There’s been a lot of investment and acquisition activity among engineering software companies, but very little of the “going public” hoopla that recently surrounded Facebook’s IPO. Will this week’s possible IPO of CFD maker Exa change that? The Boston Globe thinks so, reporting that Exa, maker of PowerFlow and other CFD codes, is expected to offer shares to the public this week. Exa originally filed a registration statement with the US Securities and Exchange Commission last August, but has recently been updating its filings every couple of weeks, so even if the IPO isn’t this week, it’s likely to be soon.
Exa is the third-largest provider of CFD solutions, reporting revenue of $46 million for the year ended January 31, 2012, up 21% from the year earlier, and says that revenue for fiscal Q1 was $11 million, up 10%. The bulk of the company’s revenue comes from licenses, which represented $39 million in revenue in F12, up 26%. Project revenue, which the company recognizes from services engagements to both implement PowerFlow and related products and to carry out analytical projects on behalf of clients, was $7 million in F12, down 2% from the prior year and down a sharp 18% from two years earlier. The company was profitable for its fiscal 2012 and 2011, but recorded net losses in the three prior years.
Among the many factoids in the S-1, I found the following most compelling:
- Exa has grown its license revenue renewal rate from 80% in F10 to 91% in F11 to 97% in F12, and reports that it’s targeting 85% to 100%. The dip in fiscal 2010 (which was really almost exactly calendar 2009) likely has something to do with the recession and troubles in the auto industry in 2008 and 2009, but may also be due to peak demand by some customers that wasn’t repeated in subsequent years.
- Exa depends on a few very large customers for the bulk of its revenue. In the first quarter of the current fiscal year, for example, Renault contributed 15% of revenue and Toyota, 9%. In total the company’s top 10 customers contributed 69% of revenue. As Exa points out to prospective investors, this is risky, since even a small reduction in PowerFlow usage by these customers could have significant impact on Exa.
- One (unnamed) Exa customer expanded its usage of PowerFlow by “a factor of over 50 times over a period of six years.” Assuming that the first year was an evaluation year, perhaps both of the concept of CFD and the PowerFlow suite, that’s a significant increase in usage in a very short time. This speaks to the real-world benefits of CFD and how its adoption can change a company’s product design process.
- Exa offered the example above (the 50x purchasing increase) in a statement on risk to investors, “the significant cost of implementing our solutions pervasively throughout their organizations under a capacity-based licensing model may deter our customers from widely adopting our solutions, which could limit out prospects for growth.” We shouldn’t underestimate this — until the cost of CAE, in general, comes down to the point where its use is so inexpensive that it can become truly routine, this risk will continue.
- Revenue in fiscal 2012 was up 21%, yet growth appears to have stalled in the first quarter of fiscal 2012, as total revenue was up only 10% to $11 million. Part of this is a typical seasonal slowdown in the company’s first quarter, but it does appear more pronounced this year.
- In FQ1, 2013, license revenue was up 9% to $10 million, with $242,000 of the $800,000 increase from new customers and the rest from increased capacity for existing customers — I don’t believe I’ve seen a company report that metric before and find it’s an excellent way to gauge truly new growth.
- Exa is investing heavily in R&D, spending $14.4 million, or 31.5% of revenue, in fiscal 2012 to “maintain and extend [its] technology leadership and competitive position”. For comparative purposes, ANSYS is far more typical of engineering software companies and invested 16% of its 2011 revenue in R&D.
Exa is offering 6,250,000 shares at a price of $11.00 to $13.00 per share, which would raise between $69 million and $80 million. Of this, one third of the shares come from selling stockholders FMR LLC (associated with Fidelity) and InfoTech Fund I LLC (owned by the shareholders and employees of FMR), leaving about $45 million for Exa to use for “general corporate purposes” which Exa identifies as paying outstanding loans, making acquisitions and, well, generally running the business.
If all goes to plan, Exa Corp. will be listed on the NASDAQ Global Market as “EXA”.
An interesting note is that Exa says it is “an emerging growth company within the meaning of the recently enacted Jumpstart Our Business Startup Act … and will be subject to reduced public company reporting requirements.” I’m not sure what, exactly, that means and will blog again when I find out. I am personally not in favor of relaxed reporting standards, since stockholders of all sorts of levels of financial sophistication will be investing on a public market to buy shares in Exa — but if the costs associated with that compliance can be made less burdensome, then it’s a good thing.
Note: This may be a reasonable time for you to review the Schnitger Corp. disclosure, linked to below. In a nutshell, no one here can buy shares of Exa. Further, I used to work as a lowly peon for Jack Shields, Chairman of Exa’s Board of Directors, back when we were both at Computervision — although I seriously doubt he even knows who I am.