AVEVA Group Plc's (AVEVF) CEO Craig Hayman on Q4 2018 Results - Earnings Call Transcript

About: AVEVA Group Plc (AVEVF)
by: SA Transcripts

AVEVA Group Plc (OTCPK:AVEVF) Q4 2018 Results Earnings Conference Call June 14, 2018 4:30 AM ET


Craig Hayman - CEO

James Kidd - Deputy CEO and CFO


Stacy Pollard - J.P. Morgan

James Goodman - Barclays

David Toms - Numis

Craig Hayman

So, this morning, I'm going to cover some highlights very briefly. I'm going to hand it over to James to go through more detail on the financials, and then come back to give you sort of my view of our business, where we are strategically, where we fit within the industry context, some of the synergies that we've committed to as you'll hear from James in a second, and then we'll take questions and answers.

So, first of all, let me introduce myself a little bit. I'm Craig Hayman; I've been with the company for 100 days. Before I was at AVEVA, I was with a company called PTC in Boston, Massachusetts. I was the Chief Operating Officer where I ran sales, marketing and engineering for that business. When I was at PTC that I really just began to understood this opportunity around digitalization as it applied to the industrial world.

We've seen digitalization apply to commerce and advertising and the incredible value that's unlooked. I believe that this industrial -- digitization in the industrial world is really accelerating. And when I saw what was happening at AVEVA, now the combination of AVEVA and Schneider Electric Software, I thought that was a really compelling proposition.

I moved back to the United Kingdom after being in the United States for 30 years working in enterprise software and I'm so delighted to with the solid numbers that we've put behind us as we begin this journey around integration and the future ahead.

So, let's start there. James will talk about the numbers in a second on a pro forma basis. Pro forma because we think that's the best way to represent these numbers on a true trailing 12 months basis for the combined business. 8.6% revenue growth, 8.9% adjusted EBITA growth on revenues of about £700 million and profit of over £165 million. These are good numbers.

I'm especially proud of these numbers from James and the team has given that we are also at the same time completing the integration of the merger of Schneider Electric Software and the AVEVA business. So, what's good here is the team did not become distracted by that integration. They were still able to deliver good numbers in the middle of that. I think that's positioned us well.

The integration, the combination occurred on March 1st of this year. We returned £10.15 back to our shareholders as a result of that and we're also today indicating that we're going to intent to deliver £0.27 dividend back to our shareholders.

So, our integration is on track. I'll talk a little bit later about what we're doing around some technical integration scenarios, around the sales integration activity. But we feel that integration, which has all of our attention quite frankly, is going really quite well.

Now, we're also in addition to the dividend for FY 2019, announcing that we're going to deliver £25 million of cost synergies. What that means is we look for our business we've benchmarked ourselves against other companies, and we have operational plans to deliver that £25 million of cost synergies.

We'll hit that £25 million of synergies exiting 2020, our fiscal 2020 which is as we come out of March 31, 2020 into our fiscal 2021. And so we also expect to generate some material revenue synergies. I'll talk about that a little bit later with some examples.

So, with that, let me hand it over to James.

James Kidd

So, good morning, and thanks for joining us this morning. I'll take you through the financials. But before we get into the actual detail, just wanted to give a set how they've been presented this morning. So, as you've seen, we have to present the statutory numbers. And to help you really understand the underlying trading performance and the constituent parts, we've also presented pro forma numbers.

So, the statutory numbers are prepared on a reverse acquisition basis. So, that's basically meaning that for accounting purposes, the Schneider Electric business is acquiring the Heritage AVEVA business. So, in the numbers on the statutory basis, you can see 12 month's performance from Schneider business plus one month from the Heritage AVEVA business, with the comparator being the Schneider business for 12 months.

So, in essence, not very helpful in terms of understanding the business and the underlying performance. So, really to help you, we've presented pro forma numbers and I'm going to take you through those this morning. I'm going to also look at the pro forma numbers in two constituent parts.

So, let's get started and look at the numbers. So, overall, I'm very pleased with the results we presented this morning. Overall revenue is up 8.6% to £704.6 million and adjusted profit before tax up £6.8 million to £162.8 million. You'll see the effective tax rate was 25% on an adjusted basis. The number of moving parts on the tax rate and I'll cover that a little bit later.

And as Craig mentioned, the board is proposing a final dividend of £0.27 per share, which is after the £10.15 we returned as part of the combination and the dividend will be paid in early August.

So, let's now look at the first part, which is the Heritage AVEVA business, which you're all familiar with. Very pleased with the results from the Heritage AVEVA business, really strong performance during the year, with headline revenue up 15% to £248.2 million. Strong performance really driven by strong focus on sales execution. We appointed a new Head of Sales back in June 2017 and he's been a real difference in terms of driving the salesforce and really focusing on closing deals.

We're also seeing signs of stabilization in our end markets in Oil & Gas and Marine and that's helping support the underlying performance. I think the other key thing we're seeing is amongst our customers is they're really realizing the importance of managing and maintaining their engineering data and that really fits firmly in the digitalization theme that Craig will speak about later.

So, overall, very pleased with the AVEVA performance, particularly given the amount of time and focus that we spent on getting the combination done. So, it's a real credit to all our teams that they've been able to deliver such a great set of results.

So, the headline growth rate of 15%, it was helped by a 1.5% FX benefit. And we also closed a large contract during the year, which we announced back at the start of January, which is worth about 3% to the topline growth rate. So, on an underlying basis, the growth rate is around 10%.

It was also good to see strong operating leverage in the P&L with margin increasing to 27.3% and adjusted profit before tax up 23.3% to £67.8 million, reflecting the strong growth in revenue and good cost control.

So, let's now move on and just look at the different revenue streams and some of the key factors around the growth. As I mentioned before, we saw strong sales execution in the year and some stabilization in our end markets. All of our regions grew during the year, but in particular, we saw strong performance from Asia-Pacific and EMEA and they both performed very well.

We also saw continued strong performance from AVEVA E3D, our flagship 3D design tool, which grew 55% during the year. And also our initiatives around More than 3D help support growth in that area of 27%. So, again, very pleasing that some of our strategic initiatives are really starting to deliver value.

Recurring revenue was up 11% to £184.2 million, representing 74.2% of total revenue. Annual fees, they were up 2.1% in constant currency terms. Annual fees are now classified within support and maintenance. We have changed our revenue classifications really in line with best practice. The increase we reflected higher rates of customer retention, as well as strong initial license wins, although we did see some churn in Latin America and EMEA.

Rental licenses, up very strongly, just under 15%, really underpinned by strong renewals and extensions from our EPC customers. But in particular, this large three-year contract from one of our Global Account EPCs, and this is one of the largest deals that we closed in AVEVA and we're delighted that we managed to get that done. That deal was, to say, contributed around 3% to the overall growth rate.

Initial license fees are up strongly as well, just under 30% in the year, with Asia-Pacific being the main driver. We closed three large deals in Korea and Japan in the Marine industry. Mainly we're seeing increased confidence from some customers there investing our technology. So, that was very encouraging to see. But I think it's fair to say we're not seeing a dramatic change in fortunes for the Marine market, but we are seeing pockets of growth.

And finally, trading services, up 22.5% in constant currency, again, really reflecting the increased number of projects that we executed during the year.

So, just moving on to the cost base, so as you know, AVEVA has largely a fixed cost base, albeit with some annual wage inflation built into that. Overall adjusted operating costs were up 9.2% on a constant currency basis. A number of moving parts here, so just looking at each of those in turn.

In cost of sales, which increased by 4%, mainly due to the higher project volume that we incurred. But I should also point out that for this year; we have actually reclassified some of our post-sales costs into cost of sales from selling and distribution, really to align our treatment with how Schneider Electric has been classifying those costs.

Research and development costs were up £32.3 million, mainly related to continued expansion of our operation in Hyderabad, but also we're continuing to invest in More than 3D portfolio, particularly in products such as enterprise resource management and instrumentation and electrical.

Selling and distribution costs were up £79.1 million, up 5.2%, due to higher sales commissions, due to the strong revenue performance and also we did hire some more technical resources supporting the More than 3D initiative.

Admin costs were at £38.7 million, up 16.5%. We invested more in our -- some of our corporate function such as IT and HR and the results are higher bonus charges related to the strong profit performance.

So that completes the first part of the pro forma. The second part is the Heritage Schneider business that completed on the 1st of March. We have presented here the 12-month pro forma results for FY 2018 with the full year comparative.

Just one point I'd like to make. We don't have all the constant currency data yet on the Schneider business. We will present that going forward, but so we're only presenting the reported numbers here today.

But before we get into the actual numbers themselves, I wanted to just to collect some of the features of the Schneider business that I think are worth highlighting. First of all, as part of our portfolio, the Schneider business is a market leader in monitoring and control software using operations.

This serves the discrete batch and hybrid process market such as food and beverage, infrastructure, power, oil and gas. And it's really used for supervisory control and real-time visualization of operations and the main brand in that area is Wonderware, which many of you will have heard of.

These products are sold through a very strong distribution channel that's been established for many years and they're supported by an ecosystem of system integrators who help with those implementations. And none of that implementation revenue actually goes through our books; it's all done directly through the distributor.

Most of the revenue coming through the channel is perpetual licenses with support and maintenance and it's approximately 30% of our total revenue comes through this channel, since it's a big part of the business. And I think for the enlarged group, it gives us fantastic capability for promoting more products through that channel in the future.

Secondly, another feature I'd just like to highlight is the fact that the Schneider business has a higher service content compared to the Heritage AVEVA business and a very strong delivery capability in the Schneider business, supporting software license sales. And as a result of that higher services content, there's a lower margin associated with that.

And finally, and probably most importantly, as well as being a very supportive shareholder in AVEVA now, the Schneider Electric Group is also a very important channel for us and one of our -- in fact, our largest customer.

In the year to March 2018, there was £73 million of revenue went through the Schneider electric channel. And we and Schneider truly believe there are great possibilities to grow that revenue in the coming years.

So, let's just look at the 12 months performance. As you can see, revenue was up 5.4% £456.4 million. FX had a minimum impact of the business during the year with a constant currency growth rate in 5.6%. Schneider business did benefit approximately 3% from the new commercial agreements that we have spoken about before, which were put in place with a wider Schneider Electric Group during the year. So, the underlying growth rate stripping those out is around 2.5%.

So, just moving on to look at the revenue in a bit more detail, starting with support and maintenance, which is up strongly at 15.2% to £132.5 million, driven really by strong performance across all the regions, but mainly from the monitoring and control portfolio.

Rentals and subscription was up 1.9%, mainly from existing customers and the process engineering area, but we also saw growth in that trading, planning, and scheduling portfolio, which is really focused on downstream Oil & Gas in the mining industry.

Perpetual licenses are also up strongly at 14.8% to £163.2 million. That's referencing the Wonderware products that I mentioned before with strong growth in those licenses in Asia-Pacific and Europe.

And finally, the one area that was down was the services revenue which was down 12.4% to £112.8 million. And mainly related to the [Indiscernible] business which was focused on the midstream Oil & Gas business where we saw drop off in project volumes following some significant asset upgrades in previous years.

Okay, so let's just move on and look at the cost base for the Schneider Electric Software business. Overall, we saw cost increased 6.8% to £358.4 million. Cost of sales within that were up 7% -- 7.5% due to the effects of the new intercompany arrangement with Schneider Electric, some FX, and also some salary inflation, that's where the cost of the delivery team gets booked.

R&D costs fell by 5% in the year due to some savings from the restructuring they carried out before the combination completed and also some reduced levels of outsourcing.

Selling and distribution increased by 12.5% due to some addition sales resources in EMEA and Asia-Pacific. And finally, admin costs were up 12.7% due to higher accounting and consulting costs, and also costs associated with the legal reorganization, which was done prior to the combination. So that's the cost base.

If we now move on and look at what the combined revenue looks like for the group on a pro forma basis, you can see we did see strong growth in our recurring revenue, up 11.1% in the year. That was driven by the strong supportive maintenance, particularly on the Schneider side and strong growth in rental and subscription, which mainly came from the AVEVA side with the strong renewals, particularly in our EPC contracts.

Initial license fees and perpetual also grew strongly during the year, up 17.8% and again, that was driven from both sides with the Wonderware licenses on the Schneider side and the strong initial licenses we saw in Asia-Pacific on the AVEVA side.

And just looking at the overall profile of our revenue, with a higher level of perpetual initial licenses and services, our overall recurring revenues dropped to just under 52% of total revenue and that's a clear focus for the group going forward that we want to grow higher levels of recurring revenue.

And finally, on revenue, I thought it would just be quite useful to show you the different parts making up the overall growth rate of 8.6%. So, underlying growth overall is 5%, that's a blend of the AVEVA underlying rate of roughly 10% and the Schneider Electric Software business 2.5%, so overall, 5% on underlying growth.

With a 2% benefit from the commercial agreements, which is a one-off effect in the year from repricing those. We have a large contract in Heritage AVEVA, which is a 1.2% benefit and with a minimum benefit from FX. So, overall, that adds up to the 8.6% growth rate that we reported for the year.

And finally, on the pro forma 12 months numbers, just looking at the combined cost base. Overall, costs are up 8.5% to £539 million. The group knows there were 4,400 employees and we really have true global scale to be able to expand the business and really take advantage of that. So, I think that gives us the great capability.

And as you can see, the group has got significant investment in R&D just under £100 million. And again, that gives us great scale to being able to innovate further and really drive the combination of both portfolios.

I just wanted to put a couple of things of the exceptional items, which are included in the pro forma results. The two main items are the acquisition costs and integration costs related to the combination. Those are the due diligence and financial advice costs that we incurred, plus some of the consulting costs we applied on the integration.

And also, we written off £15 million of capitalized R&D on the SES side following a review of some of the projects that we're in [Indiscernible] there, so total of £44.4 million, of that £25 million was paid out in cash during the year.

And I just wanted to pull up a couple of the highlights of the tax rate. So, the pro forma adjusted tax rate was 25%. The AVEVA rate was abnormally low, you can see that 11%. We had a couple of one-off benefits. We had a catch-up from the Patent Box regime during the year. That relates to AVEVA E3D, which is patent-related to that product. That delivered a significant benefit in the year, which is great news. And we also have a release of the provision for withholding tax. So, that resulted in the AVEVA underlying rate being 11%.

The Schneider business moves their profits or domiciled in the U.S. So, we are -- we will get benefit from the reduced U.S. corporate tax rates. We saw a small benefit in the three months to March and we will see the full benefit coming through in FY 2019. So, when you look at FY 2019, we expect the overall effective rate to be around 25%.

And finally, just on the balance sheet, obviously, the combination has increased the scale of the balance sheet and most notable item is our non-current assets up because the goodwill.

So, there's goodwill of £1.26 million created as part of the combination. And also highlight the cash number, which was a bit stronger than we expected, £105.8 million. Although we're still to complete the mechanics on the working capital net debt adjustments related to the combination.

So, overall, that concludes the financial slides. Very pleased with the results we presented this morning. We've seen a strong performance from the Heritage AVEVA business, good progress on the Schneider Electric Side. I think it gives us a great platform for this current year and for which the business can grow. And I'm very excited about the possibilities and opportunities that are ahead of us.

So, with that, I'll now hand back to Craig and he will give you his review. Thank you.

Craig Hayman

Thank you. Thank you very much. Now, I think hopefully you saw from James is this operational rigor that he certainly bought to the AVEVA business that we're working on bringing to the broader company now.

But now let me shift from the broader context within which this deal was done, the merger between the two businesses. Recall that I talked about digitization being applied to the industrial world and there's two sides of that coin. There is the capital expenditure, the build-out of facilities, process manufacturing facilities that produces the food and medicines of the world and the staples that we consume. And then there's the operational aspects. Once you've built those environments, now operating them, ensuring that they're operating a best-in-class model.

If you have a baseball team, you want to be sure -- or a soccer team, you want to be sure it's the best-performing soccer team or football team. Similarly, if you are running a process manufacturing facility, you want to ensure it's the best performing process manufacturing facility. You want to be in the first -- the top division basically.

So, in that context, digital technology is letting you do that. And that was the premise between bringing together these two businesses, AVEVA, the leader on the capital-intensive side, the build-out, the design of these process manufacturing facilities; and Schneider Electric Software, the leader in the operational side of those facilities, bringing them together into one business. And that's how we created this now a new leader around this industrial transformation.

So, let's test that for a little bit and see okay, within that thesis around the secular trends in the industry, how is the new AVEVA doing? So, let's come back to a few of these themes, data, big data, machine learning, let's think about analytics, let's think about industrial IoT, and let's think about cloud, and let's test our business through those secular trends.

Well, first off, data. That is one of the secrets around the new AVEVA in that it has these great -- this great ability to pull in data from all of these end points. This is the Wonderware portfolio, this is the AVENA NET portfolio, bringing in design data not just from AVEVA's toolsets, but from other companies' design tool set, bringing it in from brownfield environments using point clouds in the same way that with a Tesla motor vehicle, you drive through the street and build an image of the street. We drive through a manufacturing facility and build a 3D point cloud of that manufacturing facility to assist you in the further design and then revamps of that facility.

We do the same on the operational side. We can pull in data from not just our endpoints, not just Schneider Electric endpoints, but that of any vendor that sits in an operational environment. This is a different approach from the closed MES systems that we saw of old.

We are able to take that data and then use analytics. We store the data. We have a historian. We store the data and then based on differences in startup sequences and operational sequences, predict where a failure will occur before it curves.

We also, in the same way that you can simulate financial numbers in a spreadsheet, we can simulate process flows in a process manufacturing facility. We can, from looking at the sulfur content of oil coming out of the ground, predict what is the right mix and process recipe to apply to that oil to get the maximum benefit from that oil based on demand. This is what AVEVA brings to bear.

So, these technical trends in the center of this chart, this is what is why this acceleration is occurring. And I'll tell you through these lens, for example, on cloud, AVEVA is accelerating its investment in cloud and is accelerating the number of customers we have in cloud. Now, over 20 customers in production using our cloud facilities have either our design toolsets or our data aggregation toolsets. So, it's this end-to-end portfolio that we have begun to articulate out to the market, and I'll touch on that as we get to integration as well.

A couple of examples. The first is around the idea of pulling the data from midstream and downstream. This is one company. We are able to take that data and present it no matter where you are in the world within three minutes or less. From a upstream and downstream facility. That's an incredible boom to safety. The only question this customer has for us is how quickly can we move on bringing on board more on more countries across their footprint into that solution.

The second example I will use is a Abu Dhabi National Oil Company, a recent win for us, deployed in under four months, where we brought together -- they have over a dozen operating companies -- Abu Dhabi National Oil Company have a dozen operating companies. And if you think about us operating companies they have disparate footprints and. We were able to bring those disparate footprints together, 100,000 data points, whether that's real-time data or aggregated analytical data point, and present that for the very first time for that business.

And this is a quick shot of what that looks like. It is best-in-class in terms of visualization, of operational data. So, that this is -- doesn't tire the eye as you look at that already, you can see areas where you want to turn your attention to. And we're now extending that work together with ADNOC to go to over 1 million end points.

That brings to bear the Wonderware portfolio together with the traditional AVEVA portfolio in a very short period of time, very quick deployment model. I think you'll be hard pushed to find any other company is able to do something like that as quickly and as effectively as the new AVEVA.

Here's another example and I'll use this to tee up some of those integration scenarios that I referenced earlier on. So, now think about this is a situation with the Temelin nuclear power plant. We see here a picture of the AVEVA toolset, this -- which brings together a high 3D, high-def 3D render of the design footprint, in this case, of a nuclear power plant. It's visualized in a very nice environment. This has been in partnership with Microsoft. You can also do this through a hollow lens or augmented reality. So, now this is from the traditional AVEVA perspective. Taken that data on this side of the -- of the circle, the asset -- the engineer procure and construct.

Now, we have completed the work, the early integration work to now connect that design data with operational data. So, this is a view that we're sharing with customers. Now, as you look through that 3D view and you click on in this case, a pump it within that 3D view, you see live real-time data of that pump being rendered in that 3D view. This is the combination of design data and operational data.

You can look at analytics around the pump, you can look at the cavitation of that pump, you can look at the heat, you can look at the voltage being consumed by the pump, and then you can connect it to the workforce automation tools that we have to dispatch or repair to that pump and understand what is the isolation procedure for the three valves around the pump to ensure work is safety in the environment. Perhaps even activate a circling red light to ensure that those workers in that facility understand that, that is an area under maintenance. This is just one example that we have begun to share with customers of the integration of the two businesses. Our sales teams are very excited about this as are our customers.

Circle back a little bit on the market that James touched. You might know of AVEVA as being a business that is very rich in oil and gas, but oil and gas is now about 45% roughly of our business. The combination takes us into these other markets such as engineering -- such as packaged goods, power and utilities, food and bev, medical. So, now we have a much more richer segment mix. We also have a much richer geographical mix in our business with how your penetration in North America, as James mentioned.

Now, very quickly on integration. March 1st is when we closed the merger with the two businesses, bolt them together. We have been busy since March 1st and I know there was a lot of work that went all and not to that to make the deal happen. And I would say actually AVEVA and Schneider were the leader in bringing together this idea of partnerships between software firms and industrial firms. That was announced back in over nine months before the closing of that acquisition. So, this idea of an industrial company and a software company together, were ahead in the industry at that point. But we've been busy.

Since March 1st, we've put together all of our sales teams, so over 500 of our sales together in Dubai and we began teaching our sellers the best practices of selling these end to end integrations scenarios that I've just been sharing with you here today in very brief terms.

We have an integration team, that includes myself, James, the senior leadership team that wakes up every day and is really focused on ensuring that our integration gets better and better and better every day.

This is, of course, a textbook moment where integration has all the great opportunities in it and also has the potential pit force. We have outside help from us. We have a consultant -- consultancy firm, who is assisting in us and applying best practices around integration and I think this is one of the reasons why our integration is absolutely on track.

Now, let's talk about synergies. Now, with respect to the cost synergies, we -- of course, there were some expectation out there around cost synergies, but we did our work through that through the integration. We did a bottoms-up analysis of our functional areas. We compared ourselves to companies similar to ourselves to understand what were the appropriate best practices to apply. And locked in a cost synergy roadmap that grows over the next three years. So, exiting 2020, that's when we got to this £25 million per year cost synergy that flows through to our business.

Now, we have also begun sharing these, what we would call revenue synergy opportunities, opportunities where we can increase the productivity of our sales teams by having scenarios that we can be cross-sell. We're testing those with customers and we'll have more news on those, the specifics around the metrics around those cost synergies later this year. That's the revenue synergies.

So, to wrap-up, we are focused on integrating the business with a lot of focus on execution. That's within the strategic context of this. We believe this is our time at AVEVA as the secular trends come together. We have spent our time with the Board and are outlook for the enlarged AVEVA Group is in line with our Board's expectations.

It's an exciting time. We feel good to have last year behind us. The team did a lot of work last year. We feel good to have it behind us and to be in solid footing as we're executing in this fiscal.

Now, we're going to shift to Q&A now. Now, one of the questions that I know many of you have is I'd like to understand a little bit more about that Schneider Electric Software portfolio? So, as a proactive response to that and give you a chance to think about the questions, let's spend a little bit of time to answer that question around the Schneider Electric Software portfolio.

[Video Presentation]

Craig Hayman

That's Rob McGreevy who Heads up our Product Management Function for the now the combined company. And Kim Cousteau who leads our Asset Performance Management or APM business, one of the very fast-growing segment for us. So, James, you only want to join in answer some questions?

James Kidd


Question-and-Answer Session

Q - Stacy Pollard

Stacy Pollard with J.P. Morgan. Thanks for the opportunity to ask questions. Obviously, we're being introduced to you, so I have several, three quick ones. First of all, you haven't exactly quantified revenue synergies, and you're probably not intending to immediately. But can you maybe give us a better idea how to think about it? So, for example, the 5% underlying, do you think synergies may be add two to three percentage points over time of growth, something like that?

And then the second question would be around the Digital Twin vision that you have. Do you think you need to look for a unified underlying platform between AVEVA and SES?

And then the third question, given that you're coming from PTC, where do you view AVEVA in the Internet of Things competitive space? And where do you see that going?

Craig Hayman

That's a good list of questions. Let's start with a hard one. Maybe I'll start with the hard one. So, you -- I think you said was we have not exactly stayed at what the revenue synergy is. I think that was a very polite way of saying, thank you for that, being polite.

I think it's frankly too early for us to commit the revenue synergy side of it. Please don't be confused. It certainly has our attention. I think of revenue synergies around sales force productivity. So, we have a certain number of salespeople. We have some of my previous company we have a certain number of salespeople, how much does each individual salesperson sell.

You can drive revenue lift by increasing the number of sellers or increasing the revenue that you can produce per seller. I mean it's just math at that level. And you can increase the productivity of the seller then make it easier for them to sell, can reduce the friction of them selling things. You make it easier to sell. So, this is what again we've done previously.

So, we have the scenarios that I shared some of those scenarios here. What we haven't been completed is the work to layer those and we don't have data yet at this point to show -- to demonstrate that productivity improvements are will be yielded.

Later this year, we'll be in a position to do that. We -- I certainly have a view that whatever we commit has to be grounded in bottoms-up analysis and we just didn't complete that work the revenue synergies.

James Kidd

Yes. I think at this stage, it's still early days with educating the sales force in both portfolios. There's still work to do there. So, I think at this stage, we're growing as Craig says, do the proper underlying work and certainly leasing the year given more granularity. We will see it coming from.

Craig Hayman

Now, to your second question around Digital Twin. Now Digital Twin is, of course, has shifted in the last 12 months from vendors laying claim that they have the secret sauce to Digital Twin by for me because I understand Digital Twin. 12 months ago, that might have been valid in the market. That's really not valid anymore.

What you're seeing is in these industrial's, many of them have hired Chief Digital Officers, Chief Information Officers, they already have a view of the Digital Twin, some of them would say that they already have an idea of the Digital Twin. They're looking for companies like ours, like AVEVA, to assist them accelerating the delivery of Digital Twin.

So, our view, as you heard me here say today, is we can help you realize that vision of Digital Twin faster than anyone else out there. And in fact, with Schneider Electric, when you go into in combination with Schneider Electric, there's very few people who would come close to accelerating your vision of a Digital Twin or accelerating the use cases around Digital Twin.

And now to your third question, which is I think was around a platform discussion about an IoT platform. Look IoT has shifted. IoT is a big segment. You've got consumer IoT. You've got industrial IoT, so I'm just going to focus on industrial IoT. Again, I would say 12 months ago, there was this view that one platform would be the savior of the world here as an IoT platform.

In reality, there are many. If you were to look at the Gartner chart, there's no leader, there's no top right quadrant. They're all down in the bottom left, bottom right as emerging platforms. So, because of that, we -- of course, we have a view. We think we have a very strong footprint. We've got over 40% market share in a Wonderware endpoint data capture point of view.

We think that really a platform would be in combination with that industrial. So, for us, there is eco structure. We think that we are the very fastest way to realize the Digital Twin with eco structure; we can realize it very rapidly.

But in terms of laying claim to branding something, I don't know that we're fixated on that as much as maybe others are. I mean other vendors have shifted, I think as well from laying claim I have product A. It is an IoT platform. That's really 1990s sales [Indiscernible] salesman type of stuff. The -- really what it is, is let me show you how I can realize the Digital Twin very rapidly. I just happen to use this technology to do it and we're in that camp. James?

James Goodman

Thank you. It's James Goodman from Barclays. Just a couple for me. I mean, firstly, there's never a deal about cost synergy per se, it's more the strategic opportunity I think we get that. My question, though, is do you need an additional investment for a period of time in order to realize some of these strategic and product opportunities that you've spoken to this morning? And behind the £25 million that you've talked to, are you tempted to be slightly more aggressive on the cost structure of the business in order to actually redeploy that investment elsewhere in some of these growth opportunities? That's first question.

And then more on the financial side per se, James. I was interested and thanks for the clarity on the pro forma reporting, but in terms of the performance of license maintenance, et cetera, why did we not see more of a maintenance uptick in the core AVEVA business from the license that came through? And on the Schneider side, why did we not see more drop through from the positive product mix towards products sales as opposed to services? thank you.

Craig Hayman

You want to start?

James Kidd

Yes, on the AVEVA side, the -- as you rightly say, the annual fees are at 1.9%. And that's a bit less than we would expect. We did see some churn in annual fees in Latin America where the market still remains pretty difficult. And also a little bit in in EMEA as well. So, that was the main cause of that.

On the Schneider said, yes, and the drop-through was not there. We had some additional costs which came through, which basically negated any drop through to the bottom-line, mainly in the annual function traditional accounting and consulting costs related to the reorganization.

Craig Hayman

Just to follow through on the R&D investment, the expense synergies, the cost synergies, that's a full drop through of synergies there. There's a remix that's occurring sort of within the ledger here. So, our R&D investment is actually quite healthy, quite a healthy R&D investment. We have a new leader of our R&D organization, Andrew McCloskey, who comes to us from Schneider Electric Software who truly is in a rocket scientist, that's his formal training.

I mean he is applying all of the best practices around agile techniques and continue process improvement to our R&D investment to ensure that R&D investment is aligned, sort of constantly realigned based on where the best revenue opportunity is for us. So, that occurs pretty constantly, I think he's even on a 30-day cycle of scrum teams being redeployed around us.

Now, that's internal to us. So, that R&D prioritization, that would have been a concern of mine when I came in. I actually did an inspection on that and was very pleased to see, I think what we were doing there is actually best of best-in-class. What was the second question, it was around--

James Goodman

That was it.

Craig Hayman

That was it.

David Toms

Hi. It's David Thomas from Numis. A couple for me; one on the cost and one on the revenue side. Just on the cost side, are you able to tell us how many locations you've got or where you expect that to go with one proxy for tracking progress integration?

And on the revenue side, it's quite stock in the numbers that AVEVA has so much more recurring revenue than Schneider. Yet when you look at the SES business model, it's all about sort of operation improvement, helping people take costs out and run plants over a very long timeframe. So, do you foresee a situation where Schneider moves to being much more on a subscription model and sort of aligned actually with customers cost down the business and running the business rather than silly people something out front 20 years?

Craig Hayman

You want to start?

James Kidd

Yes, so, on the location side, so we have a number of places where we got duplicate offices, so example being Houston in Texas where we've got two offices, one Schneider and one AVEVA. So, part of the real estate strategies, obviously, to consolidate those and rationalize those. So, we're looking at ultimate ending up at around about 80 offices, that's the sort of target. But that's obviously still early days in that process.

David Toms

Roughly where are you now?

James Kidd

Over 100.

Craig Hayman

You can imagine today, we have employees who sit in Schneider electric Software business, employees who sit within smaller offices, perhaps are in the same town; city is where we have an AVEVA facility or the reverse. So, it's just obvious opportunities to move people into the same facility to drive efficiencies in there, or in a situation if they're actually working within the Schneider facility and they're driving partner sales through Schneider, then of course, the issue should within the facility and work within that Schneider facility there's no reason for us to put them in a different office as an example.

Your second question was on maintenance. I think it was on subscription, yes. Look, there are different dynamics between the AVEVA business in the Schneider Electric Software business. There are different dynamics between them. And I think there are best practices that occur in different ways and different businesses.

Our opportunity, and one of them is around subscription, is to understand how we can bring those together in a way that is -- drives more topline for us. So, for example, in the Schneider Electric Software business, there is a business that is 100% subscription today and doing quite well. However, those best practices are not applied across systemically across the Schneider Electric Software business.

Well, you have to ask well why is that not the case. Well, its management acumen, it's operating a business at scale, operating perhaps now as a software business as opposed to being part of an industrial company. These are known techniques in the software world is how to replicate those best practices. It has our attention, renewal rates, driving recurring revenue.

We're not blind to these techniques. Our -- part of our work is to understand how rapidly can we apply those techniques to increase the amount of subscription software across our business. Again, we're not completely ready to commit a number to you today, but perhaps late in the year we'll say more about this.

Unidentified Analyst

-- UBS. Maybe a couple for you Craig and then one for James. In terms of the framework you haven't done in the products between Schneider and AVEVA, is there anything you need to either build or buy sort of in a hurry if you like to make the connectivity work better, if you like, either the IoT site or maybe some cloud functionality?

And then also, the feedback from some of your big industrial customers maybe people like GE, now you're more closely aligned to Schneider. Has there been any negativity there. And then one for James.

Craig Hayman

That's a good question. So, in terms so portfolio, we have a pretty rich portfolio. In fact, we have, I would say, the reverse problem. We have more capability than the world is aware of. And part of our challenge is to or opportunity is to present that in a compelling customer way as opposed to product feature, product feature, product feature. That's part of our FY 2019 plan, is present more of a solution approach out to the market.

So, I use that as a way to explain from technically we have a wealth of riches. More technology than I think the world is aware of. Now, of course, if there is opportunistic tuck-in acquisitions, then certainly we're always interested in that. What is the second part? Sorry, yes. Yes, we've got good relationships with many of the industrials through the Heritage AVEVA and some of the Schneider portfolios. We haven't seen any fallout from that at all, so no impact.

Unidentified Analyst

And then just a follow-up on the cost side of things. I mean Schneider is obviously a French company. A lot of the software assets were U.S., Australian, British even. From a headcount point of view, can you just a moment of the Schneider employees are in France? And from our savings perspective, how much is people and how much is other things, property, for example?

James Kidd

Yes, so I guess, one misunderstanding on the software business is it really is a U.S. company. It's headquartered in California. It really grew out of many of the acquisitions that came to the U.S. There are hardly any software employees in France, it's very small. So, it's really more U.S. around about 1,200 employees now in the U.S. in the combined group compared to roughly 100 in the old and heritage AVEVA.

Craig Hayman

Can we just check if there's any calls -- sorry questions from the call?


[Operator Instructions] There's no questions at this time.

Craig Hayman

Okay. All right. Well, thank you so much for your time. Thank you for your interest. Thank you. We're excited about the future. Hopefully, you saw some of that from us today. I think you hopefully will give us your warm wishes and the credibility. We feel that we've built so far in doing what we said we would do and that's clearly what we intend to do in FY 2019. Thank you.

James Kidd

Thank you.

Craig Hayman

Thank you.