AVEVA’s CQ2 revenue down/flat cc but ARR up

Jul 28, 2022 | Hot Topics

AVEVA released one of its quick-and-cryptic investor communications this morning. It said revenue in the June quarter declined at “a mid-single digit rate … on a constant currency basis” but was “flat on a reported currency basis, supported by the strengthening of the US dollar, which accounts for the majority of AVEVA’s revenues.”

So, what happened? AVEVA gave three reasons for the lackluster results:

1. “This was due to a decline in Perpetual licenses, which have upfront revenue recognition” — the main reason companies have been so leery of changing this license model to subscriptions. AVEVA doesn’t say whether it lost deals altogether or that customers preferred subs; let’s hope it’s the latter. Since AVEVA is driving customers to subs, this is likely to continue — the company today sees almost 70% of revenue from subs

2. “a strong comparator in the prior year“. That’s the trouble with these year/year comparisons. We don’t have enough information to infer whether this was down more than the typical Q4 to Q1 dip, but the company did say that the third reason for the revenue decline/flattening is

3. “a pull forward of order wins into Q4 FY 2022 ahead of the price increase.” We’ll just leave that there–customers know what’s coming and are smart in timing their purchases. And, of course, AVEVA benefitted from reporting a strong Q4 that included these deals …

One bright spot: “The Group saw very strong growth in Cloud revenue, driven mostly by order wins in the prior financial year.”

AVEVA also uses annualized recurring revenue (ARR) as a metric. ARR increased by “11% year-on-year in the 12 months to 30 June 2022, driven by growth in the annualised value of the Group’s Subscription and Cloud contracts.” That’s below the forecast of 15% growth, but up sequentially (from 10%). The company said that it expects “ARR growth to accelerate during the financial year. The list price increase implemented on 1 April 2022 will take effect on more contracts as the year progresses, in the context of a second half weighted contract renewal cycle. The Group also expects its focus on Subscription and Cloud to drive increasing ARR in subsequent quarters, which also typically have a greater weighting than Q1 in terms of new order wins and revenue.”

And more good news, echoing some of what Hexagon said yesterday: “AVEVA’s end markets are strong, particularly Energy, and the sales pipeline is solid for the remainder of the financial year.”

What does it all mean? Honestly, nothing all that unusual in this announcement. Customers buy what they want, when they want it — and if that’s subs when you were expecting perpetual, and it’s early in order to avoid price increase, so be it. The transition from perpetuals to subs has been rocky for all who’ve done it, and AVEVA is following the same pattern as everyone else: revenue dip before a return to growth. We’ll get more detail when the company reports half-year results in another three months or so.