Medidata Solutions (MDSO) Tarek A. Sherif on Q2 2016 Results - Earnings Call Transcript

| About: Medidata Solutions, (MDSO)

Medidata Solutions, Inc. (NASDAQ:MDSO)

Q2 2016 Earnings Call

July 20, 2016 8:00 am ET

Executives

Hulus Alpay - Senior Vice President-Investor Relations

Tarek A. Sherif - Chairman & Chief Executive Officer

Glen Michael de Vries - President & Director

Rouven Bergmann - Chief Financial Officer

Michael L. Capone - Chief Operating Officer

Analysts

Sean W. Wieland - Piper Jaffray & Co (Broker)

Donald H. Hooker - KeyBanc Capital Markets, Inc.

David Howard Windley - Jefferies LLC

Garen Sarafian - Citigroup Global Markets, Inc. (Broker)

Scott Berg - Needham & Co. LLC

George R. Hill - Deutsche Bank Securities, Inc.

Sandy Y. Draper - SunTrust Robinson Humphrey, Inc.

Operator

Good day, ladies and gentlemen, and welcome to the Medidata Q2 2016 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 be given at that time. As a reminder, this conference is being recorded.

I would now like to introduce your host for today's conference Mr. Hulus Alpay, Senior Vice President and Head of Investor Relations. Sir, you may begin your conference.

Hulus Alpay - Senior Vice President-Investor Relations

Thank you, Chelsea. Good morning, everyone, and thank you for joining Medidata's second quarter 2016 conference call. On the call today are Tarek Sherif, Chairman and Chief Executive Officer; Glen de Vries, President; Rouven Bergmann, Chief Financial Officer; and our Chief Operating Officer, Mike Capone.

Tarek, Glen and Rouven will offer comments on our second quarter and our business outlook for 2016. Then we'll open the call to questions. The team will take as many questions as possible on the time allotted.

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

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

Tarek A. Sherif - Chairman & Chief Executive Officer

Thanks, Hulus. Good morning, and thank you all for joining today's call. On the heels of our strong first quarter, we had an even better second quarter, giving us the right kind of momentum as we enter the second half of the year. With our performance year-to-date, we remain on track to hit our full year plans.

This quarter really was all about great execution. Revenue growth came in ahead of our expectations, while profitability was at a healthy level, driving great quarterly cash flow. While we achieved lots of significant milestones, we hit two records that standout, total clients and quarterly client growth.

Our results validate our product strategy as we continue to see strong multiproduct adoption on our core platform. The number of multiproduct commitments among new clients has more than doubled versus Q1 and year-over-year setting an all time record. Moreover, we're pleased with the growth of implementations and usage across our core, including Balance and CTMS. While many of our pure cloud companies talk about their path to profitability, we're already there in a big way and have been for some time.

As you'll hear from Rouven, earnings growth and operating margins and cash flow are all at levels that many companies hope to achieve at much greater scale. This gives us the flexibility to invest in areas where we see great growth potential, both in terms of building value for Medidata and shareholders, and ultimately achieving our mission by making our clients more successful and impacting patient lives.

We have a unique vision for how drug should and will be developed and we're executing against that vision, and clearly our customers are buying into that vision. Adoption of our new product offerings including Payments, mHealth, and analytic are building momentum, while our core business is healthy as we continue to take market share.

We're increasingly the backbone of our clients' drug discovery operation. When they walk into the office in the morning, they turn on Medidata. They know us for reliability, innovation and the most sophisticated analytics in the life sciences industry. Most of all, they trust us with their mission critical data, data that impacts their market value and importantly, patient's lives.

But our platform isn't just designed for life sciences sponsors, we also focus on clinicians and their staff. High site satisfaction is an area where Medidata has excelled for more than 1.5 decades, because we know it can mean better and more timely data and higher future trial participation with the sponsor. Everyone needs to have a great experience. It's why we invest so heavily in user experience.

Now, let's take a closer look at our Q2 performance, starting with some financials. Revenue came in above expectations at $114.6 million, up 17% year-over-year, in part, due to strong services revenue, which was up 25% year-over-year, as our recent enterprise wins ramp. We achieved healthy and improving GAAP profitability of nearly $5 million, up more than 200% year-over-year.

Non-GAAP operating income for the quarter was $25.4 million, reflecting sequential margin improvement and an operating cash flow came in at nearly $26 million versus nearly $13 million in Q1 of 2015. We achieved our third straight quarter of strong bookings and healthy overall backlog growth. Our execution was broad-based from a geographic, solution and client perspective. And as you'll hear from Rouven shortly, we have good confidence in our guidance for the year.

As I just noted, we saw a strong momentum in our services business, and I want to thank Dan Shannon and the entire services team for their outstanding performance. Our growth reflects large enterprise implementation work, as well as, our continued success in the mid-market with partners globally. The team is doing an incredible job of stepping up to support and drive our growth, not only managing four major implementations with great initial customer feedback, but also managing the rest of our broad and growing client base with similarly excellent results.

Putting the work in upfront, helps to ensure that our clients will be successful and get the most leverage from their investment in our platform. The combination of great service, rapid innovation, and the most feature-rich integrated cloud-based platform in life sciences is the key reason for our success retaining customers. It plays a big role in driving our winning streak against Oracle.

As you know, we've had some major wins in the last several quarters with more to come. In fact, after the close of the quarter, another top 25 pharma, Biogen, made the commitment to make Rave its primary platform going forward. Whether it's large enterprise deals or individual studies, Oracle customers are voting with their feet and dollars and are moving to Medidata.

It's telling that Oracle recently issued a major announcement just because they renewed one of their existing customers, as opposed to winning a new one. Our retention rate is amazing, and we keep winning and winning new customers.

Speaking of clients, in Q2, more clients decided to re-platform and come to Medidata to meet their next-gen needs than in any other quarter in our history. We ended the quarter with 711 customers, crossing the 700 customers milestone for the first time. Of the 96 new customers added in Q2, 64 customers were from organic growth, a quarterly record. The remaining 32 customers came from Intelemage acquisition, which I'll speak a little bit more about later.

Asia had a strong quarter with 12 new clients, including 5 in China, and 3 in Korea. As you may recall, in Europe, we brought on Christian Hebenstreit as Managing Director for the region. He is already playing an integral role in the development and execution of our growth strategy in Europe. With 19 new EMEA clients in Q2, the team is off to a good start.

Another Q2 highlight was the growth of our partner ecosystem. Our CRO partners are increasingly looking for new ways to enhance growth, while also improving margins and operational efficiency. As we look to streamline and automate processes, our Cloud platform has become their solution of choice.

In Q2, we expanded our CRO partner network by adding six new relationships. Partner bookings were up 54% year-over-year and unique bids were up over 108%. We're seeing significant interest at the top end of the CRO market. In Q2 alone, we signed strategically significant deals with three of the top 10 CROs worldwide. Product momentum was strong across the board.

Last quarter, we announced that Medidata Payments, our end-to-end payment solution that eliminate another key process pain point which is generally available. This quarter, we signed our first client. We'll help them launch and run several studies covering over 260 sites in 27 countries.

A foundation of our product strategy is building and continuously growing our data asset, which are already by far the largest set of clinical data in the world. We're monetizing this data with analytics and are seeing some early momentum.

Customer demand for our Trial Assurance offering, which evaluates data quality and integrity for clinical trials is building as we added 17 studies in the quarter. Our mHealth solution is on fire and you'll hear more from Glen about our recent successes shortly.

The integration of Intelemage, the strategically valuable business we acquired recently, is progressing very well with everything going according to plan. Our clients are really interested in this capability and we're seeing some interesting cross-sell opportunities.

In Q2 alone, we signed five new clients for this business. As a result of the acquisition, we're expanding our Partner Program by extending our relationships to image core labs. These partners provide medical image reading and assessment services as part of the clinical research process. They augment the Intelemage offering and will become an extended distribution channel for Medidata.

Before I turn the call over to Glen, I'd like to share a perspective on the broader environment we operate in. The clinical development market is healthy and growing, with more excitement about scientific breakthroughs that impact patients' lives than we've seen in a long-time. The amount of capital committed to finding next-gen cures is enormous and as the leader in helping companies achieve the next level of innovation, we stand to benefit disproportionately.

It's clear that Medidata is becoming the strategic technology partner to a massive and important transformation in life sciences and healthcare, driven by digital automation in drug development. Broader healthcare initiatives such as the Cancer Moonshot headed by Vice President, Joe Biden, are fertile grounds for Medidata. As you probably know, this is a new national effort to end cancer as we know it. We're uniquely positioned to play a pivotal role in helping make this aspiration a reality. We believe that our already strong position in the fight against cancer gives us a natural advantage.

For example, 100% of the five fast track anti-cancer drugs and 60% of new oncology therapies approved in 2015 were developed on Medidata's platform. You'll hear more from Glen about this topic in a minute.

Looking ahead, I'd like to address the recent Brexit decision, as the uncertainty created by it raises many questions with likely very few answers for the foreseeable future. As we've discussed on multiple occasions, our business is driven by innovation cycles and science, much less so by macroeconomic forces.

Technology spend in our industry continues to be strong and is growing. We have a strong presence in Europe, both the UK and mainland, and are planning to continue our expansion there. Our investments are driven by our clients' needs and opportunities.

For example, we've been busily ramping up our European data center. In late May, we brought our first customer into this new data center for setup, planning and testing and they're on track to go live later this year. Overall, we believe that we are not just insulated from macroeconomic disruptions, but are good defensive choice.

Now for a few closing comments. First, I want to thank our team at Medidata for helping us become one of Fortune's 2016 100 Best Workplaces for Millennials. We believe that investing in the next generation of top talent ensures that we're bringing fresh perspectives to our company and client, as we work together to improve patients' lives.

I also want to congratulate Mike Capone and everyone in his organization for their strong execution and delivery last quarter. Moreover, we have a great team at Medidata that's committed to improving patient lives and they show their commitment everyday through their hard work and extraordinary dedication to client success and patients. Thank you all for making Medidata such a great company.

I'm proud of what we've achieved in the first half of the year, and feel confident that the rest of the year will continue to be marked by strong execution and delivery. Now, over to you Glen.

Glen Michael de Vries - President & Director

Thanks, Tarek. So, let me give you some more specifics on the scientific and technology highlights from Q2. First, I do want to make a comment about momentum in Asia. I just got back from Seoul, South Korea, where I was at the largest Medidata Symposium outside of the U.S. that we have ever had. There were 372 prospects, customers and partners there. Tarek talked about CRO momentum, LSK, the leading CRO in Korea was there, and by the way, that was after having just attended the May Tokyo Medidata Symposium, which was the previous record holder for the largest outside the U.S.

And the momentum that region includes everything in our product line including analytics. And that's actually where I want to start the main focus of my comments. So, in data science, we are now impacting the quality and outcomes of our client studies, not just helping them reduce timelines and save money. And a great example of that is Medidata Trial Assurance.

This is that machine learning software that we have, was built by people who used to work at the FDA in statistical review and it evaluates the integrity and quality of all data in the study. We provide a service around that so we can use our own analytics team and make recommendations to clients about how they manage quality better. We find issues with them that they would have missed using traditional clinical trial processes before submitting data to the FDA. And once we've done that, we then turnover the software to the sponsor of the CROs, they can further their own work.

This is unique across the board. The software is unique, the service is unique, and the combination of the two is unique. As Tarek said, we did this for 17 studies in Q2, and that actually I proponed in my comments about Korea, included Hanmi in South Korea.

Also in data science this quarter, we successfully completed a pilot of a exciting new data science endeavor for us. This is around leveraging and repurposing clinical data across not just clinical trials, but even across sponsors for scientific purposes.

As I said in regards to outcomes, we are firmly in the world now of clinical data analytics, benchmarking that data and creating more value from [technical difficulty] (14:49) client. These are complicated, exciting ideas. There is a huge future potential and we're doing things that the industry is going to talk about at conferences and in conference rooms, but now Medidata is actually productizing, making these things a reality.

Let me move over to Patient Cloud. I think Tarek used the phrase on fire. Our innovation velocity continues to be a key differentiator for us. Our mHealth offerings are being used in combination where we get traditional patient reported outcomes with sensors and apps, and we are running trials across all phases, one, two, three, and four. We're doing medical device studies and we are working in a very wide variety of therapeutic areas inclusive of oncology, GI, neurology, immunology. We're even doing vaccine studies.

We have biopharma and medical device companies. We're using SensorLink, remember, we told you about how that – the software that lets you get real-time in-life data including things like movement and suite quality and combine that with your clinical trial data. And, just last week, GSK announced that their plan is to make it the largest real world rheumatoid arthritis evidence study ever. They're using Apple's ResearchKit and Medidata. So that's AppConnect which we told you about. It's the framework that we have that lets you put things like ResearchKit or proprietary apps on the frontend, and use these scientific and regulatory engine of the Medidata Cloud on the backend.

In this case, the app is called PARADE, you can see it in Apple's App Store. And, GSK is going to use it to monitor the activity and quality of life for hundreds of rheumatoid arthritis patients over a three-month period. The results are going to be part of GSK's larger efforts to incorporate patient insights and centricity into their research programs. This is on top of the already strong partnership that we have with GSK around mobile health. In fact, for the last thing that we talked about doing with GSK, the GADGET study, which was a high frequency data study with a medical patch, we just jointly won the 2016 Clinical Partnership of the Year at Informa's CARE Awards. So, we're excited about all the work we're doing at GSK.

We're doing a lot outside of just data science and mHealth obviously. We have, as Tarek said, our European data center is running. We can deploy new customers in it in an automated way. Our team calls it five-minute deployments. And, we just released a huge set of new features across our platform, again, fueling our own client's innovation with the things that we're creating here at Medidata. There is further centralization and integration of data models across district parts of our platform. As you've heard me say before, having the collection of kind of industry acronym systems, it's just not enough anymore. We are setting a new bar for what clinical trial infrastructure needs to work like, and that includes things like unified platform reporting, and master data management across everything that our clients are doing.

I do want to make a special mention of Balance. We just put out in that release a final culmination of a series of enhancements from the past year, that combined, allow our clients to randomize patients, and to manage clinical supplies across the kinds of studies that really required custom/bespoke systems in the past. No one has ever done this kind of thing in a SaaS/Cloud model. And not only are we now at future parity with what so many people use custom solutions for, we're going to actually do things beyond what some of those people were doing in the custom world, and this includes the kind of modern and statistical designs that are going to be so critical for things like the Cancer Moonshot.

Balance is the industry's most innovative randomization and trial supply management solution period. I'm excited to tell you that we've expanded our partnership with Cognizant around Balance. So, Cognizant will now be providing Balance implementation services, and I think our combined capabilities are going to be really valuable for our clients who are looking to adopt or just adopt more of Balance.

So final thoughts on that Cancer Moonshot. It's pretty exciting to see the public attention that life sciences is getting, and how Medidata is at the forefront of that. We are the standard for managing clinical, operational, and financial data in clinical trials. As Tarek said, we've got the biggest data asset in the industry. Our entire mission that's sprawled across our lobby is powering smarter treatments in healthier people, and not only we're working with life sciences companies, but we're working with people like the National Cancer Institute in the U.S. We're working with Cancer Research UK as well as companies like BMS, who are leaders in immuno-oncology, and are standardizing on our platform.

Last night, we announced, kind of thinking about the Cancer Moonshot and mHealth, a partnership with Memorial Sloan Kettering Cancer Center around mHealth technologies in oncology specifically. So, they were already using our platform, but now they're going to use activity trackers, mobile apps and our Cloud to look at things like movement patterns in the patients with multiple myeloma. Now, aggregating all the data across our platform means that the MSKCC researchers will use our visualization and analytics dashboards to manage and monitor the patients on their trials, to look at data quality, and to identify interesting trends and outliers.

Let me give you another interesting example in that kind of Mooshot category on the industry side. There is a company called Forty Seven. It's started by some Stanford researchers in 2015. It's backed by Google Ventures. Forty Seven is named after CD47, which is the target protein for its experimental drugs. And they are looking to standardize on the Medidata platform as they look at treating colorectal cancer and non-Hodgkin lymphoma in new ways.

If you look at all this combined, our platform is a treasure trove of oncology focused clinical data. Of course it's a treasure trove we think of data across all therapeutic areas outside of oncology as well. And we're really excited that the Medidata Cloud has, can and we think will continue to make a meaningful difference in making the call to action of the Cancer Moonshot in actual successful mission.

So with that, I will turn the call over to Rouven.

Rouven Bergmann - Chief Financial Officer

Thank you, Glen. Good morning, everyone. As you saw in the announcement this morning, we delivered strong Q2 financial results, and high growth in operating cash flow for the first six months in 2016. In my view, this is the result of outstanding execution across all our business segments and demonstrates the momentum we have created in the marketplace. In essence, our strategy is working. And I agree with Glen that our investments will support our customers in overcoming silos and inefficiencies that will help make the Moonshot a reality.

Let me take a moment to highlight for you what I will cover in my prepared remarks. First, I will share some key accomplishments regarding product adoption and customer success. Second, we'll review our second quarter results and as usual, I'll comment on both the short-term and long-term value implication that I believe are really important for you to understand. And lastly, I will share with you an update on our visibility and outlook for the remainder of 2016.

Now let's first talk about what we've done to create momentum in new product adoption and long-term value creation. Product adoption remains strong as the industry is increasingly standardizing on the right platform. Overall, in Q2, total number of products added by new and existing customers grew by more than 75% year-over-year and even excluding Intelemage, which we acquired in Q2, products added were up more than 35%. This enhances our data assets and ultimately the integration of our products on a single platform creates an incredibly powerful value proposition. In particular, we're seeing strong interest from both pharma and medical device customers to adopt digital image management capability as part of the platform.

Data analytics is a key differentiator for our platform and a critical component for our strategy. CSA and OPAL are our major application providing predictive, analytic and benchmarking capabilities to our clients. We talked about this on previous calls, including the adoption of CSA at Bristol-Myers.

To further accelerate product adoption of CSA, we started earlier this year introducing Trial Assurance. It is a real breakthrough as it enabled our clients to apply the power of CSA on pivotal high impact trials with Medidata delivering the results of the data analysis within weeks. As Glen already pointed to, we are seeing strong interest in the market and adoption is off to a great start validating our strategy.

A lot of you have expressed interest in our new digital payment solution, Medidata Payments, which we launched in Q2. The market response has been extremely positive. As announced in the press release earlier this week, we expect more customers will adopt this platform to process site payments at new levels of efficiency and accuracy in the second half of 2016.

Finally, let me provide some additional color as it relates to the professional services. Q2 was a record quarter. The implementation projects following large scale enterprise deals signed over the past several quarters are all well on-track. In addition, increased adoption of our technology related to both single study and multiproduct deals are driving healthy demand for our professional services business. Overall, we see this as a leading indicator of increased product adoption, customer success and ultimately, recurring subscription revenue growth.

These proof points clearly show that our investments in R&D are addressing the needs of our customers. We are executing our strategy focused on customer success and our opportunity ahead.

Now, with this, let's drill into the financial results for Q2. Q2 total revenue was $114.6 million, up 10% sequentially, and 17% versus last year. Subscription revenue was $96.8 million, up 8% sequentially, and 15% year-over-year, benefiting from strong bookings growth across product and customer segment in the first half of 2016.

As a reminder, since I know Brexit is on everyone's mind these days, approximately 95% of revenue is denominated for payment in U.S. dollars. Therefore, our exposure to foreign currency fluctuation is very limited.

Professional services revenue came in at a record of $17.9 million, up 25% sequentially, and 26% year-over-year driven by the strong trends I outlined earlier.

Moving to gross profit. Q2 gross profit was $85.6 million, up 14% year-on-year. Gross margin decreased 200 basis points year-over-year to 74.6%, driven primarily by lower subscription margin and a greater mix of professional services revenue in the quarter.

Gross margin from subscription revenue was 83.9% compared with 85.3% in Q2 last year, primarily due to our global investments in infrastructure and personnel to support, scale and drive long-term growth. This includes the investment for our new data center in Europe. In addition, subscription margins reflect the amortization of intangibles from the acquisition of Intelemage, which we closed in Q2.

Gross margin from professional services revenue was 24.6%, compared with 25.4% in Q2 last year. With several large enterprise customer implementations currently underway, this will in the short-term slightly change our revenue mix. At the same time, the accelerated growth in professional services revenue hit a very healthy trend, which points to strong demand for our platform adoption and future subscription revenue growth.

And as you can see in our EBITDA results, any temporary margin implications are offset by the operating leverage of our business model. We delivered this expansion without compromising our overall profitability.

So now let's go straight to our overall profitability metric, non-GAAP operating income or EBITDAO, increased 17% year-over-year to $25.4 million in Q2. EBITDAO margin was 22.1%, up 280-basis points sequentially. We delivered this increase in profit in the second quarter while continuing our investments to support long-term growth, including a net growth of 86 full time employees in the first half of 2016, with over half of the hires in R&D, focused on building our next generation products. 25% of the incremental hires are dedicated to our expanding data center operations and delivering the growth in professional services driving product adoption.

On a GAAP basis, operating income was $11.1 million, up 124% year-over-year. Income tax expense was $3 million and we continue to expect an effective tax rate of 35% for the full year. Adjusted non-GAAP net income was $13.5 million in Q2, up 12% year-on-year.

Adjusted non-GAAP EPS was $0.24 per diluted share. On a GAAP basis, net income was $4.9 million or $0.09 per diluted share, compared with $1.5 million or $0.03 per diluted share in Q2 last year.

Turning to the balance sheet and cash metric. Cash flow from operations for the quarter was $25.5 million. This is up 115% compared with $11.9 million a year ago. On a year-to-date basis for the first half of 2016, cash flow from operations was $38 million, up 32% year-over-year. This reflects strong billings and collections.

DSOs were 65 days at the end of Q2, slightly above the previous quarter and much improved versus Q2 of 2015 by 20 days, due to strong cash collection and improved timing of billing. The calculated billing defined as revenue plus change in deferred revenue were $120 million in Q2. This is up 16% year-on-year.

As a reminder, the timing of billings on a quarterly basis is just one of many factors that can influence year-over-year growth. For example, if you were to normalize the calculated billings for customers with semiannual invoicing by just assuming quarterly invoice in each year, this increase would have been 24% year-on-year in Q2 and 16% year-to-date.

CapEx was approximately $5.8 million for the quarter as expected. For the full year, we still expect CapEx of approximately $20 million. And we ended the quarter with $483 million in total cash and investment even after we funded the Intelemage acquisition, as well as the build out of our European data center.

Now, let's move on to our backlog, visibility and guidance for the remainder of the year. We ended the quarter with $189 million of remaining 2016 adjusted subscription backlog, up 17% year-over-year. Given our progress year-to-date, we are reiterating our full year 2016 total revenue and profit outlook.

Furthermore, we feel comfortable with the current full year revenue and profitability estimate, which are near the midpoint of our guidance range. And as I mentioned earlier, our professional services organization is delivering several major technology transitions onto our platform at customers such as Boehringer Ingelheim and Bristol-Myers, two former Oracle customers as well as Celgene.

As such, we now expect a greater mix of professional service revenue for the year. For the full-year, we now expect professional services revenue of approximately $68 million to $70 million. As I noted earlier, this is a strong leading indicator of our momentum in delivering innovative cloud solutions to our customers and ultimately driving future recurring subscription revenue.

Now, when considering the mid-point of our 2016 total revenue guidance range of $462 million, which represents 18% year-over-year organic growth, our remaining adjusted subscription backlog together with our remaining professional services guidance provides coverage for about 93% of remaining total revenue guidance. This is a 200 basis point improvement year-over-year compared with 91% at this time of last year.

Furthermore, at this point to help keep your models up to date, third quarter sequential total revenue growth is expected to be closely aligned with 2014 sequential Q3 growth. Given the strong services revenue trend and increased mix I outlined earlier, we now expect overall gross margin for the full-year to be in line with the year-to-date Q2 levels, while overall profitability or EBITDAO, our expectations remain unchanged.

In conclusion, Q2 was another solid quarter of continued execution and momentum, as we build our business for the long-term success. With our strong quarterly results, improving execution across our business segments and the increased visibility, we remain confident in our current outlook for 2016. Looking ahead, we are well positioned to drive our next wave of growth on our path to becoming a $1 billion plus revenue business.

Now, let's open the call for questions.

Question-and-Answer Session

Operator

And our first question comes from the line of Sean Wieland with Piper Jaffray. Your line is now open.

Sean W. Wieland - Piper Jaffray & Co (Broker)

Thank you very much, and good morning, and congrats on a good quarter. So, I hear you on the strengths of your professional services revenue and guidance. But the offset to that is an implied reduction in subscription revenue for the back half of the year, given the strong customer retention rate. I'm just trying to get my head wrapped around that. Can you help me with that?

Rouven Bergmann - Chief Financial Officer

Yeah. So, Sean, thanks for the question. I think the way we look at our business is really holistically as a portfolio. It's a combination of the professional service and the Cloud subscription. I don't think that I can say that the cloud subscription revenue is kind of lagging behind. I think we are on track if you look at the overall mix of our revenue and the traction we have in the market.

And you heard us talking about the trends in terms of product adoption, all of this drives Cloud subscription revenue growth. And we are bringing in lot of new products to market that will drive revenue in the second half of the year. So, when you look at our overall plan that we have in place to get to our midpoint, we are now at a healthy level of our revenue mix and we have the pipeline that supports the second half of the year to drive the whole business plus the midpoint on our plan.

Tarek A. Sherif - Chairman & Chief Executive Officer

Sure. And I'd add one other thing just to remind you. The large implementations that we talked about, the deals that we won at the end of the year and early this year, they all have pretty significant subscription revenue ramps in out years. So, I think you got to take Rouven's comments in the context of that.

Sean W. Wieland - Piper Jaffray & Co (Broker)

I totally see the setup here and how these new big wins are going to impact subscription revenue in 2017. But as I look at my model here, if I'm going to increase my professional services revenue for the remainder of the year, I got to take it out of subscription revenue and that math just doesn't seem to align with the commentary that you're giving and that's just why I'm drilling into that.

Tarek A. Sherif - Chairman & Chief Executive Officer

Yeah. I mean, look, when we start the year, we give guidance based on what we can see and we try to predetermine a mix based on some of the historical experiences we had. Obviously, services is always a little bit – because it doesn't have the same backlog characteristics, there is a bit more forecasting art than science in it, and now that we're halfway through the year, I think there's a lot more confidence in what we think the services mix is going to look like relative to subscription, and we're very comfortable with it. And I think what I would point out to you is that it also as Rouven said, has no margin implications for us overall. I think the level of profitability that we're going to achieve and that we talked about for 2016 versus 2015 and before is going to be very high. So, as an organization, we're very comfortable with where we are. And I wouldn't read too much into it for future periods.

Sean W. Wieland - Piper Jaffray & Co (Broker)

Okay. Got it. Thanks so much.

Operator

Thank you. And our next question comes from the line of Donald Hooker with KeyBanc. Your line is now open.

Donald H. Hooker - KeyBanc Capital Markets, Inc.

Great, good morning. So, I'm looking at the adjusted subscription backlog, which looks great. I think I'm guessing there is probably $10 million or so kind of – it's somewhat understated because you have a number of these large contracts ramping, a number of these relationships ramping. Is it right to think that that backlog is a little bit, maybe if those larger relationships were at their full run rate that might be a bit – that backlog might be like $5 million to $10 million higher?

Rouven Bergmann - Chief Financial Officer

Yeah. So, the way we've defined the subscription backlog, it's – we give the subscription backlog that's contracted till the end of the year and the large contracts that have these significant ramps, they're coming in the second year, third year, fourth year. So, everything that's currently reflected till the end of the year in the $189 million, that's what we have on the contract. Now, I think to take this a little bit further is, if you look at the strong adoption trends that we are currently seeing in the market and the business we are building, this will obviously add to our backlog as we continue to execute.

Tarek A. Sherif - Chairman & Chief Executive Officer

But the other piece to that is, if you don't see the ramp that happens with the subscription agreement that happened in out years, you're only seeing the tail that happens in 2016.

Donald H. Hooker - KeyBanc Capital Markets, Inc.

Yeah. I got you. I was just sort of thinking that maybe – when we think about that subscription revenue guidance going forward and looking at the backlog sort of for the near term, there might be a little bit of an understatement there because like you just mentioned, there is a fair amount of revenue that will come in year two, three years and four years, but you've already booked it essentially. It just doesn't show up in the backlog as you define in.

Glen Michael de Vries - President & Director

Yes. Our point is that, you're right. But it's not an understatement, it's just – you don't see it in 2016.

Rouven Bergmann - Chief Financial Officer

Exactly.

Donald H. Hooker - KeyBanc Capital Markets, Inc.

Got you. And maybe just one another one. I guess on the Biogen relationship, I don't know if you characterized that as an enterprise relationship. But, if you did, I think you're at – maybe, what is it, 18 of the top 25 biopharma companies, so there is sort of seven left. How many of those...

Glen Michael de Vries - President & Director

Your math works.

Donald H. Hooker - KeyBanc Capital Markets, Inc.

Okay. How many of those seven remaining large pharma companies do you think are sort of unsettled as to who their go-to vendor is, and give us some idea of maybe some more big deals?

Tarek A. Sherif - Chairman & Chief Executive Officer

I don't want to get – a couple of years ago, we kind of went down that path on big deal expectations. I view pretty much anybody has fair game with the exception of the one we noted in our scripted comments, but even there I think, there is opportunity in other areas for us to work with them. So, we feel pretty good about the competitive landscape, not just – I wouldn't get overly focused just on the top 25, it's great, your math is right, it's 18 out of the top 25, but there are lot of companies out there that are running clinical trials and as you can tell from our client count, it's going up pretty dramatically.

Glen Michael de Vries - President & Director

And remember there is plenty of wide space for us in those 17 now, plus 1 to 18 that are already using some part of our platform or another. They are not using all of it by far for all those studies.

Donald H. Hooker - KeyBanc Capital Markets, Inc.

Okay. Got you. And I'll jump off here, but just a quick follow-up on that, about the Biogen relationship. I think you mentioned it was only EDC or only Rave, is it – is there a reason why it's only Rave or are you hoping that that expands? Maybe you can talk about kind of how you see that relationship expanding? Thanks.

Glen Michael de Vries - President & Director

Yeah. So, as usual, we don't want to comment very specifically on what individual customers are doing and why that their business they do in our platform. Just remember, Rave is not EDC, at least in the way that some people define it very narrowly. So, there is things in Rave like risk-based monitoring, which is obviously a huge differentiator for us given where the market is going. So – I just, a lot of you've heard it before. I find the term EDC so limiting in the way most people think about it and there is a lot more in there.

Donald H. Hooker - KeyBanc Capital Markets, Inc.

Thank you.

Operator

Thank you. And our next question comes from the line of Dave Windley with Jefferies. Your line is now open.

David Howard Windley - Jefferies LLC

Hi. Good morning, gentlemen. Thanks for taking my questions. Wanted to clarify perhaps on an item or two on revenues. So, the European data center that you've been building now, sounds like it's operational now. Was that the same center that was a commitment in one of the platform deals? Is that, I know you had intended to have that done by the end of the year in that particular case. Are we talking about the same one?

Michael L. Capone - Chief Operating Officer

So, this is Mike Capone. So, yes, the European data center that we opened was one of prerequisite to start one of our clients. However, now we're going to amortize that across the large number of clients as we grow our business across Europe and the globe.

David Howard Windley - Jefferies LLC

Excellent. So then, if I remember correctly, the completion of the data center, the delivery of the data center was a trigger to then begin recognizing revenue in that particular clients platform deal. I think that was not anticipated to happen until late in the year. It sounds like now you're going to get a good half years worth of revenue from that client in app services. App services guidance is going down, can you help to reconcile that a little bit please?

Glen Michael de Vries - President & Director

I think you're reading too much into previous comments. Absolutely we needed that data center running to get that client ramped up. There are other elements of their revenue recognition ramp that are beyond just having the data center have power on it related to their usage of products.

David Howard Windley - Jefferies LLC

Okay. So, by that – I think that was Glen, by that meaning the revenue recognition is still pushed out into the latter part of the year that there are other things, other hurdles...

Glen Michael de Vries - President & Director

Yeah.

David Howard Windley - Jefferies LLC

..that need to be cleared.

Tarek A. Sherif - Chairman & Chief Executive Officer

Yeah. Absolutely.

Michael L. Capone - Chief Operating Officer

Yes. And that was Glen at the start and Tarek to finish. Thanks, Dave.

David Howard Windley - Jefferies LLC

Yeah. Thanks. So, Glen, one for you on the virtual study that's described also in your comments. Can you flesh out, I'm interested in how that potentially structurally disrupts how studies might be done? And wondering – so these are obviously real patients, right? So, it's not – it sounds like, it's not like a retrospective Medidata type study. So, real patients in study being monitored with sensors and is the virtual aspect of it that the data is flowing directly into the database and you don't have an investigator that needs to input that data and say monitors that need to go out and monitor the data at site, is that how I should think about that virtually?

Glen Michael de Vries - President & Director

Not exactly. So, there is really two things that your question kind of touches. One, just actually going back to what I said about Rave. We have the ability, all our clients who use Rave for things like EDC, have the ability and we work with them to integrate electronic health record data. Again, it's one of the strengths of our platform architecturally. So, there is going to – there are increasingly cases where nobody from at a hospital or a doctor's office actually logs on to EDC in the traditional clinical trial since we can flow that data. That's one topic.

The other is where some of this data science work is going. And that is, you're absolutely right, this is not the same thing as going in retrospectively clearing old data in the kinds of studies that people do with that typically today. There are different ways to statistically think about combining data from previous studies that allow you to just do, I think very interesting game changing things. It's not actually one idea, there is lots of different ideas in there, and which is exciting to me, and obviously we'll share more with you guys as things get productized. But what's exciting to me is, we're actually able to make this happen now and we've now proven in this pilot with Roche that we can hit the scientific and regulatory bars necessary to make ideas that a lot of us have known for decades with good ideas, things that can really be done today. So, again, stay tuned, but yes, you are thinking about it correctly, new kinds of clinical trials that we will enable our clients to do in our platform.

David Howard Windley - Jefferies LLC

Great, thanks. And my last question on margin. Rouven, your comments around margin implication that it's essentially neutral despite the shift in revenue. I think that implies that the operating costs, your operating cost budgets now are viewed as being a little more efficient. I suppose a little lower for the year and that offsets what might be a lower gross margin. Am I thinking about that right and where are those savings coming from?

Rouven Bergmann - Chief Financial Officer

Yeah. Generally, you're thinking about this in the right way. If you look at our financial statements that we published earlier this morning and you go through the areas you see we're creating efficiencies in G&A, we are operating at the level in R&D investment as we communicated earlier in the year as part of our plan. And we're just being smart around where we spend money and how we invest them on the business. And that's kind of giving us the leverage all in aggregate and our business is highly profitable.

David Howard Windley - Jefferies LLC

Okay. All right. Thank you.

Rouven Bergmann - Chief Financial Officer

You're welcome.

Operator

Thank you. And our next question comes from the line of Garen Sarafian with Citigroup. Your line is now open.

Garen Sarafian - Citigroup Global Markets, Inc. (Broker)

Good morning, guys. And I will keep it to a question and one follow-up. One is, I need to go back to this, just on the revenue mix. Tarek, I totally understand how it could be more of an art than a science when it comes to forecasting professional services. But, could you give us a little bit more color as to how that line item sort of evolved versus what you were expecting previously? Just because in the past professional services has indeed been lumpy, but it seems that now it's being sort of more of a leading metric with some of Rouven's comments. So, just wondering how that's sort of evolving so that we can sort of do a better job thinking through that in the future?

Tarek A. Sherif - Chairman & Chief Executive Officer

Sure. I think from a – I'd actually take you back a few years to when we were doing a lot of enterprise implementations. And services revenue really was kind of that lead horse for us. Right now, we've got four major implementations going on. And so, there is going to be a shift in that direction, right. And then, if you look at the customer count for us, we've added a lot of customers. It's not just four major implementations, but we've got a lot of single study activity going on. We've got other enterprise activity going on.

And then, if you look at some of our newer products, you heard that we've got a lot of – there is a lot going on from a product adoption perspective across the platform and that drives services. So, it's kind of a perfect storm that's driving services right now.

And there are lot of moving pieces here and when we start the year, we tend to be pretty conservative about how we think about something that's not committed backlog. I think now we have a lot better visibility into ongoing projects, and I think, so our ability to forecast and our certainty around that forecasting gets a lot stronger and that's kind of what you are seeing reflected in the numbers that we put out. What I would say is just at the end of the day, the company is in line with achieving the guidance that we put out there. We're going to have a really profitable year and I think those are the things that as a management team we focus on.

Garen Sarafian - Citigroup Global Markets, Inc. (Broker)

Is that impacting the interplay though between the two line items? I mean, is it more of you thought that they would go more in tandem and now it's more of – no, let's just pull that forward from 2017 and then let's push that one back to 2017?

Tarek A. Sherif - Chairman & Chief Executive Officer

No, no. I wouldn't look at it that way. I think they move slightly independently, but the services tends to have historically, in periods like this for us, been a good leading indicator rather than a lagging indicator with subscription being more of a lagging indicator.

Garen Sarafian - Citigroup Global Markets, Inc. (Broker)

Okay.

Rouven Bergmann - Chief Financial Officer

And maybe one thing to add Garen. If you look at the overall mix, we now have about 15% to 85% and if you compare that across peers in the industry, I think that's a very, very healthy mix and you could actually take the argument that in the past it was lagging behind. I think we are catching up with all the innovation and the trends that Tarek pointed to, to make sure that our customers are driving success, get the value from all the products that they're subscribed to and professional services is a market maker in that sense.

Garen Sarafian - Citigroup Global Markets, Inc. (Broker)

Got it. Okay. And then just switching gears on, I had a question on mHealth. I mean, you guys mentioned a couple of times it's on fire, but how should we think of this offering? Is that something that's priced separately or when you say it's something that can impact earnings or is it more of a sales tool to increase your sales hit rate or is it just a retention tool or if it can go even higher than near 100% I guess? I'm just trying to figure out what does that really sort of mean to the financials at this point?

Glen Michael de Vries - President & Director

Yeah. So, mobile health is an offering. This is a product. This is incremental sales. You do not have a conversation with a head of R&D or the head of a therapeutic area. It doesn't include them thinking about their future digital strategies and our mHealth offering is around helping them craft and execute on those digital strategies. It's a whole new category of how people are thinking about what needs to be done in clinical development. So, yes, this is about expanding revenue a 100%.

Garen Sarafian - Citigroup Global Markets, Inc. (Broker)

All right. I'll stop there and take the rest offline. Thank you so much.

Glen Michael de Vries - President & Director

Cool. Thanks, Garen.

Tarek A. Sherif - Chairman & Chief Executive Officer

Thanks.

Operator

Thank you. And our next question comes from the line of Scott Berg with Needham. Your line is now open.

Scott Berg - Needham & Co. LLC

Hi, everyone. Thanks for taking my questions. I have two quick ones. We'll start on the Intelemage acquisition. I believe Tarek was talking about some of the partners that you've been able to sign to help solve those solutions here going forward. But, just want to kind of understand what the go-to-market strategy around that product looks like maybe, 6 months, 12 months, 18 months from now? Is the mix of bookings coming from direct sales any different with that product versus partners than say the historical part of the business?

Tarek A. Sherif - Chairman & Chief Executive Officer

I would say, no, because we have a fairly substantial direct sales opportunity and we do see interest as well from the channel. So, a number of our CRO partners are really excited about the capability that we now have. So I don't expect any major shift.

Scott Berg - Needham & Co. LLC

Great. And, I guess, my follow-up is on the Biogen deal. Congrats on another large top-25 customer obviously. But just wanted to see if there is anything different in the sales cycle for that customer or maybe the products that they buy, do they buy more upfront than maybe that was a little bit more unusual or different than some of the other large customers that you've recently signed?

Tarek A. Sherif - Chairman & Chief Executive Officer

No. And, again, we don't comment on specifics. I think the takeaway here is, we've got another customer who is moving over to the platform. We've tried very hard to not talk about specific product adoption. Some customers are more comfortable with us talking about it than others and I think it's just a – it's a big win for the team. We're really pleased with it. I think it speaks worlds to where Biogen is moving in terms of how they're thinking about their innovation strategy going forward and we couldn't be happier to have them as a significant customer to us.

Scott Berg - Needham & Co. LLC

Great. That's all I have at the moment. Thanks for taking the questions.

Tarek A. Sherif - Chairman & Chief Executive Officer

Thank you.

Operator

Thank you. And our next question comes from the line of George Hill with Deutsche Bank. Your line is now open.

George R. Hill - Deutsche Bank Securities, Inc.

Hey, good morning, guys. And thanks for taking the question. And, I guess, Tarek and Glen this is going to kind of be a loaded open-ended question. But, I guess, there is a lot in the PDUFA renewal about real world evidence and the regulatory body participating in the data revolution that's going on in life sciences. I guess to try to keep the question simple, if you could talk about the couple product buckets or couple product opportunities where you think the PDUFA reauth is most likely going to impact clients, and most likely going to impact you in a way that you can monetize so that we can measure that? I guess, could you just spend a minute or two and touch on that.

Glen Michael de Vries - President & Director

Yeah. I actually think, if you look at kind of our three main categories that we think things are going in the future, one is this consistent platform that you can do all the clinical, financial and operational stuff. Some of the sources of that clinical data, some of the types of operational questions that will be answered will be changed, but that life sciences companies are going to need a platform to do that, and we're going to be that platform. So, I think it's good for that core part of our business. 100% will over time become more and more inclusive of things related to those digital strategies and the measurement of outcomes. Again, we are our sponsors' best partner for figuring out how to prove that their drugs and devices are worth being paid for. So that is going to positively impact the mobile health part of our strategies.

And then the third piece that you hear us talk about is the analytics. And, again, once again, that is, I think a 100% positively impacted by PDUFA and the directions that the government and payers were taking. Again, we need to – if you have thought about real world evidence in pricing by the time you've gone to market as a life sciences company, you thought about it too late, because you've already been priced. You have to think about how you're going to show your value while you are figuring out what it is that you're bringing to market, as well as then and this is what I think will carry our offerings further and further. We are already, as you've heard, doing Phase 4 in real world studies like the GSK one, that is in the App Store. But, I think it's going to carry what we do further and further into the commercial part of the way people think about science and medicine, not just the business. I do think it's really positive for us.

George R. Hill - Deutsche Bank Securities, Inc.

Okay. And, I guess maybe just if – still a quick follow-up here. If you look at kind of the focus on real world evidence in patient reported outcomes, where and how do you see that disrupting the industry the most? I mean your industry – I guess your industry is specifically in kind of the research process more broadly?

Glen Michael de Vries - President & Director

Yeah. I mean the things that we published before, I'm already on record saying that patient reported outcomes are no where nearly as powerful as patient outcomes, and again one of the exciting things that you can do now is objectively, quantitatively measure them, not subjectively and qualitatively ask people about them. SensorLink, AppConnect, and again, the CMB news in the marketplace, to me that evidence that we are at least in the right ways correct about how the world is going to change, are going to be things that are part of that revolution. I actually think we are making that happen faster, and I hope we're making that happen faster than it would have happened without us.

George R. Hill - Deutsche Bank Securities, Inc.

No, Okay. That's helpful. Thank you.

Operator

Thank you. We only have time for one more question on today's call. And our last question comes from the line of Sandy Draper with SunTrust. Your line is now open.

Sandy Y. Draper - SunTrust Robinson Humphrey, Inc.

Thanks very much for sliding me in here, it's a bitter end. So, maybe just put out two questions. First on the CRO commentary, I think you said you either renewed or signed three of the top ten CROs. Can you just remind us where you are in terms of penetration with the top ten CROs?

And then the second question, a financial one for Rouven. If you look historically, while you guys have ramped up professional services in a given year, you may not have sequential – in the following years grown at the same level, that you've been able to hold that same level? I'm just trying to get a sense of, is that where we are, we're sort of setting a new base line this year or because this is really driven by some high implementations this year, we should be thinking about once these three deals to four deals go live, app services accelerate the professional services actually starts to moderate your drops back down to maybe that sort of more normalized $60 million level? Thanks.

Tarek A. Sherif - Chairman & Chief Executive Officer

Let me hit your first question around CROs. I think it's a nuanced answer because, we basically work with pretty much every CRO in the world. And – I'm not – I don't mean that with hubris, but some of them, we contract with directly, a lot of them work as a sales channel for us and pretty much all of them touch Rave because of our penetration into our customer base. If you have 700 customers and you've got 18 of the top 25 pharma, who are standardized on Rave or your platform, then they're going to be working in Rave.

And so, really what I was alluding to is the fact that the direct relationships with three of them, they made capital commitments to us versus using Rave in the market or just being a channel partner to us. And we're increasingly seeing that, like, if you look across our platform, the portfolio of solutions that we have, there are a whole number of them that becomes strategically important to our partners to allow them to become more efficient and to allow them to be much more competitive in the marketplace.

And you know the list of products we have and you can imagine the improvements we've made to Balance, what we're seeing with mHealth, Payments, CTMS, those all play a big role in the decision making. And so, we were alluding to direct deals with some of our partners. And again, there's a lot of activity going on in the partner channel and that's both direct and indirect.

Now, I hand it over to Rouven to do the second part.

Rouven Bergmann - Chief Financial Officer

Okay. Thanks, Tarek. And Sandy, I think the way we look at this today and we outlined that earlier is we've seen strong trends and it's coming from the fact that we have a very healthy business across all the segments. But we are driving also a huge transformation on a large scale level at Global Pharma. And this is our huge enablement project as it relates to training, implementation, process redesign.

And as we are getting more strategic with our product portfolio and evolving our platform, my prediction is we're going to continue to see these type of engagements and the role we play in the market. Also we have kind of what our position is and what our customers are expecting from us, because they're coming to us and asking to make sure that ultimately they're in success and they can get the value from the products they are seeing at. So, in 2017, we will obviously evaluate the situation as we did it in 2016, go through our portfolio and our growth plan. But if you ask me today, I see this trend to continue the role we're playing in the market and that's with the visibility I have today what I can say.

Tarek A. Sherif - Chairman & Chief Executive Officer

I would just add to what Rouven said, which is, typically, these engagements are multiyear. So, I don't think you should – without giving you guidance for 2017, because there is an element – there would be effectively an element to that. I think you should expect that we have – we are at a run rate that is, we wouldn't expect a sharp drop-off from.

Sandy Y. Draper - SunTrust Robinson Humphrey, Inc.

Okay. That's really helpful. I appreciate it.

Tarek A. Sherif - Chairman & Chief Executive Officer

Thanks, Sandy.

Operator

Thank you. And this concludes today's question-and-answer session. I would now like to turn the call back to Tarek for closing remarks.

Tarek A. Sherif - Chairman & Chief Executive Officer

I just want to thank you all again for joining us today, and we're looking forward to a great second half of the year. And we look forward to talking to you on our Q3 earnings call. Thanks.

Operator

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

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