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Veeva Systems Inc Is Just Getting Started

By Brian Stoffel - May 31, 2016 at 12:15PM

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The company blew away expectations, but that wasn't the big piece of news.

The shorts -- of which there are many -- should be worried. Veeva Systems (VEEV -0.58%) -- the cloud specialist with a niche in the pharmaceutical industry -- reported earnings this week that blew past expectations. This has become commonplace, as the company has bested estimates in all 11 quarters as a public company.

More importantly, results came in ahead of what management had forecasted -- showing that founder/CEO Peter Gassner can generally be trusted not to overstate his company's potential.

Metric

Q1 2016

Growth

Revenue

$120 M

33%

Non-GAAP EPS

$0.15

25%

Data source: SEC filings.

Heading into Thursday evening's earnings release, I outlined what investors should look for in Veeva's two key product offerings: Veeva CRM and Veeva Vault. Let's see how results stacked up.

CRM continues to add customers and woo them with add-ons

Veeva's customer relationship applications (CRM) are its bread and butter. Revenue from the segment has typically brought in more than three quarters of revenue. Heading into the report, I noted investors should look for incremental improvements in total customer count, while hoping for the real boost to come from high-margin add-ons established customers usually buy.

Though management didn't provide specifics for either metric in the company's release or conference call, the language surrounding the performance of CRM was encouraging. On the customer front, Gassner said, "we started our first CRM project with another top 20 Pharma." That alone is cause for celebration, as there were few top 20 pharmaceutical companies not using Veeva's CRM solution.

And from an add-ons viewpoint, it's clear there was significant traction in the first quarter. Gassner stated, "Our newest CRM add-on products are starting to gain meaningful traction as well." The company's Events Management, Align, and Approved E-mail applications were singled out as the stars, here. Because these are higher-margin offerings, subscription services saw non-GAAP gross margins expand 100 basis points during the quarter to 79%.

Vault is on fire

There was a lot of positive news management announced when it came to Vault. I was a little disappointed the company didn't provide a breakdown of customers signed up for all of the Vault applications (Clinical, Quality, Regulatory), but again, the discussion surrounding the applications was very positive.

The company announced a secondary product offering in Vault Quality: Vault QMS, which "will be used to manage quality work processes, so the identification of problems in manufacturing, documenting a plan to fix the problems and tracking the implementation of remediation plans." Gassner noted that the application only took six months to develop in response to customer demand, and that it was able to do so that quickly because of the leverage the Vault platform provided. He also said Vault QMS would double the total addressable market within Vault Quality.

In all, the company said it had 11 new regulatory customers -- a 26% jump assuming there was no churn -- and that it had 18 Vault customers total with seven-figure contracts in place.

But perhaps the most interesting comments from the call came when Gassner said Vault might soon be offering its products outside of the life sciences industry:

That optionality was built into Vault from day one. Our customers have seen great success with Vault and word has spread, as a result, over the past three years, we have had growing interest in Vault from companies outside of life sciences who have a need to manage critical content ... This quarter we will start selling Vault outside of life sciences with a small dedicated go to market team. They will focus on regulated industries adjacent to life sciences with solutions that are based on our existing commercial content and quality applications. 

This is huge news investors need to keep an eye on. By focusing on other heavily regulated industries, Veeva is massively expanding its total addressable market. While results from the effort are likely to be small at first, I wouldn't be surprised to see significant traction within the next 12 months.

That, combined with a slight guidance bump in full-year revenue and non-GAAP EPS, is what helps explain the company's 10% jump in the market on Friday.

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