Veeva Systems Inc (VEEV) 2016 Q2 法說會逐字稿

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

(Operator Instructions)

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

Thanks, Mike. Good afternoon, and welcome to Veeva's FY16 second-quarter earnings call for the quarter ending July 31, 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-Q, 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, August 27, 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 to report that Veeva delivered another quarter of strong growth and profitability, with results above our guidance. Revenue in the quarter was $98 million, up 30% from last year. And subscription revenue totaled $75 million, a 33% year-over-year increase. We posted a non-GAAP operating margin of 29%.

Our outlook for the second half and full fiscal year calls for the continued high growth and profitability that differentiates Veeva within the broader cloud software market. We have further extended our position as a leading cloud solutions provider to the global life sciences industry. This is a $1.6-trillion industry that spends heavily on technology and data. And that investment is increasing, as life sciences companies look to technology and better data to be more efficient, and gain a competitive advantage. We believe that our proven track record of customer success, continued innovation, and execution of our industry cloud strategy positions us well to win a large share of the markets we address over time.

The ecosystem around Veeva is also building, as we are emerging as the de facto standard in a number of our markets. Key providers are forging alliances with us, or are extending their existing partnerships. Today, we have nearly 50 technology and implementation partners, and more than 900 Veeva-trained consultants.

In addition, our agency partner program has grown to well over 300 creative agencies worldwide trained on Veeva. This larger community built around Veeva is important, as it provides additional reach, and many of these partners are viewed as key opinion leaders by the industry. We've deepened our long-standing partnerships with the broad-based players like Accenture and Deloitte.

Our relationships with the specialty providers that are solely focused on life sciences are also growing. For instance, in the quarter we expanded our relationship with HighPoint, a well-respected life sciences-focused IT consultancy with a long and successful track record of implementing master data management systems. HighPoint sees great opportunity in helping us to bring Veeva network to their customers, since it is the only master data management application developed exclusively for life sciences. We are already seeing this collaboration pay off in an opportunity with a top 20 pharma, which progressed this last quarter due in part to this alliance.

Additionally, we recently formed a strategic partnership with ZS Associates. As a 30-year advisor to the industry, ZS is a major force in life sciences on the commercial side, with over 3,000 employees worldwide. They have worked with more than 200 life sciences companies in 70 countries on their customer-facing strategies. ZS's Chairman delivered a keynote address at our commercial summit, and shared how we will be working together to accelerate the industry's move to a multi-channel CRM and provide a new approach to the data market with Veeva OpenData.

The Veeva Commercial Summit in June was our largest to date. Drawing more than 1,000 people, it's the biggest commercial event in the life sciences industry. To put it in context, the life sciences analysts from one of the leading firms told us: Everyone who is anyone in the industry is at this event; and if they aren't, they're falling behind. Commercial Summit is one of the most important events of the year for Veeva, and often sets the stage for many go-forward opportunities, as hundreds of customers formally and informally share their successes.

At Summit, we announced the general availability of Veeva CRM Events Management and Veeva Align, as well as a new capability in core CRM that leverages data science to recommend the next best actions in channels to field reps. It was the 2014 Commercial Summit where we unveiled Commercial Cloud, our full suite that includes customer data, customer master software, content management, and multi-channel CRM. Having data, content and customer interactions all together is incredibly powerful, and can have tremendous impact.

It was very positive to see, just a year later, the number of customers who are planning for the full Commercial Cloud. For example, one of our newer customers, a top 20 pharma company that just started on the path to standardize on our core CRM product, is now adding several new solutions within Commercial Cloud. They recognize that an integrated approach is crucial to their commercial success.

We're also seeing uptake in small- and medium-sized businesses, many of whom, before Commercial Cloud, have never had access to such a broad and complete suite. They see Commercial Cloud as critical to rapid commercialization, and the means to gain competitive advantage. With Veeva, in just a few months, they're ready with a commercial infrastructure needed to go to market. More than a dozen customers now have at least one solution from each of the four major product families that comprise Commercial Cloud.

Within Commercial Cloud, our multi-channel CRM product suite continues to ramp at a solid pace, and we remain on track to achieve an increase in CRM subscription revenue of roughly 20% for the year. Additional core salesforce automation suites, both within our existing customer base and new wins, is a growth engine we expect to continue for the coming years. And our expanding share in core salesforce automation provides a foundation for the upsell of add-on products, and the entry into entirely new areas. We believe the overall market for CRM add-on products is significant over the long term, and the majority of the multi-channel CRM market opportunity is still ahead of us.

As of Q2, more than 50 of our CRM customers have started the move toward multi-channel CRM, and are beginning with Approved Email as a way to more effectively reach healthcare providers. Approved Email was our second CRM add-on, after Veeva CLM, and I'm pleased to report we are seeing strong adoption. Two of the top 20 pharmas have standardized their largest US sales teams on Approved Email. Subscription revenue for this add-on has nearly tripled year over year, and we now have our first customer approaching seven figures in annual contract value.

Approved Email continues the trend we began with Veeva CLM of bringing to market high-value add-ons, which, in turn, drive high attach rates. Like CLM, we believe Approved Email will ultimately be utilized by the majority of our CRM users.

In Q2, we also announced the general availability of Veeva CRM Events Management and Veeva Align, which brings us to five substantial add-on products that will enable Veeva to deliver greater value to customers over time. Events Management and Align are showing promising early traction, with initial deals for each already signed, and pipeline that's as strong as we saw with Approved Email out of the gate. By moving these functions to Veeva, customers can eliminate many disparate and siloed solutions. And through the tight integration with core CRM, customers gain considerable agility, streamlined key business processes, and improved compliance. It has become clear that our broad industry cloud vision is winning in the life sciences industry.

The second major opportunity for Veeva in industry cloud is Vault. While it's early, Veeva Vault is on a path to becoming the standard for enterprise content management in life sciences. Regulatory pressures and aging systems are prompting customers to make a change, and Veeva has brought to market a suite of industry applications built on our cloud content management platform that is, by far, best in class. As a result, 30 of the top 50 pharmas have begun using Vault in some capacity. We have 170 Vault customers in total, and all have a very long runway remaining for additional Vault growth.

As we get further along with customers, and better understand the extent to which they want to utilize Vault, we have become increasingly bullish on the size of the Vault opportunity ahead of us. At our current annualized run rate of $75 million for the Vault business, we are approaching just 4% penetration within the $2-billion addressable market. We are just at the very early innings here.

Today, five deep applications and a robust cloud content management platform make up our Vault offering. The Vault applications span clinical, quality, regulatory, medical and marketing. And we have two more on the horizon for early next year as part of the Veeva RIM suite for regulatory information management.

As with CRM, customers often adopt a single Vault solution in a division or geography to start, then expand to additional divisions, geographies and functional areas after the initial project success. While no single large pharma has completely standardized on Vault for enterprise content management yet, some are already on that path. For example, we have a top 20 pharma customer in the early implementation phase with four of the five Vault applications, and they are considering a fifth. The rapid trajectory of Vault, its powerful business benefits, and our ability to scale with customers after their initial purchase, all combine to provide us with even greater confidence that the Vault opportunity is at least as large as our CRM opportunity, and the Vault solution set continues to grow.

The content management landscape in life sciences is predominantly one of legacy client server and homegrown systems, as well as paper and manual processes. We are now moving this to the cloud with a set of integrated best-in-class solutions. In the second quarter, we signed a major Vault eTMF win, our sixth top 20 pharma customer to choose Vault eTMF within the last 18 months. Vault eTMF will be an enterprise-wide standard, replacing their entire legacy document and stack, including the core Documentum Platform, the applications built on top of it, as well as its infrastructure and services. All will be replaced with Veeva Vault in the cloud.

Another of our key customers was so pleased with its initial Vault QualityDocs implementation, which was live and successful in just 12 weeks, that in Q2 they expanded their use of Vault QualityDocs across multiple areas of their manufacturing organization and their outsourced partners. The limitations of their legacy enterprise content management system made it difficult to access and use, slowed them down, and put them at some regulatory risk. With Veeva QualityDocs, they have streamlined their quality processes, strengthened compliance, and users can now easily [and find] and access documents. On the heels of this success, we have the opportunity to further grow the Vault footprint at this customer.

Overall, the pipeline for Vault has never been stronger, and we are looking forward to the upcoming Veeva R&D summit in November where we'll showcase the breadth of our offerings, and give customers and prospects a chance to learn from each other's successes in moving their content to the cloud with Veeva. We anticipate far greater numbers this year, and representation from decision-makers across R&D. The record attendance we see at Veeva Summits are an indication of our customers' success and the industry's need to migrate from legacy systems to the cloud. It also reflects an industry-wide recognition of the rapid innovation our industry cloud delivers.

Legacy and point solutions are also the norm today in the customer data market. Until Veeva Network, the only choices for master data management software were generic toolkits. Now with Veeva Network, customers can have a customer master application that's built specifically for life sciences.

For the customer data itself, depending upon the region, companies have had to either piece together customer information from multiple sources or contend with a restrictive legacy provider. Customer data that is open, easy to use, and increasingly global is the new imperative for the industry. And Veeva OpenData's new approach to customer data eliminates the complicated and prohibitive practices that have held the industry back.

In Q2 we launched Veeva OpenData in two additional European markets -- France and Italy -- bringing our global coverage to six countries. Even though it's just become available, we already have our first customer for data in both France and Italy. This follows an early trend we are seeing of customer interest, large and small, for OpenData just as soon as it's available. Many are interested in data from us, regionally or globally, as a better option than their historical country-by-country approach.

We are also building the Veeva OpenData ecosystem. We now have signed 20 partners to the Veeva OpenData partner program. We believe we have the right offerings to transform the data landscape, and are on the path to leadership in this market.

Overall, we delivered another great quarter -- above expectations. We continue to invest for the opportunity we see ahead, and to set the stage for strong future growth, expanding our solutions and the team. To that end, I'm pleased to note we had a record quarter of organic hiring, adding 100 employees in Q2.

Veeva is solving an increasing number of challenges faced by our customers, while delivering strong top-line results and solid margins. We are very well positioned for future growth as the clear industry cloud leader for life sciences. We have multiple vectors for expansion over the long term.

Our Vault opportunity is at least as big as CRM, and growing at over 100%, just as CRM did at this phase in its evolution. Our deeply integrated add-on products for multi-channel CRM are gaining early traction. We have made bold moves to disrupt business-as-usual in the master data management and customer data areas with Network and OpenData.

As the life sciences industry moves to the cloud to improve business performance, Veeva is recognized as the innovation leader and strategic partner of choice. For this reason, we believe we're well positioned to drive strong growth over the long term, and capitalize on the very large market opportunity that lies ahead.

With that, I'll turn it over to Tim.

Thanks, Peter.

Q2 was another solid quarter on both the top and bottom line. Total revenue was $98.1 million, up from $75.7 million one year ago, a 30% increase. We saw outperformance from both subscription and services revenue. Though similar to Q1, the upside relative to total revenue guidance was more concentrated in the services line.

Subscription revenue was up 33% to $75.3 million from $56.6 million last year. Each of our major product categories contributed to the strength of our subscription revenue growth. We believe we remain on track to generate subscription revenue growth of about 20% from our multi-channel CRM suite of products, and well north of 100% from our non-CRM products for the full fiscal year. Our services business performed well in the quarter, contributing revenue of $22.8 million, up 20% from $19.1 million year over year. These results were driven largely by growth in Vault implementations and accelerated CRM project ramps.

Overall, our subscription revenue continues to outpace our services revenue, increasing the recurring nature of our total revenue. For the quarter, the percentage mix was 77%/23% subscription versus services, a 2-point shift to subscription year over year. The geographic mix of revenue remained relatively stable at 55% from North America and 45% 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 Q2, our subscription gross margin was almost 79%, an increase of approximately 130 basis points from a year ago. This was 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 products.

Services gross margin for Q2 climbed to more than 31%, up from approximately 26% one year ago. Note that this metric benefited from a large milestone completion that was recognized in Q2, while nearly all the associated costs were incurred in previous periods. Otherwise, services gross margin would've been in the 20%s, which is the typical range associated with normal utilization rates of our services teams.

Our total gross margin for Q2 was almost 68%, an increase of over 3 percentage points from one year ago. This improvement was driven by the increased mix of subscription revenue, the continued rise in subscription gross margin, and the spike in services gross margin.

Moving down the P&L, operating expenses grew 35% from the same period last year. We had a great quarter attracting talent into our Organization, resulting in an ending headcount of 1,123. This was up 101 from the end of the prior quarter, and represented an increase of 38% on a year-over-year basis. This was a record hiring quarter for Veeva, and the additions were focused in three areas that drove long-term growth: R&D, as we continue to drive innovation in the life sciences industry; sales and marketing, as we continue to expand our resources to bring our growing product suite to the global market; and services, to ensure that our customers are successful with our solutions.

Overall, our operating margin of 29% in the second quarter was up 170 basis points from the prior-year period, driven by an improving gross margin, and slightly offset by continued targeted investment to support our long-term growth initiatives. Net income for the quarter was $18.2 million compared to $12.4 million last year. Our non-GAAP effective tax rate of 35.6% is roughly in line with last quarter, but at the lower end of the range that we expect going forward. Our fully diluted net income per share was $0.13 compared to $0.09 from 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. Consistent with our expectation shared on last quarter's call, our Q2 revenue was negatively impacted by approximately $2.4 million or 2% due to changes in FX from the same period last year. Assuming current rates remain static, we expect the headwind to be roughly $2 million on revenue in Q3 and roughly $7 million to $8 million for all of FY16, an increase of $1 million from our previous expectations.

Turning to the balance sheet, deferred revenue was $110 million at the end of the second quarter, compared to $111 million at the end of the first quarter. This resulted in total calculated billings of $96 million, which was up 12% year over year, and above the minimum 5% growth that we discussed on last quarter's call. Looking ahead to Q3, we expect year-over-year billings growth in roughly the same range as Q2, about 12%.

We recently had a large customer elect to realign the renewal date of a large order from Q3 to the rest of their business, which renews in Q1. This means that we will bill them for a five-month coterminous stub order in Q3, followed by the full 12-month renewal in Q1 of next year. As discussed on our last earnings call, this type of change has no impact on the timing of revenue recognition or the size of our ongoing customer commitment.

However, this particular realignment of renewal date will impact our calculated billings by about $6 million for the third quarter and for the full year. Thus, for the full year, we now expect our calculated billings to grow roughly 13% compared to our previously shared expectation of approximately 15%, with the vast majority of the delta being attributable to the realignment of renewal date for the customer I mentioned earlier.

It's equally important to note that there is no change to our view that normalized billings growth will be approximately 30% for the full year. This is another good illustration of why calculated billings is not necessarily 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.

Moving back to the balance sheet, we exited Q2 with $438 million in cash and short-term investments, up from $429 million at the end of Q1. This increase was due to a combination of solid cash from operations, partially offset by CapEx related to our new headquarters building.

Cash from operations came in at $15.2 million, slightly down from $16.6 million one year ago. This was driven by a tough billings compare and a large cash tax payment due to a smaller stock option exercise deduction to offset year-to-date taxable income. As we've said previously, 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 $89.8 million, up 60% from the previous 12-month period.

Elsewhere on the cash flow statement, you'll notice that our total CapEx was $9.8 million. The vast majority of that was related to the continued buildout of our new headquarters building. We're now moved into the new facility, and the buildout is substantially complete. However, because of the timing of completion, we now expect $4 million to $5 million of CapEx related to this project in Q3. Beginning in Q4, our CapEx should return to a more normal run rate going forward.

Turning to guidance for the third quarter, we expect revenue between $101.5 million and $103 million, non-GAAP operating income of $27.5 million to $28.5 million, and non-GAAP net income per share of $0.11 to $0.12 based on a fully diluted share count of approximately 145 million. For the year, we now expect revenue in the range of $395 million to $398 million, up from $393 million to $397 million, and including the negative FX impact that I noted earlier. We continue to expect subscription revenue to grow in excess of 30% for the full year. For FY16, we now anticipate non-GAAP operating income of $111 million to $113 million, up from $107 million to $111 million, while sustaining investments key to our growth. Finally, we expect non-GAAP net income per share of $0.47 to $0.48, up from $0.45 to $0.46, based on a fully diluted share count of approximately 145 million.

Overall, I'm very pleased with our Q2 financial results, and remain excited about the Company's long-term growth opportunity. Veeva's the innovation leader in driving meaningful customer success in the life sciences software industry. We believe the combination of our strong market position and industry cloud model will allow us to deliver a unique combination of long-term growth, coupled with strong profits and cash flow in the coming years.

Thank you for joining us today, and I will turn it back to the operator for questions.

(Operator Instructions)

Sterling Auty, JPMorgan.

Wanted to kick off in terms of the billings growth and the realignment. I know it's frustrating for you guys, but since it is a metric that is widely used, is there a sense in terms of where we are within the customer base in terms of the impact of this? In other words, are we passed the peak of it?

Is this something that we could continue to see via persistent headwind on the billings growth reported numbers in the next fiscal year? Or like I said, is the bulk of this behind us?

Sterling, this is Tim. Thanks for the question.

I don't know if I would characterize the bulk of it being behind us. I think what you're seeing and we've talked about it both in last quarter and this quarter. What we're seeing is some of our larger customers who are aligning their billings with us with more of their fiscal year.

I wouldn't say that that has been widespread across our customer base. Nor has it been something that we've heard from all of our customers either. I couldn't characterize it as behind us, we are well through it or that there's a lot in the future either. I think that's just a little more color for you.

Just a follow-up to that. In each of these situations, is this the customer coming back to you guys saying, hey listen we really want to realign it? How does this discussion, how does it even top up that this is a move that they want to make?

It can come from a number of different places, Sterling, in terms of that conversation. What we've seen, some pattern for a couple of these customers has been that alignment with their particular fiscal year. There's no real significant single pattern.

Again, this is not happening across many customers. It is just a few customers that happened to be fairly sizable in terms of their run rate with us.

Bhavan Suri, William Blair.

This is Al [Pertukin] in for Bhavan Suri. Can you hear me okay? Congrats on the quarter.

I had a question around the data opportunity. I understand you guys have a very large install base today and you have really expanded your data play with Veeva Network, OpenData and some recent data related acquisitions. I was wondering how we should think about this data opportunity and how it's going to play out over the next few years?

Hi, Al. This is Matt.

High level, we see the data opportunities together with the master data management software is about half the size of the CRM opportunity. So we think of it is as about a $1 billion opportunity. The data that we go after today is something that goes -- the reference data that we call OpenData now, is something that goes along with our CRM product or a competitor's CRM product basically all the time, everywhere in the world.

If you're going to run a pharmacy or end product, you need to understand who the physicians are and other healthcare providers and all of the places at which they practice. This is something that in a perfect world, this is 100% attach rate because our customers need to buy both the CRM software and Data. Hopefully both from the same provider.

So we see it as about $1 billion opportunity. We're very, very early. We have Data in six countries. We have dozens of countries to go.

The early signs are very positive that this is what customers are asking for. Not just because of the complexity of buying things from multiple providers and some of the restrictions that that can lead to. But because there hasn't really been a very innovative approach to creating this data and delivering it right in the hands of the sales reps when and where they need it.

And so there's been a lot of opportunity for innovation. We think that we're feeling that space and we think it's a very significant opportunity for us going forward.

I'll just finish with the KOL data coming from the acquisition that we closed last quarter. That is starting to come together. That also looks like a big opportunity and they'll be more along those lines to come in the coming quarters as we start to really commercialize that around the world.

Stan Zlotsky, Morgan Stanley.

A couple of quick questions for you. First one, Q2, very nice billings. As we think about the rest of the year, you've reiterated approximately 30% growth and billings for the rest of the year.

Are you incrementing more confident than a 30% number and is it also correct that you may be a little bit more comfortable in that number coming in above 30% also? And then I have a quick follow-up after that.

Stan, this is Tim. To be clear, what we talked about was the full-year actual billings number we think is going to be about 13%. But when you take out some of the factors that we talked about in last quarter's call and the recent factor we talked about in my prepared remarks in this call, we still are very confident that the normalized calculated billings number is roughly 30%.

I don't know if I would characterize us being more bullish now than we were last quarter. I think we are as confident.

A more general question. As you think about the growth of your Company, are there certain factors that are constraining your growth whether it be more product being brought to market, whether it be hiring more sales reps or maybe it's some kind of external factors?

This is Peter. We are really pretty pleased with our growth and our results this quarter. Growing subscription revenue growth for this quarter, 33%. Forecasting over 30% subscription revenue growth for the year. So we really pleased with that.

But if you look at the big picture and about our growth and how it comes, we're building this franchise in our industry cloud for life sciences. And you can see that in a few areas.

Our core CRM business, it's strong. We have happy customers and so then we're able to sell add-on products in there and we're growing that CRM business at about 20% this year. And we have a long way to go in CRM and the add-on products.

And then, we talked about Vault and that's a tremendous opportunity. That's a $2 billion opportunity there. We have a $75 million business. It's growing at 100%.

And we're really well-positioned for that opportunity. We are really the clear leader there with nobody else close and there's no question those customers will move from client server to the cloud. So that's really working out in our favor.

Then we have these early seeds that we've planted in Network and OpenData. Both combined, that's $1 billion market we've invested over the last couple of years and we are starting to see early traction.

I'm optimistic. We have the right products. Good pipeline of products. We have enthusiastic customers.

And then, to get to your question about hiring, et cetera. Yes, we are able to hire the right volume of great people to fuel our growth. Record hiring quarter this quarter.

And that's probably the thing that makes me the most optimistic. We are hiring great people. They're going to do great things. I think our future looks pretty bright.

Brendan Barnicle, Pacific Crest Securities

Tim, I wanted to follow-up on Sterling's question about these deals that the billing data is changing on. We haven't seen that with other SAS vendors even on big deals. So is there something about life sciences industry where customers are more cash sensitive, where they do this kind of shifting around because we haven't seen this before?

Brendan, I wouldn't say that it's specific to life sciences and you know these players as well as I do. I don't think cash is an issue for the largest of those customers in this industry.

I don't know what's specific about this industry that's driving it. I would say that there is a concentration as we talked about in the past with 70% plus of the revenue opportunity being with the largest customers in this industry. And that creates some big deals for us and when there are shifts like this, it has an impact, as we've articulated, in the billings number and sort of the billings guidance we've given.

So I wouldn't say it's an indication of a weakness in the market that we serve for sure. This is a $1.6 trillion industry and it's growing. And as you heard Peter talk about, it continues to drive a need industry cloud solutions to continue to drive its business. I wouldn't say there's anything specific that I can mention.

Matt, I don't mean to turn it over to you but do you have any follow-up questions? You've been in this industry longer than I have.

I can think of something that I think is potentially different. That is the high number of acquisitions that we've seen in this industry. We get asked all the time how that affects our Company. From a revenue and from a customer acquisition perspective, it's in pretty neutral.

But from this billings perspective, I was just working with a customer who has acquired three other Veeva customers. They use three different Veeva products and they had eight different renewal dates. So they're basically getting an invoice from Veeva almost every month.

So this Company after all these acquisitions, said hold on this is a big number, I want to be able to manage it better. Let's choose one date. Let's have that be our renewal date and let's sign stub orders for everything to get us there.

That has huge implications on the billings number but it's all positive for our business. It's a Company wanting to make it easier to do business with Veeva.

That's one thing that stuck out to me. I worked pretty closely with that customer to do it and of course, that's basically neutral to us. We are doing them a favor but it's one that we're happy to do as a partner in this industry.

Brendan, just to quickly add to Matt's point which was a very good one. That is just a timing of the billings. It is not reducing billings and it doesn't, as we have talked about, have any impact to the revenue we are recognizing or the size and quality of that customer commitment.

Understood. Matt, I had another follow-up around total addressable market. As you guys have been adding and introducing some of these new products, is $5 billion still the right tam for us to think about or if we see any increase from some of these new additions?

There are some small increases but we haven't gone back and recast the entire tam. I think what you'll see is continued announcements from us both in the data space and around content management with Vault that I think at some point we will probably recast. But we'll give you a sense of the relative sizes of these new things. I think it's still right to think of the opportunity we're going after as $5 billion or a little bit more.

Lastly, Matt, as you go to market on the networking product internationally, is that requiring some changes in go to market strategy or sales hires?

I wouldn't say it requires changes. The model that we see where software people can sell software and data people can sell data, that's sort of largely true inside and outside of the US.

As we've expanded, we add data specialists. People that know how to talk about data, sell data. And they work very closely with our existing software team.

So no, nothing really unusual there. It feels a lot like it felt when we started to scale up that team in the US.

Tom Roderick, Stifel.

Wanted to shift the discussion back to the CRM side. I guess one of the things that jumped out to me this quarter was the fairly dramatic improvement or increase on the Approved Email line. Really nice to see some real steep uptake in the traction on that product.

The question behind that is, as we've seen sort of a natural slowing or deceleration of the CRM business and now you have CLM and Approved Email as a second product contributing and two new products out, at what point, and maybe at a secular growth level, how do we think about where CRM balances out from a two, three year growth perspective? Is this a product that can still grow even with penetration in the space being what it is?

Can that still grow mid-teens if you look out two, three years? Is it slower than that? What are the drivers and inputs in how you think about that?

Matt, do you want to take that one?

Yes, Peter, I'll take it. Without providing specific guidance about beyond this year, we think that there's still plenty of room to grow here in both the base CRM and the add-ons. Let me give a little bit of color of where the growth is coming from now and how I think it will change.

This year's growth, this fiscal year is, even with this great success of Approved Email, the vast majority of the growth is still new seat adds. It's the base product maybe coming along with CLM and Approved Email. But the vast majority of the CRM growth this year is new seats. I think that will continue next year.

But coming into this year we were selling two add-ons. Going into next year, we'll have five. Events and Align are significant opportunities for us, Engage, all three of them. They're very early, but at some point next year, they're going to start to really drive some revenue as well.

So I think the shift in growth in CRM shifts a little bit towards the add-ons next year but I think that it's still the majority is new seat adds next year. So between the ability to continue to commercialize these five add-on products and even the ability to commercialize new ones over time, we still see a long runway of growth in the CRM market.

Great. Tim, let me shift the next question and ask you a little bit about margins. You guys have easily outpaced your expectations for the first half of the year. And yet, I also heard you say you hired a record number of people this quarter.

Is that signaling renewed effort or newer efforts perhaps on various Vault products or Network products that is a sort of sustained higher level of investment that we should expect for the coming quarters? Was the 100 plus people a bit more of a catch-up? How do we think about the pace of investment and particularly how you staff for that?

I guess I will take that one. This is Peter.

I don't think the quarter was any type of anomaly. I think we are stepping up our investment and that's really across all areas because the business is growing across R&D, sales and marketing and services.

We are making new products. We're improving existing products. That drives the growth in R&D, therefore, we have more products. We need more people to sell those products. We have more customer relationships to manage and that drives investment in sales and services.

I think it's best -- I could talk about a couple examples. We are investing in new applications in the regulatory area, the Vault regulatory area, with our RIM products. These are brand new products, brand new product team, got to increase the team, we need specialist to bring those to market, et cetera, so we have to invest there.

If you look at investment we're making in OpenData. That's a big investment around the globe. We update in six countries now but soon we'll have many more. So that takes investment.

And we tend to really focus our investments. I think it's going to continue at this good price. We tend to focus them. Also, we don't tend to waste money.

We invest the right amount. We move fast. We get results.

One example I can give is about OpenData in Europe. Our very first person for OpenData in Europe, we hired them 15 months ago. Today, we're selling data in three countries in Europe and we'll have the whole of Western Europe covered by the end of this year. We already have early customers, et cetera.

So we move pretty quickly and yes, we are in investment mode now as a Company. We have a good opportunities ahead.

Karl Keirstead, Deutsche Bank.

This is Jobin Mathew sitting in for Karl. Thanks for taking my question.

I wanted to focus on the Vault business. Clearly that's been the foundation for all the growth that you've seen. When you said the annualized revenue run rate of $75 million, what's the mix of software and services over there?

Also when I look at the customer count increases, I think on an annualized basis, I think you've grown your Vault customers by over 50%. Where are these new customers coming from?

Is it the top 50 Pharma or is it more smaller startups? What's the mix there? Thanks and I have a follow-up.

Let me start with the big picture and then I'll dive it down into details of that $75 million. The big picture, if you look at what's happening, in the content management space, it's very similar to CRM. Customers, they're stuck on client server, they need to move to the cloud because they have these slow systems, they are difficult to maintain, inflexible, can't be externalized, so they have to move things to the cloud. That's what's going on in content management. We were well-positioned because we have the products there and the successful early customers.

Color on the $75 million and the 100% growth rate, I think as you would expect most of that revenue is subscription revenue. But what's more interesting is most of that revenue is actually on the R&D side of Pharma. And that's incredibly fast progress in the R&D area which of course is the bigger area, the much bigger area, of content management in life sciences.

To give you some context, it was just two years ago that we sold our first $100,000 deal in R&D. So it's growing very fast. Thanks to Vault, now we're a provider -- the only provider, that can provide things across R&D and commercial.

In terms of the top 50, where does this revenue come from, I don't have the exact breakdown there. But it comes in different manners.

Sometimes with a small biotech, 100 people, 50 people, we will be their first application. Basically, hey, let's move all of our important documents off paper because we need to get organized and compliant. We need to be ready for any potential partners, ships or acquisitions. So that happens and then boy, all the important stuff involved.

Or you have the other type of thing with the very large Company, a top 20 type Pharma or Biotech. I was just at one last week where they started very small, very specific process in the quality management area of their Company.

Now their very happy with it. And I had a meeting there and it was all about how can we expand? How come we expand into different areas of quality? How about regulatory? How about clinical, et cetera. It's really a mix of the large companies and the small and it's actually majority of it is in the R&D side of Pharma rather than the commercial.

Got it. What's the mix of software and services in the total size of the Vault business today?

We're not breaking that down giving you an exact break downs to that level. As you would expect, it's mostly subscription.

I have a follow-up question. I wanted to come back to this billings issue. This isn't something new that we've seen now.

Obviously, we saw with Workday last night when they said that they were giving some form of new terms of payments to their customers. I'm just trying to understand what's causing this.

Can I ask in terms of the Pharma customers, at what stage are they in terms of the mode to SAS based solutions? Is there still some pressure on CapEx versus OpEx and is some of that pressure flowing out of the OpEx side as well which is causing people to push out some of their payments? I'm just curious on any thoughts there. Thanks.

Hey, Jobin. This is Matt. For sure there's this normal cloud computing shift from capital expenditures to operating expenditures.

I think that this industry is generally still a little bit behind from most other industries. For the majority of our customers, the first cloud projects they did were Veeva CRM. For a lot of our small R&D customers, the first cloud projects they ever did were Veeva Vault.

And so it does take some time to mature and to figure out how budgets change. And so that's why we're not done with this.

I think it's important to even reiterate, it's not something that we create. We're flexible.

But as the number of products that they buy from Veeva grows, as the amount of money that they're paying too Veeva each year grows, it becomes more and more important for them to line it up with their sometimes very lengthy budget cycles. And it just becomes easier to manage.

Kirk Materne, Evercore ISI.

Hi, this is actually Patrick Flavin on for Kirk. Congrats on the quarter.

As it relates to the big name Vault lends, are these net new customers for you guys or are you upselling into existing CRM customers in those instances? More generally, what kind of traction are you seeing with Vault in that new customer accounts?

We see traction in both ways. Certainly with existing customers.

If you look at the top 100 Pharma biotechs, most of them are our customers. In some form or another. Pretty soon we're going to collect all the logos.

We really have the mix of both. The largest number of net new customers of course, are in the small and emerging biotechs. There's many hundreds of them and so we're collecting new logos all the time there.

We have very low penetration. I guess that's the thing to remember about Vault.

It starts in a particular functional area, division or geography. That's how it starts. Especially in the large Company, in one of the top 50 started in an area, geography, particular application and then it grows from there. So right now we estimate, as we mentioned, a little less than 4% penetrated. So the growth is coming in all areas.

Peter Lowry, GMP Securities.

Can you talk about where your customers are pulling you next? What are they asking for? And then, how do you manage that demand versus executing on the existing product that you already have?

This is Peter. I'll take that one.

That is something I have a lot of experience in over the last 20 years in enterprise software. I once had a mentor of mine say, you can go out of business just doing what your customers want and you have to balance that with the market and what they need and you have to have a good vision looking forward. I can tell you when we started Vault, in the first line of code in 2010 there was not a customer asking for it.

So the big macro level pictures, you have to get out -- you have to lead the duck. You have to skate to where the puck is going to be. But then as you calibrate on these macro level debts then you can really use your customers to guide you.

So a great example is the large investment we're making in RIM the regulatory area of Vault. We have Vault out there, we have it in the clinical area, we start seeing this need in the regulatory. We start seeing customers asking for it and multiple customers, and starting to really understand why they're asking for it and does that make sense?

And then, we'll sort of pounce on that. We'll make it then, okay, that's it. And we're all in and we're in it to win it. So that's kind of how we look at it.

Macro level things. You've got to lead the duck. And then, incremental things? You've got to listen to multiple customers and make a decision.

We have time for one more question. Stephen Wardell, Leerink Partners.

Can you tell us about what you're hearing from Veeva Vault prospects in the market recently? What are the issues that they are talking to you about in general? And in particular -- just in general with the first part of that. And then, particular, you mentioned that 30 of the top 50 Pharma have begun using Vault in some capacity. I think that's great news.

My impression is that buyers of Vault have longer decision time frames than buyers of CRM and they have a greater challenge transitioning their software systems to a Vault-like product then CRM. There's a greater transition costs.

Are you finding something else? Are you finding that they are able to make decisions faster or that they are able to transition with less challenge, less cost transitioning?

I would say Vault has more variety than CRM in a couple different ways. First of all, yes, we would sell Vault to the largest Pharma customers just like we do CRM. But you got to remember, we are selling to 50 person biotechs involved and those are people that would never even need CRM yet. Not only that, we are selling all the way from R&D and manufacturing side all the way to the commercial. So there's more variety.

I would say some Vault cycles are faster than CRM sale cycles. Small biotech getting their first system, this might literally be a three-week discussion and away we go.

Now, if you're talking about the system to store, the most important clinical documents at the largest Pharma Company, that's probably going to be a longer sales cycle than CRM just because the importance is higher. That's kind of what we are seeing, more variety. The common themes are, you got to move fast, you got to be externalized, you need a cloud-based system.

So that's either a small Company saying, of course I'm going right to the cloud. There's no way I'm installing some software. Or, an existing customer has some on premise and they know they have to get rid of it.

I think also they like performance. Global performance in the notion of this stuff especially in R&D, is very global. Global teams working on it. They like the fact that they can have good performance.

And also, its externalized access. If you look at the manufacturing area. This area of outsourced manufacturing is -- there's serious economic benefits to our customers if they can do that and do that correctly. Very clear competitive advantage.

To do that, you either have to shuffle around a lot of paper or you need an externalized system. So that's also a driver. I would say at a high level we've come back. There's a lot more variety involved then there is in CRM because in small and large companies and because of the different areas.

I will now turn the call over to Peter Gassner, CEO, for closing comments.

Thanks, everyone for joining the call. Before we go, I would like to thank our existing customers and employees and also welcome all of our new customers and employees. We are excited to have you with us and I look forward to many successful years together. Thank you.

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