Big changes afoot at ESI, even as H1 was so-so

ESI recently released half-year results in an announcement that was packed with big news. The biggest: ESI co-founder and CEO Alain de Rouvray will step aside in the new year, as ESI’s board has appointed his daughter Cristel de Rouvray as CEO, effective February 1 2019. Ms. de Rouvray becomes the first woman to lead a CAE company**, and only the second to lead a PLMish one (following Carol Bartz at Autodesk). She isn’t coming into this as a newbie, either: she’s been a member of ESI’s board of directors since 1999 and she’s business-minded, with degrees from Stanford University and the London School of Economics. M. de Rouvray will stay on at ESI in a non-executive board capacity.

Ms. de Rouvray is talking over at a time of great change at ESI, which I’ve written about before. I recently spoke with ESI’s COO Vincent Chaillou and CFO Olfa Zorgati about ESI’s new leadership and the half-year results report.

My first question to ESI was, why now? What has happened to cause M. de Rouvray to retire and hand over to Ms. de Rouvray? M. Chaillou told me that this change has been contemplated for a while and that it reflects ESI’s succession plans. And the timing simply felt right to the board of directors. ESI recently brought on board Ms. Zorgati as CFO as well as new VPs of Sales and HR with Ms. de Rouvray instrumental in their hires. The new team is seen as crucial in transforming ESI, those changes are taking longer than anticipated — and, presto, new CEO. But not unknown: I was told that Ms. de Rouvray is well-respected within ESI and there is a general feeling that this reinvention will be successful under her leadership.

Now to the half-year result:

• Revenue for the period from February 1 to July 31 2018 (H1) was €53 million, down 1% as reported but up 2% in constant currencies (cc)
• License revenue was flat at €39 million (up 5% cc)
• Services revenue was down 6% to €14 million (down 4% cc)
• New business, which ESI defines as new sales to existing customers as well as new customer wins, was down 5% cc. ESI’s statement about the results said that ESI had seen a change in customer buying patterns, which the execs clarified was more to do with ESI’s selling approach than with true customer behavior. Customers still value ESI’s solutions, support channels and so on — but ESI’s shift to focusing direct resources on key, fixing regional weaknesses and training customer-facing teams on new software is taking time.
• ESI’s is developing what it calls “sales plays”, standardized methodologies suited to its products, which will be rolled out over time. Developing them costs money and implementing them slows sales leading to slightly lower revenue and higher costs
• By geo, revenue from Europe was up 4% cc, from the Americas was down 8% as reported but flat cc. Revenue from Asia was down 4% as reported and up 1% cc

M. de Rouvray, current CEO, said of the results. The ‘first half of 2018 [didn’t] deliver the expected revenue growth and financial results, [but] does provide useful and constructive business information on where ESI stands in its transformation to support the Industry 4.0 and Smart Factory challenges … [O]ur operations have been recently successfully reorganized into three business pillars (Engineering, Manufacturing and in-Service) to accelerate the creation of added value solutions for our existing and targeted key customers”. M. de Rouvray adds that this is a ‘work in progress’ that will needs another year or so to complete. He said that the “challenge is to promote revenue growth while deploying expert resources and containing costs. Achieving sustainable growth with cost control will require higher synergies and global coordination, which inevitably takes more time that one would wish”. That will be Ms. de Rouvray’s challenge into 2019.

Bottom line from the H1 results? Per M. de Rouvray, “we expect a mitigated financial performance for Fiscal Year 2018, achieving moderate revenue growth but with a significant decrease in yearly profitability (EBITDA). We believe this is a necessary step to pursue and complete our own transformation and effectively promote the ‘zero real prototype’ disruptive solutions that are critical to maintaining and achieving our ambitious performance objectives of FY 2020 and beyond.””

And there’s even more news. ESI is (finally) moving its fiscal year end to December 31. It’s alway been at January 31, which caused no end of confusion when the company would say “2015” and mean the year that ended in January 2016 but had 11 of 12 months in 2015. What this does, however, is create a partial year in 2019, when the fiscal year will go from January 31 to December 31 — yup, that’s 11 months. Expect some difficulties with comparisons.

OK. So, what does it all mean? On the face of it, H1 wasn’t awesome. But sometimes, in the process of making things better, one has to take a step backwards as everything works into its new normal. Total revenue was down, yes, but license revenue was up year/year in constant currencies. With a new CEO, new CFO, new VP of sales and a reorg into these pillars, it’s a chaotic time that (everyone hopes) ultimately leads to a stronger ESI.

** Update:  “Ms. de Rouvray becomes the first woman to lead a CAE company” is not strictly correct. As Dennis Nagy of BeyondCAE pointed out, Ms. de Rouvray is the first woman to lead a publicly-traded CAE company. As Dennis emails, “Janet Wylie led Engineous (for 7 years) after I did, Jane Trenaman is CEO of Phoenix Integration, and Sharon MacDonald led CD-adapco briefly until she sold it to Siemens”. I believe there are others, too, such as Barbara Guerra, who became CEO after SRAC’s acquisition by Dassault Systemes. No slight was intended and I apologize for the error.