Recession hits Aconex order book, it sheds staff, but still grows

Australia-based Software-as-a-Service construction collaboration technology vendor Aconex has just signed off its accounts for the year ending 30 June 2009, and they show another year of growth, albeit slower than in previous years (see Aconex reports…, 2008, and Aconex results hit by legal row, 2007). This is no surprise, of course. The global recession has seen numerous construction projects postponed or cancelled, and this has had an impact on many supply chain companies, including providers of IT services. Accordingly, Aconex’s order book took a hit and it shed some employees, but the company feels it is back on the growth curve again.

However, Aconex’s financial report is also made a little more difficult to interpret due to a change in revenue recognition policy, and to the restructuring of the group’s balance sheet after the capital raising exercise completed in September 2008 (see Aconex gets private equity injection). To make sense of the changes, in addition to a copy of Aconex’s statutory accounts, I received a summary document based on an extract from the firm’s shareholder report put together by Aconex CFO Matthew Walsh, and then had a telephone conference call with Matthew, operations director Paul Perrett and marketing chief Frank Carron (the tele-conference was to have included Aconex co-founder and product director Rob Phillpot but that product-focused conversation will now take place shortly).

Revenues up (restated)

The consolidated Aconex group generated revenues of AUD$38.923m (or £17.985m at average exchange rates) in the year to 30 June 2009, up – at first glance – a healthy 34% up from a restated figure of AUD$29.033m (or £13.413m) in 2008. However, the figures have been restated due a change in revenue recognition policies implemented because the directors felt:

“… recognition of revenue more evenly over the life of each individual contract will provide more relevant information, and result in a more accurate indication of the financial performance of the group….” (p.25)

In short, Aconex’s old accounting policy effectively over-stated revenues during the early stages of projects, whereas some other SaaS collaboration software companies, such as [my former employer] BIW Technologies, have tended to apply a more conservative, straight-line policy, only recognising revenues as they were received. (For me, it’s a welcome policy change, as it makes for easier comparisons between the different SaaS vendors – though not all will be conservative as Aconex or BIW.)

There is a time-lag between when customers are invoiced and when revenues are received; Aconex says it invoices a significant number of customers upfront, and as a result its invoicing for the year (AUD$48.9m) is significantly higher than revenues.

Aconex revenues for 2008 were originally stated as AUD$41.59m, and if Aconex had stuck with the previous accounting policy the 2009 revenues would have been given as AUD$41.652m, suggesting growth of just under 1.5% (the relevant note to the accounts doesn’t roll-back the impact of the policy change to years beyond 2008). However, Matthew explained the revenues were also affected by project cancellations (see Order book, below), meaning that the 2009 revenue figure had to be adjusted downwards – making the 1.5% a little pessimistic. He continued:

“In terms of comparison between results of different vendors, we believe operating cash flow and invoicing are the key metrics which illustrate success in developing / growing businesses in this space.”

Losses

According to the statutory accounts, the consolidated group made a loss (EBITDA) of AUD$6.48m (or £2.99m), an apparent improvement on the restated AUD$12.379m (£5.72m) figure given for 2008.

Order book

A major virtue of SaaS businesses has been that the subscription model makes future revenues from existing contracts very predictable. With clients being billed on, say, a monthly or quarterly basis for projects with a duration of perhaps three or four years, it was easy to forecast what the company would earn even if it didn’t win any more projects. However, project postponements and cancellations can damage that predictability, as Aconex has found. It says:

“Historically, the number of projects that finish prematurely is low, however over the last year a large number of projects were cancelled, which reduced the order book by $12.1 million. Most of these cancellations occurred in the United Arab Emirates and are related to sales in the previous financial years. As of 30 June 2009, the order book stood at $49.3 million (2008: $62.0 million). Approximately 75% of this will be billed over the next 3 years.” (p.4)

I had been wondering what impact the Dubai downturn would have on one of the collaboration vendors most active in the UAE and that reduction in future order book to AUD$49.3m (£22.78m) – roughly a fifth – shows that such IT businesses have been scarred in the same way as contractors and project managers working in the region.

Paul and Matthew said that after a strong first quarter, the market downturn began to take hold in late 2008: “In Q2 we saw some weakening and quarters 3 and 4 were poor, though we did start to see some improvements in June this year.” Indeed, the shareholders note says: “June was one of the strongest bookings results in the history of the business”.

Employees

I was told that Aconex staff numbers peaked at around 370 in October 2008, but the business then shed some staff, particularly in Dubai, while others were relocated to other locations. By the year end, the business employed around 330 staff, but has since started to grow back towards its late 2008 levels. The company’s Middle East operation (it’s largest after Australia/New Zealand, which was apparently “the clear standout financially with outstanding results across all key financial metrics”) had seen project wins in Qatar, Oman and Abu Dhabi, helping compensate for the cancellations experienced in Dubai.

Financing

The Aconex report also covers the period during which a deal for new investment in the business from US-based technology investor Francisco Partners was concluded (see Aconex gets private equity injection). As mentioned in last year’s report, AUD$25m of the initial AUD$57.5m tranche was used to complete a buy-back of existing shares, and the company’s balance sheet at 30 June 2009 showed cash and cash equivalent assets of AUD$25.9m as against just AUD$1.48m a year earlier. Under Australian accounting standards, the investment has to be accounted for like a debt instrument, resulting in some notional figures appearing in the P&L covering interest expenses and a liability appearing in the balance sheet.

Regional operations

Again, apart from the direct references to the United Arab Emirates, there is precious little detail in the accounts about the performance of different geographical Aconex segments. I guess we will have to wait for publication of the next annual results from Aconex (UK) Ltd to gauge what impact the downturn has had on its British-based operations (2008 results covered here); and these numbers will also be restated in line with the group’s revised revenue recognition policy.

I asked Paul about Aconex’s international strategy and he said they had been building a wide footprint in Asia, particularly in places like Hong Kong, China, India and Singapore: “Hong Kong is our head office and currently biggest largest office in the region. These are key markets and we are working very hard to grow business in them – growth has been slow and steady.”

Southern Europe and north Africa, notably Libya, were also reasonably buoyant, and the company’s push into North America has given Aconex some traction in that market too; the shareholders note cautioned that these markets were “volatile due to their relative infancy”.

Analysis

I have been downbeat about the impact of the recession on the financial performances of the various UK-based collaboration technology vendors (see Gloomy times for SaaS collaboration vendors), and this mood was, to some extent, justified by the the June trading update released by Asite (post) and figures given for industry minnow Storedata (post). 4Projects most recent results (see Good numbers from 4Projects) and the apparent turnaround in Sword CTSpace (see post) appeared to buck the trend, but I wonder if they were boosted by a good first half of the year before the recession really began to bite 12 months ago. My conversation with Matthew and Paul seems to suggest this might be the case.

When I wrote about the Storedata results in August, I had just met Paul and he admitted that the company had taken a hit in the Middle East, releasing some staff in Dubai, so I wasn’t really expecting a repeat of previous years’ stellar growth figures. But whether you take the given figures or look at the restated numbers, at least Aconex has continued to grow, whereas some rival vendors have actually seen revenues shrink. As Paul suggested to me, having operations in a spread of regions – some of which are less affected by the recession – has proved to be prudent strategy for Aconex, enabling it to weather the storm better than rivals focused on just one or a handful of countries.