AVEVA’s F12 ahead on all counts

It’s hard to come up with a single headline. Total revenue: £195.9 million, up 13% and ahead of analysts’ forecasts of £192 million. Profit before tax of £62.3 million versus median estimate of £61.5 million. Cash balance of £178.9 million against estimates of £173 million. Dividend higher than expected. The only fly in the ointment: AVEVA NET sales grew 24% to £23.5 million while analysts had expected revenue of £26.7 million — but that can be explained by conservative accounting policies that pushed revenue into future periods. Result: share price up 11%, the biggest jump since late 2008. CEO Richard Longdon summed it up this way: “During the year AVEVA continued to invest significantly in our long-term strategy through product innovation, new office openings in close proximity to our customers and a major investment in and restructuring of our business in China. Decisions made and implemented at the start of the year seemed like tough choices in the first half but persistence has shown these to be the right choices for the long-term health and growth strategy and they contributed positively in the second half.” Indeed. The details:

• AVEVA last year reorganized into two lines of business and now reports results for each. Engineering & Design Systems is its historic core, focused on the engineering solutions PDMS and AVEVA Marine, and by far the larger of the two. Total revenue for this business unit was up 11% to £173 million. Recurring revenue was up 20% to £21 million, while software rentals were up 30% to £87 million. Initial license fee revenue was down 12% to £33 million.
• LFM Software, the maker of laser data capture software acquired in October, contributed under 1% of growth, or about £1 million. This is lower than my estimate, but that’s likely because any royalties LFM (as Z+F Software then) was getting from AVEVA are no longer part of the economic equation. As far as I can tell anecdotally, sales of LFM are up over last year.
• The other segment, Enterprise Solutions, focuses on building out and bringing to market the company’s AVEVA Net and MARTS platforms. Revenue was up 24% to £24 million in fiscal 2012, as the company grew its implementation capability both internally and through partners. On an organic basis, revenue was up 14% for the year, implying that ADB and Logimatic (acquired in 2010) contributed about £2 million. Investors remain concerned about the operating loss of £4.4 million from this segment, but it is an improvement of £1.5 million on 2010/11, when the loss was £5.9 million. The company expects Enterprise Solutions to hit breakeven in fiscal 2013.

• By type of revenue, initial software license revenue declined 9% to £37 million as some customers opted for software rentals and as sales lagged in China (apparently biased towards perpetual licenses). As a result, recurring revenue hit 70% of revenue (or £138 million) for fiscal 2012, up from a typical mid-60 percent range. Services revenue was £21 million for the year, up 31%, as the company implemented more AVEVA NET installations.

• The geographic picture was good, though uneven across the regions. Revenue from EMEA increased 21% to £93 million on strength in Central and Western Europe and Russia.
• The company’s restructuring in China slowed performance in the first half of the year, but improved in the second half. In total, revenue from Asia Pacific was £64 million, a decline of 3% from last year. Mr. Longdon says that the new office in China is a “well structured, well managed and integrated business … which we are confident will provide a solid platform for growth in the future.” CFO James Kidd said that “The performance of our restructured China business continued to strengthen in the second half of the year and generated some notable customer wins. We are optimistic that our strong organisational foundations and promising opportunity pipeline will drive a much improved performance from China in 2012/13.”
• Revenue from the Americas turned in the most surprising performance, given the slow start in the first half. Total revenue for the year was £38 million, up 24%, driven by an consistent strength in Brazil and an improved second half performance from North America. Mr. Kidd characterized the competitive conditions as “tough” in here but said the climate improved a bit in the “second half of the year with a number of EPC customers placing additional orders”.
• AVEVA has been growing its presence in China, Russia and Brazil and will, in the coming year, conduct a major push in India to improve its reach to Indian companies, in addition to supporting the India-based engineering offices of its European and American customers. The timing of this push coincides with an expected expansion by the Indian navy, which will modernize its fleet and, depending on what one reads, make it larger than China’s by 2030. Selling and supporting AVEVA Marine, MARS and AVEVA Net in a project of this size could be very lucrative for AVEVA.

• AVEVA operates in essentially three core end-markets: oil and gas, power and marine. AVEVA characterized demand from the oil and gas and power verticals as “strong” in fiscal 2012, with “a notable number of new ‘mega projects‘” that use products across the portfolio. AVEVA sees this trend continuing, as the higher price of oil and gas makes exploration and exploitation of fields that lie further offshore or are deeper more economically viable.
• The company characterized the power business as uneven, as the public wrangles with conventional versus nuclear power generation, but as strong in general and says its solutions are used across the spectrum of oil, coal and nuclear-fueled plants.
• The marine market was characterized as “subdued”, and is likely to remain “depressed for at least another two years”.
• One emerging area for all of the infrastructure software suppliers (not just AVEVA) is mining. These companies have typically been technology-averse but competition, an aging workforce and increased mechanization as a result of safety and environmental concerns are spurring demand for design and operational software solutions. To boost its competitive standing, AVEVA has opened a Mining Centre of Excellence in Chile as part of its expansion plans in Latin America.

AVEVA ended fiscal 2012 with a net cash balance of £179 million (up from £153 million). Such a strong cash position always begs the question: acquisitions, R&D investments, share repurchases or dividends? AVEVA is recommending a dividend of 17.0 pence for the second half (bringing the total dividend to 21.0 pence per share), an increase of 15%. But the company certainly isn’t ruling out more acquisitions, with Chairman Nick Prest saying that that it remains interested in “further acquisitions that enhance our product offerings and/or our penetration of key geographies and end markets.” Like many European companies, AVEVA doesn’t provide forward-looking guidance, other than to say that it is “confident about the prospects for 2012/13”. London City analysts aren’t as shy and are forecasting revenue of £217 million, or growth of 11%. That seems a bit low given the bocad acquisition already announced, and the likelihood that more deals are in the pipeline, but it’s a good start.