Good afternoon. My name is Chantelle, and I will be your conference operator today. At this time, I would like to welcome everyone to the Veeva Systems Fiscal 2018 Fourth Quarter Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star 1 on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. Rick Lund, Director, Investor Relations and Corporate Development, you may begin your conference.
Good afternoon, and welcome to Veeva's fiscal 2018 fourth quarter and full year earnings call for the quarter and year ended January 31, 2018. With me on today's call are Peter Gassner, our Chief Executive Officer, Matt Wallach, our President, 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-Q, which is available on the company's website at veeva.com under the investors section and on the SEC's website at sec.gov.
Forward-looking statements made during the call are being made as of today, February 27, 2018. 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.
Also, we've made a presentation related to the new accounting standard, commonly known as ASC 606, available on the investors section of our website. As a reminder, beginning in fiscal 2019, we are adopting ASC 606 using the full retrospective method, which means that we'll be restating certain of our fiscal 2017 and fiscal 2018 financial information according to the new standard. Please note that these numbers are still under review and are subject to change until they are finalized in our 10-K, which we expect to file toward the end of March. With that, thank you for joining us, and I will turn it over to Peter.
Thank you, Rick, and thanks to everyone for joining us today. I'm pleased to report a strong finish to another great year for Veeva. We once again delivered financial results that were above our guidance. Total revenue in the fourth quarter was $185 million, up 23% year-over-year. Subscription revenue grew at 26% and our non-GAAP operating margin was 28%. This is a great quarter, one of our best quarters. We made great progress in each of our markets. We innovated in multiple areas. We continued our focus on customer success, and we're planting seeds for future growth. Turning to the different areas of the business. In commercial, we continued to extend our leadership position as companies look to Veeva as a cloud technology foundation for their commercial operations.
In Q4, two top ten pharmas committed to expanding their use of Veeva CRM to emerging markets, including Latin America and Asia Pacific. These rollouts will happen over the next 12-18 months. Both are longstanding Veeva CRM customers who started with us in the U.S. many years ago. It's great to see these early partnerships expanding towards global deployments. This progression is consistent with the trend we're seeing toward greater global harmonization and standardization on Veeva. This creates a more efficient environment for IT organizations, enables consistent engagement channels around the world, and sets our customers up with a solid commercial technology foundation as they look to leverage more digital engagement in the future. With global CRM as a base, we are seeing steady regional adoption of the broader Commercial Cloud, including Veeva Events Management and Veeva Align with a number of wins in the quarter.
Overall, we are very pleased with the performance of Veeva Commercial Cloud. Turning to Vault, we had another excellent quarter across all areas. Q4 was the first quarter where we had double-digit customer additions in every area of Vault: clinical, quality, regulatory, and commercial. This is an indication of the momentum we are seeing in each of these markets, as well as the emergence of Vault as a strategic platform for life sciences. It's especially exciting to see the franchise we're building on the R&D side of life sciences. Veeva is uniquely positioned there to help streamline drug development since we're the only technology provider with best-in-class application suites across each of the major areas of development, including clinical, quality, regulatory, and coming next year, safety, all on a single modern cloud platform. We believe Veeva Development Cloud will be transformational for the industry over the long term.
Let me highlight a couple of specific wins to give a flavor of our business on the R&D side of Vault. In the quarter, a top 20 pharma who is an existing eTMF customer committed to standardizing on the Vault RIM suite and Vault QualityDocs. This is a large project involving mission-critical applications that will roll out over multiple years. They will replace legacy and custom systems as well as manual processes. From a revenue perspective, at full deployment, this deal is over twice the subscription size of our existing Vault eTMF deal. Another top 20, also an existing eTMF customer, added Vault QMS this quarter. This is our first top 20 pharma to select Vault QMS. Wins like this and successful deployments are the keys to our strong momentum in QMS. We now have more than 40 QMS customers.
This is great progress considering the product was just released in June 2016. We also had another very strong quarter in clinical. Vault eTMF continues to grow. We added new customers in all regions and expanded with existing customers in the quarter. We are well into reference selling mode with eTMF. Deployments are quick and predictable. Customers are happy and getting a lot of value. eTMF was our first R&D product, and its success is paving the way as we expand in clinical and to the broader Development Cloud. We are making good progress in other areas of clinical as well with our early traction in CTMS and EDC. We're seeing rapid uptake on CTMS. We now have 19 CTMS customers with seven customers live. This is really driven by two things. Customers want a modern, flexible, cloud-based CTMS system.
They also want CTMS on the same platform as their eTMF. EDC is also progressing well. We now have six early adopters, two are live. We're focusing our attention on these early adopters. As our work with these early adopters speeds our product development and reference selling cycle, EDC will mature further, and we expect to start ramping this business later this year. We have a growing pipeline. Everything we're seeing with customers and prospects reinforces our view that the market needs a new modern solution. We believe Veeva can be the long-term leader in EDC and in clinical overall as we disrupt the market with superior offerings and a unified suite. Finally, I want to give a quick update on Vault QualityOne, our quality product suite for companies outside of life sciences.
I'm very pleased with our progress in the first full year of Veeva expanding to other industries. We are pursuing this opportunity in the Veeva way with a focus on learning from early adopters, making them successful, and developing lighthouse accounts that lead to reference selling. In total, we now have more than 20 customers outside of life sciences. These deployments are going well, and in many cases, early adopters are already expanding. In Q4, we added several new customers, including an initial deal with our second top 30 chemical company. Like the growing relationship with our first top 30 chemical company, this one is also an early project with a significant amount of expansion potential as the relationship progresses. Looking ahead to next year, we will continue to invest in our team, refine our products, focus on winning early adopters, and ensuring their success.
This is a way we will scale QualityOne in a meaningful way over the long term. In closing, Veeva delivered a great performance this past year and another year of financial results that exceeded our expectations. We're leading in commercial and R&D. Vault is becoming a foundational platform across the enterprise, and we're seeing early success delivering innovative cloud solutions beyond life sciences. I'm also very happy with the work we did in the year to plant the seeds for continued strong growth well into the future. Our progress this year with QualityOne, QMS, CTMS, EDC, and Safety will be significant for Veeva and our customers for many years to come. With that, I'll turn it over to Tim to review our financial results in more detail.
Thanks, Peter. Q4 represented a great finish to another strong year of execution. Our top and bottom-line results came in ahead of our guidance. We have raised our expectations for fiscal 2019. Subscription revenue in the quarter was up 26% to $151 million from $119 million last year. Subscription revenue was improved by a stronger-than-expected bookings performance in Q4, wrapping up a full year in which subscription revenue came in at $554 million, up from $434 million in fiscal 2017, a 28% increase. For the full year, Veeva Commercial Cloud subscription revenue grew almost 16%. Veeva Vault grew nearly 57%, both slightly better than our previous expectations. In fiscal 2018, our revenue retention rate was 121%.
This metric is defined in the earnings release and reflects annualized subscription revenue growth within existing customers, net of revenue attrition. This demonstrates our focus on delivering increasing value to our customers over time. Services revenue for the quarter was $34 million, up 11% from $31 million one year ago and flat from Q3. This result exceeded our expectations by about $2 million due to the strong demand within Vault RIM and a couple of fixed-fee milestones that we recognized. Total revenue for the fourth quarter was $185 million, up 23% from $150 million one year ago. Momentum in Vault continued, with Vault representing 42% of total revenue in Q4, up from 35% a year ago.
This capped a year in which total revenue was $686 million, up from $544 million in fiscal 2017, an increase of 26%. In discussing the remainder of the income statement, please note that unless otherwise stated, all references to our expenses and operating results are on a non-GAAP basis and are reconciled to our GAAP results in the earnings press release that was posted just before this call. In Q4, our subscription gross margin was 81%. This metric decreased by 25 basis points from Q3 as expected and was the result of duplicate expense associated with our AWS migration. We are now through most of the migration, and I expect the cost from our legacy provider to fully roll off by the end of Q2. Services gross margin for the quarter was 21%, down from 32% in Q3.
As expected, Q4 saw fewer billable days due to holidays and our field kickoff in January, which for the first time combined North America and Europe. The kickoff also materially increased our cost of services for the quarter. We continue to ramp our R&D services teams given the Vault demand we are seeing this coming year. There were a handful of miscellaneous items that lowered services gross margin from the mid-20s guidance that we gave on the last call. I expect services gross margin to return to the mid-to-high 20s in Q1. Our operating income was almost $52 million, a 28% operating margin, which was down from almost 31% last year. It's important to note we took a onetime charge of roughly $2 million as a result of an ongoing U.S. payroll tax audit.
This was a catch-up related to the payroll tax treatment of our employee lunch program. In addition, compared to last year, this year's Q4 saw incremental costs associated with our combined field kickoff and the previously noted AWS migration. In the quarter, we also saw continued headcount growth, adding 71 people net to finish at 2,171, up from 1,794 one year ago. Net income for the quarter was $35 million. Given the new tax reform for fiscal 2019, we will change our flat non-GAAP tax rate from 35% to 21%. As a reminder, this is not something that we will adjust quarterly, but we'll reevaluate on an annual basis. Turning to the balance sheet, deferred revenue was $275 million compared to $173 million at the end of the third quarter.
This resulted in calculated billings of $287 million, which was ahead of our guidance of $272 million-$274 million. This outperformance was a result of better-than-expected billing duration for the business closed in Q4, stronger than expected bookings, and outperformance in services revenue. 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 approximately $875 million-$880 million for fiscal 2019 and of roughly $200 million-$202 million for Q1. Please remember that our renewal base is heavily weighted toward Q4 and is becoming increasingly so. For fiscal 2019, we expect that roughly 40% of our total calculated billings for the year will come in the fourth quarter. Elsewhere on the balance sheet, we exited Q4 with $762 million in cash and short-term investments, up from $758 million at the end of Q3. As a reminder, Q4 is our typically lowest cash flow quarter because of the seasonal pattern of renewals, while Q1 is our highest seasonally.
As discussed on previous calls, fiscal 2018 was the first year that we adopted ASU 2016-09, which changes the accounting treatment of tax benefits associated with our stock-based compensation. For Q4, this increased operating cash flow by $9 million. While our operating cash flow was $3 million, if you exclude that benefit, our operating cash flow would have been an outflow of $6 million. For the year, our operating cash flow was $235 million, which included $46 million related to this tax benefit. Excluding the benefit, our operating cash flow was $189 million for fiscal 2018, an increase of roughly 31% from fiscal 2017. For fiscal 2019, we expect operating cash flow to be roughly $240 million, excluding the excess tax benefit. As you look at this benefit, I would keep two things in mind.
First, this benefit is directly related to our tax rate. When that tax rate comes down materially, as we will see in fiscal 2019, the benefit also materially decreases. Second, this amount is dependent on individual employee decisions related to equity, which makes it very difficult to predict. Let me wrap up by sharing our outlook for Q1 and for fiscal 2019. Note that all guidance is based on the new 606 accounting standard for the anticipated fiscal 2019 guided numbers, and any guided growth rates are based on fiscal 2018 numbers as if restated for 606. In addition, our net income per share guidance takes into account our new tax rate.
For the first quarter, we expect revenue between $188 million and $189 million, non-GAAP operating income of $58 million-$59 million, and non-GAAP net income per share of $0.30-$0.31 based on a fully diluted share count of approximately 154.5 million. Note that Q1 contains 89 days compared to 92 days for our other three quarters. The fewer days of revenue recognition primarily affects our subscription revenue, which is recognized on a daily prorated basis. We currently believe this will negatively impact Q1 revenue by about $5 million. This also affects our gross and operating margins, as virtually all of our expenses are recognized on a monthly basis while revenue is recognized daily.
For the year, we expect revenue in the range of $815 million-$820 million, which is an increase from our initial guidance of roughly $805 million. This is driven by the increased momentum in Vault, especially in the development cloud products, and by our current view that 606 will likely help by a few million dollars. We still expect subscription revenue to grow at least 20% for the full year. Additionally, we expect subscription revenue from our commercial cloud products to increase roughly 10% over last year and subscription revenue from Vault to grow at least 40%. We are anticipating non-GAAP operating income of $250 million-$255 million for the full year, which implies a non-GAAP operating margin of roughly 31%.
Note that under the new accounting standard, we are now capitalizing and amortizing commissions, whereas we previously expensed these in the period in which they were incurred. Normally, this would have reduced operating expenses similar to what we saw in fiscal 2017 and 2018 when restated for ASC 606. Unrelated to the accounting change, we have changed our sales compensation model for fiscal 2019 to a higher percentage of fixed versus variable compensation. This better aligns compensation to our long-term and strategic selling approach. Due to this change, we expect the impact from ASC 606 on operating expenses to be negligible for fiscal 2019. Turning back to guidance, we expect non-GAAP net income per share of $1.30- $1.33 for the year based on a fully diluted share count of approximately 156 million.
In summary, I'm very pleased with the way that our team executed in Q4 to complete the year. We enter fiscal 2019 poised for another year of healthy growth and strong profitability and continue to invest for the long term. With that, thank you for joining us on the call today, and I will now turn it over to the operator for questions.
We'll pause for just a moment to compile a Q&A roster. Your first question comes from Richard Davis with Canaccord. Your line is open.
Hey, thanks. You know, you kinda touched on it, you're looking at the EDC market at an interesting time, right? You got CROs merging and data sources changing and collection, et cetera, et cetera, and all that. I'm, you know, a cold-hearted finance guy. You know, help me think about kinda how the revenue path should occur in this space. I mean, I know it's early, but will it come in kind of like a small beachhead where you would be in a specific project and then you would expand from there? Or is there a possibility that you could get, you know, like a big transformation. I know transformation, but a large deal that would pop in potentially in 2018 or whatever. Thanks.
Hey, Richard, this is Peter. I think the, excuse me, the EDC revenue will be incremental. We'll start to see some momentum build in the next year. I don't think in the first year or two it'll be amenable to a large transactional chunk. The reason why that customers will be particularly sensitive about getting a new provider in this area because, you know, it's dealing with patient data. We have to prove ourselves out either in smaller companies or in studies, very specific clinical studies of larger companies. I think over the years, you know, if you look a couple of years out, yeah, I think, I think you could have it come in big chunks like the rest of Vault, but it won't start out that way. By its nature, it's a study-based thing.
I think it's gonna be, more sort of steady increments and not quite so much in big chunks.
Yeah, that makes sense. That's very helpful. Thanks so much.
Thanks, Richard.
Your next question comes from the line of Sterling Auty with JP Morgan. Your line is open.
Yeah, thanks. Hi, guys. I actually wanna ask a similar question, around Vault. Given where we are in the evolution of the Vault business relative to where commercial cloud is, you've given us the guidance for 40% plus growth in terms of the Vault revenue. How should we think about the evolution of how much of the Vault revenue is gonna come from further expansion of existing customers versus continuing to add, as you mentioned, double-digit new customers in each one of the categories here in fiscal 2019?
Sure, Sterling, it's Matt. I think similar to commercial, there's, you know, 50 companies that are significantly bigger than the others, and the majority of those companies have some Vault already. Because those are so much bigger than the others, the majority of our Vault revenue will come from kind of cross-selling within those top 50 companies. The one big difference between the commercial business and Vault is that Vault has a much longer tail. Right? The commercial business we can sell to the 400 or 500 companies that have a product on the market. For Vault, there's an extra 2,000 pharma and biotech and, like, 10,000 smaller med device companies that we can sell to. The tail of what we consider our SMB or small and medium-sized business is much, much larger with Vault.
That's why you see the customer count increasing so much more quickly with Vault than it did with CRM. The way that we manage the business is that that is an even more important part of the overall Vault business.
All right, great. One follow-up on QMS. You know, it seems like you've got really good traction in terms of their early referenceable customers, et cetera. How is this one monetized? Do we need to wait for the second or third purchase to get meaningful revenue? Just how is the monetization model in QMS going to work?
QMS looks a lot like other Vault applications, where it can be an employee-based thing, so it's a per user per month with small and medium-sized companies. With the largest companies, we may do an ELA. When we do a big ELA for a big global QMS deal, it would look something like what we've talked about in the past. It could be $1 million, $3 million, $5 million in the first, second, third year or something like that, and I'm using just representative numbers.
We call those our escalating ELAs. As you drill down with 606 with Tim, maybe later in the call, these are the things that cause the change in how revenue is recognized based upon how those contracts are written. QMS, you should think of as just like another one of our big enterprise Vault applications. Nothing different there.
All right. Thank you, guys.
Your next question comes from the line of Bhavan Suri with William Blair. Your line is open.
Hey, gentlemen. Thanks for taking my question and congrats there. Another good quarter. I guess just first question, as you think about the investments you made in 2017, you sort of made more investments, I think, than you have sort of in the past as you think about new initiatives, right? You had the CRO sales folks. You had OLS salespeople. You sort of increased sort of the EDC sort of space, and obviously that's end to some of the Vault, but the different buyer than, say, eTMF. So as you think about those sales investments, I'd love to just understand how you've seen the productivity ramp, and has it been in line with what your expectations are a little better? How have those investments actually played out?
Bhavan, this is Peter. They played out well. They're different, right? OLS, I would say there we're more looking for early adopters. You know, we're not gonna get quite the sales productivity there that we would have in our established areas. In the CRO area, that's worked out very well because we have established products that we can sell in there. You know, productivity is high there. Also we built out last year, we significantly increased our capabilities in the med device area, in the field team for med device. That's also gone very well. I'm happy with the build-out in all areas. I really measure the productivity in the field by the, you know, the depth of the customer relationships we're getting, the initial projects we're starting.
That's, you know, that's the leading indicator of productivity. They're all going very, very well for us. I can't point out to one that's going particularly better than the others. The ACV will come when it comes, and that just has to do with the phase of the market.
Got it. Got it. Just on OLS, obviously, you know, if you'd asked me, I'd have said maybe you got a dozen or maybe, you know, 15, 16 customers or 20 was definitely a positive. When you think about the customers that started adopting this, that sort of might be in the implementation phases, and you think about the penetration of the OLS product in those markets, just two questions. One, who are you displacing? Two, what does that penetration or potential for upsell or ASP lift or share of wallet look like, say, over the next three to five of one of those existing customers, say even that sort of large CPG customer you signed a few quarters ago?
Well, generally, we're replacing different types of vendors. Maybe the most common vendor we'll be replacing is actually a custom-built system on a Documentum or on a SharePoint. It could be on something else like OpenText. That's the most common thing that we're replacing. We may be replacing a legacy QMS provider. Now in terms of cross-sell or growth, these large customers like that CPG customer, I do believe that can be, you know, an eight-figure annual subscription deal over time. That will probably play out over the next. If it plays out, that will play out over the next, you know, to get to that level is really, you know, three, four, five years.
You know, probably four or five years because that's when you're doing multiple projects with this customer across multiple regions. You're doing QualityOne, you're doing some adjacent things. There's certainly potential for those to be eight-figure customers.
Very helpful, guys. Thank you, and congrats again. Appreciate it.
Your next question comes from the line of Rishi Jaluria with D.A. Davidson. Your line is open.
Hey, guys. Thanks for taking my questions, and it's nice to see some continued strong results. I guess first, Peter, as we look at Vault EDC, I mean, it's nice to see the early adopters and go lives. You know, can we see kind of a similar sales motion with EDC, with reference selling and kind of expansions just given the nature of clinical trials and how that may be different from other areas of life sciences? Then I have a follow-up for Tim.
Yeah. We definitely think we'll see reference selling for sure because inside of life sciences, this EDC area, you're selling into an area of life sciences called data management, and it's a specialized area, and word of success really gets around. This year, for example, we're working on our early adopters. We'll get them live, get them happy, improve our products. We have our R&D summit coming in the fall in Philadelphia. We hope to get our early adopters there, get some prospects there to see that and feel that enthusiasm. That'll be very similar to the other parts of life sciences. It'll be a reference selling game for sure.
Got it. That's helpful. Thanks. Tim, just kind of more of a housekeeping question, but can you help us understand what sort of benefit you'll see next year from the lower tax rate on cash flow? 'Cause if my recollection is correct, FY 2018 wasn't a full cash tax paying year. Just maybe if you could walk us through that'd be helpful. Thanks.
Sure. Yeah. The, with the new tax reform, we will actually see both a tailwind and a headwind on operating cash flow. The tailwind, as you mentioned, Rishi, will simply come from a lower tax rate being applied to our GAAP income before tax. What may not be as obvious is that we will also see a headwind that will come from the smaller excess tax benefit from equity compensation as the tax rate declines. There's a tailwind and a headwind that is impacting us from the tax reform and the operating cash flow line.
Got it. Thanks, guys.
Your next question comes from the line of Stan Zlotsky with Morgan Stanley. Your line is open.
Perfect. Thank you so much, guys. A couple of very quick ones for me. On the first one, the 20 customers outside of life sciences, which products are these customers getting into? Is it the QualityOne or is there something else that they're buying in that segment? Second question, this probably would be for Matt. The sales comp structure changes that you're making for fiscal 2019, can you just maybe dig into that a little bit more? That's it for me. Thank you.
Okay. In terms of QualityOne, we're selling into those 20 customers outside of life sciences. Yes, we're selling QualityOne in there, and in some cases, we're selling platform deals. When we first start talking to customers outside of life sciences, we'll be talking to them about QualityOne, and that's a very important, very strategic area. They like our vision, but they may not be able to start there right away. That might spark interest in, "Hey, well, this Vault platform looks great. Can we use it? We're gonna have to replace this other custom system that we have. Can we use it for that?" We'll entertain some platform projects. In fact, the new top 30 chemical company that I talked about, that's actually a small platform project. We were in there talking about QualityOne.
It sparked interest in this platform project, that can happen. As you may recall, we started with our large consumer packaged goods company. We started in the platform area that has moved into QualityOne. It's always those two products. In terms of the sales compensation, I guess I can take that one, too. You know, sales compensation, that's a very important thing over the long term. We look at it closely every year. When we looked at the way we do reference selling today, the products we have, the strategic nature of our customer relationships, it became clear that the old sales comp model, you know, we need to make some changes there. One of the changes was to increase the fixed compensation and lower the variable compensation for the salesperson.
We expect the total sales compensation to be about the same on the average for each individual person. Of course, the, you know, high performers making more than low performers. We're just changing the mix, the fixed to variable. Those changes are rolled out already. They're going well. We communicated to them in Q4. Existing people like it. We're bringing on new people under that model and it's going really well. It's really about setting up for the future. It's about being proactive with our sales comp model.
Perfect. Thank you, guys.
Sure.
Thanks.
Your next question comes from the line of Tom Roderick with Stifel. Your line is open.
Gentlemen, good afternoon. Thanks for taking my questions. Curious a little bit to hear a bit more on the EDC and CTMS decision cycles if you look at some of your top 20 customers. You know, I recognize that those decision cycles sort of come up as new trials come about and, you know, on the clinical side, that doesn't happen every day. Maybe you can talk a little bit about the pace of new opportunities that you see out there. Are you given the chance at some of those top 20s to displace the existing competition, or do they kinda continue to roll over what they're using?
When you look at the aggregate of those opportunities, and from a dollar basis, does that start to add up to what you're already doing in Vault? In other words, you know, capable of seeing eight-figure deployments between EDC and CTMS at those, top 20s. Thanks.
Sure. Yeah. You're lumping CTMS and EDC, so let me just start by splitting that. CTMS looks like a more normal, I shouldn't say normal. It looks like many of the other Vault applications, where we're starting with smaller companies, and when you get a CTMS deal, they generally use it for everything. And of the 19 companies, some of them are replacements of a competitive product, and some of them are smaller companies that are actually deploying a CTMS for the first time. As we talk to companies in top 20, the largest companies, CTMS is one of the most heavily integrated products, the sales cycles will be relatively long. And those are big, major enterprise deals where they're gonna rip out a system that could have literally dozens of integrations to other systems.
It's a major project. It's not a two or three-month project. It's more like a 9- 12-month project. Those will start in the next one or two years as the early adopters get on stage and tell the larger companies how successful they've been with the product. Once we're moving with those large companies, it'll look like a lot of the other Vault applications. EDC is different because of the nature of it being a trial-by-trial thing. We're already talking to top 20 companies, but we're talking to them today about their phase I and II trials. These are smaller trials, and they would look identical within a large CRO or a small CRO or a large pharma company or a small one. Kind of a phase I, phase II trial is a phase I, phase II trial.
As Peter talked about it, we're gonna ramp that business. The end of the year going into next year, what he's referring to is that we're gonna have the ability to go after phase III trials, so the really big global trials that generally you would see from the larger companies. Eight-figure deals here, those are gonna come when we can go after phase III trials at the largest companies. As Peter said, you know, we're a year or two away from being able to really compete successfully for those. The market dynamics in both of those segments are different from each other, but they're well understood, and it's basically what we expected when we made the decision to go into those markets.
Perfect. That's a great distinction. Thank you. Let me turn my second question here over to the Commercial Cloud. Thinking about a business that grew 10% here in the four quarter, sounds like you're still projecting 10% subscription growth for 2018 calendar year. How should we think about the breakout of that? I mean, it seems as though you've had some major top 20 deployments that have been rolling out a lot of seats, particularly in North America. Some great traction there, though we know that can't last forever. As we get into your, you know, fiscal 2019 calendar 2018 here, how much of that 10% growth is seat-driven? How much of it is add-ons at this point? Thanks.
Yeah, sure. It's looking pretty balanced now. There's always new seat add-ons from small companies, from companies in new geographies. We closed our first deal in Korea with a Korean domestic pharma company, a company that many of us hadn't heard of, two, three years ago. We talked about these two top 20s that are expanding in emerging markets. Yes, there's still new seat adds. That's probably about half of the incremental revenue, and then the other is doing well with the add-on products, which, as we've said, are generally being sold more regionally. There's more sales cycles there. We do get to use the reference selling sometimes even within the same company, right?
If someone tries one of those add-on products in Asia, it can lead to deals in Europe and the U.S. It's pretty balanced this year between new seats and add-on products.
Perfect. That's really helpful. Thank you, guys. Nice job.
Your next question comes from the line of Brad Sills with Bank of America Merrill Lynch.
Hey, guys. Thanks. I wanted to ask a question on Safety. I know it's probably early here, the product's not out yet, but what's your expectation here for Safety? Is there a legacy install base here that you view as, you know, ripe for displacement? You know, could we perhaps see Safety going in higher than the other, you know, products in Vault, you know, further up market and then kind of move from there than we've seen in the past?
Sure, Brad. The safety market, I think, is perfect for Veeva to disrupt. There's two main companies that basically dominate the top 50 and many smaller companies. One was bought by Oracle years ago. One is a smaller company. The two of them have been the clear market leaders for at least 15 years. It's probably over 20 years. They've really split the market. Both are traditional on-premise legacy software solutions. When we look at that market, we think, you know, it looks a whole lot like going after Documentum or going after Siebel and CRM. The level of importance of these systems is one of the other things that gets us excited about it 'cause this, for many companies, this is one of the most important systems.
I had one customer tell me if the adverse event system, the safety system goes down, the CEO gets an email right away. While our other systems, many of them are important, the CEO is not informed the moment one of those things has an outage. This is a really important thing. They spend a lot of money on it. We think this is gonna be maybe even larger than something like our whole regulatory business, so bigger than the whole Vault RIM suite. That's because of the level of importance and the depth of the product. It is a big product. You'll see this year we're gonna be building it. We'll have an early adopter in the year. Next year, we'll probably be going after smaller companies.
It'll be a couple years before we're announcing big deals with top 20 pharmas.
Great. Thanks. One also on commercial, if I may. With Events Align, I think, you know, last quarter, you excited that you expect a longer tail of adoption here, more departmental expansions than, you know, companies kind of going all in, with one of those two products. Is that still the expectation, you know, going forward? Just, maybe just a reminder on kinda how penetrated you are and what kind of a, you know, cycle we're looking at for those two. Thank you.
Sure. Yeah. It still feels more regional, though we did sign one large events deal that was a global deal, but we think that that's not going to be the norm here. It can still happen for sure, and that was a company that really wanted to streamline their global processes around events management. Generally what we've seen both for events and Align is that they think about those things regionally. They run their businesses more regionally. It does align to how some of them have deployed CRM and some of their business processes before. In terms of penetration, they both had a good year. Events, I think, had a particularly great Q4.
A lot of new projects, a lot of excitement, and it's now eclipsed 10% of our customers are using events in at least one place. Align is still chasing that 10% penetration rate.
Great. Thanks, Matt.
Your next question comes from the line of Scott Berg with Needham. Your line is open.
Great. Thanks, guys. This is actually Peter Levine for Scott, but just one question from me. To piggyback off some of the EDC questions, can you provide any additional color on your go-to-market strategy? I'm not gonna ask that question, if there was a specific group of pharmas or trials that you're targeting, whether it be kind of more complex trials that you're targeting, whether it be kind of more complex trials like oncology or gene therapy, or is it more targeting trials with much larger patient studies, say, for blood pressure, diabetes type kind of medication trials? Thanks.
Yeah. Our end market for EDC is all types of trials from the phase I all the way to the phase IV for small molecule, large molecule, big trials, small trials. Where we're going to get traction first is in less complex trials. That will be phase I and phase II in general. One of our early adopters is in a pretty complex phase II oncology trial. It can happen where we will get into a complex trial, but in general, we're going to be in the simpler trials. We expect to, by the end of the year, we would like to have all the features and functions and things that we need in our service to handle trials of all sizes. We're just gonna have to prove that out with some early adopters and get into that reference selling mode.
Great. Thank you.
Your next question comes from the line of Brian Peterson with Raymond James. Your line is open.
Hi, guys. Thanks for taking the question, and congrats on the quarter. Just wanted to hit on the outside of life sciences effort. You mentioned that you could see an eight-figure subscription relationship potentially over four to five years. I'm curious, do you have an eight-figure relationship in quality today in life sciences? As you think about the platform demand outside of life sciences thus far, has that interest been a lot stronger than you expected when you started this initiative?
Let's take the second one first. I think the platform interest outside of life sciences has been about what we've expected, actually. We knew that when we showed QualityOne, not everybody's gonna be, you know, amenable to replacing their quality system right away, and they're generally a little risk-averse in that area. We knew we'd be enthused about the system. We knew we'd be sometimes talking with people from the IT side. This would bring up thoughts about other systems. I think that was that was planned. Now, in terms of the eight-figure customers inside of life sciences that are specific only to quality, that's a level of detail that we don't break out.
I think we've mentioned before, we certainly have quite a few seven-figure deals in the quality area, but we're not gonna break out into whether we have individual eight-figure customers in the quality area.
Got it. Maybe one follow-up for Tim.
Now, what I would say
Oh, sorry. Go ahead.
You know, some of these customers in the quality area for the OLS, some of these are, you know, very large customers, right, that are doing manufacturing all around the world, more manufacturing-heavy than our life sciences customers. When I, when I say an eight-figure customer there, it may not only be QualityOne. It may be some of the platform things that are associated with QualityOne. I think that's how you should, that's how you should read it. We'd be a very important supplier to some of these customers outside of life sciences doing QualityOne and some other things, and then a big customer that can add up to an eight-figure-a-year customer.
Got it. Thanks. Maybe one follow-up for Tim. Just on the retention metric, you know, as you guys clearly scale the customer base, 122% this year, any help on how we should be thinking about that metric relative to revenue growth going forward? Thanks, guys.
Yeah, sure, Brian. It was 121. I may have stuttered on that. Maybe you heard 122. It was 121. Typically, I would say over the last three years, three to four years, what we've seen is a pretty close relationship between overall subs revenue growth and that revenue retention rate. Typically, we're seeing anywhere between sort of 2/3 of or 70% of, sometimes it could be a little higher, but right in that range, Brian, of the subscription revenue growth that's attributable to the existing customer base. It's probably the relationship that you would want to look at as we move forward.
Got it. Thanks, Tim.
Your next question comes from Jesse Hulsing with Goldman Sachs. Your line is open.
Yeah. Thank you guys for taking my question. I had a question about QualityOne. I'm curious what you're seeing on the referenceability side. Life sciences, your referenceability is incredibly strong. It sounds like you closed another top 30 chemicals company. Was the original chemicals company involved in referencing on that? If you are seeing that sort of referenceability, should we expect clustering in some of these industries like chemicals, as a couple of big buyers tip over, you know, more to follow?
Yeah. In terms of the new top 30 chemical company, there may have been some references behind the scenes that, of course, you know, it's hard to know exactly what sways things in your favor, but nothing direct that we know about because we're very early in that cycle. However, this, I believe it's in May, we're gonna get our QualityOne customers together in Cincinnati for the first time for a QualityOne summit in Cincinnati. That's the first time we'll get customers together and really start that reference selling cycle in earnest. Right now, no, we're not in reference selling mode yet. To the second part of your question, yeah, I do expect things to go in clusters.
I think the reference selling works, and a chemical company listens to a chemical company, and a consumer packaged goods company listens to another consumer packaged goods company. I think it's just natural. That's also the way employees flow too. Employees often move in similar types of companies.
Yeah, no, that makes sense. One quick one for Tim. Once you're done with this migration to AWS, what should we expect for gross margins? Should we expect those to trend higher and any sense of how much higher they can go? Thanks.
Sure, Jesse. As it relates to subscription gross margin, as you, as you heard in my prepared remarks, we are right now paying AWS costs, and we're still paying our legacy provider as we go through this period of transition. Once that rolls off, and we targeted fully to roll off by the end of Q2, I think you'll start to see subs revenue or, excuse me, subs margin, continue to climb up, as you saw in the past. It'll continue to inch up as we get more leverage in that particular area.
Thank you.
Thanks, guys.
Your next question comes from the line of Kirk Materne with Evercore ISI. Your line is open.
Hey, guys. This is Daniel Greenfield on for Kirk. As you all continue to evolve, you know, into a more strategic platform for your large customers, do you feel you have all the necessary bandwidth in terms of services resources internally? Then, you know, how are you thinking about your own services business versus building out your partner ecosystem as you continue to broaden your portfolio? Thanks.
Hi, Daniel. Thanks for the question. Basically, we split projects with partners. Over time, this has become more and more the way that we do it, where we do certain parts of an implementation, and they do other parts. When we think of scaling our services business, we think of scaling to do our piece of those implementations. I don't think that the relative importance of partners has really changed over time. We did the same type of thing with CRM in the early years and even today. We set up that same type of relationship with multiple implementation partners in each area as we go into a new area of Vault.
The other thing that is happening within the customer base and kind of flowing through the partners is looking not one application at a time but looking at Vault as a real enterprise platform. Right now, we're leading that, and we have most of those discussions with our customers, and the customers very often wanna have those discussions with us. I hear from CIOs, even CEOs, often they wanna have a Vault-first or a Veeva-first strategy, where they'll actually say, "Why couldn't we do it with Veeva?" I think our partners are now starting to give that same kind of messaging when we're not in the room.
I think that that's going to be a theme as we continue to become more and more strategic, and companies buy more and more Vaults all on this unified platform, really making us a strategic partner to the industry.
Great. Thanks.
There are no further questions at this time. I will now turn the call back over to Peter Gassner.
Thanks for your time today. We're pleased with our outstanding results for the quarter and for the year and would like to thank our employees for their outstanding work as well as our customers and partners for their trust and partnership. Thank you.
This concludes today's conference call. You may now disconnect.