Veeva Systems - A Profitable Cloud Offering

| About: Veeva Systems (VEEV)
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Veeva Systems (NYSE:VEEV) made its public debut on Wednesday, October 16th. Shares of the leading provider of cloud-based software solutions for the life sciences industry ended their first day with gains of 85.8% at $37.16 per share.

While many cloud companies are showing decent growth, accompanied by large losses, Veeva is different. Growth is still very high, with annualized growth for 2013 over a 100%, while the company is reporting solid earnings in the meantime.

I am a buyer on significant pullbacks, if they may arrive.

The Public Offering

Veeva Systems is a leading global provider of cloud-based software solutions for the pharmaceutical and life science industry. Its solutions allow these firms to reap the best out of modern cloud-based infrastructure in a global, complex and highly regulated industry.

The content management and collaboration solutions allow for great efficiency within the industry and for Veeva's customers. The company has been founded back in 2007 and has developed the "Industry Cloud", a cloud-based solutions to serve the life sciences firms.

Key offerings include Veeva CRM, the customer relationship management solution which offers a lot of industry specific functions, such as drugs sample tracking. Other offerings include Veeva Vault, used for content management and collaborations, and Veeva Network, to be used by the sales and marketing organization of the customers.

Veeva Systems sold 13.0 million shares for $20 apiece, thereby raising $261 million in gross proceeds. Some 9.72 million shares were sold by the company which thereby raised $195 million. The remaining 3.32 million shares were being offered by selling shareholders.

Initially, bankers and the firm set an initial price range of $16-$18 per share. Shares were eventually sold above the high end of the initial public price range.

Some 11% of the total shares were offered in the public offering. At Thursday's closing price of $41.60 per share, the firm is valued at $5.08 billion.

The major banks that brought the company public were Morgan Stanley (NYSE:MS), Deutsche Bank, Wells Fargo Securities (NYSE:WFC), Stifel, Pacific Crest Securities and Canaccord Genuity.


Veeva has seen rapid growth since being founded back in 2007. At the moment the firm employs some 593 workers, of which some 190 outside of North America. Its solutions are developed with global regulatory requirements in mind, and are available in 27 languages.

The firm currently serves 170 life science customers, after adding 36 new customers so far this year. These include 33 out of the 50 largest pharmaceutical companies of the globe. Some high profile pharmaceutical companies include Bayer Healthcare, Boehringer Ingelheim, Eli Lilly (NYSE:LLY), Gilead Sciences (NASDAQ:GILD) and Merck & Co (NYSE:MRK), among others.

For the year of 2012, Veeva Systems generated annual revenues of $129.5 million, up 111.5% on the year before. Net income more than quadrupled to $18.8 million in the meantime. Note that net income attributable to common shareholders came in at $3.5 million, due to payments towards preferred stockholders.

For the first six months of 2013, Veeva Systems generated revenues of $92.4 million, up 71.2% on the year before. Net income rose by 47.5% to $10.8 million, as earnings attributable to common shareholders came in at $2.2 million.

The company operates with $52.9 million in cash and equivalents. Veeva has no debt outstanding as preferred stock investments will be converted into common stock in the public offering. Factoring in the gross proceeds of $195 million from the offering, and Veeva will operate with a net cash position north of $200 million.

With the equity in the business being valued around $5.1 billion, operating assets are valued around $4.9 billion. This values operating assets of the firm at 37 times annual revenues being generated in 2012, and 260 times earnings for the year.

Investment Thesis

As noted above, the offering of Veeva Systems has been a huge success. The company priced the offering at $20 per share, some 17.6% above the midpoint of the original preliminary offering range.

Shares have seen even more upside ever since, rising to $40 per share, some 144.7% above the midpoint of the preliminary offering range.

I shouldn't have to repeat this but Wall Street is going mad about the "cloud" market at the moment. Veeva is operating in the industry, showing insane growth and is even profitable at the moment, which is quite unique.

The pace of revenue growth is amazing especially when considering the fact that Veeva is already solidly profitable. Add to that the relative great customer and geographical diversification, and the company has done a great job. Note that the company is still heavily reliant on Veeva CRM given the fact that other offering have been introduced just recently.

Other risks are the fact that the top two customers made up over 10% of total revenues for the year of 2013 each. Veeva CRM furthermore depends heavily on the partnership with (NYSE:CRM) which ends in September of 2015, but could be prolonged. Competition is always an issue, but the highly focused strategy means that Veeva just might have crated a nice little niche for itself.

While revenue growth is still very impressive, Veeva already has the majority of top customers in the industry as existing customers, so growth will have to come from more up-selling within the current customer base.

For the second quarter, Veeva generated some $50 million in revenues on which it earned about $6 million. Annualizing these numbers gives you a $200 million business, earning $25 million, while growing very rapidly. The prospects look bright. Management is happy to sacrifice short term pains for long term gains while executives don't earn insane salaries, and hold on to large share holdings post-IPO.

Despite the insane valuations for many cloud offerings, I actually like Veeva quite a bit, even as the company trades at a significant premium compared to some of its already expensive competitors. There is no reason why this could not become a solidly profitable cloud business, generating $1 billion in annual revenues in 3-5 year's time.

I would definitely consider buying around $30, if the market gives me an opportunity to pick up some shares at those levels.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.