I’ve decided to deep dive into Veeva Systems. This “First Impression” post will present a wide-ranging overview of the company. A follow-up post will provide analysis of Veeva’s first quarter earnings report (fiscal year 2021, which ends January 31, 2021). Finally, on the TMF Premium boards, I will review the “5-and-3” analysis that Karl Thiel provided, bringing it up to date with news from the current quarter.
Why Am I Interested in Veeva Systems?
When Veeva Systems was first recommended, I didn’t bite. I wanted it to be a company that provided software to manage things like clinical trials. Back then, it wasn’t that – it provided Customer Relationship Management (CRM) software, tailored for the Life Sciences industry. I’m glad I kept watching it though, because now it has evolved to become what I wanted it to be. Unlike many SaaS (Software-as-a-Service) companies in vogue these days, Veeva is profitable, debt-free, and cash-rich. I’m old-fashioned, and these things matter to me, although I don’t absolutely require them. I established positions for myself and my family in 2018 and further fleshed them out in 2019. This year, I’ve decided to spend a little less time with companies that The Motley Fool has assigned to me (they’ll still get good coverage, I promise) and more time with companies that interest me and/or are family holdings that I feel I should understand better. Veeva meets those criteria. I feel as if the entire healthcare sector has a tailwind, and Veeva has found a profitable niche. Veeva has shown strong double-digit earnings and revenue growth during its life as a public company, although I’ll save most of those details for when I analyze earnings.
The Motley Fool message boards have a mix of people; some will know a company really well, and others have a passing interest. My target audience for this post is someone who wants to learn a lot more about Veeva. For those of you who already know Veeva well, I hope you’ll study this post and correct anything you find to be incorrect. I try very hard to get my facts right, but this is a “First Impressions” post, so I’m less familiar with this company than usual.
Who Runs This Outfit and What Does Veeva Systems Do?
Veeva was founded in 2007 and went public in 2013. As I understand it, Veeva has four co-founders: Peter Gassner, Matt Wallach, Doug Ostler, and Mitch Wallace. Mr. Gassner started his career at IBM, helping to build the DB2 database, which earns him some “street cred” in my book. After time at PeopleSoft, he worked for salesforce, which specializes in CRM software. At salesforce, he recognized the need for – and interest in – CRM among companies in the life sciences industry. However, found it difficult to close sales because salesforce’s CRM product – while quite robust – didn’t meet many specific industry needs. He co-founded Veeva to remedy that by building CRM tools specifically meeting industry requirements. For example, when a pharmaceutical sales representative contacts a doctor to promote a medicine, there are strict regulatory limits on the representative’s claims and what they can offer. A CRM designed specifically for life sciences will support the salesperson to stay within appropriate boundaries.
All four co-founders had runs with Veeva that lasted 10+ years, but only one is still on the management team. Mitch Wallace was the Vice President (VP) of Operations until he retired in 2018. Doug Ostler was the VP of Products and Technology. On LinkedIn, he indicates that he left Veeva in June 2019 and is currently on “sabbatical”. Matt Wallach was President of Veeva for many years, but he retired in June 2019 and has been offered a seat on the Board of Directors. He is in his mid-to-late-40s. Peter Gassner has been Chief Executive Officer (CEO) of Veeva since the beginning. He serves on the Board of Directors, but is not Chairman of the Board. I appreciate that role separation as good corporate governance, but I’ll often give the benefit of the doubt when the Chairman/CEO is also a company founder. CEO Gassner is in his mid-50s. The Chief Financial Officer (CFO), Tim Cabral, also has about ten years with Veeva. He is still the CFO today, but he announced in August 2019 that he would retire after the company finds a successor and the transition is successfully completed (more detail in the 1Q21 earnings analysis). Mr. Cabral is in his early-50s. This sounds like an amicable separation, but I have one eyebrow raised that three (young) co-founders and the CFO have left the company (or are planning to) in a roughly two-year time span. In September 2019, Veeva hired Tom Schwenger as President and Chief Operating Officer. Mr. Schwenger is in his early-50s and held high-level positions serving the life sciences industry at management consulting firm Accenture. Often, these titles are indicative of succession planning. But I detect no signs that CEO Gassner’s passion for the company he co-founded is wavering. Mr. Schwenger does not speak during earnings conference calls (he may or may not be present – he isn’t announced). However, the VP of Commercial Strategy for Veeva, Paul Shawah, does typically sit in on conference calls. His presence is announced and, while he doesn’t offer any prepared remarks, he plays an integral role during the question and answer section of the calls. Oddly, Mr. Shawah is not listed as a “Named Executive Officer” in Veeva’s annual proxy filing, so I don’t know his age.
As I alluded to earlier, Veeva’s initial product was an industry-specific CRM tool. Rather than compete against his former employer (and build a CRM system from scratch), Veeva took the intriguing approach of building its CRM on top of salesforce’s product. Its agreement with salesforce is such that it pays salesforce a substantial amount. In return, salesforce hosts Veeva’s CRM product on its servers, and it has agreed not to compete with Veeva in the Life Sciences space. That agreement runs until 2025. It is very early to be thinking about renewal, but it is my understanding that this is a win-win deal for both companies, especially since CEO Gassner had an intimate understanding of salesforce’s likely requirements to accept such a deal.
Veeva takes another interesting approach to software development. At many companies, software is developed by a company internally. When they feel as if they have working code – perhaps not even feature-complete yet – they may label that “alpha” and start testing it – still internally, probably. Once they’re happy with “alpha”, it graduates to “beta”. “Beta” software may be shown to select clients, who use it and report their experiences. Once the beta software is fully vetted and fixed, it becomes “generally available”, or GA. Veeva’s approach is different. It is my understanding that Veeva seeks out a small number of early adopter clients for each new product, and they will work with those organizations to fully understand what requirements the organizations have for the software to be developed. These organizations get software very tailored to their needs, and they probably get a significant price break since they’ll have put a fair amount of work into the requirements definition portion of the development effort. Later, assuming they’re happy with the work that Veeva has done, they’ll become “reference customers”. I get the impression that there is an excellent chance that these early adopter customers will be happy because “customer success” seems to be one of Veeva’s highest values and it is deeply embedded in their culture. Of course, as with any software, once it becomes “generally available”, there will be modifications as the new broader community makes feature requests. But Veeva seems very content to let its major new systems simmer with the small set of early adopter customers for years. They want to be sure the product is top-notch before moving to GA.
At a broad level, Veeva calls its CRM system the “Veeva Commercial Cloud”. Veeva actually has more than two dozen distinct products that can be bought individually or in bundles. But it is much easier to think about it in terms of two larger sets of products, and that is generally how Veeva talks about their products. At the other end of the spectrum from “commercial” is the “Veeva Development Cloud” which is also commonly referred to as “Veeva Vault”. When I talked about Veeva’s product set evolving toward what I wanted to see them build, that is represented by the Vault set of products, and it goes beyond what I had originally hoped for. Many sources describe Vault as Veeva’s “crown jewel”. I won’t go into all the tools that make up Vault, but the general categories are: regulatory; clinical; quality; and safety. Vault is Veeva’s fastest growing product set, and some of its important tools are still only available to the early adopter customers. The Vault suite generally carries Veeva’s highest gross margins. During the last quarter of calendar 2019, the Development Cloud overtook Commercial Cloud in terms of revenue size. Pricing models vary within the Vault suite. Many subscriptions are “per seat”, but one of the safety-related modules is priced based on the number of patient safety incidents, and there are probably other modules where pricing is volume-based.
There are three additional main revenue categories that I want to touch on briefly, but before I move to them, I want you to notice that these two main products both have “Cloud” in their name. As best as I understand it, these systems are cloud-native – built to run in the cloud, rather than retrofitted for cloud use. This will be important when we discuss Veeva’s competitors. One last set of points here before I move on. As products that can be purchased “individually or in bundles”, these modules are highly integrated. Customers recognize that an additional module will “play well” with an existing one, making the up-selling process easier. In addition to good customer retention, Veeva has commendable net revenue retention (i.e., the amount of revenue this year from a customer roster dated one year ago).
Veeva has professional services revenue. Often, this isn’t high-margin revenue, but is a necessary adjunct to product sales, which are high-margin. An example might be helping a client set up a new product in their environment, especially to the extent that new software requires different procedures and protocols than the processes replaced by the software.
In the past couple of years, Veeva has selectively branched outside of the life sciences industry. They’ve chosen to support chemical, cosmetics, and consumer packaged goods (CPG), as these industries have somewhat similar regulatory structures to life sciences. The initial offerings seem to be from among the Vault suite, and they are still in a phase where they are working with early adopter customers only. In its 2020 10-K, Veeva teased that they now have a Vault Medical Device Suite. Prior to reading that, I hadn’t heard of it, so I have no idea who the early adopters are or when Veeva might be targeting broader release. While “medical device” can easily be seen as falling within the “life sciences” realm, I know from my recent research of Guardant Health that the medical device and pharmaceutical regulatory structures are different, so I can understand why they’re treating this as a separate product set.
Veeva’s “Data Cloud” is still nascent and may largely be the driven by Veeva’s late 2019 purchase of Crossix, which has a team of “data science” specialists. Data is an important battlefield in Veeva’s competitive landscape, as we’ll see later, and I think Veeva sees the acquisition as a way to improve utilization of the data they capture. But I think they may also view Crossix as helpful in mitigating the situation where a competitor is trying to withhold access to data. Looking at the FY 2020 10-K, Veeva envisions their data offerings as becoming as important as Commercial and Development, but they aren’t expecting a launch until late 2020.
One final area worth mentioning is that Veeva is offering some Artificial Intelligence (AI) products and has embedded AI as part of the feature set of some of its other offerings.
Who Owns Veeva Systems and What is the Ownership Structure?
Like many young software companies these days, Veeva has a dual-share structure. Class A shares are publicly-traded and carry one vote per share. Each Class B share carries the same economic value as a Class A share, but Class B shares have ten votes each. As of March 31, 2020, there were ~134 million Class A shares and ~15.2 million Class B shares outstanding. CEO Gassner owns almost 90% of the Class B shares. He additionally holds some Class A shares and, as a result, he controls a bit more than 50% of the company’s voting rights. Nothing happens unless he wants it to happen! Just in case you find that off-putting, Veeva is unusual in that it has a sunset provision on the Class B shares where they convert to Class A shares in October 2023. At that point, all else equal, CEO Gassner’s voting control would be reduced to ~5%. With limited exceptions, any holder of Class B shares who wants to sell must convert their shares to Class A shares first.
Other than the dual-share structure, I see nothing unusual in who owns Veeva. Vanguard, Morgan Stanley, and Blackrock are large owners. Vanguard’s and Blackrock’s positions are likely due to mutual fund and ETF holdings. While there is less clarity around Morgan Stanley’s interest, their ownership dropped only slightly between March 2019 and March 2020, so their holding seems unlikely to be a source of volatility.
The number of Class B shares declined by about 25%, or about 5 million shares, between January 31, 2019 and January 31, 2020. Comparing the FY19 and FY20 proxy statements, I can see that the Chairman of the Board of Directors Ritter decreased his Class B holdings by ~1.5 million shares, while outgoing President Wallach reduced his Class B shares by ~0.5 million, and soon-to-be-outgoing CFO Cabral reduced his Class B holdings by ~0.15 million shares. CEO Gassner increased his Class B holdings by 0.5 million shares. Other than Mr. Ritter’s decrease, my best guess is that the year-over-year decline in Class B shares is largely due to the three recently-departed co-founders, although I admit to having done no research to support that contention. For any company, but perhaps especially a software company, working through a year of SEC Form 4 filings is tedious business. Except to the extent that we’re worried that former insiders would rather forego their economic interest in Veeva, Class A shareholders generally benefit from a reduction in the number of Class B shares.
Is Veeva Systems Financially-Solid?
The short answer is, “Oh my God, yes!”, and I’m not sure that the long answer is particularly nuanced. I’m more inclined to wonder, “Given their cash flow and cash hoard, should they be paying a dividend?” While it is true that the company has ambitions to extend its product suite, its fortress-like balance sheet seems more than sufficient to support that purpose.
Current liabilities (i.e., those due within a year) are covered roughly twice-over by cash and short-term investments. The company has no debt, although it does have some lease obligations and obligations associated with its long-term agreement with salesforce. Recent acquisitions (more later) have caused a marked increase in goodwill and intangible assets, but shareholder equity is roughly triple those two asset line items combined. Even after the late-2019 acquisitions, cash and short-term investments exceed $1 billion. The balance sheet is rock-solid. The company has been profitable every year since they’ve been public, per Value Line.
Please treat this as an overview. I have NOT looked into potential competitors to the degree that I’ve studied Veeva.
Looking first at the CRM side of Veeva’s business, one could view salesforce as a potential competitor once their non-compete contract expires. I don’t envision that, though. As long as Veeva continues to use salesforce’s platform, salesforce already profits from Veeva’s niche. Would the incremental work to become a viable competitor be worth the incremental profit they might recognize? I doubt it, although they might push for more reimbursement when the contract is renegotiated in 2025, given Veeva’s success. Conversely, I think Veeva is likely to stay on the salesforce platform, as long as they can maintain a non-compete agreement with salesforce. Should these two fail to reach agreement in 2025, that would alter the landscape.
Although salesforce itself has a non-compete agreement, other companies can use the salesforce platform to compete. The most notable competitor in this regard is IQVIA, which I will discuss shortly.
Regarding Vault, let me first quote from Veeva’s 10-K: “No single vendor offers products that compete with all of our Veeva Vault applications, but IQVIA, Medidata Solutions, Inc. (recently acquired by Dassault Systèmes), OpenText Corporation, Oracle Corporation, and other smaller application providers offer applications that compete with certain of our Veeva Vault applications.” During Veeva’s earnings conference calls, there is typically no mention of Oracle or OpenText – I know that the principal business of the latter is document management.
The above link is the press release announcing the acquisition of Medidata Solutions, which appears to represent significant competition. Here is the description of Medidata: “Medidata’s clinical expertise and cloud-based solutions power the development and commercialization of smarter therapies for 1,300 customers worldwide, including pharmaceutical companies and biotechs, contract research organizations (CROs), and medical centers and sites. Its solutions enable efficiency and improve quality throughout clinical development programs by enhancing decision-making, accelerating processes execution and oversight, minimizing operational risk, reducing costs and adapting trial strategies. Thirteen of the top 15 drugs sold in 2018 were powered by Medidata’s technology. Eighteen of the top 25 pharmaceutical companies and nine of the top 10 CROs are all Medidata customers. Founded in 1999, Medidata is headquartered in New York City, with 16 offices across seven countries, notably in the U.S., Japan, Korea, and the U.K., and counts 2,800 employees and contractors”. The press release also notes that Medidata’s 2018 revenues were $636 million. For a comparison with eleven months overlap, Veeva’s fiscal 2019 revenues were $862 million, but less than half of that would have been Vault revenue. While I don’t want to downplay the importance of this competitor, Vault’s growth rate in recent years suggests to me that Medidata doesn’t present “smothering” competition. I’ll save a detailed analysis of growth rates until my analysis of Veeva’s 1Q21 earnings report (which were reported on May 28). Suffice to say for now that, over the past five years, Veeva has grown revenue by 24% annually and earnings by 33.5% annually (per Value Line), and the Vault portion of revenues is growing faster. Going forward, a lot may depend on how Medidata fares under new ownership and how Dassault wants to shape them. From the press release – heck, even from the URL in the link if you didn’t click through – you can see that Dassault’s emphasis is on “the 3D experience”. I can certainly see how 3D imaging plays a big role in life sciences product development, but its biggest role is earlier in the process than tasks that Veeva – or most of Medidata – address.
IQVIA (pronounced: eye-QUEUE-vee-a) takes the title as the most contentious competitor. IQVIA is the new name adopted after the 2016 merger of Quintiles with IMS Health. Whereas Veeva’s systems are built to be cloud-native, I get the strong impression that IQVIA’s software is based on legacy platforms. IQVIA describes itself as “a leading global provider of advanced analytics, technology solutions and contract research services to the life sciences industry … leveraging the analytic rigor and clarity of data science to the ever-expanding scope of human science … to enable companies to reimagine and develop new approaches to clinical development and commercialization, speed innovation and accelerate improvements in healthcare outcomes.” Their 2018 revenue was $10.4 billion, so they are huge compared to Veeva and Medidata. With its larger size and longer history, more patient data has been stored in IQVIA systems than in Veeva’s. Veeva accuses IQVIA of anticompetitive practices for their refusal to allow IQVIA data to be imported into Veeva systems, even if the customer is paying for systems from both companies. Veeva describes the lawsuits it has filed – and IQVIA’s countersuits – in its annual 10-K filing. I looked at IQVIA’s comparable 10-K filing to get “the other side of the story”. As best as I can tell, it is not the facts of the cases that are in dispute by the two sides, but instead whether the cases have legal merit. Veeva further argues that denying access to patient data hurts both customers and patients, but I’m not sure to what extent the courts will factor in “better serves the common good” arguments. Given IQVIA’s emphasis on data science, you can see why I view Veeva’s Crossix acquisition (more soon) as a shot across IQVIA’s bow. Should the suits between IQVIA and Veeva go to trial, the expected date would be in late 2021.
Other Random Musings
This is a section heading I’m borrowing from my earnings analyses. I use it for topics that don’t fall neatly into other subject headings, or where I’m speculating rather than presenting facts.
Veeva is not particularly acquisitive, but they made two acquisitions in late 2019. At its core, Crossix is a data sciences company. Its expertise has the potential to benefit many Veeva products, but most directly Veeva’s Data Cloud, which should be available late in 2020. Veeva paid about $427 million for Crossix (compared to Veeva’s ~$29 billion market cap).
Veeva has offered software to support events where medical professionals gather to hear Key Opinion Leaders (KOLs) speak, but their second purchase was Physician’s World, which manages the logistics of these events. Apparently, this acquisition was driven by customer feedback, looking for a one-stop shop for this kind of event management. Terms of the deal were not disclosed in the press release, but the 10-K indicates that Veeva paid ~$41 million.
An investor looking for the fastest growing SaaS companies will be disappointed with Veeva. Veeva’s growth is very respectable, but not eye-popping. Investors interested in fast growth, with some downside protection coming from profitability and a rock-solid balance sheet, will want to pay attention here. I’ll delve a bit more into valuation when I analyze Veeva’s upcoming earnings report, but let’s just say for now that Veeva’s attractions haven’t been lost on market participants. I outlined the relative sizes of IQVIA and Veeva in terms of 2018 revenues. Veeva has already eclipsed IQVIA’s market cap. Admittedly, they’re not in exactly the same businesses. But IQVIA is slower-growing and debt-laden. Clearly the market sees a better future for Veeva.
Although past growth has been strong, I think there is plenty of room for future growth. Many of Veeva’s newer products are still being vetted by early adopters. Once they become generally available, each in turn should add to Veeva’s future growth prospects. I don’t think that Veeva is trying to be a fast grower – instead, I think they are positioning themselves to be a very steady grower in the very long term, and a powerhouse software provider in life sciences and beyond.
What Will Be My Role Reporting on Veeva Systems Going Forward?
I cannot answer that question with certainty today, but my guess is that it will be “hit-or-miss”, at best. Veeva reports “off-cycle”, since their fiscal year-end is January 31. When I see “off-cycle”, I interpret that as “potentially during my vacations and definitely interrupting my down time”, neither of which I appreciate. One of my official Coverage companies was taken private during the first quarter. That left me with some extra time to devote to analyzing companies. Sheltering-in-place to avoid contracting COVID-19 has given me additional time recently that might otherwise have been spent in fitness classes. Therefore, I chose to study two additional companies this quarter beyond my usual responsibilities; Veeva is the second and Guardant Health was the first. I kind of like the idea of shifting the time I spend analyzing companies toward those that interest me instead of ones that TMF has assigned to me. The most likely case is that I’ll cycle through companies that are important in my family’s portfolio, and put a bit less effort quarterly into my TMF assignments (they’ll get good coverage, but less than what I’ve typically offered). Learning a new (or semi-new) company is always harder work than updating the companies for which I have permanent TMF responsibilities. But I think I’ll benefit from a deeper study of the companies I own. My portfolio is very diversified, so there is only so much time I can devote to each company. Hopefully Fooldom will also benefit as I cover a broader swath of companies than I have in the past.
I hope this was useful for you. If you have any questions or comments, please post them. Ideally, if you want me to see your post, please reply to one of my posts, not just a post in the thread. I am not “up-to-date” on every board where this analysis will be posted, but I do check for replies to my posts with some regularity.
Thanks and best wishes,
TMFDatabaseBob (long: VEEV, BLK, GH; CRM has been on my Watch List; no position in any other company specifically named)
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Please note: I am not a member of any newsletter team. My opinions are my own and do not necessarily reflect those of the TMF advisers. I am a Maintenance Coverage Fool (please see the above link for details). I am not an investment professional, merely an investor.