Schnitger Corporation

ESI’s first half shows progress

ESI’s first half shows progress

Sep 23, 2019 | Hot Topics

ESI Group, the French CAE company, last week reported results for the quarter and half-year ended 31 July. For the half, revenue was up 3% as reported and up 0.4% in constant currencies (cc) to €55 million; for the quarter, total revenue was €28 million, up 5% (up 2% cc) on flat license revenue but a booming services services business. ESI says this reinforces “the fact that a longer-term perspective should be taken when reviewing our business model”.

The details, for the quarter:

  • Total revenue was €28.2 million, up 4.5% as reported and up 2.4% cc
  • License revenue was €20.7 million, up 1.9% (down 0.4% cc)
  • Services revenue was €7.4 million, up 13% (up 11% cc)

For the half year,

  • Total revenue was €55 million, up 3% as reported and up 0.4% cc
  • License revenue was €41 million, up 3.7% (up 0.8% cc)
  • Services revenue was €14 million, up 1% (down 1% cc)
  • By geo, the company reports that revenue from the Americas was €9.1 million, up 9%; from Asia, €22.6 million, up 3%; and, from EMEA, €23.1 million, up 1% — all up in part because of exchange rates.
  • By vertical, revenue from automotive was up 5%; from aerospace, up 11%; but from energy, down 3%

ESI is working on being more transparent in its reporting and offered a couple of very interesting insights.

“Major customers are less visible in ESI’s first half revenues than in the full year”, the company said. That’s because the largest customers renew in the fourth quarter –always has been the case with ESI– meaning that growth in the first half comes, often, from new accounts or from new sales into existing ones. That’s a good thing, and sets up these customers to perhaps be drivers of greater growth in the future.

It makes for lumpy financial results, though, because the R&D, marketing and other investments occur all year long.

CEO Cristel de Rouvray and CFO Olfa Zorgati acknowledge that the company has not been as profitable as investors might like (not something I report on in detail; go here if you’re interested) but point out that they believe this is will change: “Now that we have integrated the additional costs linked to [strategic] investments made to spur our transformation, we see an expected uptick in our profitability. At this stage, the Group considers having the right resources and we are now focused on tuning the allocation of these resources to drive growth”.

Ms. Zorgati told investors that costs are stable, and in general are growing more slowly than revenue, even in H1 when ESI’s revenue generally is stronger in H2. That means profitability should improve over time. Ms. de Rouvray added that the company continues to look for synergies, being disciplined in systems and organizational investments that will drive revenue — which will further grow profitability.

Remember how I wrote above that H1 customers are often new to ESI? Ms. de Rouvray called these new customers “technology runners up”, companies that may not be as advanced as others in their verticals at eliminating prototypes and tests. The “runners up” are just now getting to this level of technical sophistication. This presents ESI, according to Ms. de Rouvray, with the opportunity to grow these engagements to large accounts, in time. That’s an interesting view, since we often see industries as homogeneous (“automotive is advanced in digital prototyping”), even though that’s simply not likely. It would be interesting for ESI to disclose more about its sales opportunities to this group, and how the sales process goes — digital transformation is tough, and can be slow. ESI is right — there are layers or levels of

Ms. de Rouvray also spoke about ANSYS acquiring LSTC. She congratulated LSTC on many years of competition in selling crash simulation — and sees ANSYS becoming a more formidable force in the market. The combo of ANSYS and LTSC, she believes, will further educate the market, which makes things easier for ESI.

The execs also reminded us that 2019 will be a strange year, financially, for ESI: it will be 11 months long to bring the company to a 31 December year-end.

It’s fascinating to watch ESI’s transformation. The new CEO and CFO are changing many things at once and it’s hard, from the outside, to know what’s working and what isn’t. Many of those changes will take time to develop into revenue or profit growth. Add in the fiscal year change (which moves the major revenue bump in January/oldQ4 to January/newQ1), and it’s going to look a bit bumpy as reported — but ESI will provide a pro forma comparing calendar years to help us through the transition. Stay tuned!

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