Nemetschek analysis: Constructing value in The Digital Age

• 🏢 Company name: Nemetschek Group
• 🔢 ISIN: DE0006452907
• 🕐 Ticker: NEM
• 🏭 Industry: Software & IT Services

Overview

Nemetschek SE (NEM) is a global leader in software solutions for the Architecture, Engineering, Construction, and Operation (AECO) industry. Based in Munich, Germany, the company is at the forefront of Building Information Modeling (BIM), a critical technology driving the digital transformation of construction and infrastructure projects. Nemetschek offers a full suite of tools that support the entire building lifecycle - from the initial design and planning stages to construction, and into the long-term operation and maintenance of buildings.

Known for its focus on innovation, collaboration, and sustainability, Nemetschek has become a trusted partner for architects, engineers, and facility managers worldwide. Its solutions help improve efficiency, reduce costs, and ensure smooth collaboration across all project stakeholders. With a broad portfolio of brands, Nemetschek serves clients globally, helping them manage the complex demands of modern construction and infrastructure with confidence.

Nemetschek's outlook

With a strong emphasis on SaaS, cloud, and mobile solutions, Nemetschek is well-positioned to capture growth as industries across AECO move toward digital-first strategies. The shift to SaaS is expected to drive steady recurring revenue, enhancing the company's financial resilience and predictability.

If Nemetschek continues to navigate economic challenges and competitive pressures effectively, its expanded SaaS offerings and international reach should support sustained growth. The transition to a subscription-based model reduces risk and provides long-term stability, making the company a strong contender for future success.

History of Nemetschek

Nemetschek’s story begins in 1963, when Professor Georg Nemetschek, a visionary civil engineer, founded the company with a singular mission - to create tools that simplify complex engineering tasks. Initially focused on providing software solutions for structural calculations, Nemetschek saw the long-term potential for software to transform the entire construction process.

In the late 1980s, the company expanded into CAD (Computer-Aided Design) software with the release of Allplan, which became a staple for architects and engineers looking for efficient ways to design and model structures. This move placed Nemetschek at the forefront of what would eventually evolve into the BIM revolution.

The 1990s marked the beginning of Nemetschek’s aggressive expansion. In 1998, it acquired Graphisoft, the Hungarian company behind ArchiCAD, one of the first comprehensive BIM tools on the market. This acquisition strengthened Nemetschek’s position as a key player in the digitalization of architecture and construction.

By the early 2000s, Nemetschek continued to expand its influence with strategic acquisitions and a focus on creating an integrated solution portfolio for the AECO sector. Significant milestones include the acquisition of Bluebeam, known for its collaboration tools for construction professionals, and Solibri, a leader in model-checking software that enhances quality control.

In 2023, Nemetschek further extended its portfolio by acquiring Pixologic, the developer of ZBrush, a powerful tool for 3D sculpting used in creative industries like gaming and film. With ZBrush, Nemetschek expanded into highly detailed 3D modeling, which complements its vision of blending creative and technical design processes for architecture and construction.

The most recent milestone came in July 2024, when Nemetschek finalized the acquisition of GoCanvas Holdings, Inc., a leading provider of field worker collaboration software. GoCanvas specializes in digitizing traditionally paper-based processes, simplifying inspections, improving safety, and ensuring compliance. This acquisition significantly enhances Nemetschek’s Build & Construct Division, integrating mobile and cloud-based solutions that connect field workers to office teams, bridging a crucial gap in construction workflows.

This series of acquisitions underscores Nemetschek's commitment to driving innovation and fully digitalizing the construction industry. Today, the company is not just a software provider but a comprehensive ecosystem empowering the future of building design, construction, and management worldwide.

Financial history

Taking a closer look at Nemetschek’s revenue per share (RPS) and earnings per share (EPS) since 2010 reveals a compelling growth story that investors can’t help but appreciate.

Revenue per share (RPS)

Nemetschek’s RPS has seen a steady climb over the years, reflecting the company's knack for generating impressive revenue relative to its share count. This upward trend isn't just a number on a graph; it tells a tale of strategic foresight and the ability to capitalize on market opportunities in the architecture, engineering, and construction (AEC) sectors. Each year’s jump in RPS is a testament to the company's resilience and adaptability, even in a competitive landscape that constantly shifts.

Earnings per share (EPS)

When we turn our attention to EPS, the narrative continues to shine. The consistent increase in earnings per share highlights not only Nemetschek’s ability to turn revenue into profit but also its effective cost management and operational savvy. This isn't just about growth; it's about efficiency and discipline, and it speaks volumes about the company's commitment to enhancing shareholder value.

Nemetschek revenue model

Nemetschek Group’s revenue model consists of four main components: Licensing, Subscription/SaaS, Maintenance, and Services & Consulting. These revenue streams reflect both traditional software sales and the company's ongoing transition to cloud-based, subscription-driven models, which offer more predictable and recurring revenue. Below is a detailed breakdown of each segment:

1. License revenue:

Traditionally, Nemetschek has relied on perpetual licenses. Under this model, customers make a one-time payment for a long-term, non-expiring right to use the software. This upfront licensing model has been foundational for many of Nemetschek’s brands (e.g., Allplan, Graphisoft, Vectorworks), especially in earlier stages of market penetration. However, as the industry increasingly shifts towards more flexible and scalable models, perpetual licensing is being gradually replaced by subscription services. Perpetual licenses still contribute a significant portion of revenue, especially in regions or sectors slower to adopt cloud or SaaS-based models.

2. Subscription/SaaS revenue:

As part of Nemetschek’s strategic evolution, subscription-based and SaaS (Software-as-a-Service) revenue has become a critical growth area. Instead of an upfront one-time purchase, customers now pay recurring fees (either monthly or annually) for continued access to the software. SaaS models, particularly those that leverage cloud-based infrastructure, are appealing to customers due to their flexibility, scalability, and lower initial costs. Nemetschek is positioning many of its products, including Bluebeam and Spacewell, to be cloud-enabled, which supports real-time collaboration, data accessibility, and integration across devices. This shift toward subscription services helps Nemetschek achieve more consistent, recurring revenue while fostering long-term customer relationships. The transition also aligns with broader industry trends favoring cloud solutions in the architecture, engineering, and construction (AEC) sector.

3. Maintenance revenue:

For customers who purchase perpetual licenses, Nemetschek offers maintenance contracts as an additional revenue stream. Maintenance contracts are typically billed annually and provide users with access to product updates, patches, upgrades to new versions, and technical support. This recurring revenue stream is essential for maintaining customer satisfaction and engagement, particularly for those who haven’t transitioned to the SaaS model. Maintenance contracts also help extend the lifecycle of perpetual licenses by ensuring that users receive continuous software improvements, which can delay the need for switching to subscription models.

4. Services & consulting revenue:

Professional services constitute another important revenue component, especially for large enterprises or complex software implementations. Nemetschek offers a range of consulting, training, customization, and implementation services. These services ensure that clients can integrate Nemetschek’s solutions into their existing workflows effectively and optimize their use. For instance, when large construction firms deploy software like Allplan or Bluebeam, Nemetschek offers consulting services to help align the tools with specific project needs, train employees, and provide ongoing support. This revenue stream is often closely tied to new software sales or enterprise-level deals and enhances overall customer satisfaction by delivering added value.

Summary of the model:

• License Revenue: Perpetual licenses, one-time payments for long-term software usage.
• Subscription/SaaS Revenue: Recurring, cloud-based access to software (monthly/annual fees), driving growth and revenue stability.
• Maintenance Revenue: Annual contracts tied to perpetual licenses, offering updates, upgrades, and support.
• Services & Consulting Revenue: Professional services including consulting, training, and implementation, enhancing product adoption and customer satisfaction.

Strategic focus on recurring revenue (ARR):

Nemetschek’s business model increasingly emphasizes recurring revenue streams through the promotion of subscription and SaaS models. This strategic pivot not only aligns with the industry's shift towards cloud-based solutions but also improves revenue predictability and customer retention. By focusing on recurring revenue from subscriptions, the company can better stabilize its financial outlook and invest in continuous innovation.

In conclusion, Nemetschek’s revenue model is evolving from a traditional, license-heavy approach towards one that is subscription-centric, ensuring long-term growth through higher recurring revenue while still supporting its large base of perpetual license customers with maintenance and consulting services.

Nemetschek's business segments

Nemetschek Group is organized into four primary business segments: Design, Build, Manage, and Media. These segments cater to different stages of the building lifecycle and beyond, addressing the needs of industries such as architecture, engineering, construction, facility management, and media production. Below is an in-depth explanation of these segments and their associated brands, along with an analysis of the underlying growing market.

1. Design 🎨

The Design segment focuses on tools for architectural, structural, and engineering design, particularly in the early phases of the building lifecycle. These solutions heavily emphasize Building Information Modeling (BIM) and facilitate efficient collaboration and planning across projects.

Key Brands:

• ALLPLAN
• Graphisoft
• Vectorworks
• Solibri
• RISA
• dRofus

2. Build 🏗️

The Build segment focuses on the construction phase of projects. This segment offers tools that ensure projects are delivered on time, on budget, and with high quality, emphasizing workflow coordination, BIM validation, and on-site collaboration.

Key Brands:

• Bluebeam
• NEVARIS
• Solibri
• dRofus
• ALLPLAN

3. Manage 👑

The manage segment provides solutions for facility management, building operations, and property management. It focuses on ensuring that buildings perform efficiently throughout their lifecycle by using data-driven insights, IoT integration, and smart building technologies.

Key Brands:

• Spacewell
• Crem Solutions

4. Media 📹

The media segment focuses on providing tools for 3D modeling, animation, rendering, and motion graphics. These products are essential for professionals in the film, television, gaming, and advertising industries.

Key Brands:

• Maxon
• Vectorworks

Underlying growing market

1. Market size and growth rates 📈

• BIM market Size: The Building Information Modeling market is projected to grow from $5.4 billion in 2020 to $10.7 billion by 2026, reflecting a CAGR of 12.5%.
• Construction management software market: This market is also witnessing substantial growth and is expected to reach $3.5 billion by 2026.

2. Key drivers 🔑

1. Rising demand for sustainable design and smart building technologies: Regulatory pressures push for more energy-efficient practices across all segments.
2. Urbanization and infrastructure development: Increased investments in design and construction tools are addressing the growing needs of expanding cities.
3. Digital collaboration: The integration of cloud-based platforms for project management has become standard, facilitating better collaboration in architecture and construction projects.

3. External factors 🪟

• Technological advancements: The rise of IoT, AI, and cloud computing is transforming facility management and construction processes.
• Regulatory changes: Stricter building codes and environmental regulations are driving the adoption of technologies that ensure compliance and sustainability.
• COVID-19 impact: The pandemic has accelerated the shift towards digital solutions, necessitating tools that support remote collaboration and operational continuity.

Nemetschek’s four business segments - Design, Build, Manage, and Media - offer a comprehensive suite of software solutions that address every phase of the building lifecycle. The company’s commitment to BIM and digital innovation ensures that it remains at the forefront of the AEC and media industries, driving efficiency and collaboration across all sectors. With substantial growth potential fueled by market trends and external factors, Nemetschek is well-positioned to capitalize on emerging opportunities in these dynamic markets.

Market position and competitors

Nemetschek stands out as a leading global provider of innovative software solutions tailored for the architecture, engineering, construction (AEC), and media industries. With a keen focus on Building Information Modeling (BIM) and digital transformation, the company has established itself as a cornerstone in the rapidly evolving construction landscape.

Recognized as a pivotal player in the BIM sector, Nemetschek offers a comprehensive suite of solutions that encompass every phase of the building lifecycle. Their BIM tools have empowered countless firms to streamline processes and enhance collaboration.

Competitors 🏇

Operating in a fiercely competitive landscape, Nemetschek faces notable rivals in the AEC and media software markets:

• Autodesk: As a longstanding market leader, Autodesk's portfolio, which includes widely-used tools like AutoCAD and Revit, positions it as a formidable competitor in the BIM domain. Their emphasis on user-friendly interfaces and extensive resources for users makes them a popular choice.
• Bentley Systems: Specializing in infrastructure projects, Bentley offers robust solutions for design, construction, and operational phases. Their focus on infrastructure makes them a key player, particularly in large-scale projects.
• Trimble: With a concentration on construction and geospatial technologies, Trimble provides tools that significantly enhance project management and collaboration. Their innovative approach to integrating GIS and construction data is noteworthy.
• Hexagon: Known for its geospatial solutions, Hexagon enhances project management through effective integration with BIM applications, allowing for a seamless workflow.

Nemetschek quality check

Each investor has unique criteria for defining "quality" in their investments. My approach to evaluating quality involves assessing several key parameters, which are outlined in the checklist below:

Based on these metrics, Nemetschek clearly passes the quality check, demonstrating strong profitability, improving leverage, and effective operating efficiency. This solid financial performance positions Nemetschek as a quality company in the market.

Nemetschek’s Moat: A deep dive into their competitive fortress

When you analyze a company’s moat, you’re essentially asking: how well can it defend its turf? Nemetschek shows a formidable moat, reinforced by several competitive advantages that make it tough for competitors to chip away at their market position.

1. Narrative: Shaping the future of AEC 🔭

Nemetschek isn't just another software company; it’s at the cutting edge of the architectural, engineering, and construction (AEC) space. They’re driving the industry’s digital revolution, pushing for smarter, more sustainable building practices. Their narrative is compelling - this is a company that’s not just riding the wave of digital transformation but helping to shape it. Whether it’s through boosting productivity or improving collaboration, Nemetschek is the kind of partner that AEC professionals don’t just want - they need.

2. Unique product: Mission-critical software solutions ❗

Nemetschek’s software isn’t just a tool you pick up and use - it’s the foundation for modern design and construction workflows. Their Building Information Modeling (BIM) solutions aren’t optional extras; they’re mission-critical for architects, engineers, and designers. These aren’t “nice-to-have” alternatives; they are essential for streamlining the entire building lifecycle, from design to execution.

3. Switching costs: High barriers to exit ♻️

Once a professional gets embedded in the Nemetschek ecosystem, it’s tough to leave. The steep learning curve, combined with the complexity of integrating their tools into workflows, creates substantial switching costs. A project manager or architect isn’t going to spend months learning the intricacies of Allplan or Vectorworks just to jump ship. This not only builds loyalty but ensures a steady flow of recurring revenue as users stick with Nemetschek to avoid the high costs (and headaches) of moving to a competitor.

4. Network effects: Growing a collaborative ecosystem 🤝

The AEC space might not see traditional network effects in the same way social platforms do, but Nemetschek’s growing user base generates its own kind of value. As more professionals adopt their solutions, they contribute to a shared ecosystem of innovation, ideas, and best practices. This collaborative network becomes a powerful draw for new users, enhancing the value of Nemetschek’s offerings through a constantly improving environment. More users means more knowledge sharing, which, in turn, makes their tools more appealing.

5. Cost advantage: Scale brings efficiency 🏭

Nemetschek’s size isn’t just for show - it brings tangible advantages in cost efficiency. Operating at scale allows the company to outpace smaller rivals, enabling them to reinvest heavily in R&D while maintaining healthy margins. With a 29.1% ROIC (as of Q2 2024), Nemetschek’s ability to innovate without sacrificing profitability is a key advantage in a market that demands constant evolution.

6. Efficient scale: Capitalizing on opportunities 🏦

The scale at which Nemetschek operates allows them to be nimble in navigating market dynamics. With their established brand presence and broad reach, they can quickly respond to emerging trends and shifting customer demands, positioning themselves as a leader in the digital transformation of the AEC sector. Their size gives them the stability to capitalize on growth opportunities, especially as industries increasingly rely on digital tools to stay competitive.

7. Regulatory risks: Staying ahead of the curve ⚖️

While Nemetschek largely controls its strategic direction, it operates in a regulatory environment that can shift, particularly when it comes to data privacy and software compliance. As new regulations emerge in different regions, the company will need to stay agile - adapting to changes while continuing to provide value. Nemetschek’s proven ability to stay compliant without sacrificing innovation is a key reason they’ve maintained their dominant market position.

Capital requirements: Lean and efficient

Investors often look for companies that don’t burn cash just to stay afloat. Nemetschek fits the bill, operating with a CAPEX/Sales ratio comfortably below 5% and a CAPEX/Operating Cash Flow ratio under 25%. This means the company is highly efficient in using capital to fuel operations, keeping it lean and flexible while generating solid returns for its investors.

Capital allocation

I like to focus on companies that demonstrate a balanced allocation of capital across various avenues, such as reinvesting in core operations, pursuing acquisitions that enhance competitive advantages, and returning excess capital to shareholders through dividends or share buybacks.

Nemetschek does pay a small dividend, but it’s still a positive aspect. The return on invested capital for Q2 2024 stood at an impressive 29.1%, indicating strong performance. Regarding share buybacks, there have been no repurchases or new issuances. Overall, I would say Nemetschek passes the capital allocation check.

Stock price

Nemetschek has seen an increase of approximately 62% over the past year, with 29% growth just this year, despite a challenging market environment. The company is poised to maintain its growth trajectory in the current financial year, even as it navigates the transition to subscription and SaaS models, which may temporarily impact revenue and earnings. Looking ahead to 2025, Nemetschek anticipates more dynamic growth in the mid-teens range.

Nemetschek Q2 2024: Strong Momentum and Strategic Growth

The latest financial results from Nemetschek Group paint an impressive picture for the first half of 2024, showcasing solid performance driven by strategic transitions and well-timed acquisitions. The company celebrated a robust 9.6% revenue growth, reaching €451.6 million, alongside a notable 10.8% rise in EBITDA to €129.7 million, yielding an EBITDA margin of 28.7%. If adjusted for M&A-related costs, this margin could climb to an even more appealing 30%.

Positive Takeaways

• Strong Revenue and EBITDA Growth: This positive performance largely stems from a successful shift to a subscription and SaaS-centric business model.
• Significant Increase in Subscription/SaaS Revenues: The transition has been nothing short of remarkable, with subscription/SaaS revenues soaring 74.9% to €230.9 million. This has propelled recurring revenues to a record 85% of total revenues, establishing a stable and predictable revenue base for the future.
• Strategic Acquisition of GoCanvas: The acquisition of GoCanvas, completed on July 1, 2024, is set to contribute positively to revenue growth, adding approximately 3 percentage points to the 2024 forecast. This move is expected to generate significant synergies, particularly within the Build segment, strengthening Nemetschek’s market position and growth potential.

The robust growth in annual recurring revenue (ARR), which climbed 26.5% and is nearing the €800 million mark, signals a bright outlook for future expansion. However, it’s important to note that GoCanvas's current profitability lags behind the Nemetschek average, which may dilute the EBITDA margin by about 100 basis points.

Negative Takeaways

• EBITDA Margin Dilution from GoCanvas Acquisition: While the acquisition of GoCanvas is strategically sound, it poses a short-term challenge as it is expected to dilute the EBITDA margin due to its below-average profitability. This emphasizes the need for careful integration to maintain overall profitability.
• Revenue Recognition Impact from Subscription Transition: The shift to a subscription and SaaS model, while promising long-term benefits, is causing short-term accounting-related effects that may dampen revenue and earnings growth in the near term.
• Challenges in the Media Segment: Despite the overall growth, the Media segment is navigating a tough market landscape, particularly in the U.S., impacted by prolonged strikes in Hollywood. This has led to a more modest growth rate of 7.7% for this segment.

Diving into segment performance, the Design segment led the charge with a 9.5% revenue increase to €228 million, thanks to an impressive 77% growth in subscription and SaaS revenues. Meanwhile, the Build segment, bolstered by Bluebeam's transition, reported a 9.9% revenue rise to €142.2 million. Even in challenging conditions, the Media segment managed to grow by 7.7%.

Financial Health

Nemetschek Group is standing strong, boasting a net cash position of €306.7 million and a robust equity ratio of 59.0%. Free cash flow before M&A grew by 18.2%, reaching €135.6 million, further reinforcing the company’s stability.

Looking Ahead

Nemetschek Group is well on track to meet its 2024 guidance, anticipating revenue growth of 10% to 11% at constant currencies, along with an EBITDA margin between 30% and 31%. With a strategic focus on subscription and SaaS transitions, coupled with the promising GoCanvas acquisition, the company is positioned for sustained growth and profitability.

Valuation & Peers

In my assessment, Nemetschek appears fairly valued, potentially slightly overvalued when compared to peers. Yet, it’s undeniable that Nemetschek is a high-quality company, and its premium valuation may be justified given its strong market position and growth trajectory.

Even a fair value price of €95 may seem somewhat stretched, as it implies a P/E of 64.9 based on the estimated 2024 EPS. Nevertheless, Nemetschek is a true powerhouse, and I firmly believe it deserves a premium valuation.

Furthermore, the transition to SaaS bolsters the justification for Nemetschek’s premium valuation, enhancing the company’s resilience to economic downturns. If you lift your gaze, you can see that this strategic shift positions Nemetschek favorably in a volatile market landscape.

Based on yesterday’s closing price of €101.0, there is a negative margin of safety of roughly 6%, suggesting that the stock is currently overvalued relative to its intrinsic value. However, it’s essential to note that Nemetschek is in the midst of a SaaS transition, which could lead me to revise my fair valuation in the future as the company continues to evolve.

Historically, Nemetschek's 5-year average P/E ratio stands at 61.2, approximately 6-7% lower than the current P/E ratio of 66.4. This indicates that while the stock may appear overvalued at present, its historical performance and future potential could provide grounds for optimism.

For transparency, I do not own any shares in Nemetschek at the time of writing.