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Veeva Systems Inc: SaaS' Biggest Bubble and Tech's Best Short
Price Target: $8.00 / share Ticker: VEEV
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"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
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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
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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.
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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.
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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???
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Oops!
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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
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Perception: Veeva Vault and Veeva Network are two new product offerings in ECM and MDM with huge future potential. Veeva has mastered this layer-cake approach, taking a slice of a number of horizontal solutions (i.e. CRM, content management, marketing automation), and focusing them specifically for the deep regulatory issues of the life sciences industry. In fact, in just one year, the company has twice rolled out entirely new functionality that entire companies were once built upon. Its Veeva Vault content management solution was quickly followed by its Veeva Network marketing and data platform-all built from scratch and deployed in the span of just 18 months.-Gordon Ritter, Emergence Capital, Vertical is the New Horizontal Reality: After 2.5 years Vault has generated less than $5 million in aggregate revenue while accounting for the bulk of annual R&D spend, and is described by industry professionals as the completely wrong product strategy in an already highly competitive ECM space with both horizontal and vertical players. (there are very good reasons entire companies ARE built around this functionality) Meanwhile, Veeva Network (part one) was launched in 2012 as Customer Interaction Repository(CIR), and quickly shot down by Pfizer at the same user conference. Veeva Network (part deux) was launched in May of this year as a LS Cloud MDM. (its current product prospects are covered in our report). Veeva CRM Approved Email generated zero revenue in the six months ended July 31, 2013. For every one of our failures, we had spreadsheets that looked awesome- Scott Cook, Intuit Founder
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Veeva Systems is at the heart of two explosive megatrends: the cloud and life sciences. So it should be no surprise that the company had little trouble with its IPO. In todays trading, the shares are up a sizzling 80%. Forbes article
This is how momentum buzz-word investing works. Cloud is hot. Life sciences is hot. This company has exposure to both. So, it is sizzling.
Am I right to think of this company as essentially a company whose software manages drug trials?Bloomberg Interviewer to Gordon Ritter Veeva Systems is the Next Salesforce-Venturebeat Vertical is the New Horizontal- Techcrunch Was Veeva a Better Deal than Twitter?-Fortune
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Cloudy Coverage
"Discounted cash flow to us is sort of like the Hubble telescope you turn it a fraction of an inch and youre in a different galaxy. There are just so many variables in this kind of an analysis thats not for us." - Curtis Jensen (Third Avenue)
Co-Lead Underwriter #1s Launch DCF: 2028 Veeva Revenues of $3.7 billion. $1.2 billion CRM (3x what Cegedim+Veeva derive from current 66% share) + $900 million Vault/Network (the future is <$5mln in 2.5 years) + $650 million Other Life Sciences (Back to the Future) + $945 million Other Verticals (isnt the whole story here that it s a Industry Cloud company?)=PV $32. Yes, you read that right. After reaching through the clouds and into the stars, fair value today is 24% lower with 70% of future revenues from outside of CRM where 98.5% of 2012 reported revenue came from Co-Lead Underwriter #2s Launch Initiation: Complete mess, and too much to cover in a slide. They will definitely need to suspend coverage. Hopefully for their case, you dont read our report
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Fundamental Contradictions
From a non-lead underwriters launch report:We believe the transformational nature of Veevas CRM solution is not accurately captured within market assessments that fail to incorporate the growth and revenue potential of solutions such as iRep and Approved Email. These relatively new features are pushing the annual subscription dollars per sales representative past the levels that Siebel and Cegedim have historically seen. Same report few pages later:We fundamentally believe Veeva offers a noticeable advantage in terms of both cost savings and functionality versus its key competitors, and we believe these factors will continue to sustain the companys growth fo/r the next several years. Confused? Note Approved Email had zero revenue at end of Q2 as per Veeva disclosure in SEC correspondance. Also, in a mobile world, wed like to think that Irep is core SFA functionality for Veevas pharma sales rep users. There are plenty more of these for those of you that end up taking a close look.
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Veeva vs Peers
The Valuation case against Veeva based on a direct comparable with French publicly listed competitor Cegedim or Horizontal CRM leader and partner Salesforce.com is overwhelming. Cegedim, Veevas French listed industry competitor (36% LS CRM Global Mkt Share), has a current market value of EUR 275 million, and a total enterprise value of EUR 775 million. In 2012, they generated EUR 922 million of revenue and EUR 154 million of EBITDA. So, they trade at an EV/Sales multiples of 0.8x and an EV/EBITDA multiple of 5x. Veeva trades at 35x ttm EV/Sales and 157x ttm EV/EBITDA. The disparity is extremely high. Based on this gap, we would argue that Veeva could afford to pay up to 3x the implied current value of all of Cegedim, and then simply shut it down. AOL/Time Warner memories anyone?
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Value in Veeva?
At TTM CRM revenue of roughly $250 million with 140k+ current users Cegedim's 36% life sciences SFA market share is basically being given away by the market. By our estimate, the same piece of pie in Veeva's hands costs 30x more. Now you know why Cegedim doesn't make it into any launch report comparable tables. Here is what Veeva looks like when it is compared to CRM subscription revenue king Salesforce.com.
Key Metrics TTM Revenue TTM Subscription Revenue Enterprise Value EV/Rev EV/Sub Rev Veeva $168 million $106 million $5.8 billion 35x 55x Salesforce.com $3.47 billion $3.27 billion $34.8 billion 10x 11x
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November 2013
We hope you will take the time to read the full 40+ page report which includes loads of details, links, references to SEC communications, underwriter reports and tons of other evidence to support our investment thesis
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Thank You
DISCLAIMER Suhail Capital Limited is an exempted company registered in the Cayman Islands ( Suhail Capital) is an investment advisor to funds that actively participate in the buying and selling securities and other financial instruments. You should assume that as of the publication date of this report, Suhail Capital (possibly along with or through our partners, affiliates, employees, and/or consultants) along with our clients and/or investors and/or their clients and/or investors has a short position in Veeva Systems Inc. Veeva (and/or options, swaps, and other derivatives related to the stock), and therefore stands to realize significant gains in t he event that the price of Veeva should decline. You should also assume that as of the publication date of this report, Suhail Capital (possibly along with or through our partners, affiliates, employees, and/or consultants) along with our clients and/or investors and/or their clients and/or investors has a long position in Salesforce.com and Cegedim (and/or options, swaps, and other derivatives related to the stock) , and therefore stands to realize significant gains in the event that the price of Salesforce.com or Cegedim should increase.
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November 2013
DISCLAIMER (continued) Suhail Capital strongly recommends that you do your own due diligence before buying or selling any of the securities mentioned in this report. We intend to continue transacting in the securities of issuers covered in this report for an indefinite period after its publication, and we may be long, short, or neutral at any time hereafter regardless of our initial recommendation. This report expresses our opinion, which we have based upon generally available information, field research, inferences and deductions through our due diligence and analytical process. To the best of our ability and belief, all information contained herein is accurate and reliable, and has been obtained from public sources we believe to be accurate and reliable, and who are not insiders or connected persons of the stock covered herein or who may otherwise owe any fiduciary duty or duty of confidentiality to the issuer. However, such information is presented as is, without warranty of any kind, whether express or implied. Suhail Capital makes no representation, express or implied, as to the accuracy, timeliness, or completeness of any such information or with regard to the results to be obtained from its use. All expressions of opinion are subject to change without notice, and Suhail Capital does not undertake to update or supplement this report or any of the information, analysis and opinion contained in it.
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