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Medidata Solutions (NASDAQ:MDSO)

Q4 2012 Earnings Call

February 21, 2013 8:00 am ET

Executives

Hulus Alpay - Chairman

Tarek A. Sherif - Co-Founder, Chairman and Chief Executive Officer

Glen M. de Vries - Co-Founder, President, Director and President of Medidata Solutions Worldwide

Cory A. Douglas - Chief Financial Officer and Chief Accounting Officer

Analysts

Michael Huang - Needham & Company, LLC, Research Division

Glen J. Santangelo - Crédit Suisse AG, Research Division

David H. Windley - Jefferies & Company, Inc., Research Division

Jamie Stockton - Wells Fargo Securities, LLC, Research Division

Sean W. Wieland - Piper Jaffray Companies, Research Division

George Hill - Citigroup Inc, Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Medidata Fourth Quarter and Year-End 2012 Conference Call. [Operator Instructions] And as a reminder, this call is being recorded.

I would now like to introduce your host for today's conference, Hulus Alpay, Head of Investor Relations.

Hulus Alpay

Thank you, Bethany. Good morning, everyone, and thank you for joining Medidata's Fourth Quarter and Full Year 2012 Conference Call. On the call today are Tarek Sherif, Chairman and Chief Executive Officer; Glen de Vries, President; and Cory Douglas, Chief Financial Officer. Tarek, Glen and Cory will offer comments on our fourth quarter and full year 2012 performance, followed by our outlook for the first quarter and full year 2013. Then we'll open the call to questions. Tarek, Glen and Cory will take as many questions as possible in the time allotted.

Now let me take a minute to remind everyone that elements of this presentation are forward-looking and based on our best view of the business as we see it today. I refer you to our detailed disclaimer set out in the press release and our filings with the Securities and Exchange Commission. Forward-looking statements are subject to risks that could cause actual results to differ from our expectations. We disclaim any obligation to update or revise forward-looking statements.

We will also discuss some non-GAAP financial measures that we think help to explain our underlying performance. Today's press release provides a reconciliation of U.S. GAAP to these measures.

Now I'd like to turn the call over to Mr. Tarek Sherif, Chairman and Chief Executive Officer of Medidata. Please go ahead, Tarek.

Tarek A. Sherif

Thank you, Hulus, and good morning, everyone. Thanks for joining us on our fourth quarter 2012 earnings call. I'm really pleased to report that we finished an extraordinary year for Medidata on a high note. Our execution in closing the year led to another record bookings quarter and when combined with sales for the balance of the year, led to record backlog build, as we'll discuss shortly.

When compared with 2011, fourth quarter 2012 revenue was up 24% to a record $58.6 million. Application services revenue in the quarter increased 32% over the same period in 2011, accelerating from 22% year-over-year growth in the third quarter. Full year revenue increased 18% to $218.3 million. Market share gains, faster adoption of our solutions and improving macroeconomic environment all contributed to our growth. The acceleration of our revenue growth, particularly in the second half of the year, reflects the successful implementation of the strategy we presented to you early in 2012.

Last year, we felt that adoption of Medidata's platform solution led to an inflection point, and we were poised to transition from being just a provider of Rave to a platform company with greatly expanded capabilities and opportunities. The strength of our 2012 revenue performance and our outlook for 2013 clearly demonstrates that we are successfully making that transition. It is evidence that we're bringing positive technological disruption to the traditional clinical development market. We are increasing the breadth of problems we solve for our customers, and they are buying more of our solutions at a faster rate than ever before.

As we enter 2013, we're confident that our revenue growth rates are sustainable, supported by market share gains, greater adoption of our platform solution, as well as growth in our total addressable market. Medidata is transforming rapidly and successfully. We see this transformation in both the number of customers purchasing multiple products and the increasing number of 7-figure transactions we are booking. Our 2012 results highlight our ability to create competitive advantage for our customers while remaining consistent with our unique and disruptive business model.

The strength and breadth of sales in the past year clearly demonstrates our ability to penetrate the full range of life sciences companies with our platform solution. Over the last 18 months, multiple opportunities emerged that allowed us to fundamentally change the competitive landscape and position Medidata for long-term success, in the process, creating meaningful value for our customers, employees and shareholders.

Last year, we told you that we were going to accelerate our investment in sales, services and R&D, focusing our incremental spend on our non-Rave portfolio while investing in our core platform. Our ultimate goal was to achieve sustainable revenue growth in line with our historical long-term target of 20%. With a 38% increase in 2013 backlog, full year guidance above our long-term target of 20%, as Cory will explain shortly, and with an 80% increase in total shareholder return for 2012, we think the value and success of those investments is obvious.

We achieved spectacular leverage from our 2012 spend, and we're going to continue to invest in our business in order to drive our revenue growth and ultimately build greater value. Before moving on to a discussion of some of the highlights of our performance, I'd like to thank the entire Medidata team and our partners for all of their efforts and hard work over the past year. The work we've done and the progress we've made would not have been possible without their extraordinary dedication and commitment to Medidata.

Now let me share some details with you that highlight the strength of our business. We set aggressive goals for our sales organization in 2012, and they not only met the challenge but significantly outperformed our expectations. While total customers grew 27%, last year was noteworthy for the breadth of our success. As our market evolves from single to multiproduct and platform solution sales, we are seeing strength across our entire product line across all geographies and segments of our customer base.

Our market share gains throughout the year were broad, encompassing the largest global pharma companies, global CROs and midsized biotechs. The Medidata Clinical Cloud, enabled by our proprietary data and analytics model, is a unique offering, which is cementing our position as the industry leader.

Over the last several years, we've talked about the importance of our relationships with our channel partners, and in 2012, our CRO relationships continued to evolve and strengthen. Throughout the year, we saw a steady increase in CRO bid volume, and we finished the full year with an increase in bids in excess of 100% year-over-year. Our win rate also increased several percentage points, showing the market's clear preference for Medidata Solutions.

A number of forward-thinking CROs recognized the competitive advantages of leveraging the Medidata Clinical Cloud as their own clinical technology infrastructure and are beginning to do so to gain competitive advantage. We expect to share more details about these evolving strategic relationships throughout 2013.

We experienced roughly 50% growth in customers committing to multiple products last year. At the end of 2012, 38% of Medidata's customers were multiproduct customers. 25% of our new customers bought more than 1 product, double the number in 2011. In addition to continued strong sales of Rave, non-Rave products including CTMS, Designer and Coder saw rapid adoption throughout the year. One of our most disruptive products, Balance, saw a 300% year-over-year increase in customers in 2012, demonstrating that this established market is clearly ready for innovation from a technology and business model perspective.

Reflecting our success on the sales side and the scale of the market opportunity, we signed 44 transactions in excess of $1 million. The 76% increase in 7-figure transactions versus 2011 includes the largest transaction in our company's history, a 5-year, 9-figure deal that we discussed on our Q2 call. Transactions valued in excess of $250,000 increased 30% year-over-year, while our average transaction size increased 61%, as customers increasingly committed to more than 1 product and the rate of adoption increased. Non-Rave product sales increased over 300% year-over-year, representing nearly 1/4 of 2012 sales.

While internally developed solutions for patient randomization, protocol design and medical coding all showed great growth, our trial logistics solution, acquired 18 months ago, led all non-Rave sales. This not only shows the power of Medidata's sales channel but also the role that acquisitions can play in helping to grow our market opportunity. Our strong sales performance drove application services backlog to an all-time high. As of January 1, 2013, our 12-month application services backlog stood at $186 million, up 38% year-over-year. The non-Rave component of the 2013 backlog is over 20% of the total amount, a significant increase versus a year ago.

Given our strong customer momentum and a robust pipeline of new business, we are meaningfully raising the preliminary revenue guidance we gave you on our last call. The midpoint of our range puts us on track to grow in excess of the long-term revenue goals we set during our IPO and which we targeted at the beginning of 2012. This acceleration in growth puts us in a very unique position. It supports our continued investment in innovation and in our people while allowing us to grow dollar profitability at a healthy rate. Cory will provide you more details in his prepared remarks later in the call.

Over the past decade, the life sciences landscape has been changed by expiring patents, generic competition, pricing pressure, heightened regulatory scrutiny and the increased importance of emerging markets. More recently, the global macroeconomic environment has been challenging. Throughout all of this disruption, and in many cases, as a result of it, Medidata has thrived.

We have witnessed firsthand the pressure on our customers to adopt new business models to counter slowing sales growth and declining profitability while more efficiently delivering improved patient outcomes. We are seeing evidence of the positive impact of changes that are happening across the industry, indicating that the more successful companies are beginning to thrive in this challenging environment.

Here are a few notable changes. The U.S. FDA approved 39 new drugs last year, marking a 15-year high. It's the most green lights since 1997 and around 40% higher than the average over the past 2 decades. Life sciences companies are increasingly focused on exploring more efficient ways to develop and test drugs and to link their development effort to other parts of the life sciences enterprise and the payer-provider community.

Technology is now being viewed as a strategic weapon to increase operating efficiency and productivity and as a way to leverage data and analytics to improve decision-making processes. Today, we are seeing the early signs of life sciences companies emerging from their prolonged period of retrenchment, once again focusing on innovation and experiencing success in drug development. The financial health of our customers is improving as they evolve their business models and balance their portfolios to deal with the challenges that we previously outlined.

The future market leaders in big pharma are likely to be global companies that invest heavily in growth and innovation. Leading biotech companies will also take a similar approach with a more -- with more of a focus on particular therapeutic areas and metabolic pathways. The common thread is that market leaders are just beginning to leverage technology solutions to make their development processes more efficient and reallocate associated savings back into drug discovery to ensure a steady stream of innovative therapies that will fuel their future growth.

We expect to be a primary beneficiary of this renewed industry focus on growth. As the market leader in life sciences cloud technology, we are working closely with our customers to identify opportunities to leverage the Medidata Clinical Cloud to dramatically improve operating efficiencies, with the ultimate shared goal of improving patient outcome.

We are committed to building value for our customers, for Medidata and for our shareholders. We will be investing aggressively in our business in 2013, and we are confident that this is the best way to build value. More specifically, we'll continue to add to our sales team and focus on improving its capabilities. We'll also increase our investment in marketing, raise the performance of our support and services organization and expand our development organization as we enhance our platform capabilities to meet the needs of our life sciences customers.

2012 was an outstanding year for Medidata, and as we look at 2013 and the emerging opportunities ahead, our focus is trained on execution. The market we operate in is large, and we see huge opportunity to rapidly and sustainably grow our business well into the future. We have the products, the people and the competitive lead to address the large and ever-expanding clinical technology market.

Medidata has transformed the clinical development process, and customers all around the world are recognizing the benefits of our solutions to address their pressing development needs. We will continue to be aggressive in maintaining our technology advantage, increasing our market share and ensuring the highest levels of customer satisfaction.

I'll now turn the call over to Glen to describe some of our platform successes. Go ahead, Glen.

Glen M. de Vries

Thanks, Tarek. So as you've heard, our organization was extremely productive in 2012, and that is certainly inclusive of our product development team. To that end, in Q4 alone, we released new modules and enhanced functionality that span the entire Medidata Clinical Cloud. Some of these release highlights included new capabilities for budgeting, new functionality to streamline the integration of legacy systems data with our CTMS modules and expanded support in Balance for more complex studies and more complex drug logistics.

These are all examples of how we replace complex, risky and expensive processes and the complex, risky and expensive systems that support them that most companies are still using for those functions today. Moreover, we're using these new capabilities in our platform with our customers to define the clinical trials of the future. In fact, given the tenor of the interactions we're having with senior executives at our customers and partners, we're actually taking a leadership position in defining the future state of our industry.

Another key value we bring to our customers, and one that is still extremely rare in software for life sciences, is being able to continually provide them with enhanced capabilities, without the need for the expensive upgrade cycles and the slow technology adoption curves they've endured for so long. In 2012, we certainly delivered a lot of innovation in our products, a lot of innovation in the Medidata Clinical Cloud. But we've also been innovating in regards to how technology can be developed, deployed and supported while confidently operating within the strict regulatory environments our industry requires around the world.

Doing that for the past 1.5 decades, keeping the best business values of true Software-as-a-Service for both us and for our customers while meeting their security, privacy and regulatory requirements is how Medidata has made the cloud a reality in life sciences. As in the past, we're not going to comment on specific unreleased functionality. However, we have a deep, robust and exciting product pipeline for 2013.

This year, we'll continue to comment each quarter on the new capabilities we've made available. However, thematically, you can expect our releases to be focused in 3 different areas. First, we will continue to release new functionality and upgrades to existing web and mobile modules that automate legacy scientific data management, biostatistics and clinical operations processes. Using our integrated platform, we can continue to help our customers and partners eliminate the high costs, the high risks and the high human capital requirements that still characterize so much of clinical development. We've been successful in driving value for customers for doing this -- by doing this for over a decade, and we see tremendous potential in continuing to lead this charge.

Second, you'll see continued focus from us on our analytics capabilities, inclusive of the truly industry-wide financial and operational benchmarking that is unique to our offerings, as well as with the addition of new predictive analytics to guide our customers to the best possible productivity and outcomes.

I cannot emphasize enough that Medidata is 100% about big data. The fact is that we have more clinical trial data, including clinical, financial and operational information, flowing through our platform every day than any medical device biotech or big pharma company in the world, and we are going to continue to make all that data a valuable asset at every company that works with us. In fact, our goal is to make it an asset to every user who works with us.

Third, we are going to continue to push the envelope in regards to how our customers can manage their overall process of demonstrating safety, efficacy and therapeutic value. I used the words "clinical trials of the future" earlier in the call, and you can expect to hear those words from us a lot in the future. We see opportunities catalyzed by the kind of disruptive technology that you've seen over our 14-year track record for our industry, not only to save time and money, but more importantly to be more productive. Our customers can get better leverage out of every dollar they spend on clinical development. Our customers can expose fewer patients to harmful or dangerous doses of new therapies, at the same time as they accelerate how quickly they get those therapies into the hands of patients who need them.

Just as some of the innovative work we did when we first started Medidata has changed the current landscape of clinical trials, we see our platform being a critical driver of how the successful life sciences companies of the future, running those clinical trials of the future, will have to operate.

I'll now turn the call over to Cory.

Cory A. Douglas

Thanks, Glen. Q4 was another strong quarter, capping what has been an excellent year at Medidata. There are a number of areas I will highlight as I walk through our financial results in more detail. I will also update you on our revised outlook for 2013. Let's begin.

We achieved record revenues for the fourth consecutive quarter. Q4 revenue was $58.6 million, up 5% sequentially and 24% year-on-year, in excess of our 20% long-term revenue growth target for the second consecutive quarter. Recurring revenues from application services grew 9% sequentially and 32% year-on-year, accounting for 81% of total revenue compared with 76% a year ago.

Non-Rave revenue for the quarter was 15% of total revenue, growing 143% year-on-year. For the full year, non-Rave revenue was $31.1 million or about 14% of total revenue, growing 135% year-on-year, surpassing our 100% growth target for the year. Professional services revenues decreased 8% sequentially and 2% year-on-year. Professional services revenues during the quarter was impacted somewhat by Superstorm Sandy, as well as seasonality associated with the end of the year. Overall, demand for our professional services remained strong, as we finished the year with record bookings and billings, supporting the increased demand we see for our cloud-based platform.

Revenue retention for the quarter remained strong at an impressive 98% versus 95% last year. For the full year, revenue totaled $218.3 million, an increase of $33.9 million or 18% over full year 2011. You may remember that our total revenue growth rate was 11% in 2011. We accelerated that to 18% in 2012 as our business continues to build momentum throughout the year.

Recurring revenues totaled $171.6 million, an increase of $27.2 million or 19% year-on-year, a significant acceleration over the 6% increase we saw in 2011. We ended the year with a record $186 million of application services backlog, an increase of 38% year-on-year. This gives us a high degree of coverage and visibility as we enter 2013. For comparison, backlog increased 23% this time last year. In line with the momentum we have seen, our non-Rave products now account for 21% of application services backlog versus 8% last year this time.

Moving down the P&L to gross profit. Gross profit for the quarter was $42.3 million compared with $34.3 million last year. Gross margins remained at 72%, in line with our expectations. Gross margins continue to benefit from a favorable mix of higher-margin application services revenues, which offset the impact of lower professional services margins. We expect this trend to continue. For the year, gross profit was $155.7 million compared with $131.6 million last year, an increase of 18%. Gross margins were flat year-on-year at 71%, with margins from recurring revenues increasing 100 basis points to 81% for the year.

Now turning to operating expenses. Operating expenses for the quarter were $33 million, flat sequentially and down 2% year-on-year. Excluding last year's onetime litigation settlement costs, fourth quarter operating expenses were up $5.8 million year-on-year, reflecting our focus on investing in the business to fuel our long-term growth.

R&D expense was $10.5 million in the quarter, down 7% sequentially and up 30% year-on-year. As you may recall, we incurred nonrecurring personnel-related costs during Q3. This accounted for the sequential decline in R&D expenses during the quarter. R&D expense for the year grew 43% to $42.3 million, reflecting the investments we made to upgrade and expand our R&D teams.

Sales and marketing expenses were $12.9 million in the quarter, an increase of 34% year-on-year. For the year, sales and marketing expenses were $47.7 million, an increase of 32% versus 2011. Our increased sales and marketing expenses reflect our commitment to upgrading and expanding our sales organization, as well as the impact of record bookings activity throughout the year.

I want to join Tarek and Glen in congratulating our sales organization on what has been an exceptional and transformative year. The results of their efforts can be seen clearly in our backlog growth, which provides us with excellent momentum for 2013 and beyond.

G&A expenses were $9.6 million or 16% of revenue in the fourth quarter. That's down from 20% of revenue last year. For the year, G&A was 17% of revenue, again, down from about 20% of revenue in 2011, so G&A continues to scale nicely. EBITDAO for the fourth quarter was $14 million. EBITDAO margins were 23.8%, up 250 basis points sequentially. For the year, EBITDAO was $47.1 million or $21.6 million -- or 21.6% of revenue, in line with our expectations.

Income tax expense for the fourth quarter was $2.8 million, representing an effective tax rate of 30%. The lower rate which had an impact on booked and cash taxes was the result of our ability to utilize certain federal NOLs previously subject to limitation. As a result, our annual effective tax rate declined to 36% versus our previous expectation of 40%. For the quarter, our adjusted non-GAAP net income increased 48% sequentially, reflecting the impact of the tax benefit. For the year, adjusted non-GAAP net income decreased 29%, primarily reflecting our full effective tax rate for 2012. You can see the rest of our results in the release.

Turning to cash metrics. We ended the quarter with nearly $123 million in cash and investments, that's up 14% over the balance we had at the end of 2011. For the year, we generated $13.2 million in operating cash flow. Operating cash flow was impacted by increase in accounts receivable during the quarter.

Overall, total billings increased 32% for the year, and we had significant billing activity in Q4. For those of you who use implied billings as a measure, that was a good proxy for our billing activity for 2012. That said, we have collected nearly 80% of the accounts receivable balance outstanding at year-end including a few large accounts we expected to collect prior to the end of 2012. Deferred revenues ticked down sequentially and year-on-year as expected.

Now before we discuss guidance, I want to note that we are in the process of evaluating our guidance and metric methodology to further align with how we run our business and make capital allocation decisions. As you know, we invest in and run our business with a long-term focus and with the perspective of creating long-term value. Therefore, we feel that the quarterly guidance runs counterintuitive with this thinking and full year guidance alone is more appropriately aligned to -- with how we manage and incentivize our employees, so stay tuned there.

In terms of the guidance we are providing for the upcoming year, we are raising our overall 2013 full year revenue guidance above what we provided you on our last call. We now expect to generate $255 million to $270 million of revenue in 2013, reflecting 21% to 24% annual growth over 2012. This is well above consensus estimates for 12% growth in the first half of last year and above our long-term target of 20%.

We expect professional services revenues to continue to be in the mid-to-high $40 million range. Based on the midpoint of our 2013 full year revenue guidance, our full year application services backlog, together with our professional services guidance, provides coverage for about 87% of revenue, which compares to 84% last year this time.

EBITDAO for 2013 is expected to range from $57 million to $60 million, in line with the EBITDAO margin expectations I shared with you last quarter. For the first quarter, we expect revenues to be between $60.5 million and $61.5 million, reflecting 20% to 22% growth year-over-year. We expect EBITDAO to be between $11 million and $12 million for the quarter, and you can see the rest of our full year and first quarter guidance in the press release.

One housekeeping note. Now that we have been operating with a full effective tax rate for all of 2012, we will no longer reference non-GAAP net income figures, which we had done for comparability purposes. Going forward, we will solely refer to adjusted non-GAAP net income figures. In terms of 2013, here are a few other things for you to consider. Gross margins and EBITDAO margins tend to dip seasonally in Q1, and that will continue in 2013, with FICA-related costs being a primary driver. For the full year, we expect gross margins to be slightly higher than 2012.

As we told you on our Q3 call, in 2013, we will again invest in our business to drive top line growth. You can expect to see these investments scale in the second half of the year. Given the value we are creating, our bias remains toward investing in sustainable revenue growth, while raising profitability in absolute terms rather than focusing on increasing margins at this time. It's worth noting that in our peer group of cloud companies, Medidata is among the most profitable.

Stock-based compensation for 2013, on a share count basis, is relatively in line with previous years. However, the expense associated with these grants will be higher, reflecting the impact of our stock appreciation over the past year. You will see the impact of stock-based compensation within the quarterly tables of our published results.

As I mentioned during our Q3 call, the build-out of our New York headquarters and new office in London will add approximately $5 million of additional costs in 2013, all of which have been contemplated in our guidance. We expect to expend slightly over $31 million on CapEx in 2013, with 80% of this spend associated with onetime items related to the build-out of our new offices. Taxes are expected to approximate 40%, and amortization is expected to be just over $1 million, as intangible assets roll off the books.

So to conclude, we are very pleased with our performance in 2012, and given the momentum we have established and the large market opportunity we see ahead of us, we feel very confident about the year ahead and our ability to drive sustainable growth in 2013 and beyond.

Now let's open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from line of Michael Huang with Needham & Company.

Michael Huang - Needham & Company, LLC, Research Division

Just a couple quick questions for you. First of all, how are you thinking about sales productivity improvements versus ramp in the sales headcount? I mean, obviously, I would imagine you probably had the benefit of significant productivity improvements in 2012, but how are you thinking about the balance between those? And what are the bigger levers to bookings through this year and next?

Tarek A. Sherif

I think it's a -- we take a pretty balanced view on it, Michael. We incrementally increased headcount in 2012. We've raised the intelligence of the sales organization, and we basically are going to follow the same playbook in 2013. So we're going to continue to add heads. We certainly have more product to sell, and we have more places to sell it. I think we did a great job of doing that in 2012. We did increase the productivity per sales head. I think there's more to be done there. But I think adding incremental heads is going to help drive both 2013 and 2014.

Michael Huang - Needham & Company, LLC, Research Division

Okay. So it's fair to say that sales quotas are moving up for your guys?

Tarek A. Sherif

It's fair to say that they've been very productive.

Michael Huang - Needham & Company, LLC, Research Division

Great. Obviously, you had a great non-Rave year. Could you share, kind of at the higher level, what assumptions you have around non-Rave growth embedded in your 2013 guidance? Should we see further acceleration from what seemed like pretty spectacular numbers in 2012?

Tarek A. Sherif

So a couple of things. Just it's important to note, we actually had a spectacular year in Rave as well. Rave sales were off the charts, so we are -- we announced Sanofi last year. We had a number of very large wins, competitive takeaways, if you will, and that had a big influence on the numbers as well. So I wouldn't limit it to just non-Rave. But yes, we expect non-Rave in absolute dollars to show very high double-digit growth again in 2013, so expected both on a Rave and non-Rave.

Michael Huang - Needham & Company, LLC, Research Division

Great. And lastly, could you remind us again -- so when you think about the penetration rate across your customer base in terms of products, I mean, obviously, you have roughly 1/3 of your customers with more than one. But what's the average number of kind of modules that they have attached right now? And what's the opportunity again?

Tarek A. Sherif

Yes, sure. So we actually do look at that, and across the entire base of customers, it's just under 2, so we kind of follow it. Last year, we -- you saw a pretty dramatic increase in the number of customers we had. And despite that, the attach rate was higher than in the prior year. But an important takeaway is that it's not just the number of customers who have multiple products, it's how much of it they're using. And what you need to remember on that side of the equation is they're at very low adoption rates for some of our newest products. So the ramp we expect to see over the next couple years, as they get familiar with those products, is much -- is pretty much in line with what we saw in EDC, 5 or 6 or 7 years ago. So they're trying it out, we expect them to buy a lot more. We've gotten a lot of good feedback. People are happy with what they bought. So we expect that non-Rave component to have a significant impact on our overall growth rates over the next 3 to 5 years.

Operator

Our next question comes from line of Glen Santangelo with Crédit Suisse.

Glen J. Santangelo - Crédit Suisse AG, Research Division

Tarek and Glen, I just want to ask a couple of quick questions. Tarek, if I heard you in your prepared remarks, did you say the Clinical Force deal that you did in '11 is now your largest non-Rave seller?

Tarek A. Sherif

That's right, yes. We've had great momentum with that.

Glen J. Santangelo - Crédit Suisse AG, Research Division

And so I guess the question is as you think about the ability to do additional acquisitions and kind of fold them into the platform, Glen, you talked a lot about the development opportunities internally within the pipeline, like how do you balance what you should be developing internally versus what you should maybe be thinking about acquiring?

Glen M. de Vries

I mean, I think, you won't see any new playbook from us on this one, either. I mean, we think we've got a spectacularly innovative R&D team. There's stuff that we think we've invented or in the process of inventing or should be inventing that just nobody's really conceived of, in terms of how you think about connecting people in clinical trials and thinking about that data. But at the same time, we're not the only people in the world trying to do that stuff. And so when we find things that might fit into our platform and we can accelerate the ability to deliver these things through a tuck-in acquisition, that's -- I think the important take-home is we now know that we have that kind of playbook that I was talking about where we can make those acquisitions and fold them in, as you're talking about. So I wouldn't expect anything different. We're just glad to have the proof point to show that we have that in our toolkit, if you will. Does that answer your question?

Glen J. Santangelo - Crédit Suisse AG, Research Division

Yes, it does. And so Glen and Tarek, as you guys think about expanding the platform, how do you now think about the competitive landscape? Has it changed at all? I mean, as we thought about the other platform company being Oracle, is there anybody else out there on the horizon globally that we should be paying attention to? Because it kind of feels like the competitive landscape is weakening and not strengthening despite the market opportunity.

Tarek A. Sherif

I think that's a fair assessment, but it depends how much you dial up or dial down the lens. So in our core market, I think that's a fair statement. I think if we look beyond just the aspects of clinical development that we're in right now, then I think you'd see more competitors. But for the time being, I think we're very happy with the results. I think we feel like we're in a great place. I think if you look at examples like what happened with Apple years ago, folks who are the leaders in the space tend to accrue the majority of the profits in that space as -- when you see explosive growth in it. And so we feel like we're in a great position. But there's a lot more to do, and I think there's a lot more opportunity out there for us.

Glen J. Santangelo - Crédit Suisse AG, Research Division

And maybe if I could just ask a last question. One of the questions we're going to get today is sort of the implied EPS guidance, which kind of came in a little bit lower than maybe what we were thinking. And as you outlined on the call, you're investing in sales, marketing, support, development, all those type of things, which probably makes a lot of sense, given where we are in the cycle. I know you don't want to give kind of multiyear guidance, but how should we think about future potential for EPS leverage? Like how much more do you think there is in terms of internal investment?

Tarek A. Sherif

Well, I think we've been pretty -- we telegraphed pretty well that we thought margins -- talking about EBITDAO margins for now, were going to be pretty much in line in 2013 with what they were in 2012. I think -- and we can go -- we can help you with your model at a later point. But I think that's -- we've stuck with that statement. I think our margins are pretty much in line or maybe up-ticking a little bit from 2012. If you look ahead, I think it's fair to say that we do expect to see margins start to creep up over time. I just think that the leverage and the opportunity that we saw in 2012, the way we were able to go after the market, what we see in the market currently keeps us in investment mode. But I think we've also proven that we can get a lot of leverage out of this model. So you should expect, certainly, absolute dollar profitabilities to improve at a very rapid clip, and I think you can also expect in out years to see margins start to tick higher as well.

Cory A. Douglas

And just to add to that, Glen, you'll start to see the gross margins improve faster. As I said in my prepared remarks, gross margin is going to tick up a bit in 2013, and we're still committed to our longer-term targets for EBITDAO margins as well, but that's going to be in out years. In 2 to 3 years out, you'll start to see that improve as well.

Operator

Our next question comes from the line of Dave Windley with Jefferies.

David H. Windley - Jefferies & Company, Inc., Research Division

So I wanted to -- some of my questions have been asked, but I wanted to move over to the partner channel or CRO channel. As your sponsored clients continue to outsource more and consolidate that outsourcing with some of the bigger CROs, I'm curious about, Tarek, how you see that landscape. It sounds like the CRO partner channel is blossoming nicely. Some of those guys are doing some internal technology development that I'd call kind of wraparound, where they don't want to replicate EDC capabilities, but they are building a lot of analytic capabilities. And I wonder how that dynamic -- how do you interplay with that if there are -- or maybe the question I should ask you is are they competing with some of the, say, additional or non-Rave products that you're developing? And to the extent that you depend on that CRO channel, how does that impact the growth opportunity?

Tarek A. Sherif

Sure. It's a great question, Dave. Thank you. I think from what we're seeing in terms of the development that our partners are doing, it's much more complementary rather than us viewing it as being competitive to us. A couple of dynamics at work, and I referenced some of it in my notes, which is that a number of CROs have decided that in order to be more competitive in the marketplace, they're internalizing our infrastructure and using that to become more competitive. And other CROs continue to work closely with us and share the infrastructure that we have, but generally, we don't see them as competing, and I don't expect that to happen. A lot of sponsors buy our technology and use that technology alongside of what the CROs are offering, and I don't see that dynamic changing anytime soon, quite frankly.

Glen M. de Vries

Dave, let me just add a thought on top of that. And we have a lot of really, as we've talked about, we think, fantastic capabilities in our platform. That doesn't mean that there isn't huge opportunity for any CRO or frankly, any sponsor to really think about their business process and how they think about the other information across their business that they're managing and integrating and create additional competitive advantage on top of what they're getting from us. And that extends to both transactional things because we're part of a much bigger set of infrastructure in any company, outside of their clinical development activities and also includes data. So again, for any sponsor, if you want to look across multiple sponsors who are in your same therapeutic area or if you're a CRO and you want to look across other CROs that are doing the kind of work you're doing or you're in either of those camps and want to go back and forth or you want to think as a CRO about how other CROs on average are managing other sponsors and vice versa, I don't think there's any other place right now in the world that you can go and get that kind of cross-industry insight. And so again, I think that's an asset to everybody who's working on our platform. And again, now, that's a perfect example of what I said before. You want to develop some additional analytics capabilities or build on top of this kind of platform as a service infrastructure that we've given you, fantastic, that's actually great for our business.

David H. Windley - Jefferies & Company, Inc., Research Division

So my next question then, Tarek, you've been fairly vocal about and prescient about competitive takeaway opportunity. One of those was quite big, as you discussed in your prepared remarks, from earlier last year. Could you comment on whether there were some fairly sizable competitive takeaways, say, in the second half or particularly the fourth quarter that maybe didn't rise to the level of disclosing and what you see the outlook for that being; that being competitive takeaways?

Tarek A. Sherif

Sure. I think one of the things that I was particularly pleased with in the fourth quarter was just how broad-based the strength was. So yes, there were -- there was some competitive takeaways. There were some renewals. There was lot of one-off business, meaning study -- single study business. But there was a great mixture, and it came from Europe, APAC and the U.S. Europe had the best year that we've ever had and just got stronger throughout the year. I think as we look at 2013, there are a number of competitive situations that we feel very good about. Again, in terms of name recognition, they probably don't rise to the level of what we were allowed to announce last year. But in terms of market opportunity or revenue opportunity, they're going to be very interesting. So we're feeling good about the pipeline as we enter this year.

David H. Windley - Jefferies & Company, Inc., Research Division

Okay. And then my final question, probably for Cory. So the kind of first few lines in the income statement make tremendous amount of sense. Revenue growth is accelerating, particularly on application services, so you expect to benefit at the gross margin line from that. Can -- in light of the fact that fourth quarter was a little higher on sales and marketing, a little lower on R&D than we were looking for, could you help us understand what those lines look like in 2013 to help us get down to that kind of flat year-over-year op margin?

Cory A. Douglas

Sure. So Q4 for R&D had impact of some sequential declines, as for some onetime items in Q3. I think about -- as you think about 2013, you should expect us to continue to invest in those areas and have those areas as a percentage of revenue be pretty consistent with what we had in 2012. The only caveat I'll give you is that when you look at stock-based compensation, that'll be a little bit higher, and I'll be sure to pull that out for you and call that to your attention in 2013.

Operator

Our next question comes from the line of Jamie Stockton with Wells Fargo.

Jamie Stockton - Wells Fargo Securities, LLC, Research Division

I guess maybe the first one is would it be accurate to say that coming into 2012, you were in a situation where a lot of the non-Rave solutions had good reference clients and you were able to take that out to the Rave base and really sell the solution and your sales force was really knowledgeable about the expanded portfolio. And now maybe going into 2013, you're in a situation where you've got a lot of clients who have had a good experience with that incremental solution that they've adopted and they're much more open to looking at a broader platform?

Tarek A. Sherif

I'd shift the timeline a little bit. I think as we entered 2012, we had just gotten over a lot of the pilot phase for the non-Rave products, and we started the build more reference ability in 2012. So I think as we enter 2013, the non-Rave components are going to still be a very important factor in driving our growth. I think -- and we've been pretty -- I think we've tried to be pretty open about talking about the platform. In terms of the scaled platform opportunities that we -- the one that we saw last year in Q2, those are going to be still a little bit more rare in 2013. I think we do have some opportunities there, and we're going to pursue those. But I think non-Rave solution sales are going to be an important driver in 2013. I think as we get out to 2014, I'd be more comfortable making the statement that, that platform becomes a much bigger driver. But having said that, there are a number of really interesting opportunities in our pipeline. We're going to go after them. We need to build that base. And obviously, given the revenue guidance we're giving, we feel pretty good about our positioning in the market currently and the opportunities ahead of us.

Jamie Stockton - Wells Fargo Securities, LLC, Research Division

Would you say that when you think about the metrics that you gave earlier in the call with the 7-figure deals being up 76% year-over-year and then the deals of $250,000 or more being up 30%, as we progress through 2013, are you going to see the kind of mix of growth shift a little more? I mean, a little more toward the smaller deals where maybe the growth rate is still very strong there, but it decelerates a little bit with the large deals if you don't see the same kind of big impact of a platform?

Tarek A. Sherif

No. Because, again, last year, the impact of the platform was nominal to the numbers I gave you, right? We didn't have a lot of platform deals. We did a lot of 7-figure deals based on Rave and a combination of Rave and non-Rave, so I expect more of the same. I actually don't expect any deceleration. I just think there's a lot of market opportunity. We should see continued growth in 7-figure and in the 250K size deals.

Jamie Stockton - Wells Fargo Securities, LLC, Research Division

Okay. And then maybe just the last topic area. Do I recall correctly that 2013 is going to be a pretty heavy year on the pro service side for the big platform deal that you announced earlier in 2012 and then you're going to see application services really kick in more for that deal in 2014?

Tarek A. Sherif

Well, we started to provide services in 2012 around the deal. I think when we talked about the deal, we did say that the revenue impact would be greater in 2013 than it obviously had been in 2012. More of the -- it's actually kind of the other way around. More of the AS kicks in, in 2013, but there's really no let up on the services side either. And in Cory's remarks, he talked about mid- to high-40s on the professional services side. Again, we're very comfortable with that in terms of the overall mix. If you look at what that implies, though, you see that our application services are becoming increasingly a much larger portion of our overall revenue base. That has positive margin implications, as well as the fact that those -- our AS tends to be annuity-like, much more so than services, which is much more time- and materials-based. So we're really happy with the trajectory we're getting out of both sides of the business.

Jamie Stockton - Wells Fargo Securities, LLC, Research Division

But was the incremental work that you did, let's call it, late 2012 around that big deal maybe a big part of why gross margin came down a fair amount for the professional services?

Cory A. Douglas

No, no. And just 2 points there. To go back to your previous question, keep in mind that the results of that second quarter deal in 2012 was already reflected in our backlog, right? So that's a part of the backlog growth we described earlier. And then as you think about professional services, the services we're providing for that contract is pretty much equal throughout the duration of each year, so they didn't contribute to the sequential decline in Q4 professional services. That had to do a little bit more with seasonality and timing.

Jamie Stockton - Wells Fargo Securities, LLC, Research Division

Well, I'm sorry, I was referring more to the gross margin coming down in the fourth quarter. I didn't know if there was some incremental…

Cory A. Douglas

Yes, for our professional services, it's still the same reason. It had more to do with revenue in Q4.

Operator

Our next question comes from line of Sean Wieland with Piper Jaffray.

Sean W. Wieland - Piper Jaffray Companies, Research Division

Ultimately, how big could the non-Rave business be as a percentage of total revenue?

Tarek A. Sherif

Good question, Sean.

Sean W. Wieland - Piper Jaffray Companies, Research Division

I didn't mean it to be a joke.

Tarek A. Sherif

No, no, no. It can be pretty big for us. I think we are seeing a lot of opportunity out there, and one of the things that we've been saying for the last year or so is that we think that when you combine Rave and non-Rave sales, you can see a 3 to 4x opportunity in a lot of our customers. So the implication there is that non-Rave is going to be bigger than Rave longer term. At some point, it sort of becomes an artificial separation between the 2. If we're out selling platform, and it includes Rave and all the various components that we have, you end up with a platform sale. And I think as we've said before, we think that opportunity can be 3 to 4x, where we are from a purely Rave perspective. And I can't help but want to put this thought in your head, too. When we're talking about these products in this context in a call like this and we're looking at it financially, yes, Rave or non-Rave makes sense to discuss. I can tell you that from the perspective of our customers, if -- our average product density is that people now have 2 modules on average instead of 1.2 or whatever the exact number were, the customers aren't thinking that way. They're just thinking they have a bigger Medidata footprint. And that's why, again, it's kind of interesting dynamic for us to think about. To us, it's really how much Medidata can we get them to do their operations on, keep taking on more of their business processes, keep taking on more of their studies from a volumetric perspective. And so that's why this kind of -- is in some ways, I think, an artificial way to think about our platform. The point is the path of the platform has a lot of penetration, and if we get it fully penetrated, that's where you get that 4x from their perspective.

Glen M. de Vries

And just a follow-up thought on this question, when we look at our addressable market as we define it, and if we use the number at $4 billion, the non-Rave component is -- or the Rave component is only $1 billion of a $4 million -- $4 billion -- $6 billion opportunity.

Sean W. Wieland - Piper Jaffray Companies, Research Division

Okay. The areas of investment, Rave versus non-Rave, I mean, are they going into the non-Rave platforms? And as another question on the areas of investment, by what percent will your sales force increase in 2013?

Glen M. de Vries

Right. So I'll take the Rave versus non-Rave on the R&D side. Actually, the dynamic that I was just explaining in terms of our customers is exactly the same way we think about it internally. So yes, we have people who work on different modules. But we're thinking very holistically on how we invest in the right places to make -- whether it's Balance and Rave or Designer and Rave or CTMS and Designer, have all these things provide additional value. So it's very difficult to say, "Here's how those things split up from an investment perspective." The point is we're investing in the platform to the end I was talking about.

Tarek A. Sherif

From a sales perspective, I mean, you can see the overall expense growth, it's going to be spread around between direct sales folks, channel folk, what we call our business consultants, the ones who really go out and demo, as well as sales management. I think the -- one of the aspects of us being elevated within our customer base is that we're dealing more and more with very high-level executives in companies, and that requires a level of sophistication and experience that is different than some of the folks that we have out in the field today. So there's big investment on our part in elevating the intelligence of the organization, if you will.

Operator

Our final question comes from the line of George Hill with Citigroup.

George Hill - Citigroup Inc, Research Division

Tarek or Glen, I kind of want take one of the last comments and look at it the other way. Do you guys have a sense for what is Medidata's share of wallet in the technology spend of most of your customers? Where do you think that is now and where do you think that can go?

Tarek A. Sherif

I'll try -- I'll answer it qualitatively rather than quantitatively because it's hard to say -- it depends on which part of the spend you're talking about, right? We have customer -- if you look across pharma, in terms of technology infrastructure, they spend somewhere around $30 billion or so, so we're such an insignificant spend. But if you look at clinical development, it gets a little bit more significant. But I think we have a massive opportunity. The majority of life sciences companies have under-invested, from a technology perspective, on the clinical development side. They invest a lot of money running trials. They haven't invested a lot of money in sophisticated technology to help them become more productive in those trials, and that's what we see as being the opportunity. So they spend $80 billion a year, $90 billion a year running clinical development. I would say that the technology side of that has got to be in the single-digit percentages and probably the very low end of that. So we see them spending, in future years, a lot more, and we're going to be there to make sure we get a fair share of it.

Glen M. de Vries

And to put another kind of dimension on that, right, when we're doing our sales, and it doesn't matter if it's Rave or it's, again, 2 modules or the whole platform, the ROI equations that we're looking at with our customers are not tied to, "What's the differential benefit of replacing this $1 of non-Medidata technology with $1 of Medidata technology?" It's, "What's the ROI in terms of the non-technology dollars I can save because I've put in things that are automating processes, sharing information in ways they haven't been shared, exposing metrics that I haven't been able to look at to manage my business." So that's why actually when we're, again, thinking about what is the wallet, it's not just defined by the technology wallet that exists.

Tarek A. Sherif

So let me give you a very -- a hard example of what Glen is referring to. One of the customers that we've been working with whose development budget is over $5 billion a year, when they were trying to look at the ROI of moving forward with us, you were talking about very high-single digit, low-double digit cumulative savings that they were expecting to get over several years by moving over to the platform. And so you're dealing with a very different mindset in terms of the spend and the expectation of the kind of productivity and efficiency you're going to get by bringing the technology in.

George Hill - Citigroup Inc, Research Division

Okay, that's very helpful. And then maybe just a quick follow-up for Cory. Your capital deployment comments sounded kind of ambitious. Can you throw a little more color around the company's appetite for deals like -- I guess, both with respect to quantity and with respect to size?

Cory A. Douglas

Let me make sure I understand your question. You're asking me concerning our capital expenditures for 2013?

George Hill - Citigroup Inc, Research Division

Well, no, I guess not specifically what the CapEx rate's going to be, but it sounded like you guys were -- sounded like you wanted to be more aggressive in your pursuit of deals. I wanted to make certain that I heard you correctly and then talk about what is the company's appetite with respect to size of deals. Is there any limit or threshold or size that you guys think is most appropriate?

Cory A. Douglas

Okay. So I'll answer that in twofolds. One is in terms of our capital expenditures, our recurring capital expenditures are around $6 million range. We have a onetime spend of about $24 million to build out our office locations. In terms of our appetite for acquisitions, I think you can -- to Glen's comments, you can see that we've had a sweet spot as it pertains to smaller types of tuck-in M&A opportunities, when we feel that there's opportunity for us to advance our technology to the market. And that's the size of the kind of deals you should expect from us in the near term, if any.

Hulus Alpay

Great. We want to thank all of you for having joined us on our call, and we're looking forward to talking to all of you again on our Q1 call. Thanks very much, operator.

Operator

Ladies and gentlemen, this does conclude your conference. You all may disconnect, and have a good day.

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