Commenting on the half-year results, Alain de Rouvray, Chairman and Chief Executive Officer of ESI Group, said: “In the wake of 2016, which featured fine performances across all indicators and the consolidation of a number of new acquisitions, we have ramped up our five-year strategic transformation plan – “Objective 2020” – designed to keep pace with the economic and industrial trends of the new “Outcome Economy”. Within this context of deep transformation, our ongoing drive to adapt our operational resources in H1 2017 took its toll on results for the period, which also suffered from a prior-period comparable basis. Priority was given to investments initiated in the first quarter of the year to provide support for the launch of our disruptive ‘PPL’ (Product Performance LifecycleTM) approach. The Group’s new solutions are based on the shift of Virtual Prototyping towards a connected Hybrid TwinTM; making it possible, for example, to provide virtual support for predictive maintenance, as well as for production control and assisted or autonomous driving. Our solutions are tackling the key challenges of the Industry of the Future by providing businesses with complete control over a product's entire lifecycle, from design to ultimate withdrawal, through manufacturing of the new product and operational maintenance of the used product that factors in the consequences of wear and tear, including repair of the damages sustained while in service.
This in-depth transformation in our offering is expected to last for several quarters. But thanks to the compelling investments, the deployment of Hybrid Twin™ solutions should enable the Group to reap the benefits of the exceptional innovation and growth potential inherent in this new – technologically and economically – "disruptive" positioning.
First-half 2017 sales
First-half 2017 sales came in at €53.7 million, down 4.0%. Sales driven by the change of perimeter amounted to €0.3 million, and correspond to the acquisition of Scilab Enterprises in February 2017. There was a mild positive currency effect of €0.2 million for the period, the favorable effect from the US dollar and Korean won partially offset by the negative impact of movements in sterling and the Japanese yen.
This decrease reflects both the base effect following the exceptional performance in H1 2016, and the impact of the transformation phase on both existing and new business.
The product mix remained stable year-on-year, Licenses contributed 73% of total sales, compared with 72% in the prior period.
Licenses revenue declined by 2.8% year-on-year to €39.0 million. Most of this decline concerned the sale of perpetual licenses (PUL) in H1 2016 and does not reflect a recurring issue in the install base.
Services revenue was down by 6.9% to €14.7 million. It should be recalled that Services grew by 15.4% in H1 2016 due to a cyclical and exceptional performance of Japan.
ESI’s geographic sales mix reflects a relative performance of global activity on the semester, better in Europe (up 2.8%) than in the Americas (down 2.4%) and Asia (down 10.3%).
Gross margin
Gross margin came in at 67.3%, compared to 69.8% in H1 2016. This lower figure was mainly due to an unfavorable product mix within the Services activity.
Continued strategic investment in R&D
In accordance with the Group’s strategy of investing in cutting-edge technology, R&D investment has been pursued at a high level. R&D expenditure rose 9.0% to €16.9 million (excluding the French Research Tax Credit ‘CIR’), reflecting ESI’s constant focus on the emerging technologies that underpin its disruptive PPL approach. These investments represent 43.4% of Licensing revenue (amplified by the strong seasonality effect). However, once the Research Tax Credit and capitalized R&D expenditure are taken into account, total R&D costs recorded in the P&L amounted to €13.5 million, an increase of 3.4%.
Profitability indicators impacted by investment
EBITDA was a negative €3.9 million, compared to a negative €0.3 million in H1 2016. This decline reflects a continuation of the R&D investments and a 3.1% increase in Sales & Marketing (S&M) costs which represent on the semester 36.3% of total sales. General and Administrative (G&A) costs dropped by 3.5% year-on-year and represented 16.1% of total sales.
As a result of the decline in EBITDA, the Group reported a current operating loss of €5.5 million and negative EBIT of €6.0 million, down by €3.6 million and €3.2 million, respectively, on H1 2016. The Financial Result remained stable year-on-year at negative €1.6 million and the Group’s attributable let loss for the period was €5.9 million, compared to a loss of €3.5 million for prior period.
It should be recalled that these financial results reflect traditionally the strong seasonality of Licensing revenue, lower on the first semester.
A robust financial structure
The Group had a cash balance of €14.8 million at the reporting date showing a cash generation of €8.7 million. Net debt stood at €28.6 million at July 31, 2017. The gearing (debt-to-equity) ratio was 30.4%.
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