# AVEVA benefiting from recurring revenue from multi-year contracts

- Link: https://www.directorstalkinterviews.com/aveva-benefiting-from-recurring-revenue-from-multi-year-contracts/412830510
- Published: 2020-06-09T07:35:36+01:00
- Author: Amilia Stone

**[AVEVA Group PLC](https://www.directorstalkinterviews.com/ftse-company/aveva-group/avv.l)**(
LON:AVV) has provided its results for the year ended 31 March 2020.

**Summary results**

| Year ended 31 March | FY20 | FY19 | Change | 
|   | 
| Revenue^(1) | £833.8m | £766.6m | 8.8% | 
| Recurring revenue^(2) | £518.5m | £412.6m | 25.7% | 
| Adjusted EBIT^(3) | £216.8m | £175.9m | 23.3% | 
| Adjusted EBIT margin | 26.0% | 22.9% | +310bps | 
| Profit before tax | £92.0m | £46.7m | 97.0% | 
| Adjusted^(3) diluted earnings per share | 108.15p | 86.60p | 24.9% | 
| Diluted earnings per share | 43.13p | 20.90p | 106.4% | 
| Final dividend per share | 29.0p | 29.0p | – |

**Highlights**

·     Revenue grew 8.8% to £833.8m (FY19: £766.6m)

·     Organic constant currency revenue^(4) grew 7.4%

·     Recurring revenue up 25.7% to £518.5m (FY19: £412.6m) representing 62.2% of
total revenue (FY19: 53.8%)

·     Growth across all geographic regions with Asia Pacific showing particular 
strength

·     Each of the Business Units grew, with strong growth in Asset Performance Management(
APM) and Planning & Operations

·     Successful introduction of AVEVA Flex subscription model supporting strong
growth in subscription

·     Cloud growth accelerating with an increase of some 200% in total contract 
value

·     Adjusted EBIT up 23.3% to £216.8m (FY19: £175.9m) with margins up to 26.0%(
FY19: 22.9%), in-line with expected progress towards medium term target of 30%

·     Strong balance sheet with cash and deposits of £114.6m, no debt and strong
cash collection post year end

·     Final dividend maintained at 29.0 pence per share reflecting confidence in
AVEVA’s resilience, strong balance sheet position and ongoing cash generation, balanced
with prudence regarding the global economic crisis. The Company has not furloughed
any employees or made any reductions to headcount related to Covid-19. We also do
not expect to utilise any government-backed financing

·     Business outlook resilient with digitalisation key to driving customers’ efficiency
and high levels of recurring revenue for AVEVA

> Chief Executive Officer, Craig Hayman said:
> “I am very pleased with AVEVA’s performance over the last year. The Group has 
> grown as we play a leading role in the digitalisation of the industrial world,
> which is being driven by a need for [sustainability](https://www.directorstalkinterviews.com/sustainability-green-stocks-news),
> the industrial internet of things, Cloud, data visualisation and artificial intelligence.
> At the same time, we continued to drive operational improvement in the business,
> which is increasing recurring revenue and margins.
> AVEVA’s team has adapted impressively to the current market and operating environment.
> The safety of our employees is paramount and I was very pleased that we managed
> to deliver a successful close to our financial year with 95% of employees working
> remotely. We are focused on being digital in everything that we do, accelerating
> Cloud and driving the roll out of our subscription offering, AVEVA Flex”.
> Looking forward, AVEVA is well placed to navigate through the challenges of the
> current environment, with the benefit of recurring revenue from multi-year contracts.
> AVEVA is in a strong position and our strategy and medium-term objectives remain
> unchanged.”

**Notes**

_^(1)__ Revenue is shown on a statutory basis. In FY19 revenue was also shown on
a pro forma basis._

_^(2 )__Recurring revenue is defined as subscription revenue plus maintenance revenue._

_^(3)__ Adjusted Earnings Before Interest and Tax (EBIT) and Adjusted Earnings Per
Share (EPS) are calculated before amortisation of intangible assets (excluding other
software), share-based payments, gain/loss on fair value of forward foreign exchange
contracts and exceptional items. Adjusted Earnings Per Share also includes the tax
effects of these adjustments._

_^(4) Organic constant currency revenue excludes the reverse acquisition accounting
adjustment to deferred revenue in FY19 and FY20; a currency translation benefit 
of £7.6 million; and adjusts for the disposals of Wonderware Italy, Germany and 
Scandinavia, and the acquisition of MaxGrip._

Webcast and conference call

AVEVA will host a conference call and webcast, for registered participants, at 09:
30 (BST) today.

To register for the webcast and access the presentation materials please visit: 
www.aveva.com/Investors

Conference calls dial in details:

Telephone UK: +44 (0) 2071 928 000 / 0800 376 7922

Telephone US: +1 866 966 1396 / +1 631 510 7495

Conference call code: 4799483

Conference call participants will be able to ask questions during the Q&A session
and are also advised to watch the webcast.

A replay of the webcast call will be made available later in the day.

**Chief Executive’s review**

**Summary**

AVEVA delivered good financial results achieving revenue growth of 8.8% and adjusted
EBIT growth of 23.3%, while continuing to drive a business model transition to subscription.
Recurring revenue increased as a proportion of total revenue to 62.2% (FY19: 53.8%).
This transition offers increased flexibility to customers, while generating long-
term value for shareholders.

The Group’s operating margin benefited from an improvement in gross margin, due 
to a better sales mix and increased operational efficiency, operational leverage
and underlying cost savings. At the same time, investment in areas including Sales&
Marketing and Research & Development was increased to help generate future growth.

**Covid-19**

AVEVA achieved a good close to its financial year, despite the challenges related
to Covid-19. The safety of AVEVA’s employees is paramount and the business has adapted
well to remote working.

AVEVA’s software drives efficiency gains for the industries it serves. As such, 
digitalisation is key in dealing with the challenges that these industries are facing,
for example helping drive efficiency in difficult operating environments and enabling
unmanned operations. The Group has been accelerating its Cloud roll-out, while increasing
investment in Cloud development, to provide flexibility for customers in how they
consume software.

Despite this, the overall level of macroeconomic disruption has had some impact 
on customer confidence and in certain sectors it has caused supply chain disruption,
making the overall business environment more challenging. Restrictions on mobility
are resulting in services being performed remotely where possible and we expect 
to see the ongoing and planned reduction in perpetual licences increase. This is
likely to lead to subscription revenues, which have continued to grow, comprising
a greater proportion of the total.

Against a more challenging revenue growth backdrop, AVEVA is taking actions which
are expected to result in a reduction in costs of approximately £50-60 million versus
the Group’s pre-Covid-19 plans for FY21. At this point, AVEVA does not intend to
make staff reductions in response to the economic environment, furlough any staff,
or make use of government support programmes. Savings will be generated from reductions
in discretionary spend, travel costs and lower costs from switching key events from
physical to virtual.

**Trading and markets**

The industries that AVEVA serves are making increasing use of technology to reduce
both capital and operating costs in the context of competitive pressures to increase
efficiency, output, flexibility and improve overall sustainability. This is being
enabled by ongoing technological mega trends that are driving the digitalisation
of the industrial world, notably the industrial internet of things, Cloud, data 
visualisation and artificial intelligence.

This is driving growth in demand for industrial software. AVEVA is optimally placed
to help its customers digitalise, due to its end-to-end product portfolio, which
runs from simulation through design and construction and into operations. In addition,
AVEVA has well-established market-leading positions serving the process, marine,
batch and hybrid industries.

AVEVA achieved growth across all its geographical reporting segments and Business
Units during the year.

**End markets**

AVEVA primarily serves process, batch, hybrid and marine industries. These industries
provide staple requirements for basic consumption, such as Energy, Food, and Transport.
As such, they have some level of resilience to the macroeconomic downturn.

AVEVA’s largest end market is Oil & Gas at around 40% of revenue, with around 10%
of revenue exposed to greenfield capex in the sector. The Group has become more 
diversified since the combination with the Schneider Electric industrial software
business. Packaged Goods (such as Food & Beverage and Pharma), Power, Marine, Chemicals&
Petrochemicals, and Metals & Mining each accounted for 5-10% of Group revenue. Other
markets include Water & Wastewater, Infrastructure and Discrete Manufacturing.

Within Oil & Gas the Group’s business is diversified across the capital and operational
expenditure phases of the asset lifecycle, with AVEVA supplying customers in the
upstream, midstream and downstream markets. AVEVA’s supply chain planning software
is particularly well placed to help customers adjust to the current market conditions.

The ongoing structural growth drivers in each of our end markets are strong.

In Oil & Gas, overall end market conditions were stable for most of the year, with
steady capital and operating expenditure across the upstream, midstream and downstream
segments. The Group won contracts with both owner-operators such as BP and Engineering
Procurement and Construction (EPC) customers, such as Worley. There was however 
a sharp reduction in oil consumption associated with the Covid-19 crisis towards
the end of the financial year. This has led to several oil companies announcing 
reductions in capital expenditure, particularly for upstream projects, which will
have a knock-on impact on the business of some of AVEVA’s EPC customers. Most of
these EPC customers have signed multi-year subscription contracts in the past two
years with a minimum level of spend, which will provide some insulation for AVEVA.
Tough market conditions also offer opportunities to drive further efficiencies through
digitalisation, particularly in operations, where AVEVA’s software can offer solutions
to supply chain planning challenges.

In Marine, AVEVA delivered a good performance, driven by product cycle upgrades 
and a large multi-year subscription contract win with Hyundai Heavy Industries in
Asia Pacific.

The Group’s other end markets are largely non-cyclical and are primarily driven 
by structural growth as industries make increasing use of technology to drive efficiency.
During the year we saw customer wins in the consumer packaged goods market with 
Procter & Gamble and Colgate Palmolive, the semi-conductor market with Micron and
the food and beverage space with the coffee division of Olam International, a leading
food and agri-business.

AVEVA has a strategy to grow in new markets, such as the infrastructure market around
cities, water and wastewater utilities, power utilities, facility and campus managers,
transportation operators and data centres. There have been several new customers,
particularly in smart cities, with the Unified Operations Centre and water and wastewater.

AVEVA recently launched its Unified Operations Centre for Datacentres in collaboration
with Schneider Electric, to provide a homogenous view of engineering, operations,
and performance across a heterogeneous, legacy installed base. Datacentre providers
will benefit from this partnership by connecting platforms and data sets that previously
existed in disparate systems. They will also be able to scale regardless of the 
number of sites or global location. Datacentre staff will be empowered to make faster,
more informed decisions and optimise asset and operational efficiency throughout
the datacentre lifecycle. As a result, datacentre providers can deliver a globally
consistent experience to address the expanding digital infrastructure needs of their
clients.

**Sales channel and geographical performance**

AVEVA delivered growth across all geographies and saw good execution from both direct
and indirect sales channels, the latter of which represented approximately one third
of total revenue, including sales made through Schneider Electric and leveraging
its end-to-end EcoStruxure architecture. The recent combined launch of a Datacentre
product, which will be taken to Schneider’s top global accounts, highlights the 
value of this relationship.

Performance from the direct sales channel was strong, benefiting from investment
and revised sales incentives.

The indirect sales channel performed well, achieving growth across all regions. 
AVEVA invested in and simplified its partner network, including enabling Schneider
Electric to process sales leads through this channel.

Growth was assisted by the sale of additional AVEVA products, particularly AVEVA
Asset Performance Management (APM), as channel sales moved beyond its historical
focus on Monitoring & Control.  Towards the end of the year, AVEVA introduced the
AVEVA Select programme, which provides our partners with the opportunity to become
distributors of the full AVEVA portfolio.

As part of the partner network simplification, AVEVA divested distributors in Italy,
Germany and Scandinavia. This had an immaterial impact on the financial results.

**EMEA:** Overall revenue increased by 4.1% driven by strong growth in Russia and
CIS in the Oil & Gas, power and industrial markets, supported by collaboration with
Schneider Electric. The other regions in EMEA produced flat to mid-single digit 
growth, reflecting the economic environment and subdued North Sea oil activity. 
There were a number of key deals in the food and beverage, power, water and marine
markets as well as expansion with existing EPC customers.

**Americas:** Overall revenue increased by 2.3% and grew in both in North America
and Latin America, with Brazil performing very well due to both expansion deals 
and new wins. The reduction in Services revenue remained higher in the Americas 
than other regions as AVEVA continued to reduce the Services element of its pipeline
Monitoring & Control business.

**Asia Pacific:** Overall revenue increased by 26.7% driven by good performance 
across the whole region. In particular, Australia and India were strong. China was
on track for an outstanding year before the impact of Covid-19 hit the fourth quarter.
Despite that, China still delivered double digit growth for the year.

**Business Unit performance**

AVEVA has four business units: Engineering, Monitoring & Control, Asset Performance
Management and Planning & Operations.

The Group is driving recurring revenue increases in all these divisions. In FY20,
over 80% of Engineering’s revenue was recurring, compared to 45% to 50% for the 
other business units.

**Engineering** consists of design and simulation software and contributed 43% of
total revenue. The Business Unit achieved approximately 25% growth in Subscription
licences, helped by the benefit from multi-year contracts signed in the year. Overall
revenue growth was approximately 7% on a constant currency basis, driven by growth
in design software.

**Monitoring & Control** represented 31% of total revenue. The Business Unit achieved
approximately 150% growth in Subscription licences following the introduction of
AVEVA Flex. Overall revenue growth was approximately 3% on a constant currency basis,
with solid growth in the core Wonderware business being partly offset by significantly
lower services associated with the pipeline SCADA due to a focus on higher margin
revenues and the disposal of distribution businesses. Growth was particularly good
in consumer packaged goods and life sciences.

**Asset Performance Management** represented 14% of the Group’s total revenue. The
Business Unit achieved approximately 250% growth in Subscription licences. Overall
revenue growth was approximately 12% on a constant currency basis, led by strong
growth in AVEVA Predictive Analytics. AVEVA’s APM offering is strongly differentiated.
It addresses the broadest dimensions of APM using design and engineering information,
real-time and historical operational data, and maintenance execution workflows, 
together with model-based machine learning for predictive asset analytics. Key wins
in the year included Suncor.

**Planning & Operations** represented 12% of the Group’s total revenue. The Business
Unit achieved approximately 70% growth in Subscription licences. Overall revenue
growth was 13% on a constant currency basis with particularly good growth from Planning&
Scheduling and Asset Optimisation. During the year, Discrete Lean Manufacturing 
software was launched to support digital transformation in the discrete manufacturing
market. The new offering improves operational efficiency through the digitalisation
of lean work management for both manual and automated production lines. The software
solution is used in Schneider Electric’s manufacturing plants and has been successfully
deployed in more than 70 smart factories globally. This resulted in circa 10% productivity
increases due to downtime mitigation and 70% improved response times due to automated
escalation of production issues.

**Cloud**

AVEVA’s Cloud products are designed to be flexible, scalable and available everywhere
and are offered in each of AVEVA’s Business Units. The Group achieved growth of 
some 200% in Cloud orders with significant new order wins, such as Veolia Water 
and continued expansion from existing customers as they increased consumption, by
for example rolling solutions out across their asset bases.

AVEVA’s Cloud platform, AVEVA Connect, was operationally strong, achieving 99.95%
uptime during the year.

**Progress against our medium-term targets**

In September 2018, AVEVA outlined medium-term targets around revenue growth, increasing
recurring revenue as a proportion of overall revenue and adjusted EBIT margin progression.
AVEVA made excellent progress against these targets during the year, achieving its
recurring revenue target ahead of plan.

**Medium-term revenue growth**

The Group aims to grow medium-term revenue on a constant currency basis at least
in line with the blended growth rate of the industrial software market.

This revenue growth target reflects AVEVA expecting to grow its underlying software
business in excess of market growth rates, driven by a combination of the strength
of the Group’s market positions, sales execution, revenue synergies and additional
value levers, including pricing and more sophisticated management of discounting.

As previously indicated, this above-market growth is expected to be partly offset
in terms of reported revenue by the impact of a phased transition towards greater
subscription revenue, together with potentially lower growth rates in services revenue.

Progress report: AVEVA delivered revenue growth of 7.4% on an organic constant currency
basis, which was consistent with the target.

AVEVA made substantial investments in sales and marketing to drive future growth,
including further strengthening of the marketing team and expansion of the sales
force.

In addition to this, further governance and sales incentive changes were put in 
place to manage discounting and price increases.

The global economic disruption relating to Covid-19 is expected to impact the growth
rate of the industrial software market in the short term.

**Medium-term adjusted EBIT margin**

The Group aims to increase adjusted EBIT margins to 30%. This margin improvement
is expected to be driven by a combination of revenue growth, previously announced
cost savings, cost control and a focus on high margin revenue growth through pricing
and revenue mix optimisation.

**Progress report:** AVEVA’s adjusted EBIT margin increased to 26.0% (FY19: 22.9%
on a statutory basis, 23.8% before the impact of a reverse acquisition accounting
adjustment). This improvement was driven by a positive sales mix, which benefited
gross margin, revenue growth driving operating leverage and underlying cost savings.
AVEVA expects to make continued progress towards the medium-term adjusted EBIT margin
target of 30%, although progress during the current financial year will be impacted
by the macroeconomic disruption.

**Medium-term recurring revenue**

AVEVA’s target was to grow the proportion of recurring revenue to total revenue 
to over 60% in the medium term. Recurring revenue is defined as subscriptions revenue
plus maintenance revenue. This will be driven by growing software as part of the
revenue mix and by increasing the mix of subscription revenue as a proportion of
new software revenue in a financial year.

The transition to greater levels of recurring revenue is expected to increase long-
term free cash flow generation. Subscription offers customers benefits including
greater flexibility, lower up-front costs and simplicity in pricing. These benefits
are reflected in higher customer lifetime value of a subscription model, versus 
a perpetual licence model.

**Progress report:** AVEVA met its target early, with recurring revenue reaching
62.2% of total revenue (FY19: 53.8%). This was helped by the modification of sales
incentive structures to encourage recurring revenue growth with a focus on driving
subscription revenue versus perpetual licences, and the introduction of AVEVA Flex.

The Group has seen very strong demand for Cloud-based solutions with both an increase
in the volume of significant order wins and substantial expansions from existing
Cloud customers.

Growing recurring revenue and Cloud remains a key focus and AVEVA expects to increase
both during the current financial year.

**Outlook**

AVEVA’s business is expected to be resilient in the context of the challenging global
macroeconomic environment. Many of our customers are accelerating their adoption
of digital technology in the new environment with a particular focus on Cloud which
supports remote working and fast start up. AVEVA’s products are key to driving efficiency
in our customers operations and AVEVA has high levels of recurring revenue.

The Group will continue to drive its business model transition to subscription, 
increasing recurring revenue as a proportion of overall revenue and accelerating
Cloud adoption. This will offer increased flexibility to customers, while generating
long-term value for shareholders.

As expected in AVEVA’s April 2020 trading update, notwithstanding AVEVA’s resilience,
we are seeing some impact from the disruption caused by the global downturn and 
we expect this to continue, particularly in the first six months of the financial
year.

In the context of this challenging growth environment, AVEVA is managing its cost
base appropriately, while protecting the longer-term growth prospects of the Group.
This includes protecting investments in strategic areas such as Cloud and Artificial
Intelligence, whilst significantly reducing costs to support operating margin and
cash generation. This combination of actions will support profitability in the short
term, while underpinning AVEVA’s ability to drive longer-term growth as the trends
towards digitalisation of the industrial world continue.

Craig Hayman

Chief Executive Officer

9 June 2020

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