AVEVA sells to engineering firms (EPCs) and owner/operators in oil & gas, power, shipbuilding and other end-industries. The oil & gas industry has really never flagged and the demand for more power generation capacity (conventional and nuclear) continues to grow. The biggest concern in AVEVA’s end-industries for the last 5 years has been shipbuilding. Perhaps that’s now behind us, as AVEVA said that South Korean shipbuilders helped boost revenue to record levels for traditional shipbuilding and offshore projects.
CEO Richard Longdon told investors that he’s seen a gradual shift over the last 4 to 5 years in how the large South Korean shipbuilders approach offshore contracts. They’ve gone from being fabrication subcontractors to big U.S. engineering firms, to offering design expertise in addition to construction. It’s not a far stretch from their shipbuilding backgrounds, and shipyards in Europe and North America are looking at expanding their offering to include offshore. There’s also new life in traditional shipbuilding, as Mr. Longdon cited statistics showing shipyard order books growing and orders exceeding completions for the first time in 5 years.
With the outlook for its end-industries strong or improving, AVEVA was very optimistic in its earnings release. The FY14 (ended March 31, 2014) details:
- Total revenue was £237 million, up 8% as reported and up 10% in constant currencies (cc) even as H2 revenue was negatively affected to the tune of £7 million due to strengthening British Pound.
- The Engineering & Design Systems business continues to drive AVEVA, accounting for nearly 90% of total revenue. EDS revenue was up 12% (up 14% in constant currencies) to £212 million. It sounds as though a lot of this growth was due to the recovery noted above in the South Korean shipyards, where customers tend to buy in the traditional up-front/maintenance scheme.
- The Enterprise Solutions business continued to struggle, as long sales cycles and cuts in discretionary spending made selling difficult. ES revenue fell 16% from FY13 to £26 million in FY14. Even so, ES counts as wins in FY14 the rollout of AVEVA NET at the massive Chevron Gorgon project. Indeed, AVEVA says that the ED pipeline remains strong, and that in 2014/15 it will focus on selling the entire portfolio to Owner Operators, which should pull ES solutions as well.
- In part to deal with the problems in trying to sell ES and EDS products with different teams to the same customer, AVEVA has rejiggered its go-to-market approach, building what it calls the ‘One AVEVA’ philosophy. One set of products, sold in different ways (and with different value propositions) for owners, EPCs and shipyards, and across its target industries. The goal is to improve cross-selling between the engineering and data management product lines, and better identification of opportunities. Mr. Longdon told investors that he “felt we might have been leaving money on the table by having sales force more aligned with products than customers”.
- By revenue category, annual fees (aka maintenance revenue) was £54 million, up 5%; rental revenue was £110 million, up 11%; initial license revenue was £48 million, up 14%. Training and other services revenue was £22 million, down 11%. AVEVA didn’t say, but it’s likely that the services decline was due to slipped/cancelled ES implementations.
- Regional performance was mixed, as we’ve heard from other engineering software providers. Revenue from EMEA was up 4% (reported and in cc) to £112 million. Within the region, growth in Central and Western Europe was characterized as good, driven by sales to EPCs; and to the oil & gas, petrochemicals, chemicals and conventional power verticals. The company reported weak economic conditions in Russia and the Middle East.
- Revenue from Asia Pacific was up 19% to £87 million (up 23% in cc) as the South Korean shipyards continue to grow their presence in the offshore oil & gas industry. China was “tough” but India was “good” due to wins in the Indian naval expansion projects, downstream oil & gas (refineries, etc.) and both conventional and nuclear power projects.
- The Americas continue to be problematic. As other have reported, business in Latin America slowed as Brazil delayed investment in oil & gas projects; North America, however, had a “good year”, as companies gear up for the shale gas boom that’s driving investment in liquefaction, refinery capacity and gas transport. In all, revenue in the Americas was down 2% as reported (but up 2% in cc) to £39 million.
AVEVA said that it’s investing in North America to capitalize on the growth on oil & gas; in the Middle East to capture more business with owner/operators; and in India as the nation builds out its oil & gas and power infrastructure. None of this is surprising, but it does highlight AVEVA’s intention to be close customers, wherever they happen to be, and to get more entrenched with plant owners and operators. After all, it may take a decade to design and build a power plant, but it may have a 50, 60 or even 70 year operational life. Which gets to the acquisition intentions, below. But first,
Interest in AVEVA’s Everything 3D (E3D) continues to build. AVEVA isn’t yet disclosing revenue from E3D products, but CFO James Kidd did say that it was in the “single-digit millions” in FY14. He added that he’s not measuring success by E3D’s revenue contribution at this point, but is encouraged by the number of major EPCs who are “committed to using it on new projects starting pretty much immediately”. EPCs often buy pools of tokens that can be used for any AVEVA product, making it easy to switch between E3D and PDMS — and, eventually, transition completely to E3D. Mr. Longdon made a point of mentioning that AVEVA is able to keep to its pricing targets, which had E3D cost at least 15% more than PDMS at list (though it’s reasonable to assume that not everyone pays list price).
I spoke with one E3D early adopter last month who told me that he’s betting on E3D to help him jump ahead of his competitors because of how easily it merges laser scan data and CAD. He’s starting small, on a single project, to grow expertise but ultimately sees 30-40 people using E3D as their workload grows. This seems to be fairly typical: teams just jumping in with E3D and not using PDMS and E3d side by side, as we’ve seen in other CAD generational changes.
One tidbit that’s sure to set hearts aflutter: In prepared remarks, Mr. Longdon said that “Acquisitions remain a high priority for us as we execute our strategy to build our presence in operations, and scale our business around the world, particularly in North America and we expect them to continue to compliment our own Research & Development efforts.” Operations, here, means plant operations and the context is around products, not service delivery. Mr. Longdon appears to be looking for new ways to leverage design and construction data in operations, and is interested in acquiring technology to add to the AVEVA platform. There are many directions AVEVA could take: preventative maintenance planning and execution, spares management, asset performance measurement, resource scheduling …
The news was generally good for FY14, though it is worrisome that AVEVA highlighted a tightening on discretionary spend as a reason ES didn’t fare so well in last year. AVEVA must work harder to prove the value of AVEVA NET and that it is not, at all, a discretionary or optional part of the IT infrastructure for these large projects. Like PLM for the auto/aero world 10 years ago, it’s a slow climb.
While the tone of the earnings release was definitely upbeat, AVEVA, like most British companies, didn’t give guidance for FY15. London City analysts are modeling total revenue of about £261 million, or growth of 10%. And that’s before any possible acquisitions. It’s going to be an interesting year!