Germany’s second-largest listed software company (the first would be SAP) posted record earnings for its latest and third quarter for yea 2019. Nemetschek Group increased its revenue 20.4% (YoY), year over year, from the third quarter of 2018.
The operating result before interest, tax and depreciation and amortization (EBITDA) clearly increased over-proportionally to revenue by 46.4% which caused the operating margin to rise by more than five percentage points to 30.9%.
“Nemetschek is on a direct course to another record year. The results at the nine-month point reflect our strong positioning across the entire value chain process in the building industry and are inherent to high growth dynamics and increased efficiency. Our Group has never been as strong and competitive as it is today,” sums up Patrik Heider, Spokesman of the Executive Board and CFOO of the Nemetschek Group.
Other Financial Details
Growth in Subscription Revenue
The company posted above 31.5% growth in recurring revenue, accelerated by subscriptions, rising to EUR 76.6 million, recurring revenue from software service contracts and subscriptions remained a major growth driver in Q3. The nine-month perspective indicated similar growth dynamics (+33.9%). The latest release of Maxon’s CINEMA 4D branded professional 3D software has also added a subscription option, which most importantly aids the ability of new customers to trial the software on real projects without committing to a long-term license.
Nemetschek brands like dRofus, RISA, and Spacewell, already have a large portion of their business on the subscription business model.
Group Earnings Improvements
The Group increased its earnings (EBITDA – earnings before interest, taxes, depreciation, and amortization) rose to EUR 42.8 million, 46.4% a significant over-proportional rise compared to Q3 in 2018. This led to an EBITDA margin of 30.9%.
Quarterly profit was also greatly enhanced by the one-off effect arising from the sales of non-strategic interest in DocuWare of EUR 18.2 million, rising to EUR 54.0 million.
The Build segment continues to be the growth driver of the Nemetschek Group, reports the company. The segment increased its revenue by 25.2% in Q3 and 27.9% in the first nine months of the year. Margins in this segment were 32.0% and 32.7% in the first nine months.
The Design segment recorded record growth of 9.8% in Q3, and 11.3% in the nine months of the year. EBITDA increased over-proportionally to 33.6%, which caused the EBITDA margin to reach 31.4% in Q3.
The acquisitions and formation of Spacewell bolstered the Manage segment considerably. Q3 revenues increased from EUR 3.6 million in the YoY quarter to EUR 9.7 million.
The Media & Entertainment (M&E) segment, which has consisted solely of Maxon until the acquisition of Redshift, saw strong growth, driven by Maxon’s conversion to subscription models. Revenues rose by 26% in Q3 and 24.3% in the first nine months of the year. The EBITDA margin in the first nine months amounted to 35.1% (previous year’s period was 41.9%) as a result of the acquisition costs for Maxon of obtaining Redshift, as well as conversion costs for subscriptions.
Architosh Analysis and Commentary
It should be noted that while the company has been focusing on the Build and Manage segments over the past few years—something that many of its key competitors are also doing in some fashion or another—it has remained reserved about future M&E acquisitions, despite acknowledging that this segment is also very much open to future acquisitions. The acquisition of Redshift is clearly following the company’s past statement.
Given the big moves by Unity and Epic (Unreal Engine) in the AEC and MCAD pro markets, and how those companies may upend the market, slowing down growth paths for the highly numerous smaller and individual players, the fact that the Nemetschek Group did not go out and buy up tons of smaller pro 3D software companies, after Autodesk, The Foundry, Bentley and other rivals largely did exactly that, or similar years ago, may turn out to be fortuitous. Given statements from the past, it doesn’t seem it was by design other than that Nemetschek has always been focusing on AEC and BIM at its core.
What will be interesting to watch is future acquisitions in this M&E space. We made a note to Nemetschek in a call a few years ago to watch Allegorithmic as it was an interesting company going after the AEC market. Gensler was a known customer at the time. Adobe snatched them up. That company might have been excellent buy. As “reality” oriented visualization ramps up, the ability to create, manage and utilize the best-in-class 3D textures will be differentiating.
[Editor’s note: We made an adjustment in our statement about drawing attention to Allegorithmic, as it related to the timing of a call with the company. The purpose of the call is not being reported here. We drew attention to that company’s statements to Architosh about the AEC market. 14 Nov 2019.]