Toward a Billion Euro Company—Patrik Heider Discusses Nemetschek’s New Formulation

PERHAPS NO AEC SOFTWARE COMPANY has been so curious and exciting to watch evolve as the Nemetschek Group, a Germany holding company that emerged from engineer Georg Nemetschek’s original company behind ALLPLAN, first introduced at version 1.0, in 1984. ALLPLAN would actually spin out as the first software subsidiary in 1988, but ten years later Nemetschek would make three acquisitions in Frilo, Glaser and Crem Solutions. A year later, Maxon would be partially acquired, and an IPO of Nemetschek takes place. So then, at the turn of the millennium, the German holding company acquired US-based Vectorworks, followed by Hungary-based Graphisoft and SCIA of Belgium in 2006.

Fast forward over a decade, and today the Nemetschek Group (as it is known) has several more subsidiaries including market share leaders in specific AEC software sectors like Bluebeam in the US construction market and Solibri in its narrow but important BIM model market.

When Nemetschek recently announced a new strategic reorganization, this author felt it necessary to talk to Patrik Heider, spokesman of the executive board and CFOO, about what is happening behind the scenes. The company’s new divisional structure is based around the AEC industry’s three primary stages of the creation and use of buildings—design, build and occupy (manage)—and is set to continue to propel growth behind one of the largest and fastest growing AEC software companies in the world.

The following interview article breaks into three parts (or themes in Capital Markets, Strategy and Future Direction)—with analytical intermissions, in which context and open inquiry add meaning and suggestive correlation to larger market directions. Let’s get started.

 

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The Capital Market Theme

(Anthony Frausto-Robledo)  You announced last month a new three-division structure at the executive board level around Design, Build and Manage segments. How will the new divisional structure change the way the daughter companies interact with each other strategically?

(Patrik Heider)  As I always state to the capital market and overall to all stakeholders, we often get the question asked if there is a bottleneck of growth, and what my standard answer is there will be no roadmap of growth coming from the parent company if we don’t go through an organization development as well. So that is precisely what we have done: we have streamlined the organization more towards ‘divisions’ and what we have as a result is we are much more business and customer focused and more efficient regarding financial and regulatory topics when it comes to the parent company.

 

 

 

 

So the brand leads, the CEOs, they will report to clear leadership structure on the Design segment, along with the other new structural divisions (Build and Manage) and I as CFOO will focus on financial and operational topics and be the spokesman for the stakeholders. So in terms of corporate governance, of leadership, of commitment, we are much more efficient now and more market and business-oriented than before. So that is the idea of this new divisional structure in general.

So are you saying that before this organizational structure there may have been some confusion, perhaps, on the part of investors to understand the company overall in terms of how these brands were working together?

I wouldn’t say from the investors’ side there was confusion; there was always a clear picture. We had Sean [Flaherty] as the strategic officer, myself as the financial and operations officer, and Viktor was part-time in there as well—we all had brand responsibilities. So it’s important to note that we didn’t do this new reorganization simply because of the investor market; we did it to get to the next stage of growth.

So that is the general idea behind it as well—not because of confusion but because you can always do better, in a company, to organize and develop yourself.

So in terms of this “next stage of growth” and the ability to always do better, how will this new divisional structure help the Nemetschek Group in terms of revenue and profit goals?

We set the core competence of each manager in a much more efficient way, to their development tasks and responsibilities. Take me, for example; I’m the one leading the company’s transformation from a 500 million euros a year company, towards a one billion euros a year company. So what does that mean? It means we need to have professional and efficient structures for growth. And I have my core competencies in the corporate and financial sector as well as the operational sector. Of course, this is not supposed to mean that I did not manage the brands well, but we have so many other talented and professional people at the Nemetschek Group. Take Viktor for example. He is a recognized and accepted leader in AEC software when it comes to the design segment markets. He was the leader of Graphisoft and responsible for the company’s success and strong growth. Now he can give that total competence to the whole set of Design segment brands.

The same is true for Jon Elliott in the Build segment and Koen Matthijs in the Manage segment. So what we have done is reframed and re-focused the core competencies of each relevant leader, to their market area expertise. And this is the new formulation in organization structure from which we can do better.

Intermission 1 — Context Around Financial Values, Growth, Hype Cycles

It is essential to provide some context for what “better” can mean in terms of financial performance for software companies this large in the AEC industry. The larger the company, the more difficult it can be to move the needle in the positive double-digit growth direction. Especially if these large companies have products or brands located at various points along the adoption cycle. Remember that the Gartner Hype Cycle finishes at what is known as the “Plateau of Productivity” where high-growth adoption begins, where just 20-30% of the potential audience has adopted the innovation. (see image) How many companies in the Nemetschek Group, for example, are behind or in front of this phase? Software innovation adoption in the Build segment, or what is sometimes called “contech” (short for construction tech) is a newer phase of software growth, with higher year-over-year percentage values possible.

As we will see in a moment below, Nemetschek’s “Build” segment has enjoyed upwards of 30% year-over-year revenue growth in the recent past. Bluebeam has been the “bull” (to use Wall Street language) in the brands. It is not surprising to see some of Nemetschek’s large-cap competition (eg: Autodesk, Trimble, Bentley, Hexagon) entering acquisitions in the construction software segment or to diversify into “buildings” or into “infrastructure” as the AEC segment, which includes both, is soon to overtake the manufacturing CAD space as a whole, in total value, according to recently reported experts.

 

next page: The Strategy Theme

 

The Strategy Theme

(Anthony Frausto-Robledo)  So let’s talk about the overall group strategy, and you had a strategic officer before in Sean Flaherty. It seems that without a single point of responsibility for overall group strategy that strategy for the Group is now going to be a “team effort.” Is that correct?

Yes, absolutely. I don’t want to be too theoretical but take the average scorecard approach—you Americans founded it—and it is exactly that what we believe that we have with several division strategies, moving to an umbrella brand strategy—meaning the Nemetschek Group strategy. So everyone is responsible for their segment or division strategy and all combined will account for the Nemetschek Group strategy.  Most likely myself, as an interface, will take part in each division strategy, because there always needs to be a financial link as well.

How often will the division leaders meet? For example, Jon Elliott is in Pasadena, will he come to Germany regularly?

We take travel seriously, so sometimes it is very good to meet in person. However, living in a digital world with time differences we can use virtual means to attend meetings. However, we usually meet four times a year in person, and that will be in Germany.

So why is it that Viktor and Koen are full-time division heads while Jon Elliott is not?

Yes, that’s a little bit tricky, and I would even correct you a bit because it is difficult to say everything in a press release. It is only Viktor and myself being full-time, and I’ll tell you why. Koen and Jon are really focusing on the main brands of their segments. Take for example Jon, in the Build segment. There is no surprise and no secret that Bluebeam represents 80 percent of the revenues in the Build segment. Due to Jon’s notable accomplishments at Bluebeam, he has been promoted to the Executive Board, and this has been publicly advertised. However, he will be devoting 80 percent of his time to his CEO role to continue Bluebeam’s success, and then 20 percent of his time to the other two brands in the Build segment.

 

 

 

 

Also, Koen is a bit similar. While he is no longer the operational CEO of Spacewell, he remains the strategic CEO and remains focused on its expansion along with the Operate segment. So both of them are 80 percent on their leading brands that mainstay their segments—Jon for Bluebeam and Koen for Spacewell—and they define the strategy around their segments.

MORE: Nemetschek Group Introduces ‘Spacewell’—Brand Encompasses Building Operations and Management Segment

In the case of Viktor—and you know that the majority of our brands are in the Design segment, we have ten out of 16 brands in this segment—and thus this warrants Viktor’s full attention and a full-time position. So it is myself and Viktor in the full-time roles and Jon and Koen in the part-time roles constituting the Executive Board.

Is there a sense now with the new divisional structure, and the clarity that it brings and how it communicates to the capital market, that it signals where your future acquisitions may be lining up?  

Yes, definitely. The focus in terms of M&A activity is really for all three of them. And it is my job to support them. Importantly, there is also a focus on both organic growth and nonorganic growth.

As for future acquisitions, it does depend a little bit on the segment. In our view, the highest probability rate for this activity to go further is in the Build and Manage segments, rather than the Design segment. In the Design segment, the focus is on sustaining and accelerating organic growth. But all of the segments are driven by revenue growth and I am the one enabling them because for both types of growth you need to have the financial funds. What we tell the capital market is that the highest probability for further M&A activities is really in the Build and Operate segment, and I would say a bit higher actually in the latter segment because the opportunities are just higher.

So this is also where the segments will fight in healthy natural competition, for the investment means of the Nemetschek Group for M&A activities. That too is something that the Supervisory Board wanted to achieve. It helps to drive revenue growth across both organic and nonorganic categories.

So when you talk about fighting in a healthy way between the brands, are you talking about how profits are reported back to Germany and how they fund investment in general and how those funds are ultimately parceled out between the brands?

Exactly. We are all together—myself and the three division heads—the Executive board. The executive board of a German stock listed company is responsible for the development of the company. So every one of us has an interest in the Group success, whether in his segment or other segments.

So how it works is at the end of November we have a budget week, and every brand CEO tells us about ideas for the upcoming period. So we had this at the end of November in 2018, and all of them had a nice investment case. And that’s a good message because if they did not have a good investment case, we would be disappointed. It would mean they do not have any ideas about how to grow further. So everybody is coming up with an investment case, and of course, we need to have arguments and KPIs to determine who is the more urgent investment case, which is the higher priority, and then prioritize and order them. We cannot do them all. If we did, I would not report a stable operative margin to the capital markets—these days around 25-27 percent.

For M&A activities we need to decide at the executive board level and then get a decision from the Supervisory Board, which approves every M&A transaction.

 

Intermission 2 — The German Mittelstand Model of Excellence

It is interesting to learn from Patrik that the Nemetschek Executive Board sees the brands in a form of healthy competition when it comes to financial investments. It also sees the brands as discreet highly-focused business entities that may, at times, overlap with each other in some form of competition, but principally offer alternative strengths across core market competencies. As has been written about here on Architosh before, Nemetschek’s organization is influenced by the German Mittelstand model, the model which has made Germany the world leader in centers of engineering excellence. Not to be taken too literally, but the Mittelstand model is fundamentally about doing one thing and being the best in the world at it. When looked at from this perspective, each brand can be compared to its competitors in the larger AEC software market on the metric of who is best in the world in “a core competency,” because in truth many brands do more than just one thing. Thus, “core competency” can exist as a sub-metric of evaluation within larger AEC technology trends—for example, “computational design.”

 

next page:  The Future Direction for the Nemetschek Group

The Future Direction Theme

(Anthony Frausto-Robledo)  So what I understand in terms of your growth path moving forward—and you said it earlier when you said “moving from a 500 million euro company to a 1 billion euro company”— what do you see as your likely paths forward to get to that billion euro mark? What can you talk about now in terms of the company’s future?

In terms of percentage growth trends—and we now report segment level reporting to the financial community—for the Design segment, I would say the goal is to take them over their average growth rate of between 11-13 percent. And this is what we see as sustainable for the next two or three years.

The Build segment, as you know, is the fastest growing, and we had rates over 30 percent in 2018 and the years before. It was obviously Bluebeam. We guide the Build segment around the high teens or low 20 percent range and see that as sustainable. The Manage segment—and this is where we see a lot of the future growth, is guided around 13-15 percent this year, but definitely in the future, we see them like the Build segment, in terms of growth, going over the 20 percent mark.

 

 

 

 

And then in the Media & Entertainment (M&E) segment, which is a nice growing part of our business as well, we definitely want to move them to the 13-15 percent mark to align with the organic growth corridor for the average of the Nemetschek Group.

We have already been talking over the last several quarters about the segments, and now we have leaders to drive each one. Viktor for the Design segment, Jon for the Build, and Koen for the Manage and Operate segment. And then myself as the CFOO. Lastly, we have a great CEO for Maxon in David McGavran, coming from Adobe in the Media & Entertainment segment. So those are the messages I communicated to the capital market a few weeks ago as well.

Do you envision in the future having the fourth segment in Media & Entertainment (M&E)?

Yes. Absolutely. And this is why we brought in David, and he is doing a fantastic job and has the potential to increase the segment substantially. That’s why I believe that the Supervisory Board will consider moving David to a corporate structure as well if he does very well over time.

There have always been questions about Maxon within the Group if it would expand or would it be sold off. Can you speak to this?

Yes, there were always rumors in the market saying “Nemetschek, what are you doing with that asset, you could sell it?” Yes, but we decided not to sell. We are fully standing behind Maxon and to make it bigger is our target.

I think you read about it that we bought the remaining 30 percent of Maxon from the former founders and they have now retired after more than 32 years of service. We are now 100-percent owners and want to take Maxon further. And we believe Maxon belongs in the Nemetschek Group. Firstly, its technology is very important to rendering in AEC, and as you know, they are doing about 15-17 percent business in AEC.  AEC rendering is over-proportionally growing within the larger rendering market. And then there are industries like gaming, film, broadcast—all exciting markets.

MORE: MAXON Reconfigures Leadership for Worldwide Growth of Cinema 4D

And in those markets Cinema 4D goes up against Maya, The Foundry and all the other players. But Cinema 4D is a beloved product. I mean the community—when you go to the community events you see this—the community just loves Maxon. It is a very nice success story.

Thank you for talking to Architosh.

You are very welcome.

 

Final Comments — M&E Division Futures: The Foundry or Adobe Model? 

Just so readers are aware, David McGavran came to Maxon from Adobe in Germany where he oversaw the entire German markets. He was already living in Germany, and Nemetschek believes its CEOs should sit next door to the headquarters of the companies they run. This is why Huw Roberts, who is now taking over GRAPHISOFT as CEO has moved to Budapest, Hungary. Another comment made during our call about McGavran is that he is an experienced CTO (chief technology officer) and that every successful CEO in the Group tends to come from the technical side of the business.

There is another layer of analysis to add to this last segment. If the Media & Entertainment (M&E) segment is a legitimate fourth segment, Nemetschek may choose one of two paths. One path is that segment develops around discreet separate companies like the other segments or Maxon itself becomes more like Adobe or The Foundry, this latter being the more direct example. With McGavran coming from Adobe it is tempting to see the latter develop and the recent Redshift Rendering acquisition conforms to that pattern.

This is the most detailed information Nemetschek has seemingly shared with the press about their inner workings. We learn a lot about their strategic thinking, key facts behind that thinking, and where this company is largely hunting for growth. This provides some road-mapping for their users and their investors without revealing their exact targets to their competitors. It will be interesting to see where things unfold in 2019.