"Jerry, just remember, it's not a lie if you believe it." - George Costanza
Our journey into the land of believing......
(Note that we spared the co-lead underwriters here as their contributions are covered in our report).
"We believe that there are more than 450,000 pharmaceutical sales reps worldwide that could benefit from using their products. Additionally, we think most pharmaceutical companies spend $5,000-10,000 per year on front-office software for its sales reps. Adjusting down for emerging markets, we are assuming the low end of the ASP range to get an average ASP of $5,000 per rep, per year. Multiplying this by 450,000 sales reps, that works out to approximately $2.0-2.5 billion in available software spend. This applies only to the company's CRM products and does not factor in any content management or MDM."- Wells Fargo, Veeva, pg10
Verdict: Extremely Poor Assumption/Grossly Negligent
Cegedim's (OTC:CGMJF) 140k Life Sciences CRM users at $5,000 per seat would work out to $700 million in CRM revenue. They did about $250 million in CRM revenue over the past twelve months. Veeva's (NYSE:VEEV) estimated avg Q2 crm user count by our calculation was 110k. Q2 Sub revenues of $34 million annualized and divided by the average rep count works out to $1236 annual asp per seat. If all professional services revenue are included, we were able to get to $1800. Note that the only way to get close to this wildly inaccurate $5k ASP number is if we use Cegedim's entire CRM/SD division revenue number of $657 million. A $10k asp would mean $800 plus a seat per month. Are we writing science fiction here or sell-side research? Better question, is there a difference between the two anymore?
"Cegedim generated greater than $550 million in revenue in 2012." -Wells Fargo, pg21
Cegedim is a public company. The company's 2012 revenues are on its corporate website, Bloomberg, Factset, and countless other financial information providers. The exact figure for 2012 is $1.23 billion. Would I say Apple did more than $70 billion over the last year when I know it did $170 billion? Would we say Ted Williams hit over the Mendoza line in 1941, when he batted .406? This number is off by 55%. The entire paragraph preceding it was cut and pasted from Cegedim's website 'about' section. This was clearly the only sentence added by the research analyst. We simply could make absolutely no sense out of it. We only highlight it here because it is just another example of carelessness and/or incompetence. If this analyst had no time to pull the correct numbers from the website, do you think he or anyone else at his firm actually bothered calling around to have detailed conversations with management teams regarding their assumptions? Well, we already know the answer to that question because we had the necessary conversations.
"Roughly half of the CRM addressable opportunity is derived from full penetration of base subscription fees, and the balance is the development and maturation of 15-20 other add-on applications, which could double monthly ASPs."-Canaccord Genuity, Veeva, pg 10
Verdict:Factually Inaccurate and Illogical
Canaccord dubbed this as its 'conservative' bottoms-up estimate for how it got to $2 billion CRM TAM. On a 450k global rep count, this works out to a base ASP of $2200 per year. At the audited 403k count we used, it works out to $2500 (btw - Veeva's own internal estimates as disclosed to the underwriters, thank you Stifel, put the rep count at 400k). As we have shown, Veeva is likely at a base closer to $1200. Since their disclosure to the SEC states they recognized no Veeva Approved Email revenue in the six months ended July 31, 2013, you can view Irep, which we deem as their core functionality versus an 'add on', as nearly every customer opts for it on top of core crm(ie. white labeled salesforce.com), as that base solution/flagship product. Again we have math on Veeva that is off by 50% and supported by comparable Cegedim analysis. Due to the fact that Cegedim and Veeva control 66% of the total LS CRM seats, we are extremely confident in our analysis. We also 'believe' that LS industry trends with respect to layoffs and patent expirations strongly contradict any assumption regarding pricing power in crm, let alone doubling asp's.
"We fundamentally believe Veeva offers a noticeable advantage in terms of both cost savings and functionality versus its key competitors, and we believe these factors will continue to sustain the company's growth for the next several years." Stifel, Veeva, pg 3
Followed by this three pages later:
"We believe the transformational nature of Veeva's CRM solution is not accurately captured within market assessments that fail to incorporate the growth and revenue potential of solutions such as iRep and Approved Email. These relatively new features are pushing the annual subscription dollars per sales representative past the levels that Siebel and Cegedim have historically seen."Stifel, pg 6
Verdict: Direct Contradiction and Factually Inaccurate
If Veeva is cheaper than its competitors how is it realizing annual revenue per seat that exceeds what it has historically seen? Is Stifel making an on-premise comparison which has no subscription revenue and is license/maintenance revenue, isn't that really misleading? Cegedim's average sub dollar per seat is higher. We repeat, as per Veeva's disclosure to the SEC, Veeva Approved Email recognized no revenue in the six months ended July 31, 2013. If no revenue was recognized, shouldn't Stifel have used the future tense with regards to its revenue impact?
"Although we believe the company has had some successes, we mostly view Cegedim as a "number three" vendor within the marketplace, given its continued insistence on a legacy selling and delivery model, as well as its lack of muscle compared to Oracle." Stifel, Veeva, pg27
Has had some success? Cegedim owns 36% global crm ls market share and the undisputed leading global HCP database. On Demand, single or multi-tenant, is 70%+ of CRM. Reading such shoddy analysis/research when you conduct extensive work on something simply makes you think you are delusional.
"Veeva's offerings not only replace the software market, but also the hardware and ser- vices used to support those software offerings. So, Veeva's opportunity could be 1x to 2x its software TAM. All TAM estimates are based on the company's current market of life sciences companies, but Veeva could expand further into adjacent markets, such as medical equipment and medical devices."Pacific Crest, Veeva, pg 10
Verdict: Factually Inaccurate and Unbelievably Stupid
The on-premise infrastructure/services being displaced by moving to the cloud are hosted in 3rd party data centers and provided by platform providers like Salesforce.com's (NYSE:CRM) Force.com platform as well as Chatter functionality. A SAAS can provide software at a 40% discount to on premise because these scale players (PAAS and IAAS) have driven down the cost of infrastructure. This is a cost of goods sold for Veeva and not a revenue opportunity. Furthermore, SAAS substitution eliminates multiple dollars in legacy IT spend, thus the overall pie shrinks as SAAS share grows. Also, Veeva is precluded by contract with their platform CRM provider, Salesforce.com, from expanding into the medical device market or even selling their software to the non-pharma sales divisions of life sciences companies.
We hope you enjoyed this brief journey into the land of make believe. Suffice to say, we believe these initiations should all be suspended and some actual 'research' performed here before anything else is published on the name.
Disclosure: I am short VEEV. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Business relationship disclosure: This article was written by a Director at Suhail Capital Management.