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  • The Motley Fool

Veeva Systems Reaches Key Milestone 18 Months Early

Updated: Sep 10, 2019

Vault is now its biggest sales driver. Here's what that means.

This article is written by Brian Stoffel and originally appeared on The Motley Fool.

Back in 2015, Veeva Systems (NYSE:VEEV) -- a software-as-a-service (SaaS) company for the pharmaceutical industry -- announced a bold goal: By 2020, it would have a run rate of $1 billion in annual subscription revenue.

By the end of that calendar year, it had collected just over $300 million in subscription revenue. Reaching $1 billion in half a decade was a tall order. But during this week's earnings announcement, Veeva revealed that it had met its goal -- 18 months ahead of time.

Veeva earnings results: The raw numbers

We'll get to what that milestone means below. But first, let's review how the company did on the headline numbers.

Metric Q2 2019 Q2 2018 Change

Revenue $267 million $210 million 27%

EPS $0.55 $0.39 43%

Free cash flow $99 million $86 million 15%

These results continue a trend we saw during the first quarter: earnings growth that far outpaces sales growth. This makes sense, as Veeva spent tons of money at the outset to built its two core products, Veeva Commercial Cloud and Veeva Vault.

The company is still building new tools, but it costs next to nothing to roll out these two core products to new customers. Each additional customer drops more revenue to the bottom line. That helps explain why gross margin for subscriptions expanded 270 basis points year over year to 85.5% -- an impressive feat.

Veeva was also able to accomplish this growth while only increasing its (non-GAAP) sales budget by 16%. This is important for two reasons: It shows that Veeva can attract new customers and get existing ones to upgrade at less cost, and it also allows the company to put more toward research and development. The budget in that department remained high, growing 26%. But that investors should like that: It's from R&D that ever more Veeva products will evolve.

What else happened during the quarter?

Obviously, hitting the $1 billion mark so early is an enormously positive sign. It's not, however, all that surprising. Investors have been well aware of Veeva's brisk growth, sending shares up almost 550% in the past five years. 

But that growth is hardly tapped out. Among the announcements from the company's quarter:

Commercial Cloud -- the slower-growing, more mature tool -- showed particular strength. Veeva's CRM Engage module doubled its customer count over the past year.A top-20 medical device maker decided to use four Vault modules -- clinical, quality, regulatory, and commercial -- for companywide functionality.Veeva Vault Quality Management Systems (QMS) now has 100 customers.Veeva Vault QualityDocs now has 230 customers, including 10 of the top 20 global pharmaceutical companies.

The company also announced that Vault now accounts for over half of Veeva's revenue. While this is (again) not terribly surprising, it shows how popular the service is, as it only went live seven years ago.

Speaking on the conference call, founder and CEO Peter Gassner also offered an update about the company's plan to serve customers outside of the pharmaceutical industry. Three top consumer packaged goods (CPG) companies have set up projects to test Veeva's new claims product. And four major customers went live with QualityOne: one top-20 CPG business, a top-20 cosmetics specialist, and two major chemical companies.

Veeva also said that while its new Nitro data warehouse was adding clients, competition from IQVIA was creating a headwind. Also, adoption of the company's new AI tool, Andi, is still in the very early innings.

Time Frame Revenue Midpoint Assumed Change EPS Midpoint Assumed Change

Q3. $274.5 million 22% $0.545 21%

Fiscal Year $1,063.5 million 23% $ 2.12 30%

While the stock is trading down slightly following the release, investors should remember that it is up over 80% in 2019 alone. What's far more important is that Veeva continues to draw in customers and up-sell existing ones on new products like Nitro. 

MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in Veeva Systems. Read our full disclosure policy here.

Brian Stoffel owns shares of Veeva Systems. The Motley Fool owns shares of and recommends Veeva Systems. The Motley Fool has a disclosure policy.

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