Aconex Building It, And They're Coming

After a difficult arrival on the stock exchange in December, construction industry software provider Aconex Limited (ACX) has begun to kick goals.

Established in 2000, the Melbourne-based company has built a cloud-based collaborative project management platform, that if offers on a software-as-a-service (SaaS) model, where the software is centrally hosted and licensed on a subscription basis, which typically brings a high degree of recurring revenue.

The platform is used by customers in the construction, infrastructure and resources sectors: it has been used on some of the biggest construction sites around the world, including the Panama Canal extension, the Dubai Metro construction, the Roy Hill Mine development in Western Australia, the Venetian Macao luxury resort and casino in Macau, the Battersea Power Station redevelopment in London, and the New York City Hall reconstruction. Aconex says the system has more than 500,000 users and has been used in more than 16,000 projects, worth more than US$1 trillion, in 70 countries.

The Aconex system is designed to bring together the data, information, documents and correspondence exchanged by all of the different members of a project team – the client, the architect, the engineer, the project manager, the builder, the suppliers, the sub-contractors and the facilities manager – across the entire project lifecycle, from planning to construction, delivery and operation. Using Aconex, all parties are able to manage documents, communicate and streamline business processes through desktop, laptop, tablet, or mobile devices from field and office locations.

Designed to ensure a single neutral point of reference, accountability and data capture, Aconex controls document distribution and revision from a single trusted location, such that the correspondence between members of the project team is managed in real time. This reduces cost, drives efficiency, and helps control project risk, because all parties are working off the latest revision, reducing the chance of errors, rework and disputes. The complete audit trail reduces the chance of disagreements and disputes, and provides a clearer path to resolution should they occur.

Aconex originally planned to raise $230 million at $2.20 a share, but its lead-managers (Macquarie and UBS) told the company in October that they were struggling to secure the support they had expected, as market conditions deteriorated, commodity prices continued to fall and activity in the resources sector continued to contract. The lead-managers went back to the market and found that there was solid institutional support for a revised offer – raising $140 million by selling 45 per cent of the company, at $1.90 a share, for a $312 million market capitalisation. US private equity investor Francisco Partners sold all of its 24 per cent stake into the initial public offering (IPO), with the company’s founders, directors and employees contributing a further 22 per cent.

Aconex shares got off to a reasonable start, with a $2 first sale giving a 5% premium, but within hours the float was below issue price. A week later the shares were at $1.70, for a 10.5 per cent haircut, and by mid-January, ACX was changing hands for $1.65. From that point, however, the shares got cracking, and have more than doubled.

Aconex was floated as a loss-making company: in fact, it was the largest loss-making technology company to ever list on the ASX. In its prospectus, the company forecast a net loss of $3.2 million for the year ending 30 June 2015, from $76.5 million in revenue: last month, Aconex updated that forecast to a net loss range of $3.2 million–$2.7 million, from $79 million–$81 million in revenue. The improved forecast was on the back of higher-than-anticipated global revenue, bolstered by foreign exchange movements. On a calendar year basis, the company said it would make $2.6 million–$3.6 million in 2015, up from a prospectus forecast of $2.6 million.

Shareholders would have been heartened in February to see a net profit of $12.5 million for half-year ended 31 December 2014, compared to a loss of $11.3 million in the December 2013 half-year. Revenue rose by 18.7 per cent, to $38.08 million.

The company generates its revenue from subscriptions: usually the owner or major contractor of a project is the subscriber, with the additional non-subscribers using the system for the life of the project. Aconex typically determines pricing based on project size and complexity, charging a percentage of the total construction value. Customers can pay on a per-user basis, but more than 90 per cent prefer to pay a fixed subscription fee for unlimited users. In FY14 there were about 1,070 fee-paying customers using the system.

Aconex’s competitive advantage lies in the “network effect” – as more users join the platform, the value of its offering is incrementally enhanced for each user. As more users join the network, and as more projects are managed, more information is captured, increasing the value to each user and organisation. The company’s highly scalable SaaS-based platform also creates an increasing barrier for new entrants.

While the highly mature Australian market represents 48 per cent of revenue, Aconex has its sights set on further penetration of the global construction industry. The company puts the size of the total global addressable market for construction collaboration solutions at US$5.6 billion.

In particular, Aconex believes that the growing adoption of cloud collaboration software in the construction industry worldwide will push business its way. It says the rising complexity and cost of construction projects, the digitisation of project documents and workflows, and the adoption of increasingly advanced design tools – for example, building information modelling (BIM) – all increase the customer benefits of using Aconex.

Replicating the success of the product in the Australia/New Zealand market – which delivers a 65 per cent operating margin – in other regions will be critical to success. Between FY12 and FY14 Aconex’s international revenue grew by 59 per cent, versus 40 per cent growth in the domestic business. The company has solid businesses in the Americas, Asia and EMEA (Europe, Middle East and Africa) and intends to expand them all.

The company’s aim is to continue to scale up the business through increasing penetration of international markets and expansion of our product offering, while consolidating its leading market position in Australia/New Zealand. The low penetration of construction collaboration solutions in most international markets is the biggest growth opportunity for Aconex. The market has picked up on ACX in a big way, and at $3.45, the shares have run quite strongly: Aconex is now valued at $568 million. But the analysts that follow Aconex think there is more to come: the consensus price target is $3.94, implying further upside of 14.1 per cent. This looks like an outperformer.