AVEVA enters fiscal 2021 betting on digitalization

As foreshadowed back in April, AVEVA today reported revenue of £834 million up 9% (and up 7% on an organic, constant currency basis, cc). CEO Craig Hayman and Deputy CEO/CFO James Kidd gave a lot of great, additional information on how the world and their business have changed since April, and we’ll get to that after the details:

• By type, Subscription revenue was £317 million, up 45% (up 43.2% cc)
• Maintenance revenue was £202 million, up 4% (down 1% cc) as AVEVA actively incentivized sales resources to move customers to subscriptions — and as the AVEVA Flex program took hold, which offers consumption-based subscriptions
• Together, that’s AVEVA’s recurring revenue category, which totaled £519 million in F20, 62% of total revenue– up from 53% of total a year ago
• Perpetual license revenue continued its planned decline, to £179 million, down 15% (down 17% cc)
• Finally, Services revenue was £136 million, down 5% (down 5% cc) as AVEVA shifts its focus to performing high value, software-related services (and offloads other types to its expanding network of partners)
• AVEVA does not break out Cloud revenue but said that it saw “growth of some 200% in Cloud orders” [emphasis mine; note, not revenue] on new and expansion orders from existing customers. Mr. Hayman told investors on the earnings call that the last quarter saw the conversation shift from “don’t talk to me about cloud” to “how quickly can we get going” as companies responded to work from home pressures
• By geo, revenue from EMEA was up 4% to £327 million, driven by growth in Russia/CIS, in the oil & gas, power, and industrial markets. The other parts of EMEA saw flat to mid-single-digit growth, reflecting the economic environment and subdued North Sea oil activity. AVEVA reports closing “a number of key deals” across its end-markets as well as expanding its footprint at existing EPC customers
• Revenue from the Americas was £279 million, up 2%. The company said Brazil “performed very well” while North America and Latin America “grew”. AVEVA said that the decline in services revenue was “higher in the Americas than other regions as AVEVA continued to reduce the Services element of its pipeline Monitoring & Control business”
• Finally, revenue from Asia was up 27% to £228 million driven by strength in Australia and India. Interestingly, “China was on track for an outstanding year before the impact of Covid-19 hit the [March] quarter. Despite that, China still delivered double-digit growth for the year”
• By business unit. Engineering was up 7% cc to £359 million, including 25% growth in subscription licenses
• Monitoring & Control reported revenue of £259 million, up 3% cc, including a The Business Unit achieved approximately 150% increase in subscriptions following the introduction of AVEVA Flex. AVEVA reports “solid growth in the core Wonderware business … [and] particularly good [growth] in consumer packaged goods and life sciences [veticals]”
• The Asset Performance Management unit reported revenue of £117 million, up 12% cc. with 250% growth in subscriptions, Overall growth was led by AVEVA Predictive Analytics
• Finally, revenue from Planning & Operations was £100 million, up 13% cc on “particularly good growth from Planning & Scheduling and Asset Optimisation”
• By end-industry, AVEVA seems to have seen a steady performance. Oil & Gas was around 40% of revenue (as compared to 40-45% a year ago), while Packaged Goods (in which AVEVA includes Food & Beverage and Pharma), Power, Marine, Chemicals & Petrochemicals, and Metals & Mining each accounted for 5-10% of total revenue. AVEVA makes this point to show its diversification away from oil and gas – and from the upstream part of that market most affected by OPEC’s manipulation of oil markets. In general, it seems like customers across the verticals are focusing more on digitalization as a means to business continuity and a means of increasing efficiency, lowering risk and improving profitability
• Mr. Hayman, who divides oil & gas into energy and fuel, gave a bit more insight: We always need energy, but the sharp reduction in fuel consumption as we stopped flying and cut down on driving as a result of Covid-19 mandates led several oil majors to announce reductions in capital expenditure. That could have a negative impact on some of AVEVA’s EPC customers. But, “most of these EPCs have multi-year subscription contracts [with AVEVA] with a minimum spend, which provides some insulation for us”
• Indirect sales represent 1/3 of total revenue and the channel “performed well, achieving growth across all regions”. The channel is increasingly enabled to sell more AVEVA products, such as AVEVA Asset Performance Management (APM), in addition to its historic focus on Monitoring & Control. And towards the end of the year, AVEVA introduced the AVEVA Select, which provides partners with the opportunity to distribute the full AVEVA portfolio

Mr. Hayman’s opening remarks on the call with investors covered the highlights of the results and the company’s experience of Covid-19: AVEVA “successfully navigated COVID in the final quarter of the [fiscal] year. COVID has changed the world, and we expect the disruption to continue for the first six months of fiscal 2021”. Later in the call, he said that “COVID is a substantial challenge but our hands are firmly on the wheel of this business, and we are very rapidly making decisions, choices, and taking action to maintain alignment around our strategy and medium-term guidance”. My take: this isn’t over, by any means, and businesses need to stay agile and adjust to changing conditions. A case pinpoint: Mr. Hayman said that AVEVA’s offices in China were the first to close and the first to reopen. The company is taking lessons learned there, on both sides of the closing, and applying them worldwide as it becomes appropriate.

Speaking of China, revenue from China was up in the “double digits” for the year, leading one investor to ask if China was back to business as usual. Mr. Hayman said that “Signs are good, energy consumption, manufacturing output, etc. are all up. China is entering the renewal phase” (in Mr. Hayman’s response — recovery — renewal model of Covid-19) but not yet at plan.

On cost-cutting: Mr. Hayman and Mr. Kidd both emphasized that the cuts were to discretionary items –travel, new hires, raises– and not to core research and development. Interesting (perhaps only to me): AVEVA’s 250 scrum teams shifted to working from home and may even have increased productivity. And, said Mr. Kidd (I think): AVEVA is looking at how it will work in the future, and comparing that to pre-Covid.

Take those two together, and it seems as though many of the things we’re hearing pundits talk about are being pondered in real life: who will work where? Why? What do they need to be productive, there? And the bigger questions: do we all need to be in offices? What about those people who travel a lot, anyway–do they need offices? How does that work if hot-desking is not allowed? What does a largely-remote workforce do to company culture?

About deals: Mr. Kidd said that it is harder to close (larger) perpetual deals and that there was some, minimal disruption in closing contracts in the March quarter — a few deals did slip out of fiscal 2020. I’m trying to find out if they’ve already closed.

Mr. Hayman told investors that Covid-19 has brought digitalization sharply into focus for many of his manufacturing prospects as they start to work out how to navigate whatever their new “normal” is. He said that solutions like AVEVA’s Unified Operations Centre expand from oil & gas into new verticals, to provide an integrated view of engineering, operations, and performance across their fleet of assets. As investments in new capacity become harder to justify, he said, companies will look to digitalization to build and maintain –and then, protect– the profitability of their current assets. AVEVA, Mr, Hayman said, is well-positioned to take advantage of those trends.