Veeva Systems Soars Into the Cloud but Can't Bring Its Stock to Life

Source: Veeva Systems.

The revolution in cloud computing has lifted many companies into the limelight, as innovative tech experts look for ways to use technology to make processes in other industries easier to accomplish. Veeva Systems has focused on the life-sciences industry, seeking to make it easier for pharmaceutical and biotech companies to navigate through the approval process for the FDA and international regulatory agencies, coordinate their sales and marketing efforts, and get the information they need to analyze and improve their business models.

Coming into Tuesday night's fiscal fourth-quarter report, Veeva investors were hoping that the company's growth would lift the value of their shares. Yet despite amazing increases in revenue and net income, Veeva shares slumped following the announcement. Let's take a closer look at Veeva Systems, and why shareholders aren't reaping the rewards from a strong quarter for the company.

The silver lining in Veeva's cloudVeeva Systems looked healthy on all fronts in its most recent quarter. Revenue climbed 39%, to $87 million, topping what most investors had forecast by about two percentage points. Of that total, about three-quarters came from subscription-services revenue, which was up an even more impressive 46% from the year-ago quarter. On the bottom line, adjusted net income soared 77%, to $16.8 million, working out to $0.12 per share, beating estimates by $0.03.

Looking more closely at Veeva's results, the company is clearly benefiting from its growing cloud-sales base, as its fixed costs rise at a slower pace than revenue when it brings in new subscription-services clients. Gross margins for its subscription-services unit climbed almost three percentage points, to 77.1%, in stark contrast to a 4.5 percentage point drop in margins for its professional-services unit.

For the full fiscal year, Veeva trumpeted its accomplishments. The company added 78 new customers during the year, bringing its total to 276, with a good mix across its CRM, research and development, and global-information products. It has also done a good job of expanding geographically, with several new deals to broaden its footprint across the globe. Revenue retention rates for its recurring subscription-services business reflected not only loyal customer relationships, but also a willingness to bring on additional services over time.

CEO Peter Gassner. Source: Veeva.

CEO Peter Gassner was pleased with the year's results, saying that Veeva is "executing well against our goal to become a growing, billion-dollar industry cloud company." With the three-pronged strategy of Veeva CRM's multichannel marketing efforts, Veeva Vault's content management systems, and Veeva Network's data management and analysis services, Veeva Systems is aiming at offering a one-stop solution for life-sciences companies throughout the industry.

Will Veeva look more lively this year?Veeva Systems' guidance for the current quarter and the coming fiscal year were also optimistic. For the fiscal first quarter, revenue of $87 million to $88 million would equate to growth of more than 30% from the year-ago quarter, and adjusted earnings of $0.10 per share would come in $0.01 ahead of what investors were expecting. Fiscal 2016 guidance for earnings of $0.43 to $0.45 per share on revenue between $390 million and $395 million reflects Veeva's belief that health growth rates will continue all year.

Veeva's strategic vision. Source: Veeva.

Yet investors apparently weren't pleased with the results, sending the stock down more than 10% in after-hours trading following the announcement. The stock's trading activity on Tuesday was somewhat unusual, with shares remaining flat until mid-afternoon, and then spiking higher by more than 5% on the day in the last couple of hours before plunging after the market closed.

What makes that behavior all the more striking is that Veeva also announced that it would make an asset acquisition to bolster its presence in the key-opinion-leader data-and-services niche. By buying assets from Qforma and Mederi related to the Qforma CrowdLink suite of products and services, Veeva hopes to take advantage of what it calls "a leading global solution for [key opinion leader] data and services for life sciences' brand, medical, and market access teams."

Regardless of the short-term trading, Veeva's results show that the cloud company is still on track for making the most of the life-sciences niche. As Veeva aims to build up its competitive moat, investors should keep watching closely to see if it can claim even greater penetration of its healthcare-related market, and build up an impenetrable competitive position in the increasingly important space. If it does, Veeva's shares should eventually move higher.

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Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Veeva Systems. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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