Nemetschek’s very interesting year

As the company revamps and builds, revenues respond in all divisions.

Nemetschek is ahead of the adapting to the new normal curve. The company has been in the process of a major restructuring for a couple of years, and some of the most obvious changes became evident in 2019.

In his annual address to shareholders, Alex Kaufman, spokesman for the management board and the company’s CFOO, wrote in the company’s annual report that “there continues to be an enormous need for the AEC industry to catch up in terms of digitalization and interlinking.”

For the second quarter of 2020, Nemetschek says they’ve raised their operating margins and income is up modestly by 2.7%. The company says its EBITDA is 28.8%. Revenue for the quarter was €141.6 million. For the first half of the year, Nemetschek says revenues rose 7.6% to €288.2.

However, as a European company with a large portion of its business in the US, Nemetschek is warily watching the third quarter.

Kaufman said in his prepared remarks, “After the corona crisis left its mark in the second quarter, especially in Europe, it is not yet possible to foresee the effects of the pandemic in the USA, where the crisis has spread much more strongly than in other parts of the world. At a later point in time, Nemetschek anticipates hurdles in this regard in the US market in the second half of the year.”

He’s not the only one.

The company is congratulating itself on its ability to gracefully transition to online sales and education and the company says they have instituted cost management early on in response to the coming uncertainty.

Overall, the company credits growth to recurring revenues from software service contracts and subscriptions. The company says revenues increased by 21.5% to €88.9 million compared to the same quarter last year. Nemetschek says they have raised their share of recurring revenues in consolidated sales in the first 6 months to 60.7%.

As the conversion goes on, license revenue has declined by 18.5% to €46.7 million compared to the same period last year when software license revenue was €57.3 million.

The story for Nemetschek is being told by its divisions. As the Kaufman quote at the head of this story suggests the company’s restructuring is intended to leverage the advantage of selling integrated products that help their customers in AEC who are performing a range of tasks using different applications.

Nemetschek is closer to the start of its transformation than to the end, but a look at the company’s revenues do tell a story. The company’s design revenues make up the majority of the company’s revenues but growth has been slow and down in 2020. That’s partially a function of the transition to recurring revenues rather than license but it’s a reality of the CAD market as well. It’s pretty stable. But, as we have seen in other parts of the AEC industry, there is a great deal of growth potential in construction and data management where digitalization is needed to improve efficiency and communication. The growth comes in bringing groups together.

Crossing all markets is Nemetschek’s Media and Entertainment division, which includes Matrox, Red shift, and Red Giant tools for 3D modeling, special effects, and rendering. What was Nemetschek’s smallest group has grown in revenues to surpass management but probably more interesting is the breadth of its capabilities. The company’s design products have been highlighting their range of rendering offerings, while the group also makes advances in motion graphics.

The company sums up its performance for the first half of 2020 as being “slightly above expectations.” The company notes that the US experienced the pandemic crisis somewhat later than expected though the company’s design segment, which includes the US based Vectorworks, as early as March. The company says that has affected demand for their Design, Build, and Manage products overall.

Kaufman expects the ongoing crisis of the COVID-19 virus and subsequent recession “will also affect our business development in the second half of the year, especially in the USA. Thus, caution and vigilance remain the top priority for us. In the medium and long term, we continue to see great potential in our markets.”

The company expects to see the decline in demand continue through the third quarter but hopes to see improvement in the fourth quarter and thanks to the good performance in the first half of the year, expects to meet their sales targets for the year.

What do we think?

The resilience, at least so far, of AEC-related businesses speaks reams about the changes that have occurred since 2008. Businesses are much more resilient. That’s not to say there’s a lot of optimism in the world right now. It’s more like wary optimism with the full awareness that there be some new awful surprise right around the corner.