Veeva Systems quality score: Can the healthcare winner expand its business?
Assessing Veeva's durability, capital allocation and future growth potential.
Hey everyone,
Welcome to the next edition of my quality score format, where I break down all 13 points of my quality score framework for a high-quality business. This way we can quickly assess key qualitative and quantitative characteristics of a business.
My Mercado Libre Quality Score post showcases how a full breakdown looks like.
Check out this post if you want more details about the quality score.
Let’s dive in!
A short introduction to the company
Veeva Systems is a Software as a Service (SaaS) company focused on the healthcare sector. Originally using a modified Salesforce platform, Veeva now runs on its own platform and has a broad portfolio of solutions in its development, commercial and data clouds to service the specific needs of its customers. With 94% BioPharma is the dominating revenue portion, followed by MedTech (4%) and Consumer Products (2%). Veeva is an efficiently run company with a track record of profitable growth and expanding its total addressable market (TAM).
Management Alignment (3/5)
Veeva has strong insider ownership, with 10% in total and 9% with the founder CEO. Positively to note is that the CEO does not get any bonus pay and is highly incentivized to grow the share price over the long term. Besides him, insiders get options with a 3-year vesting period and RSUs. There is no short-term incentive and there also are no targets for the equity compensation. Additionally, there is strong insider selling, like for many US companies with high equity issuance. Overall, the high insider ownership and a CEO without bonus payments convinced me to give them 3/5, despite lacking general incentives.
Secular Trends (3/3)
Veeva operates in growing and necessary markets that need to transform and evolve. As a SaaS CRM and enterprise software provider they benefit from strong tailwinds. Increasing complexity in drug development further helps companies to see the need for investment in data solutions.
Margins (2/5)
Gross margins are high (75%) and growing. The operating margin is strong, but if we exclude the large stock based compensation expense we arrive at 27% instead of 40%+ margin. There is volatility in the margins and Veeva expects to see lower margins in 2030, with a 35%+ target, compared to 41% currently (non-gaap, ignores large SBC expenses). I applaud that the company seeks to reinvest back into the business in expense of short-term margins, but we’ll likely see some headwinds from it.
Balance Sheet (3/3)
The company has a fortress balance sheet with 12% of the market cap in net cash and no debt. Cash has been piling up for years, ensuring a very high security and survivability. We’ll critically look at this in the capital allocation section.
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