Veeva Systems (NYSE:VEEV) has quickly become a standard-bearer in the pharmaceutical industry. The company was born out of co-founder and CEO Peter Gassner's experience while an executive at Salesforce.

Gassner saw that there were industry-specific cloud needs that Salesforce couldn't meet, and he set out to build that new system. While the company's commercial cloud gave it a solid start, the success of Veeva Vault is what really has shareholders excited.

Medical Team Joining Jigsaw Pieces Against Sky

Image source: Getty Images.

Veeva earnings: The raw numbers

There was a lot for shareholders to like in the most recent report. Before we get into the details, here's how the company's fiscal 2018 q3 results look from 30,000 feet.

Metric

Q3 2018

Q3 2017

Growth

Revenue

$176 million

$143 million

23%

*Earnings per share

$0.25

$0.22

14%

Free cash flow

$30.6 million

$23.5 million

30%

Data source: SEC filings. *Earnings per share presented on a non-GAAP basis.

Because Veeva derives some revenue from providing services to new clients, the growth of subscription revenue can sometimes be overlooked. This is the repeat business that investors should really be focusing on. That segment grew sales by 25% over the most recent quarter, and -- just as important -- gross margin expanded 179 basis points to 80.7%.

Earnings growth continued to trail sales growth because of investment in the future. Research and development costs jumped 34% to almost $30 million in the quarter -- not including the effect of stock-based compensation. What's interesting to note, however, is that Veeva continues to grow its roster of pharma clients without breaking the bank on sales and marketing, which increased just 12% from the same time last year.

Four important takeaways

Heading into Tuesday's release, I highlighted several areas to focus on. But one tidbit that I didn't predict was probably the most important piece of positive evidence for long-term investors. According to management, "the number of customers using multiple Vault applications increased roughly 50% year over year, fueled by growth across all Vault application areas."

This is important because as pharmaceutical companies integrate more and more of their processes on Veeva's cloud, the switching costs associated with going to another provider become prohibitively high. Not only would leaving Veeva be expensive for these customers in the short term, but there would also be enormous headaches in retraining staff and risking the loss of mission-critical data.

Beyond that, I also wanted to know how certain new products were being adopted within the field. According to the company's conference call:

  • Vault Clinical Trial Management Systems, which became available at the beginning of 2017, added four new customers to bring its total to 11.
  • Vault Electronic Data Capture, an even more recent release in a more developed niche, added three new customers to bring the total to five.

Those might seem underwhelming, but getting early adopters to sign on is usually the hard part. Once they're set up as "lighthouses" in the field, as Gassner likes to say, interest usually follows.

The third big development of note was the announcement that Veeva's newest product -- set to come out in 2019 -- will be Vault Safety. The application will help drug companies handle everything from the intake of information during adverse health events to reporting to health authorities and even signal detection for future problems.

Finally, the feedback from Gassner on the progress of Vault QualityOne -- a cloud service for companies outside life sciences -- was underwhelming. He indicated that a few more early adopters had signed on, and those that were already using QualityOne had added services.

Looking ahead

For the fourth quarter, management expects revenue to come in at a midpoint of $179.5 million, with non-GAAP earnings of $0.21 to $0.22 per share. Once again, that means revenue that's growing far faster -- roughly 20% -- than earnings, which are expected to decline.

That being said, it's important to note that Gassner sees revenue growing at a 20% annual clip through 2020, and at some point, the leverage Veeva has established could produce enviable cash flows for investors.

Brian Stoffel owns shares of Veeva Systems. The Motley Fool owns shares of and recommends Veeva Systems. The Motley Fool recommends Salesforce.com. The Motley Fool has a disclosure policy.