Veeva Systems' CEO Discusses F3Q 2014 Results - Earnings Call Transcript

| About: Veeva Systems (VEEV)

Veeva Systems Inc. (NYSE:VEEV)

F3Q 2014 Earnings Conference Call

December 5, 2013 4:30 PM ET


Peter Gassner - Founder and CEO

Tim Cabral - CFO

Matt Wallach - Co-Founder and President

Rick Lund - Director, IR


Jennifer Lowe - Morgan Stanley

Nandan Amladi - Deutsche Bank

Brendan Barnicle - Pacific Crest Securities

Richard Davis - Canaccord Genuity

Tom Roderick - Stifel Nicolaus

Jason Maynard - Wells Fargo


Good afternoon, and welcome to the Veeva Systems Third Quarter 2013 Conference Call. All participants will be in listen only mode. (Operator Instructions). Please note, this event is being recorded.

I would now like to turn the conference over to Rick Lund, Investor Relations Director. Please go ahead.

Rick Lund

Good afternoon and welcome to Veeva's fiscal third quarter 2014 earnings call for the period ending October 31, 2013. With me on today's call are Peter Gassner, our Chief Executive Officer; Matt Wallach, our President; and Tim Cabral, our Chief Financial Officer.

During the course of this conference call, we will make forward-looking statements regarding our trends, strategies and the anticipated performance of the business. These forward-looking statements will be based on management's current views and expectations, and are subject to various risks and uncertainties. Actual results may differ materially. Please refer to the risks listed in our earnings release and the risk factors included in our registration statement on Form S1 filed with the SEC on October 15, 2013, which is available on the company's website at, under the Investors section, and on the SEC's website at

Forward-looking statements made during the call are being made as of today. If this call is replayed or viewed after today, the information presented during the call may not contain current or accurate information. Veeva disclaims any obligation to update or revise any forward-looking statements. We will provide guidance on today's call, but will not provide any further guidance or update 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.

Peter Gassner

Thanks Rick, and thanks to everyone on the call for joining us today. I am pleased to report total revenue for the quarter of $55 million, a 54% increase over the same period last year, and subscription revenue for the quarter of $38.9 million, an increase of 95% over the same period last year. We continue to grow profitably with Q3 non-GAAP net income of $8.3 million, up from $6 million a year ago. Our growth and profitability are indicators of the strong demand for our industry cloud solutions.

Since this is our first earnings call, I will take a moment to provide some background and context on our model and market opportunity, along with a few customer highlights from the quarter. I won't name these customers, since they generally prefer we not cite them in this type of forum.

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

Veeva provides industry cloud solutions: software, data and services, for the global lifesciences industry. Our customers include companies such as Pfizer, Novartis, Lilly and Amgen.

Lifesciences is one of the world's largest industries at $1.6 trillion, and it’s growing at roughly 6%. It's also rapidly changing, and under intense competitive and regulatory pressure. Legacy client server systems often can't keep up with the pace of business and regulatory change. It's a perfect fit for industry specific cloud solutions.

We are at the very beginning of a major technology replacement cycle with lifescience companies as they move from client server systems to the cloud with our industry applications. Our objective is to become the most important technology provider to the lifesciences industry, by delivering an expanding suite of applications and data, in areas of the high strategic value, and ensuring that our customers are successful.

Customer success has always been our number one company value, and has fueled our growth. Prioritizing customer success is crucial, when you are focused on one industry. Even more so, in one with so many large global players. Word of success or failure quickly gets around. Our customer success oriented approach has allowed us to grow rapidly and profitably. We don't do multiyear transactions to pull in business. Our financial model is not based on onetime mega deals. We engage with a view toward a 10 year plus customer relationship, based on earning business through successful projects that provide strategic value.

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

When we have a successful project with one product, in one division or geography, the customer will likely deploy more Veeva products to more divisions and geographies. That customer is also likely to recommend our products.

Today, we deliver 10 major products across three product lines. Veeva CRM for customer relationship management; Veeva Vault for content management; and Veeva Network, our customer master solution. These solutions help companies get drugs to market more quickly, maximize sales of existing products and maintain compliance with government regulations.

Let me share a few CRM customer examples from the quarter, that are representative of how many of our customers purchase and expand their usage of Veeva. One is a long time customer, and one a new global deal.

Roughly two years ago, we were selected as the global CRM standard for a top 50 global pharma company, as a result of a few successful pilots. The customer has steadily expanded its use of Veeva to new divisions and geographies ever since. In Q3, it purchased roughly 5,000 CRM subscriptions for users in Asia, Latin America, and Europe.

With the significant base of Veeva CRM users globally, and a highly strategic relationship, we have great opportunities to continue to sell more add-on products and product lines.

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

In the quarter, we also had our very first 1000 plus user deal for Veeva approved email, a new CRM add-on released in June. It was the result of a pilot, with one of our large, longstanding CRM customers. They see approved emails, as a strategic capability to deliver product information, in a compliant way, reaching healthcare professionals, when and where they need it.

The project is in its early stages. So far, they are thrilled with the products ease of use and the high email open rates. We believe there is great potential to expand beyond these first few thousand Approved Email users, to users in more divisions and geographies.

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

The majority of our vault applications were released just over a year ago, but we are in the very early innings. We are already seeing good traction in the market and a strong pipeline for Vault.

This quarter, the first global implementation of Veeva Vault Medcoms went live at a top 50 pharma company, to replace a custom built application built on SharePoint, that just wasn't keeping up. The project was completed successfully, on-time and on-budget, and is delivering material efficiency in compliance gains. The customer is now planning more Vault projects.

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

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

Our first data offering, Veeva Network, became generally available for the US and China, just a little over a month ago. A complete customer-master solution, Veeva Network is a single source of up-to-date customer information. The customers in this case are the doctors, other healthcare professionals and healthcare organizations, lifesciences companies promote their products too.

We are coordinating track interactions while remaining compliant with regulatory and reporting requirements, lifesciences companies should maintain a single master record for each customer, that includes all the key information. And it's not as simple as names, numbers, and addresses; they must track hospital affiliations, where doctors work on any given day. Whether their licenses are up-to-date; if they can receive drug samples at that location; what specialty their license is for, and so on. And the information is constantly changing.

Today, to try and get to a single customer master record, companies buy data from many different sources, and then configure software toolkits to merge and deduplicate the data. This process is very difficult and (inaudible). They may still need to integrate the data with their enterprise applications. In all, it's a costly and time intensive effort, highly inefficient, as nearly all companies across the industry are recreating the same wheel.

Veeva Network provides the customer information they need, right where they need it in their CRM system, and because Veeva Network is accessed via the cloud, there is a network effect, as updates from across our customer base, become part of the master data repository, benefiting everyone. In effect, we are leveraging the power of crowd sourcing for the enterprise.

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

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

Tim Cabral

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

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

Let me now discuss how our revenue model works. Our total revenues include subscription services revenues and professional services revenue, which we will refer to as subscription revenue and services revenue respectively.

Our subscription revenue is generated by selling annual subscriptions to our cloud solutions. Revenue is recognized ratably over the length of the contract. Our orders with new customers and renewal orders are typically one year in length. However, as our customers add more users across new divisions and geographies, we make these add-on orders coterminous with the customer's current renewal date. This means that we initially build these add-on orders for a period that is less than 12 months.

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

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

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

As we move down the income statement, please note, that unless otherwise stated, all references to our expenses and operating results are on a non-GAAP basis, and are reconciled in the tables from our press release, which is posted on our website and filed with the SEC.

Our subscription gross margin was 76.6%, up from 74.2% a year ago. Fees for the platform make up the substantial majority of the costs of subscription revenue for our base CRM products. These fees include the cost of the datacenter infrastructure and the cost of the technology platform, which is normally reflected in R&D expenses, for companies that build their own platform. You will see the same accounting treatment with other companies as the use of platform-as-a-service becomes more common.

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

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

Turning to operating expenses, we continue to make investments to support our rapid growth. Our total operating expenses are up almost 100% from one year ago at $21.8 million versus $11 million. Sales and marketing expenses were $10.9 million or 19.9% of revenue, versus $5.3 million last year. We added sales capacity for our newer R&D focus solutions and expanded our international sales capacity across all product lines. That investment in our sales team will continue in the near term, and you may see sales and marketing, as a percent of revenue, increase slightly in future quarters.

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

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

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

While it is common practice to derive a calculated billings metric, using total revenue plus changing deferred revenue as an indicator of future revenue growth; in our case, that metric is not always a reliable indicator.

There are three important reasons why; first, while most of our customers are built annually, some are built quarterly, including some of our largest customers. Second, a proportion of new business in a given quarter, attributable to add-on orders, varies significantly. As I mentioned earlier, add-on orders are coterminous with the customer's current renewal date. If the proportion add-on orders in a given quarter is comparatively high, with the average stub period particularly short, the calculative billings number in that quarter will be lower.

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

Let me wrap up by sharing our outlook for our fiscal fourth quarter. On the top line, we expect revenue in the range of $57 million to $58 million, which would imply 43% to 46% growth year-over-year. This also implies total revenue of fiscal 2014 of approximately $204 million to $205 million, which will represent 58% to 59% growth from fiscal 2013. On the bottom line, we expect non-GAAP net income per share between $0.05 and $0.06. When we report our fourth quarter results, we will provide revenue and net income per share guidance for fiscal 2015.

In summary, we are very happy with the results this quarter. In the future, we will continue to invest in our business to drive rapid subscription growth, as we take advantage of the large opportunity in front of us.

With that, let me thank you all for joining us on the call, and I will now turn it back to the operator for questions.

Question-and-Answer Session


We will now begin the question-and-answer session. (Operator Instructions). And our first question will come from Jennifer Lowe of Morgan Stanley.

Jennifer Lowe - Morgan Stanley

Great. Thank you. First, I want to ask about Vault, and it was great to hear a couple of the wins that you’ve had there. And what's sort of notable to me is, is that it sounded like both of those were on the R&D side of the house with the Medcoms and the eTMFs and I think historically, we have thought about Vault team, the greatest adoption on the commercial side of the house. So can you talk a little bit about what you are seeing in R&D with Vault? Are you starting to see more momentum there? Was it coincidental that those were sort of the two wins you called out, or are you really starting to see a pickup in momentum in the R&D organization as well?

Peter Gassner

Thanks Jen, that's a great question. And actually, your first question is great there about the Medcoms, because that is an area that some customers, in their internal areas, consider it in the R&D side, and some customers consider it in the commercial side. So we actually, as to probably the majority of customers, consider Medcom in the commercial side. So Medcom, who we have considered in the commercial side, and ETMF in the R&D side.

And we are seeing good pickup in Vault across the board. We started our first product within the commercial side, with the promotional materials management, that was roughly two years ago, [where it became GA] [ph] and then in the last 15 months, we have introduced products on the R&D side with eTMF, with QualityDocs, with System Submissions, and also the Vault platform.

So at a high level, what we are seeing for Vault, or what I am enthused about is, we have customers. We have over 50 customers that are doing their implementations. We see a pattern of customers adding more users and more products in getting real value out of the system, so that's very encouraging.

What I'd say is, Vault is -- it has reached its escape velocity. We see that pattern. We know it’s going to be a big product, and we see that pattern, where it's going to go. We have implementations. We have a pipeline of seven figure -- some seven figure deals involved, that have active opportunity. So we are very happy about that, and that's one of these leading indicators that you see, and that's one of the things we saw in CRM also at the time.

And then another really, thing that we focused on, is we have been working on Vault since the first line of code for over three years, and we are doing something unique. We are building a content management suite of applications on our own content platform in the cloud for a highly regulated industry. Nobody has done that before, and nobody is trying to do it. So we feel like we have a three year head start on anybody to do that, so there are some barriers to entry. And the market timing is right, overall because our customers -- this is a very critical area for them, and they want to become agile and move to the cloud. So we are really seeing this great activity, great early activity across the board for Vault.

Jennifer Lowe - Morgan Stanley

Great. And Tim, just one for you. On the professional services side, last quarter, the growth there slowed. It looked it slowed a little further this quarter, and there are certainly a lot of factors at play there. Some of it is, the mix between upsell and new business, some of it is the business you are doing with partners. But, was there anything kind of notable on the quarter on either of those fronts or something different, and how are you thinking about that trajectory on professional services revenue going forward?

Tim Cabral

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

Jennifer Lowe - Morgan Stanley

Great. Thank you.


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

Nandan Amladi - Deutsche Bank

Hi, good afternoon. Thanks for taking my question. Congratulations on your first quarter as a public company. First question is on -- actually, you have become a public. How has customer perception changed, particularly as you address some of your international markets? You talked about international revenue already being 40% of the global, but that's based on [States] [ph]. How about on the truly international side, where the companies are actually based outside the US?

Peter Gassner

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

Nandan Amladi - Deutsche Bank

Okay, thank you. And a quick follow-up. On the add-ons, I know we have talked about this during the (inaudible). How is the trajectory trending now over the last quarter or so, with -- specifically, the CRM add-ons? And that has been a source of a lot of questions from investors?

Peter Gassner

Matt, why don't you take that one?

Matt Wallach

Sure. Hi Nandan. So the two CRM add-ons are close with marketing, and this is something that generally, almost all of our customers are using in one way or another across different geographies. The product is about two and a half years old. We continue to see it generally purchased along with the initial CRM projects now; where initially, it was something that was people adding on to an existing CRM, now we see it more and more as just part of the base of starting a project, and that's what we would expect.

The attach rate of that product is right around two-thirds. So two-thirds of our CRM users are also using Veeva CLM, which was the first add-on. The second add-on is Approved Email. This is something that really didn't exist before, the ability for sales reps to send compliant emails to physicians and other customers and guarantee that they are going to get the right version of the right content, because of the integration that Veeva CRM product has with Veeva Vault. So it’s a unique product. It has only been out for a couple of quarters. We’ve signed our first few customers, Peter referenced more than a 1000-user deal, and the statistics are actually quite shocking. Where we all know, normal email open rates are in the 0% to 2% range. What our customers, two of them have reported back to us, one in Europe and one in the US, is open rates in the 30% to 38% range, and just have been a remarkable success for them so far.

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

Nandan Amladi - Deutsche Bank

Thank you.


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

Brendan Barnicle - Pacific Crest Securities

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

Peter Gassner

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

Matt Wallach

Sure. Hey Brendan. So we've talked about penetration, let's define the base CRM product as the way that we would talk about it, because it gets confusing if you talk about add-ons and altogether. So for the base CRM product, when we think about the high end of the market, you mentioned 500 companies. We measure in track, kind of the top 50 pharma companies. So if you look across the top 50 global pharma companies, at all of their pharmaceutical sales reps, we penetrated roughly one third of those users. And this is great, because with the successful projects, we are able to expand, not only to the other two-thirds within that market, but then into all of the CRM add-ons, and we have already started to see a lot of opportunity to expand beyond CRM, with the Vault and Network product lines, and that's really based on the customer success of those first projects.

Brendan Barnicle - Pacific Crest Securities

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

Peter Gassner

Okay. The platform, and just to add to Matt's answer there, one of the great things about -- it’s a great thing when we penetrate in with the base CRM product, right, because we get the customer success there and the word of Veeva there, and its really -- that's part of our strategy to get in with the product, customer success and then further products. But now, about the platform, so we have a great relationship with, we are a preferred partner for the global lifesciences industry, things are going well, and actually, I think for us this year, you could really see the momentum at salesforce, of their platform business, and people, Veeva and others building specific applications on the platform, and this is a key part of their strategy. So the nice thing is that it's a win-win relationship for us and salesforce, that comes in line with their strategy.

Now, as far as, we don't plan to replatform, it's not in our customer best interest -- our best interest or's best interest, but to answer your question, could Veeva replatform if we needed to, absolutely we could, as we have been doing platforming for along time, and we have platforms for other products, we could. But we absolutely don't think that's in anybody's best interest.

Brendan Barnicle - Pacific Crest Securities

Great. Then lastly, Tim, just one for you on professional services. Obviously, you have mentioned the emphasis there. But do you guys feel like -- you said you built out the ecosystem. Do you have an adequate ecosystem to meet the demand for all the new bookings that you are seeing? We have seen several companies this year, that sort of run into some issues not having adequate support for the new deals?

Tim Cabral

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

Brendan Barnicle - Pacific Crest Securities

Great. Thanks guys.


And our next question is from Richard Davis of Canaccord.

Richard Davis - Canaccord Genuity

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

Peter Gassner

All right Richard. Yeah, the strategic relationship, that's a great question. I think when you deliver more value into a customer, more product lines, more products, more divisions, more geography, that's really how you become strategic. As you deliver more value and as they see, the customer sees the potential of you to deliver even more value.

Now with that comes many different points of contact, across divisions, products. Many different -- more contact points into Veeva, and that becomes a need to coordinate it. Now something we have always done, because we have had a field force in the different regions, and we have our field force, our sales force also split by commercial products and R&D products. So we have always needed to coordinate, and I would say that the changes going forward will be more formalization of a global account manager type role.

Now, nothing abrupt or radical, I think that's a gradual change you get into, and in fact, it started with -- as soon as we started going internationally, but I think you will just see a gradual change of more of a specialization, in terms of global account managers, regional managers, product line, specific customer support people, that type of thing, in order to manage effectively the global relationship. And I think in this area, our customers have been great, because they give us feedback. They tell us how they want us to involve, they often explain to us, what of their vendors do this well, what don't do well. They give us clue. So if we listen enough, we can really excel in this area.

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

Tim Cabral

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

Richard Davis - Canaccord Genuity

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


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

Tom Roderick - Stifel Nicolaus

Hey guys, good afternoon. So wanted to take a step back out here, maybe ask a high level question. One we get a lot, I am sure you get a lot, is the question about market penetration. Can you give us a sense, if we can think about the global opportunity from a sales rep perspective, on the sales and marketing side, how many reps do you think about as being addressable, and how should we think about where the company is today penetrated from a US standpoint, global standpoint, ultimately trying to get a feel for where could market share go for your solutions, longer term? Thanks.

Peter Gassner

Matt, do you want to take that one?

Matt Wallach

Sure. Hey Tom. So I talked a bit in terms of the top 50 pharma, and we are roughly a third penetrated there. If you look globally, there is about 450,000 pharmaceutical sales reps, animal health sales reps and consumer health sales reps. I think I said before, the number has been pretty static actually over the past five years. It shifted around a bit. You will see announcements of layoffs in one country or one company. But there is also lots of announcements that you probably don't see, because they are not as public. Companies getting a new drug on the market, and increasing.

So that 450,000 has actually stayed about constant, over the past four or five years. And so, we have penetrated roughly about a third of them, with just the base product. So then you ask kind of where is the opportunity. So obvious opportunity is to continue. There is another two-thirds of those sales reps roughly, that we can penetrate with the base product. But CRM is one of about 20 different applications that pharmaceutical and animal health and consumer health sales reps use on a daily basis or a weekly basis.

So we have already picked off kind of two of those, what we call CRM add-ons. But these are not insignificant development efforts. These are six to nine even 12 month development efforts to replace a significant application that's controlling or managing an important business process, whether it'd be something around, call activity or especially around compliance or reporting, or any of these things. So over time, we do have plans to add more CRM add-ons; and the larger the install base, the larger of an opportunity we have for these add-on products.

I will also say -- I mentioned earlier, Approved Email, this was something that really didn't exist before. Sometimes, we will replace things that they have an existing client server system for this deployed to all the users, and its kind of traditional replacing a legacy client server system.

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

Tom Roderick - Stifel Nicolaus

That's great. Thanks. One quick follow-up for me. Tim, I [could turn] this on you. I have few questions about professional services. Can you give us a sense as to how big your professional services division is today, and what sort of hiring plans you have laid out for the immediate future, and maybe think about next 12 months?

Peter Gassner

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

Tim Cabral

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

Peter Gassner

And manage the demand. We have pretty good visibility into demand. Oftentimes, we have quite a strategic relationship with the customer. So many times, we may know 12 months in advance some time about a project starting. Its part of a plan, a multiyear plan we put together. So I think this will be more controlled in this area, rather than somebody who doesn't have as much lead time with their customers.

Tom Roderick - Stifel Nicolaus

Great. Thank you guys. Appreciate the help.


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

Jason Maynard - Wells Fargo

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

Peter Gassner

Jason, in terms of competitive areas, there are a lot of similarities with CRM in that. We are replacing these legacy client server systems in the CRM area. We had competition from Oracle, from (inaudible). In the Vault area, its often SharePoint and Documentum and the different application layers built on those platforms.

Now, these vault applications -- Vault is a big product line, we think at least as big as CRM. And when the Vault area, if we just take one of the applications, lets say the ETMF application, that's sold into the clinical area, clinical operations more specifically, of lifesciences company. They wouldn't really consider too much the success of the CRM application, but that's in a completely different area. Now however, they would consider the validity of the Veeva company and the strong financial strength, so they would consider that.

I think, Vault will track very similarly in CRM. We have to win the business of the different applications. We have to get the small pilot successful and happy. We have to watch them grow, and then at some point, it reaches a tipping point. Vault is a journey we have to work hard on this week, this month, this quarter, this year, and over the long term, many years. There will be no easy way to have growth in Vault.

Jason Maynard - Wells Fargo

Okay. And the other question I had was around Network; and the idea of master data management has been around for a long time, and that has been an extremely difficult problem to solve, and as you move to, what I will call I guess a data cloud model, can you may be talk about what you think the ROI -- hard dollar ROI savings are for this product line? I mean, where you think that comes from, whether you want to measure it in terms of reducing redundant labor, that information, you name it in terms of the validity of costs that are associated with this issue?

Peter Gassner

(Inaudible) that, the costs. The costs are varied in multiple areas of the lifesciences company. However, you can add them up. Your lifesciences company would know exactly the amount of money they spend on data, in general. They will know that. And then it's large. The amount of money they spend on data in general, as oftentimes, more than CRM. So it's large. Then they have software and service and things in data stewardship. So we don't have the exact number there, but it’s a large amount of data. But the reason why they would do this, is not about cost savings, its about driving more sales, because when you think about it, the pharmaceutical company, biotech companies who can spend billions of dollars each, per year promoting their products, they are doing it with a very substandard view of their customers. So they could be wasting significant percentages of their sources, and they are supplying significant percentages of the resources.

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


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

Peter Gassner

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


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

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