ESI’s Q3 shows subs transition ahead of plan
You might recall that ESI held its Live event in September. That was customer-focused, where presenters talked about how the auto, aero, and heavy industries use ESI products to design better and faster. The week after that conference, ESI held a capital markets day where CEO Cristel de Rouvray, CFO Olfa Zorgati, and their team said that recent actions had been aimed at tightening the company’s focus on serving customers in its primary industries with critical products.
Two main initiatives, selling subscriptions to the offerings in a more coherent price book and offloading non-core services to partner companies, are ahead of plan. This means that revenue won’t grow as quickly as forecasted at the plan’s debut a year ago, which caused ESI to lower its 2022 revenue growth forecast by 2% to revenue growth of 2% to 4% over 2021. But like many companies going through a subs transition, the trough ultimately leads to accelerated growth, and the company is sticking its objectives of high single-digit revenue growth and improving profitability by 2025.
ESI’s self-help plan is all about refocusing resources on what can help the company grow. Earlier this year, the company sold a non-core CFD product line for €24 million and divested the Scilab and Inendi product lines for an undisclosed amount. It also set end-of-life milestones for other non-core R&D programs while also consolidating locations, rebuilding teams, and rewriting that price book to be more coherent — that’s a lot of change, all at once, in an uncertain economy. Ms. de Rouvray was clear: these decisions have been guided by “prioritizing doing the right things for the long-term health of the business while managing the short term.”
Last week, ESI announced the first set of results, Q3 2022, since the investor event. Of course, given that the investor event happened just before the end of Q3, it’s no surprise they are fully in line with what ESI presented at the event. On a pro forma basis, as if the divestitures and Russia exit had happened last year,
- Total revenue for Q3 was €22 million, flat as reported (down 1% cc)
- License revenue was €18 million, up 4% as reported (up 2% cc)
- Services revenue was €4 million, down 13% (down 14% cc)
- For the nine months, total revenue was up 4% to €104 million, license revenue was up 5% to €89 million, and services revenue was down 1% to €15 million
Within that nine-month pro forma license revenue total, recurring revenue was up 7% (up 6% cc) to €84 million. Revenue from perpetual license sales was down 20% (down 23% cc) to €6 million. (€2 million is deferred, and that’s how we get to the €84 million.) Anyway, the shift from perpetual to subs, plus the move away from non-core services, is happening faster than management anticipated and explains the lowered revenue forecast for 2022.
ESI said revenue grew across all geographies and focus industries in both as-reported and constant currency rates, led by the automotive industry. In the first nine months, revenue from the Americas was €15 million, up 19% (up7% cc); from EMEA, €41 million, up 2% as reported and in cc, and from Asia, up 4% (up 5% cc) to €34 million.
Ms. de Rouvray told investors last month —and reinforced during the earnings call— that ESI’s transformation is focused on streamlining processes and the offer book. She uses recurring revenue as a key performance metric for this reinvention. This KPI is already impressive, starting at 89% in 2020, coming in at 92% in Q3 2022, and is likely to be between 90% to 93% for all of 2022. She sees recurring revenue as critical to the long-term goal of making ESI more resilient. A healthier, growing, and more profitable business requires managing the short-term uncertainties but not losing sight of the long-term.
One thing that came up during the investor event is that ESI has relatively long sales cycles because the products and value proposition are complex, and this doesn’t seem to be changing. Q4 is on track, and nothing is slipping at this point.
(And, ESI, thank you for the shout-out during the earnings call!)