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Medidata Solutions Inc. (NASDAQ:MDSO)

Q1 2014 Earnings Conference Call

April 22, 2014 08:00 AM ET

Executives

Hulus Alpay - IR

Tarek Sherif - CEO

Glen de Vries - President

Cory Douglas - EVP and CFO

Analysts

Jamie Stockton - Wells Fargo

Glen Santangelo - Credit Suisse

Michael Huang - Needham & Company

Dave Windley - Jefferies

Garen Sarafian - Citigroup

Sandy Draper - SunTrust

George Hill - Deutsche Bank

Operator

Good day, ladies and gentlemen and welcome to the Medidata First Quarter 2014 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 call is being recorded.

I would now like to introduce your host today’s conference Hulus Alpay. Please go ahead, sir.

Hulus Alpay

Thank you, Daniel. Good morning, everyone and thank you for joining Medidata's First Quarter 2014 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 also comments on our first quarter 2014 performance and business outlook. 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. Please go ahead, Tarek.

Tarek Sherif

Thanks, Hulus and good morning everyone. With our execution in the first quarter, we’re off to a solid start for what will be another exciting and record year of growth from Medidata. We’re operating in our receptive market in which we continue to see more larger opportunities and we are executing on our near and long term plan.

Accelerating new deal activity is creating strong momentum and importantly we made progress on a number of platform pipeline opportunities during the quarter, positioning us well for the remainder of the year and beyond. As I commented before, we are experiencing a privileged moment, one in which we stand to be a primary beneficiary of the massive transformation happening in the Life Sciences industry, as it leverages technology to drive innovation and growth.

We are seeing multiple healthy trends in today’s market. R&D budgets are rising for our clients as a renewed focus on innovation and growth through product development, once again becomes a central theme. Similarly, in-flows of capital to younger companies in early stage biotech have increased dramatically over the past year. The combination of these of two factors in our strong competitive position is resulting in a much greater level of sales activity, as I’ll discuss a bit later in the call.

While the overriding themes of increased outsourcing, simplification and strategic partnering are central to the kinds of decisions that are being made, more than ever technology is being viewed as an integral part of the decision making process. More specifically, we are seeing that Life Sciences companies are migrating more rapidly than before to cloud based technology and are starting to use data rich analytics to meet their needs.

The potential to drive substantial value for our clients is leading to a dramatic increase in interactions with senior executives; in part, because these same leaders are increasingly seeing their term incentives align with improved R&D productivity. We see this as a positive long term development for the industry and for us. Our current and perspective clients are actively engaged in looking for ways to leverage our technology to drive efficiency and transform their organizations.

These theme may feel familiar to you, because it has happen previously in the golden age of ERP in the 1990s and the cloud revolution in customer relationship management created by salesforce.com in the mid-2000. The technology transformation of Life Sciences is still in its earlier stages and no company is better positioned to help drive that transformation than Medidata.

According to a recent CIO survey, three of the biggest priorities for CIOs in 2014 are cloud computing, analytics and mobile applications. Medidata is uniquely positioned to match this priorities. We currently offer the most extensive cloud based platform in Life Sciences, the industry’s most comprehensive set of operational, financial and clinical data matched with increasingly robust analytics and the Medidata patient cloud, our rapidly evolving mobile solution.

As you’ll be hearing from Glen shortly, we’re currently executing on this opportunity and we’re putting significant resources into these three areas, demonstrating our long term commitment to growing our leadership. In previous calls we’ve discussed our intention to continue to invest aggressively in our technology. Our R&D spend in this quarter and for the full year, is consistent with the strategy and demonstrates our confidence.

The cost of Life Sciences R&D has increased dramatically where it has couple of decades with clinical development alone approaching a $100 billion per year. At the same time, the number of drug approvals has declined during the same period. This dynamic much like healthcare productivity, where costs now account for just under 20% of U.S. GDP is sustainable.

The smart application of technology is an important part of the strategy and approach to change this unhealthy trajectory. Not all companies will be early adopters but those that are will be a disproportionate competitive advantage. We believe and in fact are seeing evidence that combining technology innovation with therapeutic innovation is critical success factor for the next wave of leaders in Life Sciences.

We recently hosted a dinner with Steve Forbes that was attended by select CEOs and other senior executives of life sciences companies. This cumulative R&D spend was over $16 billion in 2013. At the event, we discussed the challenges facing the industry and there was universal agreement that the current business model is not sustainable. All the participants agreed that the application of technology will play a critical role in transforming the industry.

That’s the key to recruiting patients faster increasing the success of trial sites and leveraging the vast trove of genomic and patient data that is expected to spur the next wave of therapeutic innovation. That’s the key to healthy growth and the promise of personalized management. Ultimately it’s all about creating greater value for patients. You’ve all been hearing and reading about the Internet of things. It will have a dramatic impact on Life Sciences as the next revolution in computing will be enabled by cloud Big Data mobility.

A recent research report predicted that a 5% reduction in clinical trials cost could represent the equivalent budget of three new drugs every year. We think that number is conservative and represents a subset of the true opportunity. Our value modeling work for life sciences companies fully adopting our platform and leveraging our data assets show significantly higher value creation through cost reduction and increased time to market, all while reducing risk and driving higher therapeutic value. This is a major reason why we’re actively engaged in platform discussions with multiple current and prospective clients.

As I noted before, while the sales cycle and adoption cycle for our platform is longer and more complicated, requiring detailed discussions on technical capabilities, and process design, the scale of the commitment is ultimately substantial and long in duration. At our Analyst Day we raised our long term revenue growth target to 20% to 25%. We did this because we believe that this target is sustainable if we successfully execute on our current strategy. Much like what we experienced with Rave from 2004 onwards, this wave of growth will be driven by direct adoption of our platform by that of our growing ecosystem of partners.

Now on to some highlights for the quarter and observations for the balance of the year. Reflecting on our performance this quarter, we see an acceleration in several key metrics and trends, a positive competitive environment, growing interest in our platform, strong new client adds, and continued multiproduct adoption. Our deal activity for both direct and partner bids hit record levels this quarter reflecting strong interest in our solutions and services. Business development leads and RFI responses were at record levels this quarter, in fact increasing over 50% and 70% respectively from Q1 last year.

I’m particularly proud to report that we achieved two major milestones this quarter. We passed the 400 client mark in Q1, and now have 420 active clients. These new clients represent additional future cross and up sell opportunities for Medidata. Given our retention rates and increasing product density now at 2.3 versus 2.2 last quarter, we expect to continue to see positive product adoption in growth trends from our growing base of clients. Also, more than half of our clients; in fact 52% now use more than one of products. And while this metric is an exciting milestone, it should be viewed as just the tip of the iceberg in terms of adoption.

Now onto some product specific highlights. Balance, our randomization solution continues to grow dramatically. We increased the number of Balance clients 95% year-over-year while revenues were up well over a 100% showing that we are taking market share from legacy service heavy randomization products as clients increasingly opt to use our cloud based solution.

Revenue from our data solutions grew in excess of a 100% year-over-year as well, supporting our view that we are at an important tipping point for adoption. The scale of our data assets is unparalleled and this asset is growing every day. It is becoming a source of significant value for our clients and is already providing competitive advantage for Medidata. While we’re still early, we’re also beginning to see patient cloud penetration increase. We’re actively executing trials and client interest is high. We expect patient engagement to be a major growth driver for the Company in the coming years.

Patient engagement is our version of social networking, enabling us to provide patients and their doctors with real-time feedback and insight, improving the overall trial experience, generating meaningful sponsor goodwill and improving patient outcome. This quarter, the top five CROs signed a multi-year agreement to adopt our cloud-based clinical trial management solution. This is the third leading CRO to make that decision to switch from a traditional on-prime product to our cloud-based solution in the past 12 months, and is broadly indicative of the growing momentum of this solution.

While Cory will shortly walk you through our quarterly financial performance; to give you some insight into how we are executing in real-time, I think it’s worth reiterating that our focus is on building and managing Medidata for the long-term. From a growth perspective, we have never been better positioned to drive sustainable above-average growth if we continue to execute as well as we have a track record of doing. In 2014 our incremental investments in our platform solutions and support should be a catalyst for closing more platform deals within the near and over the longer term.

In summary we continue to win new clients, expand our footprint with our existing clients and deliver healthy financial metrics which should gain momentum throughout the year. We also continue to grow and develop our team, our market leadership technology innovation and most importantly our mission to improve patient lives enables us to attract exceptional talent in all areas of our business, people who are committed to change, people who know how to build great solutions and people who are trusted advisers to our clients and their peers. Our employees are the foundation of our success and I want to thank all of them for their performance, dedication and passion. We think 2014 will be a great year for Medidata and we’re looking forward to sharing our growing success and momentum as the year goes on.

With that, I’ll turn the call over to Glen for more insights on how we’re transforming the industry we serve.

Glen de Vries

Thanks Tarek. Good morning everyone. So as Tarek said, we surpassed an important milestone this quarter. For the first time, over half of our clients are using more than one Medidata product. Broader adoption of our capabilities across our customer base, as well as the dialogues that we’re having at the highest executive levels that’s both with clients and with prospects shows the desire for and the willingness to move forward with a new type of infrastructure for clinical development. Simply put, they want our platform because it creates efficiencies, comprehensively across trial planning and execution, they want it for its built-in analytics tools and they want the unprecedented cross industry benchmarking which is a combination that’s only available from Medidata. These capabilities which are the products of our investment in R&D by driving meaningful competitive advantage, both for us and for our clients.

So today I’d like to talk about the scale and transactions in analytics that’s driving these capabilities and I’d like to outline a few specific examples of how we’re using these capabilities to help redefine the best practices in our industry. So first in regards to that scale; our users, that includes people from our clients and partners as well as all the doctors and nurses that they’re working with, have almost 20 million interactions with the Medidata cloud every single week. That’s inclusive of entering data, cleaning data and generally managing their studies. That amounts to what’s going to be about a billion interactions this year. In our last call, I gave an example on how we could save physicians’ time because we streamlined the way they could sign off on clinical trial records and that saved almost 50,000 hours across our user base.

So to give you a sense of that scale, if you look across our platform, when we can save a second, just one second for all of our users’ time, we can free up about 30 person years for the world of clinical research. We think that’s an astounding lever for productivity and that’s just when you look at saving people time who are already running processes on our platform. So now imagine the impact as more clients continue their march to using more and more of our products and ultimately the whole platform.

On top of that, we’re continuing to broaden the platforms still with new capabilities. We still have market share to gain, and we’re still finding opportunities to replace paper. So in short you can see why there is continued strength in our corrugated business. It still has a tremendous runway in regards to value creation. We can save our clients’ time and money in regards to real world work, not just in regards to IT costs and that’s driving that growth in our study conduct solutions.

Now of course, as you’re processing transactions at that scale, you’re also creating an incredible data asset. And much as I said in regards to that transactional business, there is still tremendous runway for what we can do with our data, both for our clients and for the industry more broadly. So I’m going to give you some recent examples of that. We’re really now in position to be authoritative about what the best geographies are for various studies and how to choose sites in those geographies, the doctors and institutions our clients engage with in order to run those studies as efficiently as possible. In a recent issue of the Journal for Clinical Studies, a Medidata team published on this topic and they used the same tools and datasets that are available to clients leveraging our insights data offerings.

So we took a problem that people thought required significant company by company investment in data aggregation, analytics and we privatize solutions for it on Medidata platform. Similarly, we published some real world data showing how the extensive capabilities we had for automating data management and data integration handles almost half of our clients’ data cleaning needs immediately, automatically at the time of data entry. Again, this is a real world example where we were able to take thousands of actual clinical trials and show how we didn’t just save our clients’ money from an IT perspective but it had significant impact on their human capital cost and timelines.

So in regards to best practices, what’s important as you look at what’s coming out of our R&D efforts to-date, as well as the robust R&D pipeline that we have coming, it’s important to understand that we’re not just building for the current state of research. We’re future proofing our platform and we’re making it possible to do things at scale that our industry just hasn’t been able to do in the past. We’re essentially making the future a reality for our clients sooner than it would be without Medidata.

So that in fact refer to growth in Balance. We built Balance to change the entire implementation paradigm and user experience around patient randomization, but we also built it to support adaptive trials. Universally adaptive designs are thought of as a way to significantly reduce time and cost for studies but they traditionally come with increased risk in both operations and IT.

With our unique approach and balance, we’re making adaptive designs a productized operational reality. So as an example, we recently completed a Balance study with what’s called the drop the loser design, where quite literally you can enroll fewer subjects in a dose ranging Phase II study, because you drop ineffectively dangerous doses as they are identified during the study instead of after the study. So thanks to those capabilities, we were able to help one of our sponsors simply, easily deploy and complete that study to, is to repurpose an existing drug in a new indication and they enrolled patients across four continents. So these are some of the drivers that lead to that doubling of balance customer year-over-year.

Another key place for Medidata is making what the industry needs reality is around risk-based monitoring. Risk-based monitoring is potentially one of the most impactful shifts in trail operations basically ever. And this strategy for cutting costs while improving controls in data quality is increasingly been pushed by forward thinking consortium like TransCelerate and its increasingly desired by our clients.

Medidata is already there for them. We have tools like our integrated target source document verification module, our site quality management tool and industry wide benchmarks that we’ve been developing for years. And just like the white paper that we released in support of TransCelerate, first big, risk-based monitoring publication, we have been and we will continue to support this shift with our software, with our data and with our thought leadership.

A third example of how we’re leading this charge in regards to the future clinical development is in patient engagement as well. I’ve spoken about patient cloud on this call before and it’s our industry first solution to really making a bring your own device strategy for patient reported outcomes a practical reality. It’s based on how we extend our platform into the Internet of Things to Tarek’s earlier point.

So today, I would like to highlight the fact that actually using the foundations of our platform, this is inclusive of wave and patient cloud, our Medidata team was recently the winner of the large organization award in the Patient Engagement App Challenge. So it was a call to quote, transform the clinical trial experience for patients through apps that educate, engage and empower participants enrolled in clinical studies unquote.

We are incredibly proud of our team and they created an easy to use app that works on Smartphones, Tablets and PCs that allow patients to supply their data to clinical trials but also see data pushed back to them. And they can have an active dialogue about their heath with their position, while being engaged by looking at their own data. This app is still prototype, but it’s giving you a glimpse into the future that we plan to help our clients realize.

So I’d like to mention two more things before I turn the call over to Cory. First, we opened a platform release and preview to customers last quarter. It’s inclusive of almost 30 new modules and it will be in full production this month. It is the biggest software release that Medidata has ever made. It has new workflows. It has new capabilities. It has new interoperability. And not only is it tremendously exciting release for our users, we’ve also put the final foundational of components of our next generation cloud infrastructure in production.

As I mentioned during the Analyst Day last year, Medidata now looks more like a consumer cloud company on the inside. So we have a service oriented infrastructure that resembles the likes of Amazon and Google versus the brittle infrastructure that you see in typical enterprise software and that includes on prime [ph] enterprise software and even a lot of the enterprise task world today.

Now of course, unlike whether you’re doing web search or e-commerce, we built our infrastructure so you can make decisions that effects human lives on it. So not only are we providing a foundation of tremendous scalability and capability, but it’s also providing a foundation of regulatory plot compliance for our clients.

And the second, tomorrow we will be welcoming hundreds of our users to the America’s Medidata symposium. This is our eight annual user conference. This year it’s hosted by GILLIAD Life Sciences. They are a long time customer and we think one of the truly great innovators in our industry. So thanks to GILLIAD Ed their team for what I am sure will be an amazing couple of days. And thanks as always to my Medidata colleagues.

And with that, I will turn the call to Cory.

Cory Douglas

Thanks Glen and good morning everyone. So as you heard, we’re off to a good start to the year and we have several reasons for our increased confidence that 2014 will be another outstanding year for Medidata. I will walk you through to our financial results for the quarter and highlight a few areas where we are investing aggressively to capitalize on our long term opportunity to drive platform adoption.

I’ll also highlight some onetime items that help to explain our profitability this quarter relative to our internal plan. Q1 revenue was $76.6 million up 3% sequentially and 21% over Q1 of last year. We saw healthy growth across our platform of products highlighted by substantial growth and randomization, protocol design, trial management and our data solutions. We’ve also grew nicely on top of a much larger base.

Q1 revenue was in line with our internal plan and given our current sales pipeline in renewals, we expect a rapid ramp in revenues for the balance of the year. Subscription revenue was a record $63.8 million, up 1% sequentially and 26% over Q1 last year. Subscription revenue accounted for 83% of total revenue, compared with 80% of total revenue a year ago.

During our fourth quarter call, we indicated that 2014 is a year for significant renewals, especially when compared to 2013. Well, I’m pleased to report that all of the contracts we expected to renew this quarter were renewed and importantly at run rates well in excess of the previous annual levels. With the majority of this year’s renewals yet to come, we are well-positioned to drive sustainable record level subscription revenue this year.

Professional services revenue was $12.8 million, up 11% sequentially and 2% year-on-year. Importantly we continue to drive client satisfaction resulting in revenue retention of 99.8%, a critical metric for the long-term success of our business. We entered the quarter with a $177 million of remaining subscription backlog, up $56 million [ph] at this time last year. We expect at least another $15 million in revenues from renewals between now and the end of the year.

Now if we include the revenue impact from these renewals in our remaining backlog, which is very reasonable given our high retention rates, our adjusted remaining backlog is $192 million. This represents coverage in the mid to high 80% range for remaining subscription revenue and is comparable to our historic trend at this time of year. As in aside, I advise you not to look at our backlog in the current renew environment as an indicator of future expected growth, but as a confidence indicator of our ability to achieve the annual guidance we provided.

Now moving to gross profit, our gross profit for the quarter was $55.8 million compared to $46.1 million in Q1 of last year. Gross margin was 73% consistent with the prior year period. Overall gross margin represents the impact of a larger percentage of higher margin subscription revenues, offset by lower margins in professional services. Gross margins from subscription revenue was 83% compared to 82% a year ago. From a professional services perspective, we continue to invest in our capability to drive client platform adoption. We expect these investments to begin paying off with higher value consulting services engagements towards end of year.

On a sequential basis gross margins were impacted by the annual compensation costs I highlighted during our last quarter’s call. Now before turning to operating expenses, see on profitability. It is important to recall that the current period includes the quarterly impact of interest expense on our convertible notes issued at the end of Q3 last year as well as additional stock-based compensation expense related to our performance based stock grants which we discussed in detail last quarter. The impact of our performance-based stock grants is the primary driver for the increase in our stock-based compensation cost with the majority of the increase impacting G&A. In fact you can see the impact by department category in the relevant tables in our press release.

Now with regards to operating expenses, we continue to execute against our strategy of making disciplined, sustained investment in R&D, and sales and marketing with a focus on driving innovation and leadership in support of our long-term growth initiatives. Operating expenses this quarter represents a combination of aggressive investments and certain one-time expenses. Overall we incurred approximately $2.5 million of unplanned one-time expenses. Finally Q1 also includes higher facilities related cost associated with our major office upgrades in New York and Tokyo when compared to the prior period.

Total operating expenses for the quarter were $55.6 million, up 42% year-on-year. R&D expense was $17.8 million in the quarter, up 49% year-on-year as we continue to increase our development capacity and velocity of innovation. This year we plan to release the most comprehensive set of product update and platform innovations in our Company’s history. Total R&D head count for the quarter was 281, a 25% increase year-on-year. R&D also was impacted by the one-time items I mentioned earlier.

Sales and marketing expenses were $20.7 million in the quarter, up 43% year-on-year. Some of the previous quarters we continue to enhance the reach of capacity of our sales team to drive platform adoption. In addition we are also increasing investments on marketing to ensure the key benefits of our platform, are resonating at the highest levels within life sciences companies.

Sales and marketing expenses were also impacted by one-time costs related to commission and marketing fees during the quarter. G&A expense were $17 million, up 35% year-on-year, with over half the year-on-year increase due to the higher stock-based compensation expenses I mentioned earlier. As I stated during our last call, you can expect G&A to begin to scale towards our long-term target as we progress through the year.

EBITDA for the quarter was $12.5 million reflecting the impact of one-time expenses, higher facilities related cost, and aggressive investing in sales and marketing and R&D. EBITDA margin was 16.3% compared to 22.5% last year this time.

Income taxes for the quarter were a benefit of $1.3 million. For the full-year 2014, we still expect an effective tax rate of approximately 38%. For the quarter our adjusted non-GAAP net income was $5.9 million, compared to $9.1 million in the prior year period. We incurred a net loss of $1.8 million during the quarter when including the impact of GAAP interest expense of $3.8 million associated with our convertible debt offering.

Now turning to the balance sheet and cash metrics. In terms of cash flow from operations, we had a net cash outflow of $6.3 million this quarter, compared to positive cash flow of $2.9 million last year. Q1 is traditionally our lowest quarter for cash flow and this quarter’s cash flow is impacted by the timing of collections. Some of our larger receivables were paid in early April instead of March. Given the shift of these collections into the second quarter, I expect Q2 cash flow to be strong. Expectations for full year cash flow remain unchanged. While there may be timing related issues that arise occasionally, this quarter our cash flows should increase along with EBITDA over time.

Total billings for the quarter were a record $90 million, an increase of 43% year on year. Q1 billings are seasonally strong each year as we still have a few legacy contracts with annual billings terms. We view our billings at a good indicator of business growth and momentum. You’ll notice that calculated billings this quarter also reflect this seasonality with certain timing effects. Record growth along with timing of cash collections attributed to higher receivables increasing our DSOs to 75 days. Over time I expect future DSOs to decline to our historic lower levels given our valuable satisfied client base. We entered the quarter with $403 million in total cash and investments, up $279 million to over the balance we had a year ago. Finally we spent about $7 million in CapEx as we completed the last of our plan major office upgrades in Tokyo this quarter.

Now let’s look at our full year outlook. We moved to our annual guidance model because we think it’s important for the investment community to be aligned with the way we run our business. A focus on our annual results provides a more complete picture of our ability to execute against our long term strategic plan since there are multiple factors that affect each quarter such as the timing with new roles and new platform deals for instance. That said, we are firmly on track to achieve the 2014 financial outlook we provided earlier this year, and I look forward to providing you with more details on our progress as we get further into the year.

We are still in the very early days of platform adaption and we will continue to make disciplined investments at a pace to keep us in front of the tremendous market opportunity before us while advancing our growth trajectory. Our financial position has never been stronger and demand for our solutions are at record levels. We’ve never been more excited about the opportunity ahead of us.

Now let’s open up the call for questions.

Question-And-Answer Session

Operator

Thank you. (Operator Instructions) And our first question comes from Jamie Stockton from Wells Fargo. Please go ahead.

Jamie Stockton - Wells Fargo

I guess maybe the first one Tarek, I believe that -- you mentioned that you guys were making progress toward a number of platform deals in the pipeline and I think you may have even said at some point that you thought there would be some near term progress there as long as long term. Could you give us anymore color on that number of deals relative to maybe the number you were looking at last year, the number that were in the pipeline last year, anything like that?

Tarek Sherif

Sure. Yes, it’s been a really interesting beginning of the year for us. We’ve seen a lot of momentum and a lot of interest in both the value assessment and value creation behind the platform. If I look at the pipeline, we probably got at a minimum 2x as many platform deals in the pipeline currently as we had at this time last year. I’m probably being a big conservative there. So a lot of activity going on.

Jamie Stockton - Wells Fargo

Okay, and then maybe just I think the other kind of evolution of demand comment, that seemed like you made was along the lines of the biotech funding environment how robust it’s been and how that could be translating into incremental deals for you guys. When you look at your pipeline and you think about the component of it that is represented by biotech companies in general, if you think about that versus last year, with the really robust funding as the tailwind, can you give us any sense for the level of activity year-over-year?

Tarek Sherif

Sure. The way that translates typically is through our channel partners, through some of the systems’ integrators and certainly the CROs. And if I look at year-over-year the number of study-by-study deals if you will that we’re seeing has increased by well over 20% and you’re coming off of extremely high, very high base last year. So we just have seen the number of RFI requests go up astronomically. There’s just a lot of activity. Our sales organization is definitely being highly utilized at this point.

Jamie Stockton - Wells Fargo

Okay. And then may be just one; Cory, the expenses -- you guys have a lot of activity going on as far as ramping up new offices, as we think about how the rest of the year is going to progress. I think you made a comment about G&A being more leveraged as the year goes by but should we be expecting any notable step ups from here from like an occupancy standpoint?

Cory Douglas

Well, Jamie, to answer your question, we’ve completed our build out in Tokyo. We don’t have any other step ups in terms of office facilities at that scale going forward. We may have some minor CapEx related to some improvements but the bulk of our major office upgrades has happened.

Jamie Stockton - Wells Fargo

And the expenses are largely already reflected in the Q1 numbers?

Cory Douglas

Yes, we expect expenses to start to scale, like I indicated during our last quarter’s call.

Operator

Our next question comes from Glen Santangelo from Credit Suisse. Please go ahead.

Glen Santangelo - Credit Suisse

Tarek, I just wanted to talk to you about -- the 1Q revenue number was probably a little bit lower than I think most people were looking for, and if you can now look at the revenue growth you generated, only 21%, it seems like that’s a much lower percentage than -- it’s the lowest percentage you had in six quarters, and just Cory, if you look at your full-year revenue guidance, you kind of implied that the Company needs to grow 25%, almost 25% for the next three quarters, just to get to the midpoint of your full-year guidance and so I’m Just kind of curious, is this kind of the way you all thought about the ramp and how it was going to play out this year? Was there something unusual to the ramp this year or are you assuming some new business wins throughout the year to kind of get to that revenue number? How should we think about that?

Cory Douglas

You’re dead on in terms of the ramp for revenue growth for the rest of the year. We had in our modeling a steeper ramp than maybe you guys modeled in your model. So we expect the revenue to ramp up really nicely towards the back half of the year, especially in quarters three and four.

Tarek Sherif

Just to add to what Cory said, we are pretty much on our plan. So Q1 came in as expected from a topline perspective.

Glen Santangelo - Credit Suisse

And maybe Tarek, when you think about that, that guidance range 22.8 to 24.6 as kind of your implied growth, do you need any sort of meaningful business wins to kind of hit that number or where there any meaningful business wins be on top of that?

Tarek Sherif

All business winds are meaningful, Glen. In response to the question, I think we’ve modeled in just what we think is achievable from a sales perspective. We’re are not looking for some home runs throughout the year. Obviously those would be incremental. But we came into the year with a set operating plan, and we’re pretty comfortable with it.

Cory Douglas

Just to add to that, Glen, I indicated in my prepared remarks that we’re very comfortable with the guidance we have out there and we’re on track to achieving that guidance. Yes, we had some blowout quarter or two in terms of deal activity. We didn’t anticipate – obviously we’ve come back to you with a modified expectation for the year.

Glen Santangelo - Credit Suisse

Maybe if like you just follow up with gross margins, when I look at the gross margins in application services, probably stepped down a little bit and I’m kind of curious if that was maybe a function of mix, because I was assuming the company had some ability to kind of raise prices which maybe would have helped continue to expand that gross margin. And then just as a follow-up to that, if I look at the gross margin on your professional services, this is two quarters in a row that we have been meaningfully below the run rate and I know, Cory, in your prepared remarks you talked about maybe some seasonal factors or maybe some investments within that gross profit number and I didn’t fully catch those comments. So can you just give us a little bit more elaboration on your gross margins? I’d appreciate it.

Cory Douglas

Yes, just to the answer to the first part of your question on subscription revenue. I think I indicated in our last call that Q1 is traditionally our lowest quarter from a gross margin perspective because we have all the reset for the compensation related cost, and so this quarter we’ve relative to the previous years, a lot more in payroll taxes and things of that nature that depresses gross margins in the first quarter. The question to the rest of the year, we expect gross margin for subscription revenue continue to ramp upwards, similar to our patterns in previous years.

In regards to professional services, we are consciously adding headcount to be able to deliver higher value consolidating services to our customers, to help them adopt the platform. And so we are high and ahead of that, and we have an expectation towards the end of the year that will start paying off for us.

Operator

And our next question comes from Michael Huang from Needham & Company. Please go ahead.

Michael Huang - Needham & Company

Just a few questions for you. I know, I think you noted that, there was some strength that you’re seeing in study-by- study activity. I was wondering, are you seeing -- what are you seeing in terms of adoption of kind of the products in study-by-study? Is it primarily just Rave or are you seeing some of these study-by-study customers adopt more than just Rave? And what’s your view on the opportunity to convert some of these to larger platform opportunities down the road?

Tarek Sherif

Sure. So we are seeing customers coming in and adopting more than a single product and the way that shows up is if you look at the total number of customers we added, obviously we’re now over 420 customers. Yet the number of customers using more than one product increased from 48% to 52% sequentially. So we’re seeing people come in and buy one, two or three products and I think the opportunity to convert them to platform or to move our partners, our channel partners, our SI partners along the platform continues to gain momentum. So we’re feeling very good about our positioning currently and the level of interest in the marketplace.

Michael Huang - Needham & Company

Great. And then kind of on the new customer activity that you’re able to deliver in this quarter so really nice there. But when we look to the cross section of these new customers that you added, could you give us some color around maybe the size of these customers and maybe geographic distribution as well?

Tarek Sherif

It’s really all over the map. So some of you would expect -- some of came through channel partners and you’ve got some smaller biotechs but it wasn’t limited to that. We have some larger companies come in as well. So I’m hard pressed to give you any one specific because it was pretty geographically diversified. We’re seeing activity out of Korea these days and Japan and then Europe continues to be healthy and obviously the United States. I think there was a bit more device and diagnostics as well which is an area that historically we haven’t done quite as much in. So pretty well rounded in terms of the new name adds.

Michael Huang - Needham & Company

Great. And I guess last question for you. So you were talking about this upcoming product release that you’re pretty excited about. I was wondering, if you were to drove in to that, are there kind of one or two capabilities within that that you think that your customers and prospects are most excited about?

Tarek Sherif

Yes, I think -- we’ve been really broadening the number of things that we can do on that productized basis. So if you look at some of the key things that are coming in this release, we’re taking a bunch of things that people thought of as data that, they would have to separately integrate into their studies or things that were going to require custom work with another and more service related vendor to get done on top of our cloud with our cloud and now you can just go online and do it. So I actually think that that’s probably to them one of the most exciting things. We’ve just made it simpler and easier to do more business on our platform at a lower cost.

But I do want to reiterate that I think one of the most exciting things that we’re going to have for our customers is some of these underlying capabilities and it goes all the way from how we manage things like regulatory compliance information all the way to how we aggregate data and make it available for analytics. So I think that we’ve taken really a huge leap in terms of what our foundation will be able to support. And so we’re really excited about how we’re going to be able to deliver on some of these things as our subsequent releases this year go on. We were investing a lot less. We kept talking about it last year and now we really think we’ve got thing launch pad for a lot of exciting capabilities that will be nicely burned in and kind of part of the DNA of Medidata’s production systems. So exciting for them, exciting for us. Makes sense?

Operator

Thank you. And our next question comes from Dave Windley from Jefferies. Please go ahead.

Dave Windley - Jefferies

So Tarek, you’re clearly very enthusiastic and excited about sales momentum that you’ve pointed to and mentioned described. I was hoping you could may be take us down in a level in regard to perhaps timing of securing some of these wins in relation to the backlog progress that we’re seeing and take Cory’s comments about not reading into backlog too much, I understand that. But sequentially backlog coverage is down quite a bit. It doesn’t, by our calculations appear that there were meaningful renewals in the quarter and last quarter you had indicated that they’d be fairly steady or evenly spread across the year. I’m just hoping you could give us a sense as -- is it that your enthusiasm is very high based on general activity but some of that slipped into April or how might we be able to reconcile the qualitative with quantitative here?

Tarek Sherif

Sure, absolutely. So a couple of things, the renewal activity was more mid-year based. So we didn’t have the bulk of renewals in the first quarter. I’m not -- I think we were, we tried to be as close as we could be without being overly so relative to competitive environment but there is definitely a bulk of it that happens midyear-ish. In terms of deal -- actual deal activity, the pipeline just continued to grow. I mean if I think about where we started the year, where we are coming out of the quarter, even current period, it’s just an awful lot of activity.

The larger deals, the platform kind of deals, hitting ourselves, or pinning anyone down on timing is very difficult and I think that’s something we’ve been very disclosive about historically. They’re just complicated deals. And you’re talking about a lot of money like -- that customers commit over anywhere from three to five years, typically out of five years. And so, I’m very hesitant to give you specific, other than to say that we are comfortable that some of that’s going to happen this year. I can’t give you the exact timing of it. But the conversations are ongoing and the negotiations are ongoing. So we’re feeling very good about it. And I think that’s -- from a qualitative perspective as much as I can give you at this point.

Glen de Vries

Just to carry on to that David, just to give you idea how, some context to how to view our renewals this year. Of all the renewals we had, we have scheduled for this year, only 10% of those renewals came up for renewal in Q1. So as it follows some renewals in Q2, Q3 and some Q4 as well. So we’re just beginning to renew those customers’ contracts.

Dave Windley - Jefferies

Okay. If I shift and follow-up on Glen’s question on application services in particular, I guess, what we’re hearing new channel that -- and you’ve talked on the last call about having an opportunity to take some fairly meaningful price. I want to make sure I understand why there was fairly limited change in application services gross margin in light of an environment where your increasing price, what we understand is fairly substantially? And Cory, your answer there was increased payroll taxes. Does that impact professional services or does that actually impact application services as well?

Tarek Sherif

It impacts our entire P&L. So our application services, professional services and operating expenses.

Cory Douglas

The other qualitative pieces of response to the question would be that we are seeing good pricing power, but the impact in any one given quarter is -- obviously we take our revenue on a ratable bases over a period of time. So even if we do see good price increase in a deal that we saw in Q1, the impact on Q1 revenues or the impact on any one quarter is going to be just a very small increment. So I’d look at it in the context of watching our subscription margins over a longer period of time than a single quarter, because it’s just not going to -- it is going to be a lot of volatility in that.

Dave Windley - Jefferies

Right, carefully. And then last question just in general in terms of the enthusiasm for the pipeline, you’ve talked about study-by-study, you’ve talked about increasing platform opportunities as well. Can you give us a sense of what the balance is between those two, which one is going to be the driver of backlog increase over the balance of the year?

Tarek Sherif

Sure. So I -- in terms of scale obviously, platform deals are the ones that have the most meaningful impact. Not necessarily in the first year out or in the first half year up but over the longer term, especially because of the way we write those deals or the way they get negotiated which they have pretty big step ups typically from one year to the next. So you see a bit more short term impact from the study-by-study deals and obviously a much larger long term impact from the platform deals.

Cory Douglas

Also I’m worried a little bit that people are equating study-by-study with Rave only in their mind and that really changing again, if you listen to what we said about how customers are adopting multiple products, I think it’s just important to understand that actually that’s not just down the road, that’s increasingly the case of the point eventually. So actually some of the studies that we’ve already done with patient cloud were Rave in patient cloud for a new customer. A lot of the Balance studies that are coming online are Rave and Balance for a new customer. So you got to go away from the model of their -- just Rave kernel that’s our thin edge of the wedge into a client and then expand and the nature of that is shifting and we’re at, in more and more instances able to go in with multiple products in the beginning. Again there’s still huge upside to Tarek’s point around turning that customer into a platform customer where they’re using everything for older studies but that could be a two-step function not a three to four step function as people might have been thinking about it in regards to our old business model.

Operator

Thank you. And our next question comes from Garen Sarafian from Citigroup. Please go ahead.

Garen Sarafian - Citigroup

I guess first on your annual targets, you seem very confident of the outlook you’ve given for the year, but your former client base seems to be on M&A. So I’m just wondering how is this impacting your sales cycle in terms of these large deals as well as the smaller ones. And is that changing any of your assumptions behind some of the outlook that you had given or what’s changing in the mix?

Tarek Sherif

I think if you look at the past probably five years or 10 years, as long as Medidata has been in business, M&A has been a big part of the environment we operate in. And so we try to guide on what we see and what we’re comfortable with and obviously we take into effect or take into account that things happen, that you do get M&A activity et cetera. It’s part of the normal course of doing business for us and I don’t view it as being anymore risky or less risky for us.

One of the interesting things in the deal activity that got announced this morning around Novartis and GSK is last year we announced out that we signed a platform deal with Alcon and one of the nice tidbits that came out of announcement this morning is that one of the core focuses for Novartis on a go forward business is the eye care business, which is where we have our foot in the door. So there are pluses and minuses that come with the M&A activity and generally if I look at the history of the company, it’s generally been much more positive for us than negative.

Garen Sarafian - Citigroup

But no, I was just thinking in terms of the short term, is that a contributing factor to the steeper slope in revenue growth in last year for example. Does that impact?

Tarek Sherif

No, it absolutely is not. This is -- as we said, this was pretty much in our operating plan, in our budget and so no impact from any of the activity that you’re hearing about right now.

Garen Sarafian - Citigroup

Got it, okay. And then just shifting gears to CROs, so you mentioned in the press release on the partnerships. Can you just elaborate or remind us first I guess, what percent of your business is from CROs now and how -- is there an optimal level you want to get to in terms of one channel versus the other? And then just a follow up on the newest client win of the CRO side. What happened there that you got that business? Was it in-house product that you displaced or was it the displacement of another competitor?

Tarek Sherif

Sure. So as it relates to the overall business mix, historically channel partners have been between 20% and 25% of new business, of bookings and that’s been a pretty steady percentage in any given quarter or year, maybe at the higher end or lower end of that. Obviously we’ve grown our direct business pretty dramatically, kind of kept up with the pace of the business we’re doing with CROs. That’s not the extent to which we work with CROs however. So as I think we’ve talked about in the past, a lot of our customers outsource to CRO. They may make the technology decision to move ahead with us and then they may outsource trails to those CROs.

So in terms of our interaction with CROs, it’s probably closer to 40% to 45% rather than 20% to 25% in terms of new business. I don’t think there is necessarily an optimal mix. We’re really happy with the level of activity we’re seeing from our CRO partners. Our strategic relationships have developed very nicely with them and we’re really -- I think we’re happy to be working with that channel. We’re seeing changes that are happening in their business and those have been very positive for us. So overall I think the channel strategy is working very well and we’re continuing to add to the number of partners that we’re working with and increasing in terms of the way they’re using our products increasing our activity with them.

And then as it relates to this specific win, so in the last year we’ve had three displacements. Some of them have been for sort of -- I wouldn’t want to call them home grown systems because they’re not necessarily home grown but by the time they have been sort of changed and have evolved over time they feel like they’re home grown systems just because of the way they’ve been customized. And I think the attraction of using our cloud based technology, which offers a lot more flexibility and I think has the advantage of not having to be maintained the way some of the more on the legacy on-prim solutions have had to be. That’s been a very attractive thing for CROs. And we continue to -- we expect to continue to see more activity with regard to that. I think we’re seeing some great momentum out of our CPMS solution and I think the next 12 to 24 months, that will continue at a very good clip.

Operator

Thank you. And our next question comes from Sandy Draper from SunTrust. Please go ahead.

Sandy Draper - SunTrust

A couple of quick questions for Cory and then may be a broader one for Tarek and Glen. Cory, if I remember correctly at the end of last year you talked about stock comp I think being around $36 million for this year. If you sort of annualize the first quarter, it’s going to be simply higher than that. Is there maybe a reason that’s going to trend down or is there something going on where the stock comp is actually going to be higher this year?

Cory Douglas

You are actually right Sandy. It is drifting a little bit higher. It’s a function of professional services –not professional, our performance-based units associated with stock-based comp. So that should step a little bit higher and then we also implemented a new AFPP [ph] plan towards the end of last year. The amount of interest in that plan was greater than we anticipated and so that’s contributed to some of the delta that you’re seeing.

Sandy Draper - SunTrust

Okay, great then the second one. I then get when you said more, I think you said there was maybe 2 million or 2.5 million or sort of what you consider one-time expense in the first quarter? Can you one confirm that, confirm the number and then give a few more details on where that showed up and what that was?

Cory Douglas

Yes, that’s right. About $2.5 million of one-time expenses. These are expenses we incurred in Q1 that we won’t incur in future quarters in 2014. Those are expenses associated with termination of employees and true ups related to terminations on things such as severance and commission payouts. We changed our basic structure in 2014. There were some one-time costs associated with that, that we didn’t anticipate; that happened, it’s distinct to Q1. We also had some bonus true-ups and some marketing expenses that we started to incur in 2013 and it persists into 2014. So in terms of where those reside in our P&L, you have the -- the biggest, one of the big components was the taxes associated with our bonus payouts and then with investing of our RSUs. Historically our RSUs or equity would vest in Q2. Last year we changed that, so they vested in Q1 and so we had a combination of bonus payments as well as RSU vesting that exacerbated the amount of payroll taxes we had to pay in the quarter. So when you look at the distribution of those costs, I mentioned in my prepared remarks we had some -- the commissions and marketing fees in sales and marketing. We also had the bulk of our termination fees in R&D, and then some of these broader costs such as the payroll taxes and some other items I mentioned kind of spread out throughout the entire P&L by Department.

Sandy Draper - SunTrust

I apologize, I jumped on the call little bit late. So I don’t know if Tarek you addressed this. But there’s been a little bit of chatter out there in the market about Oracle starting to get its act together and get a little bit more on track in that there are some niche players out there maybe getting a little bit more competitive. I know you’ve always been, Tarek, very respectful of Oracle, the size of the company they are, but at the same time wanting to obviously win every deal you can against them. I’m just -- can you -- any commentary -- have you seen any notable change one way or the other in terms of their competitive positioning, one? And then two, anything shifting in terms of any small players out there are that you think seem to be -- maybe you’re seeing a little bit more, or getting a little bit more traction or so. I guess the simple answer to the questions is, is the competitive landscape changing any?

Tarek Sherif

I appreciate the question, and the color for me. I think the competitive environment’s always changing. As you said, Oracle never went away as a competitor. I don’t think that we are seeing them necessarily being more of a competitor than they were in the past. I think the game has changed a bit, the goal posts have moved. I think with what we’re doing around value creation for our customers and platform sales, I would argue that our competitive position is stronger than it’s ever been. And I don’t feel that they have a competitive offering against us there.

So the goal posts have moved from where they were, call it through years ago, when the battlefield was mostly around EBC. And I think we’re just -- if you listen to what Glen was talking about in terms of what we’re doing without platform, and what we’re doing with the data, we’re moving in a direction that puts us in a very strong position. As it relates to some of the smaller players, there’s always been a fair bit of activity at the lower end of the market, whether it be academic or in Phase 1s with smaller biotech and, yes, that’s been an evolving dynamic, that’s been -- we have always kept our eye on it. Again, I don’t think that it’s changed dramatically. We’re feeling pretty good about our competitive position. If I look at our win rates and if I look at the amount of deal activity, the win rates are pretty consistent and the amount of activity has actually shown another stepwise increase. So I’m feeling pretty good about it.

Operator

And our last question comes from George Hill from Deutsche Bank. Please go ahead.

George Hill - Deutsche Bank

Hey guys, thanks for sneaking me in. Most of my questions have been answered. I guess I would just ask for outlook on M&A environment uses of cash at this point.

Tarek Sherif

I think, pretty much has changed relative to what we’ve said before. So we’re very comfortable having a large cash balance, especially in a very volatile market environment. I think that’s always a great thing to have and obviously there’s been a lot of volatility in the first part of this year. We’re constantly looking at M&A opportunities. Again we’ve been pretty steadfast in saying we look for tuck in M&A, especially when we can buy some technology that we can put through the sales channel that we’ve developed that’s stronger than never at this point. And we have a process here where, we’ve got pretty big funnel of things that we look at. But it’s the kind of more directional or strategic M&A that we’re looking at.

Obviously our industry is not made for any kind of rollup and that’s not going to happen. But if there’s an interesting piece of technology that moves our agenda forward, faster, we’re going to go look at that. But we’re pretty disciplined about it. I think we have a track record of that. We’ve done a few deals in the last five or six years. I think both have worked out quite well for us, neither one of them has been that big. But we’re certainly open to it. But as I said we’re disciplined about it. And the other piece of it is, we’re putting a lot of money into R&D right now. We’ve got a lot of different opportunities that we feel comfortable that we can handle organically and that’s where we’re investing for the time being.

George Hill - Deutsche Bank

Okay. It looks like you also had a little bit of a step up in share repel recently. I guess how are you guy thinking about that, given to your point the weakness that’s occurred in the market?

Tarek Sherif

Sorry a bit of what?

George Hill - Deutsche Bank

Share repel -- share repel …

Tarek Sherif

You’re looking at our -- are you looking at the balance sheet, you’re looking at our treasury stock?

George Hill - Deutsche Bank

Yes.

Tarek Sherif

That’s associated with the vesting of our RSUs.

George Hill - Deutsche Bank

Okay. My bad. All right thank you.

Tarek Sherif

Thanks. With that, I think we’re going to close today’s call. We want to thank you all for having joined us today and we look forward to giving you an update on our next quarterly call. Thanks very much.

Operator

Ladies and gentlemen, thank you for participating in today’s conference. This does concludes today’s program. You may all disconnect. Everyone have a great day.

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