Mark Sawyer, Vico CEO and President, recently addressed a gathering of Vico international channel partners. His comments are excerpted here.
State of the Industry:
I just wanted to give a quick snapshot (now that we're coming up on the end of 2009) of what the industry feels like, what's happening inside of Vico, and then reiterate the mission and vision of our company.
I don't know if you've all seen some of the same statistics I have. There are regionally specific numbers around this. But if you look at those regional numbers and compare them to the world I think there are only a few regions of the world that did not follow these same trends. In 2009, construction starts across the board for all construction projects is down 25%. Now we're talking about an industry that is the largest private sector contributor to most nations' GNP. For that to be down 25% is a whopping change. In a growth year, an absolutely on-fire year, the construction industry may grow five or six points. Anything in double digits is a big move and of course down twenty five points is drastic. The curves on the right show construction starts from 2001 thru 2009 and construction put in place for the same period. And you can see that 2009 was very challenging for our customers. Commercial construction, that is commercial buildings, was even worse...down 43% in terms of starts.
Most of our customers are the larger GC's and CM's who came into this financial crisis with a fairly large project backlog (18 to 24 months in many cases). So they entered this with projects that kept them busy and the real test is how many projects begin to emerge before they start to run out of work. I'm happy to report that most feel like we've touched bottom and now some new projects are getting let go and some of our customers that have been very busy in bidding new projects are actually starting to win some. And that's true around the world as well.
The drop off was less severe in what we call the institutional space. That is, government and public projects or large healthcare projects and large education projects. There are really two reasons why the institutional market was less impacted. One is that the demand didn't diminish greatly in 2009. The other thing is that many of the institutional projects are owner-funded. Or at least a large percentage of these projects are owner-funded. They don't have to borrow so much money to create it whether it's a big hospital built by a medical group or an educational facility like a lab at a large university. There may be a little bit of lending involved but mostly owner-funded. And with the banks being in the kind of trouble they were is what really shut the commercial market down. Bank lending for commercial construction all but stopped.
So it was a very tough year for our customer. Many of them remained focused in the government, healthcare, and education space and survived because of it.
The other thing that changed quite a bit is the delivery system around how these projects worked. You've heard us talk about, you've seen it blogged a lot, and Holly has covered it a lot in Fridays with Vico. We used to do a lot of work with our customers in a paid preconstruction engagement where bids for construction hadn't even gone out yet but the contractor was on a paid and fee-based engagement with the owner and with the design team to put some constructability know how into the project before it went to bid. Those have changed quite a bit and I think of all the things that changed in 2009 because of the economy the one I'm most disappointed in is that owners almost immediately reverted to the old, bad behavior of hard bid and predatory pricing in a market where every builder was hungry. So a lot of things went to hard bid, a lot of paid pre-con engagements shut down and we've had to adjust to that as our customers have had to adjust to that. So, lots of moving parts, a very difficult year, and yet virtual construction grew in 2009.
What we're experiencing now (and I think the various regions of the world and the business cultures of these regions handle this topic differently)... In the Nordics, where there is less bragging and just a lot more performance, I would say that those customers have always "walked the walk instead of talk the talk" to use an American expression. But certainly in most of the world we now see that creating a 3D model and spinning it around on the screen to impress the owner is no longer sufficient. We have a lot of customers who are walking the walk now and actually using Virtual Construction techniques to plan the project and run the project. This is being verbalized to us it's not just an observation that we have noticed. Our customers are telling us they have to move on to be differentiated and to be competitive.
I've included here and excerpt from a 2009 SmartMarket Report published by McGraw-Hill Construction Group. And they've been doing this kind of survey for years. The one I circled is BIM adoption and they would categorize our 5D Virtual Construction as BIM for Construction so it's all in the same category. For BIM adoption in 2009 I've circled the contractor poll which shows that 1/3 of all contractors polled are creating and analyzing models using BIM in the construction process. 51% still are not using BIM at all. So that shouldn't surprise us. But fully 1/3 are. Look at everybody else, look at the architect, look at the engineer, and look at the owner. In 2009 the contractors passed everybody. Now they might just be making a 3D model and doing clash detection... that counts in this survey. But that's good news because once they get past that they've got to go to the next level and we need everybody to do 3D before they're ready for 4D and 5D. BIM usage by contractors has quadrupled in the last two years. Our customer is moving faster than any other supply sector in the AC industry. So it's very encouraging to us that the contractors really get it and see the benefit for them.
State of the Company:
As far as Vico goes, a little report on the state of the company. Revenue will be up for 2009 over 2008. As I've said despite the economy virtual construction grew and so did Vico. I won't pretend that we grew to the target that we had hoped for. So 2009 fell short of what we had hoped but I'm declaring victory that it's bigger than 2008. We did close our series B round of 3.6 million in financing from our investors. And commensurate with the 2009 year being a rough one we did reduce expenses for the near term in order to bring ourselves back within a financed plan as a company. So financially we're in great shape. As I said, we're encouraged that while 2009 was an unwelcomed bump in the road, it feels like most of our customers are coming up now from the bottom they've been at for about six to nine months. I wanted to point out our new account production (that is, people who had not previously done business with Vico) was smaller than it was the previous year. So new accounts came in but they spent less but by number they increased over the previous year. We won more business from new customers albeit they were smaller orders. You could find fault with the fact they were smaller orders but what is important to us is that they are new accounts in the fold that we know will grow and will increase and demand more from both of us... for partners as well as for Vico. That's building the account base for the future so that's really good news.
The other thing is existing accounts (those we have done business with for more than a year) are maturing and as they do so they move from just using these tools for planning a project to actually using these tools to run them. Or from just using these tools to experiment and try to understand where the benefits might come to actually implementing because they now understand where the benefits do derive. And from 3D to 5D, I think a lot of folks would have defined virtual construction three years ago as "I built the model and I did clash detection." That's all pretty low hanging fruit 3D stuff and now moving into derived schedules, derived estimates, and production control usage right off of the model as the dashboard for the project is becoming more prevalent. And as I've said we are hearing from the customer we're not deducing this and announcing it to you ourselves. So that's the really encouraging news and I think we're in a strong position to move forward from here.