Veeva Systems (NYSE: VEEV) Security Analysis

Veeva Systems Healthcare Information Services

Student Research Report This report is published for informational purposes only by the students of the Neeley School of Business.

December 2015

Ticker: VEEV Price: $26.72

Daniel Brown daniel.brown709@gmail.com

Earnings/Share

Varun Gadia varungadia@gmail.com Cheryl Kniatt cherylkniatt@gmail.com

2014A 2015A 2016E 2017E

Amit Lalvani Amit.lalvani@tcu.edu Paul Pieniadz paul.pieniadz@gmail.com

Jul.

Oct.

Jan.

Year

$0.07 0.12 0.12 0.15

$0.09 0.13 0.12 0.15

$0.09 0.12 0.13 0.16

$0.12 0.11 E 0.14 0.16

$0.37 0.48 E 0.51 0.62

P/E Ratio 75.67x 45.04x 62.99x 58.04x

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Tailored cloud solutions for life sciences: All of Veeva’s solutions are designed from the ground up to address the unique business and regulatory requirements of the life sciences industry. Having the expertise they have is a key strength for Veeva to meet the growing demand in the life sciences industry.

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Robust financial health for long term growth: Veeva Systems currently has an attractive balance sheet with zero debt and significant cash. Their revenues have increased every year since the company was founded and this trend is expected to continue into the next five years. Strong financials coupled with an experienced management team makes the company well positioned to continue improving its product line through acquisitions and expanding its business.

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Institutional ownership indicative of potential takeover candidate: Veeva System’s benefits from high institutional ownership of its outstanding shares. We view this as a positive sign that the company’s stock has entered a long-term, steady growth phase. Furthermore, we surmise that this could be another attractive sign for Veeva becoming a takeover candidate in the near future.

Mid Cap

Value

Apr.

Company Highlights

Lg Cap

Sm Cap

Recommendation: BUY Price Target: $35.78

Blend Growth

Market Profile 52 Week Price Range Average Daily Volume Beta Dividend Yield (Estimated) Shares Outstanding (million) Market Capitalization (Million) Institutional Holdings Insider Holdings Book Value per Share (mrq) Debt to Total Capital Return on Equity (ttm)

$22.11 - $33.10 876,903 1.34 n/a 128 $3,361.28 78% 22.55% $3.58 0% 12%

Source: Morningstar

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Important disclosures appear at the back of this report

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Company Overview Veeva Systems is a leading provider of cloud-based customer relationship management (CRM) and IT software for the life sciences industry. Veeva offers an innovative suite of products to its more than 300 customers with users in over 80 countries. These customers are primarily healthcare professionals, pharmaceutical companies and biotech firms. While still a young company, Veeva is poised for steady, long-term growth in a rapidly evolving and growing industry.

Veeva’s management team is replete with strong leaders and industry experience. Management success and effectiveness is evident from Veeva’s return on assets (ROA), return on equity (ROE) and return on investments (ROI) ratios which rank Veeva overall in the top 87th percentile of its sector. Veeva’s CEO and Founder Peter Gassner still has strong ties with his former employer Salesforce which provides for an amicable and beneficial contract agreement for Veeva CRM to utilize the Salesforce.com platform.

Product Line Spans Entire Pharmaceutical Company Veeva’s product line includes Veeva Vault, Veeva CRM, Veeva Network and Veeva OpenData. The combined suite of offerings meets the needs of every area of a pharmaceutical company – from research and development to commercial sales of the drug itself. As Figure 1 shows, Veeva CRM accounts for approximately 75% of revenues, Veeva Vault 20%, and Veeva Network and OpenData the remaining 5%.

Veeva CRM uses the Salesforce.com platform for a fully integrated call center, customer portal and other apps to support more of the commercial side- marketing and sales- of customer needs. This product includes an Approved Email feature which tracks regulatory compliant emails between pharmaceutical sales representative and physicians. Veeva CRM is accessible via computer and mobile app for tablets and Apple smartphones making it convenient for traveling pharmaceutical sales reps to maintain connection while in the field.

Veeva Vault is quickly expanding and has the highest projected future growth rate of all of Veeva’s products. Veeva Vault is a cloud-based solution for customers’ content management and collaboration needs. It includes eTMF, an electronic trial master file, as a formalized means of organizing and storing documents and digital content for pharmaceutical clinical trials that are required for compliance with government regulatory agencies. Companies can easily organize and compile all documents needed before submitting their new drugs for approval. Of the top 50 pharmaceutical companies, 34 use Veeva Vault for their cloud-based content management needs.

Veeva Network offers customer master software and data management for customer records. Veeva OpenData maintains data for all government feeds and regulator data. Veeva’s newest acquisition completed in September 2015 was for Zinc Ahead which will complement the Vault PromoMats application that provides easy approval and tracking of promotional content for pharmaceutical companies. Veeva’s robust and expanding product suite addresses regulatory information management which is crucial for the life sciences industry.

Industry Overview Veeva Systems is located in the Customer Relationship Management (CRM) industry. Veeva’s concentration is specifically in the sector of cloud-based software for the Healthcare and Life Sciences Industry. The CRM industry develops software or other platforms for managing a company’s interactions with their customers and/or sales prospects. The customers include banks, financial institutions, retailers and online businesses, healthcare, and manufacturing. The CRM business as a whole is in the maturity portion of the Industry Life Cycle where growth has typically slowed down in most industries. However, the CRM business is experiencing resurgence in growth due in large part to the technology changes that are occurring with how data is being stored and managed both within and between companies.

Sector Strengths and Opportunities The industry has an expected growth rate of 16.0% to $27.5 Billion from now until 2020 with corporate profit expected to grow at 4.3% per year over the same time period. This high projected growth is the biggest strength that the industry has over the next few years. This growth is projected due to significant investments that are being made into computers and software due to organizations relying more heavily on information technology.

These investments are expected to continue to grow at approximately 3.7% per year to 2020.

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With these advances in technology and reliance being placed on them, companies are demanding that the technologies be more suited for their needs from both an industry standpoint and a size standpoint. In the past, companies would have looked for integrated intranets through dedicated servers to provide such systems.

However, these dedicated servers came with a large price and small to mid-size companies were not always able to afford such a system. Now with Cloud-Based servers, companies are able to pay for exactly what they need without making as large of an investment in their own dedicated server. Thus, allowing the companies to fulfill the requirements of their own intranets without the expense of having their own dedicated server or server farm established.

Risks to Price Target Due to the high growth opportunity within the industry, more competitors are being created that can potentially take away Veeva’s profit share. As well, there are several larger companies, such as Cerner or IMS Holdings which have been well established within the industry for years that can continue to compete heavily against Veeva. The higher rate of competition from both newer and older companies can hurt the overall market share that Veeva may experience in the future.

Though there is high growth opportunity and the industry is seeing the potential for up to 213 companies within the industry by 2020, there is still a substantial amount of concentration in the overall industry. The four largest firms in the industry control about 76.6% of the industry revenue. This concentration of business can make it more difficult for small and mid-size companies to compete in the overall industry.

Lastly, the biggest risk is the unknown of potential cyber-attacks. A company within this industry has to rely heavily on being able to protect their customers’ data while it is on their servers or within their established Cloud. Cyber-attacks on any company within this industry could be disastrous for not only the actual stock price that the company is trading at, but also the future business that it can generate after such an attack has occurred.

Institutional Ownership Advantage Veeva benefits from a very high institutional ownership advantage. The fact that 78% of institutions hold this stock can be viewed as a sign of confidence of less downside risk. Since institutions are mainly on the buyside, a strong level of support is there. If the stock price sags too much, institutions will pick up additional shares to help lift the price. The correlation between increasing institutional ownership and lowered volatility can be drawn from this. As institutions have bought up the majority of shares outstanding, the stock has experienced lower volatility. Insiders make up 22.55% of the ownership in the stock. This is a good sign that management still has a strong interest in the company.

One significant phenomenon of Veeva’s ownership is that it is currently listed at 111.60%. When looking at non-institutional owners, they comprise -11.60% of the stock. We believe this is the “short squeeze” on Veeva that causes the stock to be undervalued. Short-selling firms borrow shares from institutions with the bet that the company’s stock price will decline. They then buy the shares back to cover their negative holdings. Because we see that more shares have been sold short (22.85%) than what has been borrowed, we believe that the short squeeze on the stock undervalues it by 11.25%, pegging the 100% ownership at $30.30. When comparing that to our relative valuation at $30.46, and our FCFE valuation at $31.69, we believe this only reinforces our position of the current stock price being undervalued.

Figure 2: Ownership of Shares Outstanding Source: Thomson Reuters, Smart Consensus

Competitive Positioning Veeva is positioned to compete at a high level over the next five years. There is a good saying, invest in the companies that are selling to the best industries. Veeva Systems, being a cloud-based solutions provider to the life sciences industry, is selling to a healthcare and pharmaceutical companies during a time in which most of those companies will allocate money to upgrade systems since they will have to modify their current systems

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to meet compliance reforms. The cost-benefit is much greater when taking on these initiatives simultaneously.

The most recent example of this is ICD-10 / HIPAA 5010 compliance updates that took effect on October 1, 2015. Electronic Health Record programs also are increasing in numbers with multiple companies. Veeva’s new product, Vault, is one of the products that will experience the most growth over the next five years, as 34 of the 50 pharmaceutical companies in the U.S. have signed on to use this for their document management system. We believe that this potential upside has not been fully recognized by the market, and that mainly just the CRM is driving the current stock price.

Strong Financials and No Debt Veeva currently has one thing that most companies cannot claim to have: zero debt. Veeva is a strictly equitybased capitalized company. While their cost of equity at 11% is higher than what the cost of debt would most likely be, Veeva focuses on staying financially healthy. This is also another validation in the high levels of institutional ownership. We see a strong “long push” on this stock due to the fact that they have been able to capture 48% market share in the life sciences CRM market, have 34 of 50 pharmaceutical companies sign on to their Vault platform, and acquire three additional companies without having to take on any debt. This lends greater scalability for management to take on debt if they wanted to expand much more rapidly.

Positioned as Prime Takeover Target Veeva’s story eventually will have a conclusion, but that growth story could be cut short by them being bought by another company. With a roughly $3.64 billion market cap, no debt, growing market share, and being a competitive threat to larger companies like SAP, Oracle, or IMS, there is a realistic possibility that institutions may already know something other investors don’t. Veeva releases its Q4 and FY15 financials on March 3 rd, 2016 for year-ending January 31st, 2016. It would not be surprising if the company already has plans in the works of being acquired should their earnings during that period have a strong positive surprise.

Earnings Analysis Veeva Systems had a very successful third quarter as evidenced by their recent Q3 earnings release and accompanying earnings call. From a revenue standpoint, subscription services of $81.7 million beat the consensus of $79.1 million which was up 33% year-over-year. Management commented that, “for the first time, [Veeva System’s] non-CRM offerings accounted for more than 25% of total revenues in the quarter."

Professional services and other revenue accounted for $25.2 million in revenues versus the consensus of $24.5 million. Margins continued to impress with non-GAAP operating margin of 26.3% beating consensus of 25.0%.

Cash from operations was $19.7 million compared to consensus of $18.9 million, and billings totaled $99.5 million exceeding consensus of $96.1 million.

In order to study the historic performance of Veeva, we looked at traditional metrics but focused primarily on the return Veeva provided its shareholders from a strictly operational standpoint. We reformulated the balance sheet and income statement to fully separate any effect of financing on the return on equity. Our big takeaway was that Veeva’s Return on Operating Assets has been increasing year-over-year. The Return on Operating Assets took into account only the tax adjusted income Veeva generated from operating activities and Veeva’s operating assets. Going forward we believe that Veeva will show a similar trend in the return it generates from operations.

Technical Analysis Veeva has traded with a linear regressed price of $26.67 since their IPO. In the last six months, their linear regressed price has traded at $25.85. Volatility has dropped below 30%, showing strong signs of the stock starting to settle in at lower standard deviations. Since June of 2015, strong support has developed around the stock at $25.25 and resistance has been most prevalent at $30.87. This resistance, or ceiling, would help validate the three different valuations derived from FCFE, relative, and adjusting for 100% ownership. As depicted in the graph in Figure 3, this stock makes very little movement in between earnings announcements. This could be due to the fact that the stock is trading within a reasonable range when looking at the valuation that is driven with sensitivity analysis used in even the bear case: $27.67 relative P/E and $28.36 FCFE value. Hence, there is strong indication that the stock is currently undervalued, even if slightly.

Momentum: The Elephant in the Room While the stock has had a narrowed trading window over the last six months, momentum since November 2015 has been positive, and is also up trending (14 period standard used as the sensitivity). Momentum currently sits at 2.48, its highest since July 2015 before the market went through a major selloff. We believe this indicator once again represents the short squeeze that has kept the stock price from trading at its valued range of $30.00 – $31.00, even though momentum has continued building in the last six weeks. We believe unless systematic risk occurs that drives down the overall market, there is not much idiosyncratic risk within this stock, even with

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a high beta of 1.34. The next earnings announcement is on March 3, 2016. This should be significant for momentum.

Figure 3: Technical Analysis Source: Thomson Reuters, Smart Consensus

Valuation Our fundamental analysis included valuating Veeva’s stock price using several methods. Since the company has zero debt, our primary valuation method was the free cash flow to equity valuation sensitized as a bear case, base case, and bull case. Our base case valuation of $31.72 indicating VEEV stock is currently undervalued by about 14%.

Using alternative valuation methods confirmed this base case free cash flow to equity valuation. A base case relative valuation using comparable firms’ price-to-equity (P/E) ratios resulted in a price of $30.46. Looking at VEEV’s technical analysis, resistance is at $30.87 currently. The consensus of our valuation estimates put the fair value of the stock around the $30.00 - $31.00 range. We believe the stock is undervalued in the market currently and that there is buying opportunity now for long term steady growth.

Investment Risks Veeva Systems faces the risk of adverse effects inherent to the life science industry as a whole. A changing regulatory environment can have both positive and negative effects on Veeva. We do not see compliance and regulations getting any more lax in the near future, so this could create more business for Veeva products as companies have to adapt to meet more stringent compliance standards. It is important for Veeva to ensure their product line remains up-to-date on current regulations in order to prevent the risk for lawsuits from clients and regulators.

Veeva’s top ten customers accounted for 54% of total revenues in 2015, making the loss of key customers a potential investment risk. However, unless a competitor develops a better product offering for a cheaper price, we see Veeva Systems prevailing. Furthermore, Veeva’s continued acquisitions keep improving their product suite and broadening the competitive moat around the company.

Maintaining and adhering to their agreement with Salesforce.com could pose a potential risk to the company if the agreement is severed, or if Veeva is unable to meet the agreement. The agreement allows Veeva CRM to utilize the Salesforce.com platform and also includes a minimum order commitment of $500 million through 2025. If this minimum order commitment is not met, Veeva is still required to make a true-up payment which could be a potential risk taking away funds from shareholders.

With any cloud-based technology the risk of hackers or potential breaches to customer data is a going concern.

Veeva addresses this risk by maintaining a comprehensive security program, including biometric entry

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authentication and 24/7/365 on site monitoring. Additionally, Veeva regularly passes rigorous third-party compliance audits and receives routine ratings from the Skyhigh Networks in conjunction with the cloud security alliance (CSA). Like every company, Veeva Systems faces many risks during their course of business; however, they are poised and ready to counter every risk in which they have the power to do so.

Investment Strategy We observed VEEV stock to be fairly priced at $31.69 in our Base Case FCFE valuation and $30.46 based on our relative valuation. We have observed the historical volatility to be around 29.14% and implied volatility to be around 30.18%. Our linear regression of stock price obtains the price to be around $26.67 since IPO. We have also observed the stock to have a positive momentum near 2.48 (Near 52 Week High).

We have two strategies to implement our buy recommendation on Veeva Systems. The first strategy is a long only strategy in which we suggest to buy VEEV at its current price of $26.26 with the expectation to hold the stock for the next one to three years re-evaluating the stock annually. Figure 4 shown below details target prices and profit potential for VEEV stock assuming a purchase price of $27.50.

Our second investment strategy is a long short hedge strategy that provides us a 8.11% hedge based on achieving our January 2017 target of $35.78. The stock’s support and resistance over the last six months has been around $25.25 and $30.87, respectively. We recommend selling June 2016 $26 strike put options while simultaneously buying March 2016 $29 strike call options. This strategy provides for a 27.65% profit potential on reaching our target price of $35.78 along with an 8.11% hedge from December 4, 2015.

Figure 4: Price Target and Profit Potential 63.0x

$60

PRICE PER SHARE

98% 58.0x

55.4x

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$40 $30

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$32.21

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$35.78

$39.73

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78% $48.99

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80% 60%

$44.12 40%

44% 30%

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$10 $-

17% Jan '16

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EXPECTED RETURN PER SHARE

$70

0% Jan '17

Jan '18

Jan '19

Jan '20

Jan '21

FY END DATE Price Target

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Return

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Figure 1: Actual and Pro Forma Income Statement Source: Company Documents, Student Estimates

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Figure 2: Actual and Pro Forma Balance Sheet Source: Company Documents, Student Estimates

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Figure 3: Actual and Pro Forma Cash Flow Statement Source: Company Documents, Student Estimates

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Disclosures: Ownership and material conflicts of interest: The authors, or a member of their household, of this report holds no current financial interest in the securities of this company.

Receipt of compensation: Compensation of the authors of this report is not based on investment banking revenue.

Market making: The authors do not act as a market maker in the subject company’s securities.

Ratings key: Banks rate companies as either a BUY, HOLD or SELL. A BUY rating is given when the security is expected to deliver absolute returns of 15% or greater over the next twelve month period, and recommends that investors take a position above the security’s weight in the S&P 500, or any other relevant index. A SELL rating is given when the security is expected to deliver negative returns over the next twelve months, while a HOLD rating implies flat returns over the next twelve months.

Disclaimer: The information set forth herein has been obtained or derived from sources generally available to the public and believed by the authors to be reliable, but the authors do not make any representation or warranty, express or implied, as to its accuracy or completeness. The information is not intended to be used as the basis of any investment decisions by any person or entity. This information does not constitute investment advice, nor is it an offer or a solicitation of an offer to buy or sell any security. This report should not be considered to be a recommendation by any individual affiliated with Texas Christian University with regard to this company’s stock.

Template adapted from materials from the New York Society of Security Analysts.

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