ESI ready for economic rebound

ESI Group last week gave more details on its financial performance for the year ended January 31. In March, we learned that total revenue for the year was €75.1 million, up 7% as reported or up nearly 4% in constant currencies. Almost all of the net increase came from the company’s Mindware acquisition, closed in December 2008. Last week’s expanded release includes a few interesting nuggets worth exploring.

1. ESI decided to keep staff in anticipation of an upturn
Profit fell even though revenue increased because the company decided “to maintain our staff numbers in Services and Sales and to continue investing in R&D so as to remain proactive and responsive in light of sustained customer demand”, according to CEO Alain de Rouvray. ESI decided to keep staffing high because customers postponed, but did not cancel, projects and because ESI recognized that its employees possess specialized knowledge and skills — all hard to replicate once demand picks up. The decision paid off, as “the sharp rise in Licenses sales in the fourth quarter, along with additional sales to key accounts and growth in our installed base through broader adoption of our solutions, testify to the pertinence of our decisions.”

2. License revenue grew twice as fast as ANSYS in Q4
ESI’s March report showed that license revenue was up 12% from the prior year, double ANSYS’ 6% increase. ESI is very unusual in that nearly half of its total revenue comes in in Q4, probably heavily weighted towards the last month of the quarter. Combine that with improving sentiment as 2009 drew to a close, and it’s possible that January 2010 was even more important than usual in closing the fiscal year.

3. ESI seems to be getting more tightly integrated into its existing customers’ processes
“New business” declined for ESI as it did for most engineering software vendors in 2009 but the company did expand its footprint within its installed base, as the company’s ten largest customers accounted for 36% of 2009/10 sales (or €27 million) , up from 29% in 2008/09 (or €20 million). Averages are just that, averages, but it would appear that ESI’s top ten customers increased their investment in ESI solutions by roughly 30% in a year during which many industrial clients restrained spending. This gets into the “share of wallet” argument I’ve been making: ESI has apparently discovered product and services extensions that customers need and will pay for, even when spending is under pressure.

ESI does not give forecasts, but M. de Rouvray is optimistic about 2010, anticipating continued growth in the license business and a gradual improvement in services utilization.