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IPO Research, Stock Research, The Battle Road IPO Review

Houghton Miflin Harcourt: a New Story to Tell

Houghton Miflin Harcourt logoHoughton Miflin Harcourt (NASDAQ: HMHC) is the merger of Houghton Miflin, the storied Boston book publisher, whose roots go back to 1832, and Harcourt Education, an educational publishing company, which was acquired by Houghton Miflin for $4 billion in 2007. Through a complex web of mergers, acquisitions, divestitures and private equity financings too complex to review here, the company has emerged as an independent entity, with over 85 percent of its sales coming from educational materials focused on the K-12 education market in the US.

Based in Boston, Massachusetts, the company came public on the NASDAQ in an 18.3 million share IPO on November 13th 2013, led by Goldman Sachs, Morgan Stanley, Citigroup, Credit Suisse, Wells Fargo Securities and six other investment banks. Notably, all of the IPO proceeds went to selling shareholders and none to the company. Consensus expectations call for revenue of $1.48 billion and EPS of $0.11 in 2014, up from $1.38 billion and a loss of $0.79 in 2013. Post IPO, HMHC has $425 million in cash and $246 million in debt. At a recent share price of $21, the company’s market cap. is roughly $2.9 billion.

Since September of 2011, HMHC has been led by Linda Zecher, president, CEO, and director. She is formerly corporate Vice President of Microsoft’s Worldwide Public sector group, an $8 billion business unit.  With its primary focus on the US K-12 market, HMHC sells educational materials, including books, software, reference and teaching guides, and digital software, which are utilized for both core curriculum purposes, as well as supplemental learning. The company targets an addressable market of 132,000 public and private elementary and secondary schools in the US which spent $30 billion on instructional supplies and services in 2011. In addition, HMHC publishes trade and reference books, including adult and children’s fiction and non-fiction titles, including Curious George, and Camen Sandiego, as well as the renowned reference guides Cliff Notes, and Webster’s New World Dictionary.

HMHC’s growth strategy calls for creating and leveraging digital content, including its wealth of story book characters into compelling educational material, expanding its curriculum and supplemental learning product and services offerings, focusing on new service and instructional content for early childhood development and workforce reentry, and targeting foreign markets with high quality English language instructional materials.

Risks to the HMHC story include the fact that K-12 educational spending in the US remains heavily tied to state and local budgets, many of which are still struggling even as the US emerges from recession. Another key risk is the company’s unproven track record for overseas sales, as sales outside of the US account for less than six percent of total revenue currently.

Cloud Based Software, Internet Equity Research, IPO Research, Software Equity Research, Stock Research, The Battle Road IPO Review

Veeva Systems: Focused on Pharma

veeva-logoVeeva Systems (NYSE: VEEV), a provider of cloud-based sales force and content management software to the bio pharma industry, is a relatively new addition to our Battle Road IPO Review Software coverage. Consensus estimates call for revenue of $276 million and $0.24 in earnings in fiscal year 2015 (ending January 31, 2015).

Based in Pleasanton, CA, Veeva was founded in 2007, and known originally as Verticals onDemand. The company changed its name to Veeva Systems in 2009. Veeva launched its IPO on the NYSE through the issuance of 15 million shares on October 21, 2013, priced at $20.00 per share. The company sold 11.7 million shares, and selling stockholders sold the remainder, as the company raised roughly $216 million, net of bankers’ fees. The transaction was led by Morgan Stanley, Deutsche Bank Securities, Pacific Crest, Stifel, Nicolaus, Wells Fargo, and Canaccord Genuity. Post-IPO, the company sports a $2.7 billion market capitalization.

Veeva serves pharmaceutical and biotech companies with a series of solutions that manage interactions between drug company sales reps and physicians, as well as a content management vault that is utilized by drug companies to manage the content relating to clinical trials, quality management, manufacturing, sales and marketing. Importantly, over 95 percent of sales comes from its CRM product.

Veeva Network, a third product set, was recently introduced in November, and appears to be a data vault which is populated with customer-specific information, and is sold as a subscription to pharma and biotech companies. Roughly 60 percent of revenue comes from North America, with the remainder from overseas markets.

Veeva’s software is sold typically as a one-year subscription, and software accounts for about 70 percent of total sales, while implementation fees account for the remainder. This relatively high level of implementation fees indicate that Veeva’s customers require a fair amount of customization of the base-level product. Software products grew by over 90 percent in the most recent quarter, while services were essentially flat. Gross margins on subscriptions run in the 70 percent plus range, while services margins are in the mid twenties. Veeva’s non-GAAP operating margin was 18 percent in the most recent quarter.

For its CRM product, Veeva tallies the addressable market at roughly 450,000 direct sales reps from the drug, animal science, and consumer health industries. Veeva acknowledges that this number has not changed much in the last several years, but that the company’s opportunity is to replace client server software from the likes of Siebel Systems (now Oracle), as well as homegrown contact management systems that are less robust.

Veeva’s platform is based on Salesforce.com (NYSE: CRM), and it pays royalties to
Salesforce.com for the base level platform on which its software is built. That said, it does compete against Salesforce.com, as some companies prefer Salesforce’s generic functionality and lower sales price. Veeva also competes against Cegedim, a French-based healthcare IT company that offers mobile sales force automation solutions specifically tailored to the bio-pharma business, in part due to its acquisition of Dendrite, a US company. To see how Veeva Systems screens against its software peers within the Battle Road IPO Review Software coverage universe, please contact: info@battleroad.com.