Veeva Systems Inc Q2 FY2022 Earnings Call

Good afternoon, and welcome to Veeva's Fiscal 2022 Second Quarter Earnings Conference Call for the quarter ended July 31, 2021. As a reminder, we posted prepared remarks on Veeva's Investor Relations website just after 1 p.m. Pacific today. We hope you've had a chance to read them before the call. Today's call will be used primarily for Q&A. With me today for Q&A are Peter Gassner, our Chief Executive Officer; Paul Shawah, EVP, Commercial Strategy; and Brent Bowman, our Chief Financial Officer. During the course of this call, we may make forward-looking statements regarding trends, our strategies and the anticipated performance of the business. These forward-looking statements will be based on our current views and expectations and are subject to various risks and uncertainties. Our actual results may differ materially. Please refer to the risks listed in our earnings release and the risk factors included in our most recent filing on Form 10-Q. Forward-looking statements made during the call are being made as of today, September 1, 2021, based on the facts available to us today. If this call is replayed or viewed after today, the information presented during the call may not contain current or accurate information. Veeva disclaims any obligation to update or revise any forward-looking statements. On the call, we may also discuss certain non-GAAP metrics that we believe aid in the understanding of our financial results. A reconciliation to comparable GAAP metrics can be found in today's earnings release and in the supplemental investor presentation, both of which are available on our website. With that, thank you for joining us. Now I'll turn the call over to Peter.

Thank you, Ato, and welcome to the call, everyone. It was another great quarter for Veeva with strength across the business. Total revenue was up 29% to $456 million. Subscription revenue was also up 29% to $366 million. Non-GAAP operating income was $192 million or 42% of total revenue. As noted in my prepared remarks, we did well in our established areas but also had major progress in our newer areas, including safety, CDMS, digital trials, Link and Data Cloud. At this point, I'd like to open up the call to questions for Brent, Paul or myself.

It's encouraging to see some acceleration in the business. Peter, in your remarks, you mentioned the shrinking footprints and deployments on the CRM side. Could you provide some insight into how long you anticipate this headwind will continue before things stabilize? Additionally, while you touched on this, it's noteworthy that Commercial Cloud growth accelerated during the quarter, which is great to see despite these challenges. Can you elaborate on what is driving this growth and how it might be offsetting the shrinking footprints? Specifically, what excites you most about Commercial Cloud, and what do you believe is a sustainable growth rate for this sector? I also have a follow-up question regarding CDMS.

Yes, I'll take that. Thanks, Rishi. This is Paul. To provide some context, if you recall, around the third quarter last year, we began discussing our efforts to enhance industry efficiency and facilitate the digital transition. As we accelerated this process, companies began to see productivity and efficiency improvements, which would likely be accompanied by some reductions. We did not notice these reductions until this quarter, when a few of our enterprise customers experienced some unusual decreases. We anticipate that these trends will continue in the second half of this year and into next year. However, we expect to offset these reductions with strong performance across Commercial Cloud. We're making significant gains in CRM, and I expect this trend to persist. Additionally, we’re seeing strength in add-ons and newer products, especially in the data sector like Link, which had a particularly strong quarter and is performing well. Crossix will also contribute to this growth, and over the long term, we anticipate further contributions from Data Cloud. There’s a lot to be optimistic about moving forward.

All right. Wonderful. That's really helpful. And then on the CDMS side, maybe you want to expand and talk a little bit about your success in partnering with CROs because if we want the clock back a couple of years, there were definitely investor concerns that CROs were going to be a little bit of a headwind to Veeva over time, and it clearly hasn't turned out to be that way. And now you're talking about the traction you're seeing on CRO partner program and how that relates to CDMS. Can you talk a little bit about your strategy with CROs, particularly as it relates to the CDMS side, and how you've been able to gain that momentum with that as a channel?

I'll take that one. This is Peter. Yes, CROs will be an especially important partner for CDMS because when CDMS becomes part of their technology stack that they can offer to their customers, it's really an efficient channel. So how are we gaining traction there? I would say, number one, through product excellence, by creating a superior, truly cloud-based CDMS product that's integrated with other Veeva products. As that has happened, sponsors will start asking the CROs about it, 'Hey, are you offering Veeva? Maybe you should be offering Veeva. We're using Veeva.' Then the CROs begin to learn more about Veeva. They start offering Veeva, initially on an experimental basis if a sponsor requests it. As they begin to like it and see the efficiencies, they then make it their standard. So it's really about customer success for the CRO, focusing on having an excellent product but also ensuring a robust partner program and providing the necessary support.

So maybe just a follow-up on Rishi's question. I'm just curious on the timing of some of the sales rep trends for some of your customers. Like how did that trend versus your expectation? And how pervasive is that? I guess I'm trying to think about where that impact is going to come in and how to think about what that could be in maybe fiscal year '23 and beyond.

Yes. Regarding timing, we mentioned that changes are expected to occur over 1 to 2 years. It's not an exact timeline, and many of our customers are still navigating the uncertainty in the industry. Previously, the industry was primarily in-person, but there has been a significant shift to digital, and the situation remains unstable. Factors such as access to offices are still being impacted by the ongoing pandemic. Life sciences companies should be cautious not to make hasty adjustments in either direction. This is why it takes time for companies to carefully consider the optimal size of their field sales force. Overall, we are observing that customers are benefiting from becoming more digital, and I believe this trend will persist in the long term. I expect these reductions to continue over the next 1 to 2 years. Once we reach a new stable phase, I do not foresee significant changes beyond that. These reductions were anticipated as the industry aims for greater efficiency, but we are observing them occurring more rapidly than expected.

Paul, considering the overall investments they are planning to make, it's possible to envision the efficiencies they might achieve by focusing on areas with a smaller workforce. However, there is a significant opportunity to reallocate some of those funds. What insights have some customers gained, and how are they approaching this opportunity with a greater emphasis on digital strategies?

Yes, you're exactly right. It's the right way to think about it. As we increase the productivity of an individual company by 10%, 15%, or 20% through enhanced digital integration, they have options. They can choose to reduce their size proportionately or reinvest some of those gains into reaching more customers. This is the calculation we're discussing regularly with our customers, involving our strategy and business consulting teams, focusing on finding the ideal balance between digital and field engagement. We're actively engaged in conversations with many customers about these issues, and it seems most will find a balance, not opting to convert all productivity gains into reductions, but rather adjusting based on geographical location, therapeutic areas, and the unique needs of their businesses.

I guess one for Peter and one for Brent, if I could. Peter, it seems that you really stood out this quarter, I think, with your first top 20 win. Do you think about that win as one of the early adopters? I mean it seems like safety is happening here maybe a little faster than I would have anticipated. And just wondering if that win with the first half '20 is just an early adopter. Or are you seeing a stronger interest and appetite to roll out that Safety Vault suite of products? And then again, one quick follow-up for Brent.

We do have early adopters and several customers, although many are smaller. We do work with divisions of some large customers, but this was the first among the top 20 to fully embrace us for safety. The right timing from a customer's perspective is crucial; they need a genuine need to go early, and our product must also be prepared. The circumstances have to align. I expected this to occur sometime later this year or early next year, but it transpired more quickly than I anticipated. However, we would never enter into a deal unless we were fully prepared. If we weren't ready, we would decline such an opportunity. This timing seems perfect with the right customer, and I believe it will have a positive outcome. While I view this as a significant milestone for Veeva, I don't see it immediately altering our revenue and adoption trajectory, which will follow its natural cycles. The true impact of this deal will be felt in 2 to 3 years when it begins to influence the market. We saw a similar pattern with CDMS about 1.5 years ago when we announced our first enterprise deal within the top 20, and now we're observing the effects of that in our widespread CDMS adoption.

That was very insightful. Brent, you mentioned the tight labor market, which has come up frequently. I'm considering the 5% salary increase, something you haven't typically done before. Is this increase a proactive strategy to mitigate turnover, or is it more of a reactive measure? Additionally, I noticed that Workday recently shifted some compensation from stock-based to cash, and I'm curious if this points to a larger trend in the Bay Area. Can you elaborate on the rationale behind the 5% salary increase and whether it was proactive or reactive? I'd like to understand the reasoning and timing behind it.

Yes, we are being proactive. We are taking the right steps for our employees, especially in these unusual times marked by inflation and a highly competitive landscape. We evaluated the situation and concluded that now is the right moment to invest in our people. This change is effective immediately.

I would like to add that we are quite international as a company, with nearly half of our workforce located outside the U.S. Within the U.S., our presence is not primarily in the Bay Area. We have several development centers in places like Toronto, Boston, and Raleigh, along with a significant number of our field employees based on the East Coast. Therefore, our approach is not specifically focused on the Bay Area. As Brent mentioned, this decision was proactive and broadly considered.

I would like to follow up on that. You mentioned the $10 million impact on EBIT for the year. How should we consider any potential effects on services revenue? Should we generally increase our services run rate in our projections? What are your thoughts on that, Brent? I also have a question for Peter.

Yes. There is a minor effect on the services revenue from that perspective. It's part of our normal business operations, and we typically reflect that in the services area, but it's not significant enough to necessitate a change in your model.

Got it. Got it. And then I guess another kind of follow-on on that vein. I think I read in the script there, Peter, that you mentioned not raising prices for software or data at this time. And you guys have never raised prices in your history. Just wondering if that's something that you're contemplating with, as you mentioned, inflation, the salary bump. Is that something that might be in consideration down the line?

That's a good question. Our philosophy has always been get the right price for our product and try not to increase the prices of our subscriptions. We haven't increased them because customers generally don't like it, and we try to get efficient and deliver more value. And we like to maintain doing that, and we think we can. Could we do that forever? That depends on how many years out in the future and what inflation does. But certainly, for the foreseeable future, we don't anticipate raising our prices for our subscriptions.

Congrats on the quarter. I was hoping you could give us some broader directional views on your digital trial suite, especially in light of the Delta variant. Could the macro backdrop result in a faster pace of adoption? And does that impact your investment speed or priorities in light of that?

Okay. Thanks, Stephanie. I'll take that. So digital trials is really about all types of trials and not really related to COVID or the Delta variant. It's about making the trial faster and less expensive. So we have a target of 25% faster, 25% less expensive. And how we're going to do that is have it be really patient-centric and really paperless. So you might hear about something, the category called decentralized clinical trials. There's a lot of talk about that. That's an area where Veeva is into. But we're taking a broader approach, overall digitizing the whole clinical trial starting from the sponsor side, the clinical data management, clinical operations to the clinical research side and then right out to the patient. So that's how we think about it, Stephanie, really broad and very long term.

And then I have to ask the flip side of the sales rep headcount reduction question. But you've been beating margins healthily despite this kind of move here over the past few quarters. What's been driving this outpaced margin expansion? And how sustainable is it?

Regarding the margin, several factors contributed to the outperformance. One factor is that the subscription data is coming through, and we experienced some timing issues with our new data suppliers. We expected one to finalize in the second quarter, but it actually closed in August, which affected our timing and is included in our guidance moving forward. Additionally, we brought on 236 net employees during the quarter, but we are slightly behind our hiring plan and aim to catch up in the latter half of the year. All of these elements contributed to the positive results this quarter and will influence our outlook for the rest of the year.

I guess maybe first one from a higher level for Peter. You touched on it kind of in the prepared remarks. But thinking about again kind of your partnership approach with not only your business consulting segment but as well as kind of with the CROs, I guess love to understand how you guys are thinking of these as vectors to not only kind of drive that adoption of the existing platform but also kind of as drivers of your innovation efforts over time, right? You've talked a lot about kind of the strategic partnership approach, but would love to kind of understand how you're kind of viewing this to drive that innovation roadmap.

Yes, that's a great question. I’ll start with the CROs. We are fully collaborating with them to serve our customers and utilize them as a channel. This partnership also allows us to receive direct feedback from the CROs, and we have actively involved them in our design process, engaging them directly with our product teams to establish a strong feedback loop. We have invested significant effort in this, and it's yielding positive results. Business consulting is somewhat different. Our billable consultants work with customers on business processes, and there is also a close feedback loop here. As our customers discuss potential process changes or change management with our business process consultants, those discussions often lead to product requirements or ideas. I would say that business consulting has been a valuable addition to Veeva and is positively influencing our product roadmap.

It's great to hear. I have a question for Paul. We've discussed this before, but I'd like to understand more about the integration of payments into CDMS as a valuable addition to the platform, considering its unified approach to the Clinical Suite. Can you explain how you view the broader payment opportunity for expanding use cases? Additionally, how has the initial adoption been, especially since CTMS is still a relatively new offering for the platform?

Yes. This is Peter. I'll take the payments one. Payments as it relates to our clinical operations, you're right that it's going well, but it's early because payments require our CTMS product. CTMS is still relatively early in our lifecycle. So the idea behind payments is to automate the payments to the clinical research sites based on the activities done. And that's where it's especially useful for the customer to get their clinical operations and their clinical data management from Veeva because the clinical data management, that creates the activity, and it gets passed over into the clinical operations and then the payment is sent out automatically. That's the value that the whole suite provides. So payments is going well, but still very early.

So Brent, Veeva beat this quarter on both revenue and billings. But relative to the last 3 or 4 quarters where you put up 4% to 6% beats on revs and 7% to 10% beats on billings, this quarter was a little skinnier. And I'm wondering what changed to create that result relative to your expectations.

Yes, we did beat our guidance, and we're very pleased with the 29% year-on-year growth, with Commercial Cloud at 22% and Vault at 37%. We're happy with our execution. One area to mention is the services side. Last quarter, we indicated that we were operating at a very high utilization rate and expected it to normalize, which is what occurred this quarter. Additionally, we observed an increase in paid time off, both on the Veeva delivery side and from our customers. While services came in at the lower end of our guidance, we are overall very satisfied with the demand we experienced for the quarter.

Great. And then if I could just ask you a margin question. So you indicated that the salary increase will occur over 5 months of this fiscal year. So if we annualize that, should we think about the impact on next year's margins, all else equal, being a roughly $25 million impact? And then I guess if we layer that into our models and assume a reversal, if you'd like, of the COVID savings you're experiencing this year, it feels like the more likely prospect is for margins to be down next year as a result of these 2 things. Is that at least directionally the correct approach, Brent?

Yes. I'm not going to provide a guide on margins for next year, but what I can say is you're right in your rough sizing. It's about $2 million a month related to the 5% increase. And then time will tell on our travel and event savings that we see. Now we have up 200 basis points in our margin this year. Over time, some of that will come back into play, and time will tell.

This is Jackson Ader on for Sterling tonight. First question is on the strength in the SMB that you saw in the Commercial Cloud. How should we be thinking about kind of the direction here of strength in SMB versus the headwinds on the enterprise side for the rep count? Is there any worry that the strength in the SMB might feed its way into the same territory we're seeing in the enterprise?

Yes, you're correct. We are experiencing strong growth in the small and medium-sized business sector. The new companies and small to medium enterprises are primarily commercial firms that are launching their first products, and we are successfully winning most of these opportunities. We have introduced the concept of a Commercial Cloud accelerator, which helps customers fully commit to a comprehensive set of Veeva products and services all at once. As a result, we are noticing larger deal sizes, as well as a stronger long-term commitment from these customers. The small and medium business segment is driving significant growth and presenting future opportunities as many of these companies are expected to evolve into larger enterprises over time. Regarding potential reductions in sales representatives, some businesses may look like enterprises due to various factors, such as their market position and the reception of their products. However, the reductions we have seen have predominantly occurred in established enterprises with established sales forces. Small and medium businesses will adjust to the appropriate size over time, while established companies may need to make changes to increase productivity. Overall, the dynamics will differ from those of established enterprises.

Yes. Okay. That makes sense. And then a quick follow-up on the second CDMS deal with the top 20 pharma. Just any additional color you can give as to how this compares with the first. Is it a broader implementation, standardizing the trials on the Veeva platform? Any additional color would be great.

Yes. Regarding the second CDMS win, this is Peter speaking. It's with a different company than the first, but they share similar needs and approaches, as well as a similar rollout strategy. They are looking to modernize their environment, which previously was outdated and fragmented with numerous point solutions. This led to slower operations over time, prompting them to recognize the necessity for a comprehensive overhaul. They initiated a pilot with a few studies, both to test the new system and to revise their internal processes. Transitioning to Veeva for CDMS requires embracing an agile clinical study building environment rather than a traditional waterfall setup, which involves significant change management. However, they are now beginning to migrate all their studies to Veeva, paralleling the approach taken with the previous client.

I wanted to follow up on the pressures faced by pharmaceutical sales representatives. I'm curious if this is more of an issue among large pharmaceutical companies or if you could provide more clarity on where these pressures are being seen. Additionally, could it be possible that the outsourcing of sales representatives to third parties like Syneos and other contract sales organizations is contributing to this pressure?

Yes. It tends to be more focused on larger enterprise companies, which have established sales teams across various portfolios, often with extensive sales forces targeting traditional primary care models. These companies are involved in traditional medicines and need to engage a large number of primary care physicians, resulting in larger sales teams. They are likely to see the initial reductions as their field forces may have been structured for a previous environment that had less digital influence. As the focus shifts more toward digital, there is an opportunity for these reductions to occur. Primarily, this will happen in the enterprise sector, although smaller and midsized companies may also experience some adjustments. The main factor driving this is the need for rightsizing and the application of productivity and efficiency improvements to achieve the right balance in their go-to-market strategies.

And then in terms of the contract sales organization, I don't think we've seen a major trend there. Now that's going to vary a little bit region by region, but we haven't seen a major trend towards outsourcing at this time.

Okay. And then maybe just as a follow-up, maybe kind of a higher level, kind of a little bit of a random question. But I would love to hear your perspective, if you have any, on sort of the commercial IRB space. I guess we saw a recent S-1 filing by a large, I guess, WCG clinical large IRB. And I know you have relationships in that area with some of the bigger ones and would love to hear your perspective as to whether this could be a growth vertical for Veeva going forward or how you sort of think about that space as a growth market either organically, inorganically or through partnership. So I haven't heard you talk about that in the past.

The IRBs are organizations that review the ethics of a clinical trial before it begins, which is a very important function. We don't offer those services or the specialized software they require. Currently, we don't have plans to move into that area. We are always seeking opportunities to add value, but we don't have any specific product plans related to the IRB space at this moment.

Congratulations on a strong quarter, particularly for Vault. I wanted to ask about the RegulatoryOne business, which seems to have secured a couple of noteworthy deals. Could you share some details about the top 5 CPG deal? Was this a new client, or is it an existing one expanding into another department? More generally, where do we stand within the CPG sector? This seems to be an industry where you've gained early traction and are continuing to see positive outcomes. Is there a chance to acquire more new business in this area, or is it mostly about expanding existing relationships with larger accounts you already serve?

Yes, I would say it's both. There are more large consumer packaged goods companies, and while there are a few we don't work with, we are involved with maybe around 30% to 50% of the large ones. So there are some new logos to acquire, but there is also expansion potential because these companies often operate in divisions. The recent win we had was with a regional division of a large CPG company, who chose us because of the success they experienced in another division. This is typically how it works in the CPG sector, where companies are very large and diversified. Yes, I would say we're still in the early stages. We're just beginning with Regulatory since these are complex systems to implement and adopt. Additionally, we're at an early stage in Quality because our offerings in this area have been expanding significantly. We started with a product called QualityDocs, then added a quality management system called QMS, followed by training solutions. Recently, we acquired a company named Learnaboutgmp to enhance our training content, and we have more product developments planned in the Quality sector. I believe that looking ahead to 2030, people will be surprised by the size of our Quality business, as it still seems quite early.

Paul, I was wondering, can you just give us a sense on these customers that took down sales reps? Had they already been talking to you about products like Engage? And I guess, meaning, are you helping them actually become more efficient from a rep perspective already? Or is that something that happens and then you go back in and help them sort of retroactively deal with it? And then I just have one follow-up on the commercial side as well.

Yes. The customers who reduced their sales reps have all been using Engage. Most of them began adopting Engage even before the pandemic, and when the pandemic occurred, their usage increased significantly. They have been actively utilizing Engage, as well as our entire suite of digital products, including email. Initially, they were set up for face-to-face interactions, and now they have activated their digital channels. It's important not to overcorrect in this market; it takes time for them to realize the benefits and to ensure they are focused on long-term optimization. So, these are long-time Engage customers who are now leveraging some of those productivity improvements.

That's helpful. My second question relates to the Commercial Cloud and all the products and data you are providing for your clients. Are you considering moving away from per seat pricing? At some point, should these discussions focus more on outcomes rather than just seat numbers? I'm curious about where you see this trend heading because, to some extent, if you're making them more efficient, they should ideally be growing with you in a net sense. I'm sure that’s the case in many instances. I'm just wondering if you're shifting away from discussions centered on per seat pricing to focus more on outcomes-based pricing and what that might entail.

Yes. That's a good one. And certainly, as the Commercial Cloud portfolio has expanded, particularly as we've added data products and data combined with software, also services, the proceed model doesn't necessarily fit those kinds of products. So we've already seen that shift happening over the last couple of years where more and more of our revenue is coming from things like ELAs. Most of our data products are enterprise license agreements with customers. So we're naturally seeing that shift away from proceed to something like an ELA. We haven't yet gotten to the idea of outcomes yet. And we're always very thoughtful of as we introduce a new product in the marketplace, what is the right pricing model, what's the right licensing model for Veeva but also, in particular, for our customers. We're happy to innovate in that area, and we have innovated in a number of places in commercial and how they consume, how they buy. So yes, that trend had already started happening.

I wanted to go back to Vault Safety. And I'm curious, does the application and the criticality of carriers influence other spending decisions at a customer? I guess what I'm wondering is that once Vault Safety is established, is it perhaps more prone to being paired with, let's say, the rest of Development Cloud and MedComms for instance?

It's a great question. This is a very serious application because if a pharmaceutical company doesn't have the right safety controls, they risk losing their license to operate entirely. When a customer uses our safety system, it creates a positive impact and can assist in adopting other products due to the benefits of integration with safety. If a customer trusts Veeva for their safety system in the cloud and has a good experience, they are likely to trust us in other areas as well. This is precisely what we aimed to achieve when we started conceptualizing the Development Cloud about ten years ago. Our vision was to create a suite of applications for drug development that encompasses safety, quality, clinical, and regulatory, ensuring they all function together effectively for both small and large companies, thus transforming the way the life sciences industry approaches drug development. This vision is coming to fruition, and each new customer strengthens the overall ecosystem.

That's great. And then you referenced it a few questions ago. I know it was a small acquisition. But in learning management, I'm wondering, is training becoming a more important consideration? Would you kind of equate this to some of the developments like realizing business consulting could ultimately be an inroad to bigger things, a better relationship with your accounts? Is training proving to be that for maybe the Quality Suite or a broader set of applications?

There are several types of training. This is correct. Regarding Learnaboutgmp, it focuses on compliance-related training and good manufacturing practices. This is closely tied to our QualityDocs product. To illustrate this, think of it as a combination of peanut butter and jelly. While peanut butter is good on its own, pairing it with jelly enhances the experience because our QualityDocs is designed for training software. It addresses questions about accessibility, roles and responsibilities, training deadlines, inspection records, validation, and language compatibility. By partnering with Veeva, customers can easily access specific training content, such as micro-training for their employees in Poland and Spanish-speaking regions, along with reliable customer service. This is what our customers seek: a strategic partner, as they prefer not to develop these solutions on their own when they have other priorities to focus on.

Thank you, everyone, for joining the call today, and thank you to our customers for their continued partnership and to the Veeva team for their outstanding work in the quarter. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you all for participating. You may now disconnect.