Well, the optimists in us had hoped that putting our research out there was enough to get the underwriters to rectify their mistakes, but it appears we are at that stage in the cycle where such a strategy simply doesn't work. Instead of revisiting their clearly sloppy initiation reports which contained materially misleading facts/analysis that we identified as well as highly exaggerated and unwarranted claims about the life sciences CRM market, the "Veeva Six", as we will refer to them from now and on, have chosen to ignore their professional responsibility with the hope that this will all simply go unnoticed. To be frank we kind of figured this is the way they would go with this. In fact, we were elated to see the Deutsche Bank and Canaccord's analysts issue notes raising their price targets on Friday morning. This phenomena is called 'backfire', and has been studied extensively by behavioral psychologists. The basic premise is that when confronted with facts that prove them wrong, opinionated individuals react very differently from the uninformed. Basically, instead of changing their minds and acknowledging the correct facts, they entrench themselves even deeper into their existing view. This type of behavior makes it a lot easier for us to show that these analysts are about as conflicted as it gets.
We would like to remind the sell-side and everybody else that while a certain degree of this behavior is accepted as 'industry practice' there are still federal securities laws and FINRA rules at play here. The fact that it has been 10 years since the regulators made a serious example out of anyone doesn't mean these regulations no longer exist. These regulations require that published research reports, amongst other things, have a reasonable basis, present a fair picture of the investment risks and benefits, and not make exaggerated or unwarranted claims. There are principles of fair dealing and good faith at play here that are supposed to protect investors from baseless, unreasonable, unverified, misleading and factually inaccurate statements in published reports on listed securities.
Investment banks are no strangers to these policies as they all have guidelines in place that are based on these regulations. This is an example from a top firm's research guidelines:
Investment Research Analysts ("Analysts") are required to observe high standards of integrity and ethical behaviour. All investment research reports ("research reports") must be based on strict standards of truthfulness and fair dealing, and must be presented in a manner such that they are fair, clear and not misleading. Analysts are required to ensure that they have a reasonable basis for their analysis and recommendations. X has policies giving guidance to Analysts regarding the proper presentation of facts and opinions in research reports, for example regarding verification of facts and the avoidance of superlative, flamboyant, emotional, libelous or promissory statements. X operates procedures to ensure the independence of expression of views by Analysts and to prevent improper influence on Analysts' professional judgment.
Now, with that in mind, we call your attention to the Canaccord Genuity analyst covering Veeva Systems (NYSE:VEEV). This analyst was very loud on Friday which really surprised us considering how many things in his initiation report were confirmed as flat out wrong after the conference call. His CRM TAM analysis assumed a 'base CRM' average revenue of $2,220 a seat. On the call, Veeva confirmed that they are 1/3 penetrated into the rep market, and that the vast majority of those reps have Irep. Thus CLM is, as we accurately described it, more of a 'base' selection versus an 'add-on'. This means anyone doing the math here for ASPs should be getting a CRM+CLM avg annual revenue per seat in the $1,100-$1,125 range. If CRM+CLM for 1/3 the seats on the planet is half your number for CRM alone, you should not be commenting at all let alone raising your price target by $2. Seriously, how hard is it to simply pipe down and 'revise' your analysis based on more complete disclosures. This is just arrogance and the antithesis of all things 'research', and because of that we will now share with you precisely how this analyst's 'analysis' was described by three independent life sciences CRM experts we shared it with during our thorough review of the space. "Utterly baseless, and without merit." -Industry Analyst; "Nonsense!" -LS CRM Exec; "You sure he's talking about CRM, because it's impossible for anyone covering LS CRM to make such a statement."- Top 50 Pharma CTO.
As you can see, it shouldn't take FINRA or the SEC too much time to figure out this analyst is publishing research for which he has absolutely no reasonable basis.
And it doesn't stop there...
"Value- focused investors can huff and puff that this stock is "too expensive," but the fact is that software stocks almost always go up as long as they hit or beat estimates, and we believe that is very likely for Veeva for the next several quarters and, frankly, years. We're buyers of VEEV today."
Canaccord Analyst, Dec 6, 2013 quote picked up extensively by wires.
This is maybe one of the most ignorant and utterly irresponsible statements we have ever come across in a sell-side research report. First, there are NO 'value-focused' investors in this stock. Second, it's comical for this analyst to comment on Veeva beating estimates because his Q3 estimate was for 1% sequential revenue growth. To put that in perspective, Veeva averaged 15% q/q revenue growth over the past four quarters. His model had their growth rate collapsing 95% in their first quarter as a public company. If that was what he believed would happen, one wonders how he had a buy rating on the name before this huge 'surprise' quarter. If a company that grew 100%+ in 2012 and is trading as the most expensive SaaS stock by far on a price/sales basis is forecasted to grow 1% in your model, then there is something very wrong with your model. If there is something very wrong with your model, then beating your estimates is irrelevant to any investor with a functioning brain. Most skilled investors are familiar with the art of low-balling an 'estimate', but that is not what is going on here. This is what we call flat out trying to manipulate investor perception of a stock. If a 'research analyst' knowingly publishes an estimate that is highly inconsistent with his recommendation/analysis of a stock simply to guarantee that the company will beat this estimate, and then comes out the next day and says stocks that beat estimates 'almost always go up'; he is nothing more than a manipulator and promoter in our book. Five of the "Veeva Six" modeled 0-1% growth with the one outlier coming in at a whopping 3%. If these estimates were independent and based on historically driven quantitative factors, statistically they would all be major outliers. If there were qualitative factors involved here, then the stock would have been rated and modeled very differently. This is business as usual for an IPO, but in this case it is so egregious because of Veeva's growth trap nature that you can't help but call them out on it. You also have to love the 'almost always go up' and 'next several quarters and frankly years' comments here. Talk about superlatives in a 'research' report. (Btw- anyone who followed this recommendation is down at least 10% already) Makes one wonder how long before Charles Schwab breaks out the "put some lipstick on this pig" commercial they ran in 2002 to take a swipe a Merrill Lynch and Henry Blodget.
Then you have the DB analyst, whose assumptions we clearly showed to be based on factually inaccurate data. This analyst is still reiterating his less than 10% CRM dollar value penetration despite the fact that this has been proven 100% wrong. He even upped his target by a dollar after Veeva 'beat' his 0% sequential growth estimate.
The other underwriters showed a greater degree of restraint, but that is not exactly saying much.
The bottom line here is these analysts picked the worst stock and sector to play make believe with. The facts are out there. They are clear, accessible, repeatedly verifiable, and undeniably refute what these analysts have been publishing.
As for our notes from the conference call, we will say one interesting thing that jumped out at us was the fact that Veeva management went on the record putting the global rep count at 450k. We point this out because our research indicated the count is roughly 400k, and because this number was in fact what Veeva disclosed to one of their own underwriters' research analysts.
"We note there are currently approximately 80,000 US-based pharmaceutical sales representatives, and approximately 400,000 global reps, according to company estimates" - Stifel Veeva Initiation Report, Nov 11, pg 3.
Thus, we find it highly dubious that Veeva's own internal global rep count estimates (which btw we can show you precisely from where they sourced this 400k global/80k US data from) changed over the past three weeks. This may explain why they went to great lengths to qualify this statement on the call by saying, "There are about 450,000 pharmaceutical sales reps, animal health sales reps and consumer health sales reps." This is what you call CYA, while also helping your underwriters out after they all royally screwed up by using a 450k count to TAM your CRM market, despite you having directly provided them internal estimates that are 10% lower. We'd also point out that this number combined with their stated 1/3 penetration disclosure doesn't comport with our ASPs for CRM+Irep. We have Veeva at around 133k live CRM users at the end of Q3, which checks out against our $1,100-$1,125 annual ASP per seat data. If you get closer to a 150k (1/3 of 450k) rep count number, the ASPs start coming in a lot lower than our research indicated Veeva is generating. Basically, increasing the global seat number by as much as possible makes the base CRM ASP assumption blunder embedded in all the underwriters models a tiny bit (and we are talking microscopic here) less embarrassing. At the end of the day, Veeva's management throws their underwriters a bone, and in return they end up looking less credible. Smart trade! Though you'd like to think that before disclosing the global rep count at 450k on their first conference call management would at least check and make sure that one of their underwriters hadn't published research stating they actually sized the market at 400k. Oops!
Anyway, it seems everyone involved in this IPO simply thinks the investment community is made up of a bunch of buffoons, and to be frank we are in no rush to dispel that notion.
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.