Q: How do you put together two very different companies, in the hope that 1+1 > 2?

A: Very carefully.

AVEVA today reported that revenue for the first half of fiscal 2019 were £343 million, up 11% as reported and up 14% in constant currencies (cc). Excluding the boost that AVEVA says it got from changes in contract periods, with some customers renewing early, the company says that revenue was up 9%.

That’s impressive. Think about it: lots of people in new jobs; lots of new people, period. Reorganizations, combining offices (even if no one was let go, moving is disruptive!), not yet able to sell fully integrated products — and the company still reported growth. In other instances, sales stall as employees and customers try to figure out the new order.

COO James Kidd told investors that the integration of AVEVA with Schneider Electric Software is progressing well and is being done in stages to minimize business disruption; he said that R&D and sales are furthest ahead. CRM, ERP and all of that stuff is underway.

The details, keeping in mind that these were two separate companies a year ago, so comparisons are on a pro form “as if” basis:

• Total revenue for the first half of 2019 was £343 million, up 11% (up 14% cc) on stronger growth from the heritage AVEVA business and more moderate growth from the former Schneider Electric Software brands. Early contract renewals contributed about 3% to growth, and multiyear contracts with change in accounting treatment added another 3%. In all, as Mr. Kidd said, a solid start for the new group
• By type of revenue, rental and subscription revenue was up 50% (up 53% cc) to £78 million as AVEVA focuses more on this type of transaction. Too, accounting rules allow it to recognize upfront more of a long-term contract total. Interestingly, the company said that revenue from rental and subscriptions in the Americas grew 83%, driven by “new customer wins for engineering and process design software and Asset Performance Management software.” In contrast, EMEA subs revenue was up 38%. Too early to tell if this was due to specific deals or if this is a trend. Overall, taking out the contract switches, underlying growth in subs was 18%
• Initial fees/perpetual revenue was £97 million, up 4% (up 7% cc). EMEA was the standout here, with revenue growth of 31% due to “a strong performance from the indirect channel for the Monitoring and Control products and a large deal signed with MW Werften for AVEVA Marine and other engineering products for the design of cruise ships in Germany”. Again, too early to tell but bears watching
• Support and maintenance revenue was £99 million, up 2%. The company said that “renewals were generally holding up” even as some customers in the Americas switched from typical support and maintenance to a rentals contract — I expect to see more of this as AVEVA rolls out its subscription offering- dragging down support and maintenance revenue while boosting subscriptions
• Training and services revenue was up 4% (up 6% cc) to £69 million
• By product area, Engineering (the design and simulation products) remains the largest business area. It “continued to perform well in the first half”, with revenue growth in the “low double digits”. This was driven by the heritage AVEVA portfolio, particularly the 3D products. CEO Craig Hayman reports making good progress integrating the process engineering and engineering products, and in delivering engineering tools (E3D, for example) that are available on-prem and in the cloud
• Interestingly, AVEVA said that it had signed major contracts with “customers including KBR, MV Werften, and EDF” — each of which is also a highlight customer for a competitor. Mr. Hayman said that EDF, in particular, is a long-standing customer of AVEVA’s design tools, and AVEVA doesn’t see that changing
• AVEVA’s Monitoring & Control business, aka the Schneider Electric HMI SCADA products, also saw revenue growth, albeit at a slower “low single digit” rate. AVEVA says this is due to “good performance from the channel, particularly in Europe and North America”. Here,  increased business with Schneider Electric.
• Asset Performance Management (APM) was the fastest-growing area of the portfolio in the first half. By AVEVAs definition, this includes AVEVA Net and PRiSM. This is where the combination of AVEVA and Schneider Electric is so interesting. I don’t have a timeline, but I can see how AVEVA does/will combine engineering information with real-time data gathering and analysis to create actionable intel for asset operators.
• Revenue in Planning & Operations was up by the low single digits, including the impact of lower services revenue
• By geo, revenue from EMEA was £132 million, up 22% (up 24%cc)  reflecting “better conditions in the oil and gas vertical, a large win in the marine vertical and a “major multi-year contract” with a global Engineering, Procurement and Construction (EPC) firm that bought from the full “menu” of the new AVEVA: process simulation from the Schneider side, and engineering from the AVEVA side
• Revenue from the Americas, revenue was £125 million, up 6% (up 11% cc) on strength in the legacy Schneider Electric Software indirect channel selling the Monitoring & Control portfolio, specially WonderWare
• Finally, revenue from Asia was up 3% (up 5% cc) to £87 million, with strong sales to oil and gas and marine customers. The company highlighted “good performance” in China and India
• By channel (yes, the new AVEVA has channels), the company reports “improving execution from the direct sales force”, about 67% of revenue,  and “good performance” with revenue up 12% from its indirect channel, about 33% of revenue
• Interestingly, AVEVA said that “sales of Cloud products grew strongly across all business areas and included demand from our top 100 customers” — in other words, it’s not just for small companies.

One of the levers AVEVA discussed at its Capital Markets Day in September was pricing. The two legacy companies looked at this very differently, and it makes for a confused order book. Today, Mr. Hayman said that AVEVA intends to simplify terms and conditions, making AVEVA easier to do business with. He also highlighted that the company would be more consistent in its use of discounting and in implementing previously agreed price increases. Customers may not like that last one, but imposing order seems to be something the new AVEVA leadership is keen to do.

Another thing the company wants to do is move to more recurring revenue, raising it from a total of 52% of total revenue in FY2018 to over 60% in the next few years. As we know, perpetual sales are lumpy; recurring revenue gives a business more visibility and stability. AVEVA has two ways of getting to that 60% target: growing the software proportion of total revenue as part of the revenue and increasing the rental and subscriptions contribution of new software revenue. Why do they believe this is possible? Because, as with every other software type, rentals and subscriptions offer customers more flexibility, lower up-front costs and simplified pricing.  In AVEVA’s historic end-markets, project work prevailed, so the ability to quickly add and drop subscriptions or change from one type to another to suit workloads was key. In the legacy Schneider Electric Software businesses, not so much. Over the rest of fiscal 2019, AVEVA plans to introduce subscription offerings for it Monitoring & Control products. Then, presumably, to more of the portfolio. Is it working? Yes. In H1 F2019, AVEVA saw a slight uptick, to 52% of total revenue.

What does it all mean? I’m impressed — the combination hasn’t even gelled yet, and it’s already growing. Customers and prospects seem to be excited by the potential; now it’s up to the company to deliver.

AVEVA’s second half is usually the bigger one, and it’ll have a tough comparable because of a large deal in the fiscal fourth quarter. AVEVA doesn’t give specific guidance, but the London City consensus is for full-year revenue of £735 million, up 5% as reported. I think that’s a bit low, especially given Mr. Kidd’s view on mid-single digits growth in the second half. But we’ll see!