ESI falters, costs outpace revenue at year end

ESI yesterday provided more details on its results for the fiscal year ended January 31, 2013. As we posted after the preliminary announcement last month, total revenue was up 16% year/year to €109 million. However, the company’s cautious outlook and higher-than-expected expenses led its share price to tumble 17% in mid-day trading on the Paris Bourse. Said CEO Alain de Rouvray in prepared remarks, “the[se] results are below our expectations, impacted by an unexpected slowdown in growth at the end of our financial year and the continuation of M&A marketing and integration investments. The economic context leads to more cautious growth prospects and tighter control over operating costs. ” The preliminary report was a bit short on details, so here’s what we learned with this new report (the annual report isn’t published yet, and will likely contain even more information):

• License revenue was up 13% to €77.5 million. New license revenue was up 7% to €17 million.
• Services revenue was up 24% to €31.5 million.
• Due to the higher expenses referenced by M. de Rouvray, pretax profit fell from 8.7% of sales in fiscal 2012 to 7.4% in fiscal 2013, and net income to 4.6% of sales, from 6.4%. Net profit for fiscal 2013 was  €5 million.
• Yesterday’s report lays out why ESI’s 2013 was perhaps better than investors might think: The gross margin (a measure of the cost of doing ESI’s business) went from 70% in fiscal 2012 to 68% in fiscal 2013. Companies typically work to move this needle in the other direction; in ESI’s case, the gross margin declined in part because of a higher proportion of revenue from services. ESI sees this as a good thing, though: services to customers focus on analytical and product design methodology and often lead to future software sales.
• From the report issued last month, we know that sales by geography followed the typical pattern, with Europe accounting for 43% of total revenue; Asia up slightly to 37%; and the Americas down slightly to 20%. Orders booked from BRIC countries edged up a bit, representing 11.9% of the total in fiscal 2013 and compared with 11.5% a year ago.

ESI highlighted 4 main points in its approach to the market in calendar 2013:

• Selling to major OEMs. ESI recently signed major agreements with Renault and EADS/Astrium and believes these deals show “the necessity of use of virtual prototyping solutions by major OEMs and their suppliers”.
• Continuing is acquisition strategy in a market that it believes is in a “consolidation phase”.
• Looking at SaaS and other licensing innovations, leveraging its OpenCFD acquisition.
• Improving organizational agility to better meet the global technical and transactional needs of its customers.

ESI Group didn’t give details on its cost containment efforts. Analysts are now modeling total revenue of €117 million, which would be an increase of 7% over fiscal 2013.