In the complicated life sciences industry, Veeva Systems (VEEV 0.17%) has managed to create an all-in-one software solution where companies of all sizes can bring products to market faster and more efficiently while maintaining compliance. Its unique ecosystem of products allows drug developers to collect data and make decisions by having a streamlined process from research to commercialization. Veeva has promising growth drivers that could continue its trend of robust revenue growth -- which could allow the business to prosper for the next 20 years.
Dominance in a niche market
Drug developers can sometimes struggle with meeting regulatory requirements and properly commercializing products. Veeva helps them with this. With its two major product areas -- Veeva Vault and Veeva Commercial Cloud -- Veeva helps life science companies achieve success and meet their goals.
Veeva is the only software-as-a-service provider with a vast suite of offerings that targets the life sciences industry, making it both the first mover and top dog for its niche. It has amassed strong customer growth, growing its customer base 22% year over year to 1,100 customers in the second quarter of 2021.
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Veeva recorded a net retention rate of 124% for the 2021 fiscal year, and Veeva Vault might be responsible for the strong success. Veeva Vault is a solution that encompasses nearly every drug developer's needs when bringing a drug to the commercial markets. From data management to safety, Veeva Vault helps drug developers step-by-step through the development process.
Once a customer tries one part of the company's Vault offerings and they realize how much time they can save -- especially time on submission paperwork, where customers can cut that time in half -- it often sees the benefits of adding on more Vault offerings. As Veeva develops higher switching costs for customers, it will become harder for competitors to enter the space and take customers away from Veeva.
Translating into growth
Vault has recently been the growth leader for the business, consistently growing 32% to 37% over the past five quarters, compared to commercial cloud growth of 18% to 32%. The product has slowly been gaining a share of subscription revenue, growing from 39% of subscription revenue in fiscal 2018 to 54% today, which has allowed the company to improve its gross margin over time -- increasing to 74.7% in its 2021 fiscal year from 71.4% in 2018.
Veeva has been able to steadily lower its operating expenses from 47% of revenue one year ago to 46% in the second quarter of 2021, resulting in a strong operating income margin of 27%. The company's strong competitive advantages, combined with financial discipline, allowed the business to reach a net income of $109 million in the second quarter of 2021 -- or 24% of the $456 million in revenue it brought in this quarter.
Where is it going?
With over $1 billion in cash and cash equivalents on the balance sheet, along with strong free cash flow generation so far this year, the company has plenty of cash to fund its growth milestones.
Veeva set a goal of reaching $3 billion in revenue by 2025 -- the fiscal year 2026 -- which would double its FY 2021 revenue. The company has plans to expand its Vault offerings to reach this goal. In the second-quarter conference call, CEO Peter Gassner alluded to plans to expand the Vault's Quality offerings.
Veeva has had a history of expanding its offerings -- including its newest product to enable faster validation management that will be available in 2022 -- and management believes that the Vault is early in its lifecycle, so this trend could continue. Product expansion within the Vault area could allow for continued 30% to 35% revenue growth for the segment, which would enable Vault to grow to over $2 billion in revenue by 2025.
Temporary setbacks
Investors still have some concerns about the stock, mainly its valuation. Veeva is currently trading at 25 times its fiscal 2022 sales guidance, which is by no means cheap. Veeva holds strong pricing power, stickiness, and leadership in this fast-growing industry, so the company could be worth paying up for.
Veeva's strong market position, expansion opportunities, and customer retention all point to the potential for it to meet its long-term revenue goals. Investors should especially watch retention, product expansion, and Vault revenue growth going forward -- all of which will show how successful Veeva is at expanding its ecosystem and bringing customers into it. If the company can do this, it has the potential to continue chugging along, rewarding patient investors along the way.
