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SUMMARY OF FINANCE DIRECTOR'S REVIEW
Recurring revenue up 42% to £94.2 million.
Operating margin increased to 35%.
Adjusted basic earnings per share
increased by 22% to 67.33 pence.
Strong balance sheet with net assets of £143.1 million.
At the core of AVEVA's business is the intellectual property generated in its software products. The Group sells its proprietary software products by licensing rights to use the software directly to customers through our network of global sales offices rather than through resellers or distributors. This strategy provides customers with local sales and support and helps AVEVA to work closely with the leading companies principally in the Oil & Gas, Power and Marine markets. AVEVA's software products also provide the customer with 'data for life' whereby current versions of the software are compatible with previous versions allowing customers to access design data over a long time span, which is essential for assets which can have a life in excess of 20 years. This strategy has helped establish long-term relationships with many of our customers and several have been users of our products for over 30 years.
At the cornerstone of our business philosophy is our 'right to use' licensing model. Customers license our software for a specified number of users by paying an initial licence fee followed by an obligatory annual fee or by paying a rental fee over a fixed period of time. In both cases, the customer has to continue to pay a fee in order to use the software. The 'right to use' model provides a strong recurring revenue base for AVEVA which allows us to invest in the future roadmap of our products. This provides visibility to the customers and allows them to provide input to the direction of the products. In addition, customers receive upgrades to software as and when they become available as well as support and maintenance.
The Group's key financial and non-financial performance indicators are total revenue, adjusted profit before tax, headcount and adjusted earnings per share. These are discussed as part of the review below.
2008/09 was another record year for AVEVA which resulted in total revenue of £164.0 million against £127.6 million for 2007/08, an increase of 29%. Initial licence fees were £57.7 million (2008 - £52.9 million) with Asia Pacific continuing to be the main driver behind this, with initial fees of £36.8 million (2008 - £33.8 million) mainly due to the success in the marine business in China and Korea. Central, Eastern and Southern Europe also generated significant initial fees with £16.5 million compared to £13.1 million in 2007/08. Americas and Western Europe, Middle East and Africa are more mature markets for AVEVA and this is reflected in the relatively higher level of recurring fees.
Recurring revenue increased from £66.1 million to £94.2 million and represents 57% of total revenue (2008 - 52%). This reflects the continued high level of renewals of annual and rental fees across the customer base as well as growth in new rental fees as customers opt for more flexibility.
Services revenue increased by 41% to £12.1 million (2008 - £8.6 million) mainly due to services associated with new customers and continued growth in licence sales of AVEVA NET products.
Cost of sales includes the direct cost of selling (third party royalties, consultancy and agent's commission) as well as Research and Development costs and associated Information Technology costs. Total cost of sales for the year was £37.6 million (2008 - £29.8 million). Research and Development costs were £27.3 million (2008 - £21.3 million), an increase of 28% and represented 17% of total revenue (2008 - 17%). The focus in Research and Development has been on developing the AVEVA Plant and AVEVA Marine products as well as new releases of AVEVA NET.
Operating expenses were £69.8m (2008 - £54.6 million) for the year, an increase of 28% on 2007/08. Of the total operating expenses selling and distribution costs were £53.2 million (2008 - £39.0 million) and administrative expenses were £16.5 million (2008 - £15.6 million). Selling and distribution costs increased by 36% during the year which reflected the additional headcount recruitment in sales and local support as well as increased performance based remuneration. Administrative expenses increased 6% on 2007/08.
Profit from operations increased from £43.2 million in 2007/08 to £56.6 million in 2008/09, an increase of 31%. The operating margin in 2008/09 increased to 35% (2008 - 34%).
Total headcount at 31 March 2008 amounted to 843 (2008 - 730), an increase of 113 people. The average headcount during the year was 809 (2008 - 663) of which 253 were in Research, Development and product support (2008 - 222), 380 in sales, marketing and customer support (2008 - 300) and 176 in administration (2008 - 141). The increase in Research, Development and product support headcount was primarily due to hiring of specialists in the AVEVA NET area and the increase in sales, marketing and customer support was due to expansion of our existing regional operations in response to the increased levels of business as well as opening a new office in Brazil. The increase in the administration staff was due to the increase of licensing and contract management staff to reflect the increased volume of business as well as additional finance and administration staff in the sales regions to support the growth of the business.
Total staff costs for the year were £55.5 million compared with £48.2 million in 2008, an increase of 15%.
On 16 April 2009 the Group announced that it was implementing a restructuring programme which involved the merger of two sales regions (Central, Eastern and Southern Europe and Western Europe, Middle East and Africa) into one combined region of Europe, Middle East and Africa with immediate effect, as well as a reduction in headcount across the Group of approximately 10%. The headcount reduction is expected to be completed in the first quarter of 2009/10. These initiatives will result in annualised cost savings of approximately £5.0 million. The exceptional costs of implementing these initiatives will be around £3.5 million, which will all be incurred in the first half of 2009/10. No provision for the restructuring has been included in the results for the year ended 31 March 2009.
Finance revenue represents bank interest receivable on cash and cash equivalents of £2.8 million (2008 - £1.8 million) and expected return on the UK defined benefit pension plan of £2.0 million (2008 - £2.0 million). Bank interest receivable has increased due to the strong increase in cash and cash equivalents in the year despite lower returns in the second half of the year, due to significant falls in UK and US interest rates. Finance costs principally relate to the interest on the pension scheme liabilities of £2.3 million (2008 - £2.0 million).
Profit before tax for the year was £59.2 million compared to £45.0 million in 2007/08. Adjusted profit before tax increased by 31% to £62.6 million (2008 - £47.9 million), which is before amortisation of intangibles, share-based payments and adjustment to goodwill totalling £3.4 million (2008 - £3.0 million).
The Group's effective tax rate is 28.7% (2008 - 23.8%) which is broadly in line with the UK headline rate. The headline tax rate in 2007/08 was lower due to a number of one-off credits such as the UK Research and Development tax credits; the benefit of tax losses generated from acquisitions, which have now been exhausted, and previously unrecognised deferred tax assets.
Basic earnings per share was 62.27 pence (2008 - 50.80 pence) an increase of 23%. Adjusted basic earnings per share (which is before amortisation of intangibles, adjustment to goodwill and share-based payments) increased by 22% to 67.33 pence (2008 - 55.22 pence). The Directors believe that adjusted basic earnings per share provide a more meaningful measurement of performance of the underlying business.
The Board of Directors recommend payment of a final dividend of 6.5 pence (2008 - 5.0 pence), which, taken together with the interim dividend of 2.86 pence (2008 - 1.65 pence) gives a total dividend for 2008/09 of 9.36 pence (2008 - 6.65 pence) a 41% increase over 2007/08. Subject to approval at the Annual General Meeting the final dividend will be paid on 31 July 2009 to shareholders on the register on 26 June 2009.
Overall AVEVA's balance sheet continued to strengthen during the year and at 31 March 2009 net assets were £143.1 million (2008 - £105.7 million).
Non-current assets increased from £36.4 million to £42.2 million due to the recognition of deferred tax assets relating to tax losses in certain jurisdictions, investment in a global private computer network and corporate telephone system as well as other computer equipment and revaluation of foreign currency denominated goodwill and intangible assets.
Current assets increased to £183.7 million from £126.8 million due to increased trade and other receivable balances, and cash and cash equivalents. Trade and other receivables were £56.8 million (2008 - £43.2 million) which reflected the increase in trading. Cash and cash equivalents were £126.2 million (2008 - £82.8 million), an increase of 52% reflecting the strong growth experienced in the year and continued focus on collection of accounts receivable.
Current liabilities totalled £72.4 million at 31 March 2009 (2008 - £53.8 million) including deferred revenue of £31.1 million (2008 - £20.0 million) driven by the recurring revenue and accruals of £18.2 million (2008 - £18.9 million). Non-current liabilities include retirement benefit obligations of £8.8 million (2008 - £1.6 million). This mainly relates to the UK defined benefit pension plan which had a deficit under IAS 19 of £7.6 million at 31 March 2009 (2008 - £0.7 million deficit). The increase in the deficit was caused by the reduction in the value of the scheme's assets due to the current financial conditions and increased liabilities due to the updated assumptions.
Finance Director's review (continued)
This strategy has helped establish long term relationships with many of our customers, some of which have been users of our products for over 30 years.
Building on our partnerships
