower than 25%, and fourth quarter is slightly higher than 25%. This breakdown could change over time.

Let me wrap up by sharing our outlook for our fiscal fourth quarter. On the top line we expect revenue in the range of $57 million to $58 million, which would imply 43% to 46% growth year over year. This also implies total revenue for FY14 of approximately $204 million to $205 million, which would represent 58% to 59% growth from FY13. On the bottom line, we expect non-GAAP net income per share between $0.05 and $0.06. When we report our fourth quarter results, we will provide revenue and net income per share guidance for FY15.

In summary, we are very happy with the results this quarter. In the future, we will continue to invest in our business to drive rapid subscription growth as we take advantage of the large opportunity in front of us. With that, let me thank you all for joining us on the call, and I will now turn it back to the operator for questions.

(Operator instructions)

And our first question will come from Jennifer Lowe of Morgan Stanley.

Great. Thank you. First I want to ask about Vault, and it was great to hear a couple of the wins that you've had there. And what was notable to me is that it sounded like both of those were on the R&D side of the house with the MedComms and the ETMF, and I think historically we thought about Vault seeing the greatest adoption on the commercial side of the house.

Can you talk a little bit what you're seeing in R&D with Vault? Are you starting to see more momentum there? Was it coincidental that those were the two wins you called out, or are you really starting to see a pick-up in momentum in the R&D organization as well?

Thanks, Jen, that's a good question. And actually, your first question is great there, about the MedComms because that is an area that some customers in their internal areas consider in the R&D side, and some customers consider in the commercial side.

So we actually, as do probably the majority of customers, consider MedComm in the commercial side. So MedComms we consider in the commercial side and ETMF in the R&D side. And we are seeing good pick-up in Vault across the board.

We started our first product was in the commercial side with the promotional materials management, that was roughly two years ago where it became GA, and then over -- in the last 15 months we have introduced products on the R&D side with ETMF, with quality docs, with systems submissions, and also the Vault platform. So at a high level, what we are seeing for Vault, or what I'm enthused about, is we have customers.

We have over 50 customers. They are doing their implementations. We see a pattern of customers adding more users and more products and getting real value out of the system. So that's very encouraging. What I would say is, you know, Vault is -- it's reached its escape velocity.

We see that pattern. We know it's going to be a big product and we see that pattern, where it's going to go. We have implementations, we have a pipeline of seven figure, some seven-figure deals involved and that's, that have active opportunities.

So we are very happy about that, and then that's one of these leading indicators that you see and that's one of the things we saw in CRM also at the time. And then another really thing that we focus on is we've been working on Vault since the first line of code for over three years, and we are doing something unique.

We are building a content management suite of applications on our own content platform in the cloud for a highly regulated industry. Nobody has done that before and nobody is trying to do it.

So we feel like we have a three-year head start on anybody to do that. So there's some barriers to entry. And the market timing is right overall, because our customers, this is a very critical area for them and they want to become agile and move to the cloud. So we are really seeing this great activity, great early activity across the board for Vault.

Great. And Tim, just one for you. On the professional services side, last quarter the growth there slowed. It looked like it slowed a little further this quarter, and there are certainly a lot of factors at play there, some of it's the mix between up-sell and new business, some of it's the business you're doing with partners.

But was there anything notable in the quarter on either of those fronts, or something different? And how are you thinking about that trajectory on professional revenues going forward?

Jen, great question. On the professional services side, as you heard in my prepared remarks, we focus professional services for customer success, and quarter to quarter you will see some variability for a number of reasons. In fact, if you think about one of the primary reasons that we see, from a seasonality perspective, we are going to see that potentially in Q4 there's a number of holidays, as you know, that will take away some billable days for us, and we saw a little bit of a dip between Q3 and Q4 of last year. We have incorporated that thinking into the $57 million to $58 million of guidance which were very comfortable with, and we don't specifically guide on services revenue.

Great. Thank you.

And the next question comes from Nandan Amladi of Deutsche Bank.

Hi, good afternoon. Thanks for taking my question. Congratulations on your first quarter as a public company. First question is on actually your becoming public. How has customer perception changed, particularly as you address some of your international markets?

You talked about international revenue already being 40% of the total, but that's based on seats. How about on the truly international side where the companies are actually based outside the US?

Nandan, thank you for that. I think certainly going public has been good for us, and it's increased the visibility, but I don't think it's -- that hasn't translated into any particular change in behavior with our customers. And I would say international or the US, in either case it hasn't translated into any change in behavior. I think our customers appreciate it because as we become a more strategic partner, and as we get on our way to our mission of becoming their most strategic technology partner, that transparency of being in the public markets is only going to be a benefit to us.

Thank you. And a quick follow-up. On the add-ons, I know we've talked about this during the past few years. How is the trajectory trending now over the last quarter or so, with specifically the CRM add-ons? That's been a source of a lot of questions from investors.

Matt, why don't you take that one.

Sure. Hi, Nandan. So the two CRM add-ons are closed-loop marketing, and this is something that generally almost all of our customers are using in one way or another across different geographies. The product is about 2.5 years old.

We continue to see it generally purchased along with the initial CRM projects now, where initially it was something that was people adding onto an existing CRM. Now we see it more and more as just part of the base of starting a project, and that's what we would expect. The attach rate of that product is right around two-thirds. So two-thirds of our CRM users are also using Veeva CLM, which was the first add-on.

The second add-on is approved e-mail. This is a product, this is something that really didn't exist before, the ability for sales reps to send compliant e-mails to physicians and other customers, and guarantee that they are going to get the right version of the right content because of the integration that the Veeva CRM product has with Veeva Vault. It's a unique product. It's only been out for a couple of quarters.

We've signed our first few customers. Peter referenced more than a 1,000-user deal, and the statistics are actually quite shocking.

Where we all know normal e-mail open rates are in the 0% to 2% range. What our customers, two of them have reported back to us, one in Europe and one in the US, is open rates in the 30% to 38% range, and it's just been a remarkable success for them so far.

So I think we are tracking as we thought. The product is having the impact that we were hoping that it would have on the efficiency and the productivity of our end users. And so we think that over time the majority of our users will end up using approved e-mail also.

Thank you.

And the next question is from Brendan Barnicle of Pacific Crest Securities.

Thanks so much. Peter, in your comments you were reminding us of the low penetration rate that you have at some of these big customers and the big opportunity that remains there. Is there any way of giving us a sense of what your average penetration is within the customer base, of that sort of -- the kind of global 500 pharma, the big pharma opportunities?

Matt, you want to take that in terms of penetration into CRM?

Sure. Hello, Brendan. So we talked about penetration. Let's define the base CRM product is the way that we would talk about it, because it gets confusing if you talk about add-ons and all together.

So for the base CRM product, when we think about the high end of the market, you mentioned 500 companies. We measure and track kind of the top 50 pharma companies. So if you look across the top 50 global pharma companies at all of their pharmaceutical sales reps, we've penetrated roughly one-third of those users.

And this is great because with successful projects we are able to expand, not only to the other two-thirds within that market, but then into all of the CRM add-ons. And we've already started to see a lot of opportunity to expand beyond CRM with the Vault and network product lines, and that's really based on the customer success of those first projects.

Great. Peter, you guys have a long ongoing relationship with salesforce. You mentioned the salesforce platform. If for some reason you decided you wanted to move to another platform at some point, or something changed in the relationship with salesforce, how difficult is that transition on that CRM product?

Okay. The salesforce.com platform, and just to add to Matt's answer there, one of the great things about -- it's a great thing when we penetrate in with the base CRM product, because we get the customer success there and the word of Veeva there, and it's really -- it's part of our strategy to get in with a product, customer success, and then further products.

But now about the salesforce.com platform. So we have a great relationship with salesforce.com. We are their preferred partner for the global life sciences industries, things are going well.

And actually at Dreamforce this year, you could really see the momentum at salesforce of their platform business, and of people, Veeva and others, building specific applications on the platform. And this is a key part of their strategy.

So the nice thing is, it's a win-win relationship for us and salesforce.com. It aligns with their strategy. Now, as far as, we don't plan to re-platform.

That's not in our customers' best interests, our best interests, or salesforce.com's best interests. But to answer your question, could Veeva re-platform if we needed to? Absolutely we could.

I have been doing platforming for a long time, and we have platforms for other products. We could, but we absolutely don't think that's in anybody's best interest.

Great. And then lastly, Tim, just one for you on professional services. Obviously you mentioned the de-emphasis there, but do you guys feel -- you said you built out the ecosystem.

Do you have an adequate ecosystem to meet the demand for all the new bookings that you're seeing? We have seen several SaaS companies this year that have sort of run into some issues not having adequate support for the new deals.

Yes. Hello, Brendan, how are you? I think it's a good question. For the CRM product, I do believe that we have a very strong ecosystem, not only of the three partners that I specifically named in my remarks, but also a number of more regional players where we have hundreds of trained folks in Veeva from a CRM perspective. I think that will grow over time on the Vault and Network side, but I do not see that being an issue to our potential growth or our ability to grow.

Great. Thanks, guys.

And our next question is from Richard Davis of Canaccord.

Thanks. Maybe taking up a little bit of an ancillary question, and also Brendan's comments. So you talked about strategic relationships with leading pharma firms, and in my experience when companies talk about those kind of evolutions it's also a time when the firm's salespeople kind of begin to sell higher in the organization. Can you talk about how you're managing this evolution in your sales effort and staff and how you see that playing out? Thanks.

All right, Richard. Yes, the strategic relationship is a great question. I think when you deliver more value into a customer, more product lines, more products, more divisions, more geography, that's really how you become strategic.

As you deliver more value and as they see, the customer sees the potential of you to deliver even more value. Now, with that comes many different points of contact across divisions, products, many different -- more contact points into Veeva, and there becomes a need to coordinate it.

Now, something we have always done, because we have had our field force in the different regions and we have our field force, our sales force also split by commercial products and R&D product. So we have always needed to coordinate, and I would say the changes going forward will be more formalization of a global account manager-type role. Now, nothing abrupt or radical.

I think that's a gradual change you get into. And in fact it started with us as soon as we started going internationally. But I think you will just see a gradual change of more of a specialization in terms of global account managers, regional managers, product line-specific customer support people, that type of thing in order to manage effectively the global relationship. And I think in this area our customers have been great because they give us feedback.

They tell us how they want us to involve. They often explain to us what of their vendors do this well, what don't do well. They give us clues. So if we listen enough, we can really excel in this area, and that's what we try to do.

The customer success being the number one value is really a real thing. So when we get these clues, we tend to try to act on them, and in some cases may try out experiments, and to see what works and refine from there. So it's a -- I would view it as a process that we will be going through over the next 10 years, really.

And Richard, this is Tim. Just to quickly add to that. As Peter talked about, as our customers use more of our products, we are gaining more traction. But the other thing that we have, which is a strength of Veeva's, is we have a strong depth of experience in our sales organization selling into this industry. On average, our sales folks are 10 to 15 years experienced into selling in this industry.

Got it. That's helpful. Appreciate that. Thank you very much.

And our next question will come from Tom Roderick of Stifel.

Hi, guys. Good afternoon. Wanted to take a step back up here. Maybe ask a high level question. One we get a lot, I'm sure you get a lot, is the question about market penetration.

Can you give us a sense, if we think about the global opportunity from a sales rep perspective on the sales and marketing side. How many reps do you think about as being addressable? And how should we think about where the Company is today penetrated from a US standpoint, global standpoint? Ultimately trying to get a feel for where could market share go through your solutions longer term? Thanks.

Matt, do you want to take that one?

Sure. Hello, Tom. Yes, so I talked a bit in terms of the top 50 pharma, and we are roughly one-third penetrated there. If you look globally, there's about 450,000 pharmaceutical sales reps, animal health sales reps, and consumer health sales reps. And as I said, I think I said before, the number has been pretty static, actually, over the past five years.

It's shifted around a bit. You will see announcements of layoffs in one country or one company, but there's also lots of announcements that you probably don't see because they are not as public of companies getting a new drug on the market and increasing.

So that 450,000 has actually stayed about constant over the past four or five years. And so we have penetrated roughly about one-third of them with just the base product. And so then you ask kind of so where is the opportunity? So obvious opportunity is to continue.

There's another two-thirds of those sales reps, roughly, that we can penetrate with the base product. But CRM is one of about 20 different applications that pharmaceutical and animal health and consumer health sales reps use on a daily basis or a weekly basis.

So we've already picked off kind of two of those, what we call CRM add-ons, but these are not insignificant development efforts. These are 6- to 9-, even 12-month development efforts to replace a significant application that's controlling or managing an important business process, whether it be something around call activity, or especially around compliance or reporting or any of these things.

And so over time we will -- we do have plans to add more CRM add-ons. And the larger the installed base, the larger of an opportunity we have for these add-on products.

And then I'll also say, I mentioned earlier approved e-mail. This was something that really didn't exist before. Sometimes we will replace things that they have an existing client/server system for that's deployed to all the users, and it's kind of traditional, replacing a legacy client/server system.

But as the market share gets high and as the industry cloud model really starts to kick in with integrated products and data being created, there are going to be opportunities to do things that our customers aren't even thinking about yet. So that's something that keeps us excited, and we are always going to be looking out for what's coming next.

Great. Thanks. One quick follow-up for me. Tim, maybe I could throw this one at you. I've got a few questions about professional services. Can you give us a sense as to how big your professional services division is today, and what sort of hiring plans you have laid out for the immediate future, and maybe thinking about the next 12 months?

At a high level for professional services, and I'll let Tim answer the specifics on the hiring plans and things, but a high level for professional services, we will keep a pulse on that, which we can do and we will hire to what we need to in professional services, depending on the demand of the customers. That's a high level answer there. Tim, do you have any more color on specifics and headcount?

Yes. So we have seen some growth this year, Tom, and most of that growth has been towards some of the newer product categories like Vault and Network as we are building out capacity to be able to manage that growth going forward. And as I said earlier, we will also work with our key strategic partners and regional partners to build that ecosystem.

In general, we've managed the demand. We have pretty good visibility into demand. Oftentimes we have a quite strategic relationship with the customer. So many times we may know 12 months in advance sometime about a project starting.

It's part of a plan, a multi-year plan you put together. So I think this would be more -- we will be more controlled in this area rather than somebody who doesn't have as much lead time with their customers.

Great. Thank you guys. Appreciate the help.

Next we have a question from Jason Maynard of Wells Fargo.

Hello, guys. I actually have two questions. First maybe on the Vault product line. What have you guys seen competitively, at least in terms of customers' willingness to start to make the move? And I'm curious if you think that this phase, if you will, of customer adoption could potentially grow faster, given the success that they've had with, obviously with your CRM products?

Jason, in terms of competitive areas, there are a lot of similarities with CRM, in that we are replacing these legacy client/server systems in the CRM area. We had competition from Oracle, from [sedgeting].In Vault area, it's often SharePoint and Documentum, and the different application layers built on those platforms.

Now, these Vault applications, Vault is a big product line. We think at least as big as CRM, and when the Vault area, if we just take one of the applications, let's say the ETMF application, that's sold into the clinical area, clinical operations more specifically of life sciences companies.

They wouldn't really consider so much the success of the CRM application because that's in a completely different area. Now, however, they would consider the validity of the Veeva Company and the strong financial strength. So they would consider that.

I think Vault will track very similarly in CRM. We have to win the business of the different applications. We have to get the small pilot successful and happy. We have to watch them grow. And then at some point it reaches a tipping point. Vault is a journey.

We have to work hard on this week, this month, this quarter, this year, and over the long term, many years. There will be no easy way to have growth in Vault.

Okay. And the other question I have is around network, and the idea of master data management has been around for a long time and has been an extremely difficult problem to solve. And as you move to what I'll call, I guess, a data cloud model, can you maybe talk about what you think the ROI, hard dollar ROI savings are for this product line and where you think that comes from? Whether you want to measure it in terms of reducing redundant labor, bad information, you name it in terms of the litany of costs that are associated with this issue.

I'll address that, the cost. The costs are varied in multiple areas of the life sciences company. However, you can add them up.

A life sciences company would know exactly the amount of money they spend on data in general. They will know that, and it's large.

The amount of money they spend on data in general is oftentimes more than CRM, right? So it's large. And then they have software and servers and things in data stewardships.

So we don't have the exact number there, but it's a large amount of data. But the reason why they would do this is not about cost saving.

It's about driving more sales, because when you think about it, the pharmaceutical company, biotech companies who can spend billions of dollars each per year promoting their products, they are doing it with a very substandard view of their customers. So they could be wasting significant percentages of their resources and misapplying significant percentages of their resources.

So that would be the real driver. In some cases there will be a specific compliance requirement that will drive something immediately in the short term, if they have a regulatory, compliance requirement in a particular country and they don't have a clean list of customers. That will drive something immediate, but the bigger picture is about the top -- it's about using the field force more effectively in a multi-channel approach, which requires a clean view of your customer.

Okay. This concludes our question-and-answer session. I would like to turn the conference back over to Peter Gassner for any closing remarks.

Thank you, and thanks to our employees for all your hard work and allowing us to have a great quarter here, and to our customers for your partnership. That's certainly a huge part of our great results, and what makes it enjoyable for us, and to our investors that are on the call today, and all investors for your partnership and your support of Veeva. Thanks, everyone.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.