Veeva Systems Inc. (VEEV) Earnings Call Transcript & Summary

Okay. Awesome. I think there's a couple of stragglers leaking in here, but we'll go ahead and get started. So I'm Dylan Becker. I'm the analyst here that covers Veeva Systems at William Blair. For all the necessary disclosures, those can be found at williamblair.com. We're joined here today with Brent Bowman, the CFO of Veeva. So Brent, thank you for taking the time.

Yes. My pleasure.

I think a lot of people -- maybe as a place to start, a lot of people are very familiar with the story on a capacity, but maybe for those that aren't, right? Can you lay the foundation of where Veeva started within pharmaceutical CRM, the evolution of the business into R&D, some of the data initiatives? And how you really serve as that strategic partner to life sciences?

Yes. Let's go back to the beginning. So we were founded in 2007, went public in 2013, and we started in core CRM, providing CRM that was specific for the needs of the life science industry. It's a highly regulated industry. So they have very unique and specific needs. So that's where we started. Shortly Thereafter, we saw the need to -- we could help the life science customers by creating additional software. So we built out a Vault platform, and the Vault platform is fundamental to how we build-out applications, specifically in R&D, but we started on the content side. So if you think about a commercial relations customer commercial setup, you need a really good CRM, but you also need good content as you work with the life science sales force organizations. So that is think about promotional material, you think about MedComms, that information is really important. So we started there. Then we built out a full R&D suite of products. Think of the operating system for drug development. We're building out software that covers clinical, the clinical documentation, clinical operations, regulatory submissions as well as the manufacturing side. So you think of quality and safety manufacturing. So -- and then we've added from there the full suite of what you need to run a commercial operation. So that software data as well. So we have data from a sales perspective, our compass data products and then we have services as well, our consulting services. So you take all that together, really a full suite product. We're now a multiproduct company.

Awesome. And a lot that we can dig into. You guys also did report earnings last week. Very, very healthy set of numbers, I guess, maybe to kind of level set the expectations here, any kind of key takeaways for maybe those that didn't get a chance to see the report last week.

Yes, we had a strong start to the year, really good execution. We beat across all guided metrics. So that's revenue, op income, OCF, billings. So a really good start to the year. We saw broad-based strength. It was across our R&D and our commercial business. And it's so we're excited about how the year started, and we have a lot of room to grow across the business.

Awesome. And there are 2 segments, right? So there's the commercial side of the business, and there's the R&D segment. So maybe let's start on commercial side. That's where you guys had started out. I think it's north of 80% seat share, within pharmaceutical sales reps now. You've delivered and innovated a number of solutions on top of that There's kind of the data capabilities. How should we think about the broader commercial opportunity as it pertains to Veeva today?

Yes, it's where we started, as you said, a really successful business. So in the core CRM, we're the market leader. We have over 80% of life science sales reps are using Veeva CRM. So that's really helpful in helping them drive their commercial operations. We then moved into what we call our add-on business. So add-ons, we have about 5 add-ons. Each of those are about 15% to 20% of the size of the core CRM, and that's things like approved e-mail, it's alignment, it's events, it's engagement software, it's closed loop marketing. That business right there, it's about 50% penetrated. So there's still a good amount of room to grow in that space. So those are a little bit more of our established products and our market-leading products. And as you look forward on the next areas of really growth that we're excited about, like Crossix. Our Crossix business Think of that as advanced marketing analytics. How do you measure the success of a brand campaign. So that's a software that's, I was a little bit impacted by the macro last year as those marketing budgets, but it is a really significant growth driver for us as we look forward. And then broadly, our data set of offerings. I touched on it just a second ago, but that's open data, think about like white pages for doctors. We have our Link product, which is real-time intelligence. It's which profiles of key opinion leaders, what they're doing, what they're saying, really valuable insights. And that data is refreshed on a daily basis. So that's a real exciting and interesting growth area for us. We have 5 commercial Link applications and 2 clinical Link applications. And in Compass, which is the broader data set, there's a large incumbent in the space. providing that patient prescriber and national data. So that area, early days. Very excited about it, and we think we have the right strategy to compete in that area.

And it's a good point. I think within the data cloud opportunity as well to your Compass as it's now called, I think you've always had the patient data within that. You've talked about now rolling out the prescriber and the sales data, I think, starting next year. And it really seems like you have kind of more arrows in the quiver to go after that incumbent that's in this space. Can you talk about how you think about that opportunity and really where you see that maybe kind of playing out into the 2025 beyond kind of type of time frame?

Yes, we feel really good about where we are for that. We know we have the right strategy, and I'll talk a little bit more about specifically why we think we have the right strategy, and we're executing well. The patient -- so as I mentioned, there's 3 parts to Compass. There's the patient. Think of it as longitudinal view of the patient from the initial doctor's visit to the initial diagnosis to the treatment. You want that full view of a patient. We had 5 wins in the past quarter. So we have a rich data set there. And to your point, the balance in our portfolio is prescriber and national data. That is projected data at a ZIP at a state level and at a national level. All 3 of those data sets that you need to be able to truly compete in the marketplace for a commercial data customer. Now why do we think that we're set up for success. Why are our tone is bullish. We're going about it in a different way than the incumbent. First off, where are we getting our data. So we're looking at different data sources. We can get the traditional retail pharma data, but we're also getting the specialty pharma data. We're getting data from claims, from PBMs, from infusion sites. So we think we have a richer, broader data set. And then how are we matching that data? We're using technology. So part of the Crossix acquisition that we did, they have some IP called SafeMine technology. That's really important because what that allows is it sits behind the firewall in a privacy safe manner, and it connects pre de-identified data. And then you pulled across and you de-identify it in a privacy safe way. So that's providing a richer data set. In our first few interactions with customers, they're finding 10% to 20% more patients than the incumbent in that space. So with that, we think we're going to have -- the quality of our data will be better. Also, the frequency of the refresh, we will be refreshing some of the state on a daily basis. That is best-in-class relative to what's out in the marketplace in life science. So better data, more frequently updated, and then we're going to provide the data in a holistic way. So we're going to give, you need a data set for the full brand. We're going to give you the full data set to do the analysis you're going to need. That's not the norm. You have to buy a piecemeal from other folks. So we think that those 3 things give us the right strategy and approach, and it's for us to execute. We have to get customers live and happy and then we'll continue to expand. We'll likely start with some SMBs broadly and probably at a brand level on the enterprise side. And then like I said, get them successful and then expand them broadly.

I mean that ROI is massively exciting, I would think, particularly for those customers. Maybe one more sticking on the commercial side. You did recently announce, obviously, having originally being built on the Salesforce platform, now transitioning to the scale of the Vault platform you guys have built internally. Kind of help us walk through the puts and takes, how you guys came to this decision? How you think about the capability of delivering greater innovation off of that?

Yes. This is not a decision we took lightly. We thought long and hard and we thought about what would be best not for 2025, but we looked out to 2030. And we thought that we could provide a better product and better customer experience if we own both the platform and the application. And why is that? That would allow us a few things. One is better, tighter integration. So if you think about having a Vault CRM tightly integrated with our Vault content products. That's -- it's a huge success right there from a customer perspective. And we can also have tighter integrations across other offerings. But also we'd have no limits. We wouldn't be limited in what we could do. Under the previous agreement with Salesforce, we could only do certain things. So now we have the freedom to solve the critical key customer problems that they have. So we announced service center, as an example, at our Commercial Summit that's not something that we could have done previously. So from that perspective, we're excited about the momentum. We did a demo of our Vault CRM in this last month at our Commercial Summit. The customers we had over 1,500 in attendance. And the important takeaways there was, there's not going to be a requirement for retraining of your sales force. The app and the data model are identical. So you're looking at your handheld and you're looking at, it looks no different. It's just pointing to something different on the back end. It's pointing to Vault CRM versus a force CRM. So no change from a user perspective. And then so what's going to happen is on the back end, there's going to be a migration. So -- and it will vary. Not all customers are the same. Some customers will be more of like a pure technical migration kind of an uplift and shift, if you will. And there will be other customers that require -- that have had more customization maybe they have more technical debt. So that will be some work around how do they think about their processes, do they reengineer, do they eliminate some of that technical debt. We'll work with customers. Our services organization, our consulting organization as well as our partners had to do that. So we expect there's plenty of time. There's no rush for customers to migrate. The current contract runs with the wind-down period through 2030. So there's a lot of time. We expect most customers to migrate in the period of '26 through '29. We'll get some new customers up and live in calendar '24, and we'll start some migrations in '25. But all in all, we feel good about the progress we're making.

Got it. Very helpful. So that's a lot, but that's just half of the business, right? So let's talk about the R&D side. There's a number of new products here and to your point, moving from a point solution to a multiproduct strategy here. Can we walk through each of the components within the R&D suite kind of clinical data management, maybe where each of those fits on that maturity curve and the value of the tightly integrated nature of each of these solutions as well?

Yes. We'd like to say we planted the seeds for growth. You probably heard that before. But it's a good analogy. We started back in 2012, '13, our documentation products. And think about on the clinical side with eTMF and on the quality side with QualityDocs and the regulatory side with regulatory submissions. Those products are the largest contributors to our current revenue today. Those are still growing businesses in product offerings, but they -- those seeds were planted over 10 years ago. So really excited about that. So because we do have, like I said, seeds at different parts of their evolution and their life cycle. The next set of products really around the operations side. Think about the heartbeat of a clinical operations. So we have software that does that. It's called CTMS. And I apologize for the alphabet soup, but it is what it is. And then on the quality side, the quality management system, it's running the quality operations. So those products are really hitting the sweet spot of the growth curve right now and contributing nicely to the growth in '24 and '25 as well. And then what gives us real excitement is our largest applications from a market opportunity, from a TAM perspective, are really just in their infancy. So you talk about clinical data, so our electronic data capture product, and that's under a suite called CDMS, really still early days. We have 6 of the top 20 that have agreed to start all new trials on Veeva. You don't cut over mid trial. It just doesn't make sense on multiple dimensions. So those 6 have agreed over a period of time. And this could be 3, 4, 5 years to get all the trials on to Veeva, but it's happening. And so it's really exciting. Safety is another example. We had our second top 20 win in the quarter. Safety is a very risk-adverse area. So we start to see the momentum. Once you get second, third, top 20, that reference selling model really starts kicking in because you can't afford to not be on the best software. So all this being said, we're creating the operating system for drug development. We're the only software provider that can actually run the gamut between clinical, regulatory, manufacturing on the quality safety side. And it's all connected on the Vault platform. So our focus is to have best-of-breed app the application level, but also connected. Your alternative is to buy from disparate vendors in all those spaces because there's no other vendor that can go end to end and then you have to find a way -- figure out how to stitch it together. So the value proposition is pretty clear there.

And sticking with that, too, obviously, right, there are different maturity levels of each of those, but you've seen significant success with the regulatory suite, the quality suite, et cetera, the more established offerings. How do you think about that cross-sell and that attach within that? Serving as maybe like a springboard for what you've talked about in CTMS, clinical data management because you're kind of not flying blind, you have an initiative from customers of what they want, and what you can develop?

No, it's absolutely true. And if you just stick at clinical for a second, and I'll throw out some numbers that kind of gives you a good example of that. So we have 18 of the top 20 on our clinical documentation product, eTMF. We have 11 of the top 20 on our clinical operation products, CTMS. We have 6 of the top 20 in our clinical data product. The only difference is time and market, but they see the value of that unified clinical suite of products. And then you can take that again outside of that and cut across regulatory safety and quality. So you can start in any one area, but there is that network effect that you see because of that connected nature.

Got it. And so maybe high level, now combining the two, it sounds like there's a lot opportunity set still for the business. You're tracking towards $3 billion in revenue run rate today. we'll discuss the profitability profile here in a second. But how do you think about all of these kind of culminating in the long-term durable growth kind of framework for Veeva?

Yes. We do see that durable growth and part of the reason why. It's a few things, one is that we're creating products that are core to the operations of life science. These are not discretionary applications, right? So these are longer strategic buying decisions. So we're working with the C-suite of the Top 20 and others. So very, very fundamental. And our focus is we create value, and we charge for that value. It seems very basic, but it is fundamentally the way that we operate from that perspective. So we're early in a growing opportunity. We're less than 20% penetrated. In the -- across the space and in R&D as well. So a lot of opportunity. We see a good durability. And one additional item is I didn't mention it earlier, but we're a public benefit corporation. And that's maybe not familiar to a lot of folks, but that's a legal obligation of the management team and the board to balance the interest of the shareholders, employees, customers and the industries we serve. And we think that, that will result in deeper relationships with our customers and more durable growth over the long term.

And sticking with the PBC point 2, are you seeing that come into play from a customer perspective? I think Merck was one who just recently said, hey, Veeva is going to be my strategic partner for the next 10 years. Plays into a little bit of that standardization strategy. But how do you see that maybe consolidation on a smaller subsegment of vendors and obviously your opportunity to capitalize on that?

Yes, that's a really good example. And all customers will handle the relationship differently, but Merck is a great example. There's a trust between Veeva and Merck. And they've -- what you're referring to is they agreed to a strategic framework. Veeva is the preferred supplier for software for Merck as it relates to the applications that we provide. It cuts through the bureaucracy and the red tape of going through procurement in those processes. So -- and that was a CEO to CEO level decision. It's like, I know I'm going to go with you. Let's cut through the red tape and let's be more efficient and effective. And they saw that because they saw our innovation, but they saw us being a good partner to the industry as well. PBC helped, I think, reinforce that as well.

Yes. Makes sense. And I didn't want to bury the lead, obviously, but it helps when you're at scale, you also have best-in-class margins, 35% plus kind of on a free cash flow basis. How do you think about the core tenants that can support that, right? You talked about the strategic partnership and R&D efficiency. You've talked about referenceability of sales, but how do you think about balancing, again, investments in that growth durability, but also being able to do that highly profitably as well?

Yes. So why do we have such a good balance of growth and profitability? I think it comes back to the fundamentals of our operating system. It seems basic, but it's really hard to execute. We start -- and we're consistent. What I'm going to describe is consistent on the original commercial side of the business, the R&D side of the business and the data side of the business. So we start with really deeply thinking about clear and correct targeted markets at a deep level. We're not looking to be a small player in a large opportunity. We want to be the market share leader, so 50% plus. So we spend a good amount of time there. Then what we do is we've rigorously focused on product excellence. It's a lot easier to sell a good product than it is a product that's not as good. So we work with our customers, and we have a very rigorous early adopter program. We'll take a few top 20, we'll take a few SMBs and it could take a couple of years. We'll take -- we'll work with them before we turn it over to the sales team. We'll make sure we got that product right. And then the reference selling flywheel kicks in. And especially impactful in an industry-specific model. You can't afford to get behind. So that reference selling model kicks in, which provides best-in-class sales and marketing expense as a percentage of revenue. So you look at this and it culminates in a nice balance of revenue growth as well as world-class profitability. So we're going to continue to focus in on those processes. It served us well, and it's going to -- we'll continue to innovate and charge with that value.

And you did touch on the kind of strategic nature of the discussions with these customers, how they're multiyear, their core systems. Can you think -- can you talk about how that provides for you guys a higher level of kind of macro resiliency, right? Like I mean, there's a ton of R&D spend in the industry. You've talked about the innovation flywheel being as strong as ever, which I think is notably impressive as well. But what are kind of some of those core tenants that are driving the broader, kind of just business resiliency in the current landscape as well?

Yes. And that's part of what I mentioned earlier in that we're providing software that runs the core operations of life science on both the commercial and the R&D side. So that provides some resiliency there. We -- the industry is less cyclical and not as impacted by macro. It's not completely immune. There's nothing that's completely immune. So not -- so you have core software that solves the mission-critical nature of those critical challenges and problems of life science. You have an industry that's continuing to -- they haven't completely figured out the human body. They're going to still develop modern medicines and they're going to need software that helps them do that in an effective, efficient way. So I think all that comes into play. And the breadth of our portfolio and how early we are gives us confidence about kind of the longer durability of Veeva.

Got it. And that durability comes into play too, as you guys have kind of outlined this $3 billion target framework by fiscal '25. You've pretty much given 18 months guidance at this point. But that's a function of some kind of dynamics within the Model 2 and multiyear kind of type of contracts. Can you kind of help explain that for those maybe that are a little bit less familiar? And maybe what those customers signing for those longer-term agreements helps kind of validate some of this platform strategy as well?

Yes, I love talking accountings. Let's get into the nitty gritty. So you're right, the fundamentals overall, the business remains strong. We did guide out of character, but we thought it was important to guide not only fiscal '24, but to also guide fiscal '25 to really reflect the underlying momentum we saw in the business and to address a change in contracting that I think that you're referring to. Effective February 1, we implemented a termination for convenience right at the MSA level of our customers with multiyear ramping arrangements. And we did that because we're inconsistent over the years on how we are treating customers, we didn't feel good about it. We wanted to have all the customers on similar terms. What this resulted in is a timing effect on revenue. There is no change in the total value of these contracts we expect to get from a revenue perspective. There's no effect on operating cash flow. There's no impact to billings. What there is, is an impact to fiscal year '24 revenue and operating income. And again, it's timing. There was about a $95 million impact given this change in contract terms. And so when you take that into consideration and you normalize for that, we're still -- we have 37% op margin in '24. We're growing at about 15% on a full year basis. So I think that's what you're referencing. And then fiscal year '25, we provided a guide of at least $2.8 billion in revenue and at least $1 billion of operating income. So we wanted to -- and that -- you can do the math on that, you're going to do a calculated growth rate around 18%, but normal to normal, it's about 15% growth rate.

Exactly. And I think that, that was valuable. And help me kind of walk through some of those dynamics and what that normalization can look like for the business. Maybe 2 more quick ones as we're coming up short here on time. The value of the core system of record that you guys can serve as to the industry. There's a ton of emphasis and interest in what AI can look like. How can you use that information, the regulatory framework, the compliance, complexity to drive a differentiated view in efficiency for pharmaceutical business?

Yes. So it all start goes back to the efficiency you get from Veeva being on that common Vault platform. That's really a differentiator for us. There are point solutions. We do think we have the best point solutions, but also like as we -- as I mentioned earlier, the connected across. And the value and the customer choice is speaking to that. You mentioned AI, obviously, generative AI is a hot topic. We're going to do it in a Veeva fashion. We're going to think deeply and work closely with our customers. We're going to do it where it makes sense and adds value to our customers. So we did announce our first application, CRM bot. That will be in our Vault CRM. So we'll build applications around AI. And we'll do it working with our customers where we see the most value. And so that's the first one we're running with. And our data assets will be really important in this space as well. I think AI will even make them more meaningful. Our data assets and we're going to make it easy for our customers to use some other AI applications on our data as well because we won't have all the AI applications. That's not our intent. We're going to be a good partner to the industry. So I think there will be some good differentiation there, and it will be a tailwind to Veeva.

Got it. I had another one within that before kind of a high-level ending wrapping up question. So the business services side as well, too, it's highly strategic for you guys in getting in and helping understand and fuel kind of that innovation cadence and road map, too. You guys just expanded that into the R&D front as well. How do you think about the strategic value of business services within the ecosystem? I think it's about an 80-20 revenue mix between the 2 today. But how do you think about that, that fueling again some of that innovation pipeline as well?

Really important. You're right. It's represented about 20% of our total revenue. The larger portion of that is professional services. Think about implementation services. As we got this large opportunity in front of us on the R&D, really working closely with our customers to ensure a really positive customer experience as they adopt our software. The other piece of the equation, which we're building is our Business Consulting side. So we launched this about 2 to 3 years ago, and we're over 250 consultants today. Think of Accenture or McKinsey, but think about the data assets we have, and we have what we call Pulse data. So you combined -- it's in a brick format, so it's anonymized. But really rich insights with our consulting that we can work back with our customers to help them optimize whether it's their commercial operations or their clinical operations. So we see that as a very important strategic part of our business.

Got it. Okay. Now wrapping up, obviously, we've got line of sight into the $3 billion kind of type of framework, and we've talked about kind of all these newer initiatives across the business. I guess what internally get your guys most excited about the long-term opportunity set beyond whatever 2025 can look like for Veeva today?

Yes, it's really about the opportunity we have to drive customer success and how early we are. I mean the opportunity within life science is significant. We've quoted a $13-plus billion TAM and that TAM might be closer to a SAM. We could take a percentage of a $2 trillion industry and do the math, but we didn't do that. So we're less than 20% penetrated to that. And we're early days specifically on the R&D side broadly as well as on the data side. So huge opportunities for us there. And we're focused on execution and taking advantage of that opportunity.

Awesome. And yes, Veeva has definitely never been known as a conservative approach on the outlook in the business, too. Well, awesome, Brent, thank you very much for the time. We are going to head up to the breakout room here to continue the conversation. Thank you everyone.

Thank you.