Earnings Call Transcript - VEEV Q1 2023

Operator, Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Veeva Systems Fiscal 2023 First Quarter Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Thank you. Ato Garrett, Senior Director of Investor Relations, you may begin your conference.

Ato Garrett, Senior Director of Investor Relations

Good afternoon, and welcome to Veeva's fiscal 2023 first quarter earnings conference call for the quarter ended April 30, 2022. As a reminder, we posted prepared remarks on Veeva's Investor Relations website just after 1 PM 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 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-K. Forward-looking statements made during this call are being made as of today, June 1, 2022, 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 forum. On the call, we may also discuss certain non-GAAP metrics that we believe aid in the understanding of our financial results. Our 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 will turn the call over to Peter.

Peter Gassner, CEO

Thank you, Ato, and welcome to everyone on the call. It was a great start to the year for Veeva, with strong first quarter results above our guidance. We also crossed the $2 billion revenue run rate mark for the first time. Total revenue was up 16% to $505 million, and subscription revenue was up 18% to $403 million. Non-GAAP operating income was $200 million or 40% of total revenue. Things are going well. Demand is strong, as customers look to establish the right digital foundations for the future, and our industry partnerships continue to get more strategic. We're executing well against our long-term plans, and our innovation engine is really firing on all cylinders. We're building a very durable business, with a long runway of growth ahead. At this point, we'll open up the call to your questions.

Operator, Operator

Your first question comes from the line of Brent Bracelin with Piper Sandler. Your line is open.

Brent Bracelin, Analyst

Good afternoon. I guess, Peter, Veeva closed one of the largest deals in the history of the company here, arguably in a macro environment where there's clear challenges. Could you just drill down into kind of the decision for that customer to go all in on Veeva on the clinical side? It looks like a very large comprehensive deal. Just trying to better understand why a top 20 pharma would make this move in an environment where there's still some pretty significant challenges out there.

Peter Gassner, CEO

Yes. It's a great question. This is really a long-term thinking move by the customer. They're thinking of this in 10 and 20-year horizons, so they wouldn't be really phased by specifics of the macro environment. So, this is about applications in the clinical area, but also in the quality and regulatory area, not all of our development cloud, but a big portion of it. When they're doing that, it's a top-down decision. It's like building a huge factory. That's why it's not affected by the macro environment. And then if you get what they're trying to do, it's laying the foundation for efficiency, digital efficiency, getting drugs to market faster to help patients, so it's a long-term play by the customer and sort of an executive level decision.

Brent Bracelin, Analyst

Helpful. And then just a quick follow-up for Brent here. As you think about capital allocation, the company is generating a significant amount of free cash flow here, a strong balance sheet. How are you thinking about shareholder allocation, capital allocation just given the very strong cash assets you have and strong free cash flow? Thanks.

Brent Bowman, CFO

Yes. Thanks for the question, Brent. Yes. So we do have $2.8 billion in cash and our business model has consistently been able to generate cash. So, we're very pleased with that. And our focus is primarily to invest for growth. Specifically, we're going to be looking at ways like M&A for the use of our cash, right? But we're going to take a disciplined approach as we look at M&A. We have had some very good successes like Crossix and Zinc, where we have good synergistic connections with them from a technology and also from a people perspective. So, M&A is an area that we're looking at for the use of cash, but we'll take a disciplined approach about that.

Operator, Operator

Your next question comes from the line of Joe Vruwink with Baird. Your line is open.

Joe Vruwink, Analyst

Great. Hi everyone. I was maybe just hoping to start by walking through some of the moving pieces, the forecast for the year now versus what was presented a quarter ago. And maybe split out organically, what's changed versus – certainly FX is in there. And then anything else you would call out particularly as it relates to your hiring plans and how that is influencing the view into the second half of the year?

Brent Bowman, CFO

Yes. Thanks, Joe. It's Brent. Yes. So first off, we're pleased with our execution in Q1. We executed extremely well across all of our metrics. And if you look out at the full year, we did increase our total revenue guide by about $5 million now specifically to services. We did call out FX exposure. Traditionally, FX is not material to Veeva. But with the strengthening of the dollar, the USD relative specifically and most importantly to euro as well as the yen, it has had an impact. So, it's about a $20 million impact. More than half of that on the revenue line was created in the last 90 days. So that's a new piece of information, and that was $30 million on the billings line. Absent that FX impact, we would have increased our subscription revenue line for the full year and our total billings for the full year. That gives you some context on the top line. Regarding hiring, we had an outstanding hiring quarter. We hired 203 net employees. That's another quarter of 20-plus percent growth, and in doing that, we were able to still increase our operating income guide for the full year by $10 million. You can see the operational efficiency we're seeing in our fundamental model and how that flows through to operating income. Demand overall is strong. We're excited about the demand profile we're seeing, which informs you a bit on our full year view.

Joe Vruwink, Analyst

Thank you, Brent. That was helpful. I want to discuss product traction, particularly with eTMF, as it appears to be gaining momentum based on the new customer additions. I remember that CTMS was already preparing for a significant year. I view eTMF as potentially a pathway to broader clinical engagement in the long run. If both areas are performing well, I’d like to know what stage we might be in regarding the penetration of the clinical opportunity and its potential impact on R&D this year.

Peter Gassner, CEO

Yes. Clinical is certainly a long runway. It's a very big area of life sciences. eTMF, I think we sold our first customer roughly in 2012, and it takes a while to really become the dominant player. We're there now with eTMF, and there's a network effect. eTMF is just the thing you do in clinical. Probably the next furthest along is our CTMS and study start-up products. They’re getting to be pretty dominant products. Clinical Data Management is yet to come. That's very early in its life cycle, CDMS, the clinical data management. Aside from that, you have the digital trials, and MyVeeva for Patients, extending the reach to patients. So, there's a really long runway of growth in clinical. It's a critical area, and macro level, we're just getting started there. eTMF is providing a very strong base, because that's the foundational system of record of documentation for a clinical trial that every pharmaceutical company is required to have.

Operator, Operator

Your next question comes from the line of Brian Peterson with Raymond James. Your line is open.

Brian Peterson, Analyst

Hi, gentlemen. Thanks for taking the question. So I just want to follow up on Brent's line of questioning. In terms of these large wins with multiple products, I'm curious, as we think about the later-stage pipeline, how many potential products are they looking at? Is it suite adoption across the board, or how do we think about attach rates and deal sizes for what's in a later-stage pipeline?

Peter Gassner, CEO

Well, it'll vary by customer. There are very few large pharma that are going to take that very broad suite approach, simply because so many of the large pharma started in one way or another with Veeva. The most common in large pharma would be looking at a suite of things and then starting in the area of that suite and then graduating from there. In smaller pharma or emerging biotech, it's more common to look at the whole development cloud all at once, knowing that that's the direction you're heading, but you'll consume products as you need them. For example, the earliest thing you need in small biotech is probably our quality products, because you need that even before you run a clinical trial.

Brian Peterson, Analyst

Great. And maybe just a follow-up on hiring. It sounds like you're continuing to add to the team. We've heard from some other software companies that maybe they're scaling back those efforts a little bit. As you think about the investments you're making and the growth opportunities, how are you thinking about hiring in that posture going forward?

Peter Gassner, CEO

Yes. Hiring, we always want to attract the top talent that has a great, what we call a ‘why Veeva,’ an authentic reason to be at Veeva, and that's always going to be tough. Right now, the hiring environment is tough, but it's not as challenging as it was before because there's a bit of downturn in the tech market, especially in early-phase tech companies. People feel that, and there’s a flight to quality. So, hiring has been a bit easier for us. In summary, I'd say it's a good hiring environment, and we certainly don't have any hiring freeze.

Operator, Operator

Your next question comes from the line of Dylan Becker with William Blair. Your line is open.

Dylan Becker, Analyst

Yeah, hey guys. Thanks for taking the question. Maybe, Peter, one for you. As we talk about that large-scale deal, historically, there were different purchasing decisions between sales and marketing and R&D teams. Can you walk through how the broader standardization converges these swim lanes to that executive level that you just kind of touched on and the confidence that you have, given that you've served as that industry strategic partner for potentially more of these deals to kind of work themselves through the pipeline in coming quarters and years?

Peter Gassner, CEO

Yes. We have a broader product portfolio that allows us to be closer to the customer, to have more strategic discussions, have more account partner coverage because we have a broader product portfolio. It forces the discussion up a level. Now rarely do we see the discussion combined across the commercial side of the business and the R&D side because those are viewed quite differently. More so, what we see is across the different areas of R&D, clinical, quality, regulatory, we see that crossing and across the different areas in the commercial area, sales, medical, marketing, that's where we see the crossing happening. Another significant area where we see crossing – just the early signs of crossing is as our business evolved – started out from the software side. It's really growing now. It's starting to grow into the data side and then the consulting side. That crossing is happening, looking at our software or also looking at our data. Hey, I heard something about the data, maybe it's time to evaluate that software. Hey, maybe we need some help with the business processes. That’s where early view, that's where the crossing, I think, is to happen in the future.

Dylan Becker, Analyst

Yes. That's super helpful. Thanks for the color there. And maybe that kind of leads into the second one for Paul. We talked about maybe the broader rollout of prescriber and sales data for Data Cloud this quarter and next, now culminating that with Link and OpenData to form this data cloud offering. It's early, right? But how do you think about each of these incremental layers adding to that broader network dynamic driving even a gravitational pull around adoption as you add more sources, more touch points to that core data asset that can refine itself and deliver greater value over time as well? Thanks guys.

Paul Shawah, EVP, Commercial Strategy

Yes. It’s a good question. We are expanding our data portfolio, as you've seen over the last several years, starting with OpenData and then Link. We've had a lot of momentum. We announced Compass, which is our patient and prescriber and sales data. These data sets serve different purposes and for different reasons, but there is a network effect. There is value when you can connect all of these data sets together. We talk about building our data sets on a common architecture. It means they're fundamentally connected at a foundational level. And for our customers, they're able to derive more value when they start pulling all of the pieces together. It’s on us to communicate the value of each product individually, but our customers gain value over the long term when they integrate our data with other products, alongside our software. We designed them to be interoperable and work together to create more value. So there is indeed a network effect, indicating that more products are more valuable than the sum of their individual parts.

Dylan Becker, Analyst

Great. Thanks guys. Appreciate the time.

Operator, Operator

Your next question comes from the line of Rishi Jaluria with RBC Capital Markets. Your line is open.

Rishi Jaluria, Analyst

Wonderful. Hey, guys. Thanks so much for taking my questions. First, I wanted to maybe drill a little bit more into the macro side of things. It looks like things are pretty resilient on your front, which is great to see, but also I think you expected just given the end market you're dealing with. Can you talk a little bit about maybe are there any areas that you are seeing softness at all? I mean, we have heard about biotech funding slowing down. Some CROs are slowing down their hiring that they've talked about publicly. And then maybe on the med tech side of the business, any kind of macro things there? Maybe help us understand those pieces. And then I have a follow-up.

Peter Gassner, CEO

Hi, Rishi, this is Peter. We are not observing any macro effects in specific segments. The life sciences industry is quite strong; it is not cyclical, and the advancements in science are driving progress. There is a strong emphasis on precision medicine, renewed interest in vaccines, and developments in RNA platforms. The scientific advancements are pushing us forward. In terms of med tech, advancements in science are also occurring. While the regulatory environment in med tech is becoming stricter with increased requirements, particularly in clinical areas, this is encouraging adoption. Therefore, we are not experiencing any softness.

Rishi Jaluria, Analyst

All right. Wonderful. And then, Peter, in your prepared remarks, you talked about some of the success you're seeing from having the in-person conferences again and, arguably, how it's maybe more important than before with everyone working remotely. Can you talk to us a little bit about what has been the general customer feedback from your first in-person conference in over two years? And more importantly, as these conferences come back and you start to extend those two-day conferences, what sort of impact do you expect? Is that something that more customers will start to think strategically about going all-in on Veeva? Is it just from a networking perspective? What sort of benefits do you expect to see now that we're back to in-person conferences from a business perspective? Thanks.

Peter Gassner, CEO

Yes. In the long term, the overall speed of business is enhanced by connectivity, relationship building, and knowledge sharing. Veeva serves as a key venue for in-person gatherings where customers not only learn about our offerings but also have the opportunity to meet their remote teams at a Veeva Summit for the first time. Some may even take an additional day for their own planning meetings, which we support. This environment aids in advancing business. Summits have always been an essential component of our industry cloud and are hard to replicate over the phone. We are optimizing the format for future events to allow more free time for connections, with some sessions being recorded for viewing before or after the summit. While we will still feature scheduled sessions, there will be increased opportunities for networking, as that is what our customers value. I believe this will significantly benefit the industry moving forward.

Q – Rishi Jaluria, Analyst

Wonderful. Thank you so much.

Operator, Operator

Your next question comes from the line of Saket Kalia with Barclays. Your line is open.

Saket Kalia, Analyst

Okay, great. Hey guys. Thanks for taking my questions here. Peter, maybe for you. A lot of talk about Data Cloud in the prepared comments. Can you just talk a little bit about early reception to Data Cloud? And maybe more specifically, how much appetite is there out there for alternative products in – or alternative data, I should say, in spaces like prescription, for example?

Peter Gassner, CEO

Yes, that's a great question. We are definitely in the early adopter phase for Data Cloud, particularly regarding Compass, as there has been a longstanding vendor that has set the standard for over 20 years. People have become accustomed to that model. Therefore, it will take some time for early customers to realize success, for us to refine our products, and for others to see that there is a fundamentally different approach. Instead of selling data by the record and delivering it in files, the new model will focus on selling unlimited data by use cases and delivering it through software. This approach signifies an early adopter who understands and embraces the change, and only a small segment of the market will be ready to adopt it right away. Once we can demonstrate the value proposition, we can begin to reach the mainstream. This aligns with our expectations.

Saket Kalia, Analyst

That's great. Good to hear. Paul, maybe for you. Just digging into the commercial side a little bit more, particularly the CRM side. How has churn looked there? And what are you hearing from commercial customers on how they're thinking about their sales forces long term? Does that make sense?

Paul Shawah, EVP, Commercial Strategy

It does, yes. So, on the attrition side, first, we had a really strong quarter in CRM. We added 12 customers. We increased our share again in the quarter. So another really strong quarter. There was some churn and some attrition, which is what we expected. It was in line with what we had anticipated and planned for and was offset from a user perspective; from a seat perspective, it was more than offset by the expansions we had. You probably heard Peter talk about the wins in the domestic Japanese market, which largely offset any churn and any attrition. The second part of your question is, how are companies thinking about their sales forces long term? This is one of the most effective, if not the most effective channel to the market, and sales teams work. Most companies are thinking on the margins, how do they tweak? How do they gain a little additional productivity and efficiency? How do they become more digital? What's the optimal mix look like? Fundamentally, the sales force is a really critical channel, particularly as many of our customers are more focused on highly specialized medicines. Organizations need that personal relationship to educate and bring those medicines to market effectively. It’s a strategic and important channel. I think we'll see some tweaking on the margins through the rest of this year, but it's certainly a strong and important channel for the industry.

Saket Kalia, Analyst

Very helpful. Thanks guys.

Operator, Operator

Your next question comes from the line of Stephanie Davis with SVB Securities. Your line is open.

Stephanie Davis, Analyst

Hi, guys. Thank you for taking my questions. Congrats on a solid quarter. Could you give us an update on some of your hiring processes, because you did say in your prepared remarks that you had another strong hiring quarter? If so, has it had any impact on sales like you mentioned last quarter? Is there any way to tease out the impact of billings timing or revenue recognition as a result?

Brent Bowman, CFO

Yes. So in response to your question, Stephanie, it's Brent. We plan to continue hiring at our current pace. We had a strong hiring quarter in Q1, adding about 203 net new employees. Based on our ability to execute on revenue billings, we are confident we can meet our guidance. We feel very positive about our capacity to deliver on our targets and about the new hires and their progress.

Stephanie Davis, Analyst

And another quick one for you, Brent. Could you help us understand how the large wins flow through to billings? Should we think of this as being built all at once, or is it going to give a halo effect to further quarters beyond 1Q?

Brent Bowman, CFO

Yes. The large deal we talked about earlier, we're really excited about that. Most importantly, on that deal is it's a great proof point for the operating system for development. We're not going to get into the specifics of how any one transaction is accounted for because we're very focused on customer success. No one deal is the same. So, it has been factored into our guidance. When we set guidance, we look at the pipeline in front of us, we observe the actuals, and we consider the macroeconomic environment. So it's all been factored in.

Operator, Operator

Your next question comes from the line of Ryan MacDonald with Needham. Your line is open.

Ryan MacDonald, Analyst

Hi. Thanks for taking my question. And congrats on a great quarter. Peter, I wanted to follow up on the large customer win. You talked about the decision being made with 10 to 20-year increments despite the near-term macro impact. I'm curious, though, as you think about implementations and project work, are you seeing any changes in the pace of which those large deals are getting implemented, given what we're seeing from a macro perspective?

Peter Gassner, CEO

Yes. Ryan, good question. No, we're not seeing that. There was some disruption six months ago, due to COVID hitting, Omicron, COVID fatigue, early inflation worries, and holiday timing. We're not seeing that slowdown anymore. Customers feel they've weathered the COVID storm, which was significant for life sciences, disrupting product plans, etc. We're not experiencing those same dynamics.

Ryan MacDonald, Analyst

Thanks for the clarification. Brent, maybe a follow-up for you. A question we're getting a lot in almost every investor meeting is about share-based compensation and how we should think that's trending throughout fiscal '23. We noticed it was up slightly or more than we seasonally expected compared to the fourth quarter. Can you remind us how you're thinking about share-based compensation for 2023?

Brent Bowman, CFO

Yes. Share-based compensation is a key portion of our overall compensation philosophy, including our base salary and the overall equity portion of the balance. It's been reflected into our guidance. It's an instrument we consider important for retention and for employee success. It’s a lever we use to drive a fair overall compensation structure for employee success.

Operator, Operator

Your next question comes from the line of Kirk Materne with Evercore ISI. Please go ahead.

Unidentified Analyst, Analyst

This is Adi on for Kirk. Thanks for taking the question. Just wanted to ask a follow-up on the FX stuff. You said there's the headwind, but can you talk about what you're seeing specifically in the pipeline that gives you the confidence for taking that in the guide, whether that's just larger deals or across the board?

Brent Bowman, CFO

Yes. Overall, we're happy with the strength of the business. The FX impact was, on a full-year basis, about $20 million on revenue, and it was $30 million on billings. That's a headwind on both line items. From an operating income perspective, there's a natural hedge with our cost structure relative to revenue in foreign currency. So there’s minimal to no impact on operating income. It’s important to level set on that. More than half of that FX headwind was created in the last 90 days. As a result, that impacted our ability to increase the full-year guide for both subscription revenue as well as total billings. Absent it, we could have increased our guidance for those two numbers. We expect a slight revenue acceleration in the back half of the year. Why do we have confidence in that? We have good visibility to the deal flow for the year. We are a strategic partner to a critical industry. Our software and solutions are serving the needs of their essential business processes. This isn’t a transactional business we manage on a quarter-to-quarter basis. Because of that, we have good visibility. So with that, we have confidence in the full year guidance.

Unidentified Analyst, Analyst

Awesome. Thank you.

Brent Bowman, CFO

Thank you.

Operator, Operator

Your next question comes from the line of Ryan Bressner with Morgan Stanley. Your line is open.

Ryan Bressner, Analyst

Hi. Thanks for taking my question. I found your disclosure on P&E being 1.5% in FY 2023 versus 3% pre-COVID listing. Do you expect P&E to remain at this level moving forward? Is that a broader trend in the pharma industry? Trying to think about it in the sense of the bigger picture discussion on the changing role of pharma reps and how this could imply how the industry is evolving and what tools need to adapt to this hybrid environment moving forward.

Peter Gassner, CEO

Okay. I think it's kind of a two-part question here. Brent, why don't you take the first one regarding our internal? And then, Paul, you can take the second part on the industry since those are actually two different things.

Brent Bowman, CFO

Yes. You're right; as we have been highlighting, we expected spending, and travel to come back and be a bit of a headwind to operating income in fiscal year 2023. That has happened. So we're at about 1.5% of revenue, compared to about 0.5% of revenue in fiscal year 2022. That's a good thing. Why? Because of the excitement we had with in-person events, the Commercial Summit we had last week was a great example. We expect different functional groups to travel to stay connected, and that's all going to be part of the equation. Looking out, where could this be? It's early; where this ultimately lands is to be determined. But for the guide for the year, we expect the travel and events to accelerate a bit through the course of the year. That's our expectations for now.

Paul Shawah, EVP, Commercial Strategy

There was a second part. Ryan, can you repeat the second part of the question again, just so I'm answering the right question?

Ryan Bressner, Analyst

Sure. The second part was just on what this might imply in the industry as it continues across all pharma for the changing role of pharma reps and how the broader selling model in the industry is changing, what that means for headcount and technology.

Paul Shawah, EVP, Commercial Strategy

Yes. What it means? We've talked about some of the shift happening in the industry where the issuers are becoming more efficient. They're increasing their mix of digital into the sales force. That's one impact that’s changing. That's creating an opportunity for companies where they can be more productive, allowing them to do more with less, and we’re seeing that play out. We've talked about that for some time. I think the other impact we're observing is shifting roles beyond just the sales reps. An example of this is field medical teams, which consists of high-science individuals who connect with doctors or thought leaders. That’s one example of a different kind of role. Many companies are re-thinking their field roles. Medical is a good example. Some of those are actually increasing. Overall, in some cases, we’re seeing reductions and in other cases increases. We've discussed this sizing and shaping for some time. We view the overall size and shape shifting and we're happy to assist the industry in making those adjustments and becoming more productive.

Ryan Bressner, Analyst

Very helpful. Thank you.

Operator, Operator

There are no further questions at this time. I'll turn the call back to CEO Peter Gassner for closing remarks.

Peter Gassner, CEO

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

Operator, Operator

This concludes today's conference call. You may now disconnect.