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Edited Transcript of MDSO earnings conference call or presentation 26-Oct-17 12:00pm GMT

Q3 2017 Medidata Solutions Inc Earnings Call

NEW YORK Oct 28, 2017 (Thomson StreetEvents) -- Edited Transcript of Medidata Solutions Inc earnings conference call or presentation Thursday, October 26, 2017 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Anthony D'Amico

* Glen M. De Vries

Medidata Solutions, Inc. - Co-Founder, President & Director

* Rouven Bergmann

Medidata Solutions, Inc. - CFO & CAO

* Tarek A. Sherif

Medidata Solutions, Inc. - Co-Founder Chairman & CEO

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Conference Call Participants

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* Alexander Yearley Draper

SunTrust Robinson Humphrey, Inc., Research Division - MD

* Brian Lee Essex

Morgan Stanley, Research Division - Equity Analyst

* Donald Houghton Hooker

KeyBanc Capital Markets Inc., Research Division - VP and Equity Research Analyst

* James John Stockton

Wells Fargo Securities, LLC, Research Division - Director & Senior Equity Research Analyst

* Peter Marc Levine

Needham & Company, LLC, Research Division - Research Associate

* Sean William Wieland

Piper Jaffray Companies, Research Division - MD and Senior Research Analyst

* Sterling Auty

JP Morgan Chase & Co, Research Division - Senior Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Medidata Q3 2017 Conference Call and Webcast. (Operator Instructions) As a reminder, today's conference is being recorded. I would now like to introduce your host for today's conference call, Mr. Anthony D'Amico. You may begin, sir.

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Anthony D'Amico, [2]

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Thank you, Kevin. Good morning, everyone, and thank you for joining Medidata's Third Quarter 2017 Conference Call. On the call today, are Tarek Sherif, Chairman and Chief Executive Officer; Glen de Vries, President; Rouven Bergmann, Chief Financial Officer; and our Chief Operating Officer, Mike Capone. Tarek, Glen and Rouven will offer comments on our Q3 performance followed by our outlook for 2017, then we will open the call to questions. The team will take as many questions as possible in the time allotted.

Now let me take a minute to remind everyone, that elements of this presentation are forward-looking and based on our best view of the business as we see it today. I refer you to our detailed disclaimers set out in the press release and our filings with the Securities and Exchange Commission.

Forward-looking statements are subject to risks that could cause actual results to differ from our expectations. We disclaim any obligation to update or revise forward-looking statements. We will also discuss some non-GAAP financial measures that we think help to explain our underlying performance. Today's press release provides a reconciliation of U.S. GAAP to these measures.

Before we begin, I'd like to announce that we'll be hosting our 6th Annual Financial Analyst Day on November 9 in New York City during Medidata NEXT, our annually -- our annual customer event. The live event will include presentations by management, product demos and a question-and-answer session. As usual, we'll also be simultaneously webcasting the event on our Investor Relations website, and a replay will be available shortly afterwards. With that, I now like to turn the call over to Mr. Tarek Sherif, Chairman and Chief Executive Officer of Medidata. Please go ahead, Tarek.

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Tarek A. Sherif, Medidata Solutions, Inc. - Co-Founder Chairman & CEO [3]

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Thank you, Anthony, and good morning, everyone. Operationally and with regard to many financial metrics, I think Q3 was another excellent quarter for us. Our importance as a strategic partner to industry continues to grow with record adoption trends, highlighting customer commitment to our business. In what was an otherwise well-executed quarter, a slight miss in revenue and lower rest of your backlog coverage are not indicative of any concerning trends. In fact, they are due to mostly timing-related events as Rouven will detail shortly. We've always managed the company with a long-term focus and with an eye to maximizing value. This quarter was no exception.

I'm pleased that we can point to many positives in the quarter, including healthy profitability, cash flow and very strong bookings. And we're rapidly closing in on the 1,000 customer mark, which is a testament to our role as the industry leader. Our integrated solutions continue to gain traction with some important wins in data and analytics, regulated content management and Patient Cloud. The growth of our multiyear backlog, which I'll touch on shortly, validates our role as well as highlighting the trust our customers place in us, and it sets the foundation for healthy growth in 2018 and beyond.

Now let's start with our business results. Q3 revenue was just over $140 million, up 17% year-over-year, and GAAP net income came in at nearly $13 million, up 75% year-over-year. Non-GAAP operating income was $36 million, up 23% year-over-year, and our EBITDAO margin improved to nearly 26%. So we're continuing to see our operating model scale even as we invest in our business.

In terms of forward-looking metrics, we're building a solid foundation for future growth. Bookings were up over 170% in the quarter and are up 75% year-to-date, leading to an increase of 57% in multiyear backlog. Year-to-date, we signed 10 deals greater than $10 million in value, of which 3 were in the most recent quarter. Our results were driven by several above run rate platform renewals and adoption of several strategic offerings, which I'll touch on later.

Despite the fact that we're seeing some impact from industry consolidation on our direct CRO business, our indirect channel business continues to be very healthy, with bid size up 20% and bid activity at record levels year-to-date. For over 18 years, we've focused on building leading-edge technology in our industry. Our customers trust us with their most valuable assets, their trial data. They are showing their confidence in Medidata by adopting more of our solutions and extending the duration of their renewals, typically for 3 to 5 years. Through the third quarter, we see customers renewing with run rates that are 17% higher, reflecting volume increases and incremental product adoption. This quarter, we renewed our largest customer for a multiyear term and at a meaningfully higher run rate. We also renewed (inaudible) to a multiyear agreement for both our core products such as Rave, Safety Gateway and Insights. And for our data analytics offering CSA to help with their outlier signal detection.

The Asia Pacific and EMEA markets continue to contribute meaningfully to our growth. APAC had a great quarter driven by the top CROs in China, who are rapidly adopting Rave, Balance and Patient Cloud. In fact, more than 10% of our customers now come from high growth APAC region.

EMEA had a strong third quarter as well. It's strategically important to us. And in October, we opened our new Hammer Smith London office to drive future growth.

Platform products are playing an important role in our growth. For example, the annualized revenue run rate for risk-based monitoring, data and analytics and Patient Cloud is nearly $70 million. And given the high-growth rate and innovation we're bringing to market, we expect these solutions to hit $100 million run rate in the not too distant future. Equally impressive were Q3 bookings, which were at record levels, up nearly 70% year-to-date.

Looking at some specific proof points in data analytics. We signed a landmark agreement with Roche to help them reuse control patients in oncology studies and in collaboration with other oncology drug developers, across multiple indications. While Glen will share more details with you shortly, this is a great example of how we're monetizing our unique data assets to create value in new and innovative ways and how we can help revolutionize how our industry thinks about study design. It's good for our customers and great for patients.

We're now also seeing more industry recognition for synthetic control arm offering as it's up for a 2017 Scrip Award. Similarly, it's exciting to see our most advanced data analytics offering starting to be adopted globally. The European Organization for Research and Treatment of Cancer, an international nonprofit org, recently selected Medidata's platform. It's inclusive of next-generation sequencing genomic data ingestion to pilot the use of genomic biomarkers and precision medicine when evaluating innovative molecules. Their goal is a shortening of time between discovery and use, a mission we share. Patient Cloud demand is growing, and is beginning to contribute meaningfully to our results as well with Q3 bookings up nearly 6x. Six customers adopted Patient Cloud in Q3, and it's one of the drivers feeling our growth in Asia Pacific. U.S. regulators, like Janet Woodcock, Director of the FDA Center for Drug Evaluation and Research, are pushing to modernize trials and explore the use of real-world evidence in submission, which should help drive Patient Cloud adoption even faster.

It's also worth highlighting our regulated content management solution, where we are seeing some early success. We've had several customers adopt SOP management, eTMF and RCM [R-cut . For example, Horizon Pharma, a global pharma company, selected our eTMF in what was a competitive situation. The power of our platform stood out as they're also using Rave, CTMS, Balance payments, TSDV, Safety Gateway and CSA. They'll be able to realize value on lots of dimensions as they streamline their clinical research process. It's a great proof point of how an integrated platform with broad capabilities that are available today creates a competitive advantage. While we certainly got more work to do, we're moving quickly to bring more innovation to market.

Speaking of bringing innovation to market. We have 6 customers choose our Payment solution in Q3, all in competitive situation. We're just getting started there and we'll have more to share soon.

As we start to focus on 2018, I'd like to take a moment to share my views on the state of our industry. We're at the beginning of an astounding and fundamental transformation of the healthcare industry, driven by massive amounts of data, greater patient involvement and quantifiable patient outcomes. This is creating tailwinds for us and potential opportunities well beyond our current markets. For example, Medidata's platform is playing a key role in helping our customers align their clinical development plans with the goals of the FDA's 21st Century Cures Act. This includes using adaptive approaches, levering real-world data, predictive algorithms, simulation models, seamless trial designs and master protocols across different targets.

Taking a more global perspective, China has the second largest spend on medicine worldwide. Recently, the China FDA has started to focus on accelerating the launch of drugs in country. New regulations allow overseas clinical trial data to be used for drug registrations, if the drug has received overseas approval. In addition, the CFDA has introduced data standards that comply with FDA's CFR Part 11. Their continuing policy changes should favorably boost clinical activities and have a positive domestic and global impact benefiting us.

Before I close, I want to congratulate and thank all of our employees. Medidata was chosen for the Fortune Future 50 Challenger List. Companies are chosen based on their long-term market potential, their strategy, people, technology and investments and corporate culture. Thank you. You're the ones who made this happen and made Medidata the kind of special company that it is. And speaking of our employees, we conduct an annual survey of employee engagement. I'm extremely proud of our recent engagement score of 88%, that's 15% higher and above average versus our peers and 3 points higher than last year. And I'm particularly proud that 95 -- 94% of our employees strongly believe in our vision and mission at Medidata.

In closing, we're on track for a good year, and I feel positive about our outlook for 2018. The core of our business is healthy and our technology expertise and analytic offerings are truly innovative, driving value for our customers in a rapidly changing market. We entered Q4 with a healthy pipeline and significant opportunities in 2018. We'll be focused on execution and closing out the year with a strong finish, laying the foundation for healthy growth and profitability in 2018. Now I'll turn it over to you, Glen.

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Glen M. De Vries, Medidata Solutions, Inc. - Co-Founder, President & Director [4]

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Thanks, Tarek. I am going to give you some more detail and data supporting those highlights Tarek just gave you, and it will illustrate the differentiation and broad and deep capabilities in our platform. So first of all, I'm going to talk about that in the context of precision medicine and the research that makes it a reality. We'll use oncology as example. It's a good one because it's the largest therapeutic area in life sciences right now, and also because there is a rich exciting pipeline of oncology treatments coming. These are compounds that are often highly targeted. In many cases, they are truly personalized and driven by genetics, like the recent FDA CAR-T approvals. So the precise and specific nature of these drugs, the way they are connected to biomarkers, means that their development has increasing needs for combining data that comes from the clinic, from labs, from medical images, from mobile health devices and from genomics. We integrate all of that natively in the Medidata Cloud, and we automatically integrate it with advanced analytics. So let me put all that a simpler way.

Precision medicine requires biomarkers. Medidata is the platform for biomarker-driven drug development. And to be clear, biomarker-driven precision medicine is increasingly impacting virtually every therapeutic area and indication, so it's well beyond oncology. Now, while all these targeted therapies are driving tremendous value for patients and for our clients who are creating them, they also inherently create scarcity in patient pools. Precision medicine by definition is segmenting patients into ever-narrowing subgroups. We help our clients run faster, cheaper, clinical development programs, while simultaneously meeting the requirements for bringing these targeted therapies to market. One of the ways we do this as an example is with these synthetic control arms that Tarek mentioned. So, again, let me put it simply. Synthetic control arms reuse the data from patients enrolled in one clinical trial to support the conclusions of other trials. The continued work we're doing with Roche and others uses a live, shared cross-industry clinical data repository to accomplish that. This is the future of life sciences that regulators have been calling for, that patients benefit from and that our clients need. And to be fair, our clients have wanted this for a long time, but finally, Medidata is pioneering a way to actually respond to that need. Actually, we're using real patients' data across multiple clinical trials.

Our patient data pool has about 3.7 million patients in it. That number goes up every day. I want to point out that this data is fundamentally different than EMR or claims data. What -- the people in our industry will refer to as real-world data. When you hear about these real-world data assets, people talk about numbers of patients in the tens and hundreds of millions. We do see a huge role for incorporating that EMR and claims real-world data into trials. In fact, we're doing exactly that in our own R&D. But the research data that I've been talking about is different than real-world data. It's exquisitely detailed, it's gathered in a controlled environment, and it meets the demands of scientists and regulators. Our data pool, which is on its way to 4 million patients, is the largest high-quality research repository we know of, that's ready for this kind of cross-industry use. It is going to be an incredible driver of new science and it's going to help catalyze the utility of all those other sources of real-world data.

Just as an important side note. Those data capabilities, those data assets are also what makes us a great platform for the collaborative research that Tarek was mentioning. We're going to talk more about that at the upcoming Medidata NEXT conference. We'll do it in the context to one of the most recent and most compelling platform studies -- the Leukemia & Lymphoma Society's Beat AML Master Trial.

Now let me move from the scientific to the operational. All these new models for research are also driving new engagement and business requirements. Let me give you 3 examples. So let me start with patient engagement and that's related to our acquisition of Mytrus earlier this year. Mytrus is an electronic consent capability, replaces a pile of paper that patients would read and sign when they volunteered for a clinical trial. I want to be clear, not all eConsent is created equal. There are incremental, evolutionary approaches that, take that pile of paper and put it on the screen and then people can sign it electronically. We have a revolutionary interactive tool. It actually engages and educates the patients. It's a rich, multimedia, digital experience and now it is deeply integrated into our platform.

From a corporate perspective, the integration of Mytrus into Medidata is done, and it has gone terrifically well technically, operationally and culturally. And when I'm talking about the technical integration, I mean, eConsent is now fully integrated with Rave. That means that a patient can be electronically consented, enrolled in a study, randomized to a treatment and receive their first dose of drug, all during one clinic visit, all seamlessly. There is no other company and there is no other collection of disparate technologies that can accomplish that. And from a traction perspective, we've got 14 customers, who've already adopted eConsent since we made the acquisition.

Example #2, regulated content management. This is the other acquisition we did this year CHITA. CHITA was the company we found that took the most modern approach to regulated content management in that market period. CHITA's integration is also complete, technically, operationally and culturally, and we are delighted with our momentum as you heard Tarek talking about. From his comments from today's press release, you can see, we've got our first client using all 3 of the modules that we now have available, electronic trial master file and our CM archive and SOP management. And with them, that brings us to 5 clients on the Medidata-regulated content platform, since we made it generally available, which was just this summer.

And that modern approach that I was talking about is taking our regulated content capabilities and building them on top of the best enterprise content management platform available, which is Box. We've got a great relationship with Box. Thank you, again, to them for featuring us at Box Works couple of weeks ago in San Francisco. And together, Box and Medidata, are delivering the only platform, where you can have regulated content and non-regulated content, that seamlessly integrated, it's all stored together and searchable and it's connected to the scientific and operational capabilities that are necessary to actually run a clinical trial.

My third example, my last one, I'll give you is a result of our organic development. It's our focus on clinical operations and monitoring in our new strategic monitoring capabilities. Monitoring can be a third of a trial's cost. And trying to do that differently and better has been a focus of regulators, CROs and sponsor companies around the world. Now we already had the most comprehensive offerings for targeted monitoring and various components of clinical operations in the market, but we are releasing a curve jumping, strategic monitoring capability at Medidata NEXT on November 9. It includes the broadest, best integrated capabilities for the new generation of clinical operations. That includes risk-based monitoring, which is what you keep hearing regulators calling for. It includes risk management within studies, risk management across clinical development programs, tools to harmonize risk management across the R&D enterprise, and it's got integrated capabilities for everything from planning to the execution of that next-generation of clinical operations. And it's seamlessly integrated with Rave, with our CTMS modules and with every other part of the Medidata platform. It also includes the industry's only machine learning capability for making adaptive monitoring function as efficiently as possible.

Quick spoiler alert for anybody who's coming to Medidata NEXT. The absolutely incredible data handling capabilities that our tech team built, allows the strategic monitoring capability to be deployed on studies across the Medidata platform, as you'd expect as well as studies run on competitive products. I know a lot of people on the tech team are listening, you guys are awesome. So it is certainly better, faster and easier if you're doing the whole thing on Medidata, but we have now made the entire universe of clinical trials, our strategic monitoring target market. That is incredibly important for sponsors who are transitioning to Medidata from other technologies. And it is also key to being the platform of choice for the CRO industry.

With that, I'll turn it over to Rouven.

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Rouven Bergmann, Medidata Solutions, Inc. - CFO & CAO [5]

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Thanks, Glen, and good morning, everyone. As you've heard from Tarek, our financial and operational performance year-to-date clearly reflects the positive long-term momentum of our business. In the third quarter, we delivered $140 million of total revenue, 140 basis points of EBITDAO margin expansion and year-to-date operating cash flow growth of 89%.

Our revenue trajectory was slightly lower than expected at 17% year-over-year and 2% sequential growth. This was the result of a couple of specific factors. First, seasonality. While not uncommon in Q3 had a bigger impact than we expected with bookings trending behind linearity in the first 2 months, but picking up good momentum in September. In addition, we saw lower contribution from our direct partner business as a result of industry dynamics that are driving the consolidation of large CROs. This is temporary and limited to a few partners who are in the process of integrating their businesses after recent M&A. It's only logical that investment decisions are being sized and scoped in this context. And let me be clear, while this caused a temporary slowdown in Q3, this particular trend represents a tremendous opportunity for Medidata. And here is why. As supported by recent industry research, CROs need to invest in technology that enables economies of scale and differentiation through big data and analytics. Medidata is uniquely positioned to provide the technology platform and analytic capabilities to deliver on this requirement. More broadly and related to the velocity of the partner channel, I'd like to underscore that we see continued strength as documented in the significant uptake in [feeding] activity.

Finally, you may recall that Q2 included an element of revenue pull forward from Q3 in our service business. Now with that said, let me be clear that the key drivers of our business continue to be strong and broad-based and draw your attention to the fundamentals that reflect the health of our business. First, total subscription bookings increased more than 170% in Q3 and 75% year-to-date. What's important here for you to understand is that our customers are signing longer-term contracts, which clearly shows that they are -- that they share our vision and trust our ability to execute by making long-term commitments. From a regional perspective, we, again, saw triple-digit growth in China.

Q3 renewals were outstanding, but upsell driving total multiyear backlog up 57% year-over-year to $900 million of unadjusted backlog. This includes renewing one of our largest customers above par. Overall, the net increase in annual bookings from renewals is 17% year-to-date. And we are currently approaching 1,000 total customers, representing a strong trend and momentum in the industry in favor of Medidata. We are also signing larger deals with high-product density. And comparing the total subscription bookings of our 10 -- top 10 tiers for the first 9 months in 2017 versus 2016, we're up by more than 125%. And overall, customers with more than 4 products are up by 30% year-over-year.

I would like to call out a few highlights that show our progress in helping the life sciences industry to extract value from data. Just 4 months, after our breakthrough presentation at ASCO, we signed our first synthetic control arm customer. Why is this important? Because it shows the scientific relevance of our data assets as sponsors look for new ways to speed up time to submission, and it exemplifies Medidata's pace of innovation.

Revenue from data analytics, risk-based monitoring and Patient Cloud combined is up by more than 70% year-to-date. Patient -- Payments, Patient Cloud and regulated content management continue to build nice momentum as we transition into Q4 in 2018 with 16 deals signed in Q3 alone.

Now with this in mind, let's turn to our Q3 results. I will focus my prepared remarks on key financial highlights. Q3 total revenue was $140.1 million, up 17% year-over-year, driven by the trends mentioned earlier. Year-to-date, total revenues up 19% year -- over last year. Subscription revenue was $118.4 million for the quarter, up 17%. Professional services revenue was $21.7 million, also up 17% year-over-year in Q3. And once again, our services business came in very strong, benefiting from healthy demand across many customers implementing the platform, data analytics and strategic services.

Q3 GAAP gross margin was 77.5%, up 70 basis points sequentially and 180 basis points year-over-year, primarily driven by a strong subscription margin of 85.5%, up 130 basis points. This solid expansion clearly underscores the strength of our business model as our focus investments deliver scale in less than 12 months. In addition, services' gross margin continues to be very healthy at 33.4% for the quarter due to high utilization.

Before moving down the P&L, I want to note that our GAAP operating expense and profits included a pretax benefit of $4.8 million or $3.1 million after taxes, related to a recent favorable Court ruling, which entitles us to insurance recovery of the wire transaction loss, we recognized in 2014. This benefit is excluded from our non-GAAP metric.

Our operating profit continues to expand at an increasing rate, while at the same time, we are investing in future growth through innovation. Total headcount is up 15% year-to-date, with the majority of hires focused on accelerating our product road maps. Q3 EBITDAO increased by 23% year-over-year to $36.2 million, and EBITDAO margin increased 140 basis points to 25.8%.

GAAP net income for the third quarter was $12.8 million or $0.21 per diluted share, up 75% year-over-year. Excluding the insurance recovery benefit on a pro forma basis, net income would be $9.7 million or $0.16 per diluted share, up strong 32%.

Now let's talk about the balance sheet and cash metrics and some very positive trends. First, operating cash flow was outstanding in Q3 at $30.9 million compared to $5.3 million in Q3 last year, driven by strong billings and cash collections of over $140 million. On a year-to-date basis, cash from operations totaled $91.6 million, up 89%. We ended the quarter with $540 million in total cash and investments, up $38 million since the beginning of the year with already 2 acquisitions completed to date.

Calculated billings, defined as revenue plus the change in deferred revenue, were impacted by the timing of billings for one larger customer that shifted from Q3 into Q4, contractually. Normalizing for this one customer, on a trailing 12 months basis, calculated billings increased 22% year-over-year to $543 million. As expected, DSO trends reflect continued improvement during the quarter. DSO at the end of Q3 includes a benefit due to the timing of the customer billing that shifted into Q4 as mentioned. Normalizing for this, DSO on an adjusted basis was 63, reflecting an improvement of 3 days sequentially and 18 days year-over-year. As we have discussed on prior calls, we expect DSO to remain consistent over time in mid-60. Q3 CapEx was approximately $40 million.

Now let's turn to our backlog and visibility for the remainder of 2017. As you see in this morning's press release, we are not changing our existing revenue and profit guidance ranges. We ended the quarter with $117 million of remaining 2017 adjusted subscription backlog, up 15% year-over-year. It is important to note that a significant portion of the upsell from renewals, that I mentioned earlier, does not take effect until 2018, and therefore, does not contribute to our rest of year backlog. As a result of this one quarter delay in revenue contribution and lower-than-forecasted Q3, we now expect to come in about 1% below the midpoint of our total revenue guidance for 2017.

So what should you all take away from this call? First, our strong profit and cash flow expansion in combination with continuous high growth and total committed future cloud revenue of $900 million, reflects the scale of our business and enables us to make sustained investments, focused on long-term growth. Second, we are seeing breakthrough commercial value in our data assets to shape the digital future of drug development and life sciences more broadly.

Finally, as of September 30, adjusted backlog for next year, 2018, is up 20% compared with 2017 backlog at the same time last year. This healthy growth is in part driven by a strong contribution from the Q3 upsell, which take effect starting in January 2018. Even though it's too early to talk about next year, we are confident and focused on executing a strong Q4, which will set the foundation to continue our momentum and accelerate subscription revenue growth in 2018 and far beyond. I look forward to see you all at our Financial Analyst Day to continue the conversation about our long-term opportunity and execution. Thank you, and we will now be happy to take your questions to start today's conversation.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Sterling Auty with JPMorgan.

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Sterling Auty, JP Morgan Chase & Co, Research Division - Senior Analyst [2]

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I missed the -- I am having phone issues, if you outlined it, but did you quantify the impacts of the direct CRO on the subscription business?

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Tarek A. Sherif, Medidata Solutions, Inc. - Co-Founder Chairman & CEO [3]

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No. We didn't put a number out.

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Sterling Auty, JP Morgan Chase & Co, Research Division - Senior Analyst [4]

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So can you help us look at the lever. So you've given us 1% below the midpoint now, that's obviously going to have an impact on subscription revenue in the fourth quarter. Can you help us kind of quantify those magnitudes? Were you always expecting some of these renewal increases and the strong bookings to take effect in 2018, that's why we're kind of getting this little bit of an air gap between now and the first quarter, or just walk me through that timing?

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Rouven Bergmann, Medidata Solutions, Inc. - CFO & CAO [5]

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Yes Sterling, I'm happy to do that. And I think you've mentioned already the 2 key drivers here. The first one is the start date in 2018, and we had a couple of a few concentrated customers that are starting in 2018. And I think the important part for you to know is that, the economics of those deals are very healthy, and they're driving strong subscription growth in 2018. But there isn't anything specific that I can point to, that drove these decisions or something that I would say that is systematic, no. There were a few customers that simply started -- starting their uptick and renewal starting in 2018. And so there isn't any underlying trends that I can point to. It was just more in this quarter than it used to be in other quarters before. And that drives the majority of the impact on backlog in the fourth quarter, right? And if you look at our numbers and you see the 1%, which ultimately gets you towards the midpoint or new number, which is around 545, which is a debt of $5 million, that delays the majority of -- the delay of this is the majority of that $5 million. You see, we missed the quarter by about $1 million in Q3, which was really due to some timing effects that we pointed to, of which one of it is -- some of the CRO deals that slipped simply because their focus is now on integrating the businesses and figuring out how they can get scale as fast as possible and we are part of those conversations. And that's going to drive for us business in the midterms, that's a net positive. So I think that's summarizing the impact.

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Sterling Auty, JP Morgan Chase & Co, Research Division - Senior Analyst [6]

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So the CRO business is at loss. It's just shifting to the right?

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Tarek A. Sherif, Medidata Solutions, Inc. - Co-Founder Chairman & CEO [7]

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Absolutely not. And we made a point of saying the indirect business is on fire. So there are couple of companies in particular that did deals fairly recently, where we have in fact a very strong competitive position. And we expect business to pick up dramatically, but they're going through integration.

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Sterling Auty, JP Morgan Chase & Co, Research Division - Senior Analyst [8]

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Got it. Last question, CSA. How did you ultimately decide to price for it?

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Glen M. De Vries, Medidata Solutions, Inc. - Co-Founder, President & Director [9]

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The CSA is -- what we used to call CSA is now in a bunch of different parts of the platform. So it's not that I'm trying to avoid answering the question, but the fact of matter is, some of that is now part of what's in strategic monitoring. We have some -- actually service offerings still will actually run CSA for you on your data and you see CSA, I think Tarek mentioned a whole bunch of them as part of people's platform deals. So there is not a direct way to answer that question.

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Tarek A. Sherif, Medidata Solutions, Inc. - Co-Founder Chairman & CEO [10]

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Let me give you some qualification around it. It's a really unique offering as are -- we talked a bit about synthetic controls. There are no other companies that can do this or have the data assets that allow you to do it. So you would imagine that pricing is commensurate with the fact that it's not a commoditized product. So we're seeing price points that are dramatically above, what we had historically seen for Rave.

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Operator [11]

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Our next question comes from Donald Hooker with KeyBanc.

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Donald Houghton Hooker, KeyBanc Capital Markets Inc., Research Division - VP and Equity Research Analyst [12]

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Wanted to kind of refocus on that total backlog number, which looked impressive. And I just maybe for my benefit and perhaps others, kind of walk through the difference between kind of that and what you have in your adjusted subscription or just your regular subscription backlog, which I understand covers just the fourth quarter, but kind of maybe some of the products in that, the mix of that kind of as we think about that burning out through 2018 and '19?

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Rouven Bergmann, Medidata Solutions, Inc. - CFO & CAO [13]

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Yes, absolutely. I'm happy to do that. Great question, Don. The total subscription backlog that I referred to, which is $900 million and up 54% year-over-year, that's really are the future cloud subscription revenue that we have contracted. And it does not include any renewals. So that's what we carry in our book over the period of time of those contracts. And that number has now been up over the last quarters steadily. And again, this quarter year-over-year by 54%.

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Glen M. De Vries, Medidata Solutions, Inc. - Co-Founder, President & Director [14]

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57%. Sorry.

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Rouven Bergmann, Medidata Solutions, Inc. - CFO & CAO [15]

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Okay. And from an adjusted backlog perspective, the -- for the fourth quarter, what we have here included is, that is our -- the value of contracts that is -- that we have on our books for the fourth quarter, adjusted for renewals, that we are signing in the fourth quarter. So the $117 million is -- we always reflect our renewals at par value, to know that we've signed to date. The run rate at 17% higher than the par value, so that always drives incremental, while it's an opportunity for us at renewal to sell more of our product. Specifically, like we talked about data analytics, that's a catalyst for growth right now. It's a huge opportunity, every renewal customers are going through the opportunities for them to transform their business with our technology. And I think that's the answer to your question.

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Donald Houghton Hooker, KeyBanc Capital Markets Inc., Research Division - VP and Equity Research Analyst [16]

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Okay. And maybe I'll just throw in one another one. The other one that jumped out to me is the gross margin on subscriptions. Obviously, a nice lift there. I understand there were some temporary headwinds last year and you are kind of normalizing back. But if I -- thinking about going forward here, I guess I go back -- I guess we've seen that get in the 86%, 87% range, how long would it take you to get there? Is there an opportunity to go higher than that over time?

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Rouven Bergmann, Medidata Solutions, Inc. - CFO & CAO [17]

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Yes. No -- that -- I think what this point, you're pointing to for us, what's really driving this is the increasing subscription revenue growth and that was a very high -- very healthy and high margin. And as the mix shifts towards higher subscription revenue, that will have a very positive impact on our overall gross margin. And on the investments we've made for some of the data center in Germany, that's, of course, now starts to pay off. And it's -- what's really important to see is that the cycles until we see the return on investment are less than 12 months. So we make these decisions and you see then with a delay of 6 to 9 months reflected in the scale effect in our margins. Now 2018 will be a next step for us, but it's -- it's too early now to give you an outlook on the subscription margin at this point, but we are in a very good position.

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Operator [18]

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Our next question comes from Sean Wieland of Piper Jaffray.

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Sean William Wieland, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [19]

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I'd like to ask about your synthetic control arms. How many clients are participating in this? And can you kind of just break it down for us and compare and contrast this data pool versus the other data pools in the market on real-world evidence? And can any of this be used for clinical trial recruitment?

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Glen M. De Vries, Medidata Solutions, Inc. - Co-Founder, President & Director [20]

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Okay. So I'll start with the very last question. Yes, real-world claims, EMR data will be really interesting for clinical trial recruitment. One of the things that we actually have -- and you'll see more of this at Medidata NEXT if you come to the Analyst Day. We're starting to help people in addition to how you might identify patients in real-world data, use the operational and clinical data assets in our clinical data repository to do a better job of selecting sites based on their historical performance. All those kinds of data are good for solving patient recruiting problems.

In terms of our data itself, here is the way I like to think about it. I'll try not to get too technical around this on the call, but claims data is very long view of a patient's history. Electronic medical record data is not quite as long as Claims data from years, but is relatively deep because you've got actual medical data in there. In a clinical trial, you have the deepest, probably most complete view of a patient that you can find anywhere in the world and it's been collected under the hospices of a protocol that is trying to ensure the breadth of that data collection. Even though it's only for a short period of time. That makes it very unique. And we have now multiple offerings. The Synthetic Control Arms are one of them, where the -- basically rules are, you have to contribute to the de-identified and [nonimized] repository to be able to consume any services based on that. So it's fed by companies who are doing any kind of clinical data benchmarking on our platform. Again, synthetic control arms are the most exciting and I think transformational thing that's coming out of that, but that's how that pool grows. So most clients start new renewals, new contracts contributing to that pool. Did that scratch get to your question?

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Sean William Wieland, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [21]

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Yes, it did. Except can you give us a sense of how many clients are participating in the pool?

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Glen M. De Vries, Medidata Solutions, Inc. - Co-Founder, President & Director [22]

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I don't know the total number. I think.

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Tarek A. Sherif, Medidata Solutions, Inc. - Co-Founder Chairman & CEO [23]

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It's just a handful at this point. Remember, this is something that's pretty new for us.

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Glen M. De Vries, Medidata Solutions, Inc. - Co-Founder, President & Director [24]

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We're doing synthetic controls, but it's about 2/3, I think of our total data volume across all of our customers that are contributing to that pool and it keeps going up. Because as I said the default is, the people are taking services and contributing to that data. But yes, the days of people using that asset in synthetic controls are just getting started.

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Sean William Wieland, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [25]

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Okay. And do you have any clients yet that are using your risk-based monitoring on non-Rave platforms that you mentioned with Medidata NEXT?

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Glen M. De Vries, Medidata Solutions, Inc. - Co-Founder, President & Director [26]

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Yes. And you'll see a lot more. (inaudible)

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Operator [27]

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Our next question comes from Jamie Stockton, Wells Fargo.

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James John Stockton, Wells Fargo Securities, LLC, Research Division - Director & Senior Equity Research Analyst [28]

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Maybe just one quick one to follow up on John's questions with the synthetic controls. Are we mostly going to see that in Phase I trials kind of until people get comfortable with it and then maybe it will progress?

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Glen M. De Vries, Medidata Solutions, Inc. - Co-Founder, President & Director [29]

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Yes. So I wouldn't bucket it to Phase I, but I will tell you that we're seeing it used right now for people who are making portfolio decisions. I'm developing a drug and I want to convince myself that the response I'm seeing, the value of my drug is real. The next step for us -- and you can do that certainly with Phase I -- Phase I/II data. We expect that people will begin to. And frankly, we have former FDA reviewers who are on the team who built it. We certainly will begin to now start to use it for not just portfolio management decisions, but to actually bring to regulatory agencies as part of the evidence of efficacy. This is what Tarek was referring to as being in line with 21st Century cures. Which is saying, streamline your clinical development activities and bring other data, real-world and other research data to us to show your conclusions. So that's where this is going to go. It's also why we mentioned these collaborative trials. So if you look at things like the AML or some of the older collaborative trials, that are still going on and frankly fantastic for patients and companies running them like I-SPY 2 is the famous one I always used to talk about. The way these trials work is by in a particular indication, they make a pool of patient data. The fact that we can now harmonize and pool patient data across effectively any indication means that we can start to help our clients get the benefits of that kind of collaborative clinical trial without in the future having to go through all of the processes and organization of dealing with these master protocols. That is pie in the sky, future state, but we've got the building bricks to actually make that a reality. And so that will also influence the way it gets used as you think about evaluating your drug even in a Phase III context.

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James John Stockton, Wells Fargo Securities, LLC, Research Division - Director & Senior Equity Research Analyst [30]

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Okay. That's great. And then maybe just one quick one. You did the CHITA deal and Mytrus earlier this year, both small tuck-in, sounds like both are doing well. Can you just give us some sense for what the pipeline looks like on that front? Are there specific areas as far as functionality that you guys are looking at for more tuck-in acquisitions?

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Tarek A. Sherif, Medidata Solutions, Inc. - Co-Founder Chairman & CEO [31]

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So first of all, the pipeline looks really robust. It's one of the things -- I think we commented it on the last call. eConsent surprised us out of the gate and continues to surprise us and some fairly large deals too. These aren't just one-offs. Same thing, you heard we're getting some real good traction on content management. We think we're competitive. And we think we actually have a better offering, and that's what we're getting the feedback from the market. So pipelines healthy there. In terms of other things that we're looking at obviously for competitive reasons, we're not going to comment on those. But clearly, we see a lot of opportunity. We talked about some of the high-level trends that are happening. And we are actively looking in areas that we think will be expansive to our overall business in TAM.

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Operator [32]

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Our next question comes from Brian Essex with Morgan Stanley.

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Brian Lee Essex, Morgan Stanley, Research Division - Equity Analyst [33]

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Rouven, I was wondering if I could follow on to a question that I think Sterling and Don both touched on, maybe put a finer point on it. As we look in -- I think next year, you commented that you anticipate an acceleration in subscription revenue growth. How much visibility do you have in that? And maybe put a context around that, is that off of the full year 2017 number?

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Rouven Bergmann, Medidata Solutions, Inc. - CFO & CAO [34]

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Yes. Thanks, Brian. I'm happy to give you some additional color. I think the best way to phrase this is, if you look at our -- and I mentioned that in my prepared remarks, if you look at our backlog, subscription backlog as of 9/30 for starting 2018, that's up 20% year-over-year. I think that gives you an indication in terms of the momentum we have billed to date by Q3. We know Q4 is always an important quarter for us. You heard the confidence on the call from all of us about the pipeline, the momentum, the products we're reaching some tipping points in data analytics. And so that's creating the momentum for us to set us up starting 2018 for healthy growth that will come. As we sit here, based on our expectations to date, with acceleration subscription revenue.

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Brian Lee Essex, Morgan Stanley, Research Division - Equity Analyst [35]

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Got it. And maybe if I could follow up with -- your last Analyst day, you talked about future revenue growth coming from -- higher percentage of future revenue growth coming from greater density and intensity. And now that you're penetrated substantially in the top 25 pharma customers, how do we think about scale and sales and marketing? Should we think about maybe substantially better sales efficiency going forward and maybe a switch to greater R&D spend as you build out these new products, or just trying to think about long-term margins and how you can manage that going forward? And where are you going to get some tailwinds from efficiency and tailing your model?

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Tarek A. Sherif, Medidata Solutions, Inc. - Co-Founder Chairman & CEO [36]

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So let me tackle that in a couple of different dimensions. First off, I think we view ourselves as not particularly penetrated within the top 25. In fact, what we're seeing is that, we have a lot of runway. I'll give you an interesting metric. So year-over-year on -- when we look at our larger deals, we saw duration go up about 70-plus percent in terms of the kind of contracts they're signing, but we have seen ASP go up more than 100%. And we think there's a lot more to go there. So one of our strategies is to continue to penetrate our existing customers. You've heard Rave certainly is in our biggest customers. It plays a substantial role, but even there we've seen some uptake. But when you look at the analytics offerings and some of the new things we've brought to market, whether it's Patient Cloud or some of the others that Glen was talking about, we've got a really long runway there. So first off, I think we're going to continue to be pretty aggressive at selling into those accounts.

In terms of our R&D spend, I think we're very comfortable with the levels, with sort of -- obviously, the absolute levels are going to continue to go up as we grow the business, but as a percentage of revenue. I think we're pretty comfortable that we're getting -- we're at the right level, and we're going to focus on continuing to get more leverage from the dollars that we're putting in there. Sales and marketing, similarly. I think we can get more leverage there. I don't think we need to substantially up our investment anywhere in particular. We'll obviously just prioritize better going forward. One of our goals, and I think we've been very explicit about it, is that we want to continue to show good margin improvement in the bottom line over the medium to long term and even in the short term, we've been able to do that.

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Brian Lee Essex, Morgan Stanley, Research Division - Equity Analyst [37]

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I guess, maybe I didn't phrase it the right way. I guess what I was pointing to is -- now that you have your toe in the door, is incremental expansion and increasing density intensity within those existing customers going to come at a more efficient rate, so that's very helpful.

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Tarek A. Sherif, Medidata Solutions, Inc. - Co-Founder Chairman & CEO [38]

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In some cases, yes. The reason that I hedged the answer. In some cases, the answer is absolutely yes if we're selling to the same buyer. But in other cases, we're selling to new buyers. And so you don't -- we don't have those scale efficiencies yet. So it's kind of TBD as we go forward.

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Operator [39]

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Our next question comes from Sandy Draper with SunTrust.

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Alexander Yearley Draper, SunTrust Robinson Humphrey, Inc., Research Division - MD [40]

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A lot of my questions have been asked and answered. I appreciate all the detail, but there is one number I was just trying to make sure, I've got context. I think Tarek you had mentioned. I think it was bookings were up 20%. There are couple of comments about bookings and some commentary around 20% and then a higher number. I'm just trying to make sure I understand those numbers? And also maybe for bookings, but also the backlog, how much of the growth is being driven by longer-term contracts, which is great for visibility, but may mean that there's not much acceleration near term?

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Tarek A. Sherif, Medidata Solutions, Inc. - Co-Founder Chairman & CEO [41]

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Yes. So just to be clear, one of the numbers that Rouven mentioned 20% as it relates to our year-over-year backlog growth for next year. So off of -- where we were in Q3 -- where we are in Q3 of '17 versus the backlog that's building for '18, that's up 20% already. One of the comments that both Rouven and I made were around our renewals. So the -- on average, our renewals are up 17% over par. So I think that's showing actually some really good traction. And if you kind of look at some of the newer solutions and the impact that they are having, which -- by the way, one of the interesting trends we didn't talk about is that the ASP on a lot of our newer solutions are pretty substantial. They're coming in higher than what we thought a couple of years ago when we started to talk about, what contribution balance might have or some of our other solutions. They are on par or greater than Rave from an ASP perspective. And I think that's extremely bullish because we're still underpenetrated with those products, they are just getting going. So I don't -- I'm not sure if that completely answers your question, but the bookings growth, which is up substantially. So it's up 75% year-to-date and was up 170% in the quarter is driven a lot of backlog growth. So that's up 57% on an absolute basis. So there is a contribution from lengthening deals, but there's also a substantial part that comes from upsell and new solutions.

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Alexander Yearley Draper, SunTrust Robinson Humphrey, Inc., Research Division - MD [42]

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That's really helpful. So maybe a quick follow up on the 17%. Is that purely a density number, or is that a duration, or is it a combination?

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Tarek A. Sherif, Medidata Solutions, Inc. - Co-Founder Chairman & CEO [43]

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No. It's not a duration number. That's actually a density -- or intensity increase.

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Operator [44]

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Our last question comes from Scott Berg with Needham & Company.

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Peter Marc Levine, Needham & Company, LLC, Research Division - Research Associate [45]

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This is Peter Levine in for Scott. So I got one quick one here. I'm not sure how far long you are on your assessments of implementing ASC 606 next year, but can you maybe give us some highlights on what you think the impact to your model will be next year?

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Rouven Bergmann, Medidata Solutions, Inc. - CFO & CAO [46]

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Yes. So happy to give you some high-level on this. We've made great progress in finalizing our other work for us to be ready for starting 2018. My current plan is to share more details around the impacts at our Financial Analyst Day. But what I can tell you at this point in time is we don't expect any significant impact from the new revenue guidance as it relates to our revenue as well as to our expenses. I mean, there are typical trends that have been discussed at other -- with other companies that there is an amortization aspect of sales compensation. We're already spreading some parts of those expenses, but going forward, that will have a bigger impact. So there is some cost implication, but in all together, I don't look at this as significant, but I will share more with you at the Financial Analyst Day. Everything is on track and we'll be ready in 2018.

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Operator [47]

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I'm not showing any further questions at this time. I'd like to turn the call back over to our host.

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Tarek A. Sherif, Medidata Solutions, Inc. - Co-Founder Chairman & CEO [48]

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Just want to thank all of you for joining us on today's call. For those of you who are going to be joining us at the Financial Analyst Day, we're looking forward to a great day. And for those of you who are going to join us on our next call, see you then.

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Operator [49]

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Ladies and gentlemen, this does concludes today's presentation. You may now disconnect, and have a wonderful day.