Veeva Systems Inc (VEEV) 2016 Q1 法說會逐字稿

Good afternoon. My name is Eric, and I will be your conference operator today. At this time, I would like to welcome everyone to the Veeva Systems' FY16 first-quarter results conference call.

(Operator Instructions)

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

Thanks, Eric. Good afternoon, and welcome to Veeva's FY16 first-quarter earnings call for the quarter ending April 30, 2015. 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-K, which is available on the Company's website at Veeva.com under the investor section and on the SEC's website at SEC.gov.

Forward-looking statements made during the call are being made as of today, May 28, 2015. If this call is replayed or viewed after today, the information presented during the call may not contain current or accurate information.

Veeva disclaims any obligation to update or revise any forward-looking statements. We will provide guidance on today's call, but will not provide any further guidance or updates on our performance during the quarter, unless we do so in a public forum.

On the call we will also discuss certain non-GAAP metrics that we believe aid in the understanding of our financial results. A reconciliation to comparable GAAP metrics can be found in today's earnings release, which is available on our website and as an exhibit to the Form 8-K filed with the SEC just before this call. With that, thank you for joining us. And I will turn it over to Peter.

Thank you, Rick. I'm pleased report that we were able to deliver another quarter of strong growth and profitability with results above our guidance. Revenue in the quarter grew 35% to nearly $90 million and our non-GAAP operating margins increased to more than 29%.

It's been a great start to the year with major new customers, expanded relationships with existing customers and a growing set of cloud products for the industry, which positions us well for continued strong growth. Customer success and the innovation we are delivering across our product portfolio is driving rising demand for Veeva in the markets we currently serve and in new areas.

A reflection of our growing importance in the industry is the IDC Life Sciences Spending Survey released this month. Industry leaders were asked which vendors they plan to spend money with in 2015. Veeva increased its position again this year, and is now one of the top three software vendors for planned investments, along with Oracle and SAP.

This positive momentum is evident when I meet with our customers. Companies plan to expand their use of Veeva in a broad range of areas and they want us to do even more. With the consistent track record of success with our products, they would like Veeva to help them solve more of their industry-specific challenges.

We are making great progress on building our industry cloud for life sciences. We are executing well on our path to market leadership in every major market we've entered. Customers want to move away from legacy systems to the cloud, and we have the industry-specific solutions to get them there.

It is significant that Veeva is the only cloud provider with leading solutions across the R&D, medical and commercial areas. Veeva is becoming very strategic to life sciences. Our cloud technologies are helping to move the industry forward.

I'm also excited to share that we are gearing up for our Commercial Summit in a few weeks. It's grown to become one of the largest commercial events for life sciences worldwide. It's a great forum for us to showcase new products and customer success which drives pipeline, helps advance opportunities and is an important forum for knowledge and best practice sharing.

Over the course of the last seven years, our Commercial Summit has grown from a sales force automation conference to an event now focused on a broad set of commercial and medical functions. We have a record number of registrations for this year's event. It will be more wide-ranging than ever, with new tracks in areas like data, marketing and medical.

Shifting back to highlights of Q1. We continue to see strong results across our CRM business. Our leadership position in core sales force automation is driving further success with our growing list of additional CRM products and major new wins.

Our win this quarter with GSK, one of the world's leading research-based pharmaceutical and healthcare companies, is a great example. GSK selected Veeva to be their global multichannel CRM partner, and is expected to roll out globally over the next few years. Having one of the leading pharmas select us not only for our core CRM for face-to-face sales force automation, but at the same time make a commitment to multichannel is a big move.

We saw many regional and divisional expansion deals for core SFA in this quarter, as well as more customers who are deploying their first Veeva CRM licenses. We continued to see good momentum with Veeva-approved e-mail.

Although Veeva Events Management and Veeva Align are not yet generally available, we see a growing pipeline of interested customers and are getting good feedback from our early-adopter program. With the upcoming launch of Veeva Align and Veeva Events Management, we will have five add-on products to build on our success and leading market share in core CRM for salesforce automation.

We estimate we've penetrated nearly 15% of the overall $2 billion CRM market, and have a long tail of opportunity in front of us with both the core SFA product and CRM add-ons. In addition to the traction we are seeing in multichannel CRM, we're also seeing further success with commercial cloud as large companies expand their use of Veeva to data, master data management and content management.

We are also seeing an interesting trend with companies facing their first product launches who need a complete commercial foundation to support sales and marketing, and are adopting the full Veeva commercial cloud. Take Medac, for example. They started from a blank slate, and in just four months were ready for launch with customer data, customer master, content management and multichannel CRM from Veeva.

In content management, with our Vault product line we saw continued strong momentum with our existing products and expanded our market opportunity with newly announced products. Q1 was a record quarter for Vault in terms of new business, and the total number of Vault customers has doubled since Q1 of last year.

The rapid market adoption and expansion of Vault has been remarkable. To give you a sense, over the past year we have tripled user count and increased the number of documents stored sixfold.

Even with this increased usage, system performance for Vault is still outstanding. In fact, the Vault system performance is better today than it was 12 months ago. Congratulations to the Vault product team on these significant accomplishments.

With the new top 20 Vault eTMF win in Q1, 5 of the top 20 pharmas have selected Vault eTMF to manage their clinical trials' documents globally. These global rollouts will happen over the next year or two.

In total, more than 50 life sciences organizations are moving to Veeva Vault eTMF. Vault is now the emerging industry standard for eTMF because it is simply the best product on the market and offers the fastest time to value.

We see tremendous opportunity in content management for all our Vault applications, as life sciences companies look to replace legacy client/server applications, custom development and manual processes. We remain focused on becoming the leader in content management, and are very well-positioned with a suite of industry-specific applications in the cloud.

We also announced two new Vault products, Vault Registrations and Vault Submissions Archives with planned availability in early 2016. They will be integrated with our currently available Vault Submissions products to allow us to deliver a full regulatory information management, or RIM, suite.

Vault RIM will be the first integrated cloud suite to help companies manage the product submission and registration process with regulatory agencies and affiliates globally. A large life sciences company can have upwards of 400,000 product registrations around the world for different products, indications, packages and formulations.

Typically in every region they rely upon multiple tools for each area of the RIM process. This is a major new area where we can have great impact with a single integrated system globally. Increasing efficiency in RIM means that companies can speed time to market for new drugs, and better meet new reporting regulations such as Europe's upcoming 2016 ISO IDMP reporting deadline.

Turning to the revenue opportunities for Vault, we are increasingly confident that the revenue opportunity for Vault is as large as CRM. Four years after our first Vault product was made available to early adopters, the trajectory of Vault revenue is similar to what we saw in CRM at the same stage.

We also now have concrete examples within top 20 pharma where Veeva Vault at full deployment will likely have a revenue footprint similar to Veeva CRM at full deployment. Looking at the Vault market in progress, the many different angles, we continue to be encouraged.

We saw substantial wins in the customer master software space with Veeva Network as well in Q1. We signed a new deal with a top 20 pharma company. We also saw our first single instance multicountry implementation go live with another top 20 pharma. We've tripled the number of Veeva Network customers year over year.

Finally, it was a great quarter for our customer data business fueled by the traction we are seeing with Veeva OpenData, which is our offering in the customer reference data market. We've expanded our growing data business to more countries, and we recently announced an entirely new approach to customer data: one that is open, easy and global. We have branded this OpenData.

We've disrupted the CRM and content management markets with a new approach. We believe we have the same opportunity for disruption in data.

The data market is hampered by restrictive three-party contracts, lack of innovation, complicated pricing and inconsistent quality around the world. Our solution is free of these limitations. The pricing model is simple and standard around the globe.

We also have an innovative partnership program that makes it easy for our customers to get products and services that are complementary to OpenData. In our first quarter we signed up 12 partners to our OpenData partnership program. The industry response to OpenData has been overwhelmingly positive, and we are already seeing the impact to our business and pipeline.

Our entry into the KOL Data market is also off to a great start after the completion of the Qforma CrowdLink acquisition we closed in the quarter. The solution identifies and delivers in-depth profiles for all relevant key opinion leaders and provides targeted engagement plans to help life-sciences companies drive more successful product launches.

This KOL Data and service offering brings us into the product launch area in both the medical and marketing divisions in a new way. Customer reception to our entry into the KOL solutions market has been strong, and we are seeing an increased pipeline of KOL business.

We also recently welcomed Alan Mateo as our newly appointed Executive Vice President of global sales. Alan is a great addition to our leadership team. Having held sales leadership positions at PeopleSoft and Medidata, Alan brings more than 30 years of experience in enterprise software and deep life-sciences industry expertise. He knows how to build and lead global enterprise sales teams. Alan will help us continue our strategic evolution and develop even more meaningful relationships with our customers.

So to wrap it up, I'm happy to report that our presence in the market continues to grow. By solving an increasing number of key challenges for our customers, our relationships are expanding and our customers are asking us to do more for them.

This is the core tenant of the industry cloud model that we have been executing on for some time now. Delivering success for customers brings further opportunities for deeper relationships. In doing so, we've been able to expand our leadership position in core SFA to include a growing list of strategic solutions.

Not only are we increasing our share of the SFA market, but our success there is generating momentum across multichannel CRM, content management, customer master software and data. This broad-based traction is driving our expectations for 20% growth in CRM subscription revenue and 100%-plus growth in non-CRM subscription revenue this year.

Given the goodwill we are generating and the fact that we've penetrated just a small portion of our overall market opportunities, I remain very excited about our ability to drive further growth in the coming years. With that, I'll turn it over to Tim.

Thanks, Peter. Q1 results were solid on both the top and bottom line. Total revenue was $89.9 million, up from $66.7 million one year ago, a 35% increase.

We saw out-performance from both subscription and services revenue, though the upside relative to total revenue guidance was more concentrated in the services line. Subscription revenue was up 42% to $68.9 million from $48.5 million last year. Subscription revenue growth was driven by strength across all of our product lines, while we continue to see an increasing portion of our subscription revenue coming from non-CRM products.

Our services business performed well in the quarter, driving revenue of $21 million, up 16% from $18.2 million year over year. These results were driven largely by growth in Vault's projects. Overall our subscription revenue continues to grow faster than our services revenue, increasing the recurring nature of our total revenue.

For the quarter the percentage mix was 77%/23% subscription versus services, a 4-point shift year over year to subscription. The geographic mix of revenue remained relatively stable at 56% from North America and 44% from outside North America, based upon the estimated location of users.

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 tables from our press release, which is posted on our website and filed with the SEC. In Q1 our subscription gross margin was 78%, an increase of almost 150 basis points from a year ago, driven by the continued growth of Vault, network and CRM add-ons, which have a slightly higher gross margin profile relative to our core SFA product.

This metric decline slightly on a sequential basis from Q4, which is a normal seasonal pattern as the first quarter of our fiscal year has three fewer days than the other three quarters. Because we recognize revenue daily, but virtually all of our expenses are recognize monthly, subscription gross margins in Q1 are typically lower than in the other three quarters.

Services gross margin for Q1 was 27%, almost identical to one year ago. Our total gross margin for Q1 was 56%, an increase of over 300 basis points from one year ago. This improvement was driven by the increased mix of subscription revenue and the rise in subscription gross margin.

Turning to operating expenses, total headcount grew by 71 in the quarter, finishing at 1,022. This was also up 33% from our headcount a year ago, which was 756.

Overall, operating expenses grew 28% from the same period last year. We continue to execute against our hiring plan to support our customer success and the growth of our business. Overall, our operating margin of 29% in the first quarter was up 5 points from 24% in the prior-year period, driven by an improving gross margin and strong revenue growth over the last year.

Net income for the quarter was $17.1 million compared to $10.4 million last year. Our non-GAAP effective tax rate at 36.6% is roughly in line with what we expect going forward. Our fully diluted net income per share was $0.12 compared to $0.07 for the same quarter last year.

Before turning to the balance sheet, I'd like to touch on FX. As we've discussed on previous calls, we typically bill about 80% in US dollars, 10% in euros and the rest in other currencies. For Q1, our revenue was impacted by approximately $1.6 million due to changes in FX from the same period last year, consistent with our prior expectations.

Assuming current rates remain static, we expect the impact to be $2 million to $2.5 million on revenue in Q2 and roughly $6 million to $7 million for all of FY16, about $1 million higher than our prior expectations. On the other income and expense line of our P&L we recognized a benefit of almost $0.5 million related to FX, largely due to the softening of the US dollar in the last month of the quarter.

Turning to the balance sheet. Deferred revenue was $111 million compared to $113 million at the end of the fourth quarter. This resulted in calculated total billings of $88 million, which was up 19% year over year and above the expectations discussed in last quarter's call of $80 million to $85 million.

We do not believe that calculated billings is an accurate indicator of the growth of our business in any given period, and is not a metric that we use internally to evaluate the business. This is true in large part because of the variability in deferred revenue resulting from how we have chosen to structure our customer contracts.

In particular, the variation in billing terms of our customers, the coterminous treatment of add-on sales and shifts in the timing of renewal dates combine to make our calculated billings metric somewhat volatile and a poor reflection of the underlying momentum of the business. Moreover, changes in these factors related to one or two very large customers can significantly impact our calculated billings metric positively or negatively without impacting the trajectory of revenue growth.

However, we know that analysts and investors commonly track calculated billings in an attempt to better understand the underlying growth of SaaS companies. For this call, I'm going to spend some time to discuss this metric more deeply, which will further reinforce why it doesn't work as well for Veeva.

In the current fiscal year there are two primary factors that will impact the growth rates of our calculated billings metric, the dynamics of coterminous add-on orders and a shift in one large customers renewal date. Let me start with the coterminous orders.

Normally new business booked throughout the year comes from customers with a variety of renewal dates. As we discussed on the Q4 call, we booked an unusually large amount of new add-on business during FY15 from customers with annual billing terms in Q4 renewal dates.

In scenarios like those, we bill customers at their initial order date a coterminous sub-period order, and then a full-year renewal order in Q4. For example, if a customer with annual billing terms and a December renewal date purchased additional subscriptions from us in June, we would bill them once in June for the sub-period of 6 months and then again for a full 12 months in December. Thus the new order would generate 18 months of billing within our fiscal year, or 150% of the annual contract value of the new order.

Historically, $1 of new subscription annual contract value has typically generated [$0.07 to $0.80] of billings in the year in which the order was closed. However in FY15 we saw billings yields from new orders of over $1, primarily due to the dynamics of coterminous sub-period orders and subsequent renewals. This led to a higher calculated billings number in FY15. And creates a much more difficult compare for FY16 as we expect the amount of billings generated by new orders to return to a more normal level.

The second item that will impact calculated billings this fiscal year is a shift in the renewal date for one of our largest customers. On occasion our customers request that we adjust the renewal date of our contract to better match their budget cycles.

In Q4 of FY15 we agreed to move the renewal date for one of our largest customers from January into February. Because of the adjustment, the annual billings for an eight-figure contract which we billed in Q4 of FY15 will move out of FY16 entirely and into early FY17. This impacts the growth of our calculated billings metric in a meaningful way, even though there is no change to the level of customer commitment or the amount or timing of the revenue we will recognize from the contract.

To summarize, the new business we signed in FY15 yielded more billings than we would normally expect and a large customer renewal moved out of FY16. Based on these two factors, we expect growth in calculated billings of at least 5% in Q2, and approximately 15% for the full year. However, this is clearly not indicative of the underlying growth of the business.

We estimate that a more normalized calculated billings growth rate would be roughly 30% for FY16 if adjusted for these two items. This adjusted figure is consistent with the anticipated 30%-plus annual growth in subscription revenue this year. Let me reiterate that tracking calculated billings is not a good way to judge the health of our business due to some of the unique characteristics of our contracting practices.

Moving back to the balance sheet. We exited Q1 with $429 million in cash and short-term investments, up from $398 million at the end of Q4. This increase was a combination of very strong cash from operations partially offset by our recent acquisition and by CapEx related to our new headquarters building.

Accounts receivable dropped to $70 million from $93 million at the end of Q4. We had a record quarter for collections, which drove both the drop in AR and the strong operating cash flow of $42 million.

As I mentioned on the last call, our operating cash flows can be volatile quarter to quarter, so our cash flow performance is best evaluated on a last 12-month basis. Over the last 12 months, our cash flow from operations was $91.4 million, up 95% from the previous 12-month period.

Elsewhere on the cash flow statement you'll notice that our CapEx was $4.7 million. Most of that was related to the continued build-out of our new headquarters building.

On the last call I guided toward a total of $15 million in incremental CapEx related to this build-out, the balance of which I expect to see by the end of Q2. Our CapEx should return to a more normal run rate in Q3 and beyond.

The final item that I'll discuss is our recent acquisition. The KOL Data acquisition that we announced in our last call closed in the last month of Q1. We paid $10 million in cash for this business.

Because it closed late in the quarter, we recognized an immaterial amount of revenue for Q1. We currently anticipate a top-line contribution of more than $1 million for the rest of the year, all of which will be recognized as services revenue.

This amount isn't counted for in our updated guidance, which I'll now provide. For the second quarter, we expect revenue between $95 million and $96 million, non-GAAP operating income of $26.5 million to $27.5 million, and non-GAAP net income per share of $0.11 based on a fully diluted share count of approximately 145.8 million.

For the year we now expect revenue in the range of $393 million to $397 million. We continue to expect subscription revenue to grow over 30% for the full year. For FY16 we now anticipate non-GAAP operating income of $107 million to $111 million and non-GAAP net income per share of $0.45 to $0.46, based on a fully diluted share count of approximately 147 million.

Overall, I'm very pleased with our results from the quarter and I'm confident in our ability to continue executing against our vision. Thanks for joining us on the call today. And I'll turn it back to the operator for questions.

(Operator Instructions)

Tom Roderick with Stifel.

Let me hit the first question, just talk about Vault. Peter, I heard you say that it was a record quarter for new business at Vault. Seems like you're getting a lot of traction there. Another top 20 win. Congratulations on all that.

I'd love to hear a little bit more about what the dynamics are when you're going through some of these global displacements relative to the opportunities internally already at these big customers? Are we seeing displacements of big installed systems? Obviously, Documentum and share-points that are fit-the-bill there.

Is there greenfield opportunity for growth? How much of this is replacement, displacement growth and how much of it is new greenfield opportunities as they look at ways to utilize the cloud for document and content management?

Thanks, Tom. The dynamics I would say at this time -- of course, the dynamics evolve throughout its lifecycle as we move forward, of course they're going to change as we do different things. At this time, it's largely on the R&D side, it's largely the replacement of Documentum as the core content management system. And then the applications built on top of Documentum which may be built internally or provided from a third-party or a system integrator. That's largely what it is.

We are seeing some incremental greenfield in terms of some platform activity on the edges. So that's where people had a process that they didn't adequately automate and they're using Vault for that. The bulk of it is they had legacy client/server systems, largely Documentum-based, especially in the larger customers. They're replacing that with Vault because they want to move to the cloud.

Then I think you had given some numbers on the call just updating your thoughts on growth for Vault. Sorry that I missed these. Relative to record new business quarter for Vault, where do you shake out in thinking about the ability of that business to grow over 100% of subscription? And with what you saw in first quarter on services, how should we think about the contribution of Vault overall this quarter?

The highest level message on Vault is that we're seeing it track similar to CRM, and we have some consistent proof points on that, very specific proof points. One, tracking similar to CRM at the same stage of the lifecycle in terms of revenue. And the other one is then when we get into the specifics of a customer, large customer type of situation where we can see the clear path to Vault revenue being similar to CRM revenue.

I would say that's the most specific things. In terms of the numbers we've given, we've talked about non-CRM subscription revenue growing 100% for this year. And I think we have about 100% for this year, and I think we have a long room to grow from there with Vault. We're just in the early innings of Vault.

Okay. Great. Tim, a quick question for you. I was writing seriously in your comments on the cadence of the billings calculation for this year, and I think I caught 5% growth for the next quarter, 15% for the full year and 30% for next year.

Can you just go through the explanation again relative to the timing of an eight-figure renewal? I think I caught that that was something that happened last year that will get pushed out of this fiscal year and into the next year? When you talk about 30% growth looking out a year, does that include or exclude the -- that renewal itself?

Tom, let me make sure we have the same set of numbers. In my prepared remarks what I talked about was the calculated billings results if we did not normalize for anything, we are saying is going to be a little more than 5% in Q2 and a little more than 15% for the year.

If we normalize for the two factors that I talked about in those remarks, Tom, number one, you talked about which is the shift of a eight-figure renewal out of FY16 entirely. Number two was the unusually high amount of billings per $1 of new annual contract value in FY15, and sort of normalizing FY15 for that. Then our normalized billings growth for FY16, not for next year, for FY16, the year we're in, would be roughly 30%.

30%, okay. Okay. I think I got you. I'll jump back in the queue. Thank you.

Jason Maynard with Wells Fargo.

I have two questions. One, I appreciate the color on sort of the normalization around billings. As you guys understand with the subscription models we're all forced to use short-term billings effectively as a proxy for annual contract value bookings, and in essence the health of your business.

Maybe I can ask a more blunt question, which is, what do you guys think this business can grow the next couple of years from a roughly an ACV bookings perspective? That way we can strip away rev rec, we can strip away billings, and all this stuff that causes all of us financial wizards confusion as we listen to these earnings calls. I have a follow-up.

Jason, this is Tim. At this time we're not giving any future -- anything beyond FY16 revenue guidance. We do see, as Peter talked about in his prepared remarks, we do see the path to long-term sustainable growth.

We didn't quantify, nor are we planning to quantify it in this call. I will reiterate our guidance for FY16, which we are very happy with, which is the 30%, or north of 30% subscription revenue growth for the year that you heard on our fourth-quarter call and reiterated again today.

All right. I appreciate that. I tried. The follow-up, then, is really around headcount growth and looking at your non-GAAP operating margin, which is getting dangerously close to 30%.

With all of the new initiatives that you're looking at, or the potential around Vault and looking at network and maybe even things that you could do in other industries with these non-CRM products, is there any hold-back or difficulty in hiring? Are you guys staffing at a satisfactory level in your view, relative to this opportunity for some of these adjacencies?

Just how do you think about balancing near-term hiring against maybe your own potential to hire faster for some of these opportunities? Do you have the people operations in place that you guys can scale effectively to meet what sounds like great demand for some of these new products? Thanks.

Jason, this is Peter. Yes, I think we're scaling effectively. We're pleased with our hiring and our revenue growth.

In our industry cloud model, we have to pick the right products and go after the right products, and every product has it maturity cycle and we have to follow along with that. We will look to make investments this year in all areas. In the field, in the new products area.

But what we're really doing is setting up for long-term growth, well-positioned for long-term growth. We're planting seeds of products, and sometimes it's about doing the right thing. For instance, this KOL Data acquisition that we did, that was very strategic for us. It starts out small in size, but then we can really build it to the place where we want it. That's what we're doing in all areas of the business.

Vault, we started off more than four years ago and now look where it is today. Sometimes it's a matter of us just doing the right things. And also, I would have to say we do plan to run a profitable business. That's just part of the industry cloud model, as well.

Bhavan Suri with William Blair.

Two quick ones. One, you sort of had guided billings a little conservatively on the fourth quarter call about the first quarter, and obviously handily beat those. As you look at that 30%, just trying to understand what the level of conservatism is built into that normalized 30% rate, given what you've seen historically. Just trying to understand how conservative that is?

Bhavan, this is Tim. Thanks for the question. When we think about guidance, we guide, and in this case when we think about the analysis of the normalization of the calculated billings metric, we do it with the best information we have today.

I wouldn't want to throw an adjective at it to -- whether it's conservative or not. I think we are very thoughtful in our guidance, and it's with the best information we have at our disposal at this time.

Fair enough. Just a more fundamental question. We've talked about the CRM market a little bit.

You've had a couple of wins last year. Any update there in the large CROs, are you starting to see some expansions there off some of the Vault products?

This is Matt. The CRO market continues to be an important market for us. We've made so much progress in Vault on the clinical side with eTMF that is looking like it's becoming a standard.

One of the things that that creates is when CROs are competing for a big deal at a pharma company, the pharma companies are now asking, what is your level of experience with Vault? That is helping to drive some of the discussions we're having with the CROs.

I would say there's two things going on. The CROs that are using Vault today are having a lot of success and they're expanding their usage. And the usage within the sponsors, within the pharma companies, is driving incremental interest within the other CROs that are not yet using it.

Do you think this network effect that you might see between the CROs and the pharmas plays out amongst like the med devices and the pharmas and other constituents? Is there sort of this whole concept that we might standardize across multiple these adjacent verticals on some of the Vault product?

To a certain extent, yes. But in medical and in animal -- actually animal health, not so much. But in medical products, consumer products, there are different CROs, actually. The company that's the largest for medical products in the US, or the largest for medical products in China, generally is different.

I don't think that you can necessarily assume that success in pharma translates into these other segments of healthcare. I think they'll have their own dynamics.

Got it. Got it. Thanks for taking my question, guys.

Stan Zlotsky with Morgan Stanley.

Thanks for taking my question. A few very quick ones. All the billing changes that you guys discussed, did any of them impact any of the revenue recognition through FY16 by any chance?

No. Neither one of them, neither one of the two factors, Stan, that we talked about -- this is Tim, of course -- had an impact to our revenue recognition, or I would say, to the commitment from our customers in any of those cases. The short answer is no.

Okay. Great. Just maybe to put a finer point on what other people have tried to ask is, after Q1 how are you tracking to your goal of 100% growth within Vault? Are you on track, are you ahead, where are you?

To be clear, and Stan, this is Tim again, the guidance that we gave for the year for subscription revenue was around 20% for CRM and then north of 100% for non-CRM. Both are tracking well.

Okay. On operating margins, obviously very impressive. On 29% operating margins in Q1, and as we look to the rest of the year, you're expecting operating margins to decline slightly. Where are the incremental investments going, and why do you think operating margins would decline going forward, or at least for the rest of the year?

Incremental -- sorry, Stan, this is Peter. Incremental investments would really be across all areas. So in the field, actually across all geographies. And all of our product lines, both in CRM and CRM add-ons, in Vault, in OpenData and in networks.

Really, across all areas. And of course in G&A as we expand there. And in services as we increase our services capacity. It's really across all areas. As far as operating margins, Tim, do you want to take that one?

Stan, I think this is true for Q1, and we saw this in the quarters last year. The operating margin performance in any given quarter has typically been driven by the revenue out-performance, or the out-performance in operating margin. So that's one of the key drivers.

As Peter has talked about earlier, we are looking to continue to invest in the business, both for our customer success and for our future scale and growth. So those are the types of things that are inclusive in the guidance that we put into the call today.

Okay. Perfect. Last one for me. This one for Peter or Matt. With the hiring of Alan Mateo, what are his top priorities, top strategic priorities for the rest of this year? Thank you.

Stan, this is Peter. We brought in Alan to be our VP of Global Sales. His top priority in the beginning, of course, has been -- as any new EVP of Sales comes in, you've got to learn about your people, your teams. And where they are and your customers, you've got to ground yourself in the Company.

Beyond that, it's about putting in process in place. Because we're scaling more products, more customers, more revenue. We need our processes to mature.

And it's also about developing deeper relationships with our customers. It's about getting more efficient in our sales, being more effective in our sales team as we scale, as our relationships with our customers scale. Because that's really -- I put in my remarks one thing that I hope everybody tuned into.

We're becoming increasingly strategic to our customers because we have leading products, leading and very important products on the commercial side, but also leading and very important products with Vault on the R&D side. Now, we're the only vendor to have these things.

That creates a whole new dynamic, because commercial is one side of pharma and R&D is on the other side of pharma and it really kind of meets up at the CEO level. When you are a strategic vendor on both sides, you have to treat those relationships in a certain way. And that's what Alan is going to be evolving for us.

Thank you, guys.

Sterling Auty with JPMorgan.

We talked a lot about the timing of renewals, the coterminous and the move to the fourth quarter, et cetera. I guess I'm curious about how you would characterize the new contract bookings in the quarter, granted understand you have the big GSK win. How would you characterize the rest of that new contract bookings in the quarter relative to your expectation?

Sterling, this is Tim. Thanks for the question. I think this quarter was -- we were happy with the quarter in terms of our new business relative to the expectations. You heard us talk last year in a few cases, in a few quarters where we saw some accelerated business for, in some cases some material customers. And this was, I would characterize, as a more normal quarter, Sterling.

One thing I do want to make sure that we understand is you mentioned the GSK win. That is a win from a contract perspective. And as we discussed in the press release, I believe, that'll over the course of time, they'll fill the users out throughout the globe. That's not necessarily a material bookings piece in Q1. It'll happen over time.

Perfect. That was going to be the follow-on, all right. How do we think about how that then flows to revenue? Is it a slow trickle-in over two years, or does it become lumpy? It's kind of hard to tell at this point?

Sterling, this is Matt. What we've seen with the large global companies is that they've run these big global CRM programs. They've averaged every three to four years, they can complete them.

This one will be across more than 50 countries. And so we look at the licenses and the subscription revenue coming in kind of over a two- to three- or even four-year cycle in order to get to the full global rollout.

Got it. Tim, on the moving around in terms of the renewals, et cetera, how does that impact your collections cash flow and DSOs?

How does it impact our collections, cash flows and DSOs? It doesn't. The moving around that we're talking about, so when you say the moving around, I'm assuming what you mean is the movement of that eight-figure contract of the renewal. What we are saying there is we moved the billing of that out of FY16 into early FY17.

The bill will obviously trigger what the collections effort is and the ultimate DSOs. So I don't think the movement of the bill itself will impact either of those metrics. Obviously that will mean, since we're of billing them later we'll get the cash later. But that again is an okay trade-off for us, given the fact that this was driven by the customer's desire to line up their budget cycle with their renewal.

Okay. Thank you.

Brendan Barnicle with Pacific Crest Securities.

Following up on Sterling's question. Another way that I was looking at this is if I do the quick back-of-the-envelope on what you guys are suggesting about billings and what that might mean to deferred. My cash flow number comes -- operating cash flow number comes out flat to slightly down this year over last year. Is that the right way to be thinking about this?

We haven't guided on operating cash flow, Brendan, for FY16 versus FY15. I think if you were to take the pieces that we gave you in the prepared remarks, meaning an unusual amount of billings relative to new annual contract value in FY15 versus FY16, I think that would be -- and I never know if a put is positive and a take is negative, but let's assume that's the case. That would impact our FY16 billings, and therefore potentially operating cash flows slightly. But again, not something that we're specifically guiding on, Brendan.

Sure. Then if I think about the SFA business, that core CRM business, within that, what part is no longer SFA? Can you give us a breakdown between the SFA and then the new e-mail and add-on products there?

Hi, Brendan. This is Matt. I think the right way to think about the CRM business, and just to ground everyone. The addressable market for CRM is $2 billion. It's based on the number of sales reps globally, how much our customers spend to equip them with technology, and adjusted for different spend levels across geographies. As we approach a $300 million revenue run rate for the CRM business, we're approaching that 15% penetration of that $2 billion TAM.

The way I think about our penetration in that market is a combination of three things. There's the base SFA seats that you're asking about, where we have roughly 50% market share, or penetration. In the current add-on products, and I would include Align and Events of the current add-on products, we have less than 10% market penetration. For the future add-on products, we obviously have 0% penetration.

We have room to grow in all three of these areas. We're going to add more users. We're going to flow more of the current add-ons into the growing installed base. And over time we'll introduce more add-ons in the future.

What I was getting at, Matt, was within that CRM businesses is there a breakdown you can share of what's SFA versus what's add-ons right now?

In terms of our revenue, you mean?

Yes.

We haven't broken that out, but we have talked about the relative penetration rates of the different add-ons. I'll give you the color that I can on that.

The CLM, the first add-on that we had, is basically becoming pervasive. And we have 80% or so attach rate on the first add-on.

The second add-on, approved e-mail, we're at about 10% of the installed base. Engage is still early, and obviously with Events and Align we're still on the starting line.

Great. Tim, just one other point of clarification. Did you say that the $1 million from the acquisition is not in the full-year guidance right now?

No. It is. We talked about for the remainder of the year, Brendan, a little north of $1 million we expect from the acquisition, and that's in professional services if you are putting that into your model.

Great.

So yes, it is in the guidance.

Thanks, guys.

Karl Keirstead with Deutsche Bank.

This is Jovan Matthews sitting in for Karl. Thanks for taking my question. Tim, my first question is for you. I had a question on the billings. You mentioned that in FY15 billings was boosted just by the nature of the coterminous agreements. If you were to adjust FY15 billings versus the reported 50% growth in total billings, what would that adjusted number have been?

When we go from this year's billings calculation from the 15% growth in 2016 to the adjusted 30%, can you give us the bridge on the two factors that you mentioned in terms of contribution from those two factors? Thanks.

In terms of the FY15, if we were to normalize the impact of those coterminous add-ons, it's probably about 10% to 12% off of the growth rate that we -- off of the actual growth rate calculated, Jovan, and so about 10% to 12%; meaning 10 to 12 percentage points, just to be clear. In terms of the two factors that drove the normalized billing calculation, it was probably close to 60% of it was driven by normalizing the FY15 billings for the coterminous add-ons and about 40% for the shift in the eight-figure renewal.

Got it. That's helpful. On my next question, it's regarding the new sales head, Alan Mateo. Are there any changes to the sale structure, existing sale structure that could be in the offing? Anything else you might want to tweak or optimize in the way we were going about sales right now?

This is Peter. I think there will be no changes in the sale structure in the short term. We have a structure that's working for us. I think these are things that we evaluate and we learn from over the year, and then we always have the start of our new sales year which starts fiscal year February 1. We will always evaluate and see what adjustments we make. But there are no interim adjustments that we're planning.

Got it. My last question is on the products. I think, Matt, you mentioned that you've hit a 15% penetration on the CRM product side on the $2 billion TAM. If I do the math, that's roughly a $300 million, and on a quarterly basis that's roughly $75 million. And if you do the $75 million on the quarterly revenues that you posted today, I think the non-CRM business was slightly less than 20% of total revenues. Was this the over 20% that you posted last quarter?

Is that just a function of maybe services revenues being moving around a bit? Anything there on the momentum of Vault versus CRM?

The short answer in terms of the non-CRM revenue for Q1, it's actually slightly above 20%. We said roughly 30% -- excuse me, roughly 15% of the $2 billion market share. So it's not exactly $300 million.

Got it. I had one last follow-up. I was looking at the [percent] services earnings, and it seems to have slowed down from the levels that we saw last quarter and last year to 16%. You mentioned that the revenue growth comes from the Vault engagements. Is there anything else that you're doing strategically by moving service revenues at a faster pace to partners, or anything else that caused a slight slowdown in the services revenue growth rates? Thanks.

In general, what we see is partners taking a little more things in the CRM area as the products matured, and that is working right and evolved since it's newer and we have multiple applications of Vault. We've been getting a higher percentage of that.

In terms of quarter to quarter, also Tim, maybe you can comment. There's also a smaller amount of days in the Q1.

I think that's the case, Jovan, and that has a bigger impact on subscription revenue, but it does impact services revenue for billable days. And the other thing that I would say in general is services revenue is going to be a bit lumpy. It's hard to draw a lot of conclusions in quarter-to-quarter sequential growth or even year-over-year growth. It will really depend upon the stack-up of the potential projects, most of which are T&M, some -- we have some fixed-T milestones that pop in a particular quarter or so. It's a little bit more of a lumpy business, Jovan, than clearly our subscription business.

Got it. Thank you.

Kirk Materne with Evercore ISI.

Hi. This is actually Patrick Falzon dialing in for Kirk. Congrats on the quarter, guys. Can you give us some idea of your success selling Vault outside the core CRM base this quarter?

Vault outside the core CRM base, meaning selling Vault into companies that don't have our core CRM?

Right.

We're doing well in that area, and that really comes in two flavors. Sometimes -- actually the most common flavor that comes in is, it might be a small customer that doesn't have a commercial field for us yet, they're a small biotech developing their products for the first time. Vault is very likely going to be their first product because they don't need our Veeva CRM yet.

In terms of the large and midsize companies, and many companies overall, we gave the breakdown of about 50% market share as for the base SFA when we measure by users. But if you measure that by companies, because of course we're not all deployed in all divisions and geographies at all companies, there's a high percentage of companies that have Veeva CRM somewhere.

In the companies where they have a commercial organization already, a lot of those folks have Veeva CRM and so we're selling Vault in on top. It's very common these days for -- as a company is emerging, Vault is definitely the first product they get from Veeva. Then CRM is probably the second product they get.

Thanks. That's really helpful.

That is all the time we have for questions at this time. I will turn the call back over to Peter Gassner.

Thanks, everyone, for your participation today. I'd like to take a moment to thank our employees, partners, and customers for their contribution to our success in Q1, and together we have an exciting opportunity ahead of us. Thank you, everyone.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.