ESI: SaaS before that was even a thing
ESI just announced results for the first three months of its 2019 financial year and they were, aside from Services, pretty good. Remember that Q1 is usually ESI’s weakest quarter, it’s hard to grow a subscription business, and that the company is transforming itself — wobbles are to be expected.
- Total revenue was €26.6 million, up 1% as reported but down 2% in constant currencies (cc)
- Software revenue was €20.1 million, up 6% as reported and up 2% cc. Lease/rental revenue was €16.8 million, up 12%. Perpetual license revenue declined €1 million year/year, which ESI sees as “another indicator of … our strategy to focus on annual rental licenses with high renewal rate”. In other words, as CEO Cristel de Rouvray said, “We were SaaS before that was even a common term”.
- Revenue from services was down 10% as reported and down 12% cc to €6.5 million. The company said this doesn’t reflect a number of projects it has engaged on for high value-added engineering studies. CFO Olfa Zorgati said the decline was mostly due to a lack of opportunistic hardware sales (which I believe is tied to sales of the IC.IDO virtual reality solution – you may recall that ESI’s Vincent Chaillou told me a couple of years ago that ESI doesn’t intend to be in the hardware business, but that VR customers sometimes want ESI to build a full installation of hardware and software.)
- By geo, revenue from Europe was €11.6 million, down 3%
- Asia reported revenue of €10.4 million, down 3%
- Revenue in the Americas picked up, to €4.7 million, as ESI saw wins in aerospace “upsells” — ESI’s term for new licenses of existing products and/or new products to existing customers. In other words, growing the footprint in current accounts. It sounds as though it remains challenging to acquire new customers in the Americas
Ms. de Rouvray points out that FQ1 results don’t really mean much for the rest of the year. ESI’s revenue has always been very heavily weighted towards Q4, when many of the company’s rental renewals occur. Nevertheless, Ms. de Rouvray sees Q1’s results as positive indicators for the mid- and long-term changes she’s working on: building a strong and consistent global account management program; becoming more agile in its approach to end-markets and end-customers of many possible different types; and engaging in strategic initiatives that take advantage of emerging tech and business trends that highlight reliance on simulation.
Ms. de Rouvray gets really animated when she talks about the opportunities she sees for ESI. Yes, eliminating test is a key use case for CAE and still creates major opportunities for ESI. But now it’s also about selling flying hours (not airplanes), more effective collaboration that includes simulation and better decision-making in many areas of industrial operation (design, production, big data, et al.). She sees ESI’s advances in these areas as major differentiators that will set the company up for many years to come.
When asked about the drop in services revenue, Ms. de Rouvray said that one of her goals is to amplify what works across its services teams. Services enable ESI to acquire customers via demonstrator engagements, well before the customer buys software, and then to support solving super-gnarly problems as needed. This expertise is often very local and ESI is working to systematize and make expertise more broadly available. CFO Olfa Zorgati also pointed out that ESI is in the process of rebuilding the pipeline of services opportunities, and expects this downturn to reverse.
This earnings release was all about revenue; literally nothing was disclosed about costs or profitability even though that was the core of many investors’ questions. Ms. de Rouvray was very clear in all of her responses: her mission is to grow ESI’s revenue, and that takes money and investment. Ms. Zorgati was equally clear: those investments will be the result of well-reasoned and logical planning.
It’s really cool to see the energy that the ESI team brings to what has historically been an old-school CAE company. No knock on the prior leadership, but it’s a completely different vibe that so far, seems to be working.
[Another reminder, ESI will change its fiscal year from ending on January 31, 2020 to ending on December 31, 2019. That means one less month (the biggest month) of revenue in the current fiscal year. Don’t freak out if forecasts seem to signal a revenue decline.]