Veeva Systems Is An Attractive SaaS Stock

It has been interesting to see the trajectory of the enterprise software market over the last 3 or 4 decades.

Business software has evolved from basic spreadsheets and word processors in the 1980's, into essentially being the system of record for all businesses big and small, across any and all departments. No longer do HR departments keep employee records in filing cabinets, or engineering groups store blueprints on shelves, or finance departments maintain reams of double-entered ledgers... now all of this stuff is handled through software.

The big development over the past 15 years has been the rise of cloud delivered software-as-a-service, or SaaS, in the enterprise market. This freed companies of the hassle of installing, configuring, updating, and maintaining large software systems and their associated data. Salesforce (CRM) led the way with its innovative customer relationship management (CRM) software.

Since then, though, we've seen SaaS platforms evolve into any and every part of a business's needs. There's Workday (WDAY) for HR tasks. Atlassian (TEAM) for project management and software development. Slack (now a part of Salesforce) for chat and messaging. ServiceNow (NOW) for service desk automation (and much more). The list goes on and on.

Today's Green Screen stock review fits into this mold - a very niche SaaS platform custom-designed to meet the specific needs of the life sciences industry (pharmaceutical firms, clinical research outfits, diagnostic testing firms, etc.). The company is Veeva Systems (VEEV). This is a good one! Let's take a look.

What Veeva Does

Veeva's SaaS platforms help life sciences companies manage their customer relationships, marketing processes, and product development efforts.

The company has two primary platforms, each representing about half of revenues. The first is Commercial Cloud. Commercial Cloud is a set of applications, data management, and analytics solutions based around CRM functions: tracking client history, managing sales leads, providing communications channels, and developing marketing strategies. All of these are highly regulated in the pharmaceutical and life sciences fields, adding to the value of Veeva's industry-specific implementation.

Commercial Cloud also includes Veeva Compass, a relatively new offering that promises to offer clients vast amounts of prescriber and patient data, a very valuable resource for firms to develop sales and marketing strategies around.

The second platform, Veeva Vault, is used largely by R&D teams to store and share clinical and trial data, quality and safety data, regulatory information and preparation, etc. Vault allows companies to gather, store, and share data in one place, organizing the product development process. The value is tremendous, allowing firms to prepare massive regulatory filings, discover new indications for existing products, develop follow-up products, and so forth.

The Revenue Model

Both Commercial Cloud and Vault are subscription-based offerings, with customers paying fees on a regular basis for ongoing access to one or more offerings under them. These represent 80% of revenue, with 20% coming from (usually non-recurring) professional service fees. Veeva expects the subscription contribution percentage to rise with time. Subscription models are (by their nature) structurally recurring, so we can check off "recurring revenues" right away.

This has been a growth company. The firm's 3 year compound annual sales growth rate is 25%. Customer count has increased 10-fold since its IPO in 2013, now sitting at over 1,000 clients. Management has targeted $3 billion in revenue by 2025, which would represent about 17% annual growth over the next few years.

The company has identified about $13 billion in total addressable market (TAM) for its current set of offerings. At about $2.2 billion in trailing twelve month revenue, that indicates a 17% penetration rate. So, there is still a reasonable amount of growth left in its core markets.

However, it is Veeva's optionality that is more interesting. The company has been laser-focused on the life sciences market - particularly pharmaceuticals - since inception. But its offerings, particularly Vault, could be adapted into similarly regulated industries such as consumer packaged goods, specialty chemicals, and cosmetics. Long term, I believe the TAM for this company could be $25 billion or more.

With a majority recurring revenue model and above average growth prospects, Veeva's passes muster here.

Measuring the Moat

Think about what Veeva's platform provides: a way for a life sciences firm to manage and track customers, sales leads, marketing campaigns, and store and share all product R&D data. These are some pretty important tasks, with a lot of manually generated information. Trying to migrate all of that business-critical data to a competing platform would be highly risky and time intensive. There's no good reason to do it unless a competitor offered substantial features or value over Veeva.

For these reasons, it is pretty clear that Veeva enjoys a very high switching cost moat. This is clear in the numbers, too. Net revenue retention rate has been right around 120% for over 8 years, meaning not only doesn't it lose many customers, but it also tends to expand their business with existing customers annually (by about 20%!).

That's not to say there isn't competition for new clients. IQVIA offers a direct competitor to Commercial Cloud. Some life sciences clients may opt to use general CRM software from firms like Salesforce or Microsoft. While there is no direct competitor to the entire Vault suite, there are options to each of its component applications from the likes of Oracle, Honeywell, Dassault, and others.

Still, you have to like Veeva's competitive position here. It offers a far more wide-ranging and functional set of offerings tailored to life sciences than any competitor. And once a customer is on board, they are more likely to expand their business than to take it elsewhere. This gives us very good confidence in the firm's ability to protect its revenues and cash flows.

Management and Finances

Veeva Systems gets a very high "GreenDot grade" on management.

The CEO is Peter Gassner, who founded Veeva in 2007 after a long career in software leadership at places like IBM, PeopleSoft, and Salesforce. In fact, along with Veeva chairman Gordon Ritter, Gassner was a key figure in the creation of the Salesforce 1 platform, considered by most the "original" SaaS enterprise software suite. It would be hard to find a leadership team more versed in software-as-a-service business models than this.

Gassner has done an incredible job leading the company. It has been profitable every quarter since going public in 2013 - how many young software firms can say that? Veeva has generated free cash flows at 35% or higher of revenues for at least the last 5 years, is entirely debt-free, and sports a cash return on invested capital of over 90%. These are just outstanding profitability and efficiency figures that most public companies can't even get close to. Veeva has grown rapidly and efficiently under Gassner's watch.

As of the last proxy, Gassner maintains about 45% voting control in the firm, although this is likely to fall later in 2023 as super-voting Class B shares are converted to regular Class A shares. Still, his economic stake in Veeva will be somewhere in the 15-20% range, worth about $4 billion dollars at present. I would say that certainly aligns his interests in the stock with ours!

At 58 years old, he should still have at least 5 years or more left at the helm. Investors can sleep well at night with this leadership team in place.

Risks

I would classify Veeva as a "medium" risk GreenDot pick.

While we have very strong leadership and a powerful switching cost moat in play here, the big question mark for me is Veeva's ultimate growth potential. Revenue growth tailed off to 16% in 2022, and was just 4% in the most recent quarter (some of that driven by an accounting change). A $13 billion TAM isn't particularly huge for a software firm, and at nearly 20% penetration, there's a fair question of how big Veeva can really get without expanding into markets outside of life sciences - which it has not done successfully to date.

Another risk is a technical transition. Since the beginning, Veeva's CRM platform had been built on top of Salesforce. However, the company has decided to move away from this dependency, initiating a 5 year transition to move its CRM offering to use Vault as its underlying technology. This makes sense - owning the full software stack is not only more economically efficient, but it should allow for more rapid and flexible feature development. But it is also risky... if Veeva doesn't get this entirely right, bugs could drive existing customers to competitors.

Finally, there is ongoing litigation between Veeva and primary competitor IQVIA. While the cases were filed way back in 2017, the trial has been delayed time and again, but is set to begin sometime this year. Generally, these kind of squabbles end up in a few fines that are not particularly material long-term to a company. Still, it is still a risk worth mentioning, as it could put a lid on the stock price until resolved.

Conclusion

Veeva hits all the marks: revenue growth potential, high percentage of recurring revenues, a very strong switching cost moat, outstanding founder-led management, and a pristine financial profile. It easily makes the cut as a "green dot" stock. We will add it to the Watch List today.

The one thing to get right here is a good buy-in price. Veeva's attractiveness as a business is no secret, and the stock has rarely traded at levels under a reasonable fair value. It looks slightly overvalued at present. Let's keep a close eye on it and strike when the price is right (see the Watch List page for the latest fair value estimate).