AVEVA’s FY16 was OK, despite end-market turmoil
Most of the questions I am asked these days revolve around three things: the cloud, licensing models and how does the situation in end-market X affect vendor Y. Lately, X = oil and Y = AVEVA because of the massive uncertainty in the oil and gas world due to geopolitical machinations in the supply. My answers tend to be: not yet, messy and it’ll be OK, in that order.
AVEVA announced results yesterday that confirm my “it’ll be OK” hypothesis and also address their own version of cloud and licensing models. More after the details:
- Total revenue for fiscal 2016, ended March 30, was £202 million, down 3% as reported. On an organic, constant currency (occ) basis, revenue was £204 million, down 2%. Acquisitions 8over8, acquired in January 2015, and FabTrol, acquired in June 2015, contributed £6.9 million
- By category, revenue from annual fees (ie maintenance) was £63 million, up 4% (up 5% occ); revenue from rentals was £91 million, down 7% (down 4% occ), while revenue from initial license fees was £29 million, down 6% (down 3% occ). Finally, revenue from services was £18 million, down 6% (down 6% occ)
- No earnings release nowadays is complete without some sort of statement about cloud and alternate licensing models. CEO Richard Longdon told investors that AVEVA is still noodling on this and will have a more extensive statement later in the year, but said this week that a SaaS delivery model will become more valuable to its customers over time, and that more than 1,000 customers had tried out the cloud version of AVEVA E3D, called AVEVA EXPERIENCE.
- By geo, AVEVA reported revenue of £72 million from Asia, up 6% (up 7% occ), as growth in China offset continued pressure in South Korean shipbuilding, CFO James Kidd said that growth here was in all territories, as the AVEVA sales teams focussed on selling to asset owner/operators in power and chemical industries in China and ro naval, power and refineries in India.
- Revenue from the Americas was £28 million, down 24% (down 33% occ), on ongoing weakness in Brazil and flat revenues in North America. Mr. Kidd says we should view the decline in this region as a deterioration but as a combination of a large 2-year deal that close last year and was not repeated this year (it was 2-year, get it?) and that weaker sales to EPCs with exposure in offshore markets were offset by sales to owner/operators
- EMEA was “steady”, as revenue of £102 million was down 2% (but up 4% occ)
- By end-industry, oil and gas still makes up the single largest block of revenue, at 40% of total. As you know, decreased capital spend in oil and gas disproportionately affects AVEVA, which has historically seen a significant proportion of that oil industry revenue come from offshore, arctic and deep water projects. When those slow down, the engineering contractors and owners don’t need as many licenses of AVEVA’s design solutions, and AVEVA’s revenue growth stalls. What’s notable is that the stall seems to be leveling (or already has) leveled off. AVEVA reported in April that its largest, global accounts continued to renew rental contract as expected (so no further drop-off) and that AVEVA was even able to raise prices in some situations.
- AVEVA has been working hard to reduce its dependence on offshore oil and gas projects (as have AVEVA’s biggest EPC clients). AVEVA has been focusing its sales teams on downstream and onshore oil and gas as well as petrochemicals and chemicals — all adjacent areas that have traditionally favored Intergraph or other solutions. These projects can be big but don’t typically involve the same engineering challenges as an offshore platform, and so favor less complex design solutions and a solid collaboration platform; AVEVA NET, E3D, AVEVA Engineering and AVEVA Engage cater directly to this type of project.
- Like Intergraph, AVEVA is now starting to dip its toe into the AEC market, as many of the same challenges hit the building construction EPCs. AVEVA has an advantage, though, in that its acquired Bocad and FabTrol address steel fabrication.
- Power remains an interesting variable in AVEVA’s end-market equation. India and China are expected to significantly ramp up their investment in nuclear and conventional power, which could further shift AVEVA’s revenue balance away from oil and gas.
Mr. Longdon said that AVEVA E3D continued to see good uptake, and even accelerated in the second half of fiscal 2016, to account for about 10% of total revenue. That’s up from 5% in fiscal 2015 — so went from something like £10 million to £20 million; not a major part of the story yet but remarkable when so many customers were hunkered down. That’s good for AVEVA, of course, but also highlights a truism from any downturn: those who take advantage of a lull to reposition themselves to offer new services to their customers can emerge stronger than when the downturn started. Many of AVEVA’s early E3D adopters are doing just that.
One final note on fiscal 2016: all of that acquisition stuff with Schneider Electric last year didn’t come cheap. AVEVA reported pre-tax profits of £29 million, down 46% from the prior year in part because of the costs related to the merger/deal/acquisition. But that hasn’t soured the company on acquisitions in general; the company’s comments on uses of cash all spoke of augmenting organic growth with “selective acquisitions … adding new product capabilities and accelerating access to new markets.”
Mr.. Longdon threw out an aggressive challenge during his call with investors: “Our goal is to be the fastest-growing engineering software provider”. How? Strong cash flow means having the wherewithal to grow by acquisition. The company’s More Than 3D sales initiative incents reps to broaden the customer’s view of AVEVA, and open the possibilities for more cross-selling. Capitalize on the momentum of E3D, both as platform and as a reference for SaaS/cloud capabilities. Extending into adjacent and new markets, like BIM. Growing its presence into asset owner operators by focusing on information integrity and access. And by aggressively targeting competitor accounts to take market share. [That last isn’t a new initiative.] “Fastest-growing” assumes a lot that is outside AVEVA’s control, such as a bounce back in oil and gas projects — but it’s a great objective to rally the troops around.
AVEVA doesn’t offer guidance the way US companies do. The consensus published in the Financial Times is for revenue of around £209 million. That would be modest growth of about 4%.