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Why This Could Be the Next $1 Billion Cloud Company

October 5, 2016, 3:07 PM UTC
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So far, three software companies selling their applications strictly as cloud services have topped $1 billion in annual revenue—Salesforce (on its way to $10 billion), ServiceNow (NOW), and Workday (WDAY).

Veeva Systems, a specialist in customer databases and apps for pharmaceutical firms and life sciences companies, could well be the next.

Last year, Veeva (VEEV) declared its goal to reach the $1 billion mark by 2020. After its annual financial briefing last week, several analysts following the stock closely issued reports suggesting that the company is tracking ahead of that goal, including Morgan Stanley (MS) and Pacific Crest Securities. For fiscal 2017, which ends Jan. 31, Veeva projects revenue between $525 million and $528 million.

“Veeva is a leading example of the move to the vertical cloud,” wrote Pacific Crest, in its post-meeting report. “The company’s strong vertical expertise has enabled it to take share from existing vendors. In addition, because it sells to a relatively small audience of large life sciences customers, its customer acquisition costs are lower than those of other SaaS peers.”

One big reason for this optimism is momentum behind Veeva’s latest product, a content management system called Vault. The software acts as a digital archive where organizations can share documents and data while staying true to the industry’s strict regulatory and compliance requirements.

As noted by Morgan Stanley in another report published last week:

Roughly five years after its initial launch, Vault continues to grow faster than the company’s original CRM offering and is tracking ahead of cumulative sales generated by the CRM product during its initial five years. Unlike CRM, Vault is going after a much larger potential market opportunity, addressing a broad number of use cases across the life sciences value chain (eg. early clinical trials, regulatory compliance and manufacturing), so the sustainability of that growth is much higher.

The Vault software could account for more than 30% of Veeva’s subscription revenue in fiscal 2017, which is double its contribution two years ago. That’s ahead of plan, and that’s in large part because many customers are buying more than one Vault application, Veeva CEO Peter Gassner tells Fortune. Roughly 200 of Veeva’s 450-plus customers are using Vault, including 35 of the top 50 pharmaceutical concerns. The client list includes Fortune 500 drugmakers AstraZeneca, Merck and Pfizer.

“It’s quite unusual for a company to have its second application be bigger than the first,” Gassner says.

For perspective, Vault accounted for only $10 million in annual revenue when Veeva went public three years ago. Now, the product has a $150 million annual run rate, he says.

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As of Tuesday, Veeva has a powerful new partner in its mission to reach $1 billion, Microsoft (MSFT). Under a technical relationship between the two companies, Vault is tightly coupled with the cloud editions of Microsoft’s Office applications including Word, PowerPoint, and Excel.

“It gives companies a complete audit trail, and there is no question as to where documents are being stored,” Gassner says.

Veeva also disclosed an intriguing relationship with Zoom, a company that sells video and web conferencing services. The Zoom technology now shows up as a feature within Veeva’s customer relationship system Engage. That will allow life sciences sales reps to share presentations with doctors more easily while ensuring that the information they’re showing would stand up under compliance scrutiny.

The influence of vertical software specialists is probably larger than you realize, and the migration to cloud computing is strengthening their resolve. Research firm Gartner figures industry apps collectively generated $114.8 billion in revenue for 2014, an annual growth rate of about 6%. Considered in aggregate, that’s approximately 27% of all software sales.

Aside from Veeva, another player to watch closely is Vlocity, a cloud specialist in customer relationship apps for the telecommunications and insurance sector founded by former Siebel executives. For the past two years, Vlocity—which in September raised another $50 million in funding—has been the fastest growing company among developers that sell specialize in software sold on the Salesforce AppExchange (CRM).

This story was updated to clarify the technical integration between Microsoft and Veeva.