Earnings Call Transcript - VEEV Q2 2025

Operator, Operator

Ladies and gentlemen, good afternoon. My name is Krista and I will be your conference operator today. At this time, I would like to welcome everyone to the Veeva Systems Fiscal 2025 Second Quarter Results Conference Call. All lines have been placed on mute to prevent any background noise. And after the speakers' remarks, there will be a question-and-answer session. Thank you. I will now turn the call over to Gunnar Hansen, Director of Investor Relations. You may begin.

Gunnar Hansen, Director of Investor Relations

Good afternoon and welcome to Veeva's Fiscal 2025 Second Quarter Earnings Conference Call for the Quarter Ended July 31st, 2024. As a reminder, we posted prepared remarks on Veeva's investor relations website just after 1 p.m. 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, EVP Strategy; and Tim Cabral, our Interim 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, August 28, 2024, 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 discuss certain non-GAAP metrics that we believe aid in 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.

Peter Gassner, CEO

Thank you, Gunnar, and welcome everyone to the call. Q2 was a strong quarter with results above our guidance. Total revenue in the quarter was $676 million with non-GAAP operating income of $280 million. Thanks to the team, we advanced in all major areas with key product expansions and strategic customer wins. This included an important new release of Veeva Site Connect to streamline clinical trials and the first release of Service Center in the CRM Suite. We have a clear product strategy and are executing well on our vision. We'll now open up the call to your questions.

Operator, Operator

Your first question comes from the line of Joe Vruwink with Robert Baird. Please go ahead.

Joe Vruwink, Analyst

Great, hi everyone. I think it's interesting, the cadence of core CRM wins was now picked up for two quarters. Of course, the last quarter was all Vault. And looking backwards I think you're actually winning more CRM on a quarterly basis than you did even before the decision was made to migrate CRM to Vault. So clearly it seems customers are comfortable making this commitment. I guess I wanted to ask just other than comfort related to the set of applications because of the Veeva and this is a proven solution. How much might be the product roadmap and things like service center and marketing automation starting to resonate in decisions? And then related to that, when you think about the vision, a customer might have around adopting a full suite across the three areas, do you think that ends up being more enticing to an SMB customer or maybe an enterprise customer for Veeva?

Paul Shawah, EVP Strategy

Hey, Joe. This is Paul. Thanks for your question. You're right; we had another very strong quarter. Vault CRM became generally available in April, and that’s exclusively what we’re selling in the market. During the quarter, we achieved 14 wins. It seems like we're winning nearly every CRM deal. While we can’t be certain about winning all of them, it truly feels that way. We are confident that we’re not losing any deals to competitors in our active competitions, so we feel very positive about our performance in that area. Regarding your question about the broader vision, including the service center and campaign manager, those elements are definitely part of our overall vision and direction. Our early customers want a solution they can trust will deliver results for them today. This is often a critical moment for their businesses as they prepare to launch and distribute their medicines. However, they also seek something that allows for growth. With the service center and campaign manager, we offer a very different approach, utilizing a simple technology stack that efficiently integrates sales, marketing, medical, and service on a single platform. This vision is a significant part of what we do, and we are executing well both in terms of product development and migration. Customers are noticing this progress, and I'm pleased with how far we’ve come.

Joe Vruwink, Analyst

Okay, that's great to hear. And then I wanted to ask, just since the R&D Summit is coming up, customers here have obviously been studying their path forward with AI this quarter, even made good progress, both with core system wins, but you also mentioned adoption around the newer bulk data APIs. I guess the summit may serve as a forum where you would anticipate more clarity coming out just in terms of how customers are approaching R&D, or maybe could this actually be an event where because Veeva can address questions and help educate and obviously customers will speak with one another maybe it provides just more visibility into decisions at your end and your expectations and the fiscal 2026 and the R&D.

Peter Gassner, CEO

Yes, Joe, I'll take that one. This is Peter. I visualize our summits as a boost, like when you're on a bicycle and your dad gives you a push to go faster. It's similar because our customers communicate with each other and with us, and through that interaction, we learn and improve. So, that's how you should think about it. This applies to various aspects, like the order of implementing Veeva applications, the best ways to do so, what new applications to introduce, and how to utilize AI with Veeva data. There's nothing particularly unique about this R&D Summit, but it will likely be more impactful than ever since we've grown significantly.

Operator, Operator

Your next question comes from the line of Saket Kalia with Barclays. Please go ahead.

Saket Kalia, Analyst

Okay, great. Hey, guys. Thanks for taking my questions here, and nice job on the quarter. Peter, maybe just to start with you. Can we just talk a little bit about the latest with Vault CTMS, maybe touch on sort of how some of those ramps are going with some of the Top 20 pharmas that have adopted the tool? And maybe we could touch on sort of how the pipeline looks for continued share gains in that market?

Peter Gassner, CEO

Great question. The ramps are progressing well, and our primary focus is on adoption. When we sell to a major Top 20 company on the CTMS, they operate under a fixed ramp and fee schedule based on time rather than the speed of their adoption. We aim for full adoption before they reach their complete financial ramp, as we believe this is fair and beneficial for the customer, aligning with our long-term perspective. Adoption is going well, and value realization is better than expected in several areas. The site experience has been positive, with no negative feedback regarding the user interface of our system, and sponsors have provided very favorable feedback on building studies faster with fewer programming needs and errors. There are significant cost savings in data cleaning when using our CDB product alongside our EDC, with many large customers leveraging both products. This has allowed them to reduce manual efforts through the data science capabilities in our CDB product, identifying data anomalies automatically and streamlining site responses without needing human intervention. Overall, this is going very well, and we expect to continue gaining market share. Our pipeline among the Top 20 enterprises is in great shape, with several companies in discussions with us. The timing of their decisions depends on their strategic priorities and existing commitments, as they can only manage a limited number of changes at once. We see room for improvement in clinical research organizations, particularly the large ones, and we are confident we will achieve this over time. Lastly, we believe we have a structural advantage that is sometimes overlooked, as we have clinical data management products like EDC alongside clinical operations products like CTMS and eTMF, allowing Veeva to handle integration, which is a challenging task that customers prefer to avoid. Overall, things are looking good in the EDC area.

Saket Kalia, Analyst

That's great. That's great to hear. Tim, maybe for my follow-up for you. Great to see the guide for commercial subscription revenue go up for this year. Can you just maybe touch on sort of the size and growth profile of maybe what we've called the non-CRM part of commercial, right, basically those businesses that aren't tied to Veeva CRM? Does that make sense?

Tim Cabral, Interim CFO

Yeah, it does. And as we look at the overall commercial business, the CRM Suite is probably 50% of that, and the non-CRM, Saket using your words, or the other 50%. While the CRM suite part of the business, as you heard Paul answer the first question on the call, is doing quite well. You can imagine that the non-CRM is growing much faster than that core CRM Suite. So very pleased with the performance of our commercial business and the continued progress that we're making both from an innovation perspective and from a customer success perspective.

Saket Kalia, Analyst

Very helpful. Thanks, guys.

Operator, Operator

Your next question comes from the line of Ken Wong with Oppenheimer. Please go ahead.

Ken Wong, Analyst

Great. Fantastic. The first question for you, Tim. I realize demand trends aren't always linear like we investors like. Can you help us think through kind of what's going on with the R&D subscription line? You guys trimmed it a quarter ago, you bumped it back up. Like what changed relative to three months ago that gives you guys this renewed confidence?

Tim Cabral, Interim CFO

Yeah. Hey, Ken. Look, we are 90 days later in the year. And as you can imagine, we are getting better visibility into the second half pipeline. What we talked about last quarter was some specific larger deals that were moving to the right. And I think today, we continue to build really productive conversations with those customers. We continue to move through the sales cycles with those customers. And today, we just have better visibility than we did 90 days ago, Ken which informed or was a good input to the modest increase in R&D subs revenue for the year.

Ken Wong, Analyst

Okay. Got it. Perfect. And then, Peter or Paul, just circling back to the Vault CRM wins, 14 customers that's a fantastic outcome. You also mentioned next release of Vault CRM in Q4 and then kind of the migration timeline. Any reason to think that the next version of Vault CRM is like that will have an impact on deployment timeline? So I guess in short, would a delay of that release somehow fall, when your customers will start to migrate?

Paul Shawah, EVP Strategy

We are excited about the upcoming release, which will bring us to what we're calling full functionality and beyond. It will include everything we've delivered in Veeva CRM, along with additional features unique to Vault CRM, such as improved content integration and built-in opportunity management. We expect that the gap between Vault CRM and Veeva CRM will widen over time with this roadmap. However, this should not affect how customers view their migration timelines. In fact, as customers witness the innovations happening with Vault CRM, they may be encouraged to transition to it more quickly. That said, each customer approaches their migration process thoughtfully, and we want them to proceed at a pace that works for them. The innovations we’re adding to Vault will certainly assist with that.

Ken Wong, Analyst

Got it. Thanks for the insight, guys.

Operator, Operator

Your next question comes from the line of Brian Peterson with Raymond James. Please go ahead.

Brian Peterson, Analyst

Thanks, guys, and congrats on the quarter. I'll keep it to one. So obviously good to see the Service Center launch. I know it is early days there, but I'm curious, how would you define success in that market as we are thinking about revenue contributions over the next few years, any way to kind of stack rank that contribution versus the other things that you have in the offer? Thanks, guys.

Paul Shawah, EVP Strategy

Yeah, Brian, thanks for the question there and we are excited about that release. It's generally available now, something that we announced last year and we executed on really, really well. I'm proud of the product team for delivering that with speed. This is a new product for us, just like we've announced Campaign Manager and Patient. We are executing well across all three of those products, Campaign Manager is on track to be available at the end of the year. I guess the way I would think about the sizing, I won't go product by product, but just if you kind of combined all of them, Service Center, Campaign Manager, and Patient CRM, those are the three new products that we've announced since Vault CRM, I would think of those as roughly the same size as core CRM. And that opportunity will certainly play out. Obviously, a customer has to be on Vault CRM to take advantage of those new products, but that opportunity will play out over time. And as customers move to Vault CRM, it will open up that opportunity for them to take advantage of our new innovation.

Operator, Operator

Your next question comes from the line of Rishi Jaluria with RBC Capital Markets. Please go ahead.

Rishi Jaluria, Analyst

Wonderful. Thanks so much for taking my questions. I've got two. First, Peter in your prepared remarks, you talked about some of the early traction you are seeing with the AI partner program. Can you maybe talk about what are some of the use cases you've seen so far? And maybe philosophically, as you see some of these use cases get built out and maybe even start to see some early adoption, is there a point at which that may inform your own internal roadmap and you have the flexibility to maybe accelerate some plans in terms of integrating GenAI into the platform? And then I've got a quick follow-up.

Peter Gassner, CEO

Thanks, Rishi. The types of use cases in commercial often have to do with data science. So things like next best action, dynamic targeting, pre-call planning, things like that. And in R&D, they can be more things like document generation, generating a clinical study report or doing specific medical coding, things like that. So those are the type of use cases. That's the thing. When you make an API like the Direct Data API, you don't know the innovation you are unleashing, and that's the whole point because the data can be consumed so fast and transactionally accurately, use cases that weren't practical before can become practical. I mean, if I step back way back when designing the first Salesforce.com API, I knew it was going to unleash a lot of innovation and you just don't know. It is not predictable and that's the good thing. Now in terms of us monitoring that and informing our own roadmap, I guess there may be some of that, but mostly that type of innovation really comes from internally our own thinking with our customers. We don't want to really disrupt our partners, especially when the partners are having customer success. If there is a major use case that we are very clear that customers need and for some reason, the ecosystem is not delivering customer success, yes maybe we might step in there. But I would guess that what we would do would be more holistic, I guess, in some sense and not specifically something a partner would tackle because we are generally going to have more resources and more ability to sway our own roadmap than a partner would and we want to be respectful to the ecosystem.

Rishi Jaluria, Analyst

Yeah, got it. Thanks. That's really helpful. And then just in terms of some of the adjacencies in CRM, you talked about Service Centre, Campaign Manager I know comes out later this year. You've had some kind of signs of early traction and early interest. Maybe can you help us understand that number one, with some of the success you are seeing with Service Centre early, is this generally greenfield? Is this displacement? And how should we be thinking about the advantages that these products have even on a standalone basis relative to incumbent vendors? Thank you.

Paul Shawah, EVP Strategy

The requirement is to have Vault CRM, and most of the customers starting with Vault CRM are new. These customers are usually pre-commercial or have just one product on the market. They tend to be smaller or mid-sized companies, so we anticipate that they will be among the first to implement Service Centre. They will be early adopters and will benefit from these products over the next one to two years. While Service Centre and Campaign Manager will also provide value for enterprise and larger customers in the future, they initially have a clear advantage because they are integrated into the CRM. This integration means that everything is organized around a single customer record, allowing the entire team to maintain a customer-focused approach. Everyone involved with the customer has the same information, consent, content, and compliance rules, reducing data hand-offs, integrations, and complexity. This results in a simpler technology infrastructure that enhances collaboration and customer centricity. We expect the adoption of these products to begin in the small and mid-sized business sector, while still being available for larger customers. Regarding standalone use, it is quite likely that these products will be utilized alongside Vault CRM, as standalone implementations of Service Centre or Campaign Manager are not typical. You can view these products as significant enhancements to a Vault CRM implementation.

Rishi Jaluria, Analyst

Wonderful. Thank you.

Operator, Operator

Your next question comes from the line of Tyler Radke with Citi. Please go ahead.

Tyler Radke, Analyst

Yes. Thank you. Peter, it's encouraging to see the beat and raise here and particularly despite some services weakness. I'm wondering if you attribute some of the strength that you saw in new bookings as a function of the environment getting slightly better. I know last quarter, you called out headwinds. I didn't see anything too much about the macro and certainly some of the results from your publicly traded peers in life sciences would indicate, we are maybe moving off the bottom. So just curious if you've seen any project acceleration, anything that makes you more optimistic about the overall environment heading into the second half?

Peter Gassner, CEO

Hi, Tyler, this is Peter. I think the macro-environment from what I can see is overall unchanged from 90 days ago. We still have the things going on that we have going on. So the good performance is related to strong execution. We executed very well in the quarter. Also, we had maybe some good luck and no bad luck, right? I think some quarters are like that. But overall, it is strong execution and no change in the macro environment that I can see.

Tyler Radke, Analyst

Great. That's helpful. And maybe a follow-up for Tim. Just as I look at the moving pieces in the guide, can you just walk through the services piece? And then as I think about the guide mostly coming from commercial, is it the new CRM wins that you talked about in the quarter? Was that the biggest driver of the commercial raise, or was it other pieces of the portfolio that outperformed on the commercial side? Thank you.

Tim Cabral, Interim CFO

Thank you for the question, Tyler. On the services side, we experienced some of the same dynamics we discussed last quarter, including some delays in service projects. Additionally, we encountered a situation where a few customers, including one significant one, chose to work directly with third-party system integrators instead of going through us. While this reduced our revenue opportunity, it aligns with our focus on customer success in the service business. As previously mentioned, customers occasionally make these marginal decisions, and we don't resist these choices since our priority is to ensure they benefit from the best innovations and realize the value our products provide. Moving on to the commercial side, the strong performance in Q2 is what led to the increase in our guidance. While we are seeing ongoing momentum in our core CRM segment, the notable contributions to our improved guidance came from our commercial content and Crossix areas. These two were key drivers for the higher guidance in this cycle.

Tyler Radke, Analyst

Thank you for the color. And Tim, hope we can continue to work together in the future. Thanks.

Tim Cabral, Interim CFO

Thanks, Tyler.

Operator, Operator

Your next question comes from the line of Stan Berenshteyn with Wells Fargo Securities. Please go ahead.

Stan Berenshteyn, Analyst

All right. Thanks for taking my questions. So in the prepared remarks, you called out a top 20 biopharma win in R&D, I think standardizing on RIM and CTMS. Could you just walk us through how long did it take for this deal to work itself through the pipeline? And maybe just generally, how active is your pipeline with other large pharma potentially looking to standardize multiple Vault product suites? Thanks.

Peter Gassner, CEO

Hi, Stan. I'll address that. The opportunity with that customer began about six or seven years ago with discussions, sharing information, and building relationships. It became more active around a year ago when we started seriously considering some initiatives and exchanging information. In the Top 20, there are several opportunities. For instance, we have a very new product suite in safety, many additional products in quality, and we've expanded our offerings in clinical and regulatory, with some customers not yet using our products. We have multiple active opportunities at different stages of progress at all times. When thinking about the Top 20, there are five major opportunities, leading to a total of about 100 potential opportunities overall. We definitely have more than ten active initiatives at any given moment, as there are several opportunities within these Top 20, not just a single one.

Stan Berenshteyn, Analyst

Helpful. Maybe just a quick follow-up on the Crossix strength that you are seeing. Anything to call out related to the election cycle? Is there more reliance by clients on omnichannel marketing that maybe you are benefiting from? I'm just wondering if you are seeing anything incremental just seasonally from the election cycle. Thanks.

Peter Gassner, CEO

No, I wouldn't attribute it to seasonality. I believe it's a result of our growing market leadership. We have been providing a high-quality product for some time now. There have been some competitors that have come and gone, and some of those didn't achieve strong returns on investment. I think customers are now returning to focus on quality. Additionally, we have two segments in Crossix: one focuses on measuring and optimizing media campaigns, while the other deals with digital audiences, where customers are utilizing our consumer audiences for their marketing efforts. We have placed more emphasis on the audience business in the past year, and those efforts are yielding positive results. So, this isn't just a cyclical shift; those weren't the main drivers.

Operator, Operator

Your next question comes from the line of Brent Bracelin with Piper Sandler. Please go ahead.

Brent Bracelin, Analyst

Good afternoon. One question on Top 20 deal activity and follow-up on margins. Peter I get the stronger execution, and a little luck this quarter helping you. But just curious what is driving the Top 20 wins? It looks like you got some in safety, quality, Link Key People, R&D it feels like a bit of a change from last quarter. And just curious if it is vendor consolidation that's resonating out there. Any sort of additional color you can point to why the deals closed this quarter would be super helpful. And then a quick follow-up for Tim.

Peter Gassner, CEO

Brent, I believe it's mainly about timing. There aren't any other reasons involved, just timing. If you take a moment to consider what Veeva is doing, we are focused on the development cloud sector and building a strong business there. We have a structural advantage with various products in different areas that work together effectively, which has led to high customer success rates and significant returns on investment for our clients. We are truly the only company offering this. The main factor attracting customers to us is the increased return on investment, as they seek greater efficiency. However, there are limits to the number of changes they can implement simultaneously, which is why not all changes occur at once. We're establishing a long-term franchise with these durable software products. While they may require customers to adjust their processes, they tend to be very sticky and are not easily replaced. In general, we don't lose to competitors; rather, we might lose due to inaction. Customers may choose to prioritize other areas for change, but we typically do not lose out to other vendors.

Brent Bracelin, Analyst

Helpful color there. And then Tim, as a follow-up on margins, I think op margins were the highest we've seen in three years. Great to see that back trending above 40%. It looks like the biggest factor there was gross margin improvement. Can you just talk a little bit about what's driving that? Is it just mix shift? And how should we think about that going forward? Thanks.

Tim Cabral, Interim CFO

Yeah. Brent, thanks for the question. And yeah, on the gross margin side, I think it is a combination of mix shift. So both more subscription revenue than services and more non-Veeva CRM revenue with all the other products that we don't pay the royalty to Salesforce. So both of those mix shifts come into play, as you think about the improved gross margin. And look, little call out, while services revenue was in-line with guidance, the margin performance was quite good. So the service team continues to deliver value in a very efficient way. And I think that is probably how you think about our overall company, Brent. I think we deliver a tremendous amount of value to our customers and Peter and the leadership team are highly efficient in doing it and you're seeing that in the results of our operating margin.

Brent Bracelin, Analyst

Makes sense. Great to see you. Thanks, guys.

Operator, Operator

Your next question comes from the line of Dylan Becker with William Blair. Please go ahead.

Dylan Becker, Analyst

Hey, guys. Really nice job here. Maybe for Peter, starting with you. You called out Site Connect in the prepared remarks and so wondering if we could get some more context on kind of the extension of the clinical offering. We've talked about other channels, ePRO, eCOA recruitment in the past and there is a long runway within the existing tool set. But how should we think about kind of maybe more of the early, early emerging solutions within clinical if that is the right way of thinking about it.

Peter Gassner, CEO

Dylan, I’ll specifically address Site Connect because it’s a vital and innovative product for Veeva. Site Connect is utilized by clinical research sites globally, and with our latest release, it’s easy for all sites to adopt without the need for specialized software. We’ve introduced a variety of functionalities that I believe the sites will appreciate. It’s important to note that the sites are essentially customers of the sponsors, so sponsors must prioritize site efficiency. Additionally, Site Connect enhances efficiency for sponsors through improved document exchange and various use cases such as safety letter distribution. The network effect of Site Connect benefits both sites and sponsors, contributing to their overall efficiency. This effect will begin to become more prominent and could also enhance other clinical products from Veeva. Now, regarding your other follow-up question, I'm unable to recall it.

Dylan Becker, Analyst

No, it was around other early-stage solutions in clinical, but I think the Site Connect piece covers it. It was more about ePRO, eCOA, and various other areas of recruitment, RTSM, and some other topics we discussed in clinical.

Peter Gassner, CEO

They are still early in their development cycle, but we are very excited about RTSM. We believe we have a world-class solution, particularly as we integrate it with our clinical operations suite. Over the next five years, we have plans to significantly impact the RTSM space, aiming to become the clear leader and encourage large customers to select Veeva as the enterprise standard to enhance efficiency across every trial. That reflects our confidence in RTSM. As for ePRO and eCOA, they are also in the early stages with various specific applications depending on the therapeutic area. We have a first group of customers, including mid-sized companies with enterprise license agreements. We just need to continue improving our product and processes, and we believe we will see success with ePRO and eCOA over time. That one will take time to gain traction.

Dylan Becker, Analyst

Okay, great. Thanks, Peter.

Operator, Operator

Your next question comes from the line of Jack Wallace with Guggenheim Securities. Please go ahead.

Jack Wallace, Analyst

Thank you for taking my questions, and congratulations on a strong quarter and outlook. Peter and Paul, I wanted to ask about how the migration conversations are progressing. You have a competitor making some noise about a potential takeaway, but it seems like you are winning nearly every new Vault deal available. First, how are the discussions advancing with your largest customers and what are the timelines? Second, are you hearing any chatter from your other competitors about any AI-based features they think could help them attract a few customers? Thank you.

Paul Shawah, EVP Strategy

The migration discussions are moving along very well across the enterprise and SMB sectors. We are engaging in these conversations broadly with our customer base. Each customer will decide on their own timeline regarding when to transition to Vault CRM, but overall, the discussions are positive. I expect to see more commitments from our Top 20 customers over the next year. We are executing well without pressuring customers to make hasty decisions; we want them to move when they're ready. We're also on track for some of our initial migrations with small customers by the end of this year, with larger migrations starting next year. Regarding competition, it’s important to understand the competitive landscape. While we’ve heard of some competitive activity, our main competitor remains Salesforce. Previously, we faced competition from IQVIA, but their product has not performed well, and they have returned licensing rights to Salesforce. Salesforce plans to build on that product, but it’s yet to be seen how successful that will be. Salesforce is heavily promoting AI and intends to release a new product at the end of next year, which marks a new direction for them. However, our competitive position is consistently improving, as evidenced by our results. We believe we have structural advantages, particularly in clinical, commercial, and CRM spaces, due to our strong execution. Our product is already in the market with 15 active customers, including a significant migration expected from a Top 20 pharma client by next year across over 50 countries. This kind of execution is challenging, and it remains uncertain whether Salesforce could achieve this timeline. Our long-standing relationships with customers also provide an advantage, as we have been collaborating and delivering results for many years. We're focused on creating a commercial cloud and an industry cloud that differentiates us from others in the market. This context illustrates our competitive position and underscores our commitment to execution, product strategy, and the growth opportunities we see in service, marketing, and patient-focused areas.

Jack Wallace, Analyst

Thank you, Paul. Really appreciate it. And then if I could add a quick one on Compass. It has been eight months since the launch of Prescriber and National. Just wondering how conversations with clients at a high level are progressing and if any of your larger customers have deemed the data to be compensation grade. And if not yet at this point, what a timeline would look like for that determination? Thank you.

Peter Gassner, CEO

We are making good progress with Compass, particularly in the patient area concerning sales and the addition of new brands in the Prescriber and National projected products. There's ongoing education and some sales activity, but a lot of preparation is focused on education. Currently, no one is using it for compensation, but I anticipate that will happen next year. It's essential to note that with Compass, particularly for Prescriber and National, we are employing a fundamentally different data approach. We are projecting not just retail data but specialty data as well, covering complex therapies delivered through specialty pharmacies. We're focusing on around 4,000 brands, which is entirely new, and people will need to adjust to that before it can be used for compensation. Generally, compensation is assessed on an annual basis and not mid-year, so we will have to wait and see how developments unfold with Prescriber and National. I'm very optimistic about the long-term potential, but there is a significant challenge ahead that will take time to overcome.

Jack Wallace, Analyst

Got it. Thank you so much. Congrats again.

Operator, Operator

Your next question comes from the line of Callie Valenti with Goldman Sachs. Please go ahead.

Callie Valenti, Analyst

Hi. Thanks for taking my question, and congrats on the quarter. Just a higher-level one for me to start with. When you look at your addressable market today, just curious like what product suite do you see the most opportunity to continue developing functionality in over time? Is that kind of more of the R&D side of the business versus the commercial and any kind of specific products you would call out?

Peter Gassner, CEO

Callie, I would say both R&D and commercial have ample opportunity for growth in several areas. Each side has relatively new products, such as Campaign Manager and Service Center. On the Compass side, we just discussed Compass Prescriber. In the safety suite, we have ePRO. When you examine our total addressable market, which we estimate at $20 billion, around 35% is focused on commercial and clinical sectors, with both holding equal significance. Additionally, quality is another significant area, where we have LIMS and batch release coming out. Following that are regulatory and safety segments. That's the overall picture. I wouldn't point to a single dominant area; clinical and commercial are the two largest sectors, and both feature a combination of new and established products.

Callie Valenti, Analyst

Yeah, that makes sense. Thank you. And then just as a quick follow-up, just wanted to ask you, as science continues to evolve at a rapid clip, how do you think about your solutions, particularly some of the trial-facing ones evolving with that and just kind of some of the flexibility that you've built into those solutions to deal with that? Thank you.

Peter Gassner, CEO

Yeah. If you look at what we do, you mentioned the science, this is where the real biology where we're understanding more about how the human body operates, how we can treat unmet needs and there is a lot of needs that are unmet right now and science is really advancing. Now with what Veeva does, we are generally not involved at that level of the science. We design our solutions to handle all different types of clinical trials to manufacture all different types of drugs to do the sales and marketing on all different types of products. So, we are generally not specifically affected by the science because we build that flexibility in. Now evolution in science is good for Veeva overall because that helps the life sciences industry grow, more medicines for more patients, more value therefore more need for automation.

Operator, Operator

Your next question comes from the line of Craig Hettenbach with Morgan Stanley. Please go ahead.

Craig Hettenbach, Analyst

Thank you. I wanted to touch on capital allocation as your cash balance continues to build up. Any update on the strategy there and opportunity to put that to work?

Tim Cabral, Interim CFO

Yeah, Craig. Thanks for the question. This is Tim. No update to that. What you've heard us talk about in the past is focused primarily on dry powder for potential M&A. So, no change in what you've heard us talk about in the past.

Craig Hettenbach, Analyst

Okay. And then as my follow-up, just touching on headcount up 1% year-over-year, I'm sure some of that is just some of the services weakness in terms of response to that. But just more broadly, how are you thinking about headcount and kind of going into next year?

Tim Cabral, Interim CFO

As we look ahead, we recognize a significant opportunity before us and are actively seeking the right level of investment, which will include expanding our team. Over the past year, while we have been adding to our staff, we have also focused on improving efficiency. You've noted that services is likely the area where we've achieved the most efficiency, which was reflected in the gross margin performance of that segment. So, there's a substantial opportunity ahead, and we will invest in it. At the same time, we are mindful of how efficiently we want to operate and how lean we wish to be as an organization.

Craig Hettenbach, Analyst

That's helpful. Thanks.

Operator, Operator

Your next question comes from Ryan MacDonald with Needham & Company. Please go ahead.

Ryan MacDonald, Analyst

Hi. Thanks for taking my questions, and congrats on a great quarter. Peter, I wanted to talk about safety a bit. Obviously, it’s continuing to have nice success there. But as it was mentioned in the prepared remarks, it is a complicated segment with customers resistant to change. Just curious, as you're continuing to have safety conversations with those prospective customers, is there some grade unlock that we should kind of look for to sort of help drive this modernization into the cloud and safety versus on-prem in that segment of the market? And as you think about the next 12 months to 24 months, is there a catalyst in your view that sort of unlocks that opportunity or maybe hastens the wave of innovation there?

Peter Gassner, CEO

I expect there will be a catalyst, although we can't predict when or what it will be. However, I believe a catalyst is coming. We have a clear product strategy with our cloud-based safety suite that is highly innovative, and we have several satisfied customers who have been using it for some time. There are primarily two legacy providers in the market, with a few smaller ones as well, but mainly just those two. We are uncertain about the operations of these legacy providers and whether one might face challenges that could become widely known, potentially leading to their decline. If that happens, it would accelerate the transition to Veeva, as our solution is stable and effective. Additionally, as our electronic data capture (EDC) product gains more users and integrates with our safety product, we anticipate significant cost savings and the ability to reallocate resources effectively. This integration will likely draw attention. It's also possible that breakthroughs could occur over time. Our safety solution is built on the Vault platform, which offers full flexibility, including the direct data API. This allows for various AI applications that would not be feasible on the legacy systems, potentially creating a tipping point. I am confident in our safety strategy because we have a clear direction and are making progress. The two legacy providers will eventually struggle to keep up, giving us a structural advantage, although I'm uncertain about the timing of this shift.

Ryan MacDonald, Analyst

Thank you for the insights, Peter. As a follow-up, I'd like to briefly discuss Vault Basics. Although it represents a smaller segment of your business, it has shown volatility in the earlier-stage biotech space over the past year. I'm interested to know if you believe the early successes or momentum from Vault Basics at the lower end of the market could transform that segment into a growth engine for Veeva in the coming years. Thank you.

Peter Gassner, CEO

Yes, I really appreciate Vault Basics for many reasons. We only started about a year ago and have made significant innovations. We already have over a dozen customers implementing it, which demonstrates how quickly Veeva can adapt and deploy talented teams to achieve great results. Interestingly, around 80% of the opportunities here were previously inaccessible to Veeva because these customers lacked the ability to transition to the full Development Cloud, leading them to rely on paper, spreadsheets, and other outdated collaboration tools. This means we are reaching a broader market. While this market might not be massive, estimated at around $100 million, it represents valuable revenue and success for our customers. Furthermore, it's helping Veeva learn to simplify processes, accomplish more efficiently, and assist in standardizing industry practices, which will benefit our enterprise and G17 businesses in the long run. Vault Basics has proven to be a success for the customers who are beginning to use it, and it feels great for Veeva to be able to adapt in this way, which will ultimately enhance our enterprise business. Not necessarily because enterprise customers will use Vault Basics directly, but due to the process improvements and standardization it promotes that will yield significant benefits. We plan to extend Vault Basics to more applications over time, including in commercial sectors, adapting the approach slightly, but maintaining the core concept.

Ryan MacDonald, Analyst

Makes sense. Appreciate the color. Congrats again.

Operator, Operator

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

Kirk Materne, Analyst

Hi guys. This is Bill on for Kirk. And thanks for taking my questions. Looking at Vault Direct Data API, how seamless is it for customers to turn it on and start using it? Is it something that needs an implementation? Or is it something that can happen kind of right away?

Peter Gassner, CEO

I'll take that one, Bill. This is Peter. That is something that's purchased by the customer. So that is something that is not free for the customer to use. They purchase it. The fee is not large. It covers our compute cost, that type of thing. So they have to really decide that they want it. After that, no, there's no implementation. You turn it on, and it's on. And that's that. Now to use it, a customer would have to learn how to use it, beat the documentation, figure out, hey this is a little bit different type of API. What do I want to use it for? How can I use it? But there is no implementation. You turn it on, it's on.

Operator, Operator

Your next question comes from the line of Jailendra Singh with Truist Securities. Please go ahead.

Jailendra Singh, Analyst

Hi, this is Jenny Cao on for Jailendra Singh, Truist Securities. Just a question on professional service. So first, congrats on a nice quarter, but it seems the professional services part of Veeva solutions continued to be a weak spot in the report this quarter. Is that still because customers kind of see professional services as discretionary and are still continuing to delay services? And then for the part where customers are contracting directly with third-party vendors, is that driven by some initiatives to bid costs or be more efficient? What do you think is driving that?

Tim Cabral, Interim CFO

Yes. Jenny, this is Tim. I'll address that question, and I appreciate it. First, I want to emphasize that professional services should not be seen as a weakness; rather, it is a strong aspect of Veeva. As I mentioned earlier, we are focused on ensuring customer success, which our services team is effectively supporting by helping customers implement and adopt our critical applications. That's the primary point. Secondly, regarding some of the trends we're observing, it's important to recognize that the nature of the services business can be inconsistent. Different products within our portfolio have varying attach rates. As you noted and I mentioned earlier, customers have the flexibility to make decisions that suit their unique needs. Our goal is to collaborate with our customers to ensure they feel confident in our services. I want to clarify that this situation does not imply that services are generally unimportant. Although our share may have slightly diminished in some scenarios, it does not mean that services or professional services are less vital for customers to derive maximum value from our solutions.

Jenny Cao, Analyst

Thanks for that color, Tim. And just a follow-up. I remember since November last year, Veeva was seeing some elongated deal cycles and deal timing. Since then, have you seen any of the delayed decision-making come back in the last 10 months? Like for the deals that weren't substituted by their own internal solutions, like what has been a typical timeframe for that to come back if you have seen any? And thanks for taking my questions.

Tim Cabral, Interim CFO

Yes, Jenny, this is Tim again. I think as you think about the conversation that we had 10 months ago, the macroeconomic headwinds were just starting to somewhat come into play. And I think that was informed in our conversation 10 months ago. As you heard Peter talk about earlier, there are still macroeconomic headwinds that are out there. But I think what we've done a nice job of and working with our customers is executing somewhat through that. So while, yes some deal cycles get elongated, we are very close to these customers and continue to keep them on the radar screen in terms of closing those deals at the appropriate time for them. So I think it is a function of the macroeconomic headwinds, but we're executing through that.

Operator, Operator

Your next question comes from the line of Charles Rhyee with TD Cowen. Please go ahead.

Charles Rhyee, Analyst

Yeah, thanks for taking my question. Well, first, I wanted to ask about Crossix. The second quarter now you had a solid performance here. And we've heard peers in the commercial space talk about seeing delayed projects also starting to convert. Are you seeing a thawing in the discretionary spend across biopharma companies that you think that can accelerate demand for some of your other offerings as well?

Peter Gassner, CEO

Peter here. I wouldn't describe it as a thawing. What often happens with pent-up demand is that it can push things off for later. You might be witnessing that. There hasn't been any significant negative macro news in the last 90 days. Typically, negative macro news would lead to a thawing, but without such news, things tend to flow more smoothly. However, I wouldn't label it as a thawing. A thawing implies ice melting and a flood coming, which is not the case. It's just a bit of improvement in the flow now.

Charles Rhyee, Analyst

Got it. That's helpful. And then maybe a follow-up for Tim. In the billings guidance for the third quarter here, it kind of implies about 5% year-over-year in the third quarter, steps back up in the fourth quarter. If I look at the last few years, billings growth year-over-year has been a little bit more constant. Anything to call out here? I know earlier Peter, in your prepared comments, you talked about timing issues. Just maybe any comments there would be helpful. Thank you.

Tim Cabral, Interim CFO

Sure, Charles. I think that guide and the shape of that guide for the back half of the year is a combination of two things. One, Q3 was a little bit of a stronger quarter last year, so a little bit of a harder compare. But also, I think where you’ve heard us normalize and you can see that in the deck that we supply as a supplement to our press release, Charles, we are seeing some billing term changes. Most of it is being driven by movement of renewal dates. That also will have an impact to that normalized billing.

Operator, Operator

Your next question comes from the line of David Larsen with BTIG. Please go ahead.

David Larsen, Analyst

Hi. Congratulations on the strong quarter. Can you talk a little bit about the competitive environment, especially on the clinical side? It sounds like you've made a lot of advancements on the clinical side over the years. So is your portfolio suite at least comparable to like Phase Forward and metadata and e-Research technologies? Do you have all of those modules that those competitors have now? And if not, when would you expect to have it? Thank you.

Peter Gassner, CEO

This is Peter. I'll address that. Regarding the breadth of our offering, I believe we have the most extensive range available, particularly when considering our ability to engage with both large and small companies. We offer a comprehensive clinical operations suite as well as a full clinical data management suite. For instance, Phase Forward and Metadata have not previously had this level of capability. The way we achieved this has been through disciplined execution. If we look back, our first clinical product was launched around 2012 with eTMF. We put in considerable effort, secured a few customers, and ensured they were fully operational and satisfied before moving forward. Once that was established, we announced our plans to develop CTMS and then EDC, focusing on enhancing these products first. Now, we're expanding into EDC, Site Connect, and study training. This systematic approach has allowed us to build a complete suite. To become a great multi-product company, it’s essential for all of our products to excel, not just one or two. It requires focused effort, and we've adopted a methodical strategy to establish a sustainable long-term business that can endure for generations. This wasn't our original goal when developing clinical applications in specific areas, and our perspective and objectives differ from others.

David Larsen, Analyst

Okay. Great. And then, Peter, from your perspective, how important is it to have the commercial and the clinical side all on one single sort of Vault database? Some people I've talked to in the channel say on the biopharma side, you really have two different kind of companies in a way. You've got the commercial sales side, and then you've got the research side. So having everything on Vault, maybe doesn't really matter. My view is different. I think it matters a lot. Can you maybe just talk a little bit about that from your perspective, Peter?

Peter Gassner, CEO

Yes, it's definitely a new approach that the industry isn't accustomed to. When Veeva began years ago, each department used separate platforms. Even in CRM, it wasn't Salesforce.com. We introduced that platform in the commercial space, while regulatory and quality had their own systems. Now, we are seeing that the R&D side uses Vault extensively, and we are incorporating Vault into the commercial side as well. The benefits of this integration might not be obvious to customers initially, as it is something they haven't encountered before, but I believe they are quite significant. There are efficiencies in IT, improvements in security, vendor management, capabilities, learning, and efficiencies in the system integrator network, among other aspects. However, the most important benefit is that it can enhance the connection between commercial and clinical functions, which is a priority for many company CEOs. Having a unified platform and data architecture will be incredibly beneficial, but it's something that needs to be seen and experienced to be truly appreciated. This vision might not be readily accepted by larger companies until it materializes. Initially, I believe smaller customers, particularly biotech firms using Veeva in R&D and clinical operations, will experience this first. When they go to commercialize their first product, they'll realize how seamless and connected everything is, thanks to Vault. That's where we expect to see our vision realized first. Our primary focus is on execution. It’s one thing to have a solid plan, but executing it with quality is what really matters, and that requires significant attention and effort. We want to assist the industry, and the best way to do that is through dedicated execution, which is challenging but essential.

David Larsen, Analyst

Great. Thanks very much.

Operator, Operator

And that concludes our question-and-answer session. I will now turn the conference back over to 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 the Veeva team for your outstanding work in the quarter. I look forward to speaking with you again at our Investor Day on November 7. Thank you.

Operator, Operator

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