CIMdata PLM Industry Summary Online Archive

15 November 2005

Financial News

ESI Group H1 Results and Q3-2005 SalesT Improvement of H1-2005 Net Result ; Q3-FY2005/06 Sales up 5.3% ; Confirmation of Annual Operating Margin Objective

ESI Group announced its consolidated results for the first half of FY2005/2006 ended 31 July 2005 and its consolidated sales for the third quarter of FY2005/2006 ended 31 October 2005.

First-half results (IFRS)

€ million	H1-2005/06 ended 31 July 2005	H1-2004/05 ended 31 July 2004	% growth
Total sales o.w. software revenue	25.4 19.4	25.1 19.1	+0.9% +1.9%
Gross margin as a % of sales	18.1 71.2%	17.7 70.5%	+2.0%
Total charges excluding depreciation as a % of sales	26.8   105.7%	26.7   106.1%	+0.5%
Operating profit (loss) as a % of sales	(1.7) -6.6%	(1.5) -6.1%	NS
Net attributable profit (loss) as a % of sales	(1.2) -4.6%	(1.6) -6.2%	NS

Financial year ended 31 January

As announced in September, H1 sales were up 0.9% including 1.9% for license sales (up 2.6% at constant exchange rates). The increased weight of licenses in overall sales boosted the gross margin. The cost control program tightened up in 2004 allowed management to keep total charges excluding depreciation under control (up 0.5%) and below sales growth. Moreover, R&D costs were optimized and decreased by 4.6% despite an increase in the number of R&D employees, with ten people added during the period under review. The operating loss excluding depreciation amounted to € (1.5 m), the same as last year. The total operating loss of € (1.7 m) was impacted by non-recurrent depreciation of € 0.2 m. Thus, the net loss improved to € (1.2 m).

Note that seasonal fluctuations (H1-2004 accounted for 43% of annual sales) have a strong and direct impact on results due to a mostly fixed cost structure.

Alain de Rouvray, Chairman and CEO of ESI Group, commented: "First-half results reflect the rationalization efforts made throughout the Group, particularly in the area of R&D and without efficiency loss. We thus managed to keep costs level with last year, resulting into a significant improvement of the net margin."

Impacts of IFRS

The first annual consolidated financial statements published by the Group according to the IFRS will be for the fiscal year ending 31 January 2006. They will be accompanied by tables permitting comparison with the fiscal year ended 31 January 2005.

Changeover from French standards to the IFRS had a positive impact on consolidated results for FY2004/2005. This was mainly due to a change in the treatment of the acquisitions of the activity branches, with amortization of Goodwill and R&D under the old rules and an impairment test according to the new standards. Results were also tuned by the recognition of personnel charges on stock options and retirement provisions.

Application of the IFRS improved net income by € 3.3 m in FY2004/2005, resulting in a net profit of € 0.4 m (versus a net loss of € (2.9 m)).

N.B.: As explained in the notes to the first-half financial statements, the accounting standards may change before 31 January 2006 and further adjustments in the presentation of the financial statements may be made before this deadline.

Q3 sales

		3rd quarter				Cumulative sales over 9 months
€ m		2005/06	2004/05	%		2005/06	2004/05	%
Licenses		8.5	7.9	+6.8%		27.9	27.0	+3.4%
Services and other revenues		3.6	3.6	+1.8%		9.5	9.6	- 0.7%
Total sales		12.1	11.5	+5.2%		?37.4	36.6	+2.3%

Q3-2005 sales came to € 12.1 m, up 5.2% from Q3-2004, entirely driven by organic growth. At constant exchange rates, growth would have been 4.9%. The growth rate was higher than in the first two quarters of the year, respectively posting -1% and +4%. License sales rose by 6.8% (6.4% at constant exchange rates), reflecting steady growth of the installed base and an upturn in Asian sales. Service sales, up 1.8%, remained marginal but were nevertheless up from the first half.

9-month sales came to € 37.4 m, compared with € 36.6 m during the first nine months of the year before, i.e. growth of 2.3% (2.6% at constant exchange rates). Exclusively organic, growth was driven mostly by increased license sales (up 3.4% in real terms and 3.7% at constant exchange rates), which accounted for 75% of total sales. The license renewal rate was 81%. Note that license sales increased evenly in all geographical zones and that the recurrent installed base, which had sharply grown in the previous fiscal year due to acquisitions, was effectively consolidated.

Highlights during the first nine months of the year:

. Steady growth of mature products

During the first nine months of the year sales growth was mainly driven by mature software products, particularly in the area of Crash-Safety, a market in which ESI Group remains the world leader with its PAM-CRASH/SAFE 2G solutions.

The ongoing deployment of 2G solutionsT designed to simulate interaction between product performance and production processes on virtual prototypes, particularly for stamping aspectsT is one of the main vectors used by ESI Group to strengthen its position with strategic customers.

. Growth in Europe

European sales increased by more than 8% during the first nine months of the fiscal year, driven exclusively by organic growth, helped by a sharp increase in license and services in France and Germany.

. Services

Despite the dip in special projects, particularly in the United States, the results of the Centres of Excellence set up to reinforce external R&D funding are promising for innovative products, starting in Europe. For example, CEA, AREVA, CETIM and ESI Group have signed a partnership agreement for the digital modeling of welding assembly and the development of associated simulation tools (MUSICA project) using ESI Group's SYSWELD software.

. Other highlights

International sales remained stable as a percentage (82%),

Geographical breakdown of sales: Europe 46%, Asia 38%, America 16%,

Available cash position on 31 October 2005 (IFRS): € 16.4 m

Outlook

Management focus on improving profitability

In addition to setting up a reengineering unit in India to create the Open VTOS generic multi-sector environment and the coming onstream of Centres of Excellence with innovation teams for development projects cofinanced by customers, Management continues to focus on measures to lower operating costs and to strengthen synergies between subsidiaries. The first results of this determination to rationalize R&D costs are already visible, particularly in selective maturity-driven management by product family.

5 to 10% annual sales growth

Despite the current momentum of license sales, buoyed by growth of mature products, the overall performance during the first nine months of the year and delays in the deployment of certain emerging products recently acquired foreshadow organic growth of 5 to 10% for the year.

Confirmation of objective to post an annual operating margin of 5%

The strong seasonality of sales and tight control of operating costs allow Management to confirm the objective of an annual operating margin of 5%.

Alain de Rouvray concluded:   "We will continue ongoing efforts to exploit synergies in the Group and to rationalize R&D spending while consolidating our market shares. The fact that we are maintaining our annual operating margin objective shows our determination to expand ESI Group according to a sound and profitable organic growth model. In a sector marked by new consolidation initiatives, ESI Group remains determined to continue building a decisive strategic advantage in the area of reengineering industrial design and manufacturing processes by digital simulation in order to speed up changeover to "Simulation Based Design."

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