Capital Market Laboratories (CMLviz) One-on-One Interview with Veeva Systems CFO - What took Veeva to a billion dollars will fuel the next several billion
Date Published: 2019-09-10
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The information contained on this site is provided for general informational purposes, as a convenience to the readers. The materials are not a substitute for obtaining professional advice from a qualified person, firm or corporation. Consult the appropriate professional advisor for more complete and current information. Capital Market Laboratories ("The Company") does not engage in rendering any legal or professional services by placing these general informational materials on this website.Preface
It was a good news, bad news story for cloud computing software vendor Veeva Systems this week, as the company announced Tuesday it crossed the threshold of having a billion a year in revenue, but also announced its chief financial officer of ten years, Tim Cabral, is retiring.The stock opened Wednesday morning higher but then dipped sharply, ending the session slightly higher at $164.21.
Tuesday's call brought many appreciative farewells for Cabral from sell-side analysts, though Cabral is staying on until his replacement is found. He sat down to talk with Capital Market Labs on Wednesday about what's next and where Veeva goes from here.
To recap the results, Veeva reported Q2 revenue of nearly $267 million, up 27%, and earnings per share of 55 cents, topping Wall Street's average estimate for $259 million and 49 cents.
For the current quarter, the company sees revenue in a range of $274 million to $275 million, and EPS of 54 cents to 55 cents, ahead of consensus for $268 million and 51 cents.
The outlook is also higher for the full year, as the company raised its revenue outlook for the second time in a row, now forecasting $1.062 billion to $1.065 billion, up from a previous $1.045 billion to $1.05 billion.
Cabral's plans for retirement sound pretty active: golf, teaching a business class at UC Santa Clara, and sitting on boards of companies.
As for Veeva, he leaves the company feeling the opportunities are as big as they've ever been. The "Vault" suite of applications has only reached about ten percent of the addressable market in life sciences, Veeva's main industry, leaving plenty of runway.
Reflecting on the company's journey forward in to the multiple billions of revenue, Cabral told CML that the four elements of success that got it this far can carry it for years to come, namely, focus on customer success, on product innovation, "the focus on customer success, on product innovation, the focus on employee success, and the focus on building a business that has a unique combination of growth and profitability."
Cabral also discussed how the investor profile for Veeva is gradually changing with the company's growth, how M&A may increase, and the puts and takes of what to report on income statements.
Current Quarter One-on-One CFO Interview
It was a good news, bad news story for cloud computing software vendor Veeva Systems this week, as the company announced Tuesday it crossed the threshold of having a billion a year in revenue, but also announced its chief financial officer of ten years, Tim Cabral, is retiring.
Cabral's plans for retirement sound pretty active: golf, teaching a business class at UC Santa Clara, and sitting on boards of companies.
As for Veeva, he leaves the company feeling the opportunities are as big as they've ever been. The "Vault" suite of applications has only reached about ten percent of the addressable market in life sciences, Veeva's main industry, leaving plenty of runway.
Reflecting on the company's journey forward in to the multiple billions of revenue, Cabral told CML that the four elements of success that got it this far can carry it for years to come, namely, focus on customer success, on product innovation, "the focus on customer success, on product innovation, the focus on employee success, and the focus on building a business that has a unique combination of growth and profitability."
Cabral also discussed how the investor profile for Veeva is gradually changing with the company's growth, how M&A may increase, and the puts and takes of what to report on income statements.
Capital Market Labs: Congratulations on the announcement you'll be moving on after a very successful run, we will certainly miss you! What prompted this move?
Tim Cabral: It's been an interesting reflection the last few days, as we were getting ready to announce this, the thing that hit me is, I've had a 30-plus-year-career, and 10 years at Veeva, and it's been an amazing journey.
CML: Do you have any hobbies?
TC: A little bit of golf, but my focus, as long as I can be successful, is to join a couple of boards. I was really lucky, I was in the Veeva seat, growing up as an emerging public company, and then as a public company, to lean on a lot of people on my audit committee, to really frame what I've done and how I've done things, and now is my chance to give back. In addition, my Alma Mater is [UC Santa Clara], and I am set to teach a MBA class there next spring. I don't know if I'll be any good, but that will be my next chapter!
CML: That sounds like a very valuable course. Let's talk about the quarter just ended. What are the main things that you think investors should take away from the results and outlook?
TC: There are, I think, a few things that jump out at me. We had two fairly sizable milestones in the quarter. We officially passed the billion-dollar run rate [for annual revenue], and we are the fifth-fastest company to ever do that. That was a big milestone, and it was one we set out four years ago, but we gave ourselves a little over five years to do it, and we did it in four years, or less, actually, so we are a year and a half early, which is testament to the execution here and the strength of the business.
The second milestone is that Vault is now north of 50% of total revenue for the company. We have talked the last number of years about how our second act will be one day bigger than our first act, and that happened this past quarter.
CRM, or commercial cloud, as we characterize it represented 48% [of revenue]. I think those milestones were important takeaways.
The overall strength across the business, commercial cloud had a very good bookings and revenue quarter, we had another quarter of a little uptick in the growth of that business, so as we characterize that business as steady growth over the long term, we are definitely proving that.
And Vault is now a $550 million-ish business, and growing north of 40%. There are not many public companies that have those stats. That's a function of customer success, execution, and product innovation.
Another thing I would take away is what Peter [Gassner] and Paul [Shawah, Veeva senior Vice President for commercial strategy] called out on the call, that we are very much in the early days of a significant opportunity in industry cloud.
We have maybe 10% penetration of Vault in the life sciences industry, with commercial cloud a little higher, but our ability to fill out the vision of being the industry provider for life sciences has a lot of opportunity ahead.
CML: Although, that question on the call that prompted those remarks by Peter and Paul wasn't really about market opportunity and more about the vector for product innovation. The question was whether, having filled out the feature set of the products for life sciences, if the focus of product development now turns to features for industries outside of life sciences.
TC: Yes, that's true, it was a question about the direction of product innovation. I don't know, it's hard, we've created a bit of a hard compare in the last three years with innovation and with the new products we've come out with.
We've come out with more than a half a dozen new products, three of which could be materially meaningful at some point. Will the next three years look like the last? I don't know.
With that said, there is a lot of opportunity ahead of us, we believe, and our customers would allow us to add value to them and make an impact. We are still very early in the outside-of-life sciences market, so I wouldn't say that there is as strong a conviction - there's clearly innovation outside life sciences, I know they're there, it's less clear what they are.
So, right now, it's about early adopter success, rather than product proliferation. But it's still early innings in the opportunity for life sciences, we are in the early stages of really filling the vision out.
For example, we just launched Safety, and an AI application in Safety. Those are a couple of the new things that are happening. AI is an interesting one.
What we have talked about in the last year with AI is not only about bespoke products, but also to be able to add features and functionality, to make some core products like CRM even more sticky. AI creates a vehicle of new innovation. AI has loosely been around for a few years; it is now taking a much more focused shape.
You know, we started the conversation with, sad to see you go, and what I told my team yesterday, and investors over last day, is, I am more confident in the opportunity Veeva has in front of it today than I have ever been.
CML: Now that you've crossed that billion-dollar run-rate milestone, what happens as you become a company with a billion in revenue headed to multiple billions, someday? Do things change as a company at that scale?
TC: I don't know that anything changes. The fundamentals that created the success in that journey to the first billion remain, the focus on customer success, on product innovation, the focus on employee success, and the focus on building a business that has a unique combination of growth and profitability.
If a company is able to continue to meet those four things, you can build a multi-billion-dollar company. So, I don't think anything has changed
CML: Probably, the investor profile has to change, though, because you may attract managers that wouldn't have been interested in you as a smaller company.
TC: "Yes" is the short answer. We are seeing that already as some fund managers of small caps need to get out of their Veeva position because we are too big for them, and we are seeing a move into mid-cap.
The good news is, a lot of our larger holders have multiple funds, so we may work with different fund managers but at least the same firm, or if not, at least the same analyst. That has been happening over the last year or so, as we moved from the mid-teens-billion market cap to the mid-twenties.
I'm not seeing a lot of challenge there. But you're right, they are a different audience, different fund managers, different metrics that matter to them. I actually think, to be quite honest, our growth and profit profile plays into mid-cap and large-cap even more than maybe small cap.
Now, that's speculation, no one has told me that, but the questions are can this company grow, can this company become a cash generator, and have a strong operating profile.
CML: And, maybe, can this company at some point deliver a dividend?
TC: I hear you, and re-deploying capital is always something people think about. It's a little bit early in our public journey to move in that direction.
I believe that investors understand that a dollar we spend has the potential of a bigger return than if we return that dollar to the market, either through stock buybacks or dividend.
In the last three years of innovation, we proved that out a little bit, and dividends has not come up often at all. Buybacks come up a little bit here and there, but, still, with the response from investors being that, I don't know if I want you getting into buybacks with the stock at this place!
They do talk about our growing cash balance and what we are going to do with this, but the stability of our balance sheet, and the optionality for M&A pretty much answers that.
CML: So what about M&A? Veeva has not been a very aggressive acquirer, relatively speaking.
TC: We haven't been very acquisitive, it's true. As you look into the future, I would imagine that like others before us, M&An is a potentially interesting opportunity for us, either to create a catalyst for something we are planning on, or to get us into a new opportunity, or to bring in talent or new customers. That exists.
The thing I would say is, the strength of the Vault platform, and the ability to spin up application areas in a very fast and efficient way, and the fact that our operating model is so strong, creates more of a lean toward build versus buy.
Now, don't take that as the Veeva answer, that's more of Tim's speculative answer. A year ago, we took our investor relations guy, Matt, and gave him corporate development as well, because the feeling of Peter and Paul was this could be an interesting area. I would be surprised if we weren't more acquisitive in future, over a 5 to 10-year period, I would be surprised if it wasn't part of the story of Veeva. I would expect, though, that those would be more small or tuck-ins. That's the calculus I would think of.
CML: What about the reporting structure of Veeva. You don't explicitly break out CRM and Vault as separate line items, even though you provide color on them each quarter. As you become a bigger company, do you at some point change the reporting to be more explicit? Microsoft is a company that has had tons of different reporting segments on the income statement over the years.
TC: Of course we have thought about it, but what we try to do is to be very productive in the things we disclose and the things we guide on. We want the investor to understand how we truly see the business and understand the business.
There is a natural tension that in the investment community, for any company, investors would always would love to have more information. But what's missed in that is that the more info that I give you, the less you will focus on what I think is important. If I give you five numbers, you will focus less on Vault's growth.
What we do is to try to make sure that the story and narrative of how we think of the business is reflected in how we segment the business and talk about the business. If we ask ten investors, you'll always get different views as to whether we are doing it the right way.
Microsoft is a massive company, they have entertainment and desktops and enterprise apps, so, yeah, absolutely, as I think about Microsoft, if I'm Satya [Nadella, Microsoft CEO], we have to tell the story for what is now a conglomerate.
So, segmentation is very helpful for something like Microsoft. If Veeva gets to that scale - I won't be in the seat - there will likely be more than two structures! I didn't mean to get philosophical with this.
We try to make sure the data and the numbers and the metrics are relevant to how we look at the business, and hopefully, investors will have the right information for how to look at Veeva.
CML: Thanks as always, Tim, we look forward to chatting with you for as long as you're still in the hot seat.
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Thanks for reading, friends. The author has no position in Veeva at the time of publication.
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