1 Thing Veeva Systems Does Right

Veeva Systems (VEEV -0.58%) has been an incredible investment over the last five years, not only beating the S&P 500 but also handing investors a sweet multibagger return.

The impressive stock performance of this cloud-based software company is not an accident. One of the reasons it has succeeded is its focus on a specific customer segment, life science companies.

Why has this strategy been so successful, and can it continue to drive growth in the years ahead?

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Why focus on the life sciences?

From its founding in 2007, Veeva built software to serve the life sciences industry for two key reasons. First, the companies that operate in this highly regulated space are often large and global, and have built complex processes to remain in compliance with regulators. Without industry-specific information technology (IT) applications, companies would have to resort to paper-based solutions or customize off-the-shelf software to their specific requirements. Neither solution is ideal or cheap. Add to this complexity the fact that regulations change and become more stringent over time, potentially requiring regular software upgrades.

Veeva investors have been enjoying the ride. Image source: Getty Images.

Second, the market is huge. In the company's 2013 filing to go public, it noted there were 23,000 life sciences companies with combined revenues of $1.6 trillion, growing at 6% annually. Today that market is even bigger, estimated at $2.0 trillion, and growing at 5%.

Veeva's goal is to become a strategic partner to the industry, and that doesn't happen overnight. It takes a focused development approach.

Building the platform one module at a time

Its first product, Veeva customer relationship management (CRM) software, was for pharmaceutical and biotechnology sales and marketing personnel. This was the foundational product for its commercial cloud. It was built on Salesforce.com's platform, but integrated important industry-specific functionality. Veeva has continued to expand its commercial cloud product, and its 2019 estimated revenue is now in excess of $500 million, growing at a 13% to 14% pace for the year. The commercial cloud addressable market is estimated at $3 billion annually.

In 2011, the Veeva Vault product launched and it was initially focused on ensuring that compliant marketing materials were distributed. Since then, it's been expanded to serve the entire research and development process to bring products to the market.

Vault's end-to-end platform is tailored to the life sciences industry. Image source: Veeva Systems.

This complete end-to-end solution is extremely valuable for customers and now accounts for more than half of total revenue. Vault revenue is expected to top $550 million for 2019 and is growing in excess of 40% annually. Vault has an estimated addressable market in the life sciences of $5 billion.

These platforms have been built with significant input from customers, ensuring that unique industry needs were met. The products have been widely accepted, and now serve over 700 customers in the life sciences. Veeva has built especially deep relationships with its top 10 customers, which account for 39% of revenue. These partnerships help it to keep pace with new regulations and best practices.

Using its industry-focused strategy, the company is now expanding beyond the life sciences market.

Same formula, new industries

Building on the strength of its compliance-based platform, Veeva is now looking to serve cosmetics, consumer goods, and chemical businesses. Because these industries have regulated product-development cycles and robust quality-management requirements, both similar to the life sciences, this is a great move to drive growth.

Veeva is already working with over 40 different early adopters of its three product offerings based on the Vault platform. Revenue for this segment is not yet material, but management thinks the addressable market could be at least $1 billion annually.

Let's look at how a focus on one customer segment has paid off.

Focus drives growth

This strategy has fueled incredible growth over the last five years. The table below compares several customer-related metrics from the end of 2014 to the most recent quarter.

Data from Veeva System Analyst Day Presentation. Table by author.

The platform also attracts more revenue from existing customers. Its subscription revenue retention rates have been above 120% for the last five years, helping to quadruple revenue to $862 million for full-year 2019. In its most recent quarter, Veeva hit an enviable $1 billion revenue run rate a full 18 months ahead of its goal.

But it's not standing still. Veeva will continue to focus on its core customers, and innovate to bring additional value to its software products. Chief Financial Officer Tim Cabral (who plans to retire in 2020) reflected on the journey so far, and the potential for Veeva's platform, on the most recent earnings call:

[W]hat I believe is, there is a history of underestimating the potential inside of life sciences. ... I think a lot of our expansion can still come [from] inside of life sciences. ... When you really invest in the platform, that's something, actually, that you monetize ... over 20, 30 years.

With that kind of long-term thinking, it should be no surprise that the company has set a new goal to triple its revenue to $3 billion by the calendar year 2025. Veeva's focus has resulted in a winning track record so far. Investors should watch as this strategy plays out to see if the CFO's prediction can become reality.