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Veeva Systems (NYSE:VEEV)
Q2 2019 Earnings Conference Call
Aug. 23, 2018 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon. My name is Chris, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Veeva Systems fiscal 2019 second-quarter results conference call. [Operator instructions] Rick Lund, you may begin the conference.

Rick Lund -- Investor Relations

Good afternoon, and welcome to Veeva's fiscal 2019 second-quarter earnings call for the quarter ended July 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, August 23, 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.

Finally, I'd like to welcome you to join us at our annual analyst and investor day on October 4 in New York. If you haven't yet received an invite and would like to attend, please feel free to reach out to me via email at the address ir@veeva.com. If you can't join in person, the event will be webcast with both the live and archived versions available on our Investor Relations website. And with that, thank you for joining us.

And I will turn it over to Peter.

Peter Gassner -- Chief Executive Officer

Thank you, Rick, and thanks to everyone for joining us today. In Q2, we had another excellent quarter with the results above our guidance. Total revenue for the quarter was $210 million, up 25% year over year. Subscription revenue growth was 25% and non-GAAP operating margin was 35%.

It was another quarter of strong growth and profit fueled by disciplined execution in multiple markets. At the same time, we made great strides planting seeds for future growth in new markets, with products like EDC, Safety, Nitro and Vault outside of life sciences. Turning to specific items for the quarter. I'll start with a few highlights in Veeva CRM and Commercial Cloud.

On August 10, we released a major user interface refresh of our CRM product. We call this Sunrise. Sunrise is the most significant UI advancement we have made in CRM since the introduction of our iPad interface in 2011. Sunrise is an adaptive, multi-device design and provides a consistent intuitive experience across laptops, tablets and smartphones.

Though it was just released two weeks ago, the majority of our CRM users on iPad are already using Sunrise. The transition was smooth for customers, and we've received great feedback from them. Sunrise was a bold move by our CRM team and over a year in the making. Hats off to them for this outstanding innovation.

We are making pharma reps around the world more efficient and effective. This ultimately helps ensure the right medicines get to the right patients. We continue to extend our market leadership in CRM. For example, we had a top 10 pharma select Veeva CRM for a global rollout.

They started with Veeva CRM in the U.S. less than two years ago, and this expansion was based upon the success of that deployment. Our progress in CRM continues in SMB as well. We added 23 new SMB customers in the first half of the year.

Our CRM customers are also steadily expanding their use of Commercial Cloud by adding other products on a regional basis, such as Veeva Events Management, Veeva Align and Veeva OpenData. Let me take a minute on Veeva Nitro, which we announced in May. Nitro is our next-generation commercial data warehouse built specifically for life sciences. Nitro has a potential to eliminate another major customers -- custom system that has been a real burden for the industry.

It also sets up customers to fully leverage the power of AI. We believe Nitro could be a real breakthrough and transform customer engagement in life sciences. We've been encouraged by the high level of interest in Nitro and our progress so far. We already have our first early adopter customers signed and a few more verbally committed.

We will roll out Nitro in the Veeva Way, and it will take time to ramp to any significant revenue. Our focus will be on the success of our early adopter customers and on creating an outstanding product. We are very pleased with our initial progress and the market demand. Overall, I'm happy with our execution in Commercial Cloud and the innovation we are pursuing to better serve customers and expand our market opportunity.

Turning to Vault. Vault on the commercial side had another excellent quarter. We added a record number of Vault PromoMats customers with success across multiple regions. Since we acquired Zinc nearly three years ago, we have significantly strengthened our leadership position in commercial content.

Zinc customer migrations are on track, and customers love the innovations we are bringing to the PromoMats product. Zinc has proven to be a great acquisition for Veeva and the industry. On the R&D side of Vault, the breadth and depth of Vault development cloud continues to be highly differentiated in the market. Development cloud is resonating with customers.

They want clinical, quality, regulatory and safety applications delivered on one unified cloud-based platform. It's a unique value proposition that only Veeva provides. I'd like to highlight quality and clinical within development cloud as examples of the traction we're seeing. It was an exciting quarter in the quality area with the announcement of a new offering, Vault Training, coming in late 2018.

This is significant for our customers who struggle with fragmented legacy systems in the quality area. They will have a modern cloud alternative for training and one that's fully integrated into their quality systems. Having Training as part of a unified system will make a big difference in increasing efficiency and compliance. There's a lot of interest in Vault Training from our existing quality customers.

Also, in the quality area, Vault QualityDocs is doing very well. In the quarter, we had our first top 20 pharma win in Europe. We now have 10 of the top 20 pharmas using QualityDocs in at least one division. It's remarkable progress and indicates how great a need there is for a modern, flexible cloud solution in this area.

In clinical, we had a number of wins in eTMF, including a top 50 pharma. We now have more than 200 eTMF customers and are becoming widely recognized as the market leader. Our newer clinical products are also ramping quite well. As of quarter end, we had 28 Vault CTMS customers and a growing pipeline for CTMS as word of success from early customers gets around.

Customers want an enterprise-class CTMS that is tightly integrated with their eTMF and on the same platform. Only Veeva has this. EDC is also going well. We finished the quarter with 12 Vault EDC customers, including our first top 20 pharma who is beginning with one study and evaluating Veeva for others.

We are committed to becoming the long-term leader in EDC through customer success, innovation and the unified platform approach based on Veeva Vault. EDC is a long-term play. It's a large application, and we're making good progress. I also want to quickly update you on our efforts with Vault outside of life sciences.

We continue to add a few new customers and expand with existing early adopters. The highlight of the quarter outside of life sciences is that we now have our first seven-figure customer. This was the result of expansion with one of our early adopters based on success with initial projects. We're still in the early adopter phase of this new area and will be for some time, but we're making great progress.

It's clear that leveraging the Vault Platform and using our reference selling model within industries is going to work well for Veeva outside of life sciences. In summary, I'm very proud of the Veeva team. Together, we once again delivered an outstanding quarter. We are realizing our vision to become the most strategic partner to the life sciences industry by delivering the most innovative products in areas with the greatest impact.

By continuing to focus on customer success, disciplined execution and innovation, I'm confident we can achieve our goal becoming a multibillion-dollar company over time. With that, I'll turn it over to Tim to review our financial results in more detail.

Tim Cabral -- Chief Financial Officer

Thanks, Peter. Q2 is another quarter of solid execution. Subscription revenue was up 25% to $170 million from $136 million last year. Strong momentum in bookings continued across all areas of Vault, which increased to 42% of subscription revenue from 36% a year ago, along with steady growth in Commercial Cloud.

In Q2, subscription revenue also benefited from deals that closed earlier in the quarter than anticipated, including some initially expected to close in Q3, and we saw some one-time catch-up items. Together, these amounted to a little more than $1 million of incremental revenue in the quarter. Services revenue came in at $40 million, up 24% from $32 million one year ago. This result came in ahead of our expectations, primarily driven by continued strong demand within Veeva Vault R&D.

I expect a similar performance in our services business in Q3. Total revenue was almost $210 million, up from $168 million one year ago, a 25% increase. Vault represented 46% of total revenue, up from 39% in Q2 of last year. Our non-GAAP operating income came in at $74 million or an operating margin of over 35%, which was above the high end of our guide.

This was driven by a mix of factors, including outperformance on the top line, more efficient computing infrastructure spend and roughly $1 million of onetime benefits from the closure of our payroll tax audit and a property tax true-up. Across the company, we had a record hiring quarter, adding 133 people net in the quarter and finishing at 2,376, up from 1,984 one year ago. We have an aggressive hiring plan for the back half of the year, which is reflected in the guidance I'll discuss in a moment. Calculated billings for the quarter were $182 million, which was ahead of our guidance of $175 million.

This was driven by the outperformance in services revenue and better than expected bookings. Please remember that there are several factors that make year-over-year comparisons of this metric highly variable on a quarterly basis. Therefore, we don't believe it's a good indicator of the underlying momentum of our business and we do not manage to it internally. Our subscription revenue guidance and calculated billings guidance for the full fiscal year are the best indicators of our momentum.

Looking ahead, we expect calculated billings of roughly $150 million in Q3 and about $915 million for the full year, which is up from our prior guide of $900 million to $905 million. This still reflects the impact of an incremental $18 million, which, as I referenced last quarter, was due to a large customer realigning their renewal date. We exited Q2 with just over $1 billion in cash and short-term investments, up from $918 million at the end of Q1. This increase was driven by our performance in cash from operations of almost $87 million, primarily due to better than expected bottom-line results and a strong collections quarter.

Note that Q2 cash flow benefited from about $9 million in excess tax benefit related to equity compensation. For the full year, we now expect cash from operations to be at least $250 million, excluding this excess tax benefit. Let me wrap up by sharing our outlook for next quarter and the rest of the year. For the third quarter, we expect revenue between $215 million and $216 million, non-GAAP operating income of $74 million to $75 million and non-GAAP net income per share of $0.38 based on a fully diluted share count of approximately $156 million.

For the year, we now expect revenue in the range of $840 million to $843 million, an increase from our previous guidance of $826 million to $830 million. We now expect subscription revenue to be at least $685 million for the full year. We continue to expect Commercial Cloud subscription revenue growth of about 10% over last year, and we now expect Vault subscription revenue growth to exceed 40%. For fiscal '19, we now anticipate non-GAAP operating income of $281 million to $284 million, a margin of almost 34%.

This is an increase in both dollars and margin from our previous guidance of $261 million to $265 million and a margin of almost 32%. One thing to keep in mind, margin has exceeded our targets this year due to the revenue outperformance. We continue to hire aggressively and invest in our numerous early stage growth initiatives. We are now targeting non-GAAP net income per share of between $1.47 and $1.48 based on a fully diluted share count of approximately 156 million.

Overall, we're pleased with the exceptional execution we're seeing across the company. The team's focus on customer success and product excellence continues to drive strong results and positions us well to capitalize on the large and expanding market opportunity ahead. Thank you for joining us on the call today, and I'll turn it back to the operator for questions.

Questions and Answers:

Operator

[Operator instructions] Our first question comes from Bhavan Suri with William Blair. Your line is open.

Bhavan Suri -- William Blair & Company -- Analyst

Hey, guys, thanks for taking my call, and congratulations, across the board but especially that margin number, wow. So well done. I wanted to touch a little bit on the Vault Training product. I guess, I'd love to just understand sort of use case.

And more importantly, just sort of how we think about -- or how you guys think about sizing that TAM. What's the addressable market here? It seems fairly significant, but love to understand how you guys are thinking about that. And then I have a quick follow-up.

Matt Wallach -- President

Sure, Bhavan. It's Matt. So to put it in context, so Vault Training is something -- it's basically required for every one of our customers. And so having that as part of the Vault quality suite makes the whole thing more complete, more strategic, and the response to the announcement has been really outstanding.

In terms of the size of the market, it's about $150 million market in addition to the Vault quality suite opportunity, which translates to about 20% more than what we would have gotten for Vault QualityDocs and QMS together. So it expands the size of what we're doing within life sciences. And the use case is for people that are working mostly in a quality and manufacturing setting. There's very, very high compliance requirements.

And so this wouldn't generally be used as a corporate LMS, certainly not for a large enterprise customer. And by the same token, they wouldn't use a big corporate LMS to train these very compliant quality manufacturing employees. So we will end up coexisting over time with the generic LMS at the enterprise customers.

Bhavan Suri -- William Blair & Company -- Analyst

Got it. Got it. Super helpful. And then just on AI, you've talked about in the past about developing sort of an AI engine specific to the life sciences.

I guess, just -- as you see that -- how do you see AI playing? Because now sort of you could see it playing in the training side, the clinical and stuff, EDC is in place. But the more important question is, how are you prioritizing the development of the AI engine versus Training versus Safety versus Nitro versus Phase 3 EDC, how should we think about sort of that prioritization of R&D? Thank you.

Peter Gassner -- Chief Executive Officer

Yes. This is Peter. One thing Veeva does well is really execute across multiple large markets. So we don't view it as any type of a trade-off.

We can execute the development across multiple markets. So when we're doing something on CRM or training, that's separate with what we're doing on AI. Now specifically as it relates to AI, Nitro is a very important product to understand because that is the data foundation layer. That's commercial data warehouse on the commercial side of life sciences.

That's a foundation layer we'll put in to standardize the data and make it very accessible, sure, for operational reporting, for analytics, all those types of things, but also that's what we will build our AI products on. And not only our AI products can be fed from Nitro, but other AI products as well. So we're pretty methodical about the way we do the products, and it's very clear to us that Nitro is the base. And then AI will come in on top of that.

Bhavan Suri -- William Blair & Company -- Analyst

Got it, got it. Thanks, guys. Thanks. That was helpful, and congrats.

Matt Wallach -- President

Thank you.

Peter Gassner -- Chief Executive Officer

Thanks, Bhavan.

Operator

Your next question comes from Kirk Materne with Evercore ISI. Your line is open.

Daniel Greenfield -- Evercore ISI --Analyst

Hi, guys. This is Daniel Greenfield on for Kirk. I've got two questions. The first one is, you guys mentioned the seven-figure expansion deal for that QualityOne product outside of life sciences.

And I know we're still in the early adopter phase, but can you just talk about how that product is moving relative to your expectations? Because it feels like it's moving pretty fast for being in the harvester mode. And then just my follow-up is, I guess, can you comment on what you're seeing in your pipeline? Because you raised full-year revenue pretty high above this quarter, considering you had a $1 million pull-forward. So I guess, what are you seeing in the pipeline that gives you confidence in that?

Peter Gassner -- Chief Executive Officer

OK. And as it relates to the QualityOne outside of life sciences, yes, things are going well there and as we expected. So we're still in the early adopter mode. I can give you some color on that seven-figure deal.

That started off as a small deal. It's quite some time ago where we had success with that small project. They liked our product. They liked our people and they [Inaudible] full audit of us to make Vault an improved platform.

This is a CPG company, so they also have these compliant type of requirements. And then when they're looking for a broader rollout of a quality system, this was a competitive process against the legacy on-premise provider that is very mature functionality made up over the last 20 years. But they really saw the progress that we've been making in our product. They liked our team.

And they really needed the modern cloud alternative, and so they chose Veeva Vault QualityOne as their best choice. So we couldn't be more excited about that. And that's what we want to do when we enter a market, provide a real cloud alternative on our Vault Platform. And it's attractive for customers who want to innovate and get rid of that legacy.

Tim Cabral -- Chief Financial Officer

And Daniel, I'll take the pipeline question. So as we think about the full-year guide and the raise in that this quarter, there's two components of that. One obviously is on the subscription revenue side. So the first-half bookings performance that we've commented on both in the Q1 call and this call as well as a strong pipeline across all of the multiple large markets that we're serving gives us confidence in the subscription part of that raise.

And the raise also considers the beat that we saw in services this quarter and really the demand we're seeing, especially in the Veeva Vault R&D area for services in the second half of the year.

Daniel Greenfield -- Evercore ISI --Analyst

Helpful. Thank you.

Operator

Your next question comes from David Hynes with Canaccord. Your line is open.

David Hynes -- Canaccord Genuity Inc. -- Analyst

Hey, thanks, guys. I wanted to ask about the top 20 EDC win. That seems like a pretty important milestone. So curious, just additional color, who are you replacing there? What's the process from here? I mean, I know you said they're starting with one trial, but how long does that have to run before there's a reevaluation? What's the potential scope of the deal? Anything you can talk about along those lines will be helpful.

Peter Gassner -- Chief Executive Officer

OK. Great. Yes, that was great to have that win in this quarter. Of course, it's small -- a very small deal from a revenue perspective but very significant.

Let me start off at the high level. If you look over the past 10, 12, 15 years, there really have been two players that service the enterprise EDC market consistently, and the innovation has not been coming too fast in that area. So this particular customer was just not quite satisfied with what they have today. They felt like they weren't current, they weren't modern.

There was too much friction in this very important clinical process. And they're not satisfied, basically. Now this is a customer that has other Vault products in the clinical and the regulatory and other areas and the commercial area, and they're quite satisfied with Vault and working with Veeva. And they saw great promise in EDC, and they wanted to see what the alternative is like.

Therefore, they're starting a trial with us. Now I certainly hope that trial goes well. They'll select us for more trials. And over time, yes, maybe a very significant enterprise deal could happen.

But we're a long way away from that, so I wouldn't want to -- I can't really predict when those things will happen. But that's certainly our goal, to bring innovation to this market of EDC that's just been crying out for innovation.

David Hynes -- Canaccord Genuity Inc. -- Analyst

Yes. OK. And then maybe switching over to the commercial side. I can't remember if you guys have talked about in the past, but Vault penetration, I mean, obviously, it's -- I think PromoMats is probably your most mature Vault.

Curious where we stand today in terms of attach or penetration of the CRM base. Is that something you could share with us? And can you give us an update?

Matt Wallach -- President

DJ, I don't know if you're trying to trick me with your question. You started talking about Vault and PromoMats, and then you ask a CRM penetration question. Well, let me just try to answer...

David Hynes -- Canaccord Genuity Inc. -- Analyst

I was just asking. So Vault Commercial, right, your PromoMats attaches to CRM seats. Where are we in terms of CRM customers buying in? In other words, how much more of a runway is there for Vault Commercial?

Matt Wallach -- President

All right. I got it. I'm sorry, I misunderstood your question. And so penetration of Vault PromoMats within CRM, I get it.

It's not actually something that I track specifically. I don't have it in front of me. So I have to answer generally. So the majority of the top 25 pharma companies also use PromoMats.

The ones that don't, use Zinc, and we're working with them to do a migration. So we think of -- I mean, we're clearly the market leader in that market. We will grow by migrating Zinc customers over by winning new deals with more kind of outside of the top 25 companies and from new functionality innovation that we have, particularly around digital asset management where the biggest innovation with the PromoMats product lately is a DAM product, digital asset management, which leads to a larger number of users licensing Vault PromoMats within potentially every customer. So there's still growth within that business.

And what we're really pleased about is that the level of customer satisfaction, the level of value that they get from these global content management products is exactly what we are hoping when we started that product, when we made that acquisition. And so that business is in very good shape.

David Hynes -- Canaccord Genuity Inc. -- Analyst

Yes. OK. That's perfect. Thanks a lot, guys.

Nice set of numbers.

Matt Wallach -- President

Thank you.

Peter Gassner -- Chief Executive Officer

Thanks, DJ.

Operator

Your next question comes from Stan Zlotsky with Morgan Stanley. Your line is open.

Stan Zlotsky -- Morgan Stanley -- Analyst

Hey, guys, good afternoon and thank you so much for taking my question. I apologize for any background noise. But two quick questions, one high level. The Nitro product and the win that you guys had in there, the early adopter, what solution is it displacing, if any? And essentially, maybe just walk us a little bit through that early win? And then a quick one for Tim.

The billings number in the quarter, anything one-time or maybe FX that we need to keep in mind as we think about for the current results as well moving forward?

Peter Gassner -- Chief Executive Officer

OK, I'll take the one on Nitro. Generally, with Nitro, overall, we'll be replacing a custom-built solution that is built on a variety of technology, might be built on a base -- relational database technology or a Hadoop-based technology, but we're replacing a custom-built. That's what's going to go on. Now in this particular case of this win with the early adopter, this is quite a smaller company that's early on in their commercial cycle, and they really had an unsatisfactory solution.

It was even a stretch to call it a commercial data warehouse. So they were considering building one, and they really thought, hey, better to just get one from Veeva that we can turn on. There, we didn't really replace anything. We replaced the lack of a system.

And that's -- I guess, that's why we can get them as a very early adopter because they were about to purchase something, they just got ours rather than having to justify replacing something.

Tim Cabral -- Chief Financial Officer

Stan, on the billings number, we had -- as you heard in my prepared remarks, we had a $7 million beat this quarter. Most of that was driven by the services revenue beat, and we did see some better bookings performance than we had expected. But there's no necessarily onetime items. And you mentioned FX specifically.

We don't have a very large exposure to FX. So it's -- there's a number there, but it's fairly immaterial for us for the year.

Stan Zlotsky -- Morgan Stanley -- Analyst

OK. Perfect. Thank you so much.

Tim Cabral -- Chief Financial Officer

You're welcome.

Operator

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

Tom Roderick -- Stifel Financial Corp. -- Analyst

So gentlemen, good afternoon and thanks for taking my question. I actually wanted to piggyback on DJ's question from earlier just on EDC. And I was hoping you could shed a little bit of light into -- I don't know if you want to talk about this deal or just some of the customers in general. Where are you at with respect to kind of Phase 1 versus Phase 2 and 3 trials.

I know kind of making that leap into Phase 2 and Phase 3 trials is sort of the next big proving ground for the EDC product. Could you just talk a little bit about how major customers are looking at that and their interest in using you for larger and later-stage trials?

Peter Gassner -- Chief Executive Officer

Yes, that's a great question. We're in the stage now with our EDC where we're no longer limiting ourselves by phase. Now that was different than where we were six, nine months ago. We were specifically looking at Phase 1 and Phase 2.

Now we're not limiting by phase. We will look at the individual protocol, which is the very specifics of the trial to see there might still be some feature that we can do and we'll tell the customer, hey, that's not a good fit for us. But it's getting more few and far between. We're starting to be a good fit for the multiple of the trials.

So we're no longer limited there. But our product is not as mature yet as the products that have been out there for a while. And the customers are not familiar with it, so they have to do some pilots and things like that. And then, of course, naturally, they're going to be a little risk averse in this area.

But that's a great question. We're no longer limited by the phase of the trial.

Tom Roderick -- Stifel Financial Corp. -- Analyst

Fantastic. Good update on that. The other one, I know we all sort of think about these things being paired together because they were released roughly at the same time. CTMS has come a long way, and it seems like the adoption of that is maybe sort of less inhibited given that it ties very naturally to eTMF and sort of more of the R&D successful Vault deployments that you have.

Can you talk about sort of the natural selling motion of CTMS, what you're seeing from the sales cycles and decision-makers attached to that? Should we think about that as being a more material revenue driver in the next, say, 12 to 24 months than EDC?

Matt Wallach -- President

Yes, Tom. So we're awfully excited about CTMS, as you heard so far. The sales cycles are not all RFPs, and so that is indicative of the value of the integration between the different Vaults, specifically, in this case, CTMS and eTMF. Now we end up selling very often to the same people that we sold to in eTMF, and it's not always competitive.

It's just sort of it makes sense. Some people use the word, no-brainer. I don't like to ever tell a customer that anything we do is a no-brainer. But I certainly hear that a lot in the market that if you have Vault eTMF, you just get CTMS.

They work together, they're on the same platform and you manage the documents and the data together. In terms of what the revenue stream looks like, I think your time line was probably about right, 12 to 18 months. We're going to be talking about seven-figure deals, big escalating ELA. We're certainly putting ourselves into those sales cycles now based on the success of the early adopters.

And so yes, I think your timing is about right. And the product just is right on from what we expect. I remember, I think it was four, five calls ago, I was really excited. You guys sort of made fun of me for my level of excitement about CTMS.

And it's actually exactly what we had hoped for, and again, back to a point that Peter made, indicative, I think, of lack of innovation in that space for many, many years. And so we're able to solve that for the industry.

Tom Roderick -- Stifel Financial Corp. -- Analyst

Outstanding. Great update on both of those. Thank you, guys.

Operator

Your next question comes from Ken Wong with Guggenheim Partners. Your line is open.

Ato Garrett -- Guggenheim Partners -- Analyst

Hi, good afternoon. This is Ato Garrett on for Ken Wong. Just another question relating to timing and some of your new product innovations, particularly Nitro. I know you spoke earlier about landing a one large customer.

Just thinking about the time line for that adoption rate to really start to turn up in revenue. I know you mentioned that, that's something a little bit further up, but if you can just kind of give us a little bit more color on whether that's a one-year or two-year-type time line you're thinking about for that product.

Peter Gassner -- Chief Executive Officer

As regards to Nitro, the early adopter there, to be clear, for the Nitro early adopter that was not a large customer. That's a small customer, very, very early customer. So it's not something very significant from a revenue perspective. Now Nitro is a very early product.

We announced it in May. It won't be generally available until toward the end of the year. In terms of significant revenue, these things take years. These might take two, three, five years to generate significant revenue.

To put that in perspective, we're generating significant revenue from our eTMF product now. Now that was first introduced roughly five years ago, and we would consider eTMF a fast ramp and a fast uptake. So that's what it takes. That's why I'm so excited we can produce the results that we've had and take care of the customers in the way we've had in this quarter, but also plant these seeds for future growth, Nitro, EDC, Safety, which we haven't even brought out.

So these things are going to pay off in revenue three, four, five, six years out.

Ato Garrett -- Guggenheim Partners -- Analyst

Great. Thank you.

Operator

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

Rishi Jaluria -- D.A. Davidson -- Analyst

Hey, guys, thanks for taking my questions. Nice to see some continued momentum and margin expansion. I wanted to start on the EDC side. You've seen some good early success with early adopters and customers.

Is eSource still on track to GA by the end of the year? And have you seen any early indications of interest from the EDC customers that you've signed up to expand eSource when it's released? And then I have a follow-up.

Peter Gassner -- Chief Executive Officer

As it relates to EDC, there's a lot of innovation that we're going to bring in that area. And that's just part of the natural learning process. We have a dozen early adopters now, and boy, are we learning literally every week, I think. What we're finding is EDC is not the priority for them.

It's something that they do want and it's something that we have to work with them on. But really, it's in the core EDC. The things like the data capture, the medical coding, the operational reporting around the data, the exchange of data between the sponsor and the CRO. I think when we first got into the EDC market, we talked more about eSource.

Honestly, I think we didn't realize how bad the market was hurting on the basics. And so we -- we're very customer adaptive. We get early adopters. We have a mindset, but then we have to learn from those early adopters.

And what we learned is, man, they really need the basics. They need to modernize their basics. So we put the eSource on the hold for now. It will come, but it's not something that's coming this year and I would think not likely next year.

Rishi Jaluria -- D.A. Davidson -- Analyst

OK. Got it. That's helpful. And then on the QualityOne side, I was wondering if you could share any thoughts or takeaways coming out of the Quality Summit earlier this year.

And if there's been any feedback from some of the early adopters that you think might help shape your product pipeline with your Vault OLS efforts in general. Thanks.

Peter Gassner -- Chief Executive Officer

Yes. So that was our first QualityOne summit, so it was sort of giving our first party in that market. So it was small and it was collaborative. And I think there was just good information sharing and help to set the patterns for future customer summits in that area.

And then it's the normal thing in the early market. People are asking, "hey, what are you doing with Veeva? And what are you doing with Veeva? And how do you think about Veeva? And where do you think it's going?" And we're getting ideas. So it's developing enthusiasm, and we are getting early reference selling. Just this last -- in the last month, we closed a small deal that came in very quickly.

And they came to us because they heard of the success that we're having with another similar customer. And therefore, it was not a large RFP process. It was Veeva -- and QualityOne is working for that customer, we are a lot like this customer, maybe we should just get Veeva. And that's the reference selling, which has to do with the product that really works but also has to do with a good customer experience.

Rishi Jaluria -- D.A. Davidson -- Analyst

Thank you.

Operator

Your next question comes from Brad Sills with Bank of America Merrill Lynch. Your line is open.

Brad Sills -- Bank of America Merrill Lynch -- Analyst

So great. Thanks, guys, for taking my question. Maybe just a follow-on to the previous question on the outside life sciences with QualityOne. Are there any verticals with some of these new wins that you've seen where you're seeing a trend, perhaps some commonalities in verticals or use cases so far?

Peter Gassner -- Chief Executive Officer

Yes. The two verticals where we're having the most success are CPG and chemicals. Chemicals is something that you would expect, but it's also things like agrochemicals. And CPG are things that you would expect, but also extends to things like cosmetics.

So broadly, those are the two big markets, and we're seeing success in the U.S. and we're seeing some success in Europe as well.

Brad Sills -- Bank of America Merrill Lynch -- Analyst

Great. Thanks, Peter. And then one more if I may, please. Just on the CRM expansion opportunity, it sounds like that's still one of the core drivers of growth in the commercial side.

Can you remind us where we are in terms of expansion of seats within the installed base? Is that still from here an incremental opportunity? Thank you.

Matt Wallach -- President

Sure, yes. It's Matt. So where we are in terms of the core SFA product, we're a bit above 70% in terms of penetration. And we have kind of line of sight to around 80%.

So I wouldn't be surprised if we're at 80% coming up on one of these calls. And that's the big strategic assets because we've gained the trust of customers across the industry, across the globe. And then that allows us to offer this wide range of other products. And so if I'll just continue kind of through the add-on products that we've reviewed on these calls before, so CLM is above 80% still.

Approved Email is still above 40%, but the number of users and the usage is expanding very, very rapidly, even as the percentage of customers hasn't grown that much. Events Management is above 15% of our installed base on a number of customer basis. And Align and Engage are both approaching 10%. So we have good incremental progress on all of those add-on products.

And then the largest of all of them, probably roughly the size of all of them combined, is Nitro. And so Nitro will be the largest growth driver of Commercial Cloud once the engine really starts moving after we get out of the early adopter phase. So the next couple of years, there's still more users to add and more add-on products. And then in a couple of years -- two, three, four, five years, as Peter explained, Nitro will probably become the growth engine for Commercial Cloud.

Brad Sills -- Bank of America Merrill Lynch -- Analyst

Great. Thanks, Matt.

Operator

Your next question comes from Sterling Auty with JPMorgan. Your line is open.

Ugam Kamat -- J.P. Morgan -- Analyst

Hey, guys. This is actually Ugam Kamat on for Sterling. So just to follow on, on the CTMS and EDC product, have you really seen any particular follow-on orders or expansion within the existing customers, just to see an indication of how they're expanding their product within -- from their initial purchase?

Peter Gassner -- Chief Executive Officer

Yes, we certainly do see that. So one of the common patterns is we have our eTMF in with the customer, and it could be small- to medium-sized customer. Now two years ago, we didn't have a CTMS product. Now we do.

And so they're adding -- they have our eTMF. They're happy with it. They're adding our CTMS. So that's a very common pattern.

As far as EDC, EDC is a little different in that they will buy it on a trial-by-trial basis, especially right now as it's in the early adopter mode. So I wouldn't consider that an add-on product. But certainly, the good experience that they have with Veeva as a company and Vault as a platform, that influences them to want to try things with Veeva on EDC.

Ugam Kamat -- J.P. Morgan -- Analyst

Gotcha, that's helpful. And one on the gross margin. I mean, gross margin came in at 73.7%. I think it's one of the highest you have seen.

Should we consider this to be the new norm going forward as you have gained developmental and other expertise on your cloud? Or should we expect that to come back to the original levels?

Tim Cabral -- Chief Financial Officer

Yes. I think this quarter, what you saw is a few things. Number one, you saw in subscription margin, really had great efficiency on the infrastructure spend there. The reduction of our old infrastructure provider, NTT, was a big reduction quarter over quarter, and we're nearing sort of the end of our spend with NTT.

And we are starting to learn how to be efficient with AWS. The team is doing a great job from that perspective. So I think from a subscription gross margin, yes, this is sort of the -- where we thought we would be after we got through the AWS -- or the NTT to AWS migration. On the services margin, we did see -- with the outperformance in services revenue, we did see another 31%, 31.5% services gross margin.

I don't think that, that is really a norm that I would say is where we should be. I think the utilization rate there for some of the teams is probably a little bit much. So I think we always expect to be more in the high-20s in terms of service gross margin. So that's probably the color that I would give you for the margin performance and how to think about it going forward.

Ugam Kamat -- J.P. Morgan -- Analyst

That's great color. Thank you very much.

Operator

Your next question comes from Brent Bracelin with KeyBanc. Your line is open.

Brent Bracelin -- KeyBanc -- Analyst

Thank you. One for Tim and one follow-up for Peter. Tim, could you just talk a little bit about the higher operating margin guide for the full year? The question here is, are we entering a period where we'll start to see scale in the business drive higher op margins while driving increased divestments? Walk us through the process with the guide up in op margins? And then I have a quick follow-up for Peter as well.

Tim Cabral -- Chief Financial Officer

Sure, Brent. So if you look at the first-half performance, obviously, we look at the operating margin performance, and it's primarily a function of the revenue outperformance. And as you've heard us talk about before, Brent, when we're having that sort of intra-quarter revenue outperformance, it's hard to ramp up spending to offset that from a margin perspective. So it's really that revenue outperformance that drove the first half.

And the beat there is really what you're seeing in the increased raise for the rest of the year. Now with the second half of the year -- and from the prior question, with the gross margin improving, that helps deliver more bottom-line results to the operating margin. At the same time, it enables us, as I said in my prepared remarks, to hire aggressively and continue to invest while showing good operating margin performance. So that's how I would think about it, Brent, in terms of the guide.

Brent Bracelin -- KeyBanc -- Analyst

Very helpful. And then, Peter, just a follow-up for you on Nitro. I mean, you talked about your first early adopter there being a small customer. Could you just walk through the broader scope of the opportunity around Nitro? Is this something that you believe will be of high interest for your larger customers? Any sort of additional color that you're seeing outside of maybe a small customer around interest in that very early product?

Peter Gassner -- Chief Executive Officer

Yes. We are seeing -- first of all, I do think it will be applicable to all of our customers that have a commercial life sciences offering across all regions. Any customer of any size must have this because they need the data to optimize their field, which is a large area of spend and a critical area of productivity. So a customer will have this, for sure.

Now because they have an existing system, all the large customers, it is a replacement project. So those things take time. We have to get our product to maturity and we have to find the right timing so the customer wants to do that project of replacement. So it'll start slow in the beginning.

When the success gets around, then there's a flurry of activity in the middle, and then there's late adopters until the end. So I think it will follow a pattern very similar to what happened in CRM. Now as far as the small customer, that wasn't the case. We didn't have to replace anything.

They were thinking about building something, so they just plugged it right in.

Brent Bracelin -- KeyBanc -- Analyst

Very helpful. Thank you.

Peter Gassner -- Chief Executive Officer

Did that answer your question, Brent?

Brent Bracelin -- KeyBanc -- Analyst

Yes, it did. Yes. Thank you. Thanks.

Operator

Your next question comes from Brian Peterson with Raymond James. Your line is open.

Unknown Speaker

Kevin here on for Brian. Thanks for taking my call. Just one quick one. You mentioned, you saw a handful of Vault deals closing a bit earlier than anticipated.

Is there anything specific to call out there regarding go-lives? Or was that really just more coincidental?

Matt Wallach -- President

So we actually weren't specific that it was Vault deals that were early. Although, I'm trying to remember which ones. I think they are. But there was nothing particularly meaningful that they were Vault or CRM.

And I think it was just the customers were able to start their projects early. It's not because there were some sale that we do. We never do stuff like that, as you guys know. And I don't think there's much of a story there except that these are things that we thought were going to close later.

And the customer decided to start those projects earlier.

Unknown Speaker

Thanks.

Operator

This concludes the Q&A session for the conference. I'd now like to turn it back to Peter for any closing remarks.

Peter Gassner -- Chief Executive Officer

Thanks for your time. It was a great quarter for Veeva, and we look forward to seeing many of you at our analyst day in New York on October 4. And thank you again to the Veeva team for your outstanding work, execution and focus on product excellence that allows us to consistently deliver for our customers. Have a great evening.

Operator

[Operator signoff]

Duration: 50 minutes

Call Participants:

Rick Lund -- Investor Relations

Peter Gassner -- Chief Executive Officer

Tim Cabral -- Chief Financial Officer

Bhavan Suri -- William Blair & Company -- Analyst

Matt Wallach -- President

Daniel Greenfield -- Evercore ISI --Analyst

David Hynes -- Canaccord Genuity Inc. -- Analyst

Stan Zlotsky -- Morgan Stanley -- Analyst

Tom Roderick -- Stifel Financial Corp. -- Analyst

Ato Garrett -- Guggenheim Partners -- Analyst

Rishi Jaluria -- D.A. Davidson -- Analyst

Brad Sills -- Bank of America Merrill Lynch -- Analyst

Ugam Kamat -- J.P. Morgan -- Analyst

Brent Bracelin -- KeyBanc -- Analyst

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