ESI’s Q3 stalls, momentum expected in Q4

While the US was busy with turkey day, ESI announced Q3 results that show strength in Europe that did not offset weakness in other parts of the world. License revenue continues to hold steady, though without much growth momentum, while the “refocusing” of the services business announced earlier this year is affecting the top line across the geos. The details:

• Total revenue in Q3 was €19.4 million, down 1% year/year (y/y) and down 2% in constant currency (cc).
• Licenses revenue was €12.8 million, up 0.8% as reported and up 0.5% at cc. The company says “economic and political situation in Russia and in China” slowed growth.
• Services revenue was down 4.4% as reported (down 5.4% in cc) to €6.5 million. The impact of the refocus on projects with higher added value, still visible during the quarter, is expected to end in the fourth quarter.
• By geo, revenue from Asia was roughly €7.2 million, down 5%; from Europe, €8.3 million, up 6%; and from the Americas, €3.9 million, down 6%. For the year-to-date, ESI says the decline in Asia is due to exchange rates and to adverse business conditions while the Americas is due to the refocusing of the services business, which masked license strength. [Reminder: ESI gives geo data as a percentage of overall revenue and only for the year-to-date, so these totals and growth rates are estimates.]
• Sales from the BRIC countries continued to decline, accounting for 12% of revenue year-to-date, down from 15% a year ago and from 13% in Q2. ESI indicates that the slowdown is due to postponed orders in China and Russia as a result of the economic and political conditions there.

ESI gave added color on the first 9 months of the year. Under that lens, license revenue was up 2.2% in cc, “mitigated by the repositioning of major contracts [to] the fourth quarter. At constant exchange rates, and adjusted for the repositioning of these contracts, the installed base grew.” It appears that ESI is telling us to be patient, that these contracts will lead to an even more pronounced Q4 than usual. CEO Alain de Rouvray said in the earnings press release that “Third-quarter sales continue the trend observed during the first half. The Licenses activity showed further strong demand for our innovative solutions, while the Services reflect the refocus in favor of high value added projects … Encouraged by the commercial momentum of the Licenses, ESI Group maintains its expectations of growth and improvement of profitability over the full year.”