ESI turns the corner, back to growth in Q1
Catching up on more earnings announcements. Last week, ESI Group reported Q1 revenue of €55.5 million, up 1% as reported and up 4% in constant currencies. ESI has been reinventing itself and first issued guidance to investors during the last earnings call. Q1 2021 beat the guidance CFO Olfa Zorgati had laid out –revenue between €52 million and €55 million– and COO Mike Salari explained what ESI is doing to more closely manage the sales pipeline.
First, the details:
- Total revenue was €56 million, up 1% as reported and up 4% in constant currencies (cc)
- License revenue was up 2% (up 4% cc) to just under €50 million. ESI said that license revenue grew in all geos but highlighted that revenue from the Americas up 3% (up 12% cc) — important because ESI has long struggled in North America
- ESI divides license revenue into New and Repeat Business: New Business revenue was basically flat at just over €3 million, while Repeat Business was up 1% (up 4% cc) to €54 million
- Why does that add up to more than what’s reported as License revenue? Because ESI adds New Business (€3 million) and Repeat Business (€54 million) then subtracts out deferred revenue (€7 million) to get to the License revenue total of €50 million. We’re more likely to see companies reporting similar categories with the deferred revenue already netted out. (Deferred revenue, for those not up on Accounting 101, is payments that have been received that can’t be recognized in the current period. Think subscriptions. Companies can recognize this quarter’s payments but not prepayments.)
- Services revenue was €6 million, down 3% (flat cc), with revenue up in EMEA and the Americas by down sharply in Asia
- By geo, revenue from EMEA was €32 million, up 1% (up 2% cc); from Asia, revenue was flat as reported and up 5% cc to €16 million; and from the Americas, €7 million, up 2% (up 11% cc)
- By vertical, ESI said that automotive continues to lead, with license revenue up 3% in the quarter
Ms. Zorgati pointed out that Q1 was ESI’s first quarter of growth in the last four, finally return to pre-pandemic revenue. Even so, the guidance for Q2 is very conservative; Ms. Zorgati forecast H1 2021 revenue of €80.5 million to €82.5 million, up from €80.8 million for H1 2020, which implies just 1% growth at the midpoint for the half-year and essentially no growth for Q2. Q2 2020 was when the bottom fell out for most companies as COVID took hold; ESI saw an 8% decline in license revenue in Q2 2020. So it should be easy to grow from that low base — but the company feels that conservative guidance in what is still an uncertain economy is better than over-optimism. Co-COO Mike Salari added that he is looking at how ESI can improve its sales pipeline management, giving more confidence to forecasts.
Another area of change for ESI is that it has created a go-to-market strategy around its Focus Accounts –the largest and/or most innovative companies in ESI’s end-industries– that it plans to pursue. Revenue from those specific accounts was up 5% in Q1, which is a good indicator of underlying demand.
CEO Cristel de Rouvray summed things up by saying that Q1 2021 results confirmed that “our top 20 customers have clearly signaled their need for more virtual prototyping to navigate the global industry crisis and enable their digital transformation. On this foundation of growing repeat business, we can drive ambitious efforts to increase new business for sustainable and profitable revenue growth.”
ESI will release Q2 earnings in June and hold an investor event this Fall, at which point we’ll know a lot more about ESI’s reinvention. But, so far, so good.