- Engineering software firm on multi-year shift
- Slower revenues, weaker margins part of the cost
- Can it replicate the success of Adobe and Autodesk?
No real surprises in the full year results, but engineering design software company Aveva (AVV) is facing a multi-year transition to the cloud and a subscriptions-based model. Such shifts seldom happen painlessly so while investors bid the share price nearly 6% higher today to £23.54, it is following a 30% 2022 decline so far.
As we highlighted in a recent issue of Shares (26 May), Aveva is in the process of accelerating its shift from term licences to a software-as-a-service subscriptions model and expansion beyond its key energy markets. This should be a plus in the long-run, creating more reliable ‘sticky’ revenues from a wider spread of industries, like renewables.
Moving forward, focus will fall on Aveva’s warning of slower underlying growth and reduced margins, with the company revealing that the latter is partly down to bringing forward cloud investments, which has helped drive stronger subscription growth and will be key in meeting its ARR growth ambitions, or annual recurring revenue.
Recapping on Aveva’s five-year targets (to fiscal 2026), the group aims to deliver compound average revenue growth of circa 10%, 80% recurring revenue, adjusted earnings before interest and tax margins of 35% and 100% conversion of adjusted net profit to free cash flow.
‘These targets are supported by the delivery of 15% to 20% ARR growth each year up to fiscal 2026,’ says Megabuyte analyst Rob Warensjo.
BIG AMBITIONS, LARGE CHALLENGES
It’s a bold plan, with some ambitious targets, including 15% to 20% growth in recurring revenues over the next four years,’ said Charlie Huggins, head of equities at Wealth Club.
‘Aveva’s destination is compelling, assuming the journey can be successfully charted. Similar moves from Adobe (ADBE:NASDAQ) and Autodesk (ADSK:NASDAQ) have made both far higher quality and more predictable businesses,’ Huggins says.
But investment in cloud delivery will weigh on margins in the near term, while revenues will initially be held back by the move away from upfront, perpetual licences.
‘Investors aren’t known for their patience, and Aveva will need to execute their plans well in order to keep them on side,’ says Huggins.
Figures for the year to 31 March 2022 show revenue up 3.3% at £1,235.6 million, while organic constant currency revenue grew 7.1%. ARR increased 10.2% to £768.7 million. Adjusted EBIT rose 2.9% to £365.1 million. But having acquired OSIsoft, most of those £226.1 million adjustments relate to amortised intangibles - add them back in and Aveva ran-up an operating loss of £6.5 million.
Aveva has a big job on its hands, the scale of which should not be underestimated by investors.
