Schnitger Corporation

Exa: strong end to FY14; optimistic for FY15

EarningsExa Corporation, maker of PowerFlow and related CFD applications, reported results last night that delighted investors enough to boost the share up 11% at the open and up 4% as things calm down a bit in mid-day trading. One investor wrote that the combination of two consecutive quarters of double-digit growth and better-than-expected revenue guidance for Q1 and fiscal 2015 were cause for an upgrade on the stock. What does it all mean? Read on.

The details:

For the year, Exa reported revenue of $54.5 million, up 12% y/y and up 14% in cc, versus guidance of $53.5 million to $55.0 million. License revenue was $44.6 million up 8% as reported and up 11% in cc. Project revenue was $9.9 million, up 29% as reported and up 33% in cc. Exa reports adding 17 new license customers in fiscal 2014, most in heavy vehicles, bringing the total to over 125.

In FY2014, 50% of revenue was from Europe; 23% from the Americas and 27% from Asia and other regions, versus 45% of revenue from Europe, 24% from the Americas and 31% from Asia and other regions in FY2013. Exa CFO Ed Furlong said that there was growth in all regions for the year, and highlighted growth in Europe during Q4 as automotive OEMs develop cars there for global sales. Mr. Remondi said that sales in Japan continued the rebound that began in Q3 and “looks very strong continuing into FY 2015”.

What’s important here is the trend: the year ended stronger than it began and Exa’s project revenue often signals future license deals. (Recall that Exa’s engagements typically start with a consulting gig for a specific project, to prove the technology and teach users; once the trial run is successful, the client buys licenses to continue with a lower level of Exa support. Classic “buy a fish/teach to fish” model.)

CEO Steve Remondi told investors that Exa’s largest vertical segment, passenger vehicles, “demonstrated continued strength, reflecting the robustness of this market. Automotive OEMs and suppliers engaged in many initial deployments of new applications [in Q4]. This segment is also pushing Exa to accelerate development, as customers respond to regulations including stricter CO2 requirements in Europe and other parts of the world”.

Mr. Remondi said that the company saw increased interest from aerospace and that the heavy vehicle market is starting to improve, though unevenly.

In all, it leads to optimistic guidance for Fiscal 2015: Q1 revenue between $13.8 million and $14.2 million, higher than the analyst consensus of $13.7 million; and FY2015 revenue of $60.5 million to $63 million, versus a consensus of $60.3 million. That would be growth of about 12% in Q1 and 11% or so for the year. The company doesn’t break out license and project revenue growth targets, but Mr. Furlong hinted at double-digit license growth for the year.

The company does still forecast a GAAP net loss for Q1 of around $1.0 million as it continues to invest in R&D and beefing up its technical sales capacity to meet anticipated customer interest; for the year, it expects a GAAP net loss of around $1.5 million.

A couple of other interesting tidbits: Exa highlighted its relationship with RTT during the earnings call, which led to the question of what will happen now that Dassault Systemes acquired RTT. Mr. Remondi said that Exa has “gotten commitments through RTT of their continued commitment to their product strategy and licensing strategy … Other of our products are based on other Dassault entities, namely Spatial Technologies. [It’s] obviously, something we have to keep an eye on [in case] there is any change of business strategy. But nothing of note in the near term.” One can infer that DS is pursuing a similar course with other RTT partners.

It’s no secret that Exa is focusing its R&D investments on expanding capabilities in ground transportation while also growing its products for aerospace and oil and gas. Mr. Remondi said that the R&D roadmap is “accelerating” as customers in automotive and highway truck ask Exa to “bring capabilities forward in time – regulatory changes are forcing them to get more accurate, more realistic simulation capabilities. We’ve made the decision to start ramping up that R&D effort [in FY 2015] to get to those tasks, to add to the products. I don’t think we had anticipated that the need would come as quickly as it has. The good news is, as we deliver these capabilities, the demand for simulations will continue to grow and grow substantially from this regulatory stuff that’s coming out in the next few years.”

In all, momentum seems to be building for Exa, with regulation continuing to push customers and prospects towards simulation. Exa’s ability to execute during the project phase of its client engagements while speeding up R&D will determine how FY2015 unfolds — but it looks like it’s going to be a good year.

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