Exa's (EXA) CEO Steve Remondi on Q1 2015 Results - Earnings Call Transcript

| About: Exa Corporation (EXA)

Exa Corp. (NASDAQ:EXA)

Q1 2015 Results Earnings Conference Call

May 29, 2014, 5:00 PM ET

Executives

Steve Sarno - Interim CFO, CAO, VP - Finance

Steve Remondi - President, CEO

Analysts

Steve Ashley - Robert W. Baird

Jim Ricchiuti - Needham

Richard Davis - Cannacord

Brad Reback - Stifel Nicolaus

Operator

Good day, ladies and gentlemen, and welcome to the Exa first quarter 2015 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions). As a reminder, this conference call is being recorded.

I would like to introduce your host for today's conference, Steve Sarno, Interim Chief Financial Officer. Sir, you may begin.

Steve Sarno

Thank you. Good afternoon and welcome to Exa's earnings conference call for the first quarter of fiscal 2015, which ended on April 30. This is Steve Sarno, Vice President of Finance and Interim Chief Financial Officer. With me on the call is Steve Remondi, Exa's President and Chief Executive Officer.

A more complete disclosure of our results can be found in our press release issued earlier about an hour ago, as well as in related forms 10-K and 10-Q filed with the SEC earlier today. To access the press release and the financial details, please see the Investor Relations section of our website at investor.exa.com. As a reminder, today's call is being recorded and a replay will be available following the conclusion of the call.

During this call, we will make statements related to our business that may be considered forward-looking under federal securities laws. These statements reflect our views only as of today, and should not be reflected upon as representing our views as of any subsequent date. We disclaim any obligation to update any forward-looking statements or outlook. These statements are subject to a variety of risks and uncertainties that could cause actual results to differ materially from expectations.

For a further discussion of the material risks and other important factors that could affect our actual results, please refer to those contained in our Form 10-K for the year ended January 31, 2014 which is on file with the SEC.

Also during the course of today's call, we will refer to certain non-GAAP financial measures. There is a reconciliation schedule showing GAAP versus non-GAAP results currently available in our press release issued after the close of market today.

With that, let me turn the call over to Steve Remondi for his prepared remarks, and then I will provide details regarding our first quarter fiscal 2015 results and our outlook for second quarter and fiscal 2015.

Steve Remondi

Great. Thanks, Steve, and thanks to those of you joining our call today. Revenue in the first quarter of fiscal 2015 increased 10% year-over-year. Revenue was at the lower end of our guidance, as a few passenger car and heavy vehicle projects in North America and Europe got off to a slower than expected start at the end of the quarter. Adjusted EBITDA loss was aligned with our revenue with a loss of $0.6 million. However, these project delays do not diminish our outlook for project revenue for the year.

More importantly, we have converted a number of customers from project-based activity to license subscriptions. These significant transitions are projected to increase our license revenue growth rates to double digits for the balance of the year. This gives us confidence to raise the lower end of our prior full year revenue expectations, and we now expect revenue growth of between 12% and 16% for fiscal 2015.

But before I get into the details of the quarter, I am also excited to announce the appointment of Richard Gilbody as our new Chief Financial Officer who will be starting with us next week. Rick comes to us with deep leadership experience at public growth companies. He was previously CFO of Agencyport Software and before that held senior finance and operating positions at IBM's Business Analytics Division and Cognos Corporation. With Rick's extensive experience at growing public companies, we believe he would be an asset in helping us scale our business in the years ahead.

Now let's take a look at our first quarter in more detail. Within total revenue, license revenue of $11.7 million grew 9% from the year ago, or 8% on a constant currency basis. We have been working hard to convert our strong project revenue growth in fiscal 2014 into license revenue this year. While not materially reflected in our first quarter results, we expect our recent success with these conversions to result in significantly improved double digit license revenue growth rates for the remainder of the year, supporting our increased full-year expectations.

In the first quarter, project revenue, which represents a significant portion of our revenue in new markets like heavy vehicles and aerospace was $2.1 million and it grew 17% from the year ago, or 18% on a constant currency basis. Our lower project revenue growth rate, compared to year ago, is a reflection of our recent success in converting customers from project mode to additional license capacity, which will be recognized right away over the course of the year, as well as from the slower start of projects at the beginning of the year.

Looking at the quarter in more detail, passenger vehicles, our largest market, continues to exhibit similar strength to what we have seen over the past several quarters. Customer activity at the license and project level remain strong and we are optimistic that this trend will continue throughout the fiscal 2015 year, particularly as customers respond to increasingly strict fuel efficiency and emissions requirements in North America, Europe and Asia.

The heavy vehicle market remains uneven with activity at customers in the highway truck market continuing to be stronger as compared to the off-highway market segments. One exception to certain headwinds in this market was the particularly strong performance in the first quarter in Asia. With our first quarter coinciding with the traditional Japanese fiscal year end, we were encouraged to see the continuation of increasingly robust activity levels in Japan that first started to appear in the middle of last year.

Despite recent choppiness in the heavy vehicle customers, we remain confident in our long-term prospects in this market and we continue to have considerable headroom to expand due to our clear value proposition that addresses the unique challenges these customers and prospects face. During the past year, we engaged many new customers and we are optimistic many of these will represent significant adopters of our solutions as we look ahead.

We also remain optimistic for the long term opportunity in the aerospace market. During the first quarter, we saw growing activity as customers continued the process of evaluating and applying the strengths of PowerFLOW 5’s capabilities to their design process.

In regards to our product strategy, we also recently announced a partnership with ESTECO representing another important step in automating the optimization of design in conjunction with simulation. As manufacturers increasingly replace prototypes with simulation, they gain the opportunity to optimize the designs in order to meet frequently opposing constraints.

Automating the optimization process enables manufacturers to explore the entire design space in order to discover otherwise overlooked alternatives to meet their needs. ESTECO is a key industry player that enables this automation and we are excited to partner with them because automation will enable our customers to leverage more simulation capacity to better impact their designs. It further enables manufacturers to utilize our joint technology to get better products to market quicker.

In summary, we believe our start to fiscal 2015 is stronger than our first quarter financial results would suggest. Our business momentum continues to build and we remain confident that we will be making significant progress towards our growth target this year, as customers move to simulation instead of prototyping in order to create products that meet customer requirements more quickly and more efficiently.

Before I finish, I would like to recognize and thank Steve Sarno for his role as interim CFO during our CFO search. Now I will pass the call over to Steve for more details on our financial performance and outlook. Steve?

Steve Sarno

Thanks, Steve. I will discuss our first quarter fiscal 2015 results and then provide our guidance for the second quarter and fiscal 2015.

Revenue in the first quarter was $13.8 million, up 10% from the same period a year ago both on an absolute and constant currency basis. Within revenue, license revenue was $11.7 million, up 9% from a year ago, or 8% on a constant currency basis. Project revenue of $2.1 million in the first quarter increased 17% from a year ago, or 18% on a constant currency basis. As Steve mentioned earlier, revenue in the first quarter was negatively impacted from projects that were not completed in the first quarter. From a geographic perspective, 49% of our first quarter revenue was from Europe, 29% from Asia and 22% from the Americas with year-over-year increases in Asia outpacing other regions.

We will discuss our profitability measures on both a GAAP and non-GAAP basis and have provided a reconciliation of our GAAP to non-GAAP measures in our earnings press release issued after the close of market today. Please note that the only differences between our GAAP and non-GAAP measures are stock-based compensation expenses and amortization of acquired intangibles.

Moving down the P&L, total GAAP operating expenses were $15.4 million, an increase of 19% from a year ago. Our operations generated a GAAP loss of $1.6 million compared to a loss of $0.5 million dollars a year ago, due to planned investments across the organization to support our continued growth including investments in new products.

GAAP net loss in the first quarter was $17.2 million or $1.28 per share based on 13.5 million weighted average diluted shares outstanding. This compares to a GAAP net loss of $0.5 million dollars or a loss of $0.04 per share in the first quarter of fiscal 2014.

Our GAAP expenses included $0.4 million in stock-based compensation expenses and $0.1 million in amortization of intangible assets. Excluding these non-cash items, non-GAAP operating loss was $1.2 million compared to non-GAAP operating loss of $0.1 million in the first quarter of fiscal 2014.

For the first quarter, adjusted EBITDA loss was $0.6 million compared to an adjusted EBITDA income of $0.3 million in the first quarter of 2014.

Non-GAAP net loss in the first quarter was $16.9 million compared to a non-GAAP net loss of $0.3 million in the same period a year ago. With 13.5 million diluted weighted average shares outstanding, non-GAAP net loss was $1.25 per share in the first quarter compared to a loss of $0.02 per share in the year ago period based on 13.3 million diluted weighted average shares outstanding.

Included in our GAAP and non-GAAP net loss for the first quarter of fiscal 2015 is a $15.2 million tax provision associated with two non-cash items. The first is a $14.5 million non-cash charge to record a valuation allowance against our net deferred tax assets in the United States. The valuation charge was triggered by three years of cumulative losses in the United States as of the three months ended April 30, 2014. The cumulative loss in the U.S. is consistent with our strategy to fund additional investments in the business during fiscal year 2015 to drive future growth.

Please note that while we are recording a valuation allowance against our net deferred tax assets, these assets remain available to us to offset future taxable income as we return to profitability.

The second non-cash charge was $0.7 million associated with Section 382 of the Internal Revenue Code [Audio Gap] net operating loss carry forwards. This is more fully described in our Form 10-Q filed with the SEC earlier today.

Turning to some highlights of our balance sheet. We ended the first quarter with $32.6 million of cash and cash equivalents, an increase of $3.8 million from the end of our fourth quarter, reflecting normal cash seasonality. Current deferred revenue was $28.2 million at the end of the first quarter, an increase of 15% from a year ago.

Please note that we do not believe that deferred revenue provides a complete view toward future revenue since deferred revenue does not include non-cancelable orders that are contractually committed but have not yet been billed. We continue to have a debt-free balance sheet as our prior debt was paid off in the second quarter of fiscal 2014.

Turning to our outlook for the second quarter and all of fiscal 2015. As Steve indicated, we are increasing the lower end of our revenue guidance to reflect our increased confidence as a number of projects have converted to license subscriptions. We continued to invest across our organization in order to support our near-term and long-term growth strategy.

For the second quarter of fiscal 2015, we anticipate revenue in the range of $14.2 million to $14.8 million, representing growth in the range of 12% to 16%. We anticipate an adjusted EBITDA in the range of a loss of $0.2 million to income of $0.3 million. We anticipate GAAP net loss in the range of a loss of $0.8 million to a loss of $0.5 million and we anticipate non-GAAP net loss between a loss of $0.5 million to a loss $0.2 million. We estimate basic share count of 13.8 million shares and fully diluted share count of 14.8 million shares for the second quarter.

Looking at fiscal 2015 guidance for the year. We anticipate revenue in the range of $61 million to $63 million, representing growth of 12% to 16% for the year on an absolute basis. We are updating our GAAP profitability guidance to reflect the $15.2 million loss of non-cash tax charges incurred in the first quarter. Therefore, we anticipate adjusted EBITDA for the year in the range of $2.6 million to $3.2 million, an increase at the midpoint from our prior guidance.

Also we update our GAAP net loss guidance to a range of a loss of $16.7 million to a loss of $16.4 million. And we update on non-GAAP net loss guidance to a range of a loss of $15.3 million to a loss of $14.9 million. We estimate basic share count of 13.7 million shares and fully diluted share count of approximately 14.8 million shares for the year. Our guidance above assumes an exchange rate of US$1.37 per Euro and 103 Japanese Yen to the U.S. dollar through the remainder of fiscal 2015.

In summary, with momentum that continues to build, we are increasingly optimistic about our outlook for the year, despite a few project delays in the first quarter. Supported by stronger license conversions and ongoing project activity, this optimism is reflected in our increased revenue guidance for the year.

Operator, we are now ready to open the call to questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from Steve Ashley of Robert W. Baird. Your line is open.

Steve Ashley - Robert W. Baird

Hi, guys. You know what, I would just like to drill down a little bit on the project delays. My first question is very rudimentary. Did that manifest here in the first quarter as lower-than-expected project revenue or license revenue?

Steve Remondi

Project revenue.

Steve Ashley - Robert W. Baird

Okay, and in terms of visibility to those delayed projects, in terms of them coming online, has some happened, is some certain, could some vanish and go away? Just a little color around that.

Steve Remondi

Sure. So I think of all of those, some have started now and from the delays, one significant automotive project was canceled and another one is starting in its place, but there is always a gap between a vehicle program being canceled that we were going to do quite a bit of work on to another one initiating in its place. So you occasionally get those kind of gaps on project like that. But the rest remain in our forecast.

Steve Ashley - Robert W. Baird

Okay, and then my second question is on cash flow. Down from a year ago, and it looks like receivables not as much in the collection side. I wonder if we could get a little color around that?

Steve Remondi

Sure. It represents about $10 million change in receivables and they are really just some large receivables. It's timing. They were collected in May. So just really timing there. There is a few that may have different payment terms than they had a year ago, but no concern with the quality of our receivables from management's perspective and we remain with no reserve on the books.

Steve Ashley - Robert W. Baird

And in terms of capital for the full year, is any change there for the full year, and you still expect it to be just modestly positive?

Steve Remondi

That's correct.

Steve Ashley - Robert W. Baird

Okay, perfect. Thank you. I will get in the back in the queue.

Operator

Thank you. Our next question comes from Jim Ricchiuti of Needham & Company. Your line is now open.

Jim Ricchiuti - Needham

Thanks. Good afternoon. I was wondering if you could elaborate a little bit on the conversion of some of the project revenue business that you are anticipating for license later this year. Can you talk a little bit about which areas this is happening? Perhaps which applications and geographies?

Steve Remondi

Well, yes, and certainly maybe even to correct that a little bit so I think a lot of these conversions that we are talking about have happened now and will be recognized going forward. So even activity in Q1 that we book and the order is in but the recognition of that will start in May or June as we progress through the year and then be recognized over the rest of the year or into next.

So these are transitions that have happened and have been booked as business for us that we are referring to. And we expect more to come as we continue to work on this. It is really has been driven by that 28% or almost 30% growth in project revenue last year when we really demonstrated. And this comes from a variety of places where we demonstrated new capabilities to customers.

So this comes from new applications, new departments within existing customers, moving them to doing it themselves in license mode to also and probably mostly in terms of number of customers, a lot of the new off-highway segment customers that we have been targeting and doing project work last year, a number of them have now engaged in license mode and are actually then will be moving to the full cloud access mode as we get to the second half of the year.

Jim Ricchiuti - Needham

Okay. That actually ties in, Steve, to just if we go back to last quarterly call, you had talked about the new customers you brought on over the past year. So I am just trying to get a sense as to overall utilization that you are seeing from these newer customers?

Steve Remondi

It's mixed. There is some that come in and go really strongly and others come in and do value projects and then go through - of thinking through their development process and then come back. So it's a very mixed behavior. It is not as though there is a consistent pattern to how customers adopt and how they have been reacting other than we have been able to demonstrate strong value and then they have to think through how they want to take their next steps.

Some just continue with the projects continue. Others want to think around and go back and just go into license mode, but then have to get budget and allocation and justification to that. Others seem to be able to find money to be able to go right to license mode almost immediately. I think we have got them all, and even in the same segments, off-highway, small participants, the large participants. We have had the whole gamut.

Jim Ricchiuti - Needham

And just to switch gears for a second and I will jump back in the queue, Japan. Can you talk a little bit about the strength you are seeing there? This has been, the March quarter is typically an important quarter for you there. So I wondered if you could just tell us…?

Steve Remondi

Yes, and historically, the last two fiscal years 2014 and 2013, Japan has been slow, very slow for us, especially in project mode, and starting in mid-last year, I think a little bit of Q2 but mostly Q3 and Q4, I think all of Q3 and Q4, we saw Japan really take off and in Q1 this year, we saw that continue in terms of strength and what the real interesting part was, it was very heavy strength, especially in the heavy vehicle and off-highway segments.

So that was also notable, but that's also coming from two things. We have expanded our sales force in Japan. We replaced members of the team and augmented that team significantly over the last year. And I think that's really also helping to drive strength in a stronger market and a stronger economy.

Jim Ricchiuti - Needham

How is the passenger vehicle business there?

Steve Remondi

Also strong but not as strong. It is not as strong from a project point of view. A large part of the project activity was really heavy vehicle.

Jim Ricchiuti - Needham

Thanks a lot.

Operator

Thank you. Our next question comes from Richard Davis of Cannacord.

Richard Davis - Cannacord

Hi. Thanks. When you guys think about scaling this business out and look at that the structure in the company, obviously as you get bigger you get some operating leverage. Where should we think about that? You already have pretty good sales and marketing leverage, but R&D is fairly heavy load and G&A is fine, but over time [bigger] [ph] scale this with revenues. But when you look out a couple of years, because as Steve asked, you are running breakeven roughly free cash flow, how do you get this thing to 25% margin business? And what does it take on the topline to get there?

Steve Remondi

Yes. It's a very good question. So I think what we will end up doing is, you will see the ground transportation market margins continue to expand. And if you actually even look within that, the margins within the passenger car segment are much better than within the heavy vehicle segment. We are making much more investment on the sales side and bringing customers up to speed. So the model internally has better view than what you see as the combined aspects. And I think the core business around ground transportation, the margin will continue to leverage. As customers scale, the cost of deploying that scale and supporting that scale continue to - drops as a percentage of that revenue.

Did you want to add something?

Steve Sarno

The [inaudible] certainly factor in as well.

Richard Davis - Cannacord

Got it. That's helpful. Okay, cool. Thank you very much.

Operator

Thank you. Our next question comes from Brad Reback of Stifel Nicolaus. Your line is now open.

Brad Reback - Stifel Nicolaus

Hello. Thanks. Hi, guys. How are you doing?

Steve Remondi

Good.

Brad Reback - Stifel Nicolaus

Just a quick question. Gross margin was down about 300 basis points year-over-year. Was that purely a function of the delays on the project side or were there some other issues there?

Steve Sarno

We also made some investments that you are seeing in there in people to produce some of the future products that we are looking for.

Steve Remondi

Remember, our cost of goods sold includes all of our field application engineers because we do not distinguish their efforts between pre-sales project support and post-sales. So we carry all of that cost burden there whether they are doing projects or not, right. So, Brad, as we increase that staff to work on the growth rate, right, that is an addition.

Brad Reback - Stifel Nicolaus

Great. Thanks very much.

Operator

Thank you. Our next question comes from Steve Ashley of Robert W Baird.

Steve Remondi

Hello again.

Steve Ashley - Robert W. Baird

You have a little bit of an echo chamber. That's fine. So my first question is kind of a housekeeping question. The $15.2 million non-cash one time one off, if we chalk that out of the results, do you know what the reported EPS loss would have been?

Steve Sarno

It would have been very close to our guidance range. You can't just subtract the $15.2 million out, because you would have had a loss for the quarter that you would have got a benefit from. And you don't get the benefit, because you are putting up the full valuation allowance. So we would have been pretty close to what we guided.

Steve Ashley - Robert W. Baird

Okay. Great, and then I just want to circle back to this project turning into license. Steve let out a litany of different things that have happened, some of those conversions have already happened, some are pending. My question is on that pending. Just how for sure pending? Meaning, have you assumed that all of them happen and there is just a lot of confidence? I am just trying to get some color around that.

Steve Remondi

No. So when we build our model, we obviously build a license. Our looking at guidance is based on licenses revenue forecast and our project based forecast. The license revenue forecast is basically built on existing license customers that are already in the contract and any upgrades or expectations that we expect to have come, but mostly it's all contracts that have already converted and significant new conversion is still -- it has been very difficult for us to project exactly the timing of conversion from customers from project mode to license mode. So we don't. When a customers is in project mode, we project their future were to stay in project mode internally through our forecast until we know definitively they are going to switch.

Steve Ashley - Robert W. Baird

So when you talk about license, and I want to confirm for the full year, you are now looking for license revenue growth at 12% to 16%? Does that sound right first of all?

Steve Remondi

We said double digits.

Steve Ashley - Robert W. Baird

What was the license growth of 12% to 16%?

Steve Remondi

That was total revenue.

Steve Ashley - Robert W. Baird

Total. Okay. So license double-digit. I am sorry. And then, what I am just hearing and saying back to you is, we really haven't baked in a lot of stuff that hasn't already happened or that there isn't some relationship that exists today when we say that license will go to double-digit.

Steve Remondi

Right.

Steve Ashley - Robert W. Baird

Okay. That's perfect.

Steve Remondi

And then it is really important, if you look at the first three quarters last year, license revenue growth was single digits, 5%, 7%. I know I am not exact, but none of it was double digits. Only for the fourth quarter, as we had that sort of surge of peak capacity rolling in at the end. So in order to meet our target growth rate of 15% to 20%, it certainly really important that we get our license revenue growth itself up into the double-digit range. Solidly through double-digit range.

Steve Ashley - Robert W. Baird

In terms of hiring headcount, you had laid out the plan to be more aggressive investing in people. We heard a little bit of that commentary here already. Can you bring us up-to-date on how your hiring is going and if you had any change to your full-year plan?

Steve Remondi

Well, the hiring is basically on plan module. There is always puts and takes on that. But we are basically on plan with regards to hiring. Our checkpoint, really for us, is we will only execute the full year hiring plan if we continue to see that we are on target for our budget to complete the rest of the hiring in the second half of the year. So will be able to modulate the hiring in the second half of the year as we see and look at our final outlook as we get to the end of Q2.

Steve Sarno

Again, I was just going to say, from a headcounts perspective, we are at 273 at the end of the quarter, versus 257 at the end of last year.

Steve Ashley - Robert W. Baird

Perfect. Okay. Terrific. Thank you very much.

Operator

Thank you. Our next question comes from Jim Ricchiuti of Needham & Company. Your line is now open.

Jim Ricchiuti - Needham

Aerospace is still a fairly small part of the business, but I wonder if you could just provide an update on the activity that you are seeing their, and whether you feel like you are on track to see this become more meaningful perhaps a year or two out?

Steve Remondi

I think, from our point of view, we continue to be -- we are on track relative to seeing that being increasingly part of our business. I described in the past that it should add, over the course of this year should add points of growth to our total growth rate and total revenue, and we continue to see that foundation being laid at some major accounts and major customers. So nothing has caused us to pull up at all into that area.

The evaluations and technology valuations do take longer times, even longer than the automotive, but we continue to see progress. We do even have customers, a number of customers in license mode. One actual conversion from project mode to license mode in the quarter. So we continue to see you know that outlook improving and the forecast certainly improving at a much faster growth rate than our overall company revenue growth rate. But anyway it's a small numbers. But it is growing at a very substantial rate.

Jim Ricchiuti - Needham

And Steve, can you talk a little bit about within the past year vehicle market, if you are seeing any areas of particular strength coming from the supply chain? Just trying to get a sense as to how the business looks versus your traditional customers in automotive and perhaps some of the activity of late that you have seen in the supply chain?

Steve Remondi

The supply chain remains as sort of an initial effort for us. We have a number of key customers in the supply chain. One in particular, Delphi has put a number, I think, on their website relative to our technology and how they are using it with regards to noise within the HVAC unit systems. They have put some, published things together. So that's public statements they have made of our work together. But from a sales penetration point of view, we have not dedicated a lot of sales effort into the supply chain at this point. That's still a future opportunity for us and we are regulating how fast and how much we spend to go capture the market and the limitations that we have in terms of how fast we go after these other participants.

Jim Ricchiuti - Needham

Got it. Thank you.

Operator

Thank you, and at this time, I am not showing any further questions. I would like to turn the call back to Steve Remondi for any closing comments.

Steve Remondi

Okay. Well thanks all of you for joining our call today. We are looking forward to building momentum as the progress through the year. We have already seen an increase in activity levels in the second quarter as manufacturers continue to adopt Exa's simulation technology to replace expensive prototyping. With that, we close the call and we look forward to speaking with you again soon. Thank you.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone, have a wonderful day.

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