With projected calendar 2015 sales of $410 million and a market cap of roughly $3.3 billion, Veeva Systems is a leading provider of cloud software for salesforce automation, content management, and sales contact data to the global life sciences industry. Based on an exclusive software license from salesforce.com (NYSE: CRM), Veeva’s CRM software is now utilized by 17 of the top 20 largest pharmaceutical and biotech companies, including eight of the top 10. Within the top 20, only three have thus far not made the switch to Veeva: Switzerland-based Roche Holding, France-based Sanofi, and France-based Novo Nordisk, which ranks in the top 15.
Veeva has identified an annual market spend of over $5 billion in software for CRM, content management, and sales data, and so it has much running room ahead. Veeva has already captured an estimated 50 percent of the CRM market for pharma and biotech, and could very well capture as much as 60 percent of the market over the next several years, as the company continues to roll out new seats to existing customers, and sell additional CRM add-on modules.
Since Veeva is cloud-based, and features a multi-tenant architecture, the company can update the software of its entire customer base at the same time, reducing the time, aggravation, and cost associated with maintaining and updating several versions of the same software program. Veeva’s cloud-based product set stands in contrast to two of its largest competitors, Oracle (NASDAQ: ORCL), and IMS Health Holdings (NYSE: IMS), which support and maintain several software packages simultaneously, many of which have been developed for older client server computer systems, and are not hosted in the cloud. Support for these older software products detracts from keeping their cloud products up to date, which will likely lead to further market share erosion.
Veeva’s newer products for content management and sales data, respectively, accounted for less than 10 percent of sales a year ago, but now account for about 20 percent of product sales. These products carry slightly higher gross margins than the company’s CRM products, and more than double its addressable market. Veeva has additional room to sell Veeva CRM, Veeva Vault, and Veeva Network to existing and new customers, as well as to sell the new products to other segments in the life sciences market, such as medical devices, laboratory instruments, and CROs—segments with which the company conducts limited business currently.
Veeva benefits from an experienced management team, led by Peter Gassner, a former SVP of Technology at saleforce.com, and at Peoplesoft (later acquired by Oracle), where he was Chief Architect and General Manager for PeopleTools, and at IBM Silicon Valley Lab, where he participated in database research and development. Matt Wallach, co-founder and President, was formally GM of the Pharmaceuticals and Biotechnology division of Siebel Systems (later acquired by Oracle). CFO Tim Cabral has held financial management positions at Peoplesoft and other technology companies. Detailed knowledge of the specific needs of the pharma and biotech segments, gives Veeva a leg up over its competitors, many of whom have only general knowledge of the life sciences sector.
Veeva has a strong balance sheet, which features $438 million in cash and no debt, and continues to generate very solid cash flow, all the while growing the business, while running at a 30 percent operating margin in the most recent quarter.
Constant Contact (NASDAQ: CTCT) of Waltham, Massachusetts is the category leader in email marketing software, with a cloud-based subscription software service that helps over 550,000 companies mount effective marketing campaigns, and maintain a continuous line of communication with customers and prospects. Though the company lost focus last year with an over-exuberant thrust into the social media market, Constant Contact, has, in the last several quarters returned to a more disciplined sales approach, and has added over 10,000 gross new customers in each of the last two quarters. We think it highly probable that CTCT will end 2013 with close to 600,000 active customers.
Constant Contact targets more than 20 million small and mid sized businesses in the U.S., as well as non-profits, including trade associations, schools, churches, hospitals and libraries. Constant Contact’s core email marketing product improves the quality and frequency of interaction with customers, constituents, and prospects, while reducing the costs associated with expensive, and often wasteful direct mail.
Three years ago Constant Contact offered only one product, email marketing, but now has six: online surveys, event marketing, social media marketing, local deals, and digital storefronts for small businesses. Each of these products target large addressable markets inside the company’s existing customer base, as well as new segments, which are receptive to the company’s affordable pricing. The new products have thus far been modest revenue contributors, yet signs are pointing in the right direction, as the company has demonstrated that its customer retention rate is 20 percent higher among customers that opt for two or more products, and 40 percent higher among customers who subscribe to three or more products.
CTCT has been slow to address overseas markets, but its products are used in the English language in over 100 countries. We believe the company will have a large addressable market overseas once it begins to roll out foreign language versions of its products.
Constant Contact, despite having made a dilutive acquisition, which cost the company over $65 million in cash, maintains a stellar balance sheet with nearly $100 million in cash, no debt, and negligible receivables. The company anticipates generating over $20 million in free cash flow this year, and not long ago initiated its first-ever share repurchase program, with an authorization for $20 million.
Constant Contact’s improving prospects coincide with a recent acceleration of M&A activity in the marketing automation sector led by Salesforce.com’s purchase of ExactTarget, and Oracle’s recent acquisition of Eloqua. Constant Contact’s large installed base, improving business model, growing portfolio of products, and untapped potential at the mid-range of the email marketing market are among its most alluring attributes, which may yet lift it above, rather than below many investors’ radar screens.
Data backup, storage, and recovery systems, once affordable for only the largest corporations and elite government agencies, are now accessible to mid-sized corporations, small businesses, and every day PC users. The sea change has occurred largely as a result of falling storage costs. Six years ago, the storage cost per gigabyte (GB) was $10.00. The price fell to $4 per GB in 2008, and to $2 per GB in 2011, according to data gathered by IDC. As an insurance policy against hard drive failure, accident, and theft, low priced hard-drives, flash drives and discs have become common for consumer and small business data back up.
The falling cost of storage has made it compelling for consumers to store more data on their computers, including storage intensive media, such as pictures and videos. At the same time, the proliferation of mobile computers, including laptops, notebooks, netbooks and tablet computers, coupled with smart phones have created a need for more frequent backup, as the probability of loss or theft has risen significantly. 247 million laptop, notebook and netbook computers were shipped around the world in 2010, along with 146 million desktop PCs, according to market researcher IDC. Tablet PCs have quickly arisen to contribute another 10 million –plus units annually.
The rising use of the internet for all things digital, and the increasing trust that consumers and small businesses place in cloud computing, with its data encryption technologies and storage on remote servers located in often far away data centers, has created a new market for data backup, based in the cloud, and accessible at an affordable price.
Carbonite’s initial focus and by far the lion’s share of revenue that drives the business today is the home-based Windows and Mac market, where consumers pay a nominal $59 per year fee for an insurance policy against the aforementioned risks. Competition is widespread in this market, with some companies offering free storage, or storage bundled with other products. Nevertheless, Carbonite has developed a series of competitive advantages based on its brand awareness, which emphasizes trust, as well as its technology infrastructure, and, thus far, management execution.
Carbonite has many competitors in both the consumer and small business segments, as the barriers to entry to the market are quite low. However, just like in the early days of cloud-based salesforce automation, when Salesforce.com amassed a large market position based on the simplicity of its solution, combined with strong sales and marketing, so too does Carbonite have the opportunity to gain share in its addressable market, despite the existence of many competitors at this stage of the market’s development.
In the consumer market, Carbonite faces competition from a large number of little known players, as well as large behemoths, that have seized upon data storage as a way to keep customers in the fold. Thus, Apple, through its iCloud service, Microsoft, through its SkyDrive service, and Amazon.com, for its Kindle Fire tablets, is bundling free storage services with their products. While this poses a threat to Carbonite’s rate of growth, the company’s affordable, easy to access service, which emphasizes backup and restore –not just storage—across multiple computer platforms, should enable the company to achieve solid growth.
In the small business market, competitors include Symantec, McAfee (now a division of Intel). Both companies bundle backup and restore capabilities into their security software suites, but the products are not easily accessed, and are often difficult to use. EMC’s Mozy division delivers cloud-based backup, and currently serves over 70,000 small businesses through its subscription-based services. While EMC has made more than a symbolic entry into the cloud-based backup and storage market, the company continues to derive the lion’s share of its sales from large disk storage systems which it sells to large corporate customers that utilize their own data centers, rather than harness storage in the cloud. Rackspace Hosting also competes in the market, and other competitors include Dropbox, Box, CommVault, Databarracks, and Zamanda.
With its new $229 and $599 small business backup service, Carbonite will be quite competitive with other small business offerings on the market, including those offered by Mozy, Backblaze, and DropBox. The Carbonite offerings will be anywhere from 20 to 75 percent less than equivalently packaged configurations from these competitors, based on current prices.
Investors long accustomed to thinking of Google as the leader in online search and Amazon.com as the king of commerce may be surprised to learn of the growing rivalry–some might say hostility— between the two companies. Only last week The Wall Street Journal suggested that Google may be speaking with brick and mortar retailers about a one day shipping service that would up the ante on Amazon’s two day free shipping service, which it provides to its most elite customers. If the report is true, one would surmise that Google could only have had the intent of taking Amazon off guard, in advance of the critical holiday shopping season.
Given the vast no man’s land which defines the border between ecommerce and online search, one may ask where the seeds of this now bitter rivalry were sewn.
We would speculate that it began with Google’s bold online book initiative, in which it sought to scan the world’s out of copyright book collection ensconced in the bowels of the nation’s great universities, including the University of Michigan. With the intent of making hard to find texts available online for the first time, Google’s ostensibly altruistic effort, lauded by researchers, became the object of scorn among the world’s publishers and authors who resented Google’s efforts to corner the market on out-of-print, and out-of-copyright books, without due consideration to paying author royalties.
Amazon.com, no doubt looking to fend off a challenge to its position as the world’s dominant online book reseller—which, by the way includes used, out of print, and out of copyright books—saw it as an obvious threat to its franchise. Thus, it joined forces with Microsoft and others to fend off the Google challenge.
To make a long story short, a period of détente began to emerge between Google and Amazon.com when Google sensibly abandoned or at least temporarily suspended its book initiative. Amazon.com, in keeping with its sophisticated yet sphinx-like approach to ecommerce (see Amazon.com: ecommerce Sphinx), began to sell Google’s internet PC on its website. Amazon.com, in a gesture of rapprochement, selected Android as the operating system for its new tablet, the Kindle Fire.
Dissatisfied with the pace at which the rest of the world was adopting Android, Google suddenly, in our opinion, lost patience with the pack of Android licensees, and purchased, out of left field, Motorola’s Mobility unit, whose Xoom tablet places it in direct competition with not only Apple, but Amazon.com.
Thus, the ante has been upped in the tablet wars, with Amazon.com’s Kindle Fire an increasingly sure bet to become the number two tablet in the next 12-18 months. This probability may have been realized only recently by the Googlers, and serves to explain—or at least better understand—its controversial decision to acquire Motorola’s phone and tablet group.
In a brief but crystal clear announcement Monday morning, old school software giant Oracle (NASDAQ: ORCL) announced that it would acquire customer service software pioneer RightNow Technologies (NASDAQ: RNOW) for $43.00 per share or roughly $1.5 billion. Oracle’s generous valuation of 6.6 times RNOW’s projected 2011 revenue provides the latest evidence of old school, client software companies’ interest in cloud computing.
Founded by CEO Greg Gianforte in 1997, and based in Bozeman Montana, RightNow Technologies sells a suite of software products that help companies improve customer service, while reducing support costs. From its heritage in website customer support, RNOW expanded into several adjacent segments, including marketing automation, call center management, online chat, and, most recently, social computing for customer service. With an average order size of about $100,000 per customer per contract, RightNow provides hosted, or what is more commonly referred to as cloud-based services for its customers. Thus, there is no need to purchase the software outright.
Over the years, RightNow has developed a solid presence in online customer service, a critical component of customer relationship management, and can now boast the leading market position in this segment. The company serves a broad array of roughly 2,000 customers.
In November of 2010 RNOW closed a $170 million convertible debt offering, and, more recently completed the acquisition of Q-Go.com, a Dutch-based company, for which it paid $34 million. Q-Go.com offers natural language search technology that helps large banks, travel services, and telecommunications companies improve the quality of customer service on their websites.
Ironically, Right Now began fourteen years ago as a client server software company, selling on premises perpetual license software. Several years ago the company began a painful and courageous transition to adapt its core technology to harness the many benefits of cloud computing. Over the last two years, RNOW managed to grow steadily and predictably, with a top-line growth rate of roughly 20 percent, across a broad number of industries.
Oracle’s generous valuation of 6.6 times RNOW’s projected 2011 revenue, and roughly 5.4 times projected 2012 revenue, indicates the length to which client server software companies may go to improve their prospects in the public cloud. The valuation appears to be on par with other publicly-traded cloud-based software companies, such as Salesforce.com (NYSE: CRM) , athenahealth (NASDAQ: ATHN), SuccessFactors (NASDAQ: SFSF), and others.
We do not doubt that there may have been other interested bidders for RNOW, such as Salesforce.com and/or SAP—both of whom seek to extend their presence in cloud computing. However, our sense is that Oracle’s generous offer leaves little chance for an alternative bidder to emerge successfully.