Veeva Systems - Q4 2023
March 1, 2023
Transcript
Ato Garrett (Director of Investor Relations)
Good afternoon, and welcome to Veeva's fiscal 2023 Q4 and full year earnings conference call for the quarter and year ending January 31st, 2023. As a reminder, we posted prepared remarks on Veeva's Investor Relations website just after 1:00 P.M. Pacific today. We hope you've had a chance to read them before the call. Today's call will be used primarily for Q&A. With me today for Q&A are Peter Gassner, our Chief Executive Officer, Paul Shawah, EVP, Commercial Strategy, and Brent Bowman, our Chief Financial Officer. During this call, we may make forward-looking statements regarding trends, our strategies, and the anticipated performance of the business, including guidance regarding future financial results. These forward-looking statements will be based on our current views and expectations and are subject to various risks and uncertainties. Our actual results may differ materially.
Please refer to the risks listed in our earnings release and the risk factors included in our most recent filing on Form 10-Q. Forward-looking statements made during the call are being made as of today, March 1, 2023, based on the facts available to us today. If this call is replayed or viewed after today, the information presented during the call may not contain current or accurate information. Veeva disclaims any obligation to update or revise any forward-looking statements. We may discuss our guidance on today's call, but we will not provide any further guidance or updates on our performance during the quarter unless we do so in a public forum. On the call, we may 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 and in the supplemental investor presentation, both of which are available on our website. With that, thank you for joining us, and I'll turn the call over to Peter.
Peter Gassner (CEO)
Thank you, Ato, welcome everyone to the call. We had a strong finish to the year with results ahead of our guidance for the quarter and year, thanks to great execution by the Veeva teams across all areas. We're early in the significant industry cloud opportunity, we're executing well. It was a breakout year for clinical data management, we saw great traction in newer areas such as Safety, Link, and Compass. Our innovation engine is strong, our strategic partnerships with the industry are increasing. We issued guidance for fiscal 2024 and initial guidance for fiscal 2025 to provide context for the one-time revenue impacts to 2024 related to TFC. Normalizing for TFC and FX, we expect revenue to grow about 15% in fiscal 2024 and at least 15% in fiscal 2025. At this point, we'll open the call to your questions.
Operator (participant)
Thank you, sir. Everyone, if you have a question today, please press star one on your telephone keypad. If you would like to remove yourself from the queue, that is also star one. Again, please press star one if you have a question. We'll go to Brent Bracelin, Piper Sandler.
Brent Bracelin (Managing Director and Senior Research Analyst)
Good afternoon. Peter, really appreciate your kinda long-term thinking here. This one's kinda aimed squarely at you here. I would love to get your initial thoughts on how Veeva's thinking about incorporating AI and large language models into the business. Is there an opportunity to lean in here to either lower costs internally around AI or are you thinking about new revenue streams via new products that you could build on kind of these AI advances and large language models? Thanks.
Peter Gassner (CEO)
A good question about AI. Well, certainly, ChatGPT kind of taken the world's imagination by storm, and it is a significant type of technology. I won't go too long into that, but it's significant. To answer your question, Brent, I don't see any opportunity to really lower internal costs. Most of what we do is relationship-based in the selling and the marketing and innovation-based, true innovation-based and construction in the product area. I don't see anything there. As far as for value for our customers, that's something we'll consider over time. We won't rush into it. We have a lot of data in Veeva, in the industry cloud, overall for the industry, and then we have our customers' data for each customer.
There's potential that we can do some things to answer some questions about the industry overall for and/or help the customer answer some questions about their internal operations. I do think the large language models are gonna be a thing and the chat-type interface. Ask about a question, get a relatively low-quality answer that you can kinda move forward from for there. I think there's a place for it. I don't think it's a revolution, and we'll just see how it goes.
Brent Bracelin (Managing Director and Senior Research Analyst)
Helpful color. One quick follow-up for Brent. Really appreciate the initial kinda milestone for fiscal 2025 here implies a rebound to 19% overall growth. In our forecast, it does suggest that the R&D business could rebound and normalize back to 25%, 30%. Is that the right way to think about the drag in R&D in this year and then a kind of a normalization in R&D growth the following year? Is that the right way to think about the impact here with the accounting shift?
Peter Gassner (CEO)
Thanks, Brent. We're really excited about the momentum we're seeing in the R&D business. It's a key obvious growth driver for us as we look out 2024, 2025, and beyond with, you know, particular strength in the clinical space, quality, so really broad-based strength. It is really driving that growth that you're seeing as you look out into 2025.
Brent Bracelin (Managing Director and Senior Research Analyst)
Okay. Thank you.
Operator (participant)
Next up is Brian Peterson from Raymond James.
Brian Peterson (Managing Director and Senior Equity Research Analyst)
Hi. Thanks for taking the question. I wanted to hit on your success in EDC with 6 of the top 20 customers now on the fold. Can you talk about what's driving that success? I'd love to understand, you know, Brent, maybe how to think about the revenue ramp of those deals. Like, how long would those typically get to be fully up to, like, the fully penetrated ARR?
Peter Gassner (CEO)
Yeah, I can take those. This is Peter. We're really happy with the success of EDC. I guess, you know, sometimes things come in bunches, and three of the top 20 in Q1 , I wouldn't expect that every quarter because we'll run out of the top 20 very quickly, right? It happens like that. Why is it happening? Why did it happen all in the same quarter? That's a series of coincidences, really. Why is it happening overall? We've been saying this for many years. It's just a better EDC product. More complete. It's true cloud, and it comes from Veeva, which we have a clinical operations suite and a clinical data management suite. That's what customers want.
These are long, long projects. Full revenue on some of these projects, you know, you're looking at sort of 3 to 5 years type of thing. Now they're not all the same and it. I'm not saying that some might not be 2 and some might not be 6, but if you, if you look at 3 to 5 years, that's kind of a good thing to think about there. It's long-term revenue.
Brian Peterson (Managing Director and Senior Equity Research Analyst)
Right. No, that would be-.
Peter Gassner (CEO)
I will say, if I just add a little color, that's The EDC, that's, there's a lot more to the clinical data management suite too, that's very significant over time. Randomization trials, supply management, ePRO, our clinical database, and there'll be more. I think you should think about EDC almost like you thought about eTMF as the start of our clinical operations. It's, it's big and significant, but the overall clinical data management is even bigger.
Brian Peterson (Managing Director and Senior Equity Research Analyst)
No, that's good to hear, it sounds like there's a lot of good news in clinical. maybe pivoting to the commercial side, I know this was in the prepared remarks a little bit, but, you know, just in terms of the CRM transition to Vault, you know, any early feedback that you can share from customers that you've heard? I'd love to get any perspective on that. Thanks, guys.
Paul Shawah (EVP, Commercial Strategy)
Yeah, I can take that. This is Paul. Yeah, the Vault CRM is going really well, pretty much across all dimensions. We have the product development team working hard. I'd say they're ahead of schedule. We're actually going to have a demo, our first demo at our summit coming up in May, that's super exciting, and I'm excited about that. I know our customers want to see that. You know, there's not a whole lot our customers need to do right now, but we are having conversations with a number of them. By and large, the feedback's positive. You know, they're just trying to understand what this means for them and what timing looks like and what's entailed, and our job is to make it really easy for them to move. Yeah, overall going really well with Vault CRM.
Brian Peterson (Managing Director and Senior Equity Research Analyst)
Thanks, Paul.
Operator (participant)
Next up is Joe Vruwink, Baird.
Joe Vruwink (Managing Director)
Great. Hi, everyone. Peter, in the prepared remarks, there was a mention of kind of early momentum in some of the newer areas like Vault Safety, which is a hard one to get into, but also something like Link, I think is one of the more successful, you know, new products for commercial in some time, and then of course, Compass. You know, when you step back and you think of this pod of newer products, and then you maybe rewind, you know, and think about the introduction of, like, submissions or eTMF, you know, the pod of kind of your, you know, first go after in the clinical areas, do you think the opportunity ahead is just as compelling and consequential as kind of that mid-2010s timeframe for Veeva?
Peter Gassner (CEO)
That's a really thoughtful question. I wouldn't draw the exact parallel, but I think the parallel is similar. The reason why is in R&D, there's multiple very separate entry points. Safety is quite a bit different than clinical. It's quite a different than regulatory. In the commercial area, sales, medical marketing, things are more related, and they're more fluid together. It's not distinct entry points. It's all related buyers. In terms of, yes, a second leg of things really, increasing our potential, that's absolutely what's happening. We have our established markets of the CRM suite and of commercial content, actually. Then we have Crossix, which is pretty well established, but has a lot of room to grow. You know, it has some advertising headwinds right now, but it has room to grow.
Then we have things that are very early, Link and especially Compass. Those are broad things and can lead into other add-on type of things. I think you're pretty accurate in the way you're saying it. It's the second leg of commercial is things like Link and Compass and business consulting as well.
Joe Vruwink (Managing Director)
Okay. That's great. maybe just a question on reconciling the margin outlook. there's some immediate impacts of the TFC, T&E is coming back. Is there kind of another category of incremental spend as you think about next year? related to maybe that thought, there was a comment in the remarks of just the evolution of Compass and taking your time to get it right and kind of introducing some new things in 2024. Would that maybe be an example of an area that's receiving incremental investment?
Brent Bowman (CFO)
Yeah. Thanks, Joe. If you look at the margin guide, I think you nailed it pretty well. When you adjust for the termination for convenience, you get to, you know, that's about 250 basis points of impact, so you get to about 36.5%. Then there's about another 1% coming in to travel and events. We had recently our first in-person field kickoff event in a number of years, so we're kinda getting back to normal, to a normal run rate around getting in front of customers and getting together. Then there's the continued investment for growth. You know, Compass is one of a number of areas where we're gonna continue to invest, where we see an opportunity to drive our durable business model.
Ken Wong (Managing Director and Senior Analyst)
Okay. thank you very much.
Brent Bowman (CFO)
Yeah. Thanks, Joe.
Operator (participant)
Our next question is Ken Wong, Oppenheimer.
Ken Wong (Managing Director and Senior Analyst)
Great. Thanks for taking my question. This is for, I guess, it could be Peter or Paul. Back to the CRM, the transition, just wondering, you know, with this demo that you guys are gonna have in May, how should we think about what this new CRM looks like? Is it really just sort of a lift and shift of what you've got today on Salesforce, or is there gonna be a bit of a reimagination to optimize for the Vault AWS backend?
Paul Shawah (EVP, Commercial Strategy)
Yeah. Hey, Ken. This is Paul. Yeah, good question. The way to think about it is it's primarily a lift and shift, so we're moving the apps that the vast majority of our end users touch every single day remain the same. Those apps today point to Salesforce, and in the future will point to Vault. That's the simple way of thinking about it. We're... You know, that's a, that's a design decision by us. Now, why are we doing it that way? One, because it's a market-leading CRM. The CRM works, and it works really well for our customers, and it's gonna make the move much easier for our customers to get there. That's how we're thinking about it, and that'll play out, you know, just really easy for the end users.
Everything stays the same. One day it's pointing to Salesforce, and the next day it's pointing to Vault. There's a lot of engineering work to make that happen. We'll start to showcase some of that, starting at our summit and then, you know, more and more as time goes on.
Ken Wong (Managing Director and Senior Analyst)
Got it. Great. Thanks a lot, Paul. For Brent, just a quick clarification on 2025. I know it's super early, just the margin goals would suggest kind of in that 35-ish% range, I guess 35.5%, give or take. Should we think of that as more of a generic plug similar to what you previously mentioned in the long-term target, so, you know, kind of just mirroring that, or is that a reasonable expectation for how you're envisioning the margin expansion from 2024 to 2025?
Brent Bowman (CFO)
Hey, Ken. Yeah. You know, what we said is at least $1 billion in operating income. You know, we're 2 years out, and that's above our long-term target of, you know, 35% plus. You know, we're gonna continue balancing growing revenue as well, you know, as well as the investments required around that. You know, it's early. We feel good about how we're executing, and, you know, we're gonna deliver at least, you know, $1 billion in op income.
Ken Wong (Managing Director and Senior Analyst)
Got it. All right. Fantastic, guys. Thank you.
Brent Bowman (CFO)
Yep. Thank you.
Operator (participant)
The next question is Anne Samuel, J.P. Morgan.
Anne Samuel (Executive Director and Lead Equity Research Analyst)
Hi. Thanks so much for taking the question. I was hoping maybe you could walk us through what headwinds and tailwinds you incorporated within the 2024 revenue guidance? Does the top end of your revenue range imply any improvement in the macro backdrop?
Brent Bowman (CFO)
Yeah, I'll take that. What we've assumed in our guide for the year is really the continuation of what we started to see in June from a macro perspective. We haven't assumed any improvement nor worsening in the macro that we continue to see June through the balance of the year. You know, that's some items like, you know, Peter mentioned the advertising spend, a little bit of headwind on Crossix. We assume that into our guidance as well as some of the SMB, you know, capital conservation that we saw in the back half of the year. That's what's informed into our guide as you look out to fiscal year 2024. I think you had a second question, if you wanted to repeat it.
Anne Samuel (Executive Director and Lead Equity Research Analyst)
Oh, no. That was really helpful. You know, maybe just was hoping you could walk through the cadence of just the pricing adjustments, you know, how those will flow through the model. 'Cause I think you said in your prepared remarks you don't expect much in fiscal 2024. How much should we expect this year, and how should we think about the cadence going forward?
Brent Bowman (CFO)
Yeah. What we announced effective April 1st going forward that we'll have a price increase of the lower of 4% or CPI. How to think about that for 2024, it's not going to have a material impact on our revenue. You think about Q4 as our largest renewal quarter. It'll have more of an impact on billings in fiscal year 2024, and then it'll be more impactful on revenue in fiscal year 2025. Realize it could take a few years for that to fully play through. We have customers on multiyear arrangements, you have to come up for renewal, so it'll take a few years to see the full amount play through.
Anne Samuel (Executive Director and Lead Equity Research Analyst)
Helpful. Thank you.
Brent Bowman (CFO)
Yeah. Thank you.
Operator (participant)
We'll go to Stephanie Davis, SVB Securities.
Stephanie Davis (Senior Research Analyst)
Hey, guys. Thanks for taking my question. I was hoping you could tell us more about the large Crossix wins. Are you seeing a renewed interest in some of these digital commercialization tools despite the tough ad environment? When we think about it, will folks be more reactive in adopting these solutions once the market starts to improve, so we could see kind of a fast follower sort of dynamic?
Paul Shawah (EVP, Commercial Strategy)
Stephanie, I believe your question broke up in the beginning, so could I ask you to repeat that?
Stephanie Davis (Senior Research Analyst)
Yeah, sure thing. It's just the large Crossix wins and kind of if this is going to be something we see people prepping for, the environment improving in ads. Were they gonna add that ahead of it, or do they adopt their solutions once the market kinda starts to improve as a reactive sort of move?
Paul Shawah (EVP, Commercial Strategy)
Okay. Yeah.
Peter Gassner (CEO)
The enterprise type deals in Crossix, I think that we're working on some more of those. We, you know, now it's undetermined when those are gonna come in. I don't think those are really correlated too much with the headwinds in advertising. That's more long-term things that people are thinking about. Do they want to standardize and have a common operating model across all their brands and go forward with the enterprise approach, or do they wanna have the budgets brand by brand? It's just a slow evolution to more of an enterprise buy that's not affected by the ups and downs of advertising.
Stephanie Davis (Senior Research Analyst)
All right. Understood. As a follow-up one, the CRM business. You guys called out a number of SMB wins. Can you tell us how and who you're winning against? I mean, because we spent so much time about the transition away from Salesforce last quarter. Is that factoring into any of these conversations as you go through it?
Peter Gassner (CEO)
We're continuing to win. I mean, our win rate really hasn't changed in CRM. We continue to execute really well. You know, the competitive environment is pretty much the same. It's all of the same players. The way to think about it is these are generally one of two categories. It's either pre-commercial companies, SMBs that are in either the US. market or the European market, or it's domestic companies that you may see in Japan as an example. Those are the kinds of companies that we're winning and we're winning against traditional competitors. It's the, they may not have anything if they're a pre-commercial company. They may be buying their first CRM system.
If it's a domestic, it may be a local competitor, or some of the traditional competitors that we've seen.
Stephanie Davis (Senior Research Analyst)
All right. Helpful as always. Thank you.
Operator (participant)
The next question is Gabriela Borges, Goldman Sachs.
Speaker 21
Hi, this is Kevin on for Gabriela. Thanks for taking the question. From a capital allocation standpoint, Peter, can you talk about doing M&A? You know, how are you thinking about doing M&A? And realize you're being patient there and trying to find the right asset. You know, what are you seeing in the private markets from a competitive standpoint and maybe how does that play into your R&D strategy? Thanks.
Peter Gassner (CEO)
Yeah, we're always... No change in our M&A strategy. We're always quite careful, right? Look for a cultural fit, look for a business fit, and something that we can execute on and those opportunities are rare. I would say we're looking more than we have in the past, but if you compare Veeva to 3 years ago, we have more effort in the M&A area. We're scouring the market more, and we've always got a few things in the hopper, and they most likely don't come through for a variety of reasons. I still am bullish over the next year or 2 that we can have something because I think people are getting a bit more realistic on their valuations, and they're realizing that there's not gonna be a quick turnaround.
I wish I could give you a schedule of acquisitions, but I can't. I'm really proud of our acquisition track record, and I think that will continue.
Speaker 21
Thanks, Peter.
Peter Gassner (CEO)
Thanks.
Operator (participant)
Craig Hettenbach from Morgan Stanley has the next question.
Craig Hettenbach (Equity Research Analyst)
Just a question on the operating margins and the implied, you know, 35.7% in fiscal 2025, or at least that much. Can you just talk about the hiring pace and things you're doing this year after what was a very strong fiscal 2023 and what environment you're seeing out there as you're looking to hire?
Peter Gassner (CEO)
I can take that one. This is Peter. The environment is good. It's a more favorable hiring environment than it was 12 months ago, I would say. I expect that favorable hiring environment to continue for multiple reasons. Veeva's a well-run company. I think people like to work at a well-run company. I think our work anywhere helps. I think there's less froth and speculation in the market. We'll really be measured in our hiring, and we've always done that. We look at where we can grow and we can invest. We keep our teams lean. That's an important thing we do. We always wanna run a good profitable business. I think the way to think about it is sort of business as usual as Veeva.
We don't go crazy in the boom times, and we don't cut back drastically, in the tough times. We sort of just keep rolling right over those speed bumps.
Craig Hettenbach (Equity Research Analyst)
Got it. Then just to follow up on the macro backdrop. It was a little choppy last calendar year, some softness in the middle part of the year, and then it stabilized. Just curious on that, on kind of the Crossix business and SMB, where it did soften a little bit. It sounds like there hasn't been much change in recent months, but if you can provide any color there in terms of any types of influence you're seeing in the macro today?
Peter Gassner (CEO)
Yeah. In terms of the macro over the last 90 days, we really haven't seen any change over the last 90 days. That's no predictor of who knows what happens, you know, 90 days from now. We don't see any signs... I don't see any signs of rapid change right now. It seems like we're, for a while now, we're in a point of consistency, which overall that's good for Veeva because we deal in core capabilities to improve efficiency and effectiveness. When there's less change in the macro, either for the crazy up or the crazy down, that's what helps us a lot. When there's less change in the macro, people look to build these, our customers look to build these durable capabilities.
Craig Hettenbach (Equity Research Analyst)
Yeah. Thank you.
Operator (participant)
We'll take our next question from Rishi Jaluria, RBC Capital Markets.
Rishi Jaluria (Managing Director and Senior Equity Research Analyst)
Wonderful. Thanks so much for taking my questions. Peter, let me start by diving a little bit deeper into the Generative AI piece and less in terms of how it impacts your engineering and software development efforts and more I wanna think about what is the impact on the actual industry itself. I mean, we saw recently, right, there's a pharma company that is putting a drug through clinical trials soon, and the entire drug was designed by Generative AI. There clearly seems to be potential disruption coming to the industry from Generative AI. Can you maybe talk about what you think that could happen, what impact that could have on your customers and, you know, how easily that'll impact your business? I've got a follow-up.
Brent Bowman (CFO)
Well, pretty early on that, I didn't read that exact press release. I would be surprised if no human touched that drug during its development and its approval. I don't think that probably happened. I think there's promising things in the early phase of discovering a drug, and that's not actually really due to the large language models or the generative AI. That's more to machine learning algorithms that are math-based. You know, I don't wanna be a skeptic here, but I don't see the real revolution. You know, that's the thing about revolutions. You'll know it when they happen, and so far really haven't seen it.
Rishi Jaluria (Managing Director and Senior Equity Research Analyst)
Okay. Totally, totally fair. Appreciate that. Wanted to think about, you know, the impact from a number of drugs coming off patent, you know, this year and maybe the next 18, 24 months. Obviously the big one with AbbVie's Humira. How are you thinking about the potential puts and takes on that? Is that gonna have an impact on the number of pharma reps and maybe lead to further cuts, which has an impact on the CRM business? Maybe conversely, you know, given the patent cliffs coming up, can that be a tailwind for R&D as some of the big companies try to iterate on drugs faster and get new drugs, blockbuster drugs out to market? Thanks.
Paul Shawah (EVP, Commercial Strategy)
Yeah, I can take that. You know, this is normal course of business for the industry. You know, as you look out over the next 5-years compared with the last 5-years, the amount of revenue that's at risk over the next 5 years as a percentage of the overall industry revenue is actually slightly less than the last 5. It's kind of interesting, the patent thing. You know, it happens. This is normal course of business for the industry. What tends to replace the revenue from those drugs that are that lose their patent expiration is new medicines. You brought up the AbbVie example. You know, this is in the public domain. There's expectations that new medicines from AbbVie will be just as large, if not larger, than Humira was in the marketplace.
That's very common, right? The industry invests a lot in R&D, they innovate, and new medicines replace the revenue from previous medicines, which to your point earlier, means more clinical trials, it means more launches, more drug approvals, and then ultimately it means, you know, sales reps continue to sell and launch these new medicines. It's, it's kind of this virtuous cycle in the industry. I expect that to continue, if not get stronger, because of the amount of investment the industry's making.
Rishi Jaluria (Managing Director and Senior Equity Research Analyst)
All right, great. Really helpful. Thank you so much.
Operator (participant)
Up next is Saket Kalia, Barclays.
Saket Kalia (Managing Director and Senior Equity Research Analyst)
Okay, great. Hey, guys. Thanks for taking my questions here. Paul, maybe for you, just a little bit off that last line of questioning, I was wondering if you could talk about what you're hearing from customers on just overall pharma sales rep plans for this year, calendar 2023. I think it was said in the prepared remarks that Veeva's actually saw CRM, Veeva CRM seats flat year-over-year. How do you think about that for next year?
Paul Shawah (EVP, Commercial Strategy)
Yeah. This calendar year, I expect it to be roughly flat also, but I'll take a little bit of a step back and just to paint the overall picture for you and for others that, you know, may not have been following as closely. We've always talked about a roughly a 10% reduction, through the last fiscal year. We've seen the majority of that play out. This year we expect we'll see some additional reductions, play out, but I, you know, I think it's gonna stabilize. The market's going to hit and operate at this new steady state, and I think we'll actually end up slightly less than the 10% that we predicted.
We're seeing signs that the market is stabilizing, but I think this year we'll have some gains in CRM, in the CRM suite, but we'll also see a slight reduction in the market, so you can think of it as relatively flat.
Saket Kalia (Managing Director and Senior Equity Research Analyst)
Got it. That's very helpful. Brian, maybe for my follow-up for you. You know, for TFC, I think going back to the analyst day, we're expecting about a $60 million impact. I think that's a little bit higher now as we look at the 2024 guide. Can you just talk about some of the mechanics there? What changed? Also just remind us whether that TFC is gonna have any impact on billings or cash flow.
Brent Bowman (CFO)
Hi, Saket Kalia. In the Q3 timeframe, we quoted a $60 million termination for convenience impact, and that was from existing deals in place at that time. You fast-forward, we had a very successful Q4 quarter. You know, we closed three large CMS deals. And with that, we added another $15 million of revenue pull forward. That's, you know, $60 to $75, and then in addition to that, there's about $20 million of anticipated deals that we expect to close in fiscal year 2024 that would have pulled forward revenue. When you add the $75 and the $20, you get to $95, and that's, I think that's very prudent to consider when you're looking at the growth rates year-over-year. That's how to think about it.
Saket Kalia (Managing Director and Senior Equity Research Analyst)
Got it. Just to clarify, no real impact to billings or cash flow. This is really an accounting point for rev rec, correct?
Brent Bowman (CFO)
Yeah. It really is. Yeah, to follow up. There's no impact in the total revenue value of these contracts. It is purely timing. To your point, there is no impact to billings and no impact to OCF.
Saket Kalia (Managing Director and Senior Equity Research Analyst)
Very helpful. Thanks, guys.
Operator (participant)
We will take a question next from Dylan Becker, William Blair.
Dylan Becker (Equity Research Analyst)
Hey, guys. Congrats on the quarter, appreciate you taking the questions. Maybe following up on the TFC piece and understand kind of some of the near-term accounting dynamics. How are you guys thinking about that incremental multi-year kind of willingness and adoption, maybe for Peter, as validation of kind of that long-term strategy you guys have kinda called out and maybe as for Brent as well, as kind of giving you some of that initial confidence and outlook as we think about giving guidance for fiscal 2025?
Peter Gassner (CEO)
Well, I'll take the first part of that. Certainly the vote of confidence from the customers in the EDC area, in the clinical data management area, which is one of the most critical and one of the most complex things and these long, multi-year roll-outs. Yeah, we take that as a vote of confidence and really humbled by that. We know we got to execute really well. That's where we feel like in clinical data management, we got a sort of a tiger by the tail, and we got to pay attention and make sure we deliver on that. Yeah, very excited about that. How that flows through to the financials, that's for Brent.
Brent Bowman (CFO)
Yeah. When, you know, you asked about how we look out the forecast. We do our forecast at a pretty granular level. You know, we, you know, we work with the business and think about it at a product level, at a market level, area level as well. These ramping deals play into that as well. When we combine all of those that informs our guide and, you know, we feel good about looking out at 2025 at least, you know, $2.8 billion in revenue.
Dylan Becker (Equity Research Analyst)
Got it. Super helpful. maybe switching over to another area as called out on the Compass side of the equation, and kind of prioritizing dedicated sales teams. Is there anything to call out in the go-to-market piece, any kind of sales model that needs to change there, and then maybe how that evolves and maybe benefits from the broader rollout of the sales and prescriber piece in fiscal 2024 as well?
Peter Gassner (CEO)
I can take that one. In general, we have structured our sales team in terms of the commercial sales team and the R&D and quality sales team. They have a lot of products that they represent, and that helps our customers, helps Veeva be a strategic partner, and that's what our customers want. Sometimes when a product is different enough or new enough or something is different about it, we'll have a specialized sales team. We made that decision for Compass. It's a very specific product, and it's going to be a big product. It has a kind of an entrenched competitor. No change in our philosophy. We've always had that philosophy. Every year, we sort of make those decisions whether we need a specialized sales team.
That's a decision we made, some number of months ago and feel real comfortable with it.
Dylan Becker (Equity Research Analyst)
Got it. Super helpful. Thanks, guys.
Operator (participant)
We'll go back to Charles Rhyee, Cowen.
Charles Rhyee (Managing Director and Senior Equity Research Analyst)
Yeah, thanks for taking the question. I wanted to follow up on Crossix a little bit more. You know, Peter, I think you said that the macro doesn't really affect the selling cycle for Crossix. It's really a decision whether when someone wants to go to enterprise or stay brand by brand. You know, you have called out a little bit of weakness in this, in this category. What is then clients saying in terms of maybe not moving forward? I know you signed a top 20 pharma here in this, or you launched this quarter.
For others where, you know, people are not willing to move forward yet, you know, what is sort of their talking points as to why they're not interested or maybe not yet looking to do it?
Peter Gassner (CEO)
I think when overall the media spend goes down, that has a negative effect on Veeva because let's say a brand is gonna do TV advertising and then feels like, wow, that I really want to measure that with Crossix versus if they decide, oh, I'm not going to do TV advertising, and we're gonna conserve that budget. They wouldn't spend with Crossix to measure that. That's where it has impacts on these when customers are buying more à la carte, which is the bulk of our business still in Crossix. They're buying brand by brand, module by module. When their spend goes down, they would conserve on their spend with Crossix.
Also when there's more confusion about where their budgets are gonna be, then they tend to be a little less bullish on spending.
Charles Rhyee (Managing Director and Senior Equity Research Analyst)
In that case, maybe not directly but indirectly, it is still tied to the macro, maybe not so much, the, like an R&D budget kind of stuff, but it's really just sort of general economic macro environment is fair to say.
Peter Gassner (CEO)
Yeah. I guess to the general economic environment or more specifically to the advertising environment inside of life sciences.
Charles Rhyee (Managing Director and Senior Equity Research Analyst)
Right.
Peter Gassner (CEO)
That again impacts more of the à la carte type of things we do, which is the bulk of our business in the Crossix, the year-to-year à la carte. Our goal is to move people more to these multi-year agreements where it's more of an enterprise agreement. It's not exactly an all-you-can-eat, but sort of like that, but smooth out the spend and make and simplify things for ourselves and for our customers.
Charles Rhyee (Managing Director and Senior Equity Research Analyst)
Appreciate that. Brent, just a quick follow-up. I kinda missed it. I think someone asked earlier about the cadence for the impact of TFC. Obviously a bigger piece maybe in the first quarter, but as we model it through the rest of the year, how should we think about the rest of it following through? Is it more in second quarter or more even?
Peter Gassner (CEO)
Yeah, $52 million is what we called out of the $95 as an impact in Q1. The balance of that will continue in a diminishing way through the balance of the year. Q3 will be less than Q2. Q4 is expected to be less than Q3.
Charles Rhyee (Managing Director and Senior Equity Research Analyst)
Okay, great. Thank you.
Operator (participant)
Up next is Ryan MacDonald, Needham & Company.
Ryan MacDonald (Managing Director and Senior Equity Research Analyst)
Hi. Thanks for taking my questions. Peter, maybe first for you, it's great to hear the continued success, albeit at the early stages for the likes of Compass and Link. I'd be curious to get your thoughts on what you're seeing in terms of sales cycles right now. We've heard of other competitors in this space talking about elongation and having issues there. Just curious if you're seeing any of that, or if you are, does this sort of benefit you in a way as it enables you to continue to mature the product offerings in the marketplace while maybe end market customers are digesting, you know, what they have? Thanks.
Peter Gassner (CEO)
I don't think our macro environment has stabilized. I don't see any change in the deal scrutiny right now. Is it maybe a little bit more than it was a year ago? Maybe, but it's not appreciably so. If we look at last year on the macro environment, probably percentage-wise, the larger impact was in the SMB area. The, you know, when the funding goes down, companies have to conserve cash. They might merge, they might get acquired, they might go out of business. They have uncertainty, so they wouldn't make decisions there. I think that has also stabilized. The funding environment is a bit more stable now. It hasn't gotten better, but it's stabilized. I really am not seeing this impact of elongated sales cycles at this time.
Having said that, I always think For the past 15 years, I thought our sales cycles are long, and that just goes with the nature of the business.
Ryan MacDonald (Managing Director and Senior Equity Research Analyst)
Thanks for the color on that. I appreciate it. Maybe a follow-up from Brent. You know, obviously, with the expectation of sales and prescriber data, coming into play and being generally available later this year, as that data set builds and as you build sort of the book of business for those datasets, will you see any gross margin pressure, initially with the inclusion of those datasets while you're sort of in the early stages of monetizing it? Thanks.
Peter Gassner (CEO)
Yeah, I can take that one. No, we don't see extra gross margin there from those products. We're always looking for data that we can add into the Crossix platform, but that data is really shared. The patient data is the root of it, and then we transpose it, we do projections to get to the prescriber. We'll add data incrementally, but there won't be any large change when we get to the prescriber product.
Ryan MacDonald (Managing Director and Senior Equity Research Analyst)
Excellent. Thanks for taking my questions.
Peter Gassner (CEO)
Thank you.
Operator (participant)
Next up is Joe Goodwin, JMP.
Joe Goodwin (Director, Equity Research – Software)
Great. Thank you for taking my question. Yeah, great to see that quality, and the quality suite is still moving forward well. I guess, can you just elaborate on the Vault LIMS product that you're all working on and its importance for your position in the quality market?
Peter Gassner (CEO)
All right. You got about 30 minutes 'cause I love that product. Here we go. All right. LIMS is interesting. It is for testing materials, largely, pharmaceutical companies, biotech. They'll make materials in batches. They're not making units, they're making batches of things that then would be packaged. You know, serious things that are either ingested or, you know, intravenous into the human body, so the quality of them, you know, is super important for obvious reasons. LIMS is Laboratory Information Management System, what we call QC or quality control LIMS. That's where you keep the specifications of how you should test this medicine along the way of its life cycle. During its multi-day, could be weeks process of making this medicine in a batch, what tests should be done?
There's a whole variety of tests, from as simple as what's the color, you know, and the pH, to some very sophisticated tests. Those specifications have to be designed and approved in the system, and then data is entered in either through APIs or through manual, and that's the quality control process. That's a big part of the quality control process that then is used to see, hey, can we release this medicine in this market to be ingested or injected into humans? Very important area, we're gonna build it inside of our quality vault, which means it will become unified with our QMS system, our QualityDocs system, and our training system.
Nobody's ever done anything like that before, I think it's gonna be a real transformation in quality control processes in life sciences, which will allow people to release their medicines faster, which is a real. It keeps the company much more agile. This is very much top of mind in the supply chain area of our customers, supply chain and manufacturing. It's a big product. It'll be one of our biggest ticket items in the quality suite. It's definitely not an add-on product to QMS or something like that.
Operator (participant)
Got it. Thank you. Our next question is Stan Berenshteyn, Wells Fargo Securities.
Stan Berenshteyn (Equity Research Analyst)
Hi, thanks for taking my questions. On CRM migration, when customers begin migrations, do you anticipate that in the year in which these migrations take place, that there may perhaps be some impact on new product uptake from those clients until perhaps the migrations are completed?
Brent Bowman (CFO)
Yeah. I would think of it as maybe three time frames: before the migration, during the migration, and after the migration. Certainly before the migration, you know, the way we're planning this, the way we've designed this is that new capabilities, new products that they do, we're gonna migrate those automatically for customers. We want customers to continue to innovate, and we'll move that innovation over with them to Vault automatically. That's before. During, you know, it can be a small to a larger project depending on the size of the company or their complexity. You know, that may be a little bit of a distraction during that period of time. Certainly after is an opportunity for even more innovation.
That's kind of generally how I would, how I would think about it. It's gonna be a project just like any other kind of project.
Stan Berenshteyn (Equity Research Analyst)
Got it. Maybe a quick question on R&D solutions. Looks like this year you added, you know, close to $220 million in revenue within R&D. Can you just share with us what % of that amount came from top 20 pharma, and what % came from pre-revenue biotech? Thanks.
Brent Bowman (CFO)
Yeah. We're not gonna break out that level of detail, but you could if you think about where our install base and we get a large portion of our revenue from the enterprise and our, you know, our top accounts. That's largely contributing, but we do have a good cross-section of customers that buy across the whole R&D solution set. We're pleased with the success and how we're executing there.
Stan Berenshteyn (Equity Research Analyst)
Great. Thanks so much.
Operator (participant)
We'll go to Jack Wallace, Guggenheim Securities.
Jack Wallace (Research Analyst)
Hey, thanks for taking my questions. Sorry in advance for the boring accounting questions, but here we go.
Brent Bowman (CFO)
This one's for Peter you're saying then, right? This is for Peter, the boring accounting question?
Jack Wallace (Research Analyst)
Exactly. I wanna just get a better understanding of the mechanics of the TFC impact. You know, I appreciate we had a couple of bigger deals that signed in four Q, and some anticipated, it sounds like, that we're gonna sign the rest of the deals. The fundamentals are strong, but that means we're gonna have, you know, less of an impact in the early years of those contracts on the revenue line. I think I get that part. The part I'm a little bit unsure about is the $52 million impact in the Q1. Using simple math on subscription line, the $460 from 4 Q, less the $52 million, less the $8 from FX, gets you $405 after you add, let's say, $5 million sequential.
That $52 million of TFC, why doesn't that get annualized into a $208 million headwind for the year, if I'm thinking about that resetting the revenue base lower, again, without the benefit of being able to recognize unbilled AR intra-year?
Brent Bowman (CFO)
I mean, the way to think about it is, in a post TFC world, you think about for the year, fiscal year 2024, how much revenue would have been above billings? You think about it from that perspective simply in that year. There's the amount that relates to existing deals, and then there's the amount related to the $20 million of deals we would have closed. You're normalizing back to that rule where billings and revenue need to be aligned. When you aggregate that all up for the full year, it's $95 million, and the amount that impacts Q1 is $52 million, largely the unbilled AR portion. That's at the highest, most simple way, that's how I would think about it.
Jack Wallace (Research Analyst)
Got it. Just to clarify, the unbilled AR portion, that would be a, I guess, what you're saying, a one-time impact?
Brent Bowman (CFO)
Correct
Jack Wallace (Research Analyst)
... impairment to the 1Q, your revenue number that then say Q2 steps back up by that amount, or maybe something, you know, less than that, as we go forward.
Brent Bowman (CFO)
It's simply a direct reduction to revenue that flows through the operating income in Q1. The important piece here is the total value of these deals is not diminished or impaired. It's over-
Jack Wallace (Research Analyst)
Right.
Brent Bowman (CFO)
You're just taking that revenue and op income over the remaining life of those individual orders, which could be an additional one year, an additional two year, three, four years, and so on.
Jack Wallace (Research Analyst)
Gotcha. Just the last follow-up on that is with the headwind diminishing over the course of the year, is that related to, say, the midstream deals that are operating, say, above the multi-year ACV?
Brent Bowman (CFO)
It's those deals, the remaining deals before renewal, where there's still an amount of revenue above billings. That's the remaining residual, the 95 minus the 52, and that amount is diminishing over Q2 through Q4.
Jack Wallace (Research Analyst)
Okay. Thank you.
Brent Bowman (CFO)
You bet.
Operator (participant)
Next up is Natalie Howe, Bank of America.
Natalie Howe (Equity Research Associate)
Hey, thanks for taking my question. You touched on R&D earlier and throughout this call, and I wanted to ask a little bit more on clinical. You mentioned that you're only 5% penetrated in clinical data and 30% in operations. Does clinical represent an opportunity more for new customers, or rather does it target the existing base? For my second question, on R&D, you mentioned some strength in Development Cloud. What products coming in fiscal year 2024 will help sustain the R&D growth rate that we can look forward to? Thank you.
Peter Gassner (CEO)
Okay. I'll take that one. This is Peter. In the clinical, you know, a lot of that is gonna be from existing customers, but that's a, you know... For example, some of our most established products are in clinical eTMF, and we have a lot of eTMF customers. To those customers, we can sell other clinical operations products, eTMS, study training, and we can start to sell clinical data management. They are existing customers, but we'll be getting into new departments is the way I would think about it. In terms of brand-new customers, you know, brand new, those will usually come in the small SMB. Preclinicalcompanies that aren't commercial yet, they're just clinical. They're running their first couple of trials. They may or may not have our quality suite.
In terms of where the revenue is coming from in Development Cloud, the real growth areas are for us, the clinical area, both clinical operations and clinical data management and also Quality. Quality has a long runway to grow, and we have a deep pipeline there. Regulatory and Safety, those are contributing pretty well, but the two biggest ones are. The biggest one is Clinical, and the second biggest is Quality.
Natalie Howe (Equity Research Associate)
Awesome. Thank you.
Peter Gassner (CEO)
Thank you.
Operator (participant)
That was our final question. I'd like to hand the call back to Mr. Peter Gassner for any additional or closing remarks.
Peter Gassner (CEO)
Thank you, everyone, for joining the call today, and thank you to our customers for your continued partnership and to the Veeva team for your outstanding work in the quarter. Thank you.
Operator (participant)
Everyone, that does conclude today's conference. We would like to thank you all for your participation today. You may now disconnect.