Veeva Systems Inc (VEEV) Q3 2024 Earnings Call Transcript

Good day. My name is Krista, and I will be your conference operator today. I would like to welcome everyone to Veeva Systems Fiscal 2024 Third Quarter Results Conference Call. I will now turn the conference over to Gunnar Hansen, Director of Investor Relations. Gunnar, you may begin your conference.

Good afternoon, and welcome to Veeva's fiscal 2024 Third Quarter Earnings Conference Call for the quarter ended October 31, 2023. As a reminder, we posted prepared remarks on Veeva's Investor Relations website just after 1:00 PM Pacific today. We hope you have 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, Veeva Commercial Strategy; and Brent Bowman, our Chief Financial Officer. During this call, we may make forward-looking statements regarding trends, our strategies and the anticipated performance of the business, including guidance regarding future financial results. 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, December 6, 2023, and 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. We may discuss our guidance on today's call, but we will not provide any further guidance or updates on our performance during the quarter unless we do so in a public form. 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, and I'll turn the call over to Peter.

Thank you, Gunnar, and welcome, everyone, to the call. We had a solid Q3 with revenue and operating income ahead of guidance, including total revenue of $617 million and GAAP operating income of $235 million. As I shared in our prepared remarks, we had a number of great milestones and new product announcements in the quarter as we progressed in building our industry cloud for life sciences. With the growing set of high-value applications, data, and services in R&D and commercial, we can help the industry become more efficient and effective across an even broader range of areas. We have a significant opportunity ahead, and with a focus on product excellence and customer success, we're becoming an essential strategic partner to the industry. Now I'll open up the call to your questions.

Fantastic. My first question is for Peter, maybe Paul. At Investor Day, you guys talked about getting an emotional commitment from customers to move over to Vault CRM. It looks like you got two written commitments now. Maybe give us some color into what went into that decision-making process for these large enterprises. And what kind of signal do you think this might send to the rest of the industry that are potentially looking at Vault CRM?

Ken, thanks for the question. This is Paul. Yes, so we're super excited about Bayer and GSK. Probably everybody on the call has seen the press releases, but we also had them join us during the keynote on the main stage at the Europe Summit, which was last week. A super exciting survey. Essentially, answering your question on the main stage, which was why did they select Vault CRM? For them, it came down to something very similar, which was innovation. They're thinking about the future. They are excited about the next generation of CRM. And for them, even I'll paraphrase what GSK said, because they said it very concisely, it was this idea that pharmacy is not a commodity, but a stall problem, thanks to Veeva. What that means is this is something that's very hard. It's difficult. It's something that they've done multiple CRM implementations with us, and it's not something they want to spend any energy on. They want a solution that works and that's proven, and they want to be able to innovate and look forward. So that, in a nutshell, is the reason it's innovation, and it's looking forward and building for the future. So we are super excited to have both Bayer and GSK talk about their selection.

Got it. And then a follow-up for you, Brent. Just as we look at the billings number for the year, you guys trimmed it by $40 million. Any way to help us segment how much of that might be the services piece, the FX piece? And I think you kind of mentioned there's a little bit of some combination of duration and timing involved. But would love to kind of understand what the moving pieces are that got you to that $40 million.

Yes, happy to, Ken. So about half of it is related to services, the services reduction we talked about on Investor Day. The balance of it is really split into a couple of buckets. One is on the proportion of quarterly billers versus new billers in our new business. We had a higher mix of quarterly billers than we expected. Then the other portion of that is related to the timing of deals. Some deals we expected to close in the Q4 timeframe are now going to be early fiscal year '25. To a smaller extent, there were some FX headwinds as well. So relative to our prior expectations, those are the pieces of it, but the biggest portion of it was clearly services.

So I'll start with Brent. I think there's been some debate in the past on how the services business correlates to subscription. Is that a leading indicator or not? I've gotten the question from investors. So I love any perspective you have on how we should think about the correlation between subscription and services.

Services, happy to, Brian. Services is not a leading indicator. There are a number of reasons. There's the timing of deals. There are product requirements that are different between the type of product you're buying, customer-specific requirements. So that's not going to be a good leading indicator. Then on the subscription side, you have things like ramping deals and pricing, and the like. So there are a number of reasons why those two don't correlate, and you shouldn't think of it that way.

Great. And maybe just as a follow-up, on the working automation side. I thought it was an interesting part of the product announcements at the Investor Day. How do we think about the ramp of that product, any thought process, and what your customers are using today? Thanks.

I'll take that one. Yes, we're starting the development of that next year in 2024. I think that's something you're seeing from Veeva as a strategic partner. We have a lot of products across R&D and commercial data, software, and services. So we're a very strategic partner to our customers. In general, once we know we're going to do something, we let our customers know so they can do long-range planning around that. So in this case, you saw us announce that before we have established a development team, for example, for it. So it's very early and too early to say what the revenue ramp would be. In terms of what most of our customers are using, they might use Salesforce.com Marketing Cloud, they might use products from Adobe. Some of the smaller customers will outsource this to agencies. But those are probably the predominant products that are used.

In years past, just in the 3Q period, I think Veeva has had a fair amount of visibility and inclination just on the upcoming year because of where big pharma customers stand in their budgeting process. I'm wondering if you can maybe compare current visibility on that FY '25 revenue target versus what's been the case over recent history. Additionally, since Brent, you were calling out some variables on just billings and this year, how do some of those things you called out maybe start to influence the puts and takes going into 2025?

Hi, Joe. So we reiterated the $2.75 billion and the visibility that we have. Every day you move forward, you get better visibility, and we have no less visibility than we had a year ago. Similar as we look out in front of us. Some things to contemplate are we have some multiyear ramping deals that will contribute a larger amount next year. That's something that comes into play. But we have a long runway for growth. Our visibility is not less than it has been historically, at least as good, and we're confident in our ability to execute the number.

That's great. I wanted to ask about the outlook for the commercial segment. It's gone up more than I expected over the course of this year. In the prepared remarks, I think you were referencing commercial content and like. So kind of a barbell in that, you have a very mature product growing nicely and that's still very early products growing nicely. There's understandably been a lot of focus on CRM of late. But how would you kind of frame performance from the non-CRM piece of commercial and what you're seeing in the market so far driving what seems like has been upside to your original forecast?

Yes, Joe, it's Brent. I'll take that one as well. We have increased that commercial number through the course of the year. You put it quite nicely in that it's a combination of our more established products continuing to contribute revenue growth by content. Then our newer products like Link are really kicking in nicely, and we're still in very early days there. Then the data products, I think you saw in Peter's prepared remarks, are really coming along nicely. We're very early days, but we're optimistic about a very long journey there. Those are the things we think about. Crossix is another one that's contributing nicely as well to our growth.

Staying on the theme of data, Brent mentioned Compass, which brings to mind the strong momentum with new customers. With new offerings scheduled for release early next year, how do you view this enthusiasm as a validation of our strategy and the positive momentum from customers? Looking ahead, even beyond 2024, how do you see the full suite coming together as we approach early next year?

Yes. So it is a great validation of what we're doing. We're excited because we have a very clear product strategy with what we're doing in data and more broadly overall with Data Cloud. We're building a modern data platform. Compass is a key part of that. We started with patient data. We did announce the expansion of that portfolio at the beginning part of next year with prescriber and national. With those three products in Compass, we are well positioned to be the standard data provider for even the very largest pharma companies. The momentum that you saw in the quarter is a good indicator for us. It's a good indicator that new customers are starting and trialing our data products but existing customers are expanding where we started with one brand and then we expand to an additional brand. So it is, in fact, a great validation of our product strategy and our commitment to getting product excellence. We're on the right path with Compass. We feel good about that.

Got it. And then maybe for Peter, too, right? As you think about that evolution of Data Cloud to R&D, there's obviously a lot of pertinent use cases there. But how do you think about that data standardization playing in with the kind of workflow or process standardization at some of the momentum you're seeing in that clinical suite today, maybe what the value can accrue from having both the connected workflow and standardized data as we think about development life cycles as well?

Yes, I'm really excited about that. I think our clinical opportunity and data could be significantly larger than our commercial one. It really can be large. Now we are much earlier. So that has all proven out. There’s a very strong synergy between our software and clinical and the data products that we can build. If you look at it big picture, I think Veeva has been working pretty hard at cleaning up the software side of life sciences over the last 15 years, and we've made a lot of progress, still more to go with adoption, but we've clearly got a great footprint for it. Now with Data Cloud, I see us cleaning up the industry data and harmonizing it, and then we'll make our data and software work very well together. So that's really what we're talking about for the industry cloud; it's a digital transformation, which is software and data all working together. I'm very excited about it. I think the special sauce on the clinical side is that clinical data all on its own is not as valuable as clinical data that can work with clinical software. I believe we're going to revolutionize that area. It will just take some time.

Maybe first one for Brent. You talked about hiring fewer people in the quarter. As we look out into next year, what areas might you be adding still? And how are you thinking about the hiring environment or hiring plan, given that we're starting to see more and more companies right-sizing their organizational structure heading into next year again?

Yes. Overall, our hiring strategy hasn't changed. We're focused on hiring for growth and we're going to concentrate on areas where we can drive customer success and innovation. That's always been our approach, and we're going to do it in a disciplined way. In Q3, we had a lower hiring quarter than you have seen in the recent past. Looking out for the balance of fiscal year '24, it's reasonable to expect that, that lower hiring rate continues. I'm not going to get into fiscal year '25 at this point; in 90 days, we'll provide our traditional metrics, which would include operating income and margin. Obviously, headcount will factor into that.

Super helpful. I appreciate the color. Peter, maybe just a follow-up for you. You talked about in the prepared remarks about some of the lower clinical data products around CDB, RTSM, ePRO, and at your Analyst Day, talking about how this really expands the TAM within that area. As you start to speak with customers or prospective customers about some of these newer products, what sort of appetite are you seeing for development or co-development on some of these newer areas and their willingness to make some of those earlier investments with you in innovation on the product roadmap amidst the evolving environment?

Yes. Great question about the clinical data software. You have EDC as the core of it, the first thing, and then you have others like CDB, Study Training, ePRO, and RTSM. Customers are generally going to be very conservative in that area. We really have to innovate first, and then they will come along because these are their studies, and they plan these studies for a long time. So there's going to be pretty conservative; I think it's an area that starts slowly but gains momentum. For the same reason why it starts slowly, once customers see something they really like, they will stick with it. Currently, the industry is not well served. If you look at the sort of professionalism of ePRO applications or RTSM applications out there, they're not at the level of professionalism of what Veeva is doing. Our products are getting there. That's one aspect involving the products and the services. The real key is the integration, the process integration—for example, between our RTSM and our ePRO. I had a discussion last week with some clinical leaders at a top 20 pharma. We were discussing the integration that we will do between our RTSM and EDC and how that affects the prescreening process and getting patients into the right trial. This can be transformational. In some cases, when that workflow breaks down, you might lose 6 months of exclusivity on a blockbuster product because of the delays in a pivotal trial. That's money you never get back. That's the criticality of these systems, which also causes conservatism. People pose the question of whether our RTSM will be used for all studies. So it's challenging to get in there, but really hard to get out if you're doing a good job.

I just wanted to ask about Compass and the event around clients migrating to the Vault CRM platform. How much does other logical upsell here? Is it fair to think about the migration event as a natural upselling opportunity?

It's a great question, Jack, about Compass and Vault CRM. I would say they're not the same at all. They're quite disconnected. Compass, in many ways, is a much more strategic decision because that really affects how you apply your resources, and in Compass, we're reinventing how you can do data. It’s a much more strategic decision; it's related to analytics and its purchase brand level for brand analytics. It has these dynamics. For example, Compass is something we sell to companies that are sometimes two years away from having a field force. They're doing their planning involving their market potential. It's quite disconnected from where CRM is. CRM is, hey, now you're ready to launch; you just need a system with the full functionality, Veeva—that's kind of a solved problem. There would be the CRM playing into that. Regarding Compass, we've been using IQVIA for 20 years; there’s a different approach. So they are out of phase and don't depend on each other. It’s nice to have multiple products to bring into a customer so you can provide the full commercial solution, including the CRM, commercial content, Crossix for your media measurement, and Link for your deep data. We have a lot of things that can fit together, especially for smaller companies that are looking for a partner who can help them get all this done quickly. But in general, those things are linked together, and I wouldn't view Vault CRM as a catalyst for Compass. The catalyst for Compass will be its product excellence and how well we do on our launch of Prescriber and National.

That's helpful. And then one for Brent around billings. Just to put a bow around the change in terms and cadence of billings, help me with the math here. If we had a $12 million headwind in the third quarter, does that mean about $6 million of billings from the third quarter slip into the first half of next year? Then is that number of, say, $6 million to $9 million from the fourth quarter so all together $12 million to $15 million or so that just due to billing cadence got pushed into '25?

Yes. I'm not going to break down the specific numbers, but I can provide directional insights. As I said, about half is related to services. Then there is the duration piece of it. The balance is split into two buckets, with a little bit of FX. The duration piece is just a matter of over time when it’s going to build. We have more quarterly billers than we expected for our new business. That's about 25% of the residual. The other portion was literally the timing of deals. Again, some of that was deals that pushed out from the back half of the year into the first half of the new year. That’s how to break down the buckets at a high level, and that has been factored into our $2.75 billion revenue number for fiscal year '25.

First, Peter or Paul, in the prepared remarks, it was mentioned you had solid bookings under Crossix, including brand expansions. I recall that process has seen some choppy demand in prior quarters. Is the reason that you're seeing a pickup of activity on this front?

I guess the reasons are some timing, how things laid out. Additionally, solid execution by the Crossix team on the product and on sales and marketing. I think some of our competitors also oversold what they could deliver last year. So we had a few potentials where customers went for some things because they were promised quite a few things, but actual delivery didn’t match. Some of those customers came back to Crossix. In some cases, they went to Crossix for the first time. So really strong execution and some timing.

Got it. And then maybe one for Brent. Services gross margin in the quarter, I think, was the highest in eight quarters or so. Is there anything to call out here besides hiring? How should we think about the progression going forward?

Yes. When talking about from quarter to quarter, you're going to see fluctuations in services margins. If you look forward to Q4, it is a lower margin quarter because of holidays having fewer days to be utilized. But we're always going to focus on having the right amount of capacity to address the demand for services we have. We executed well in Q3, and you saw a little bit higher services margin in the quarter. The range of margins you've seen over the last 4 to 8 quarters is probably a reasonable amount to think about. We're not looking to maximize it to 50% or anything like that.

Pharma companies have been trying to move commercial insights deeper into clinical development stages of their R&D. Veeva is unique in its span of solutions across clinical and commercial. I'm wondering how much you think about the integration of those solutions across clinical and commercial to drive stickiness of Veeva's solutions? How important is the transition of Vault in that effort? And how important is data in that effort?

It's Peter. I'll take that one. I would say the most important thing that Veeva can deliver in that area is data on a common data platform. This enables pharma companies to have a common data architecture across specifically commercial and clinical. This allows them to talk about product classes in the same way, disease areas, therapeutic areas in the same way, and to have a common vocabulary and a common source of truth for the data on both sides. This capability would allow us to interact with key opinion leaders using the same view of commercial and clinical. The second one is enabling the process flow between commercial and clinical. The connection between, for example, our CTMS system and our CRM system, is useful. Perhaps the biggest barrier is the internal processes inside pharmaceutical companies. Do they have those processes? Do they have an operating model? Do they have responsibilities for enabling that flow? Our business consulting can really help there, especially as we're building up our consulting capacity in clinical. I think we're going to be experts at helping companies with their business processes. Many executives in large pharmaceutical companies feel that there’s lost value because their integration between commercial and clinical is not where they want it to be. You can't accomplish that without a common view of the data. While it’s not sufficient to make those connections happen, I think it’s necessary.

That's great. As a follow-up, and on a different topic, just on thinking about pipeline, funnel discussions for your sales team. You've talked over multiple quarters about slower decision-making and budget scrutiny. You mentioned in your prepared remarks that you—could you shed some light on the most updated view on how these macroeconomic and IRA-related effects are affecting decision-making? Do you feel like that's getting worse or getting better?

Yes. In terms of interest rates, IRA, global conflicts, over the last 60 days, I don’t view it as getting worse or better per se; it’s staying stable. This does result in questioning on decision-making conservatism, which is a damper on innovation for small biotechs. They're contemplating whether they should start a biotech company or wait until they can get funding. I don’t create that optimism. There’s a bit of deferred action happening. There's a lot of core capabilities we modernize during COVID that became lower priorities during that time. During uncertain times, that naturally shifts. However, I feel there's also more deferred maintenance building up, especially among the top 100 life sciences companies. That pent-up demand for modernization of systems will have to be addressed over the next 2, 3, or 4 years.

Apologies if you covered this. I've been jumping around a few earnings calls tonight. But I wanted to ask about the top 20 pharma that you did migrate over to Vault CRM. I'm just curious, post that announcement, what's the interest in conversations been with others? Can you share any milestones or other goals that you have in terms of the number of pharma companies you hope to have over the next few quarters or years?

Yes, Tyler, this is Paul. In terms of the migrations, these companies have announced their selection. The migration will follow. We will do some services work next year, but you can think of their migration starting in 2025. Next year, we will have early customers going through the migration process with us. We treat this like an early adopter program, similar to any other product. That’s what we will use next year for, and then we will be ready to scale in 2025. Those companies have announced their selection, and they want to communicate that internally and align their organization on their go-forward strategy. That’s really important for them to get organized and focused. They have shifted from decision mode to execution mode. In terms of other companies, we're ready when they are. This has created additional urgency, and our new commercial cloud has generated excitement as moving to the Vault platform unlocked a lot of innovation. There’s no timeline; we’re not forcing our customers to adhere to any specific timeline. I do expect most will begin in 2025, but 2026, 2027, will see the majority of customers moving.

If I just chime in there about momentum, our Customer Summit at Europe had over 1,000 people in attendance. Bayer and GSK were there, and they spoke both in a large session and in smaller executive sessions. This is certainly a momentum builder, not only because they’re going to see the CRM, but for why and what was the thought process behind their choices. These companies are leading the charge and providing great reference selling there. We also demoed a concept of the service center for the first time live to our customers. That was well received, so the vision is starting to get clearer, and it's building momentum. I'd like to close by thanking our customers for their trust and partnership and our employees for their continued commitment to our values: do the right thing, customer success, employee success, and speed.

And this concludes today's conference call. Thank you for your participation, and you may now disconnect.