Essensys Drops 45% On Update – What Have They Done Wrong?

Essensys (LON: ESYS) shares are down 45% this morning on the release of a trading update. Clearly, there’s some horror buried in here which leads to this near halving of the share price.

As ever with such share price disasters, the actual cause might not be quite the one that many think it is, nor the one highlighted in the release itself. There’s a good argument to be made here that the real problem is uncertainty. Uncertainty among the likely customer base for Essensys that is.

What the company does is provide software as a service solutions to the flexible workspace industry. Flexible workspaces is that WeWork sort of thing, Regus being another such property provider. Those are just names from the industry, no necessary link with Essensys that is. Software as a service is a lovely industry, once the client is landed then there’s an ongoing stream of revenue as monthly or longer period payments for the service flow in. The major costs are in developing the software plus landing those clients – servicing them tends to be fairly low cost. So, grow to volume and coin it is the basic idea.

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Essensys has announced, in this trading update, that last half-year’s results are going to be ahead of the previous ones. But only just. That’s not encouraging in a business we’d hope would be growing fast. What’s worse though is this “The Group's expansion and acceleration of its go-to-market activities has been delayed by continued COVID related uncertainty. This has also resulted in extended sales cycles leading to lower than anticipated sales bookings year to date.” So, current operating period results are going to be – OK, likely – below consensus expectations.

So, one part of the Essensys share price drop could be explained easily enough. The share price is determined by what the market already knows, by what people think will happen. Change expectations and the price changes, simple enough.

But perhaps we also need to go one step further. We all know that the world of work has changed. Lockdown accelerated that whole idea of work from home and we see organisations all around us wondering whether dragging everyone back into an office is ever going to be necessary again. Sure, Essensys is in a slightly different world, that provision of flexible workspaces. But that’s possibly still going to be collateral damage from any large change in working habits over the long term.

This leads to a ponder – has the market for the product itself just got smaller? Is flexible workspace, therefore software to support it, no longer the expansionary market we all previously thought it was going to be? Or, in more formal terms, are we seeing a cyclical increase in sales cycles, or a strategic change in the structure of the marketplace?
It’s not just new information we’ve got here, it’s an increase in uncertainty as well. Uncertainty does hammer share prices, just as new information can.

The Essensys share price is likely to continue to be affected by that uncertainty – resolution of whether we have merely cyclical or more worryingly structural changes would resolve it, but each solution in a different direction.