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

Great. Now I could probably conduct an entire fireside chat just on the commercial business alone, but we should definitely shift the conversation to R&D, particularly given the fact that R&D subscription revenue is going to be the primary driver of achieving these 2030 targets that you've set. Can you talk about which products really lead the charge on that march to $4 billion in R&D revenues in 2030 relative to the ones that's led you to achieving the 2025 targets that you're hitting today?

Yes. It's a great question, Ryan. So if you look at the business today, it's roughly 50-50 between commercial and R&D. As we look out to 2030, it's about 2/3 R&D and 1/3 commercial. So it's almost twice the growth rate that we see in your R&D products over this next 5 years. Part of what we're excited about, as Paul has touched on earlier, is just recharging the growth engine for commercial long term. But in the next 5 years, the main story is R&D. And it is a different set of products than what got you here, as you'd expect. We think about product adoption happening in 3 phases. We've got early adopters, which is when we're first launching a product. We're building it with customers. We're focused on getting them live and happy, building the product. And then we move to the second phase, which is reference selling. That's when we get that first wave of early adopters out and evangelizing the product within the industry. And it's a small industry so folks hear when we do that. And then the last phase is market leader, and there's usually some late adopters and other folks who focus on growing with. And so some of our first R&D products are now in that market leader phase. So eTMF, CCMS, Quality Docs would be kind of headline as well as some of our regulatory suite, Submissions, Submissions Archive. The big products, I think, as you look out to 2030, are really driven in the clinical and quality space, as well as safety. So I think we talked a lot about EDC in clinical, but it's also continued growth in CTMS. Even though we're the market leader, there's still a lot of market there. RTSM is another product closely related to both ClinOps and EDC. It's one of our single largest product opportunities. So there's a lot of growth there. In quality, it's QMS and it's LIMS, which is a newer product. And then we're really excited about safety. We've been investing in that product for a number of years. It's a very deep product as we've discovered and the market moves a little bit slower on that. The benefit of slower-moving markets is they're very slow on the other side too. So we think we've got really good momentum on safety coming out of this year and over the years ahead. So those are probably the big areas in clinical, and particularly EDC and RTSM, quality, and then safety.

That's really helpful. And maybe to talk about EDC because it seems to be a continued driver of sort of near-term success in R&D for Veeva. Correct me if I'm wrong, but I think you've added 2 more top 20 customers in the past year or 2, you have 8 total now. What continues to drive the success of that product offering? And is the rate of sort of adding 2 new top 20s per year, is that a good cadence to expect for investors?

So you're right, we did add 2 top 20s. We're at 8 total. I expect we're going to continue to accelerate and become the market leader, we're on that path there. And your question is a good one, like what's driving that? Why is that happening? You know that companies spend a lot of money on the clinical trials process. It's a very important process. Obviously, it's the core of delivering medicine, creating new medicines. And to the extent that you can make that more efficient, 1%, 5%, 10% more efficient, that creates really huge value. How can I run that clinical trial fast -- clinical study faster, get it started faster, manage changes faster, analyze the data, bring all the data sets together and get results that I can create a submission from, do that more efficiently? That's why companies are moving to, EDC specifically, but in general, more broadly, the clinical suite from Veeva, right? Because we're really connecting all those pieces together. The EDC is kind of a core pillar of that, but it's not the only piece. So you found -- we have to have a better product, and we do, and that's proven in the marketplace. And that's what's driving some of the momentum that you're referring to.

And as you've mentioned, I think, in the past, EDC can unlock opportunities for sort of adjacent -- new adjacent products like ePRO and RTSM, which combined could be as large as the end-market for EDC. Can you just provide a bit more color on how EDC success can drive that newer product adoption in these categories? And then when do you expect -- or how difficult is it to sort of add on those products or sort of continue to kind of take -- gain share for some of these newer products from sort of a core product today?

Yes. So your premise of the question is accurate, right? The EDC, I would think of as the foundation of the data capture, but it's -- it's not required to do RTSM as an example. You can use our RTSM and not use our EDC. But think of EDC as kind of the core of that data capture component of the trial, and the RTSM is something that ties into the data capture because they're all related, right? You got to get those supplies and medicines to the patient so you can actually do the -- run the trial and execute on the trial itself. And then that ties into capturing information about the patient directly. And that's our eCOA. So they all fit together. And to the extent that you can have them in a unified suite where all of the pieces are talking to each other, it creates a lot of additional value. So where many of our customers, I would say, EDC is a little bit further ahead in the market than where our ECOA in RTSM is, it creates the perfect foundation to -- and then to start adding additional products onto that. And I would say it even reaches upstream into the operational side of the clinical, the clinical trial management system and that full suite of products. So they all tie together. And I would say if you buy into our clinical trial management system and you buy into our EDC, it's very likely you're going to build out the rest of the suite over time using the rest of all products.

Safety continues to be an interesting area of opportunity. And Brian, you just mentioned it's a sort of a deep area but maybe slower moving than historically. And I know Peter has definitely talked about how complicated that segment with customers are resistant to change, essentially, in safety. Are you starting to see signs of this resistance to change, softening at all? And if so, like as you've had discussions with customers, what do you think the great unlock is to sort of drive a faster rate of change in the safety market?

Yes. So it is somewhat of a conservative market where they want to get something in place and they don't want to touch it or don't want to change it. But the reality is requirements change, they have to move, they have to evolve it. And doing it with a modern cloud system like safety, like Vault Safety, is a whole lot better. So at some point, it gets to the point where it's too painful to maintain the old thing and it's much better to move at once to transform and become more efficient with Vault. I think we're at that -- we're very close to that tipping point, right? We're starting to see that. We have 3 top 20s. We've executed very well. The industry was watching. Because these are hard projects to do, right? It's a hard product to build. And it's an important process to get right. And now we're past that point. So you can kind of think of this as like the EDC market playing out. We had a couple -- we had 2 top 20 EDCs that we won. It took us a couple of years to kind of get those live and happy and referenceable and then talking up on a big stage. And we're starting to hit that point in safety. So I feel really good about where we are. And I would say the other thing we've done in safety is not only -- beyond just kind of advancing the core product, is delivering and building out the suite. So Safety Docs and Signal and Workbench, this is now very unique. It's that unique value proposition of having the suite of products all working together. So yes, we're more and more bullish on where safety is in its life cycle.

Brian, maybe for you, going back to sort of the long-term targets, since we already talked about the top line and sort of some of the drivers there. But one of the components is at least 35% operating margins in 2030. The company is on pace to finish this fiscal year with 41% non-GAAP operating margins. Where is that additional or incremental 5 to 6 points of margin going to be invested over the next 5 years?

The best way to think about that 35% is as a floor rather than guidance. So we give long-range revenue guidance through our 2030 targets. We give annual revenue guidance and annual margin guidance. So what we're not trying to say is we're on a mission to spend 5% or 6% and get down to 35%, right? It's a floor that we think of to ensure that we're thinking about both revenue and growth. And that's been a really core part of Veeva for a long time. So that 35% is unchanged since our last goals, our 2025 goal that we set in 2020. We've been consistently exceeding that. I think as you look out, there are some tailwinds to margins, right? You asked about where might we invest, but there's some tailwinds as well as we wind down the Salesforce contract, as we get general operating leverage on the business and as services shrinks as a percentage of revenue, which again is just a function of the size of the business and the renewal base growing. I think we will continue to make investments for growth. So we'll invest in new products. We've talked about the new markets initiative, we'll look at that year by year. And then our data business, which is an area that we're committed to and excited about for growth, but it does take some investment to build out a data network. So those are the predominant places that we're making investments but the 35% isn't meant to be a target that we're working towards around those, just the floor that we think of.

Yes. That's really helpful context. Okay. And then based on the conversation we've had here today so far, there seems to be plenty of opportunity for growth across the commercial and R&D segments of your core markets over the next several years. So I'm kind of curious to know a little bit more about this experiment of developing more horizontal enterprise software applications that you discussed during the Analyst Day in November. Can you provide a bit more insight into the strategic rationale here?

Yes. I'll take that one. We've been talking about this for quite a while, right? And I think probably many folks here know that we're a PBC and we think about balancing the interest and needs of a lot of stakeholders. And I think part of what that means is we think very long term as a company and want to be a generational kind of company. We've got to earn that, but we've got to put the work into doing that if we're going to do it. And so you look out to 2030, and a $6 billion revenue run rate, well, the annual growth on that starts to get pretty big. So we have to start thinking now about what that next horizon of growth is for the company. We think there's a lot of growth left in life sciences, out through 2030, beyond 2030. But you don't start a new business overnight. And so this is also about getting started on a new big frontier of growth to support what will be a much larger company after 2030. We're really excited about new markets and around entering horizontal software. We've done a lot of innovation at Veeva to date, have a perspective that there is room for innovation in horizontal markets as well. We're still mostly in the first generation of cloud software. It will be very surprising in the history of computing if the first generation was the last generation. So we think there's room to innovate, and we're starting with, as many folks here probably know, with the platform that underpins that. So we've got a very small team hard at work on that right now. We'll be later on announcing which specific applications and markets, but we're focusing on the platform first. And really excited about where this can go, but it's something quite new, and we're still very early in the inning -- in the journey on that.

Excellent. Just a reminder to the audience that we've got about 7 minutes left. If you do have questions for management, make sure to put them in the chat and we'll make sure you get them asked and answered. And we do have 1 question. So it was around -- and this is my error. It's 2025 and I didn't ask a GenAI question yet. So thanks to the audience for that. They wanted to understand, Paul, how, if at all, are you intending to monetize GenAI within the products fleet? And Brian, is there any built-in or any potential for gross margin compression as Generative AI technology grows in usage and, potentially, you got to obviously pay for that? So 2 parts there.

Yes. So I'll take the first one. So in terms of monetizing, maybe let me take a step back and kind of talk a little bit about our AI strategy. So our AI strategy is, in some areas, we're going to build -- we're going to build AI features, which are part of an existing product. So you would get them as you license a core product, and CRM is a good example of that. We announced something called CRM Bot and it's included in the CRM license. I'll explain a little bit more about that. In other cases, we'll actually have a separate product that we monetize separately, and that's our MLR Bot. That is an add-on to PromoMats. So as you buy PromoMats, you can also license the new MLR thing. Now one of the new -- one of the differences there, one of what is unique in each of those areas, MLR Bot is a licensed product but it's also our own large language model that we're building and training and running and operating on behalf of our customers. And it's kind of a stand-alone area, it's a really important area. Our customers are spending a lot of money trying to figure that out today, and not getting the value that they're anticipating. We think we can do that better. So that's an area that we are going to monetize, and that's why it's a separate product. In the area of CRM, it's a different strategy. The strategy there, many of our customers, they don't want a single model. They want to use their own model, because this is where they create differentiation. They don't want anybody like the rest of the industry. Their secret sauce is, are the insights they generate, the actions they suggest, the recommendations they make to the field team, they want to build and own and create that. So our strategy is to enable that and to make it kind of natively embedded into the CRM system. And it's -- because it's their large language model, we do not monetize that. So we'll be very specific. This is what allows us to be -- we're not taking a blunt object approach of like, you got to buy everything from us and it's -- we're going to monetize everything, and that's our main revenue driver. It's not that way at all. We're being very thoughtful about the use case. So we're excited about our AI strategy. And that's evolved over time and our customers are appreciating the direction that we're going there.

But I think again, maybe pick up the second part of the question around margins, I think that nuanced kind of 3-pronged approach that Paul talked about is really the headline in how we think about margins and why there's not really a risk to margins from GenAI. You've seen a lot of companies just launch features and hope that pays off in acquisition or retention. In general, we've aligned our strategy so that the places where we're incurring compute costs are the things that we're charging for, is sort of the mental heuristic I'd use. So we see it as a revenue growth opportunity. We don't see it as a vehicle for margin compression. And we're excited and think this is the right strategy for the life sciences industry. They've got very specific needs. You've seen things like Einstein in the past get launched and get basically no adoption because they weren't built for life sciences. So we're trying to start by really listening to our customers, how they want to use AI, what their real needs are, and then aligning the right strategy for the right use case.

Makes sense. And maybe just more broadly, Paul, I mean, are you seeing a real demand from customers for generative AI features in the product? I know we started to see use cases in -- for hospitals and health systems and in the insurance reimbursement process. But are pharma companies actually asking for this functionality?

Yes, very much so. And not surprisingly, the 2 areas that we announced are some of the 2 -- or 2 of the areas of highest demand. Like we're certainly -- we have our ear to the market, right? We know what the industry is looking to do and what they need and how we -- and we think deeply about how we can help them. So the content side is one really important area, and getting through that content review and approval process more efficiently. So no surprise that that's exactly where we announced our first product there. And then the second is in the CRM system. How do you make the field reps more productive? Can I give them a -- essentially this virtual assistant that will make them more productive, do basic tasks for them, but also answer questions for them as they prepare for a conversation with the customer. So those are some of the top 2. There are many other use cases, there's a lot of areas that we could go, but we're starting with some of the highest value.

Another one that's coming in the last couple of minutes here is around the commercial cloud sort of budgetary environment or decision-making environment. Given the importance of the CRM transition, is that distracting customers at all from looking at other innovations within commercial cloud as we think about data cloud or some of those other products? Or can you kind of roll all of that into the same sort of discussion sort of process?

Yes. So I would think about it as CRM and the suite. So all of the add-ons around CRM. And that's generally -- that's pretty stable. That's a decision where companies know they're going to make a transition so they're generally not doing a whole lot of new things. In some cases, they do. But in general, they want to keep that very stable. And then I would characterize everything else within commercial, and that area is like Crossix and Compass and Link. And that's totally independent. It's not throttle. It's not based at all on what the decision they're making in CRM or that transition. So we're seeing, and you've seen over the last year as a specific example, particular strength in Crossix. So it's very independent from the CRM decision.

Excellent. Maybe just a last touch point on M&A. Obviously, culture has been very important in terms of how Veeva has been built and continue to evolve. How are you thinking about M&A in the space, opportunities to expand in some adjacencies, whether it be on R&D or commercial? And would you -- actually, would you consider M&A on this new horizontal enterprise application as well? Thanks.

Yes. We take a very disciplined approach to M&A. You've seen us do a few things in the past. But it's a pretty high bar. Culture matters, the price of the asset matters. It's got to really fit our strategy and where we're going. And so I think as we look in the life sciences space, I wouldn't anticipate major M&A there. Been surprised before, but I think what we've talked about is we'd predominantly be thinking about M&A for our customer success rather than to drive revenue directly in life sciences. And so I think the predominant place we would look at larger M&A would be to support new markets. But it's super early there still, right? We're still building a platform, still picking which markets we want to enter. And so we're going to take a disciplined approach there too. The bar remains really high. It's got to be a high-quality asset, good culture fit for Veeva. Right price, right market for us. So we'll start with the platform, think about the markets, and then think through whether M&A is the right vehicle to support that.

Awesome. All right. Well, with that, gentlemen, we're out of time. Paul, Brian, Gunnar, thank you so much for joining me today. Thanks to the audience for participating and for some great questions as well. But we'll leave it there. And have a great rest of the conference, everyone.

Thanks, Ryan.

Thanks, Ryan.

Thanks, Ryan.