Shares of Veeva Systems (VEEV 2.21%) rallied 12% to an all-time high on Aug. 24 after the cloud services provider reported second-quarter earnings. Veeva's revenue rose 25% annually to $209.6 million, beating estimates by $6 million and representing its strongest growth in four quarters.
Its non-GAAP net income grew 68% to $61.4 million, or $0.39 per share, which beat estimates by five cents. On a GAAP (unadjusted) basis, its net income rose 30% to $50.3 million, or $0.32 per share.
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For the third quarter, Veeva expects its revenue to rise 22%-23% annually, and for its non-GAAP EPS to grow 52%. For the full year Veeva anticipates 23% revenue growth, and for its non-GAAP earnings to rise 58%-59%. All those forecasts exceeded analyst expectations.
Veeva's growth prospects look rosy, but at around $100, its stock trades at 68 times this year's earnings estimate and 63 times next year's estimates. Should investors chase Veeva at these levels, or wait for a pullback?
What does Veeva do?
Veeva provides cloud-based services for the healthcare industry. Its Veeva Vault helps companies track industry regulations, clinical trials, and prescribing habits on a cloud platform. Its Veeva Commercial Cloud helps drug companies maintain customer relationships through a cloud-based system.
Veeva has strong ties with Salesforce (CRM 3.10%), the world's top provider of cloud-based CRM (customer relationship management) solutions. Veeva founder and CEO Peter Gassner was previously Salesforce's senior vice president of technology, and Veeva's CRM platform is powered by the Salesforce1 app development platform. Veeva's services are also integrated into Salesforce's marketing and service clouds.
Salesforce also offers CRM services for the healthcare industry, but its Health Cloud doesn't directly compete against Veeva's services. Salesforce's platform generally focuses on patient care and personalized medicine instead of clinical trials and the industry needs of pharmaceutical companies.
Veeva serves over 600 customers, including pharmaceutical giants GlaxoSmithKline, Novartis, and AstraZeneca. On the clinical trials front, it finished the quarter with over 200 Veeva Vault eTMF customers, 28 Veeva Vault CTMS customers, and 12 Vault EDC customers.
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Veeva continues to expand its ecosystem with new services like Veeva Nitro, a next-gen commercial data warehouse for life science companies; the Veeva Vault Training platform to help companies with role-based training; and the Veeva CRM Sunrise UI (user interface), which lets users access the platform across multiple devices.
How does Veeva make money?
Veeva generates most of its revenue from subscriptions for its Veeva Vault and Commercial Cloud services. It generates a smaller amount of revenue from its growing "professional services and other" division, which trains companies' teams in the deployment of their cloud services. Here's how those core businesses fared during the second quarter.
| Metric |
Subscription Services |
Professional Services and Other |
|---|---|---|
|
Revenue |
$169.6 million |
$40.0 million |
|
YOY growth |
25.1% |
24.1% |
|
Non-GAAP gross margin |
83.6% |
31.5% |
Source: Veeva Systems Q2 earnings. YOY = year-over-year. GAAP = generally accepted accounting principles.
Veeva's total non-GAAP gross margin rose 1.5 percentage points annually to 73.7%. Its total operating expenses climbed 23% to $97.6 million, but its non-GAAP operating margin still expanded from 31.9% to 35.5%.
Veeva's stock-based compensation expenses rose 47% to $19.7 million, but that only accounted for 9% of its revenues. Meanwhile, its cash and equivalents grew from $320.2 million at the beginning of 2018 to $511.7 million thanks to its stronger billings, rising operating cash flow, and a minor tax benefit boost during the second quarter.
Does Veeva deserve its premium valuation?
With a trailing P/E around 100, investors are paying a premium for Veeva for three main reasons. First, it's generating impressive double-digit revenue and earnings growth. Second, it dominates a high-growth niche within the CRM market with a first-mover's advantage and long-term support from Salesforce.
Lastly, the healthcare cloud computing market could still expand from $20.2 billion in 2017 to $35 billion by 2022 according to Research and Markets, indicating that Veeva still has plenty of room to grow. Therefore, Veeva isn't a stock for queasy investors, but I think it's still one of the best long-term plays in cloud computing.
