IPOs, Initial Public Offerings: pre & post IPO

Exa Corporation (EXTA)

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Update:  priced at $10; 17% under range mid-point

Based in Burlington, MA, Exa Corporation (EXA) filed an updated S-1 June 18, 2012.  The estimated IPO amount is $75.6 million at the price range mid-point of $12, with a market capitalization of $158 million.  EXA is scheduled for Thursday, June 28, 2012.

[S-1] updated June 18, 2012.  EXA’s first  S-1 was filed August 3, 2011.

UNDERWRITERS
Manager, Joint Managers:     Stifel Nicolaus Weisel
Co Managers: Baird; Canaccord Genuity; Needham

SUMMARY
EXA provides simulation software and services to vehicle manufacturers to enhance the performance of their products.  Most of EXA’s revenue is based customer usage, based on an annual capacity-based model per customer.

Pre-IPO grade-score summary
. Many IPOs in today’s environment are graded C+ and scored 7
. If the pre-IPO grade is below C+ or the score is below 7,
then our analysts may have some concerns about the company’s
outlook and/or its market segment
. If the pre-ipo grade is above C+ or the score is above 7,
then our analysts believe the company’s overall business outlook
is more favorable
Glossary of IPO Analysis terms

EXA SCORECARD

Mgt

Market

Market Do-

Proprie-

Total

1-5, 5 is high

Growth

mination

tary

rating

20 is perfect

2

2

1.5

1

C+, 6.5

VALUATION

Valuation Ratios

IPO Mrkt

Price /

Price /

Price /

Price /

% offered

12 months ended March ’12

Cap (mm)

Sales

Earnings

BookValue

TangibleBV

in IPO

Exa Corporation (EXA)

$158

3.4

72

2.3

3.2

48%

SEQUENTIAL QUARTERLY RESULTS

Quarterly results

Jan ’11

April ’11

July ’11

Oct ’11

Jan ’11

April ’12

Revenue

$11

$10

$11

$12

$13

$11

Revenue change over prior qtr

-10%

6%

8%

13%

-14%

License revenue

82%

90%

88%

85%

76%

89%

Gross profit % of rev

75%

73%

74%

75%

73%

71%

Operating Profit % of rev

3%

13%

12%

18%

3%

2%

Income tax benefit

$12

Net income (loss) ($mm)

$0.3

$0.2

$0.5

$1.4

$12.4

$0.01

Adj net income — backout $12 mm tax credit

$0.4

Adj net income (loss) % of rev

2%

2%

4%

12%

3%

0%

Adj EBITDA

$0.8

$1.7

$1.8

$2.6

$1.0

$1.0

Adj EBITDA % of revenue

7%

16%

17%

22%

8%

9%

 

CONCLUSION
At 72 times earnings for the 12 months ended March 31, 2012 EXA looks too expensive, after backing out the $12 million tax credit for the three months ended January 31, 2012.  IPOdesktop’s recommendation is to avoid EXA at the current price range.

Also, looking at the quarterly progression EXA in the last two quarters EXA’s operating profits has dropped uncomfortably low levels, respectively 3% and 2% for the December 2011 quarter and the March 2012 quarter.

In addition, EXA plans on selling 48% of the company on the IPO.  That’s a very high percentage which doesn’t leave much margin for raising money in the future at a non-dilutive price.

SHAREHOLDER EQUITY
As of April 30, 2012, proforma shareholder’s deficit was -$2.5 million.  Post-IPO EXA expects to have a shareholder book value of $40.5 million.

At the price range mid-point of $12 EXA would have a market capitalization of $158 million with 48% of its shares publicly traded.

OBSERVATIONS
To drive top line revenue growth EXA needs to add more customers and/or must help customers  increase usage, which EXA has been doing.  For example, for years 2009, 2010 and 2011 the “License Revenue Renewal Rate with Capacity Expansion” (*) respectively was 95%, 113% and 123%.

(*) an annual operational metric that measures growth in the usage of simulation capacity by the existing license customer base.  Includes revenue attributable to upgrades or expansions of capacity purchased by prior year customers.

For the three months ended April 2012 Renault contributed 15% of revenue, Toyota contributed 9% of revenue.  69% of revenue for the April quarter was attributable to ten customers.

BUSINESS
EXA develops, sells and supports simulation software and services that vehicle manufacturers use to enhance the performance of their products, reduce product development costs and improve the efficiency of their design and engineering processes.

EXA solutions enable customers to augment or replace inefficient and expensive methods of evaluating designs, such as wind tunnel testing using physical prototypes, with accurate digital simulations that are more useful and timely.

EXA believes is enables significant cost savings and fundamental improvements in customers’ vehicle development process by allowing their engineers and designers to gain crucial insights about design performance early in the product development cycle.

EXA currently focuses primarily on the ground transportation market, including manufacturers in the passenger vehicle, highway truck, off-highway vehicle and train markets, as well as their suppliers.

Products
PowerFLOW® is EXA’s innovative software solution for simulating complex fluid flow problems, including aerodynamics, thermal management and aeroacoustics.  PowerVIZ® provides visualization tools.

MARKET
According to a May 2012 estimate by CIMdata, an independent global consulting firm, the global comprehensive product lifecycle management (“PLM”) market was $29.9 billion in 2011, and is expected to grow to $49.6 billion by 2016, representing a compound annual growth rate of 10.7%.

The simulation segment of the PLM market, in which EXA participates, was $2.9 billion in 2011, and is expected to grow to $5.7 billion by 2016, at a compound annual growth rate of 14.0%.

CUSTOMER BUDGETS
EXA estimates that its customers spend as much as 10% to 15% of their research and development budgets, or $6 billion per year, on physical prototypes, test facilities and related travel and staff costs.

In recent years, computer-aided technology has played an increasingly important role in the product development process. Digital modeling and simulation, in particular, have emerged as enabling technologies to aid in the design, analysis, and manufacture of products.

The emergence of simulation-driven design has been facilitated by increasing adoption of computer-aided design, or CAD, and product lifecycle management, or PLM, software by manufacturers and their suppliers, by the continually decreasing cost of computing power and by increasingly powerful tools for visualization and computer generated imaging.

REVENUE SOURCES & MARKETING STRATEGY
EXTA derives revenue primarily from the sale of simulation software, using an annual capacity-based model.

Customers usually purchase PowerFLOW simulation capacity under one-year licenses. Simulation capacity may be purchased as software-only, to be run on the customer’s own computer hardware, or provided in the form of software-as-a-service, via EXA’s hosted PowerFLOW OnDemand offering.

EXA separately licenses front-end and back-end applications software that interfaces with core simulation server software for a fixed annual fee, based on the number of concurrent users.

To introduce new customers to EXA’s simulation solutions, EXA typically performs fixed-price projects that include simulations accessed via OnDemand facilities, along with engineering and consulting services.

Customers typically license EXA’s products for one application, such as aerodynamics, and over time expand to other applications such as thermal management or aeroacoustics.

As EXA’s customers have recognized the predictive accuracy of EXA’s simulation solutions, they have begun to adopt verification of design behavior by means of PowerFLOW simulation as an alternative to physical experimentation as a basis for critical design signoffs.

CUSTOMER CONCENTRATION
A significant portion of EXA’s revenues is derived from renewals by existing customers of annual licenses to use PowerFLOW, and in any fiscal period, a large portion of EXA’s revenue is typically attributable to a small number of significant customers.

In fiscal years 2010, 2011 and 2012 and in the three months ended April 30, 2012, 13%, 13%, 13%, and 15% of revenue, respectively, was attributable to Renault.  10%, 11%, 9% and 9% of revenue, respectively, was attributable to Toyota.

EXA’s contract with Renault expires in December 2013. EXA does not have a long-term contract with Toyota.

In each of those years and in the three months ended April 30, 2012, 61%, 69%, 64% and 69% of revenue, respectively, was attributable to EXA’s ten largest customers in the aggregate, including Renault and Toyota.

Due to the concentration of revenue in a small number of customers, a significant reduction in usage of PowerFLOW by any of these customers, or the non-renewal of their annual licenses, due to the cancellation or postponement of vehicle development programs or for any other reason, could have a materially adverse affect on EXA’s results of operations.

SALES FORCE
EXTA sells its products and services primarily through a direct sales force, including sales executives and applications engineering teams deployed near our customers in the United States, United Kingdom, France, Germany, Italy, Japan, Korea and China, through a distributor in India and through a sales agent in Brazil.

INTELLECTUAL PROPERTY
As of April 30, 2012 EXA owned eight patents issued in the United States and two pending patent applications in the United States.

COMPETITION
EXTA considers the primary competition to be customers’ continued use of physical prototypes and test facilities.

EXTA also encounters competition from companies that provide multi-function digital simulation software that is used for various purposes in the ground transportation industry and elsewhere, primarily CD-adapco, with its products STAR-CD and STAR-CCM+, and ANSYS, with its products Fluent and CFX. CD-

adapco has a strong presence in the automotive market, and offers capabilities in certain areas in which EXA currently does not focus, such as combustion. ANSYS offers a suite of digital simulation software that includes many applications that we do not address, such as structural mechanics and electromagnetism, and that it markets to a broad spectrum of industries.

EXA also competes against open source software such as OpenFOAM that includes computational fluid dynamics capabilities.

In most of EXA’s existing and potential new accounts, products such as these are already in use for a variety of purposes, and likely will remain so. EXA’s competitors’ products are often offered at what customers may perceive as a lower cost than EXA’s.

VENTURE CAPITAL
Pre-IPO 84% owned by Venture Funds.
FMR LLC ((Fidellity), 42%
Boston Capital Ventures, 38%
InfoTech Fund I LLC, 4.5%

EMPLOYEES
As of April 30, 2012 EXTA had 203 employees,

USE OF PROCEEDS
EXTA expects to net $43 million in IPO proceeds from sale of 4.2 million shares.  Shareholders intend to sell 2.1 million shares.

Proceeds are allocated to general corporate purposes, including working capital and perhaps to repay debt.

FINANCIAL

Exa Corporation EXA, C+, 6.5

Post IPO shares:13.2mm

Software simulation for vehicle mfgs Jan 31 year

April 3 mos ’11

April 3 mos ’12

Burlington, MA

2010

2011

2012

2011

2012

IPO Mkt

Revenues ($mm)

$36

$38

$46

$10

$11

Cap (mm)

License revenue

75%

81%

84%

90%

89%

$158

Gross profit % of rev

72%

74%

74%

73%

71%

@$12

Operating Profit % of rev

3%

7%

11%

13%

2%

Income tax benefit

$11

Net income (loss) ($mm)

-$1

$0

$14

$0.2

$0.0

Net income (loss) % of rev

-3%

1%

31%

2%

0%

Adj EBITDA

$5

$5

$7

$1.7

$1.0

Adj EBITDA % of revenue

14%

12%

15%

17%

9%

License renewal rate

80%

91%

97%

n.a.

n.a.

License renewal rate with capacity expansion (1)

95%

113%

123%

n.a.

n.a.

Quarterly results

Jan ’11

April ’11

July ’11

Oct ’11

Jan ’11

April ’12

Revenue

$11

$10

$11

$12

$13

$11

Revenue change over prior qtr

-10%

6%

8%

13%

-14%

License revenue

82%

90%

88%

85%

76%

89%

Gross profit % of rev

75%

73%

74%

75%

73%

71%

Operating Profit % of rev

3%

13%

12%

18%

3%

2%

Income tax benefit

$12

Net income (loss) ($mm)

$0.3

$0.2

$0.5

$1.4

$12.4

$0.01

Adj net income — backout $12 mm tax credit

$0.4

Adj net income (loss) % of rev

2%

2%

4%

12%

3%

0%

Adj EBITDA

$0.8

$1.7

$1.8

$2.6

$1.0

$1.0

Adj EBITDA % of revenue

7%

16%

17%

22%

8%

9%

Valuation Ratios

IPO Mrkt

Price /

Price /

Price /

Price /

% offered

12 months ended March ’12

Cap (mm)

Sales

Earnings

BookValue

TangibleBV

in IPO

Exa Corporation (EXA)

$158

3.4

72

2.3

3.2

48%

EXTA SCORECARD

Mgt

Market

Market Do-

Proprie-

Total

1-5, 5 is high

Growth

mination

tary

rating

20 is perfect

2

2

1.5

1

C+, 6.5

(1) License Revenue Renewal Rate with Capacity Expansion — an annual operational metric that measures growth in the usage of simulation capacity by the existing license customer base.  Includes revenue attributable to upgrades or expansions of capacity purchased by prior year customers.

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