Investors in Veeva Systems (VEEV 3.60%) have grown accustomed to massive returns from the cloud software provider to the life sciences industry. Rapid top-line growth led to share gains of 41% in 2016 and 36% in 2017, but the stock has gone nowhere since May of last year, and at a recent price of $60 is down close to 15% from its 52-week high. So will 2018 be more of the same, or will it be the best year yet for Veeva?
Veeva got its start in 2007 when Peter Gassner, vice president of salesforce.com at the time, realized that industry-specific software systems could be built on Salesforce's cloud platform, and the life sciences industry would embrace an integrated software-as-a-service solution that simplified the cluttered landscape of legacy on-premise systems.
Veeva's platforms have been adopted by most of the largest enterprises in life sciences, and as Veeva has grown its suite of offerings, it's been able to cross-sell new applications to its growing customer base, resulting in revenue growth of 33% in the last fiscal year, which ended Jan. 31, 2017.
Image source: Getty IMages.
Slowing growth may be stabilizing
It was inevitable that that sort of growth rate would slow eventually, though, and that's what happened in calendar 2017, putting the brakes on the stock's long run. Veeva has two broad platforms: the more mature Commercial Cloud, which includes its customer relationship management (CRM) application, and the newer Development Cloud, which supports a company's clinical, quality, and regulatory processes.
Growth of the Commercial Cloud is slowing, as Veeva is already selling to almost all the major industry players. The Development Cloud with the Veeva Vault product is where the growth is coming from. For the full 2018 fiscal year, Veeva expects 15% subscription growth from Commercial Cloud and 50% subscription growth from Vault, which comprised 40% of revenue in Q3.
Market saturation of the company's CRM core product has caused the overall revenue growth rate to decelerate.
| Fiscal Quarter | Revenue Growth (YOY) |
|---|---|
| Q3 2017 | 34% |
| Q4 2017 | 31% |
| Q1 2018 | 32% |
| Q2 2018 | 27% |
| Q3 2018 | 23% |
| Q4 2018 (Guidance) | 20% |
Data source: Veeva Systems.
Preliminary guidance for full-year fiscal 2019 revenue growth is about 18%, so the slowdown is continuing, but could be close to leveling off. Veeva Vault is still early in its life, so as it grows into a bigger proportion of Veeva's business, it should stabilize the decline in growth. In any case, Veeva investors need to factor into their thinking that the days of sustained 30% top-line growth are probably over. 2018 won't be Veeva's best growth year ever, and neither will subsequent years, most likely.
Meanwhile, although sales growth has slowed down, profit and cash flow continue to pile up. In the first nine months of this fiscal year, operating cash flow increased 59% and net income more than doubled.
Plenty of drivers for long-term growth
The investment thesis for Veeva is that the company is the dominant leader in helping life sciences companies consolidate a hodgepodge of legacy IT systems into a single, integrated, cloud-based system. This is a big potential market, and Veeva has perfected a methodology of developing add-on applications, working closely with early adopters to refine the software, and using reference accounts to cross-sell new solutions. The pipeline of new applications is key to maintaining growth, and Veeva has plenty in the works there.
Veeva has a large core of CRM customers and part of its growth strategy is to sell additional offerings in the Commercial Cloud to this large base. These add-ons help sales and marketing teams stay coordinated and share information while staying compliant with the myriad regulations across the world. This is the slower-growing part of Veeva's business, but new add-ons such as event management and a marketing territory alignment tool are still early in their lives and have a long runway ahead.
The biggest immediate growth catalyst is Veeva's Development Cloud, which is still in its early days and, according to the company, has a $4 billion addressable market. The core offering is the Vault Clinical Trial Management System, which is starting to get some good traction with Veeva's pharma customers. Add-ons include document management, quality management, and software for keeping track of interactions with regulatory agencies. The company's latest announcement is a new safety module that will help drug companies keep track of all adverse events associated with a treatment.
A third major source of future growth is expansion outside of the life sciences industry. Veeva is working on adapting its quality management suite to sell to customers that manufacture things other than drugs, such as packaged consumer goods. The company expects that this business will add $1 billion to the company's addressable market, but that could be conservative. The payoff won't be in 2018, and probably not in 2019 either, but Veeva is laying the groundwork for the company's next big expansion years into the future.
Finally, Veeva's growing cash hoard gives the company some optionality for growing by acquisition. Veeva has been conservative in that regard, preferring to grow organically. But with over $5 per share in cash, the company is in good shape to pounce on any opportunities for growth-enhancing additions.
Don't expect big surprises in 2018
Could there be any big positive surprises from Veeva in 2018? Probably not. That's not because there isn't anything good happening with the company this year, but simply because this company doesn't typically deliver big surprises at all, positive or negative.
Veeva's business is simply very predictable, since its revenue comes mostly from subscriptions. And its software helps companies run mission-critical aspects of their business, so when a customer buys into its platform, it is making a strategic decision that often gets reviewed all the way up to the C-suite. It may take a long evaluation process for a company to commit to the Veeva platform, but once it does, that customer will be retained for the long term and typically adds new Veeva applications over time.
The company has managed to beat revenue and earnings expectations every quarter since it went public four years ago, but don't expect things to change very suddenly for Veeva -- for better or worse.
Keep this year in perspective
Will 2018 be Veeva's best year ever? With slower growth and little chance for some explosive good news, it isn't likely that this year will eclipse the previous four. But that doesn't mean you shouldn't own the stock.
Fortunately, long-term investors don't have to worry about predicting what will happen in any given year, and Veeva Systems has plenty of appealing qualities for the patient shareholder. It's an emerging leader in its space and has plenty of addressable market still ahead of it. The founder-led management team is investing for the long term, and plenty of profit and cash flow growth is ahead for this steady, predictable business.
