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Chief Executive's review

Overview

AVEVA continued its development despite the challenges of the world economy, delivering a good performance reflecting the fundamental strengths of the business. Our strong base of recurring revenue and good growth in developing markets helped to mitigate the impact of global economic uncertainty, particularly on initial fees in Marine. As a result, overall revenue fell only 10% to £148.3 million (2009 – £164.0 million).

Decisive restructuring actions taken in the first half delivered the anticipated efficiency savings, better equipping the Group to address the trading environment. This helped to ensure that margins remained strong at 33% (2009 – 35%), whilst also enabling us to invest selectively in growth opportunities, particularly in South America, the CIS, where we expanded local resources and AVEVA NET where we increased capacity in solutions delivery. The whole organisation showed great professionalism and commitment throughout this process and the Group was quickly able to move forward this year with the right cost base.

Overall performance of most industry segments served by AVEVA has been in line with our expectations. Funding constraints in the Oil and Gas sector led to some major new projects proceeding slowly, although the situation steadily improved during the year. In particular, there have been some areas of intense activity, notably Brazil, where we have expanded our presence in Rio de Janeiro.

The Power industry tends to have much longer investment cycles and has not been as susceptible to the global downturn with our business in both fossil-fuelled and nuclear builds continuing to grow steadily. Marine did suffer from a dramatic decline in new build orders and concerns over funding for the existing ship order backlog.

By making some hard decisions at the start of the year to adjust the cost base we have been able to expand the business during the year to exploit new opportunities. We have recruited high calibre people into both our office network and the AVEVA NET organisation, which has already benefited our sales. There have been a number of significant sales of AVEVA NET during the year and a strengthening business pipeline as we have built up our specialist business development team focused on sales into the owner operator market. We have already started on building up our service delivery capability in order to serve this £500 billion market.

"AVEVA continued its development despite the challenges of the world economy, delivering a good performance reflecting the fundamental strengths of the business."

Global performance

Providing a consistent high quality level of product performance and customer service has become increasingly important during the last year, as customers who already operate internationally seek to introduce further efficiencies into their own operations by increasing the use of 24/7 working and high value engineering centres.

Key to the success in winning customers away from our competitors has been the high quality of support and service we can offer from our 35 locations, in addition to the partners who work with us in some regions.

Asia Pacific – Revenue £50.5 million (2009 – £67.1 million)
Whilst we have had to adjust for a rapid decline in Marine sales, growth was delivered in other parts of the business, in particular the Chinese Power market. We also made good progress in sales of AVEVA NET to both Plant and Marine customers. Asia has borne the brunt of the decline in initial fee licence sales, as the majority of Asian business tends to be based on the initial fee sales as opposed to the rental model, which is more prevalent in other regions.

Due to the very high number of sales in Marine during the latter part of 2008/09 and the ongoing opportunities of providing start up assistance to new customers, support levels were maintained in China Marine. However, we were also able to focus these resources on selling AVEVA NET into the rapidly growing market for Product Lifecycle Management (PLM) solutions within the Marine customer base.

Despite the downturn, AVEVA managed to secure important new contracts with Kyokuyo Shipyard in Japan and Samsung in Korea for both Marine and Plant divisions.

In non-Marine markets we made good progress in securing important new strategic contracts. This included collaboration with one of the world's largest companies, China National Petroleum Co Petrochemical Project Company (CNPC PPC).

Americas – Revenue £26.9 million (2009 – £24.4 million)
Latin America, particularly in Brazil, provides an important development opportunity for the Group. Since the opening of our office in Rio de Janeiro last year, we have built a high quality team and have already doubled the size of our original office, with plans to continue hiring into our sales and customer support teams. The quality of the AVEVA products and their suitability for the Oil and Gas projects in Brazil, along with the local support, has positioned AVEVA for strong growth in this market for the foreseeable future. We have secured a two year corporate agreement with Petrobras for the supply of design products.

AVEVA products are already being used on many of the offshore projects starting to be commissioned in the region, with new customers joining from the Brazilian Engineering, Procurement and Contracting (EPC) community. In addition, AVEVA has the opportunity to sell the AVEVA Marine products into new shipyards which are expected to be commissioned to build Floating Production and Storage Offshore (FPSO) vessels and a fleet of Very Large Crude Carriers (VLCC).

Performance in North America has remained subdued. As in previous years our strong and enduring relationships with many Oil and Gas customers have provided stability and some growth opportunities. We have used the downturn to build our business development expertise, with particular focus on deeper penetration of the Owner Operator market in the United States, with the aim of replicating our recent successes. We were pleased with the highly successful implementation of AVEVA NET at Mustang, one of the largest EPC firms in the US.

The market in Canada was one of the first casualties of the rapid oil price decline and shows little sign of recovery in the short term. With the oil price at circa US$80 there is still uncertainty surrounding the exploitation of oil sands reserves in Canada and the high costs of subsequent environmental impact.

EMEA – Revenue £70.9 million (2009 – £72.6 million, combined former WEMEA and CES regions)
The combined EMEA region, which was created last year from two business regions, has performed very well throughout the year. This region has a very diverse spread of business and a wide geographic mix with diverse drivers, from the Middle East, up through the CIS, across to Spain and down as far as South Africa.

The Oil and Gas business has performed well. Some notable highlights include a large rental expansion from Technip and our first significant sale in Iraq with AVEVA products installed at SIDDCO and ADMA in Abu Dhabi, who have mandated the use of AVEVA products on all future projects. The Power market is very important across the EMEA region, with long-term customers like Alstom and AREVA as key players. We have extended our relationship with AREVA by securing business from the AREVA Nuclear Fuels division. The Marine business, which is spread across the region, has been generally flat throughout the year.

EMEA has been the region where we have been the most consistently successful in winning customers away from our competitors. This year we have added 79 new name customers across the region, with many of these converting to AVEVA after years of using competitors' systems.

We are also investing in the CIS and have seen very strong sales in this sub region. AVEVA has won important new business with customers in the Oil and Gas and Power markets. Some of these customers will be strategic in winning further business as we expand in the region. Of particular note is the contract with OJSC TANECO, the operator of the new multibillion dollar refinery complex in Russia, who will now use AVEVA NET as the consolidation tool for all engineering data for this mega project. In the Nuclear power field we have secured KIEP as our second CIS nuclear design institute.

"AVEVA has achieved a very strong position as a preferred supplier for many of the world's power station providers, both fossil-fuelled and nuclear."

End user market trends

We have seen differing trends in each of the main end user markets during the year.

AVEVA has achieved a very strong position as a preferred supplier for many of the world's power station providers, both fossil-fuelled and nuclear. The global span of customers using AVEVA products on new build power plants can be seen by our leading position with many of the European suppliers but is particularly pronounced in Asia, with some great successes during the past year in China. The market for power stations has a very long-lead cycle and may span a recession but there have been concerns over the funding of future projects, in particular large nuclear power projects. Although we have not yet seen a huge upturn in demand for products from this sector, we anticipate a steady increase in demand for many years to come, as the current global power generation capacity falls well short of predicted consumption even before taking into account all of the capacity which is due to be retired in the near future.

Marine presented us with the most challenges but has performed predictably throughout the year. We still have a very busy customer base in Marine as most customers are working on orders received over recent years and for the majority of customers these orders still stretch out over the next two or three years. Until the market for new ships returns we expect the market for design tools to remain subdued. However, efficient production is paramount in a modern shipyard and we plan to extend the use of the Marine variant of AVEVA NET to more yards, particularly in China and Korea.

In Oil and Gas, whilst the tar sands project in Canada remains slow to recover from the stoppages caused by uncertainty over commodity prices, most other areas have remained buoyant. In Brazil the market is very strong, as Petrobras and others rush to capitalise on the huge oil reserves off the Brazilian east coast. We expect this market to continue to grow strongly and further investment in Brazil is a key element of our future planning. We see additional opportunities in Russia and expect to continue to grow our team there following the strong performance from this region during the past year. With greater stability in the oil price we are planning further investment in those regions likely to benefit from consistently increased commodity prices. These include Malaysia and the global market for FPSO assets, where AVEVA is already a leader.

"AVEVA has done very well over the last year and the core strengths in both our people and products have served to provide confidence to customers in a difficult year."

Technology and products

Research and Development continued to be a key priority during the year in order to enhance our software applications and functionality. The high levels of investment in recent years ensure that we have the most advanced product offering in the industry. There has been a large investment in consolidating the developments of recent years and further improving quality. This work has been carried out across the entire product portfolio, with special focus on those developments deemed essential for deeper penetration of developing markets in Latin America and Eastern Europe.

Integration between applications from multiple vendors has been high on the agenda of many Chief Information Officers and AVEVA has always been a leader in providing open solutions and investing in global standards initiatives. During the last year we have provided more interfaces to third-party software products than ever before to enable customers to achieve greater value from their project and enterprise information.

Last year we acquired a specialist business in Australia to manage instrumentation data. The new version of this instrumentation product has been delivered and, with many new customers taking up this product during the year, we have received very positive feedback on the level of functionality and the competitiveness of our new solution.

In addition to work on consolidating the core product range, we have continued to expand the functionality of AVEVA NET with many new features added, as we gained further experience working with oil majors and large Chinese shipbuilders. The teams working on AVEVA NET have been increased during the year, with plans in place to continue the expansion of AVEVA NET and bring to market a novel web navigation capability within the coming months.

Organisation and people

The AVEVA human resources team played a key role in successfully transitioning the organisation into a shape and size which was needed as we entered the downturn. This was achieved by introducing a range of cost saving measures including a salary freeze, career breaks, part-time working and some redundancies, both voluntary and compulsory. Once again I would like to thank all those affected by this for their understanding and professionalism.

We have continued to expand the sales and support network and our relatively new office in Brazil has doubled in size to cope with the demands of this exciting new market for AVEVA products and services. We have also increased staff numbers in Russia and the CIS, along with some areas within the Asia Pacific region.

Since merging two sales regions into one to form EMEA last year and the rigorous examination of our cost base, we have made cost savings by rationalising some corporate functions and introduced new centralised systems to streamline the reporting processes of a very international business.

Outlook

AVEVA has done very well over the last year and the core strengths in both our people and products have served to provide confidence to customers in a difficult year.

As the global economic outlook improves, AVEVA is well placed to fulfil customers' requirements through our world-class products together with their increasingly high level of service demanded. We have taken the opportunity over the past year to evaluate all aspects of our business and have been continually strengthening the areas where we see the most opportunity for growth, in particular increasing the investment levels in AVEVA NET.

With our design products we have invested in new geographies that have grown strongly and we will continue to invest and develop offices and people. AVEVA has the right products and a proven track record which appeal to customers seeking highly functional products backed by first class local support and service.

We will continue to seek to maximise organic growth and to complement it with acquisitions as and when opportunities arise which can extend the functionality of our products or our market reach.

Richard Longdon
Chief Executive
26 May 2010

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