AVEVA has big Q4 but subs transition to slow F23 before picking up steam

Apr 27, 2022 | Hot Topics

AVEVA today gave a more extensive-than-usual financial update on fiscal 2022, the year ended March 31. We’ll get the full earnings release in early June, but the company disclosed today that overall revenue was up 7% in fiscal 2022, with Q4 revenue up 18% in Q4 due to its OSISoft acquisition. (The data in today’s news were all in constant currencies.)

Other tidbits:

  • This release didn’t include any actual numbers, so this is my guess: Total revenue for fiscal 2022 was likely around £1.2 billion — we’ll get real numbers on June 8
  • ARR was up 9%, slower than expected as traditional AVEVA customers switched to subs while the transition of OSISoft customers has just started
  • That said, AVEVA expects ARR to accelerate to 15% to 20% growth per year in FY23 and then maintain that growth rate through FY26
  • The company also said that it continues to see very low churn, customers who defect, at around 3% per year — that’s about average for PLMish companies and highlights the sticky nature of these technologies
  • It also said that it is able to maintain this low churn even when it increases prices, by an average of 5% to 10% per year — to me, this means AVEVA is able to continue to add value to its offers
  • End-markets may be improving. AVEVA said it is seeing Energy customers renewing contracts early, and in some cases increasing the volume of purchase, and that it’s seeing orders in infrastructure, marine, and in nuclear and renewables
  • Cross-selling and contract expansions are ahead of plan –selling OSI into AVEVA accounts and the opposite– and is expected to increase as the company develops more integrated solutions
  • The war in Ukraine is having an effect: “AVEVA has ceased new business in Russia. The Group continues to support existing non-sanctioned companies where there is no legal basis to terminate contracts. Russia is a relatively small market in the context of the Group, representing around 2% of revenue in FY22.” Maintenance customers who are not sanctioned could be renewed but it is apparently a very complicated process and it’s possible that AVEVA will not pursue that business. TBD. AVEVA intends, over the longer term, to make up this lost revenue from other regions
  • I believe CFO Brian DeBenedetto said that cloud product revenue grew 25% in Q4 but represents only 2% of total revenue — encouraging progress that caused AVEVA to pull planned cloud investment forward, to the tune of £20 million in fiscal 2023, to help accelerate the move to subs

All of that leads AVEVA to this: “revenue growth is expected to be lower in FY23 than in FY22 and adjusted EBIT margin is expected to reduce, before resuming growth in FY24.” That’s the cumulative effect of the subs transition and its revenue recognition, ramped-up investment in the cloud, wage inflation in a tough hiring environment, and lost revenue in Russia.

Even so, the company reaffirmed its longer-term goals through fiscal 2026, of a revenue Compound Annual Growth Rate (CAGR) of around 10% in constant currencies, recurring revenue of over 80% of total in FY26 due to the transition to subscriptions, and cloud adoption.

My biggest takeaway from today’s announcement? It seems that OSI customers want to switch to subs as quickly as they can, which drags down FY22 and FY23 revenue and puts pressure on AVEVA’s selling and subs-management infrastructure. But that’s a good problem to have.

We’ll learn more on June 6.