Rick Lund - IR Peter Gassner - CEO Tim Cabral - CFO Matt Wallach - President, Co-Founder

Jennifer Lowe - Morgan Stanley Tom Roderick - Stifel Richard Davis - Canaccord Karl Keirstead - Deutsche Bank Brendan Barnicle - Pacific Crest Securities Sterling Auty - JPMorgan Jason Maynard - Wells Fargo Bhavan Suri - William Blair

Good afternoon. My name is Chris, and I will be your conference operator today. At this time, I would like to welcome everyone to the Veeva Systems Fiscal 2015 Third 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. [Operator Instructions] Thank you. Rick Lund, Veeva's Investor Relations Director, you may begin your conference.

Thanks Chris. Good afternoon and welcome to Veeva's fiscal third quarter earnings call. 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, November 25, 2014. If this call is replayed or viewed after today, the information presented during the call may not contain current or accurate information. Veeva disclaims any obligation to update or revise any forward-looking statements. We will provide guidance on today's call, but will not provide any further guidance or updates on our performance during the quarter, unless we do so in a public forum. On the call, we will also discuss certain non-GAAP metrics that we believe aid in the understanding of our financial results. A reconciliation to comparable GAAP metrics can be found in today's earnings release, which is available on our website, and as an exhibit to the Form 8-K filed with the SEC just before this call. With that, thank you for joining us. I will turn it over to Peter.

Thank you, Rick. In the third quarter, we had revenue of $83.8 million, up 52% from a year ago. We continue to deliver solid profitability with non-GAAP operating margin of nearly 29% for the quarter and achieved a number of significant milestones demonstrating our progress in all product lines. Our goal from the start has been to establish Veeva as one of the most important technology partners to life sciences by providing fully integrated industry cloud solutions. We're seeing great progress in this mission with offerings that support the most critical needs across our customers R&D and commercial operations. With an expanded set of solutions and a track record of customer success, we're now engaging more broadly and at higher levels with our customers and prospects. This dynamic is driving significant momentum with our existing and newer products and fuelling our growing pipeline. We have an increasingly strong mix of revenue across all areas. CRM has healthy growth and our newer product lines are now becoming more significant contributors to our business with non-CRM revenue surpassing 15% of total revenue in the quarter. We're seeing great momentum in Veeva Vault, our cloud based content management solution for life sciences. In October, we hosted the first ever Veeva R&D Summit. With more than 300 attendees, it was the largest content management conference for life sciences this year. We drew leaders from 80 different life sciences companies and had a great mix of prospects and customers. More than 20 customer speakers shared why they chose Vault, lessons learnt and most importantly how Vault is adding value. It was an outstanding conference. You could feel the excitement around Vault from our customers, our prospects and our product team. I heard time and time again from customers and prospects that they love our products and our people. 100% of attendees surveyed said they were satisfied or extremely satisfied with the event. 100% said they plan to attend next year. We're building on the momentum from R&D Summit as we work to establish Vault as a de facto standard for content management and life sciences over the coming years. Why are customers so excited about Vault. Today the industry is stuck on a variety of client server systems that are 10 to 15 years old. These systems are slow. It can take minutes to find them retrieve a document. Usability is poor. They are highly customized. There is no integrated reporting. As a result documents are kept inside systems, which can cost compliance problems and a real drag on efficiency. The industry wants cloud solutions to streamline IT. They don't want to manage the overhead of servers, software versions, IT operations and upgrades. They want applications that fit their business. With Vault, they get a suite of cloud applications, they can typically implement in just a few months because the applications are functionally complete. Vault is fast and easy to use. The average document download time is currently less than 1.5 seconds as measured from the end user's browser. There is integrated reporting. These are applications that fit and deliver significant time to value and it's about our people. Our services team and our product team have deep domain expertise and a track record of delivery our customers can trust. We're seeing outstanding growth with Vault and it continues to track to a similar growth rate that we saw in the early days of CRM. We now have more than 100 Vault customers. In the last 12 months we have seen a threefold increase in the total number of Vaults utilized by Veeva customers and in the third quarter alone, we signed three Vault deals with annual contract values in the seven figures. Life sciences companies large and small as well as CROs are moving to Vault. In Q3 Vault eTMF was selected as the global standard at yet another top 10 pharma managed documents for all their clinical trials globally, third customer from the top 10. We also had an emerging biotech company sign up for all three R&D applications at the same time. Submissions, eTMF and QualityDocs are first for our business. Finally inVentiv a top eight CRO selected Vault eTMF this past quarter as a company-wide standard. One of the other seven figure deals, Vault deals in the quarter was a global enterprise subscription agreement for Vault PromoMats, our solution for promotional materials management. This company, a top 10 pharma is an existing CRM customer and our successful relationship that we built with them contributed to our selection. Vault PromoMats will replace a large number of disparate systems across all their commercial divisions and regions around the world. They will now have a single global system in the cloud with the accessibility and flexibility to meet local needs. We anticipate Vault will significantly decrease time for content approval, increase reuse and save them millions of dollars per year. We're laser focused on making this customer successful. If we deliver, there will be a highly visible reference for Vault. We have continued growth across the other areas of commercial cloud as well. In CRM we won a number of new customers and expanded with existing customers. In the quarter, we sold and deployed 5,000 users in Asia Pacific with the top 10 pharma. Also in CRM, companies continue the expansion from single channel face-to-face interactions to multi channel CRM. Our emergence as the leader in core CRM is driving this success. It was a record quarter for Veeva CRM approved email, which included our first enterprise wide win with a large customer who is standardizing on approved email. And we have great interest in our new CRM applications, event management and Align that aren’t yet generally available. Both early adopter programs are oversubscribed and we're now close to new customers. We even received our first order for Veeva CRM events management this quarter, though the product won't be generally available until Q2 of calendar 2015. Veeva Network had a substantial milestone in Q3 as our first top 10 pharma customers went live in the quarter in the U.S. with our network software and data. This customer is a key reference for other companies considering Network. Because of the tremendous potential in industry specific data, we've continued to make big investments in the network side of our business. Over the last few years, we've built a highly specialized development team in Toronto that has a built a global single instance customer master software solution that is unlike anything that has been available to this industry today. Now to complement that, we are in the process of expanding the reference data of healthcare professionals, healthcare organizations and affiliations that we intend to make the gold standard for the industry. To help establish our leadership position in reference data, we recently brought on Tim Slevin as SVP of Global Data Solutions to run our data business worldwide. Tim brings 20 years experience in data with more than half of that serving life sciences. Most recently, Tim was the CEO of Healthcare Data Solutions. Tim is one of the very best and brings proven leadership skills, extensive domain expertise and a track record of innovation and customer success to this growing new area for Veeva. In summary, I am very pleased with the continued strength of our business. Our industry cloud is driving success for customers, which in turn is fueling the momentum we are seeing across all areas of the business from commercial to R&D. We continue to expand our strong partnership with the industry as we solve more of our customer's biggest challenges and are well on the path for becoming the most important and trusted technology partner. With that, I'll turn it over to Tim.

Thanks Peter. Overall, I was pleased with our third quarter results. Total revenue was $83.8 million, up from $55 million one year ago, a 52% increase and above our guidance of $78 million to $79 million. For the quarter, subscription revenue was up 58% to $61.4 million from $38.9 million last year. Our subscription revenue base continues to grow at a healthy pace due to strength across all of our product lines, but especially as our customers expand their use of multi channel CRM and as the Vault business gains considerable momentum. Services revenue for the quarter was $22.4 million, up 40% from $16 million one year ago. This strength in our services business this quarter was driven largely by a dramatic increase in Vault R&D services projects and the achievement of certain project milestones, which contributed slightly over 700,000. However given the timing of the project schedules and lower utilization during the upcoming holiday season, I expect services revenue to be down in Q4 on a sequential basis. We continue to expect services revenue to be variable period to period depending on a number of factors, including the requirement, complexity and timing of our customer's implementation projects and the achievement of milestones in some of our professional services arrangements. The primary purpose of our professional services business remains to ensure our customers achieve success with our cloud solutions. In terms of geographic mix for the third quarter, approximately 55% of our total revenue came from North America and 45% came from outside North America. This was a shift of five percentage points towards international versus Q3 from a year ago. In discussing the remainder of the income statement, please note that unless otherwise stated all references to our expenses and operating results on a non-GAAP basis and are reconciled in the tables from our press release, which is posted on our website and filed with the SEC. Our subscription gross margin was 78%, up one percentage point from a year ago, largely driven by the increased contribution of Vault, Network and CRM multi channel add-ons. We expect the trend in subscription gross margin to be up over time as our newer products account for growing percentage of subscription revenue. As discussed previously, these products generally have a slightly higher gross margin profile relative to our core CRM product. In Q3, services gross margin was 31% compared to 27% one year ago. We saw a significant rise in utilization this quarter associated with increased project activity, especially within Vault R&D. Our target services gross margin remain in the 20s; however, we may see temporary deviations above that range during periods of unusually high activity as we saw in Q3. Accordingly in Q4, I expect services gross margins to return to this range as utilization rates normalize. Our total gross margin for Q3 was 65% versus 62% one year ago. This increase was driven by the growth in subscription revenue as a percent of total revenue and by the improvements in subscription and services gross margins. Turning to operating expense, we had an outstanding hiring quarter adding 73 people net across all functions of the organization. We ended the quarter with 887 employees compared to 663 a year ago. This growth in headcount was the primary driver behind the 37% growth and overall operating expenses from the same period last year. Sales and marketing expense was $13.5 million versus $10.9 million last year. R&D expense came in at $9.8 million, up from $6.8 million one year ago and G&A expense was $7.3 million compared to $4.7 million in Q3 of last year. We expect to continue hiring aggressively across the organization in the foreseeable future as we look to drive further success for our customers and long term growth for our company. Our operating margin was 28.7% in the third quarter, up from 21.6% in the prior year period. The operating margin improvement was driven by an increase in gross margin and by the outperformance on our topline. As you'll see from the guidance that I am about to provide, we expect the operating margin to be down sequentially in Q4 due to the full impact of the hiring that we completed in this quarter, further expected hires in Q4 and lower services gross margin. Net income was $13.7 million compared to $7.7 million last year. Our tax rate was up slightly on a sequential basis, largely due to FX and other equity compensation related items, absent a reinstatement of the R&D tax credit or other large moves in foreign exchange rates, you should expect a roughly 40% effective tax rate on a non-GAAP basis going forward. Our fully diluted net income per share for the quarter was $0.09 based on net income attributable to common stockholders of $13.6 million and diluted weighted average share count of 144.3 million. Before moving to the balance sheet, I would like to spend a few minutes on FX. We reported revenue by geography based on the location of the end user, however our billings are based on the location of the entity purchasing the solution and services. Thus in a typical quarter, over 80% of our billings are in U.S. dollars, about 10% in Euros and the rest is a mix of yen, Chinese RMB and other currencies. When there are significant movement in exchange rates, the impact on our topline revenue will be realized gradually as our customers are billed at different times during the next year. In Q3, FX impacted our deferred revenue by about 400,000 and therefore had an immaterial effect on revenue in the quarter. Looking forward I am anticipating a negative impact on revenue of roughly 700,000 to 800,000 to Q4 and a total of $3 million to $4 million over the course of fiscal 2016, based on current exchange rates. In addition, the realized and unrealized effects of changes in exchange rates in Q3 appear in the other income line of our income statement and amounted to a loss of $1.3 million in the quarter. Turning to the balance sheet, deferred revenue was $84.7 million, slightly down on a sequential basis from $85.3 million in Q2. Our calculated billings were up 38% on a year-over-year basis, and were down slightly from the previous quarter as indicated on our last earnings call. As you consider calculated billings for the quarter, there are a few things to note. First, the accelerated CRM deployment that we saw in Q2 pulled ahead some of the billings that were expected in Q3. Second, within our renewal base, Q3 sees fewer renewal billings than Q2 or Q4 and finally FX headwinds affected our billings number by 400,000. As a reminder, our calculated billings metric is impacted by many factors including the timing and duration of orders, payment terms, seasonality within our renewal base and movements in foreign currencies. Therefore, this metric is not necessarily indicative of the overall health of our business in any given period. We exited the quarter with $393 million in cash and short term investments, up from $350 million at the end of Q2. Cash flow from operations came in at $34.3 million, up from $5.3 million one year ago. This performance in Q3 was driven largely by strong bottom line performance and an outstanding quarter of collections. Before I turn to the guidance, I wanted to quickly that our ongoing patent litigation was recently settled. This settlement amount is confidential, but was included in the results reported today and will have an immaterial impact to our financials going forward. Let me wrap up by sharing our outlook for Q4. For the fourth quarter, we expect revenue between $84.5 million and $85.5 million, non-GAAP operating income of $22 million to $23 million and non-GAAP net income per share of $0.08 to $0.09 based on a fully diluted share count of approximately $145.5 million. For the full year 2015, this guidance for Q4 implies revenue of $310.7 to $311.7 million. Non-GAAP operating income of $83.1 million $84.1 million, which implies a non-GAAP operating margin that is approximately 26.9% at the midpoint of the range and non-GAAP net income per share of $0.33 to $0.34 based on a fully diluted share count of approximately 144.5 million. When we report our fourth quarter results on our next earnings call, we plan to provide guidance for our fiscal year ending January 2016. Overall, I am quite happy with the momentum of the business and the results from the quarter. Our focus on customer success is fueling growth across all product lines and we're continuing to invest for our future growth. With that, thank you for joining the call today and I will turn it back to the operator for questions.

[Operator Instructions] Your first question is from Jennifer Lowe with Morgan Stanley. Your line is open.

Thank you. Maybe I'll start. It was encouraging to hear all the positive data points around Vault momentum. So I had a couple questions just following-up on that. first is to the extent that you’ve seen over 100 Vault customers at this point, do you have a feel for how many of those are outside of your traditional CRM base versus up-sells into customers that you’ve been working with already? And then secondly related to that, to the extent that you are building out sales force capacity to go after some new customers with Vault that you weren’t able to sell into with CRM, how is that process ramped and where are you in that investment cycle?

Sure. Yes. This is Matt Wallach, hi Jen. So in terms of the customer base for Vault, about half of those companies have both Vault and CRM and so we've been very effective in selling into the current CRM installed base, but we've also been effective selling outside of it. And in terms of what that took so remember Vault is a commercial Vault applications for promotional materials and medical content and then there is three applications on the R&D side. We've leveraged the commercial sales team to sell the commercial Vault applications. So that's a lot of the overlap. On the R&D side, that's where we added the significant new headcount in the sales force, both in the U.S. and outside the U.S. although at it continues to grow outside the U.S.

Thank you. And then maybe just one last one for me since you’ve touched on some of the opportunities outside of the U.S. I think maybe a year ago, you talked about adding your first sales person in Brazil and expanding internationally was something that you were focused on. Can you just give us an update in terms of your sales footprint outside of the U.S. where that stands currently?

Yes, we're making good progress in Latin America, which we started towards the end of last year and we're starting to see some early wins there. We see similar momentum there as we saw with our other regions that we opened up over the years Asia Pacifica and before that China and Japan and Europe. It starts with supporting the -- our global customers, supporting them in the region and selling add-on regional projects to our global customers and then it continues with selling to the domestic companies in the region and as particular to Brazil, we've recorded our first win with a local Brazilian company and we expect more of those in the future. So it's good progress in Latin America.

Okay. Thank you.

Your next question is from Tom Roderick with Stifel. Your line is open.

Hey gentlemen, good afternoon. So I wanted to build up on Jen's question on the Vault side of the business here. Curious if you're seeing customers for may be a year ago or even more that have taken on PromoMats that are now started switching over and adoption eTMF. As it relates to the Vault side, do you see different decision makers within those two areas have started to see some crossover, how does that sort of all play out with one customer adopting both sides of the Vault equation. Thanks.

Sure Tom. This is Matt. So yes, so you know we've been selling the PromoMats application for about three years, eTMF for about half of that and we definitely have seen some companies start on the commercial side with Vault with the PromoMats application and then expand on to the R&D side. Although that I would say that the majority of our eTMF customers did not start that way. So we're seeing it, but it's not actually the majority and the majority of the eTMF customers are companies that were buying their first vault was eTMF. Now that being said, we see a lot of expansion across customers. We talked about the one company that bought all three Vaults and we have some companies that have even more than that, but the average number of Vaults per customer is still around one and half. So we actually have as many companies with more than one vault as we have that are still on their first. So we do see that expansion. And in terms of the decision makers, they are very different with large companies on the commercial side versus the R&D side. Within smaller companies we can see some overlap in decision makers particularly within IT, but the vault decisions generally are more business focused than IT focused and we've different decision makers that are driving those decisions for each of the vault applications.

Perfect. Second question for me is it seems slightly different topic, but thinking about the SI community the partner community versus it's integrators, can you give some update on how that's progressing and how they're building themselves around both for CRM product line and of course vault here, which is still in the emerging front. Interesting to see if the services business picked back up, seems to be tight, but how is the community looking at both sides of the business between CRM and Vault has been, thanks.

Yes, so our overall strategy for working with their size is the same across the product lines and it maybe wasn’t so obvious in the CRM side because we weren’t talking on calls like this in the beginning, but we did a lot of the early implementations ourselves when the product was new, when we were developing patterns and best practices and then the SI community took more and more of the services business over time. So we see the same thing happening within Vault and with Network where we we're still relatively early and so we're still doing a larger percentage of the services work involved in Network today than we're in CRM today, but the normal trend has already started with multiple partners going through Vault training, partner starting to go through network training. So I think the strategy is the same and we're seeing the same kind of patterns emerge as these products grow.

Thanks Matt. Thank you, guys. Nice job.

Your next question is from Richard Davis with Canaccord. Your line is open.

Thanks. So I actually got this question today from an investor. So there were about a 100 biotech IPOs this year. So which products maybe it's R&D Vault or whatever, would be relevant opportunities for you guys to sell to these newly minted companies and how -- what's the matriculation pace of the opportunities today or the opportunities obviously if they scale to a larger side and then I have a quick follow-up, thanks.

All right. So this is Matt again. In terms of -- if I can oversimplify those 100 IPOs, companies rate will either raise money to go into serious clinical trials. So late phase two or going into phase three trials or they’ll raise money as they're getting ready to commercialize. So and then the answer would be different for both. As you see companies getting successful enough to their -- with their molecules under development that they're going to start major clinical trials, it is the R&D Vault that is most relevant for them. Sometimes they would start with eTMF, but sometimes they would also start with the QualityDocs application so that they can get the SOP management under control around the company and then as they get out of phase two and into phase three, the Submissions Vault becomes more important. So the early stage IPOs is clearly commercial, it's the R&D vault, but when they start to commercialize, then it's the full commercial cloud as well and so by the time a company is getting ready to launch their first product they're actually a potential customers of every product that Veeva sales today.

Got it. No matter what it took, it's a positive for your guys I would think. So…

It is a positive Richard, but there we also have a lot of privately owned customers as well. So yes, it's a point, but there is -- I can remember a few cases where the company said okay, we just got our funding now. We can go forward with the project, but these are enterprise systems. You can't run the company without some of these systems and so it doesn’t feel like sales of all are tied to major financing events generally.

Got it. When I think about event management and Align, they're kind of slightly different used cases at least in kind of your core FFA, CRM stuff. How should we think about and maybe you’ve talked about this. The pricing on these modules is it going to be more and because it's not directly tied I don't think to an individual sales person. So how should we think about pricing on those at least to the high level?

So we'll take Align first. That one is more like the way that we've priced other things per use per month and Align is very closely tied to the number of territories and the number of territories is very closely aligned to the number of sales reps. So as we've talked about Align and our other CRM add-ons being something in the range of 15% to 25% of the base charge, it will be in that range and that's how we think about it. The event management app, you're right. That one is different and that one is not at all tied to the number of sales reps. That one is tied to the number of events. And so you have some very large companies that because of their therapeutic mix may not run that many events compared to a company that may have a 100 reps, but does thousands of events because they're very medical or marketing focused. So the event management not tied to sales reps, that one is tied to the number of events that the companies run worldwide.

Got it. That makes sense. Thanks very much.

Your next question is from Karl Keirstead with Deutsche Bank. Your line is open.

Thank you. Couple of questions for Tim. Tim we haven’t seen a sequential decline in DR from Veeva before. So I just want to focus my first question here, so it sounds like it was due primarily to the accelerated deployments in 2Q. So I guess I've got a two-part question. One is, is there any way for you to quantify what that pull forward was to enable us to calculate a normalized billings growth rate for your third quarter? And then secondly, is that phenomenon largely behind you now such as in the fourth quarter we might return to quote “normal seasonality” thanks?

Yes Karl, thanks for the question. So in terms of quantifying the size of the pull forward in Q2, we don't want to do that at this point, but what I would say is its exceptional and we've talked about pull forward business before. Q2 was of an exceptional nature and was material from that perspective and that as you heard in my prepared remarks had a impact on the sequential comparison of the deferred revenue and therefore calculated billings between the two quarters. In terms of whether that's largely behind, let me generalize it a little bit more. As we're selling into a large enterprise companies, and you’ve heard us talk about this is a little bit, there is some lumpiness to that business. There will be some large deals and potentially deals that get pull forward or pushed out depending upon our customers implementation cycle and really their strategy and priorities for the business. So I wouldn’t say specifically that that phenomenon is behind us from that perspective, specific to Q4, we don't see anything that Q4 billings in that way or calculated billings or deferred revenue in that way Carl.

Okay. Great. And if I could ask my follow-up again to you Tim and this one is more on the operating margins, for this fiscal year, your margin performance has been extraordinary and it looks like you're now guiding for the full year to something close to 27% up from I think 22.5% last year. So I don't think on this call, you're going to give guidance for fiscal '16, but given the extraordinary performance in our efforts to model the operating margin line for fiscal '16, maybe you could touch a little bit on what some of the investment priorities are that might impact that figure?

Karl, this is Peter. I can take that one. In terms of investment priorities, it's really across the Board as we gain more customers, we have more momentum involved. We've new products going on. We're really investing in these areas. Products across the Board, CRM Vault and Network. Services capacity and that's a global efforts. Sales capacity and G&A as our business grows. So I don't see a particular step function, which we had or let's say more than a year ago, when we were building our R&D sales force. So I don't expect that, but I expect consistent investment across the Board and that as Tim mentioned, will probably bring down our operating margin slightly, but we're focused on the long term momentum and next year we have to invest to ensure that growth.

Got it. Okay. Thanks for that color.

Your next question is from Brendan Barnicle with Pacific Crest Securities. Your line is open.

Thanks so much. I wanted to follow-up a bit on Richard's question, like the IPO that you’ve seen in the space is also continues to be ongoing consolidation, any impact that that consolidation is having? You’ve talked about it before, but any changes there?

Hey Brendan this is Matt. So no real changes. We haven’t seen the industry consolidation driving big reductions in the sales force size. As most of the acquisitions have been in complimentary therapeutic areas. Should we take an example of like Actavis. Actavis is the combination of Forest, of [Tellus, Watson] [ph], Actavis Warner Chilcott and then recently Durata Therapeutics. Those are basically all complimentary deals and so the size of that sales force is roughly the size of all of those combined. And then if Actavis does close this Allergan deal that was just announced, that's largely complimentary as well. I think Actavis may have a small dermatology sales force, but the Allergan sales force is more highly specialized. So we just haven’t seen the consolidation changing the market dynamics, changing the size of the market. It's been a normal part of the industry since we started the company and it continues to be their neutral or even positive for Veeva.

Terrific and then Matt, we're seeing more and more companies that have fully depreciated their legacy systems like their [CEBO] [ph] and their document systems, is that having any impact on business and demand?

Yes, I that's been a big driver from the beginning. The advantage we have now is that it's across multiple product lines. So we're used to be kind of dependent on how quickly could you depreciate the old [CEBO] [ph] stuff, but now it includes the old documented, the old Cyprian stuff in the MDM space and so that is -- that's kind of the constant demand is as companies get to the end of life of the installed software that they're on, they have a decision to ether go through a very expensive upgrade of their may or may not get a whole lot of business benefit, or to look around for a new solution and in our case a cloud based one. So that continues to be a driver of growth and demand across the industry and across our product lines.

And Brendan I would say just to add on to that, particularly involved one of the things that going on at, I wouldn’t say it's primarily the depreciation driven. I think the momentum, is caused by this is the first major technology innovation in content management for life sciences is really the tapping unless 10 or 15 years. So that's causing the momentum we had the R&D customer summit. We had about 300 people there. We have some significant customers live and they're sharing that or sharing the business benefits of that with prospects and other customers. So I think more than anything, it's the technology innovation that's really driving our growth. I think we also saw this with CRM. In that area it was moving to cloud based systems and iPad off of client server and older hardware and involved it's really about these cloud-based systems. The first major innovation that they've had. So I think that's what driving it.

Okay. Thanks Peter.

And your next question is from Sterling Auty with JPMorgan. I am sorry just one moment I am having a technical difficulty on my end. My apologies Mr. Auty. Mr. Auty your line is open.

Hey great thanks. Hi guys. Tim, I missed if you got into any details about looking at the sales and the marketing. I think there were some discussion about hiring across the Board, but specifically wondering if you can give us a little bit of color about the leverage that you got of the sales and marketing in the quarter. Were there any expenses may be on the commission side that also got pulled forward into the second quarter or anything else that it might describe the leverage you got on that line item this quarter?

I don’t think there was any unusual leverage Sterling on the sales and marketing line item this quarter relative to any other quarter. I think in terms of the percent, which I am imagining that’s what you're asking, I think one of the things that impacted that as a percent of total revenue was the services revenue outperformance, which really at some level moves fairly independently of our sales and marketing line item. I want to take fully independently but somewhat independently Sterling, but to answer your question specifically there was no leverage point in the particular quarter's performance beyond the general leverage in the model itself, which we've talked about before.

Okay. Well maybe the better way I should have asked is when you look at the sales and marketing level in the quarter would you say this was in line with your expectations a little above or little below?

I would say that given the revenue outperformance, it was a little bit below and I think you will see that in quarters when there is that level of revenue outperformance that our percent of operating expenses will be a little bit lower than we had internally expected.

I guess I was looking more from a dollar terms than in percentage terms.

Yes we don’t quantify that level of detail Sterling.

Okay. And then just last quick one, really big collection in this quarter, anything in particular is that just coincide with hitting the milestones on the services side?

Well I don’t like to call out individuals within this call, but we did recently actually hire a person on to our collections team, that has really done a phenomenal job of spearheading collections and Sterling as you can imagine, collections is a discipline of persistence and consistency. And I think this person and as he has built out his team a little bit, they've driven that level of focus and persistence. So I think that’s been a part of the improved performance in that area.

Got it. Thank you.

And your next question is from Jason Maynard with Wells Fargo. Your line is open.

Hey Good afternoon guys, I had a couple questions. So the first thing I wanted to get a little bit of color on is the operating margin outperformance that you’ve been showing is great for obviously near term cash flow. And -- but if I look out to next year and I think about your productive sales capacity or your ability to drive up-sales and cross-sales of some of the new products, it does make you sort of ask the question where do you stand relative to your original hiring plan? Are you above or behind plan and just how do you think about operating margin at this level in context of what looks like obviously a multi, multibillion dollar group opportunity? Thanks.

Yes Jason, this is Tim. Thanks for the question. So as we look at the last couple of quarters, I think there has been some themes that have been similar in terms of what has driven our bottom line performance. The revenue outperformance being higher than we had expected is one of the key drivers and as you can imagine, that revenue is hitting our books faster than the expenses that are hitting our books from hiring or making investments. We also saw in Q3, the professional services revenue and that business really drove a great performance from the higher utilization rate. As we look forward and we haven’t provided any specific guidance for the future, property margin specifically FY16, but we do plan to continue to invest as Peter talked about earlier across all the areas for long-term growth and customer success. So overall I would say these last two quarters have been higher than we've expected as revenue as outpaced our spending if you will. In terms of your specific question around our headcount plan, we are performing nicely against an aggressive hiring plan. And we're comfortable in how we're doing that and we will continue to invest aggressively through hiring for the opportunity in front of us.

And maybe as a follow-up just in terms of drilling into the network product area, you actually have made a few recent additions, but I am curious just to get a sense as you think about that opportunity, has that become more of a main stream adoption play by your customers next year? Do you need more sales capacity on your end to drive it or is that a question of just customer maturation and willingness to adopt sort of the gating factor of growth, thanks.

Yes, I would say Network is -- Network is a product, its data and it's also software and so especially the data product is going to vary by region. Its maturity and whether it's out of the early adaptor phase. Overall network is just a couple years old. So it's certainly in the early adopter phase and I would say that it's a gating factor now. We need to get more customers live. We need to get more data assets in more regions until it hits mainstream. Now as far as adding sales capacity, largely we do have the sales capacity for network and we will sell that out of our operations, it sells into the commercial side by scientists, but we will have to add incremental capacity as we go along specifically to support the data sales area of network and that's going to -- that's going to require actually more sales consulting type of resources and data consulting type of resources than it would be your classic sales reps. So I would say incremental investment and network is showing a similar pattern as CRM or Vault did and that you got to get the product mature, take some time, try to get your early adaptors live and happy that take some time and then you just move from there. So we're really pleased with it, but its early days with Network.

Great. Awesome. Thank you.

And your final question is from the line of Bhavan Suri. Your line is open.

Hey guys, can you hear me okay?

Yes, we can.

Great, thanks for taking my question. I guess I just wanted to focus a little bit on the CRO space, which was great. You had some wins there. When you look at that space and you look at the LabCorp, Covance deal that was recently announced and you look at your traction, the CRO space, any trend whether it's early stage or late stage, given that sort of the data from Covance suggest that the early stage CRO is just not doing that well.

Yes, so as you know, contract research organization or CROs are really key players in clinical trials, but I haven’t seen what you just referred to in your question that it's slowing down because we actually see all of these companies continuing to grow. So saving that debate, the CROs are important, whether they're growing incrementally or shrinking incrementally, they're doing almost half of the clinical trials on behalf of the life sciences industry. So for us, it's a big important segment. We have about a dozen CRO customers today and each time a CRO chooses Vault, it's kind of extra important because the reason that the CROs exist is to be able to run these trials more efficiently, more cheaply and more quickly than their companies could do themselves and so when they make a technology choice, that contributes to their competitive advantage. And then kind of word gets around quickly because whenever they're pitching for new business, they're talking about the technology choices that they've made. So it's an important category for us or its important type of company and the partnership with inVentiv as the first of the top eight CROs choose our clinical product we think will prove significant over time.

Okay. And then just a quick follow-up because -- and again these folks down at LabCorp, Covance feel for a second, obviously with Covance, LabCorp is touching the fact that it can get real time sort of patient data and as you look at future products potential area, how do you think you play into that sort of ability to provide value as we look at more real time patient data to drive better enhancement in the [indiscernible] area. Is there a play there or am I stretching?

Well there is clearly plays here. I mean LabCorp saw it. Metadata talks about patient level data and they've just done a couple of studies with Pharma companies. I think that it's early for us given the maturity of our clinical business to get into the specific patient level data, but we think about it not only on the clinical side, but we also think about it on the commercial side. And so it's an area that there is no single clear market leader and so I think it's still up for grabs who the leaders will be in patient data and the application of that for kind of real world decision making.

All right guys. That was helpful and thanks for taking my questions.

Sure.

That concludes the question-and-answer portion of today's call. I'll now turn it back to Mr. Gassner for closing remarks.

Okay. Thank you. And thank you all for attending and for your questions. We're really pleased with our results this quarter. And I wanted to take a minute to call out our employees for their great efforts in the quarter and for their dedication to customer success. Also to our customers for their partnership along the way. We're excited about the future as we build this industry cloud. It's going to be exciting road ahead and I look forward to seeing you on the next quarterly call. Thank you.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.