Veeva Systems Continues to Flex Its Muscles as Profit Soars

The idea behind the software-as-a-service (SaaS) model is simple enough: Companies spend a ton of money up front to develop the best software they can, and hire a sales force to lock customers in. Investors need to trust that the money spent will be worth it, even if it takes years for enough customers to sign on for profit to drop to the bottom line.

For investors in Veeva Systems (NYSE: VEEV), the wait is over, according to the company's first-quarter release. While there are still many avenues for growth for the company to pursue, it has reached a size where impressive leverage is starting to show -- and cash is flowing right into the company's coffers.

Veeva earnings: The raw numbers

Before we dive into all the moving parts at Veeva, let's review the headline numbers for the company's first quarter.

Metric Q1 2019 Q1 2018 Growth
Revenue $245 million $196 million 25%
EPS* $0.50 $0.33 52%
Free cash flow $235 million $150 million 57%

The leverage shown here is very impressive. If you're looking at that free cash flow figure and wondering how it could be so high (it's almost the exact same as revenue!), its worth noting that most companies pay their subscription fees at the beginning of the year. While the company collects all of that money early on, it is officially recognized over the course of the year.

But that shouldn't take anything away from what the company has accomplished. Consider that subscription revenue grew 27% to $198 million. At the same time, the cost to service that subscription revenue jumped just 2% on a non-GAAP basis. That's because the software, once written, costs next to nothing to make available to customers.

The leverage showed up across the board. Operating expenses were up just 18% on a non-GAAP basis, and would have been even lower if the company didn't need to hire additional people for specific litigation purposes.

What else happened during the quarter?

If you've been following for a while, you know that Veeva offers a veritable alphabet soup of products for pharmaceutical companies. The business is broken down into two segments: Commercial Cloud, which is primarily a customer relationship management tool for a drug company's sales force, and Veeva Vault, an end-to-end cloud solution for pharmaceutical companies to do everything necessary to bring a drug to market. In fact, there are currently 17 different Vault applications being offered.

One of those applications, Clinical Data Management System (CDMS), got a lot of air time on the conference call. That's because Veeva signed a top-20 pharmaceutical company to CDMS. As this is one of the newer offerings from Veeva, it was a very big deal to announce such a big win.

But that wasn't the only big news. Veeva also announced that it had just deployed its artificial intelligence (AI) tool, Veeva Andi. For now, the tool is focused on the Commercial Cloud side of the business, and it makes suggestions for sales representatives in the field.

The other interesting tidbit had to do with the company's efforts at growing a business outside of the life sciences (read: pharmaceutical) field. Over the past two years, it put together an ad-hoc service of existing products dubbed QualityOne. The product is primarily popular in the heavily regulated industries of consumer packaged goods, chemicals, and cosmetics.

But Veeva announced a second tool that's brand new, and devoted entirely to these non-pharmaceutical fields. According to founder and CEO Peter Gassner, Veeva Claims will "help manage the product claims lifecycle from creation to approval to marketing usage." While Veeva is holding its cards very close to the vest in this endeavor, the fact that it has developed a secondary, purpose-specific tool is encouraging.

Looking ahead

Results were positive enough that the company raised guidance for the rest of the year. Here's where it currently stands, with the estimates representing the high-end of management guidance.

Time Revenue Revenue Growth EPS EPS Growth
Q2 $260 million 24% $0.49 26%
FY20 $1,050 million 22% $2.03 25%

Within that growth, Commercial Cloud is expected to grow 11%, while Vault is expected to grow 40%. Investors should keep a close eye on if Vault can really grow that much. It will end the year providing more revenue than Commercial Cloud for the first time in the company's history. And if it's roster of tools continues growing beyond the current count of 17, there might still be a very long rubbery for growth in the years ahead.

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