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Edited Transcript of VEEV earnings conference call or presentation 29-May-19 8:30pm GMT

Q1 2020 Veeva Systems Inc Earnings Call

Pleasanton Jun 27, 2019 (Thomson StreetEvents) -- Edited Transcript of Veeva Systems Inc earnings conference call or presentation Wednesday, May 29, 2019 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Matthew J. Wallach

Veeva Systems Inc.

* Paul Shawah

Veeva Systems Inc. - SVP of Commercial Strategy

* Peter P. Gassner

Veeva Systems Inc. - Founder, CEO & Director

* Rick Lund

Veeva Systems Inc. - IR Director

* Timothy S. Cabral

Veeva Systems Inc. - CFO

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Conference Call Participants

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* Bhavanmit Singh Suri

William Blair & Company L.L.C., Research Division - Partner & Co-Group Head of Technology, Media and Communications

* Brent Alan Bracelin

KeyBanc Capital Markets Inc., Research Division - Senior Research Analyst

* Brian Christopher Peterson

Raymond James & Associates, Inc., Research Division - Senior Research Associate

* Ken Wong

Guggenheim Securities, LLC, Research Division - Senior Analyst

* Jackson Edmund Ader

JP Morgan Chase & Co, Research Division - Analyst

* James Paul Rutherford

Stephens Inc., Research Division - Research Analyst

* Rishi Nitya Jaluria

D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst

* Scott Randolph Berg

Needham & Company, LLC, Research Division - Senior Analyst

* Stan Zlotsky

Morgan Stanley, Research Division - VP

* Stewart Kirk Materne

Evercore ISI Institutional Equities, Research Division - Senior MD

* Thomas Michael Roderick

Stifel, Nicolaus & Company, Incorporated, Research Division - MD

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Presentation

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Operator [1]

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Good afternoon. My name is Chantel and I will be your conference operator today. At this time, I would like to welcome everyone to Veeva's Fiscal 2020 First Quarter Results Conference Call. (Operator Instructions)

Rick Lund, Head of Investor Relations, you may begin your conference.

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Rick Lund, Veeva Systems Inc. - IR Director [2]

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Good afternoon, and welcome to Veeva's Fiscal 2020 first quarter earnings call for the quarter ended April 30, 2019. With me on today's call are Peter Gassner, our Chief Executive Officer; Matt Wallach, our President; Paul Shawah, SVP of Commercial Cloud; and Tim Cabral, our Chief Financial Officer.

During the course of this conference call, we will make forward-looking statements regarding trends, our strategies and the anticipated performance of the business. These forward-looking statements will be based on management's current views and expectations and are subject to various risks and uncertainties. Actual results may differ materially. Please refer to the risks listed in our earnings release and the risk factors included in our most recent filing on Form 10-K, which is available on the company's website at www.veeva.com under the Investors section, and on the SEC's website at www.sec.gov.

Forward-looking statements made during the call are being made as of today, May 29, 2019. If this call is replayed or viewed after today, the information presented during the call may not contain current or accurate information. Veeva disclaims any obligation to update or revise any forward-looking statements. We will provide guidance on today's call but will not provide any further guidance or updates on our performance during the quarter, unless we do so in a public forum.

On the call, we will also discuss certain non-GAAP metrics that we believe aid in the understanding of our financial results. A reconciliation to comparable GAAP metrics can be found in today's earnings release, which is available on our website and as an exhibit to the Form 8-K filed with the SEC just before this call.

With that, thank you for joining us. And I will turn it over to Peter.

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Peter P. Gassner, Veeva Systems Inc. - Founder, CEO & Director [3]

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Thank you, Rick, and thanks to everyone for joining us today. I'm pleased to report another great quarter with the results ahead of our guidance. Total revenue for the quarter was $245 million, up 25% year-over-year. Subscription revenue grew 27% year-over-year and our non-GAAP operating margin was 38%.

It was an outstanding start to the year. Congratulations to the Veeva team and thank you to our customers for your continued partnership. I'll share some Q1 highlights, starting on the commercial side of the business where we had another excellent quarter.

We continue to extend our market leadership in core CRM. We added many new Veeva CRM customers on the SMB side in both the U.S. and Europe. Many of these customers also purchased Veeva OpenData at the same time. We also made good progress with global CRM rollouts in existing enterprise customers. CRM add-ons also saw further adoption.

Events Management, Align and Engage continue to do well. For example, a top 20 pharma added more than 700 Engage users in Europe after their success with initial pilots last year. We hosted our Commercial Summit a few weeks ago in Philadelphia. With more than 1,600 attendees, it was our biggest event to date and is the largest of its kind in the industry. The feeling and sense of community was great. It's one of the highlights of our year. We and our customers always get a lot of ideas and energy from Summit.

The major Summit themes were customer success and the emerging use of AI in multiple areas of our Commercial Cloud. In CRM for instance, we announced Veeva CRM Approved Notes, which will use AI to reduce the compliance risk of taking free text notes, providing field reps a better way to manage relationships with doctors. Approved Notes will be part of our core CRM subscription and is planned for release early next year. Customers are excited about Approved Notes and our continued investment and innovation in CRM overall.

In Commercial, there is a strong desire to do more with AI and advanced analytics. At last year's Summit, we announced we would build our first AI application, Veeva Andi. Veeva Andi is an Artificial Intelligence application designed to provide customer insights and next best action recommendations right in Veeva CRM. I'm happy to announce that Andi is now available. We had a lot of great discussions about Andi at Summit and are developing a pipeline of early adopter candidates. Overall, it was another great Commercial Summit.

Turning to Veeva Vault. In Q1, we added almost 50 new Vault customers, which was a quarterly record. We saw strength across each Vault application area, including early success with new products and continued momentum with more established products. We won our first top 20 enterprise deal for CDMS. This is a big milestone for the product and for Veeva. The customer was looking for a cloud EDC solution on a proven platform. The existing enterprise EDC offerings are older systems and are not true cloud applications. The customer also liked some of the innovative ways our system handles data entry, data review and protocol amendments as well as our vision for comprehensive data cleaning and reporting with Data Workbench.

The customer had trust in Veeva because our teams have delivered success for them in multiple areas over the past 8 years, both in R&D and Commercial. They completed some pilot studies with CDMS in the last 9 months and that went well. So last quarter, they decided to move forward with a multiyear enterprise deal for CDMS. This was a great win for Veeva, one of our top company priorities is to ensure the success of this project and to use it to drive innovation in CDMS.

We also signed a multi-product deal with a top 20 pharma in Europe for Vault in the clinical and regulatory areas. This customer just went live with Vault QualityDocs for over 50,000 users around the world. After working with our product and services teams on the QualityDocs implementation, they decided to go forward with eTMF submissions and submissions Archive. This is a great example of customer success leading the way to future business.

We have also signed our first 4 early adopters for Vault Safety, our newest product line in Development Cloud. It's still early days for Safety and these were small deals with small companies. But I'm pleased with our overall progress. Product is maturing every day and we have a growing pipeline of early adopter candidates. Safety is a mission-critical application for life sciences. It's complex and will have many integration points with our other Vault applications, so having a modern solution on a single platform is a great thing for the industry.

Turning to our business outside of life sciences, where we are concentrating on consumer goods, chemicals and cosmetics. We recently announced a new application, Vault Claims. Claims will help manage the product claims life cycle, from creation to approval to marketing usage. When speaking with early QualityOne customers, we saw a real need for a claims management application. We have already started a claims project at a new top 20 CPG customer and have early discussions underway with others.

Progress with QualityOne continues as well, both expansions in existing customers and bringing on new customers. For example, this quarter, we closed an initial QualityOne deal with another major cosmetics company. While still early, we are finding that companies are responding to our product offerings in consumer goods, chemicals and cosmetics.

In closing, we had another great quarter. We executed well across all areas, focused on customer success and product excellence and had exceptional traction in new markets.

With that, I'll turn it over to Tim to review our financial results in more detail.

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Timothy S. Cabral, Veeva Systems Inc. - CFO [4]

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Thanks, Peter. Q1 was another quarter of consistent execution across the company. Total revenue was nearly $245 million, up from over $195 million, 1 year ago, a 25% increase. Vault represented nearly 50% of total revenue, up from 44% in Q1 of last year. Subscription revenue grew 27% to $198 million from $156 million last year. Outperformance in this metric was driven by a very strong bookings quarter, favorable linearity of those bookings and a tailwind of a couple million dollars more from 606 as compared to Q1 of last year.

Services revenue was almost $47 million, up 18% from roughly $40 million, 1 year ago. Strength in services revenue continues to come primarily from R&D Vault projects. I expect Q2 services revenue to be roughly flat with Q1.

Our non-GAAP operating income came in over $93 million, a 38% operating margin, which was above the high end of our guide. This was driven primarily by outperformance on the top line. Across the company, we added 92 people net in the quarter, finishing at 2,645, up from 2,243 one year ago.

Turning to the balance sheet, deferred revenue was $364 million compared to $356 million at the end of Q4. Calculated billings for the first quarter came in at $247 million, which was ahead of our guidance of $235 million. This result was primarily driven by strong bookings and outperformance in services revenue. The year-over-year growth rate of calculated billings was 16% in the first quarter.

When considering that growth rate, please remember that calculated billings in Q1 of last year included an $18 million renewal of a large customer that subsequently shifted its renewal date to Q4. Adjusting for this, year-over-year calculated billings growth for the quarter would have been 26%. Please remember that there are numerous factors that make year-over-year comparisons of this metric highly variable on a quarterly basis. Therefore, we do not believe it is a good indicator of the underlying momentum of our business and we do not manage to it internally. Our subscription revenue guidance and calculated billings guidance for the full fiscal year are the best indicators of our momentum.

Looking ahead, we expect calculated billings of roughly $220 million in Q2 and a range of $1.115 billion to $1.120 billion for the full year, which is an increase from the $1.1 billion guidance provided last quarter. We continue to expect about 41% to 42% of our billings for the year to come in Q4.

Elsewhere on the balance sheet, we exited Q1 with over $1.3 billion in cash and short-term investments, up from almost $1.1 billion at the end of Q4. This increase was driven by our performance in cash from operations, which came in at $236 million and included $14 million in excess tax benefit related to equity compensation.

For the full year, we now expect cash from operations to be $330 million to $335 million, excluding this excess tax benefit. This is an increase from our previous expectations for slightly more than $320 million, excluding the excess tax benefit.

Let me wrap up by sharing the rest of our outlook for next quarter and for fiscal 2020.

For the second quarter, we expect revenue between $259 million and $260 million; non-GAAP operating income of $94 million to $95 million; and non-GAAP net income per share of $0.48 to $0.49 based on a fully diluted share count of approximately 158.5 million.

For the year, we expect revenue in the range of $1.045 billion to $1.050 billion, representing a $20 million increase from our previous guidance. We expect subscription revenue to grow roughly 24% and within that, we expect Commercial Cloud subscription revenue growth of at least 11% and Vault subscription revenue growth of roughly 40%.

For fiscal '20, we anticipate non-GAAP operating income of $385 million to $390 million, a margin of about 37%. This is an increase in both dollars and margin from our previous guidance of $365 million to $370 million and a margin of almost 36%.

As you consider this margin guidance, note that we have an aggressive hiring plan for the rest of the year, and we are expecting increasing litigation fees as we move into the next phase of our cases. We are now targeting non-GAAP net income per share of between $2.01 and $2.03 based on a fully diluted share count of approximately 159 million.

To conclude, it was a great start to the year. Our product teams continue to lead the industry forward with innovation and our field teams continue to deliver customer success. Given this consistent execution, we remain confident in our ability to deliver at least 20% subscription revenue growth through calendar 2020.

As always, thank you for joining the call and I will now turn it back to the operator for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Tom Roderick with Stifel.

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Thomas Michael Roderick, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [2]

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So I wanted to ask the first question here, just on the clinical side, as it looks like a tremendous Vault quarter again. And pretty exciting to see CDMS get the -- land your first top 20 enterprise deal. I was hoping you could talk about that a little bit more. Two parts to that question. First, of course, being sort of the competitive dynamics. As you went in there, I gather you've probably been with this customer for a while. Can you talk about what they were looking to sort of, to fix or to change, or, what the competitive dynamics were that got you over the top on that product?

And then sort of secondarily, as you think about the opportunity set or the wallet share within CDMS, how do those deals compare at a top 20 compared to say, CTMS? Are those larger as you get into CDMS, enterprise wide?

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Peter P. Gassner, Veeva Systems Inc. - Founder, CEO & Director [3]

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Thanks Tom, this is Peter. As far as the competitive landscape for the deal, it was certainly competitive. This is a customer -- a long-standing customer of Veeva's that had one of the large enterprise players for CDMS and had that for many years. So there was no formal RFP process, but there was certainly a selection process. And in terms of what they were looking for, the CDMS is really, it's a very critical process for pharmaceutical companies. They're trying to collect clinical data from these research sites, the faster and more accurate they can do it, the better chance they have of completing their clinical trials and completing them quickly. So it's a really, really mission-critical application. And they just needed a true cloud system that had better data collection and workflow. Just really, a better system overall. And a chance to be great, I think that's what they were looking for, is a chance to be great. So it's competitive and we won.

In terms of the size of the deal or you mentioned the wallet share, this is -- CTMS is a bigger, larger application than -- sorry, CDMS is a bigger and larger application than CTMS. So to give you an idea, this deal, it's a multiyear deal. It will roll out over time and at the full rollout, it will be an 8-figure per year deal. So it's certainly a significant application area for us, it's our largest single Vault application.

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Thomas Michael Roderick, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [4]

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Fantastic. That's great. And maybe just a quick follow-on in thinking about that opportunity. I know that CTMS has worked really nicely in conjunction with eTMF, given that you have a lot of, sort of similar decision-makers. This seems to be a little bit of a separate category and you've worked hard to integrate the workflows, but from a resource standpoint, do you need separate independent sales teams -- sales reps and a different go to market strategy as you start to land these top 20s? Or does this go right in the existing bag of the same clinical sales rep that's been selling there already on the other products?

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Peter P. Gassner, Veeva Systems Inc. - Founder, CEO & Director [5]

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Yes. I'd say it's a combination of both. This is a different area. The clinical data management area, which is different than the clinical operations area, where you'll have CTMS and eTMF. So it's certainly a different area of the pharmaceutical company. We need specialized product consultants and specialized salespeople. But they do work with the broader R&D sales team. So it's a combination of specialization for certain people and then tying it together to the broader Veeva R&D vision.

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Operator [6]

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Your next question comes from Ken Wong with Guggenheim Securities.

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Ken Wong, Guggenheim Securities, LLC, Research Division - Senior Analyst [7]

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I guess I wanted to focus also a bit on Vault. You guys raised the subscription outlook there to 40%. Just wondering, what's changed in that dynamic? Is it you guys called out faster growth of new customers. Also it sounds like the Vault pipeline is getting more mature. CDMS, you guys signed an enterprise customer. I'm just trying to figure out what are the puts and takes that got you to the higher number.

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Timothy S. Cabral, Veeva Systems Inc. - CFO [8]

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Yes, Ken, this is Tim. I think you sort of answered the question a bit. It's a combination of all those things. Certainly, Q1 represented a very strong start to the year for Vault. We are seeing strength across the board, across the entire development cloud. And the contributing products are the ones that we've seen contribute in the past, meaning eTMF had a great quarter, CTMS had a very good quarter, QualityDocs had a good quarter and we also had a good quarter in Regulatory. So across the board strength and a really strong start to the year, enabled us not only to raise the Vault subscription revenue guidance roughly 40%, but the overall subscription revenue guidance to roughly 24%.

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Ken Wong, Guggenheim Securities, LLC, Research Division - Senior Analyst [9]

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Got it. And then maybe for Peter or Matt, the QualityOne opportunity that you guys have touched on that for a while now, it feels like there, you guys are focusing a little more aggressively on being a, kind of Veeva 2.0 for a bunch of these verticals. Can you talk about whether or not you're going to have to accelerate some investments there? And now that you guys have broadened out the portfolio a little bit, does it make more sense now to be aggressive in those markets? Or is this still something further down the line?

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Matthew J. Wallach, Veeva Systems Inc. [10]

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Ken, it's Matt. So we're already being aggressive in these markets. We've aggressively added people onto the product teams and we've just announced that first product specifically for those 3 market segments. And we've continued to add salespeople in the U.S. and Europe. So it feels like we're being aggressive already.

Now we also are reminding everyone, we're still learning a lot, right? So this is not just another application that goes right in the bag of the life sciences rep and we just turn the crank. Not that those are easy, but there are more moving parts on these. And so because we're going after multiple types of companies in multiple market segments, with multiple products and now a brand-new product, there's still a lot for us to learn. But I would say, we're already being aggressive here in making sure that early customers are super successful and that we use that and start the reference selling.

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Operator [11]

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Your next question comes from Bhavan Suri with William Blair.

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Bhavanmit Singh Suri, William Blair & Company L.L.C., Research Division - Partner & Co-Group Head of Technology, Media and Communications [12]

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Congrats. I just wanted to touch a little bit on the breakup of the Vault business and sort of how you guys think about growth there. So if you think about Vault, obviously growing really fast over the past few years. And the Vault customer count now almost doubles CRM customer count. Can you just touch, Peter, Tim, maybe both of you, on how you're thinking about the growth formula with Vault going forward between new customers and new adds and how they expand versus the existing customers and the cross-seller expansion within that existing base.

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Matthew J. Wallach, Veeva Systems Inc. [13]

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Bhavan, this is Matt. I'll actually take that one. So because we have so many of the large customers, top 50 pharma companies already, the vast majority of incremental revenue is going to come from existing customers. So that's just going to be the dynamic for Veeva going forward. We have multiple -- we had a target of 20 eight-figure customers hopefully by the end of 2020. And it looks like we're on track for that. Those are really significant relationships.

And while -- when a new customer -- when an existing customer buys one more Vault, it's certainly good for Veeva. But it's great for the customer because there's so many advantages that they get from having another enterprise product on the same platform. They get IT benefits, they get administrative benefits and they get tremendous business benefits of having a single source of truth.

So in terms of incremental revenue, it's always going to be a larger number from existing customers because we have so many. But the long tail of smaller customers is also important. Some of those customers are going to become big. Some of those customers if they go with competitors could help competitors get large. So those companies are important to us from every different angle. But the large revenue story is going to come from existing customers and I think we'll see that over time.

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Bhavanmit Singh Suri, William Blair & Company L.L.C., Research Division - Partner & Co-Group Head of Technology, Media and Communications [14]

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Got it, got it. And then one on Andi, and AI in general. And maybe Matt, this is for you. Maybe it's for Peter. When you think about AI, can that serve -- or Andi specifically, a halo effect on the rest of the CRM suite? Like whether it's Nitro or Line or a CRM add-on?

And then a quick follow-up to that is, how do you think about, like, introducing a similar sort of AI engine on the Vault side, right? So I've got X number of steps in a particular process submissions, Regulatory and we can optimize that, we can automate that. I guess are you seeing an appetite on that side for AI? Or is that still early? So first, just sort of what's the halo effect of sort of getting Andi and AI working on the core CRM side, obviously with Nitro? And then b, I guess, is there an optionality on an interest on the Vault side for that?

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Paul Shawah, Veeva Systems Inc. - SVP of Commercial Strategy [15]

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Hey, Bhavan, this is Paul. Thanks for the question. Yes, so on Andi, good to speak. So this is something we announced a year ago at our Summit, and then at the time, we didn't have a product and we didn't have a team focused on it. And at this Summit this year, we announced -- we actually demoed the product and showed real life product to customers and there was tremendous interest. We had hundreds of customers attend sessions, focused on Andi. So there's a very significant halo effect because of the excitement around the product and the potential for what it can deliver. Andi's focused on delivering suggestions, next best actions to customers, which really, we believe, will have a significant impact on, and potential to have sales uplift for our customers. So there's a lot of excitement, there's a lot of potential for what Andi can deliver. And we're focused on proving a lot of that out in our early adopter program, which we're kicking off over the next couple of months. That's next for us.

In terms of -- one other thing I'd say, just beyond Andi, is just around the concept of embedding AI into the application. So at Summit, we had also 2 big announcements, one in the CRM space that Peter alluded to called Approved Notes, which is where we're using AI to drive compliance, better compliance as sales reps and they use free text in their comments. We'll use AI to drive better compliance around that. Compliance and visibility to all the notes that they have in the system. That's super valuable to customers. That resonated extremely well.

And then also on the Vault side, as you mentioned, we're starting to involve PromoMats with AI, doing auto claim linking. So what that means is that as you make a claim about a specific product, you have to link that back to the underlying reference material. So we're already getting interest and excitement around Vault for AI, and we're already making some strides in terms of embedding that in there, and I think you'll see more of that in the future.

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Bhavanmit Singh Suri, William Blair & Company L.L.C., Research Division - Partner & Co-Group Head of Technology, Media and Communications [16]

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That's really cool. I might squeeze one more in. So as you think about outside life science obviously AI as it talks to Quality and Quality process and Quality management teams is really interesting too, is that an area -- are we talking 2 years down the road where that gets embedded in Quality One and OLS? Or is that something near term?

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Peter P. Gassner, Veeva Systems Inc. - Founder, CEO & Director [17]

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In terms of outside of life sciences, this is Peter, we're still early there, so we have our basic blocking and tackling to do our new claims product. What's going on outside of life sciences is, we're learning a lot, we're developing deep customer relationships. And what we're finding is, they have a need for a partner in the Quality, Regulatory, Clinical and Claims areas of consumer packaged goods companies. What claim am I making about this new product, how fast can I get things like the label approved? When I change ingredients, how do I need to do my regulatory filings in the different countries? If I were to have a complaint on this product, how do I register that? If I need to change a process, how can I do that in a compliant way? So that -- Claims, Quality, Legal, Regulatory set of things is very highly related and there's a need for that integrated in together, all on the same platform. So that's what we're focused on. AI will come, outside of life sciences, but not in the immediate future.

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Operator [18]

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Your next question comes from Sterling Auty with JPMorgan.

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Jackson Edmund Ader, JP Morgan Chase & Co, Research Division - Analyst [19]

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It's Jackson Ader on for Sterling tonight. Question from our side. When we're talking about an enterprise wide CDMS win, can you give us just a little bit more color on how that -- how CDMS is going to be rolled out to Veeva? Is it going to be all trials or all new trials and all new phases going forward? What does that actually look like?

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Peter P. Gassner, Veeva Systems Inc. - Founder, CEO & Director [20]

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Yes, I can take that one. Yes, it has to be phased-in, because you -- in the clinical data management system, there's many people inside of the customer that work with many different groups from data management people to statistical type people to the people that do the clinical monitoring. And there's also people in the research sites that deal with these systems, too. So it'll be a phased approach because you have to train people up and get them going on it.

Yes, at some point, it will be all clinical trials, all new ones started on Veeva. That may be, oh, between 18 months or so from now or 2 years from now. That's how long it will take. Because for example, in a therapeutic area, where you have multiple related trials, and you have some system of reuse going on on an existing system, you're going to be a little hesitant to break off the sort of add-on trial and put it on a new system. You're going to want to keep that with the family of other related trials. So it's a nuanced thing. But certainly in, 2 years from now, we would expect the bulk of the trials to be on our system.

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Jackson Edmund Ader, JP Morgan Chase & Co, Research Division - Analyst [21]

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Okay. That makes a lot of sense. And then can we just clarify, Peter, I think the comment you made about the -- these types of deals for CDMS possibly being eight figures, is that on an annual basis? Is that a total contract value? What kind of time frame of subscription are we talking about?

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Peter P. Gassner, Veeva Systems Inc. - Founder, CEO & Director [22]

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Yes. That's on an annual basis, at the terminal, when it's fully ramped up, the subscription fees. And that rolls out over several years. But not getting into the specifics of how many years. But that's -- the figure I quoted there for eight-figures was on an annual basis at the terminal run rate.

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Operator [23]

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Your next question comes from Scott Berg with Needham.

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Scott Randolph Berg, Needham & Company, LLC, Research Division - Senior Analyst [24]

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Congrats on a great quarter. I have one and a follow-up here. I guess a kind of an extension of a couple of the outside life sciences questions. You're bringing Claims there. Can Safety fit outside of life sciences going forward? I would imagine that there are some similarities between those types of customer sets.

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Peter P. Gassner, Veeva Systems Inc. - Founder, CEO & Director [25]

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Yes. It will. Safety will. Now it will have a slightly different flavor to it because of -- the process is different and the regulatory bodies are different. Drug safety versus consumer product safety. And that's something for the safety products outside of life sciences, that is not for the immediate future. We feel that Safety inside of life sciences, that's going to keep us really busy. And it's a mission-critical, large application. So we're talking probably a couple of years out for Safety outside of life sciences.

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Scott Randolph Berg, Needham & Company, LLC, Research Division - Senior Analyst [26]

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Great. And from a follow-up question, Tim, I'm just kind of reviewing the model a little bit and I'm probably nitpicking on a company that has 38% operating margins in the current quarter, but why are you not seeing any leverage around G&A? I kind of look at the spend there and it's been relatively flat as a percentage of revenue over the last 3 years.

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Timothy S. Cabral, Veeva Systems Inc. - CFO [27]

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Yes. Scott, I would say, we are seeing leverage in G&A but we're also as I mentioned in my prepared remarks, seeing increasing litigation fees for a couple of the lawsuits that we're working on. And that is hiding the leverage we're seeing within G&A.

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Operator [28]

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Your next question comes from Stan Zlotsky with Morgan Stanley.

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Stan Zlotsky, Morgan Stanley, Research Division - VP [29]

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Matt, good to hear you on the call. I'm guessing this is going to be your last one. Maybe just a question for you, in that case. Commercial Cloud, the newly planned acceleration to over 11% this year. I don't think many people were really expecting to see an acceleration here versus a year ago. If you were to rank the drivers of the continuing growth in Commercial Cloud, what would they be? Would it be adoption by new SMB customers? The product like Events, Engage, any other add-ons?

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Matthew J. Wallach, Veeva Systems Inc. [30]

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Hi, Stan. Yes, this is Matt. Thanks for the call out, I'm actually going to let Paul answer the question though.

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Paul Shawah, Veeva Systems Inc. - SVP of Commercial Strategy [31]

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Hey Stan, how are you? This is Paul. I get to steal this one from Matt. So yes, I mean really excellent quarter in Commercial as you've heard. I wouldn't attribute the strength in Commercial to any one thing in particular. I'd actually -- the strength is really from, broadly in CRM and across the add-ons in general.

So to be more specific, in CRM, we saw significant expansion from global customers, existing customers who were completing their global rollouts as they went and expanded into new markets. We also saw expansion from existing customers as they launch new drugs and they get approval and they build out a sales team. They've -- we saw -- we've seen growth there as well.

And also on the SMB side, we continue to win the vast majority of those deals also. So that's continuing to add to the strength. And that foundation for CRM that we're building is, is giving us really, the right foundation to sell the additional add-ons, too. And we've seen that pull through in this quarter as well, with really great traction from Events. And then some of the other add-ons that are building momentum, like Engage, for example, which is newer. We had customers speak at our customer Summit, talking about how they're changing the selling model, how they're getting access to customers, to doctors that they've never been able to get access to in face-to-face, they're now accessing them in a video call, and they're getting more time in video than they would of face-to-face. So we're starting to see that traction pull through on the add-on side. So I would say that that strength is really CRM and the add-ons, pretty consistently.

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Stan Zlotsky, Morgan Stanley, Research Division - VP [32]

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Got it. What I was trying to get at was the guidance for Commercial Cloud for the full year, to accelerate to 11%. And I would presume your answer still applies to going forward for the rest of the year, right? As far as the drivers?

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Paul Shawah, Veeva Systems Inc. - SVP of Commercial Strategy [33]

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That is correct. Yes. Those are the drivers so far. Yes. That's right.

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Stan Zlotsky, Morgan Stanley, Research Division - VP [34]

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Okay. Got it. Great. And maybe a quick follow-up. How is the Nitro product doing? We heard on the Q4 call, there were 6 early adopters and you already had a couple live. How is that product doing despite like the competitively restrictive practices that we're seeing from -- out in the space?

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Paul Shawah, Veeva Systems Inc. - SVP of Commercial Strategy [35]

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Yes. So you know, Nitro's doing really well. In the quarter, we had a couple of early customers go live. In fact, we had 3 customers speak at our Customer Summit. One was on the main stage, and then 2 shared very detailed presentations about the benefits they're getting from Nitro. It's is getting metrics out to the field and to their home office faster, putting that foundation in for AI.

So our customers, the early adopters are doing very well. We've also added some customers to Nitro also. That growth that we have there is really measured. We are focused on early adopters and customer success in the early market. We are -- we're unfortunately still seeing some of the anticompetitive behavior from IQVIA. So that's creating some headwinds for us with Nitro. We're hopeful that we're able to get that resolved over time. But yes, that has been an impact so far.

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Stan Zlotsky, Morgan Stanley, Research Division - VP [36]

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Perfect. Then the last one, maybe for Tim. Tim, the strong operating margin performance in the quarter, you mentioned it's largely just revenue outperformance. Was there any kind of hiring linearity in the quarter? Because when we've seen operating margin outperformance to this degree, it usually coincided with hiring maybe being a little bit more heavily skewed to the back half of the quarter versus a little bit more linear throughout. And that's it for me.

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Timothy S. Cabral, Veeva Systems Inc. - CFO [37]

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Yes, Stan, thanks for the question. We had a really good quarter from a hiring perspective. I think you're right, there was probably a little bit more back end loaded linearity but overall, it was a very strong quarter.

The one thing that I did say, as it relates to the outperformance of revenue in my prepared remarks, especially on the subscription revenue line, is a couple more million of 606 impact than we had seen last year. And Stan, I think you probably know this, that is 100% margin. So that drops right down to the bottom line, with no cost of goods sold and no really, operating expenses against it. So I think that also benefited the operating margin performance. But I would say lastly, that the operating margin of a little over 38% was fairly consistent with what we saw in the second half of last year in terms of what the operating model is starting to firm up and look like as we go forward.

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Operator [38]

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Your next question comes from James Rutherford with Stephens.

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James Paul Rutherford, Stephens Inc., Research Division - Research Analyst [39]

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A couple for me. First, I wanted to circle back on the CDMS win. Obviously, a very nice milestone, but the question is, perhaps it's too early, but I'm curious how you've seen customer conversations change since that deal was announced, and whether it's starting to push things in your favor, when you kind of go up some of your -- against your more legacy competitor in that space.

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Peter P. Gassner, Veeva Systems Inc. - Founder, CEO & Director [40]

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Yes. I think it was certainly noticed in the industry, clinical data management is a tight community. They're kind of scientifically oriented, fact oriented, really interested in the patient outcomes and getting therapies out to patients, getting therapies approved. So information flows fast. I would say faster in the scientific and clinical community, it flows faster than in the commercial communities. So there's a lot of interest. We've seen an uptick in conversations, I think there's an uptick in customers thinking, well, maybe that could be possible for me.

So there's more interest, I think in pilots by large customers. Now whether that will turn into fruition or not, that's something that we'll see over the next 12 months, but certainly, the interest is up and I think a lot of eyes are on this project. How successful will it be? There's a lot of people wanting to know that.

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James Paul Rutherford, Stephens Inc., Research Division - Research Analyst [41]

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Okay. That's helpful. And then a follow-up for Tim, if I may. I think, last we heard, outside of life sciences, was contributing I think over $10 million of revenues is what you had said. I'm curious if you can frame up where the ARR on that product sort of stands today and how much it might contribute to fiscal '20.

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Timothy S. Cabral, Veeva Systems Inc. - CFO [42]

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Yes, James, thanks for the question. We haven't talked specifically this year about outside life sciences, in terms of what the contribution is. What I would say qualitatively is what Peter and Matt said earlier, which is we're seeing really good early progress with our early adopter customers, the innovation that we're seeing from the product team, you heard in Peter's prepared remarks. The momentum continues to be strong. We haven't specifically quantified what that -- the size of that business is at this time, though.

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Operator [43]

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Your next question comes from Brent Bracelin with KeyBanc Capital Markets.

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Brent Alan Bracelin, KeyBanc Capital Markets Inc., Research Division - Senior Research Analyst [44]

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I had one question and one follow-up. The question I wanted to drill down, again, is something you've talked a lot about today and that's on the demand side. But wanted to kind of help frame what's happening. Obviously, you're raising the full year guide by $20 million. Subscription growth accelerated to 27%, the highest in more than a year. Is this a byproduct of customers going all in on Veeva that you talked about at the Analyst Day? Is this more of a financial mechanics of just Vault increasing as the mix grows to close to 50%? Are you -- do you have increasing confidence on both the Vault and commercial parts of the business? As you think about kind of what surprised you most this quarter and given you the optimism here, what would you attribute it to?

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Peter P. Gassner, Veeva Systems Inc. - Founder, CEO & Director [45]

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This is Peter. It's overall, good execution. Good execution in our product, good execution in our field. That's #1. You can't take those things for granted. Right? That's -- it's actually -- we used to have a saying, we say execution matters most. It's what you do every day, every week, every month, every quarter. A grand idea is just a grand idea. So I think it's just consistent, great effort, by the Veeva team in partnership by our customers. That's the bulk of what's going on.

Now what that -- and I guess there's a couple of other things. There's a backdrop involved. We now have 17 Vault applications. And they are for very specific areas, diverse sets of areas. So that does create a halo effect. Customers are starting to see, wow, I can, my internal operations can be much more efficient with Veeva. I can get a lot of applications, they're integrated together and the projects are generally successful, and I like working with the people. So with 17 applications, now there's more bites at the apple with any particular customer.

So I think those are the 2 things going on. And then reputation. Reputation grows every year with continued success. As long as you continue to have success. So the longer we have success, the reputation grows, we have more products, and we're -- the Veeva team's continuing to hustle every day, go the extra mile for the customer. So that's it. No real magic, but just great execution.

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Brent Alan Bracelin, KeyBanc Capital Markets Inc., Research Division - Senior Research Analyst [46]

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That's helpful. And then I guess, Tim, for you, just as we think about the monetization opportunity around Nitro and Andi, we've certainly seen other SaaS companies kind of layer in and weave in AI functionality with the -- as part of the platform to differentiate. What is the monetization path for you, as you think about -- as we think about Nitro and Andi add-ons? Are these going to be consumption-based models tied to kind of usage -- as more people use Nitro or Andi, you're going to get revenue tied to it? Walk us through the monetization opportunity around those 2 new products.

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Paul Shawah, Veeva Systems Inc. - SVP of Commercial Strategy [47]

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Yes, hey Brian, so this is Paul. You mentioned 2 things there, one was Nitro and the other was Andi. So I'll take them separately. Nitro is the commercial data warehouse. And that -- there's certainly a monetization concept around Nitro, which will be driven by, basically the size of the organization, we're using field users as a metric for that. And that's a significant opportunity, we've talked about being roughly the size of CRM. That's a foundation for AI. It's not necessarily the AI capability. It's what AI is driven from.

Andi is the application engine. And that does a very specific thing. That drives insights, it drives suggestions directly to the field, so the industry -- people in the industry typically talk about that as next best action. And we'll also monetize that as well. And that's on a per user, per month basis for our customers.

And then you also heard Peter in his prepared remarks, talk about some of the AI that we're building into the application. And some of those components are just about really driving efficiency, making the application more smart -- kind of smarter or more compliant. And some of those are differentiating, and just value-add, that just are part of the existing license.

So what Peter talked about as Approved Notes, that's part of the Veeva CRM core license. And what we talked about as auto claim linking. That's part of the Vault PromoMats license. So you see a little bit of a mix of both where some are very specific products and then others are embedded into the application.

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Peter P. Gassner, Veeva Systems Inc. - Founder, CEO & Director [48]

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Yes, I would just add on to that. Broadly speaking, some AIs can be added into the existing subscriptions. Some are going to be brand new AI applications that are a subscription on their own. And I wouldn't be surprised if we have transaction oriented AI pricing in the future where it fits.

So Veeva, I think -- the thing to remember is, Veeva will run to the complexity. We will really find the application that really, really fits for an area. And part of that is finding the pricing model that fits for that area. And that's going to depend on the use case, just as it does in a transaction-oriented system. It can depend on the use case and in the AI-oriented system.

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Operator [49]

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Your next question comes from Brian Peterson with Raymond James.

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Brian Christopher Peterson, Raymond James & Associates, Inc., Research Division - Senior Research Associate [50]

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Congrats on the quarter. So just on the record Vault wins, I'm just curious, how much of that is a function of having the 17 Vault applications that you referenced? Or is there anything that we can actually read into in terms of deal close rates or anything with sales velocity that that's accelerating that as well?

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Matthew J. Wallach, Veeva Systems Inc. [51]

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Well, so -- and this is Matt. It's a good question, Brian. So that was the number of new logos. So companies that bought their very first Vault. And so that is -- it's going to be because of success of those Vaults that they bought at other customers. So is it because there's so many Vaults? I guess yes, I mean that would contribute to it, that there's going to be more opportunities, more shots on goal per se. But I think that what is driving faster adoption by new companies, is that these companies are all in the same industry.

The overarching objective of people that work in the life sciences industry is to help patients. And so what we find, and the reason why our reference selling is so intense, is because if they can help another company help patients, they'll do it. So our happy customers are pretty eager to talk to prospects about their use of Vault, and because their use has been so positive across so many of these applications, we're getting a lot of opportunity to introduce Vault to new companies.

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Brian Christopher Peterson, Raymond James & Associates, Inc., Research Division - Senior Research Associate [52]

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Got it. And Tim, maybe one for you, just on Vault. Given the success that you're having across the product portfolio, I'm curious, how should we be thinking about service capacity investments and any impact on margins going forward?

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Timothy S. Cabral, Veeva Systems Inc. - CFO [53]

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Yes. So Brian, on the services side of Vault, we have a really strong team there. A lot of good domain expertise in that team. And as you've seen us grow the Vault business over time, obviously, a lot of pattern recognition on best practices that a company like Veeva can be a cross pollinator or a pollinator of best practices across the industry. So that's happening.

In terms of the capacity model, we continue to not only build talent through our Generation Veeva, which is our college recruiting engine, which has gone fabulously well over the years. Certainly in the last couple of years, we've accelerated that as well as finding great people in the industry. So we're not necessarily capacity constrained. And one other thing I would add to that Brian is, over time, like you saw in Commercial Cloud, we built quite a nice ecosystem of partners in the U.S. and Europe primarily and starting to -- some early stages in Asia. So from a capacity perspective, we're in good shape, given those dynamics.

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Operator [54]

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Your next question comes from Rishi Jaluria with D.A. Davidson.

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Rishi Nitya Jaluria, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [55]

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I wanted to start on Veeva Claims. It looks to be a brand-new product versus QualityOne, where you were taking existing solutions in QMS and QualityDocs and kind of repackaging them into something new. Should we expect this idea of purpose built OLS products to be a new normal? And then alongside that, is there potential for a little bit of a margin hit since you're actually investing dollars in product development versus retooling existing solutions? And then I've got a follow-up.

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Peter P. Gassner, Veeva Systems Inc. - Founder, CEO & Director [56]

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Yes. It is the right way to think about it, that Claims is a new -- a brand new application. It's in a separate Vault from the QualityOne Vault. It's a standalone. And the reason for that is it's a very specific use case, has a different set of users and it rolls out in a different way.

So for example, our first customer, from -- for Claims, was with a top 20 CPG customer. Now in turns out, this is the first application that they bought from Veeva because they had a very specific need in the area of claims and it needs to roll out on its own way. Now that customer we believe will buy other products from Veeva over time.

So now in terms of the margin hit, the other applications, QualityOne and the Regulatory, they need effort and specific features for outside of life sciences. So I would see no really difference in the margin hit. This will be small things that you won't be able to see, in terms of overall cost. You have to remember that we're getting a lot of leverage from the Vault Platform. That is -- if you look at the maturity of the Vault Platform now versus even 2 years ago, it's pretty striking. Like that's the -- if you look at the iceberg where most of the effort is under the covers, the -- most of the effort in our product area is actually under the covers in our Vault Platform. You see the application sales but the leverage and the operating model and the power of the sales is actually, a lot of it coming through the Vault Platform, where we've made tremendous strides over the -- really, over the last 2, 3 years.

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Rishi Nitya Jaluria, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [57]

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Got it. That's helpful. And then just as a follow-up, I wanted to maybe take a step back. So in 2015, so about 4 years ago, you put out this $1 billion target or $1 billion run rate target for calendar year '20. Clearly, you've overachieved that, and if we go by your guidance, you're going to hit that $1 billion run rate next quarter. So about 1.5 years or so ahead of schedule with significantly higher margins. If you were to take a look back, where was it? Or what particular areas was it that you're able to kind of hit that goal significantly ahead of schedule and with higher margins? Was it things like Vault taking off faster than expected, was it a larger kind of set of solutions that you were able to go after? Or anything else, that would be helpful.

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Peter P. Gassner, Veeva Systems Inc. - Founder, CEO & Director [58]

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Yes. That's a great question, right. As we think back to 2015, quite some time ago now, and we had the plan. So your basic question is, what went better than expected? I would say the number one thing is that nothing bad happened, right? When you're making that long range of a plan, you have to assume that there will be some unexpected bad news along the way, right? Nothing bad happened. We -- I guess since 2015, we've roughly doubled the size of the company, close to or so. And we've retained our energy and in fact, got some acceleration, I think. We've actually gotten more efficient as we got larger, more efficient in our selling cycle. I don't think we anticipated that we would get more efficient as we grew larger. So that's happened well. I think those are really the things. Outstanding execution, good decisions on process and no one expected bad news, and so we got there. And I would say, along the way, we probably had some key things that just happened to break our way and that accelerated us.

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Operator [59]

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Your next question comes from Kirk Materne with Evercore ISI.

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Stewart Kirk Materne, Evercore ISI Institutional Equities, Research Division - Senior MD [60]

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Congrats on the quarter. Given that you guys are just coming off Summit, I was actually curious, just based on some of Matt's earlier comments, is there a number of Vaults that a customer or after a customer buys, that the discussion sort of tips more to a discussion almost more about the platform meaning, are we at the point now where companies are betting on your platform as much as they are betting just on some -- they obviously expect really good products to go along with that. But I'm just kind of curious, the bigger customers [Matt] has been talking about the benefits from just having everything on an integrated platform as they are about the specific product features for each of the specific -- it may be too early for that, but I'm just kind of curious, if you're comparing say this year and last year, if things are heading in that direction. It sounds like that it is, but just curious on your thoughts, maybe.

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Timothy S. Cabral, Veeva Systems Inc. - CFO [61]

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Yes. I don't think it's too early to think that way. I mean when we first invented Vault, remember, the very first PowerPoint slide we put together was Vault as an enterprise platform. So the idea was that companies would make that part of the electricity that runs the company. And we thought it could take 4, 5, 6 years before we got there. And we did get there faster than I think we expected at that time.

The way you asked your question is interesting. I think that when you buy the first application, you're probably not thinking, this is my platform across the board. When you buy the second application and see the benefits of having 2 major systems of record on the same platform, which has never been possible before across Clinical, Regulatory, Quality, Medical and Commercial. I think when you get the second one, is when the discussion, at least starts internally, is like hey, we got great benefit from this second one. What if we got them all? And so we don't have a formula here. And I think a lot of companies are different. But I don't think that the first successful project necessarily is the entrée to an enterprise-wide deployment. But I do think the second successful one is a good way to think.

And so as a specific example, we talked in the prepared remarks about one company, just went live with all of their employees, 50,000 employees around the world with QualityDocs. That was actually their second Vault. They also had PromoMats. And then their decision to expand into Submissions Archive, Submissions and eTMF is basically making it an enterprise platform. So I hadn't planned it this way, but that specific example does support the answer there.

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Stewart Kirk Materne, Evercore ISI Institutional Equities, Research Division - Senior MD [62]

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Okay, that's helpful. And then maybe just one last one I will ask, you had mentioned (inaudible) it's always been the important, referenced on, it's always been key to your success. Getting into (inaudible) if there's some size and scale in terms of the number of customers, or the amount of ARR, where it's time to sort of turn on the gas even more from just a distribution and a sales perspective, meaning making sure that you're covering a bigger portion of the U.S. or the amount of targets that you might have out there, in the specific industries. Are we a year away from that? Are we there? I'm just kind of curious about -- you want to have success with the customers and your customer's success translates into more selling opportunities. Where are we on sort of like, now it's time for us to sort of focus on adding distribution capabilities, or just distribution coverage more broadly, versus just having to focus on making sure these guys are really successful from a customer perspective.

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Peter P. Gassner, Veeva Systems Inc. - Founder, CEO & Director [63]

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Yes. I would say we're early days. We're really focused more on the customer success. We just introduced this claims application, for example. We have some customers using our Regulatory application outside of life sciences, but it's new. It's new, it needs more features. We have our top 20 CPG that's rolling out QualityOne through all their manufacturing sites. But they're less than halfway through that, and they have to get through that and then we have to optimize that. So we're really focused on the customer success. Now we're incrementally adding head count in the field, that's for sure. But we feel we'll be tremendously successful outside of life sciences, if we buckle down, stay true to the Veeva Way and use these projects to make our products excellent.

And what can get in the way there is, if it becomes a sales game and you're just trying to complete as many sales as you can with a product that's not quite ready. Now one thing to know is we don't feel competitive pressure outside of life sciences. We're doing something quite unique there with this Vault Platform, with applications for Quality, Regulatory, Clinical and Claims. That's -- it's not that we're competing with anybody in that. We're sort of also evangelizing or espousing this model outside of life sciences that you can get this. And there is value in that. And that takes time.

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Operator [64]

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I apologize, we are out of time. I'll now turn to it back to Peter for closing remarks.

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Peter P. Gassner, Veeva Systems Inc. - Founder, CEO & Director [65]

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Thanks, everyone, for your time today and we'd like to thank our employees for their dedication as well as our customers and partners for their trust and partnership. Thank you.

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Operator [66]

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