Veeva Systems Added To The FFJ Portfolio

In my December 26, 2023 Veeva Systems (VEEV) post, I stated VEEV was on my 'Watch List'. In hindsight, I should have just acquired shares.

Fast forward to February 29, and VEEV released its Q4 and FY2024 results and FY2025 guidance while I was on my ski trip to various resorts in British Columbia.

Following a review of the company's results and guidance and the transcript of the earnings call, I initiated a 100 share position on March 1 @ ~$219.81 in a 'Core' account within the FFJ Portfolio.

Business Overview

Please refer to my December 26, 2023 post.

Financial Review

Q4 and FY2024 Results (VEEV has a January 31 FYE)

Refer to VEEV's Q4 2024 Earnings Release and Earnings Presentation; the Form 10-K is unavailable as I compose this post.

The following total annual revenue and FY2025 guidance differs slightly from what management provided on December 6, 2023. I provide actual results AND what management provided on December 6, 2023 for ease of comparison.

This was provided on December 6.

Operating Cash Flow (OCF) and Free Cash Flow (FCF)

VEEV has impressive OCF and FCF growth track records.

In the fiscal years ending January 31, 2014 to January 31, 2024, VEEV generated OCF of (in millions of $): ~41.82, ~67.6, ~80, ~144, ~233.4, ~310.8, ~437.4, ~551.2, ~764.5, ~780.5, and ~911.

Annual capital expenditures are typically well under $30 million. As a result, FCF is almost the same as OCF.

Although VEEV spends very little on CAPEX, it invests heavily in research and development. In the fiscal years ending January 31, 2018 - January 31, 2024, for example, R&D amounted to (in millions of $): ~132, ~158.8, ~210, ~294.2, ~382, ~520.3, and ~629.

FY2025 Guidance

The following is VEEV's FY2025 guidance.

Risk Assessment

VEEV has no debt to rate.

At the end of Q4, VEEV had ~$0.703B in cash and cash equivalents and ~$3.324B in short-term investments.

Its total liabilities were ~$1.266B of which ~$1.05B was deferred revenue; deferred revenue represents funds received from clients in advance in services being provided.

In essence, the $0.216B in liabilities other than the deferred revenue is offset by ~$4.027B in cash and cash equivalents and short-term investments.

VEEV satisfies my risk averse investor profile.

Dividends and Share Repurchases

Dividends and Dividend Yield

VEEV does not distribute a dividend.

Share Repurchases

The weighted average number of diluted shares outstanding (in millions rounded) in FY2021 - 2024 is 160.7, 162.2, 162.4, and 163.5. This had increased to ~164.1 in Q4.

VEEV typically does not repurchase shares to offset the shares it issues annually as part of its employee compensation structure.

Valuation

When I wrote my December 26 post, I noted VEEV generated $4.28 in adjusted diluted EPS in FY2023. Management's guidance for FY2024 was $4.76 and with shares trading at $190, the forward adjusted diluted PE was ~40.

In the first 9 months of FY2024, VEEV generated $3.46 in adjusted diluted EPS versus $3.14 over the same timeframe in FY2023.

VEEV's valuation using the current broker estimates at the time of that post was:

• FY2024 - 26 brokers - mean of $4.79 and low/high of $4.74 - $5.57. Using the mean estimate, the forward adjusted diluted PE is ~40.
• FY2025 - 25 brokers - mean of $5.57 and low/high of $5.26 - $6.10. Using the mean estimate, the forward adjusted diluted PE is ~34.
• FY2026 - 17 brokers - mean of $6.28 and low/high of $5.70 - $6.68. Using the mean estimate, the forward adjusted diluted PE is ~30.

Looking at VEEV's valuation based on FCF, I estimated FY2024 FCF would be ~$0.925B; at the end of 3 quarters it was ~$0.854B. NOTE: VEEV generated $0.885B of FCF in FY2024 so I overestimated its FY2024 FCF by ~$40 million.

The weighted-average number of diluted shares in Q3 2024 was 163.761 million. I, therefore, envisioned ~$5.21 in FCF/share. By dividing the current ~$190 share price by ~$5.21, I arrived at a forward ~36.5 P/FCF. This was somewhat better than the FY2024 forward adjusted diluted PE.

We now know that VEEV generated $3.22 and $4.84 in diluted EPS and adjusted diluted EPS in FY2024. Using my $219.81 purchase price, the diluted PE and adjusted diluted PE are ~68.3 and ~45.4.

It generated ~$0.885B in FCF and the diluted weighted average shares outstanding in FY2024 were ~163,486 million thus giving us a ~$5.41 FCF/share. Using my $219.81 purchase price, the P/FCF is ~40.6.

Management's FY2025 adjusted diluted EPS guidance is $6.16. Divide my $219.81 purchase price by $6.16 and the forward adjusted diluted PE is ~35.7.

VEEV's valuation using the current broker estimates and my purchase price is as follows:

• FY2025 - 24 brokers - mean of $6.15 and low/high of $6.05 - $6.19. Using the mean estimate, the forward adjusted diluted PE is ~35.7.
• FY2026 - 21 brokers - mean of $6.81 and low/high of $6.23 - $7.09. Using the mean estimate, the forward adjusted diluted PE is ~32.3.
• FY2027 - 8 brokers - mean of $7.65 and low/high of $7.04 - $8.30. Using the mean estimate, the forward adjusted diluted PE is ~28.7.

If the historical FCF and adjusted diluted earnings are an indication of what to expect in FY2025, FCF should once again exceed adjusted diluted EPS. VEEV's forward valuation based on FCF/share, therefore, should be somewhat better than the FY2025 forward adjusted diluted PE of ~35.7.

Final Thoughts

In my December 26 post, I note that VEEV's vertically integrated customer relationship management (CRM) services and end market data and analytics solutions were originally built on the Salesforce 1 platform. In late 2022, however, VEEV announced that it will migrate the product to its own Vault platform. Although migration will begin in 2024, its existing users will have the option to continue to use CRM on Salesforce’s platform until 2030. While this poses a risk, I remain confident that VEEV will ultimately come out ahead in that it will no longer be at the mercy of Salesforce.

As noted earlier, VEEV has been incurring considerable R&D expense in recent years which has led to the implementation of new products to its suite thereby making its offering increasingly attractive. This has resulted in new end markets and opportunities.

In my December 26 post, I also touched upon VEEV's standardized Termination for Convenience (TFC) for customers with multi-year ramping deals. This allows a customer to terminate a master subscription agreement with VEEV without cause within a predefined notice period and simplifies contract negotiations and provides consistency for VEEV's customers. Prior to this standardization, most customers had one year contracts. Now, however, contracts will be primarily multi-year. This will lead to more stable and predictable financial results.

In multiple previous posts, I state my preference for companies which generate strong FCF and which do not rely on debt or the issuance or new equity to finance growth. VEEV is such a company.

Investors who purchased VEEV shares between the second half of 2020 and the end of 2022 are currently 'licking their wounds'; VEEV's results during this time frame did not justify its share price. VEEV's recent results and forward looking earnings and cash flow, however, are considerably better than just a few years ago.

Given my long-term outlook, I hope to periodically add to my VEEV exposure when I deem its valuation to be attractive. Currently, however, VEEV's share price is ~$230 and I deem shares to be at the top end of fair valuation.

I wish you much success on your journey to financial freedom!

Note: Please send any feedback, corrections, or questions to [email protected].

Disclosure: I am long VEEV.

Disclaimer: I do not know your circumstances and do not provide individualized advice or recommendations. I encourage you to make investment decisions by conducting your own research and due diligence. Consult your financial advisor about your specific situation.

I wrote this article myself and it expresses my own opinions. I do not receive compensation for it and have no business relationship with any company mentioned in this article.