Medidata Solutions' CEO Discusses Q4 2013 Results - Earnings Call Transcript

| About: Medidata Solutions, (MDSO)

Medidata Solutions, Inc. (NASDAQ:MDSO)

Q4 2013 Earnings Conference Call

February 6, 2014 8:00 ET


Hulus Alpay - Vice President, Investor Relations

Tarek Sherif - Chairman, Chief Executive Officer

Glen de Vries - President

Cory Douglas - Chief Financial Officer, Executive Vice President


Michael Huang - Needham

Sean Wieland - Piper

Gene Mannheimer - B. Riley

Jamie Stockton - Wells Fargo


Good day, ladies and gentlemen and welcome to the Medidata Fourth Quarter and Full Year 2013 Conference Call and Webcast. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now turn the call over to Hulus Alpay, Head of Investor Relations. Please go ahead.

Hulus Alpay

Thank you, Stephanie. Good morning, everyone, and thank you for joining Medidata's Fourth Quarter and Full Year 2013 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 2013 performance, followed by our outlook for the full year 2014. 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 disclaimers 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'll 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 Solutions. Please go ahead, Tarek.

Tarek Sherif

Thank you, Hulus and good morning everyone.

We are really pleased to be with you on our call today from our new corporate headquarters in the greatest city in the world. It's been exciting to come to work here everyday. Our employees love it. And it's already turbo charging our recruiting in two short months. We have seen enthusiasm and collaboration go up dramatically and that's good for building future value.

Before I proceed, I would like to thank our employees globally for the great job they did last year across the board our people's execution was extraordinary. Our sales, services and hosting teams delivered on our commitment and provided great support for our customers, while our R&D folks kept the innovation engine humming. Our internally focused teams including finance, quality and human resources made sure that we could keep scaling the business and building value for all of our constituents.

Now I would like to talk you about our performance and share some of my perspective of what's happening in our industry. Medidata's record fourth quarter helped to cap an already impressive year. Our 2013 growth and our outlook for 2014 reflect the fact that customers are buying more at higher price points and at a faster rate.

For the full year, we experienced across the board acceleration in our operational and financial metrics over the prior year and we knocked operating cash flow out of the park. Demand for our products is the strongest in our history and with the increased breadth of our solutions both sales opportunities and sales momentum continued to build. The size and strength of our pipeline record large deal activity and the growth of our indirect channel have us excited about 2014 growth prospect.

Throughout 2013, our team's execution led to the record revenue growth increasing product adoption and growing momentum as we focused on leading our industry to the cloud. This march to the cloud was reinforced by the success of a growing list of our peers like NetSuite, Workday and Salesforce. Like them we are helping companies achieve their business objectives of doing more with less by driving productivity and efficiency gain.

The life sciences industry currently ranks 7 out of 8 in cloud based solution adoption. But a recent survey highlighted that many CIOs are projecting an acceleration in spending on SaaS in the coming year and beyond. We are seeing this heightened level of interest for our platform in the marketplace. In the past year, we met with many senior execs in the pharma industry to discuss how their organizations could most effectively leverage their investment in clinical development.

Just a few weeks ago. I met with another CFO and the CIO of one of the world's largest pharma company to share an analysis with them which define how we could jointly drive enormous value through the adoption of our platform. Our interaction built interest and momentum and we are now working with them to analyze how to implement the changes that will lead to cost savings and improved time to market in the near future.

Senior level conversations like this are taking place at an accelerating pace demonstrating strong interest in the Medidata clinical trials and signaling that 2014 should be a breakout year for adoption of our platform.

At this point, I want to highlight a few metrics then Cory will provide a greater detail on shortly. Full year total and subscription revenue accelerated for the second consecutive year growing 27% and 33% respectively. Non-Rave revenues grew more than a 100% representing nearly a quarter of our subscription revenues for the year.

EBITDA grew 43% year-over-year. Cash flow from operations increased by more than 4x and we signed a record 50 deals each worth $1 million or more during the year including three deals worth more than $10 million each in the fourth quarter alone.

Looking back on 2012, which now feels like a decade ago, we targeted investments in corporate initiatives to drive top-line growth in the near term and set the stage for future growth. I think it's pretty clear that our investments are paying off given our results and outlook and I think you would agree. And while our strategy last year continue to be invest heavily in our business, our margins are still expanding even with our level of investment, we continue to lead our peers in profitability as our gross margin scale and we see leverage from our sales efforts. More than anything, I think this reflects the power of our business model highlights the strength of our vertical cloud focus and speaks to the great execution the Medidata team consistently delivers.

Since the days when Glen and I started Medidata, we've always invested for the long-term believing that building a solid foundation ultimately creates the greatest value. I think we've been pretty much on target today. While 2013 was a great year it was in many ways still a foundational year. We've been investing in our infrastructure, our people, our systems and we are building for scale.

On the infrastructure side 2013 plus not only opened new head quarters in New York City, but also a new office in London and we'll soon be doing so in Tokyo and we upgraded many of our facilities in the U.S. as well. The infrastructure investments we've made and are now leveraging allow us to hire and retain the best talent, provide work environment that our employees deserve and will allow us to build on our success.

We've already done a lot of the heavy lifting and we expect these investments to scale from an expense perspective but we're also not yet done investing in the business as Cory will describe shortly. Some of our 2014 investments are focused on making Medidata the best technology company in life sciences to work for including enhancing training and development for employees and by extension building on our culture of world class customer service and innovation.

Along similar lines, we are firm believers that spending on innovation has the potential to generate the best returns for building future value. You've witnessed us successfully change Medidata's growth trajectory by leveraging increased R&D spend to raise the competitive bar and grow our addressable market. Our investments are very targeted with 70% of our spend focused on broadening our capabilities including developing greenfield market opportunities.

This stands in sharp contrast to legacy software providers who rely on maintenance and upgrade revenue and are spending the vast majority of their R&D budgets to maintain and modernize outdated technology while using acquisitions and share buybacks to fill the value vacuum resulting from their lack of innovation. In 2013, we focused our R&D investment on our clinical cloud platform and our benchmarking and analytics opportunity. While we more to do there, we also see so many areas for capitalizing on our unique position that we plan to once again invest aggressively in innovation in 2014.

Reflecting on 2013, there were a number of key drivers that supported our performance and gave us the confidence to increase our long-term targeting growth rate to 20% to 25% at our year-end financial Analyst Day. Foremost are the changes taking place in the life sciences industry today. Our customers spend nearly $100 billion on drug development. In the phase of challenging revenue growth and that's a major force that's resulting in a much more focused approach to innovation and value.

Historical industry dynamics are shifting including a number of large pharma narrowing their focus while some biotech dramatically grow their businesses by extending their reach to new therapeutic areas. New models of research collaboration are emerging including data sharing. Payers are increasingly focusing on reimbursing for unique solution to complex diseases and the FDA is providing expedited status for drugs that treat serious diseases especially break through treatments enabling trial flexibility and faster time to market.

We envision that in the next three to five years drug development will change dramatically as science, economic and technology collide to shape the future that emphasizes treatment effectiveness pay-for-performance greater patient engagement, focused drug development and increased collaboration. To sustain their business models life sciences companies will no longer rely on therapeutic innovation alone but we'll also focus on process innovation allowing them to bring new discoveries to market cost effectively ahead of their competition and with the right efficacy to warrant being reimbursed. This will ultimately lead to better outcomes for patients.

In this rapidly evolving landscape a new set of drug companies will emerge as the winners. It's our belief that Medidata will play a major role in this changing environment and that ultimately the most successful companies will be leveraging our platform. As the market leader and a disruptive industry force, we expect to benefit disproportionately from this process. As you may recall Medidata was founded with a vision of transforming drug development. We've never be closer than we are today to achieving that goal and that makes coming to work really exciting.

Now for a few details on our performance, in the fourth quarter total revenue rose 27% from a year ago to $75 million driven by subscription revenues which grew in excess of 30%, non-Rave revenues grew in excess of 100%.

I want to highlight two contributing solutions, randomization grew more than 3x year-over-year and trial management had another great quarter. In fact, since acquiring this capability in 2011, revenues have grown over 8x. We're now entering 2014 with substantial backlog in both solutions and see a significant pipeline of opportunity.

The stellar growth of our non-Rave revenue over the past two years is an example of how we build substantial value through innovation and by leveraging acquisitions. Product penetration in both new and existing customers increased this quarter and is a trend that has accelerated over the past two years.

In the fourth quarter, 46% of new customers contracted for multiple products versus 29% the same period a year ago. Among existing customers 49% now use more than one product and the number of customers adopting more than three products increased 50% year-over-year. These are great results and with the bulk of adoption yet to come, we're excited about our future growth.

As we begin this year, continued market share gains, increased adoption and a reputation for innovation, reliability and trust make us feel good about the sustainability of our long-term revenue growth. In light of the momentum, we had exiting last year supported by our healthy backlog and based on the size and strength of our pipeline as we enter 2014; we expect this to be another year of exciting growth.

I'd like to leave you with the final thoughts before turning the call over to Glen. The best gauge of customer adoption and success is rapid growth in usage. Our platform now supports and delivers data transactions for customers at an ever increasing scale and throughputs. In 2013, Medidata passed the $8 billion mark for total clinical records on our platform. That's up from $4 billion just three years ago. Nothing speaks more to the volume we generate for our customers than this accelerating usage of our platform. It's been a great year for Medidata, for our customers and for our employees and this has been a terrific year for me.

Now, I'd like to turn the call over to Glen. Go ahead Glen.

Glen de Vries

Thanks Tarek. As you just heard, we finished another record year with a strong fourth quarter. What I'd like to do is give you some insight into how our products and strategy have been fueling that growth and some concrete examples of how we're driving value for our clients as well as small preview of what's to come in 2014. As Tarek made a comment about scale, we crossed the $8 billion mark this year in terms of the number of clinical data records managed on our platform.

We think that this is one of the -- if not the largest repositories of consistent, clean, current clinical data in the entire life sciences industry as well as a remarkable data set in the broader world of healthcare. And of course, it's growing every single day. In fact, on an average day about 1,400 new patients are enrolled in clinical trials on the Medidata platform.

We had over half a million patients enrolled in Medidata studies in 2013. Not only this represents an extraordinary set of patients' data, but remember we managed the financial and operational transactions that surround the process of collecting and cleaning that data as well. There is a whole other order of magnitude of information that's available on our platform for analysis.

The individual customers who passed the mark of themselves having run billions of transactions and we have the ability both technically and contractually to de-identify and aggregate all that information across our client base. That's what makes our benchmarking and analytics so powerful.

And so using that data, I want to give you a tangible example of the value that our platform can drive and the value that it is driving. This is an example for studies that were completed using a component of our site engagement solution called TSDV. That stands for Targeted Source Document Verification. And with it, our clients and our channel partners can reduce their site monitoring costs, those cost could be upwards of a third of the total budget for a study.

Now from an industry jargon perspective, you may have heard of this technique being called risk-based monitoring. So our data science team performed an analysis. And what we saw was a significant reduction in monitoring effort. 20% fewer data points were monitored and there was no reduction in data quality for our clients. In fact, data quality appears that have gotten slightly higher. We even saw 7% reduction in what we would call non-enrolling sites, these are sites that don't enroll patients and are a huge cost and operational burden in almost all studies.

Let me put this into simple terms. These studies benefited from high-quality data better operational outcomes and lower costs, those costs could easily represent $30 million in a Phase III study. So better, faster and cheaper and now extrapolate that across the 100s of Phase III studies being one on the Medidata platform right now. You can see how we literally can save our clients billions of dollars.

You may have heard of TransCelerate BioPharma is an industry organization that promotes collaboration and data sharing, its members are some of the industries top companies many of whom are obviously Medidata clients. Last year TransCelerate released an industry white paper on this idea of risk based monitoring. We immediately responded with a white paper of our own showing how we can help our clients use our platform and make these transformation ideas into a reality, apropos the example I just gave.

So you can expect to continue to do this type of analysis, to continue to publish around them and use them to help establish the future best practices in our industry and to that end an incredibly important way that we leverage this type of cross customer research is by enabling our professional services team to go help our clients.

Many of our clients aren't yet benefiting from risk-based monitoring. We can show them its benefits and how they can quickly efficiently achieve them using our software. Now risk-based monitoring is a really big industry idea. But I want to give you another example. This is how the Medidata clinical cloud is driving spectacular value even through what might appear to be just incremental features. Before any of those 8 billion clinical records that Tarek was talking about can be reviewed by the regulatory agency like the FDA, they have to be electronically signed by a physician.

Like all true cloud platforms meaning what you see if you use Salesforce, Google and NetSuite. We are constantly; we are continually releasing improvements to our user experience.

Now last year, our engineering team introduced the change to our electronic signature process. Conservatively, saves about 10 seconds of time out of each electronic signature the doctor makes when they are using our platform. Now 10 seconds may not sound like much. Until you realize that they were over 18 million e-signature is done on the Medidata cloud in 2013.

We are talking about 50,000 person hours of time we save. To put that in perspective 25 person years, if you were a surgeon, you could do a 11,000 coronary bypass surgeries in that amount of time. As you will recall that investigators, doctors have a choice for who they do research projects with, so with all other things being equal many of us at Medidata certainly myself included know from our own experience of the investigator sites would choose the immediate sponsor to work with, sponsoring with the better user experience. But we see those time savings is something it isn't just good for our users. But this is actually adding to how refractive Medidata clients are to do research with versus their competitors.

So I've given you a big example as well as “small” one those are which are pretty huge and those are related to just a handful of features. Last year, we released 37 new improved modules and now represented 1000s of features. As Tarek mentioned, we released several new capabilities around randomization and trial supplier logistics and Medidata balance was one of our fastest growing product areas last year revenues increased over 300%, the number of customers using it grew by over 85%, we took our patient cloud into production last year and now our platform is extended past doctors and nurses who are already collaborating on it all the way to the patients participating in the studies on our platform.

To put simply, we added and helped through our patient engagement solutions. And we introduced new analytics such as a site quality monitoring dashboard. These go hand in hand with risk-based monitoring. And again, we provide this in an instant on method where you can get access to industry leading site engagement solutions that are backed by research, the Medidata research that I described before.

So for 2014, we are going to continue to invest in infrastructure and our architecture and given the fact we are running clinical trials at a truly unprecedented scale. We are going to continue to release highly levergable incremental improvements on a continuous basis. And we are going to be bringing brand new solutions to market inclusive of disruptive and innovative capabilities. And on top of that, we are going to continue to work with our clients, industry associations, governments, and out technology service and data partners could use these innovations to create real world value.

Again, to put things simply and in summary, we have a tremendously exciting product pipeline for 2014. We have a talented and enthusiastic R&D team ready to deliver. And we have a highly skilled professional services team who can help ensure that our clients benefit from the maximum value of what we create. As always, I'd like to take a moment to thank the global Medidata team for all your efforts last year. It is certainly a privilege to be able to work with all of you.

With that, I will turn the call over to Cory.

Cory Douglas

Thanks Glen, and good morning everyone.

I'm really excited to report on what was an excellent end to a transformative year for Medidata. Our Q4 results serve as a exclamation point to a record year and validate the vision, execution and commitment we bring to our customers in the life sciences industry. As Tarek and Glen mentioned earlier, our customers are increasingly turning to Medidata's disruptive technology to drive value at every aspect of this clinical development activities. Our performance in 2013, and importantly our outlook for 2014 is reflective of this momentum.

Let me first walk you through the details of our financial results and highlights from the fourth quarter and full year. Then I'll conclude with an update on our revised outlook for 2014 before we open up the call for questions.

In terms of our financial results, Q4 revenue was a record $74.6 million, up 5% sequentially and 27% over Q4 of last year. This represents our highest Q4 revenue growth since our IPO. Revenue from our software applications or subscription revenue was a record $63 million up 9% sequentially and up 32% over last year. Subscription revenue accounted for 84% of total revenue in Q4 compared with 81% of total revenue a year ago.

Total revenue for the full year was a record $276.8 million up 27% year-on-year. Subscription revenue was a record $228 million up 33% year-on-year and accounted for 82% of total revenue. Revenue from Rave's grew 20% year-on-year, while revenue from our non-Rave's products increased 114%. The acceleration in our revenue growth during the year was driven by our market share gain and the faster adoption of our solutions by existing customers.

Professional services revenue for the fourth quarter was $11.6 million, up 6% year-on-year and down 11% sequentially as expected due to the typical seasonal impact of the holidays in Q4. Demand for our professional services remained high as our customers seek to optimize the value of the platform and we ended the quarter – ended year with record customer services bookings. For the full year, professional services revenue came in as expected at $49 million a 5% increase over last year.

In terms of other key metrics, we maintained our high retention rates, the 98% revenue retention in 2013. We ended the year with a record $228 million of subscription backlog for 2014 up 23% compared to a $186 million this time last year. As I mentioned before, this backlog measure is just a subset of our total multiyear backlog and represents contracted revenues that will be recognized during the upcoming year.

It is important to note that backlog does not include renewals. The timing of and size of renewals can have a significant impact on reported backlog. This is relevant when considering 2014 and I will provide more details later when I discuss our guidance for the year.

Now moving down our profit and loss statements to gross profit. Our gross profit for the quarter was $56 million compared with $42.3 million in Q4 of last year. Gross margins increased to 75.1% up from 72.1% last year, driven primarily by the growth of our higher-margin subscription revenue. Gross margin for subscription revenue was 84.5% during the quarter up 230 basis points versus last year.

For the full year, gross profit increased to $207 million up 33% compared with $155.7 million from 2012. While gross margins increased to 74.7% up from 71.3% last year. Gross margins for subscription revenues increased to 83.7% from 81% in 2012 representing an increase of over 217 basis points year-on-year.

Now let's move to operating expenses. First, I want to provide some details related to our stock-based compensation expense during the quarter. Operating expenses and to a much lesser extent cost of revenues were impacted by $9.3 million of additional stock-based comp related charges associated with our long-term performance based restricted stock units. These performance units contain a three-year consideration related to compound annual growth and total shareholder return which tie our management team to the long-term interest of investors. Based upon strong results in 2013, coupled with our revenue outlook for 2014, we concluded that we are likely to meet performance criteria associated with the performance unit and therefore we incurred a charge in the fourth quarter representing a little less than 1/3rd of the overall plan cost.

Based upon our current expectations, the remaining 2/3rds of the charge is expected to be recognized ratably over the next few years. This expense has already been considered in my forward-looking guidance for 2014.

Now, total operating expenses for the quarter was $57.5 million up 30% sequentially and 74% year-on-year. Overall Q4 included nearly $9 million for additional stock-based comp related costs associated with the long-term performance units. But the majority of these cost impacted G&A and sales and marketing.

For the full year 2013, full operating expense was $183.1 million up about 23% year-on-year. R&D expense was $14.1 million in the quarter up 8% sequentially and 34% year-over-year as we continue to invest in our capacity to bring innovation to market at an accelerating rate. We increased R&D head count by 26% year-on-year and for the full year R&D expense was $51.2 million up 21%.

Sales and marketing expenses were $20.2 million for the quarter up 31% sequentially and up 57% year-on-year resulting in higher stock-based compensation expense as well as higher head count related cost as we continue to recruit top talent from leading cloud computing and enterprise software companies.

For the full year, sales and marketing expenses were $66.3 million up about 39% year-on-year. G&A expenses were $23.3 million or 31% of revenue in the fourth quarter that's up from about 15% of revenue in Q4 of last year and 22% revenue last quarter. The increase is primarily due to higher stock-based compensation expense and other one-time cost we incurred during the quarter. For the full year, G&A expenses were $65.5 million or 24% of revenue.

Then moving to profitability, EBITDA was $17.3 million for the fourth quarter, up 24% and $14 million last year. EBITDA margin was 23.2% down 50 basis points from 23.8% in Q4 of last year. For the full year, EBITDA was $57.2 million, an increase of $20 million versus last year. EBITDA margin for the year was 24.3% up 270 basis points from 21.6% in 2012 and notable increase in profitability even as we aggressively invest in our business during the year.

In terms of income taxes, we had a $5.6 million benefit impacting both books and cash tax in the fourth quarter primarily due to lower pretax and our ability income and our ability to utilize certain foreign tax credit and tax incentives. For the full year, income tax expense was $1.7 million representing an effective tax rate about 9%.

For the quarter, our adjusted non-GAAP net income was $12.5 million up 17% sequentially and 37% year-on-year reflecting our strong revenue growth in gross margin. For the full year adjusted non-GAAP net income was $41.8 million up 58% versus last year.

Now turning to the balance sheet and cash metrics. I'm particularly pleased with our cash flow as we generate over $20 million from cash flow from operations during the fourth quarter. For the full year, cash flow from operations increased 427% to a record $69.6 million. Now, while we don't revise specific guidance for cash flows, we believed we are running this business in such a manner that we can expect meaningful and sustainable cash flow going forward.

Billings for the quarter were up 24% year-on-year and cash collections were once again very strong resulting in an improvement in DSOs to an impressive 48 days. For the full year, billings increased 32% and cash collections were a record $272 million all positive indicators of a well-run company.

We ended the year with $436 million in total cash and investments up approximately $314 million over the balance we had a year ago primarily due to the net proceeds from our convertible note offering and a strong cash flow I just mentioned.

Finally, we spent about $37 million in CapEx during 2013 of which $32 million was non-recurring spend primarily associated with the build outs of our new head quarters in New York City into a lesser extent other offices globally. You can see the rest of our results in this quarter's press release.

Now let's discuss our revised outlook for 2014. For the full year, we are raising our revenue guidance from our previously stated range of $335 million to $240 million. We now expect to generate more than $240 million to $345 million of revenue reflecting 23% to 25% annual growth over 2013. We expect professional services revenues to be in the low to mid $50 million range.

Based on the midpoint of our 2014 full year revenue guidance, our full year subscription backlog together with our professional service guidance provides coverage for about 82% of revenue. This is quite impressive coverage for any company, however, keep in mind we have a number of renewals throughout 2014 that are not captured in this coverage ratio. Including the impact renewals coverage was approximately 86% of our implied full year subscription revenue guidance. Thus given our high retention rates, renewal history and current record sales pipeline I'm very comfortable with our coverage going into 2014.

EBITDA for 2014 is expected to range from $80 million to $83 million with margins ranging from 23% to 24%. As I've indicated on our past calls, our near term buyers remain towards investing in revenue growth are raising profitability in absolute dollar terms rather than focusing on significantly increasing operating margin. EBITDA margins did creep up a bit in 2013 and we are holding the line with this higher margin into 2014 rather than taking it down.

In terms of long-term scale of our business model here is something else we need to consider. In early 2014, we will have completed the build out of our new Tokyo office marking the completion of significant upgrades to all of our major facilities. The additional cost structure associated with our office upgrades represents a significant step function investment in our operations and capabilities inline with our long-term growth objectives.

In terms of magnitude, our 2014 facilities cost carry which includes rents, appreciation utilities are approximately $23 million about two-fold increase over our 2012 run rate. Now this higher level of expenses included in our guidance. However, again you can discern these facilities related cost a step function in nature and you can expect these investments to scale considerably beginning in 2015 as we grow the top line.

You could see the rest of our 2014 full year guidance in the press release. In the absence of quarterly guidance, let me share some color on the few items that should be helpful to you as you build your model. First, as you know Q1 is historically our lowest quarter from our profitability and cash flow standpoint as gross margins and EBITDA margins tend to dip seasonally. Annual compensation related cost is a primary driver here. Overall, we expect gross margins to be slightly higher than 2013, again, lower in Q1 then scaling up thoroughly through out the year. You can expect continued investments in R&D and sales and marketing increased investment in professional services, our G&A will begin to scale towards our long-term operating target.

Few other items we just consider, the quarterly progression of revenue for 2014 should be fairly consistent with 2013. Stock-based compensation is expected to be consistent with the full year amount for 2013. Depreciation and amortization expense is expected to be about $11 million for the year reflecting the impact of our new offices. For interest income and expense, Q4 2013 is a good proxy for the quarterly run rate for 2014. We will spend about $10 million to $12 million in CapEx was about half of that related to finalizing the build outs of our offices. Taxes are expected to approximate 38% after our ability to take advantage of certain tax incentives such as the R&D tax credit.

And finally, we are assuming $55.7 million in fully diluted shares outstanding in 2014.

Now just to wrap up before questions. We are very pleased with our performance in 2013, our revised outlook for 2014 demonstrates our continued strong momentum in our business and our focus on execution in the year ahead. We will continue to invest in key areas of our business and are confident in our ability to capitalize on these investments as we execute against the strategies to drive long-term sustainable growth.

Now let's open up the call for questions.

Question-and-Answer Session


(Operator Instructions) Our first question comes from Michael Huang with Needham. Your line is open.

Michael Huang - Needham

Thanks very much and great quarter, great year guys. Just a couple of questions for you, first of all, you had mentioned the strong growth of balance in trial management, was wondering were these the largest contributors to bookings from an absolute standpoint in 2013 among the non-Rave products and how does that compare with what you are seeing in the pipeline, are these likely to be the standouts again in 2014?

Tarek Sherif

Sure. Thanks Mike. Both of those products were highlighted or solutions were highlighted because we did see a lot of momentum in 2013 for them. And yes, they are at the top of the list but quite frankly we are seeing a lot of momentum out of insight from designer as well and so it's pretty broad based. They are all clustered at a fairly high level. We just felt like those were very exemplary, but we are feeling very good about our non-Rave bookings for the year came in with a lot of momentum at the end of the year and the pipeline is looking very good.

So we expect to see a fair bit of penetration out of all those products but really across the board for non-Rave. And quite frankly, Rave was pretty strong last year as well. I mean, it was around 20 or so percent. And we got a lot of opportunity in the pipeline around that as well. I think the highlight for us is, we are really seeing customers focusing on the platform solution. So some existing customers as well as some greenfield opportunities, they are looking at going all in and that's got us very excited.

Michael Huang - Needham

Great. And my follow-up is kind of related to my first question. So I believe was earlier this year that you are talking about opportunity to sell the broader platforms to some of the single study customers. I was wondering if you could update us on – on the progress that you are making on that front and whether or not you are seeing any positive trend there? Thanks.

Tarek Sherif

Yes. As a matter of fact, we went live with a couple of our clinical site studies. So we have seen some good traction there. And just like we are seeing interest in the overall platform, we are seeing interest by single study customers. The numbers are still pretty small in terms of number of studies though we did find some fairly substantial one about 5 or 6 asked what we should usually see as an ASAP. So we are pretty optimistic about how that's going to go in 2014.

Michael Huang - Needham

Thank you very much guys. I will turn it over.


Our next question comes from Sean Wieland with Piper. Your line is open.

Sean Wieland - Piper

Good morning and nice work guys.

Tarek Sherif

Thanks Sean.

Sean Wieland - Piper

So I want to ask about enterprise deals in the pipeline landing some big elephants, what – any progress there in the quarter what's the outlook going forward?

Tarek Sherif

The outlook going forward is great. We got a number of existing customers who might have been Rave only customers that may have had a couple of additional solutions who are looking at the entire platform as well as some – as I mentioned earlier some greenfield opportunities with customers we haven't historically worked with in any meaningful way. We are looking again at the entire platform. It's really focused on value creation.

So how much value can be created for them, how can we help them to drive down their cost and improve productivity and efficiency. It becomes a mainstream topic now at very high levels within our customer base, within potential customers. And at the end of the year, we did get a couple of what I would call pretty close to platform deals in the pipeline and got them signed.

Sean Wieland - Piper

All right. Super. And what are your thoughts on pushing up -- into early stage?

Tarek Sherif

In terms of you mean pre-clinical or in–

Sean Wieland - Piper

Yes. Pre-clinical, yes.

Tarek Sherif

I think the Phase I. And we are pretty deep into Phase I already.

Sean Wieland - Piper


Tarek Sherif

At this point, no comment on pre-clinical.

Sean Wieland - Piper

Okay. And then finally my last question, I will just squeeze three and you mentioned that you have the right to the de-identified data and the aggregated data across sponsors. That is different then according to my notes on what you said at the analyst day where you specifically said that the sponsors retained the rights to the data. Can you help me correlate those two comments?

Glen de Vries

Yes. Sean, they do not actually consult with each other. So the data that our clients put through our platform as you said belongs to them completely. We are there to process it for them and they are the ones and the only people who can look at the discrete identified information. For example, individual blood pressures for different subjects who are how long it took a specific person to do a specific task. But we had contractual rights to and this has been an evolving part of our analytics strategy now for years just before the IPO.

If you take away the ability to associate that individual person's performance or that individual patients clinical data with them and you aggregate that kind of information plus part [ph] of our platform, if you will. So here is how quickly people do tasks across all Phase I studies versus Phase III studies. Here is how much it's going to cost to do something in China versus South America. That aggregate de-identified data is what we are able to package back up in our analytics and benchmarks and include in our products going back to our customers. Does that clarify?

Sean Wieland - Piper

Yes. It does. It's very helpful. Thanks so much.

Glen de Vries

Thanks Sean.


Our next question comes from Gene Mannheimer with B. Riley. Your line is open.

Gene Mannheimer - B. Riley

Thanks. Good morning and congrats on a great quarter and year.

Tarek Sherif

Thanks Gene.

Gene Mannheimer - B. Riley

Tarek, I think if I heard you right, you mentioned that you signed in 2013 10 deals north of $10 million is that the right number?

Tarek Sherif

No. I refer to the third, to the fourth quarter and I said we signed three deals north of $10 million.

Gene Mannheimer - B. Riley

Okay, okay. Great.

Tarek Sherif

But a total of 50 for the year that were north of $1 million.

Gene Mannheimer - B. Riley

Okay. So three north of $10 million in the fourth quarter, just to give us some perspective how does that compared to 2012 in terms of these mammoth size deals?

Tarek Sherif

Sure. It's definitely a step up. It's the most number of large deals or deals of that scale that we ever signed.

Gene Mannheimer - B. Riley

Okay, great. And I'm sure indicative of just of the platform breadth that you have delivered over the last couple of years. And then with respect to the subscription backlog, I'm showing that if we x out professional services, you got about maybe 80% coverage, if you will into the current year revenue and I know that a lot of that is a function of renewals. So can you tell us the timing of these renewals, whether you expect them to be front end or backend weighted?

Tarek Sherif

Actually, I think the way to think of them is that they are pretty much spread fairly equally across the year. We try not to get into the specific of the timing just for competitive reasons as well. But it's a – we are very comfortable with where we are from a coverage perspective. And obviously, that comes through in the fact that we raised guidance again coming into the beginning of the year.

Gene Mannheimer - B. Riley

Okay. Thanks guys.

Tarek Sherif

Thank you.


(Operator Instructions) Our next question comes from Jamie Stockton with Wells Fargo. Your line is open.

Jamie Stockton - Wells Fargo

Hi. Good morning. Thanks for taking my question. I guess the first one is, Tarek I think you said or maybe Glen did that 46% having your new clients are signing up for multiple solutions. Could you give us some feel for what that would be if you were to just look at the new clients that were signing up for Rave?

And then also taking an incremental solution just to help us understand how many clients might be coming in that are picking off on the non-Rave solutions and then maybe later on you could cross-sell them Rave?

Tarek Sherif

If I understood the question right way, the vast majority of our new customers or still coming in buying Rave and then buying incremental additional solutions with Rave whether it would be Safety Gateway or Coder or some other – one of the other solution. We are starting to see and this trend started to accelerate sort of at the second half of the year. We are getting in with a different product. Maybe it's our trial management solution. And then we are actually able to sell them EDC. So the vast majority or so coming in via EDC and we are upselling other products, so but that equation shifting a little bit.

Jamie Stockton - Wells Fargo

Okay. And you said that you expect kind of a new type of pharmaceutical company to emerge, should we be thinking about those companies being from within the top 25 seem to be spending most of the R&D dollars today or we also going to see some really innovative smaller companies that ultimately end up driving a lot of growth. And therefore, maybe the number of new clients that you are signing up each period is still going to be a very material component of the overall growth trajectory?

Glen de Vries

So, I mean we certainly think that they are going to be new entrance into the top pharmas in the world. We're obviously not in a position to outline on who exactly we think that's going to be. But I will just give you an example there was a tiny biotech that we used to work with years and years ago that windup being acquired by a company, which is actually Gilead. They're doing a huge number of studies when we look at their own performance. If you look at some of the smaller companies and their ability to wrap their minds around how to drive maximum value from a platform like Medidata's. In many cases they can really do that very quickly, they don't have some of the legacy systems or just legacy thinking that you see in some top lines.

That said, now to Tarek's point, we are spending 100 times with senior leaders at some of these huge pharma companies who have realized that disparity. They are conscious of the fact that they've got teams who might not be thinking in the right way or incented the right way and certainly don't have the right tools to act like a more nimble organizations. But if you're looking at one of the key issues that whether it's a big company or small company, that our clients have to think about, how do you match as quickly as possible, your new therapy with the best patients who will benefit from it. That's going to maximize therapeutic value, that's going to maximize reimbursements.

And you have to think very differently about how you do research. You have to leverage the fact that we can instrument people this is why mHealth is so important in new ways. You have to be able to think differently about how biology, how you think about what's happened in research and how it connects to development and can be leveraged to figure out the best indications to be in. And frankly just to think of new statistical models and actually models are hundreds of years old, but they're pretty new in terms of being applied to clinical trials.

In terms of how you get to the point that you've matched those right patients with new therapy quickly and whether it's a big or small company, you think the people who are figuring that out are the ones who are growing. We take the ones who are thinking the right way about that or the ones who we see with strong product pipelines themselves. And frankly, those are the ones who we are making sure are Medidata customers.

Jamie Stockton - Wells Fargo

Okay. Thank you. Just one follow-up housekeeping question. What was the gross number of new clients during the period? That's it from me. Thank you.

Glen de Vries

I think you can find out in our press release. I think it's been covered in our press release, you can find that information.

Jamie Stockton - Wells Fargo

Okay. I think the net number maybe in there. Thanks.


Thank you. That concludes the Q&A session. I will now turn the call back over to Tarek Sherif for closing comments.

Tarek Sherif

I want to thank all of you for joining us today. And we're looking forward to a great year. Talk to you on our Q1 earnings call. Thank you.


Thank you, ladies and gentlemen. That does conclude today's conference. You may now all disconnect. And have a wonderful day.

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