AVEVA’s F19 revenue up 12% on reinvention & execution

It’s always hard to pick out one factoid from a company’s earnings release, but I think this one says much about how AVEVA is doing: 13 months after swallowing / being swallowed by the larger Schneider Electric Software (SES), the company reported total pro forma revenue of £775.2 million, up a whopping 12%.

Why’s that the key point? Because it’s too easy to get lost in the other stuff, of how the businesses are being combined with office consolidation and IT harmonization — it’s important to streamline processes and control costs, but that’s not, ultimately, what buyers care about. They want to know that the products they rely on to run their businesses are being extended and enhanced, if their favorite support people are available to help when needed — that stuff. Cost containment efforts rarely make customers happy, yet AVEVA has managed to balance that with positive initiatives that lead to customers engaging a lot more than they have been.

And, since I make a big point about trying to go for audited numbers whenever possible, why do I focus on a pro forma numbers here? Because it’s almost irrelevant to look at absolute growth in the case of a large acquisition. In absolute terms, AVEVA is now 58% bigger than it was a year ago — pretty meaningless, since that’s all acquired revenue. The pro forma numbers are squishier, yes, but also more indicative of the trajectory the company finds itself on.

Enough. The details:

• Pro forma revenue for the combined company was £775.2 million, up 11.9% as reported and up 12.4% in constant currencies. As reported, revenue was up 58% to £766.6 million
• By category, revenue from rentals and subscriptions was £219 million, up a massive 40% for three reasons: First, AVEVA is focussed on growing recurring revenue, so sales teams are incentivized to steer customers towards that option. Second, a number of big and multi-yer SimSci deals came up for renewals this year, which causes lumpiness but is, ultimately, a good thing. Finally, the company benefitted from accounting rules that let it recognize some revenue up-front revenue on some multi-year contracts. CFO James Kidd indicated that fiscal 2020 is likely to see a more moderate growth rate, in the mid-teens to 20% range for rentals and subscriptions
• Revenue from support and maintenance was £202 million, essentially flat. This is due, in part, to fewer perpetual sales in prior years that spawn lower maintenance in subsequent years, and also to customers who switched to subs at renewal
• Revenue from perpetual licenses was £212 million, up 6% on sales growth in the Monitoring & Control products, which did not have a subscription option until recently
• Finally, services revenue was £142 million, up 5% on demand for initial implementations of Asset Performance and Planning & Operations products
• Interestingly, CFO James Kidd told investors that AVEVA saw a general trend for larger deals and longer contract terms. No details but something to watch — it’s a solid indicator that customers like the new AVEVA’s direction
• Mr. Kidd also said that it appears that revenue from AVEVA grew 14% while SES grew 11%. These aren’t apples-to-apples comparisons, but Bentley said earlier this month that it grew around 7% last year (but across many verticals and domains), while Hexagon said its Process, Power and Marine business also grew 7% in 2018. We can’t read too much into these numbers, since each company is at a different stage in the whole perpetual/subscriptions thing and accounting rules allow different styles of recognition — but, still. It appears that AVEVA’s legacy engineering and design solutions are growing faster than the rest. Taking share? Perhaps. Growing the market? Also possible
• By business unit, Engineering (the design and simulation software assets) represented 43% of total revenue (or about £333 million) and delivered revenue growth in the high-teens. AVEVA said it saw “solid” revenue growth in all core product areas “with substantial revenue synergies coming through cross-selling to large customers”
• Monitoring & Control, the Human to Machine Interface and Supervisory Control and Data Acquisition (HMI SCADA) products, represented 32% of total revenue (£248 million). Customer software upgrades and favorable end market conditions “drove mid-single digit revenue growth, with a particularly good performance from channel sales”. AVEVA is in the process of launching its Flex subscription licensing model to these legacy SES customers, and expects this to make selling simpler for its channel partners
• Asset Performance Management (APM) represents 14% total revenue (or £108 million) and grew around 20% in fiscal 2019. AVEVA said this is due to its ability to combine design and engineering information with real-time and historical operating data. This, plus model-based machine learning for predictive asset analytics enables its users to create maintenance execution workflows
• Finally, the Planning & Operations business, 11% of total revenue (£85 million), saw “high single digit revenue growth during the year, despite a planned reduction in sales of services”
• By geo, on a pro forma basis, revenue was up across the board. Revenue from EMEA was £318 million, up 20%. AVEVA said it delivered growth end-markets, including Marine; in the second half of the fiscal year. The company also saw “strong demand in downstream Oil & Gas, with competitive wins across Spain, Italy and Turkey” and ave shout-outs to wins in Food & Beverage, Power and Mining, and Automotive
• Revenue from the Americas was £274 million, up 10% as reported. AVEVA said it closed large orders in North America (typically Intergraph-land) with EPCs and in Oil & Gas sector
• Importantly, AVEVA said it saw good growth through its channel partners in North America, as end users modernize and upgrade Monitoring & Control software (from the legacy SES offering). This matters because channel sales are one area where the legacy AVEVA struggled — see below
• Finally, revenue from Asia was £184 million, up 3%. The company saw good growth in China’s Oil & Gas end-market, but the Marine market continued to be subdued, which impacted Japan and Korea.
• By channel, indirect sales represented one-third of total revenue and grew by “solid double digit[s] overall and broadly spread, with around two-thirds of our distributors growing revenues by more than 10%”. Roughly 10% of that channel revenue is via Schneider Electric while the rest is mostly from a group of resellers who came to the party via WonderWare. AVEVA is paying more attention to this important element of go-to-market, bringing onboard new channel leadership —Kerry Grimes, formerly of PTC and Siemens/UGS— and working with the channel to develop cross-selling opportunities
• By end-market, the legacy AVEVA saw over 45% of revenue from Oil & Gas, mostly upstream (oil rigs versus downstream refining). The new AVEVA generates around 40% revenue from the vertical, but with more diversification, reporting that 15% of total revenue comes from upstream projects, 15% from downstream and 10% to mid-stream. This matters because economic and political cycles may make upstream projects harder to get off the ground; we always need heating oil and gas, meaning the downstream and midstream can be less affected. By being in all three major segments of this market, AVEVA cushions itself somewhat from these cycles
• For fiscal 2019, AVEVA said that it “benefited from a slight increase in capital expenditure related to upstream Oil & Gas projects, growth in mid-stream as pipeline capacity expanded and ongoing digitalization in downstream, particularly by national oil companies”
• Other end-markets account for 5% to 10% each of total revenue. results were mixed. The Marine market “remained subdued, although strong sales execution drove wins in growth areas, such as the construction of cruise ships, and product upgrades”
• Less cyclical end-markets, such as Chemicals/Petrochemicals, Packaged Goods (which in AVEVA’s definition includes Food & Beverage and Pharma) and Metals & Mining and Power are “increasing [their] use of technology to drive efficiency”, which can only be positive for the new AVEVA
• Last thing: AVEVA Cloud revenue tripled in F19 (but only to 1% of total revenue, so teeeny). With most of the portfolio now enabled to run in the cloud, AVEVA has a total to 57 enterprise cloud customers (up from 20 a year ago). Expect more on this, as it’s an R&D and sales focus for FY20

CEO Craig Hayman told investors that AVEVA’s fiscal 2019 was so successful because the company is able to capitalize on increased interest in digitalization, even in old-line industries and companies.

My take? What he said, plus a revitalized product set, cross-selling and a systematized go-to-market. Schneider Electric hadn’t invested as much as it should have in its software assets; AVEVA is refreshing that product set and, where, relevant, integrating it with legacy AVEVA products. That’s incredibly powerful, but it’s meaningless unless it’s sold in a way that’s modern and consistent across products, geos and customer accounts. Mr. Hayman and his team created a global account process that targets cross-selling opportunities at key customers and are standardizing contractual terms, better managing discounting and putting in place company-wide licensing mechanisms. All of this makes it easier for customers to do business with AVEVA and to manage the resulting software installation.

Mr. Hayman had a good analogy to explain the opportunity he sees for AVEVA: We used to buy word processing software from one vendor and a spell checker from another. Doesn’t it make more sense to buy an integrated product from one supplier? That’s what AVEVA is aiming to do with its portfolio so that process designers, for example, can iterate with 3D designers on capital projects. For existing facilities, he operators to have access to original design and engineering intent. That ability to use data that’s already created across the life of an asset is a powerful vision.

Today’s AVEVA is most certainly not the AVEVA of a few years ago. Three times the revenue. Five times (I dunno – 8? 11?) the software titles in the portfolio. A lot more sales teams, a real indirect channel, a concerted approach to selling … Fiscal 2020 is going to be very interesting.