Cloud software provider for the life sciences industry Veeva Systems (VEEV 2.21%) announced it's divorcing longtime partner Salesforce (CRM 3.10%) although Veeva hopes the two companies can remain friends.
The announcement was made concurrent with the company's third-quarter earnings update. Like Salesforce, Veeva has seen slowing growth amid global economic turmoil. Revenue rose 16% year-over-year in its latest quarter (ended October). For comparison, revenue was up 26% in the year ago period. So recent results represent a slowdown as pharmaceutical and biotech customers spend more cautiously heading into 2023.
Still, Veeva should have plenty of ways to grow for years to come as migration to the cloud continues at a brisk pace. But what does the split with Salesforce actually mean? And how will it affect Salesforce? Here are some things to consider.
A planned break from a long-term partner
Veeva Systems was co-founded by CEO Peter Gassner back in 2007. Gassner was actually a Salesforce employee from 2003 to 2005, helping to build what is still the cloud-based customer relationship management (CRM) infrastructure software core to the cloud giant today. When starting Veeva as a specific CRM offering for the life sciences industry, Gassner partnered with the platform he helped build to handle the back-end data infrastructure. In exchange, Veeva CRM became Salesforce's referral partner for the life sciences industry.
To this day, Veeva pays Salesforce for these behind-the-scenes services, listed as "cost of subscription services" on Veeva's income statements. Along with Amazon's (AMZN +0.53%) AWS cloud platform, cost of subscription services was $65.7 million in the last quarter, or nearly 12% of revenue. Veeva said in a statement that its current contract with Salesforce expires in September 2025, and it does not plan to renew. Instead, it will be migrating the back-end cloud management of Veeva CRM onto its own, newer cloud platform and application suite it calls Veeva Vault.
There is a five year wind-down period through 2030 in which Veeva CRM customers can continue using Salesforce, but Veeva expects it will migrate most over to Vault in short order. Consolidating down to one primary vendor (AWS) could save Veeva money, but Gassner and the top team explained that moving its CRM product over to Vault is more about delivering a better customer experience.
Veeva has disclosed in quarterly filings that both AWS and Salesforce have "experienced significant service outages in the past." Whittling down to just one major vendor could help reduce application down times -- plus, of course, possibly reduce some cost of revenue long-term.
Beyond 2025, Gassner hopes Salesforce and Veeva will continue to collaborate since they have many joint customers and complementary cloud products. However, it's worth noting that after September 2025, Salesforce could choose to become a competitor and design its own custom CRM and data management products for life sciences.
NYSE: VEEV
Key Data Points
Salesforce: losing more than just infrastructure revenue
When Veeva starts migrating its CRM customers off of Salesforce in 2025, Salesforce will lose out on that revenue stream. However, losing Veeva may not amount to much. After all, Salesforce hauled in $30.3 billion in revenue over the last 12 months, and CEO Marc Benioff remains vocal about reaching $50 billion in revenue by 2025 even though Salesforce has also experienced a sharp slowdown as of late.
Its Q3 revenue was up just 14% year-over-year, or up 19% when excluding the effect of a record run-up in the value of the U.S. dollar. Basically, losing millions of dollars of business -- perhaps $120 million on an annual basis -- won't make much of a dent in Salesforce's empire in 2025. $120 million is just 0.24% of $50 billion (assuming Salesforce reaches that milestone).
But here's what is interesting. Veeva is but one recent departure from Salesforce's ohana ("family" in Hawaiian), which is how Benioff likes to refer to the collaboration among Salesforce's employees, partners, and customers. After just one year, Co-CEO Bret Taylor announced his departure from the company. Stewart Butterfield -- co-founder and CEO of Slack, which was acquired over the summer of 2021 -- also announced he's leaving. And Mark Nelson, CEO of Tableau (acquired in 2019), has indicated he is leaving too. Other executives are vacating their seats as well.
It suddenly doesn't sound like much of an "ohana" over at Salesforce right at the moment. Or perhaps it's just a sign of the times. The nearly three years since the pandemic started have been stressful, to say the least. And now there's a bear market, hastened by the U.S. Federal Reserve's aggressive interest rate hikes, which are forcing companies like Salesforce to aggressively cut expenses to boost profitability. Many executives might just want a break from the pressure or to pursue other interests.
At any rate, the market is reading these executive departures negatively, and have sent Salesforce stock back down to multi-year lows. I'm certainly not saying loss of leadership is a good thing, but I'm not ready to call it a bad thing either. This still remains Benioff's company, and he's been at the helm since the beginning back in 1999. I have to believe he still knows what he's doing.
NYSE: CRM
Key Data Points
It's been a tough year for cloud stocks, Veeva Systems and Salesforce included, but the long-term thesis for investing in them remains intact. For now, I'm not planning on making any changes based on the pending breakup between Veeva and Salesforce.
