• 
• 
• 
• 
• 

• Home
• Overview
• Business review
  • Chief Executive's review
  • Finance Director's review
• Corporate governance
• Financial statements
• Other information

Finance Director's review

Business model

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 and 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.

Key performance indicators

The Group's key financial and non-financial performance indicators are total revenue, adjusted profit before tax, headcount and adjusted earnings per share. The financial results for the year ended 31 March 2010 are summarised below. These are discussed as part of the review below:

	2010 £000	2009 £000	% change
Revenue
Recurring revenue	102,701	94,196	9%
Initial licence fees	35,149	57,741	(39%)
Services	10,484	12,104	(13%)
Total revenue	148,334	164,041	(10%)
Cost of sales
(including Research and Development costs)	(30,380)	(37,612)	(19%)
Gross profit	117,954	126,429	(7%)
Total operating expenses	(68,745)	(69,780)	(2%)
Profit from operations	49,209	56,649	(13%)
Operating margin	33%	35%	(2%)
Net bank interest	1,097	2,805	(61%)
Net interest on pension scheme	(732)	(253)	189%
Adjusted profit before tax*	50,685	66,360	(24%)
Profit before tax	49,574	59,201	(16%)
Income tax expense	(16,134)	(17,047)	(5%)
Profit after tax	33,440	42,154	(21%)
Earnings per share (pence)
– basic	49.36p	62.27p	(21%)
– diluted	49.08p	61.98p	(21%)
– adjusted basic* (2009 restated)	50.92p	69.99p	(27%)
– adjusted diluted* (2009 restated)	50.62p	69.67p	(27%)

• *Adjusted profit before tax and adjusted earnings per share are calculated before amortisation of intangible assets, share-based payments, gain/loss on fair value of forward foreign exchange contracts and restructuring costs in the relevant year. In addition, adjusted earnings per share also include the tax effects of these adjustments.

Revenue

Total revenue for the year fell by 10% to £148.3 million compared to £164.0 million last year with, as previously disclosed, the Group being impacted by the world recession. Revenue from initial licence fees in the Marine market was particularly affected with total fees falling 39% from £57.7 million to £35.1 million. In particular, initial licence fees in Asia Pacific fell from £36.8 million to £19.7 million reflecting this trend.

However the decline in initial licence fees was partly offset by the robustness of our recurring revenue consisting of annual fees, rental licence fees and recurring services. Recurring revenue increased by 9% from £94.2 million to £102.7 million reflecting the continued renewals of annual fees and rental fees from our established customer base and new customers preferring to rent rather than buy the software for more flexibility.

Services continue to remain a relatively small part of the business with associated revenue falling by 13% from £12.1 million to £10.5 million although in future this is expected to increase as sales of AVEVA NET software increase.

The Group's revenue was impacted by movements in foreign exchange rates during the year, particularly in US Dollars and Euro. Revenue on a constant currency basis was approximately £141.0 million (reported £148.3 million) compared to £164.0 million in 2008/09, down 14%.

Cost of sales and operating expenses

Cost of sales consists of direct cost of selling (third party royalties, consultancy costs and agent's commission) as well as Research and Development costs and associated Information Technology costs. Total cost of sales for the year was £30.4 million (2009 – £37.6 million). Research and Development costs were £20.9 million (2009 – £27.3 million), a decrease of 23% which reflects the impact of the restructuring programme that was carried out in April 2009. Research and Development costs represented 14% of total revenue (2009 – 17%). The focus in Research and Development has been targeting our investment in key product areas such as AVEVA NET and to continue to improve the quality of AVEVA Marine and AVEVA Plant products.

Operating expenses were £68.7 million (2009 – £69.8 million) for the year, a decrease of 2% on the prior year. Of the total operating expenses selling and distribution costs were £60.0 million (2009 – £53.2 million) and administrative expenses were £8.7 million (2009 – £16.5 million).

Selling and distribution costs increased by 13% during the year which reflected the additional investments in our direct sales office network. Administrative expenses included a gain on the fair value of forward foreign exchange contracts of £3.6 million (2009 – loss of £3.7 million) and, excluding these amounts, administrative expenses were broadly in line.

The operating margin in 2009/10 was maintained at 33% (2009 – 35%) which was pleasing in light of the difficult trading conditions and reflects the benefits of the restructuring programme implemented in the year.

"At the core of AVEVA's business is the intellectual property generated in its software products."

Headcount

Total headcount at 31 March 2010 amounted to 820 (2009 – 843), a net decrease of 23 staff. The average headcount during the year was 815 (2009 – 809) of which 228 were in Research, Development and product support (2009 – 253), 417 in sales, marketing and customer support (2009 – 380) and 170 in administration (2009 – 176).

As noted below, the restructuring programme implemented during the year largely affected Research and Development which resulted in the reduction in the average headcount. The increase in the average headcount in sales, marketing and customer support was due to the continued investment in our direct sales offices, particularly in South America and Eastern Europe.

Total staff costs for the year were £58.8 million compared with £55.5 million in 2009, an increase of 6%.

Restructuring

As announced previously, the Group implemented a restructuring programme at the start of the financial year to make sure that AVEVA was better equipped to address the difficult trading environment, whilst also selectively investing to exploit growth opportunities. As part of this restructuring programme, we combined the Central, Eastern and Southern Europe region with our Western Europe, Middle East and Africa region to form the European, Middle East and Africa region (EMEA). As part of this combination and restructuring of some of our Research and Development activities, a number of employees were made redundant giving rise to a one-off cost of £1.9 million. The cost of restructuring was lower than anticipated and annualised savings were approximately £5.0 million, which was in line with our initial expectations.

Finance revenue and finance costs

Finance revenue represents bank interest receivable on cash and cash equivalents of £1.1 million (2009 – £2.8 million) and the expected return on the UK defined benefit pension plan of £1.7 million (2009 – £2.0 million). Despite strong growth in cash and cash equivalents and treasury deposits, bank interest receivable fell from £2.8 million to £1.1 million due to the significant falls in UK and US interest rates. Finance costs principally relate to the interest charge on the pension scheme liabilities of £2.5 million (2009 – £2.3 million).

Presentation of adjusted profit before tax

We have amended the calculation of adjusted profit before tax to include the change in the fair value of forward foreign exchange contracts as this is a non-cash item that has become more material due to the volatility in the underlying exchange rates. In the year ended 31 March 2010, there was a gain on the fair value of forward foreign exchange rates amounting to £3.6 million (2009 – loss of £3.7 million). Adjusted profit before tax also takes into account amortisation of intangibles, share-based payments and restructuring costs totalling £4.7 million (2009 – £3.4 million). This resulted in adjusted profit before tax for the year of £50.7 million (2009 – £66.4 million). Profit before tax for the year was £49.6 million compared to £59.2 million in 2008/09.

Taxation

The Group's effective tax rate for the year was 32.5% compared to 28.8% in 2008/09. The main reasons for the increase were irrecoverable withholding tax suffered in Asia, expenses not deductable for tax purposes and adjustments in respect of prior years. The Group has tax losses of £5.1 million (2009 – £3.8 million) which relate to overseas subsidiaries for which no deferred tax asset has been recognised (2009 – £0.6 million). The losses can be carried forward indefinitely.

"AVEVA continued to deliver strong cash generation."

Earnings per share and dividends

Basic earnings per share were 49.36 pence (2009 – 62.27 pence) and diluted earnings per share were 49.08 pence (2009 – 61.98 pence).

Following the change to the presentation of adjusted profit before tax as noted above, adjusted earnings per share has also been amended to reflect the changes in the fair value of forward foreign exchange contracts. Therefore adjusted basic earnings per share, which is calculated before amortisation of intangibles, gain on the fair value of forward foreign exchange contracts, restructuring costs and share-based payments and the associated tax effects, were 50.92 pence (2009 – 69.99 pence). Diluted adjusted earnings per share on the same basis were 50.62 pence (2009 – 69.67 pence). The Directors believe that adjusted earnings per share provide a more representative presentation of the underlying performance of the business.

Comparative figures in the financial statements for adjusted profit before tax and adjusted basic and diluted earnings per share have been restated accordingly to reflect this change in presentation.

The Board of Directors recommend payment of a final dividend of 13.9 pence (2009 – 6.5 pence) which, together with the interim dividend of 3.0 pence (2009 – 2.86 pence), gives a total dividend for 2009/10 of 16.9 pence (2009 – 9.36 pence), an 81% increase over 2008/09. Subject to approval at the Annual General Meeting, the final dividend will be paid on 30 July 2010 to shareholders on the register on 25 June 2010.

"The Group makes substantial investments in Research and Development in enhancing existing products and introducing new products."

Balance sheet and cash flows

AVEVA's balance sheet continued to strengthen during the year and at 31 March 2010 net assets were £169.2 million compared to net assets of £143.1 million at 31 March 2009 with increased cash and treasury deposits being the main driver behind this.

Non-current assets at 31 March 2010 were £42.1 million (2009 – £42.2 million) which was in line with the prior year.

Investments in intangible assets during the year included software licences for components used in the suite of AVEVA products at a cost of £1.2 million. Investments in tangible assets of £1.5 million (2009 – £3.7 million) were for replacement computer equipment and the refurbishment of offices.

Current assets increased to £195.6 million from £183.7 million principally due to the increase in cash and cash equivalents and treasury deposits of £23.5 million from £126.2 million to £149.7 million. AVEVA continues to be cash generative and the Group has continued to focus closely on cash management during the year particularly on the collection of customer receivables and repatriation of cash to the UK from overseas subsidiaries. Total cash and deposits held in the UK at 31 March 2010 represented 85% of the total cash and deposits balance (2009 – 69%). As noted below, treasury deposits represent deposits with an original maturity of six months following the amendment to the Group's treasury policy. The Group has no debt.

Cash generated from operating activities before tax in the period amounted to £47.7 million (2009 – £58.7 million). Cash conversion, measured by cash generated from operating activities before tax as a percentage of profit from operations, was 97% compared to 104% in 2008/09 which continues to reflect the quality of earnings and results of these cash management initiatives.

Trade and other receivables were £44.1 million (2009 – £56.8 million) which partly reflects the reduction in revenue but also continued focus on collection of customer receivables. Accounts receivable is also net of the provision for impairment of £6.6 million (2009 – £4.8 million) which reflects the Group's continued prudent view of the collectability of accounts receivable.

Current liabilities totalled £48.9 million at 31 March 2010 (2009 – £56.6 million) which included deferred revenue of £26.9 million (2009 – £31.1 million), and trade payables and accruals of £22.0 million (2009 – £25.5 million). Non-current liabilities include retirement benefit obligations of £13.1 million (2009 – £8.8 million). This mainly relates to the UK defined benefit pension plan which had a deficit under IAS 19 of £11.7 million at 31 March 2010 (2009 – deficit of £7.6 million).

The increase in the deficit was caused by increased liabilities from £36.3 million to £52.4 million due to the updated assumption for discount rate. This was partly offset by an increase in the fair value of the scheme assets from £28.7 million to £40.7 million at 31 March 2010.

Capital structure

The authorised share capital of the Company is 120,000,000 ordinary shares of 3.33 pence each (2009 – 90,000,000). The issued share capital at 31 March 2010 was 67,928,208 ordinary shares of 3.33 pence each (2009 – 67,818,868). During the year the AVEVA Group Employee Benefit Trust 2008 purchased 89,016 ordinary shares in the Company in the open market at an average price of £7.29 per share for total consideration of £653,000 in order to satisfy awards made under the AVEVA Group Management Bonus Deferred Share Scheme 2008. At 31 March 2010, the Trust owned 122,770 ordinary shares in the Company.

Treasury policy

The Group treasury policy aims to ensure that the capital held is not put at risk and the treasury function is managed under policies and procedures approved by the Board. These policies are designed to reduce the financial risk arising from the Group's normal trading activities, which primarily relate to credit, interest, liquidity and currency risk. Further details of these risks are contained at note 24. The Group is, and expects to continue to be, cash positive and currently holds net deposits. The treasury policy includes counterparty limits which are adhered to. During the year the treasury policy was updated to enable deposits with an original maturity of up to six months to be placed with banks with a high credit rating.

During the year the Group had a bank overdraft facility of approximately £0.9 million (SEK 10 million) (2009 – £0.8 million, SEK 10 million) in Sweden, aimed at managing short-term fluctuations in cash of which £nil had been drawn down at 31 March 2010 (2009 – £nil). The Group has a net funding requirement in Sterling due to the majority of Research and Development costs being incurred in the UK. The revenue of the Group is predominantly in foreign currency, with approximately 35% in US Dollar and 25% in Euro. The overseas entities incur costs in their local functional currency, which acts as a partial net hedge. Any cash flows which cannot be offset against each other result in a net currency exposure and where possible these exposures are hedged. These hedges aim to minimise the adverse effect of exchange rate movements, without eliminating all upside potential.

Review of principal risks and uncertainties

AVEVA has continued to be successful during the year, but as with any organisation there are a number of potential risks and uncertainties which could have a material impact on the Group's long-term performance. Where possible the Group seeks to mitigate these risks through its system of internal controls but this can only provide reasonable and not absolute assurance against material losses.

The principal risks and uncertainties faced by the Group are as follows:

Protection of the Group's intellectual property rights
The Group's success has been built upon the development of its substantial intellectual property rights and protection of this remains critical. The Group generally protects its proprietary software products by licensing rights to use the application, rather than selling or licensing the computer source code. Infringement of the Group's intellectual property rights by third parties or its failure to defend infringement claims from third parties could cause damage to the business. The Group uses third party technology to encrypt, protect and restrict access to its products. Access limitations and rights are also defined within the terms of the software licence agreement and the Group seeks to ensure that its intellectual property rights are appropriately protected by law wherever possible.

Dependency on key markets
AVEVA generates a substantial amount of its income from customers whose main business is derived from capital projects driven predominantly by growth in the Oil and Gas, Power and Marine markets. The current world economic conditions may adversely affect our financial performance. Funding constraints may cause the delay of major new projects and customers who operate in the Oil and Gas, Marine and Power industries may reduce capital expenditure budgets further. Future success is dependent on growth and continued demand from within these markets. These industries are cyclical and subject to fluctuations in the price of oil and general economic conditions. Such downturns, pricing pressures and restructurings may cause delays and reductions in expenditure by many of these companies and reduced demand for our products and services. A recurrence of these industry patterns, as well as general domestic and foreign economic conditions and other factors that reduce spending by companies in these industries, could harm our operating results in the future.

Competition
AVEVA operates in highly competitive markets that serve the Oil and Gas, Power and Marine markets. If we do not respond effectively we may lose market share and the business could suffer. We believe that there are a relatively small number of significant competitors serving our markets. However, some of these competitors could, in the future, pose a greater competitive threat, particularly if they consolidate or form strategic or commercial relationships among themselves or with larger, well capitalised companies.

Foreign exchange risk
Exposure to foreign currency gains and losses can be material to the Group, with approximately 80% of the Group's revenue denominated in a foreign currency, of which our two largest are US Dollar and Euro. The Group enters into forward foreign currency contracts to manage the currency risk where material. The overseas subsidiaries trade in their own currencies, which also acts as a natural hedge against currency movements. The Group is also exposed to foreign currency translation risk on the translation of its net investment into Sterling.

Recruitment and retention of employees
AVEVA's success has been built on the quality and reputation of its products and services, which rely almost entirely on the quality of the people developing and delivering them. Managing this pool of highly skilled and motivated individuals across all disciplines and geographies remains key to our ongoing success. The Group endeavours to ensure that employees are motivated by their work and there are regular appraisals, with staff encouraged to develop their skills.

Identification and successful integration of acquisitions
The Group expects to continue to review acquisition targets as part of its strategy. The integration of any acquisitions also involves a number of unique risks, including diversion of management's attention, failure to retain key personnel of the acquired business, failure to realise the benefits anticipated to result from the acquisition, system integration and risks associated with unanticipated events or liabilities.

Research and Development
The Group makes substantial investments in Research and Development in enhancing existing products and introducing new products. There are many risks in software development. This process is managed by developing a product roadmap that identifies the schedule for new products and the enhancements that will be made to successive versions of existing products. Our software products are complex and may contain undetected errors, failures, performance problems or defects. Furthermore if new products or enhancements are introduced which do not meet customer requirements or competitors introduce a rival product which better meets the requirements of the market, this may have a material impact on the long-term revenue and profit.

International operations
The Group operates in Continental Europe, the Middle East, the United States, South America and Asia Pacific and is required to comply with the local laws, regulations and tax legislation in each of these jurisdictions. Significant changes in these laws and regulations or failure to comply with them could lead to additional liabilities and penalties. The Group manages its overseas operations by employing locally qualified personnel who are able to provide expertise in the appropriate language and an understanding of local culture, custom and practice. Dependence on local management can increase the risks of Group policy not being correctly applied, especially where diverse languages and cultures exist. The Group endeavours to mitigate these risks through oversight by regional management in each of the three major zones of the Group, Asia Pacific, EMEA and the Americas, as well as through the use of local professional advisers.

Paul Taylor
Finance Director
26 May 2010

 

^ back to top