Tech Earnings Watch: Veeva Systems

Despite delivering another beat-and-raise performance in the July quarter, the stretched valuation at Veeva Systems (VEEV, $62.81), a provider of cloud-based software for the life sciences industry, finally caught up to the stock, which fell as much as 20% from the all-time high of $68.07 reached in June.

After hitting a low of $54.16 in late September, the shares have been on the rebound ahead of the fiscal Q3 (Oct.) earnings report on December 5.

At the recent market cap of $8.8 billion (and taking into consideration cash & investments on the balance sheet totaling $725 million), Veeva trades at 12 times the FY’18 (Jan.) consensus revenue estimate of $674 million. While definitely extended, that valuation would not be so bad if the company was still putting up hyper-growth numbers, but it’s not. Top-line growth of 23.8% expected for this year is nothing to sneeze at; it’s also not setting any records.

Don’t get us wrong, Veeva is firing on all cylinders, and looks to have a bright future both in life sciences and potentially other verticals. The company continues to track well in terms of meeting its 2020 revenue run rate goal of $1 billion. Veeva simply has reached a revenue level where it’s more difficult to turn out high enough growth rates to fully justify the pricey valuation.

In FQ2 (July), Veeva turned in another fine quarter, with revenue up 27% to $166.6 million, powered by 28% growth in subscription revenue (representing 80% of total revenue). EPS of 23 cents came in three cents above the consensus. Billings of $151 million topped guidance of $145 million. Gross margin of 72% rose roughly 200 basis points from the year-ago level. Veeva even offered above-consensus revenue guidance for the October quarter.

However, one FQ2 metric raised a red flag for momentum investors (the ones who had driven the stock up 67% YTD at the all-time high) because it showed a marked downshift: The revenue beat compared to the consensus estimate was just 1.5%, vs. 3.9% in the previous quarter and an average beat of 4% for the previous four quarters. In addition, Veeva saw decelerated top-line growth compared to FQ1, which also indicates a more subdued overall showing.

Putting the negatives aside, there were still plenty of encouraging things to come out of the latest report. In FQ2, Veeva’s core Commercial Cloud business (consisting of a suite of CRM products and associated data-related add-ons) experienced “significant” CRM bookings, according to management. Included among the new contracts were two top 20 pharmaceuticals companies starting U.S. deployments and a top 20 pharma vendor with a deployment in Japan. All three were expansion deals with existing customers (involving new divisions or countries).

Veeva’s Vault family of content management solutions in the latest quarter continued to show strong traction across the customer base, representing 38% of total revenue, up from 36% in FQ1 and 30% in the year-ago period. The Vault growth runway is broad, as there are 14 different offerings covering both commercial and R&D use cases. At the $1-billion revenue run rate goal for 2020, Veeva management expects Vault to represent at least 40% of the mix.

The clinical segment of the Vault business really shined in the latest quarter, with the customer count for the eTMF product (used to manage content related to drug clinical trials) expanding 31% from the year-ago level. Since eTMF already has an established customer base, it’s a good driver for Veeva’s new Vault CTMS solution for clinical operations management, as the two offerings are complementary. Introduced in April, CTMS already has seven customers.

In FQ2, Veeva’s new Vault EDC offering (also introduced in FQ1) for clinical data management (patient data collection) signed up its first two customers, neither of which had any Veeva products previously. Vault EDC, more of a standalone offering, is sold by the number of sites in a trial. It has an estimated total addressable market of $1 billion. Management says the potential customer pool for Vault EDC is the broadest of any Veeva product.

After offering initial FY’18 revenue guidance of $650 million in November 2016, Veeva’s latest forecast stands at $672 million to $674 million. With the Vault family of products still ramping, the guidance bias remains to the upside.