November 2013 Veeva Systems Inc: SaaS' Biggest Bubble and Tech's Best Short Price Target: $8.00 / share Ticker: VEEV www.suhailcapital.com 1
"Men occasionally stumble over the truth, but most of them pick themselves up and hurry off as if nothing ever happened." - Winston Churchill “The combination of precise formulas with highly imprecise assumptions can be used to establish, or rather to justify, practically any value one wishes, however high, for a really outstanding issue . . . calculus [gives] speculation the deceptive guise of investment.” — Ben Graham www.suhailcapital.com 2
Background • Veeva is a cloud based CRM provider for the life sciences industry • Founded in 2007, VEEV has 170 Life Sciences Customers including 33/50 of Global Pharma Top 50, and 115k+ live CRM users according to IDC • 2012 Revenue of $129.5 million, +111% YoY • Profitable SaaS with $18.7 million in net income and $30.8 million in operating cash flow www.suhailcapital.com 3
Vertical is the New Horizontal? • Lower Customer Acquisition Cost (CAC): Typical SaaS CAC can be 2x annual contract value vs. as low as ¼ for a Vertical SaaS • Industry focus allows for few sales reps and lower marketing spend, and thus greater capital efficiency • Faster and greater market share penetration potential due to highly focused nature of model • Ability to expand into other product segments and grab larger piece of the pie (CRM to ECM to MDM to Clinical to….) • Case in point: In just 4 years Veeva displaced Oracle in Life Sciences CRM www.suhailcapital.com 4
Vertical is the Same Old Vertical • Veeva’s CAC was significantly lower because they built their CRM on top of the leading Horizontal’s Platform. Thus, Vertical is the new Horizontal only if the global leader in cloud based CRM is getting a cut of your sub revenue. Otherwise CAC would have been much higher as every large enterprise would not have had the comfort of knowing they were essentially relying on the leading cloud CRM’s technology and infrastructure which has been developed over the past decade. • With fast penetration (30% of global reps and pretty much entire pie in US market) comes saturation and the need for new avenues for revenue growth. Without a best in class horizontal behind it, Veeva has had a very tough time gaining any meaningful traction in new areas like ECM and MDM. • Being a Vertical means that there are other specialists doing the same thing in Life Sciences. NextDocs based of Sharepoint in ECM is one. Medidata in Clinical Development. Reltio in MDM. If the strength of your pitch in CRM was all we do is life sciences cloud CRM, then how does your pitch in these segments work against the existing ‘focused’ vertical providers saying the same thing? • Veeva’s Q2 annual revenue run rate equals .5% of Oracle revenues. Declining reps, tightening budgets, and falling asp’s due to on demand have made this a market they probably don’t care too much about right now. It’s a small vertical for a reason. If that were to change, the horizontals would look at it in a different strategic manner. www.suhailcapital.com 5
Total Addressable Market • Veeva’s current market capitalization already exceeds its total addressable market opportunity reported in the S-1 • Veeva’s fully diluted market capitalization is $6.1 billion (closing price of $40.54) • The $5 billion TAM breakdown is provided in detail within the launch report of co-lead underwriter #1 of the Veeva IPO – $2 billion CRM + – $2 billion Enterprise Content Management (ECM) + – $1 billion Master Data Management (MDM) Customer Data= $5 billion • So, their core sales force automation (SFA) business is a $2 billion TAM. That's more than 2x-4x what the actual total revenue opportunity our research indicated currently exists in this space. www.suhailcapital.com 6
TAM (continued) • Perception: Veeva's Life Sciences CRM Vertical which accounted for 98.5% of 2012 revenue is a $2 billion TAM today in which they have achieved only single digit penetration. • Reality: A bottom-up analysis confirms this market is no greater than $840mln. If you account for the secular decline in pharma reps as well as the much lower ASP's in on-demand CRM, it could end up being as small as $500 million. Thus, they have already achieved substantial penetration as measured by active users and revenue market share. www.suhailcapital.com 7
2011 CRM Market Share Numbers • Cegedim had 37% (based on public disclosures) market share at the end of 2011 • We’ve estimated Cegedim’s CRM life sciences revenue to account for approx.35- 40% of their total CRM/SD div rev in 2012. (Mkt Research, Onekey, Compliance, and other services make up the other 60%) www.suhailcapital.com 8
Q2 2013 Estimated CRM Market Share • Food for thought: If 66% of global life sciences (i.e. Cegedim + Veeva) CRM/SFA pie is worth $440 million can the remaining 34% be worth $1.56 billion? That is, $250 million (40% of Ceg TTM CRM/SD revenue) + $190 million (Veeva calendar Q2 2013 CRM revenue annualized) + X= $2 billion??? www.suhailcapital.com 9
How you make a $1.3bln LS CRM TAM mistake! • Cegedim CRM and Strategic Data division 2012 revs of EUR 488mln ($654mln) • Cegedim’s disclosed CRM market share share 2012 37% • Co- lead Underwriter #2’s 2012 CRM life sciences actual market size $1.776bln • $654 million/ 37% = $1.767 billion. These numbers are not just close they are approximate.( slight variation here is euro conversion rate used). So, the co-lead underwriters used CEGEDIM as a comp (not shocking considering their CRM mkt share and publicly listed nature) WITHOUT bothering to verify anything. Using the whole groups revenue is COMICAL because OneKey in of itself is a $125 million revenue business, and they both comp that against Network which they TAM out separately. • $1.776 X 10% Gartner Q1 2013 CRM market CAGR= $1.95 billion or the $2billion TAM for CRM LS that both co-lead underwriters cite in their initiation reports. • This is of course despite the fact that pharma sales reps continue to shrink and industry ASP’s continue to decline thanks to the full transition to lower cost on-demand CRM in what is already fully penetrated market as far as CRM/SFA for pharma reps. • Cegedim’s ttm CRM revenues were estimated by us at $250mln( we verified the accuracy of this estimate) • Actual TAM if it had been calculated correctly based on Cegedim CRM revenue and market share is approximately $700mln vs the approx. $2bln noted by co-lead u nderwriter #2. That’s a 65% downside correction in the TAM of the market in which VEEV derives >95% of revenue. Also, when you read our full report, you should reasonably conclude this error carried over into the sizing of the other two markets in which Veeva hopes to generate meaningful future revenue • Oops! www.suhailcapital.com 10
Underwriter TAM Assumptions • Just look at their white paper financial model from 2 years ago on why an on-premise life sciences customer should switch to a SaaS CRM. • These numbers work out to an average total cost of $146 per seat a month ($1,750 per annum) over five years. Multiply this by the entire global rep count of 403k and you get $700 million TAM. Now take Veeva's Q2 revenue and annualize that number and then divide by 115,000 users. What you get is a spot on match as far as total revenue per seat. • This means the co-lead underwriters TAM dollar target of $4,500 would work out to a 60% increase over the legacy on-premise CRM solution average annual price of $2,840 that they have ‘displaced’ www.suhailcapital.com 11
The Glass Ceiling on Veeva • Perception: Veeva's early profitability as SaaS company is remarkable and evidence of the appeal of the industry cloud model and warrants a premium multiple. Vertical is the new horizontal! • Reality: Veeva CRM solution is a white-labled Salesforce.com product. Basically, vertical is the new horizontal, if you have direct access to the leading horizontals entire platform. This strategy is what allowed them to achieve such capital efficiency and profitability. However, as a vertical CRM provider their core market is by definition finite, and in this case, also specifically limited by contract. This type of business model has always translated into a market discount EV/Sales multiple to the horizontal/platform players. Veeva's forward multiple is the highest in the space of any horizontal or vertical SaaS provider. • A leading CRM life sciences consultant on Veeva achieving avg annual revenue of $4,500/seat “ That's impossible. And even if it was remotely possible, then the horizontals would then immediately target the entire the market." www.suhailcapital.com 12
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