veeva systems inc: saas' biggest bubble and tech's best short · –$2 billion enterprise...

Veeva Systems Inc: SaaS' Biggest Bubble and Tech's Best Short

Price Target: $8.00 / share

Ticker: VEEV

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November 2013

www.suhailcapital.com

"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

3 www.suhailcapital.com

Vertical is the New Horizontal?

• Lower Customer Acquisition Cost (CAC): Typical SaaS CAC can be 2x annual contract value vs. as low as ¼ for a Vertical SaaS

• Industry focus allows for few sales reps and lower marketing spend, and thus greater capital efficiency

• Faster and greater market share penetration potential due to highly focused nature of model

• Ability to expand into other product segments and grab larger piece of the pie (CRM to ECM to MDM to Clinical to….)

• Case in point: In just 4 years Veeva displaced Oracle in Life Sciences CRM

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Vertical is the Same Old Vertical • Veeva’s CAC was significantly lower because they built their CRM on top of the leading

Horizontal’s Platform. Thus, Vertical is the new Horizontal only if the global leader in cloud based CRM is getting a cut of your sub revenue. Otherwise CAC would have been much higher as every large enterprise would not have had the comfort of knowing they were essentially relying on the leading cloud CRM’s technology and infrastructure which has been developed over the past decade.

• With fast penetration (30% of global reps and pretty much entire pie in US market) comes saturation and the need for new avenues for revenue growth. Without a best in class horizontal behind it, Veeva has had a very tough time gaining any meaningful traction in new areas like ECM and MDM.

• Being a Vertical means that there are other specialists doing the same thing in Life Sciences. NextDocs based of Sharepoint in ECM is one. Medidata in Clinical Development. Reltio in MDM. If the strength of your pitch in CRM was all we do is life sciences cloud CRM, then how does your pitch in these segments work against the existing ‘focused’ vertical providers saying the same thing?

• Veeva’s Q2 annual revenue run rate equals .5% of Oracle revenues. Declining reps, tightening budgets, and falling asp’s due to on demand have made this a market they probably don’t care too much about right now. It’s a small vertical for a reason. If that were to change, the horizontals would look at it in a different strategic manner.


Total Addressable Market

• Veeva’s current market capitalization already exceeds its total addressable market opportunity reported in the S-1

• Veeva’s fully diluted market capitalization is $6.1 billion (closing price of $40.54)

• The $5 billion TAM breakdown is provided in detail within the launch report of co-lead underwriter #1 of the Veeva IPO – $2 billion CRM + – $2 billion Enterprise Content Management (ECM) + – $1 billion Master Data Management (MDM) Customer Data= $5 billion

• 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.


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.


2011 CRM Market Share Numbers

• Cegedim had 37% (based on public disclosures) market share at the end of 2011

• We’ve estimated Cegedim’s CRM life sciences revenue to account for approx.35- 40% of their total CRM/SD div rev in 2012.(Mkt Research, Onekey, Compliance, and other services make up the other 60%)


Q2 2013 Estimated CRM Market Share


• 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???

How you make a $1.3bln LS CRM TAM mistake!

• Cegedim CRM and Strategic Data division 2012 revs of EUR 488mln ($654mln)

• Cegedim’s disclosed CRM market share share 2012 37%

• Co-lead Underwriter #2’s 2012 CRM life sciences actual market size $1.776bln

• $654 million/ 37% = $1.767 billion. These numbers are not just close they are approximate.( slight variation here is euro conversion rate used). So, the co-lead underwriters used CEGEDIM as a comp (not shocking considering their CRM mkt share and publicly listed nature) WITHOUT bothering to verify anything. Using the whole groups revenue is COMICAL because OneKey in of itself is a $125 million revenue business, and they both comp that against Network which they TAM out separately.

• $1.776 X 10% Gartner Q1 2013 CRM market CAGR= $1.95 billion or the $2billion TAM for CRM LS that both co-lead underwriters cite in their initiation reports.

• This is of course despite the fact that pharma sales reps continue to shrink and industry ASP’s continue to decline thanks to the full transition to lower cost on-demand CRM in what is already fully penetrated market as far as CRM/SFA for pharma reps.

• Cegedim’s ttm CRM revenues were estimated by us at $250mln( we verified the accuracy of this estimate)

• Actual TAM if it had been calculated correctly based on Cegedim CRM revenue and market share is approximately $700mln vs the approx. $2bln noted by co-lead underwriter #2. That’s a 65% downside correction in the TAM of the market in which VEEV derives >95% of revenue. Also, when you read our full report, you should reasonably conclude this error carried over into the sizing of the other two markets in which Veeva hopes to generate meaningful future revenue

• Oops!


Underwriter TAM Assumptions

• Just look at their white paper financial model from 2 years ago on why an on-premise life sciences customer should switch to a SaaS CRM.

• 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’


The Glass Ceiling on Veeva

• Perception: Veeva's early profitability as SaaS company is remarkable and evidence of the appeal of the industry cloud model and warrants a premium multiple. Vertical is the new horizontal!

• Reality: Veeva CRM solution is a white-labled Salesforce.com product. Basically, vertical is the new horizontal, if you have direct access to the leading horizontals entire platform. This strategy is what allowed them to achieve such capital efficiency and profitability. However, as a vertical CRM provider their core market is by definition finite, and in this case, also specifically limited by contract. This type of business model has always translated into a market discount EV/Sales multiple to the horizontal/platform players. Veeva's forward multiple is the highest in the space of any horizontal or vertical SaaS provider.

• A leading CRM life sciences consultant on Veeva achieving avg annual revenue of $4,500/seat “That's impossible. And even if it was remotely possible, then the horizontals would then immediately target the entire the market."


Product Mix/ Penetration • 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


http://techcrunch.com/2012/07/28/vertical-is-the-new-horizontal-how-the-cloud-makes-domain-expertise-more-valuable-in-the-enterprise/


The IPO Process

• Perception: This was a well managed IPO and the big success story of 2013 in the software space. The stock's current $6.1 billion dollar market capitalization validates this.

• Reality: This was a rushed IPO complete with misleading disclosures and clear evidence of remerging IB/Equity Research conflicts. The fact that it is trading where it is at is reflection of the poor state of affairs in the IPO market these days. Beyond buzz-words and sound bites that demonstrate a clear lack of understanding of the business, nobody has bothered to put this name under the microscope yet. This is simply shocking considering the coverage the name has gotten in the press, and its current market cap.

“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 today’s 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


http://www.veeva.com/



http://www.forbes.com/sites/tomtaulli/2013/10/16/veeva-ceo-customer-dissatisfaction-is-my-opportunity/

http://www.forbes.com/sites/tomtaulli/2013/10/16/veeva-ceo-customer-dissatisfaction-is-my-opportunity/

http://venturebeat.com/2013/10/16/gordon-ritter-veeva-systems-is-the-next-salesforce/


http://finance.fortune.cnn.com/2013/10/17/veeva-vc-twitter/

Cloudy Coverage • "Discounted cash flow to us is sort of like the Hubble telescope – you turn it

a fraction of an inch and you’re in a different galaxy. There are just so many variables in this kind of an analysis – that’s not for us." - Curtis Jensen (Third Avenue)

• Co-Lead Underwriter #1’s 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 (isn’t 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 #2’s Launch Initiation: Complete mess, and too much to cover in a slide. They will definitely need to suspend coverage. Hopefully for their case, you don’t read our report


Fundamental Contradictions

• From a non-lead underwriters launch report:“We believe the transformational nature of Veeva’s 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 company’s 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, we’d like to think that Irep is core SFA functionality for Veeva’s pharma sales rep users. There are plenty more of these for those of you that end up taking a close look.


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, Veeva’s 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?


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.

• This valuation gap can only be explained by one word: BUBBLE!


Key Metrics Veeva Salesforce.com

TTM Revenue $168 million $3.47 billion

TTM Subscription Revenue $106 million $3.27 billion

Enterprise Value $5.8 billion $34.8 billion

EV/Rev 35x 10x

EV/Sub Rev 55x 11x

Veeva vs. Life Sciences Industry Clinical Cloud Leader Medidata

• Medidata is life sciences “industry cloud” company which primarily focuses on clinical trial development software.

• Like Veeva their model is subscription revenue driven. • In Q2 2013 they generated $56.6 million in subscriber

revenue. That is 66% more than Veeva generated. • Their EV is $2.8 billion. Their EV/Sales ratio is 11x. • Does this make any sense? Note we have been long

this stock (at much lower levels) before and find their product niche to be much more of a ‘true’ life sciences vertical play. Our rationale behind this can be found in the full report.


SaaS and the Greater IT Spending Pie

• Every dollar that moves to SaaS is eliminating multiple dollars in old IT spend.

• Every model we have looked at for SaaS companies uses legacy market TAM assumptions as well as historical CAGR’s going forward. This is flat out wrong, but understandable as visualizing this is not easy. We too had a problem finding great evidence to support this deflationary theory until we started researching VEEV.

• Our deep dive into LS CRM via VEEV provided good evidence to support this thesis. Market is easy to size because of pharma rep data and concentrated nature of market share amongst 3 companies. Basically, you can see how SaaS transition here has turned a once premium niche software product into a more commodity priced solution.

• Over the very long run this is good news for SaaS, but in the immediate to medium term we imagine that Wall Street will really have to start rethinking their financial models.


How to play this?

• This is what we would describe as a dream short. All the good news in the world still equates to 65%-80% downside in the share price.

• Our fair value is $8 as we are giving them the benefit of the doubt as far as their growth strategy goes.

• Our strategy would be simply short this stock in size and wait for more people to start focusing on everything we have raised in this piece versus the puff coverage that is out there now.

• If you are really cautious and worried that this bubble somehow won’t pop, you can always pair it with a Salesforce.com long position or a ridiculously priced Cegedim to hedge market risk.

• There is no way Veeva’s market valuation can continue to maintain its relative value versus Salesforce.com, Medidata or Cegedim without drawing a lot more eyeballs. We are 100% certain of that, and in the market you can very rarely make such a statement!


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

[email protected]

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 the 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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November 2013


veeva systems inc: saas' biggest bubble and tech's best short · –$2 billion enterprise...

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