Nemetschek SE (NEM) Earnings Call Transcript & Summary

Dear, ladies and gentlemen, welcome to earnings call of Nemetschek Group. At our customers, this conference will be recorded. [Operator Instructions] May I now hand you over to Stefanie Zimmermann, Vice President, Investor Relations, who will lead you through this conference. Please go ahead.

Thank you, operator, and hello, everybody, and welcome to our conference call. Thank you for joining us to discuss our results for the second quarter and the first half of 2020. Today's conference call is being recorded. A replay of the call will be available at our website after the call. As always, we have prepared presentation with the most important figures and highlights of the second quarter and the first half of this year. You will find the presentation, the half year report and the press release on our Investor Relations website as well. But now let's start with the presentation. I would like to hand over to our Spokesman, Axel Kaufmann, who will lead you through the presentation. So go ahead, Axel.

Thank you, Stephie. And also a warm welcome from my side to our earnings call. As usual, we have prepared a little slide deck that I would like to briefly walk you through so that we have enough time afterwards for your questions. Let's start with a quick overview of the key figures for our second quarter on Page #3. In short, our second quarter came in a bit better than we initially had anticipated back in March. Our reported growth for Q2 increased by 2.7% to EUR 142 million. Excluding a slight foreign exchange tailwind as well as the contribution from recent acquisitions, our organic development was basically flat year-over-year. As one could have expected, our top line growth was mainly driven by our recurring revenues, so maintenance and subscriptions sales, which increased by more than 21%. In contrast, our license revenues recorded a strong decline of more than 18.5%, although, the decline was less pronounced than initially expected. With the challenging quarter ahead, we temporarily stepped up our cost-saving efforts in the second quarter, which, together with our better-than-expected top line performance resulted in a very strong second quarter margin of 28.8%. However, please let me highlight that the strong margin in the second quarter should not simply be extrapolated into the coming quarters. As we highlighted already earlier, our main priority is to set up the company for future growth, and we will, therefore, continue to invest in the second half in efficiency and growth initiatives at the same time. In addition, an unfavorable foreign exchange development that is likely to happen, in particular of the USD versus the euro, could also potentially impact our margin during the second half of the year. In contrast to our EBITDA, our earnings per share slightly decreased to 0.18 per share. The sole reason for the decline are the increased PPA charges due to our previous acquisitions of Red Giant and Redshift. Adjusting for this effect, our EPS grew in the second quarter by 4.8%. Summarizing, a better-than-expected results in the second quarter, which concludes a very solid first half, which we detail on the following slide. Page 4, once again, gives you a summary of our key business highlights in the first half. Similar to Q2, the main drivers were our recurring revenues with a growth of around 24% as well as our international markets with a growth of around 8%. We will be talking about this in more depth in a moment. In addition to what we have shown already in the second quarter, our high cash conversion of almost 95% once again underpins the highest quality of our balance sheet as well as our earnings. Then if you look at the right side of the slide, you can see an overview of our M&A or special activities. As communicated earlier, we acquired ADAPT, the market leader for concrete structural design in the U.S. at the beginning of second quarter. During the first 6 months of the year, we also moved forward with the integration of Red Giant and Redshift in the Media division, which is progressing as planned. To summarize, again, with our solid start into the year and together with our swift reaction and decisive measures to cope with the effects of the global COVID-19 pandemic, we believe we have a strong basis for the upcoming still uncertain and challenging months ahead. Moving on to Page #5, which gives you a good overview of the growth in our different regions in the second quarter and also in the first 2020. As expected, Q2 showed a substantial slowdown in growth compared to last year as well as Q1, driven by the negative effect of the global COVID-19 pandemic. Looking at the single regions, our European business suffered over-proportionally in the second quarter with a decline of minus 4.1%. Within Europe, U.K., minus 25% and Eastern Europe, minus 17%, are impacted the most, while the German market proved to be relatively resilient with a decline of only almost minus 3%. Apart from Europe, also the U.S. market showed a clear deceleration of growth, and we currently expect that the very high level of uncertainty will last, unfortunately, into Q3 at last. However, together with our strong first quarter, we were still able to achieve a very solid first half of the year, which was said before. And along the entire AEC life cycle, we believe that one of these reasons for the result is also the strong regional diversification, including the portfolio. Those of you who have been already following us for a long time know that one of the main objectives and always an important discussion point was and is the topic of growing the recurring revenues. If anything, the recent events in the first 6 months of the year have further amplified the importance of these better predictable and more resilient revenues, so let's look at the revenue distribution between our categories. Recurring, consulting, hardware as well as our traditional perpetual license business, all to be found on the following Page #6. As mentioned previously, we're very pleased to note that the strong increase in our recurring revenue with a reported growth of 24% year-over-year and still 19.4% on an organic and FX-adjusted basis. This translates into a sharp advancement of 8 percentage points of the recurring revenue category, which now accounts for more than 60% of our total sales for the first time in company's history. Within the recurring category, I would like to highlight our subscription revenues, which almost doubled to EUR 40 million. This already represents a share of 14% by our total sales compared to just 8% last year. In contrast, our perpetual license business recorded a less satisfying development with a decline in revenues of 11% and even 18.5% in the second quarter alone. Main reasons for the decline were of course of slower customer demand due to the COVID-19, especially in our design segment as well as the ongoing move to a subscription-only model by, for example, Maxon, which was started already back in the last -- in the Q3 last year. On Page #7, we again provide an overview of our most important KPIs. We've already addressed our revenue and EBITDA development in detail previously. So going on and down the P&L, you see that the EBIT and earnings per share increased somewhat under proportional during the first half of the year. We also covered that in the previous commentary, resulting as a sole function of higher PPA charges. I would like to also draw your attention to some of the numbers that we haven't touched on so far during this call. For example, the, again, very strong operating cash flow of almost EUR 78.2 million in the first half, which underpins the high-quality of our earnings, as I said before. But last and not least, we further improved also the quality of our balance sheet, represented an important metric such as in the equity ratio, which is now standing at 43.3% compared to 40.7% last year and at a very low net debt position at EUR 31 million. Furthermore, we recently announced that we have secured an additional EUR 200 million in credit lines, whereas we have made use of the currently favorable credit market conditions for Nemetschek Group. Therefore, our extremely solid balance sheet and virtually no debt provide us with a higher degree of safety going forward while enabling us to act flexibly and opportunistically, should interesting opportunities rise up in the coming months and quarters. Now to conclude my view on the first half numbers, let's look at our 4 segments on Page #8. Starting on the left side, our Design segment recorded the weakest development in Q2 with minus 5.3% on a currency-adjusted basis and minus 2.1% for the entire first half. As we already indicated in our last conference call, Design was the first segment to be impacted from muted customer demand since March. However, we were still able to preserve our margin at the high level that you're used to. Our Build segment, which -- with almost 8% up year-over-year, showed a very resilient development in the second quarter with the largest contribution coming again from Bluebeam, and still in the absence of a major COVID-19 impact. Our Manage segment showed a similar picture with a plus 12% year-over-year in the first half, but was more negatively affected in its service-related activities in the second quarter, for example, with limited access to customers' properties and buildings in the service area. But last not least, our Media segment presents a satisfactory development. While reported growth of 55% was strongly impacted by the first-time consolidation of Red Giant, integration costs and the recent move to subscription by Maxon posted an expected but negative drag on organic growth and profitability. Before we now move to the financial guidelines for the remainder of 2020, let me quickly highlight 2 important strategic initiatives besides our ongoing CSR activities that we recently started and to which we are committed to also be driven in the future. You might remember that Slide #10, which shows our ongoing commitment to sustainability also in more difficult times like today. As you probably know, the footprint of the building and construction industry in general, here listed on the left side of this page, is not really great to save for likely. You can, therefore, rest assure that our customers very much appreciate the improvement in efficiency and productivity that they obtain by using our software along the entire value chain. We therefore have initiated a series of projects to not only further improve our own footprint, but also to continue to significantly improve the so-called handprint, which our customers create by using our software. In order to make our sustainability approach and the benefits of our product portfolio more tangible for you, we provided, moving on, on Slide 11, a wide variety of real-world examples along the entire construction cycle. It starts already in the design phase where our brands, for example, Allplan, Graphisoft and Vectorworks can help our clients to minimize the amount of construction materials used in a specific project. For example, by using the leading software solutions of our brands, it was possible to reduce the amount of concrete needed for the construction of the Gotthard Base Tunnel by roughly 90,000 cubic meters. Another example by using the digital solutions of Bluebeam in the construction phase, we can further help to reduce the consumption of paper on a construction site by up to 90%. In 2019, as an example, Bluebeam helped the construction entity to work on 32 million digitized documents instead of using paper as traditionally. In addition, also in the subsequent and operational phase of a building that can have integrated workplace management systems of our brand Spacewell, they help to substantially reduce the energy consumption, for example, via the smart management of lightning, heating or ventilation systems. So even though we only looked at a very small fraction of our product portfolio, you can already get the idea of a wide range of a real-world applications where Nemetschek and our solutions can help our clients to build in a more resource efficient and sustainable way. Let me now turn to our strategic initiatives, as mentioned before. In the past, we have often talked about our plans to implement more cross-brand projects. Today, I'm proud to present you 2 new innovations in the Design segment. Both of them follow the overall objective to further improve the workflow in the construction industry. Led by my colleague, Viktor Várkonyi, who is spearheading as the CTO of the Design division, the first innovation presented mid of July is Integrated Design, a cross-brand workflow solution, which will revolutionize the collaboration between architects, structural engineers and civil engineers. With this integrated approach, it is possible for the first time that architects and engineers work together on 1 3D model across disciplines, and that is great. This is a milestone for the industry and improves the efficiency in the collaboration process tremendously. Thanks to Integrated Design, same time unsynchronized work in silos and duplications are a thing of the past. Another innovation is our so-called SCIA auto converter that significantly improves the current BIM workflow by integrating structural engineers much earlier in the BIM process. With our auto converter, any 3D structural model can be converted into high-quality analysis models. This automated process saves time, and there is no need to rebuild analysis models completely from scratch. Additionally, we offer a central cloud storage and management platform powered by Allplan's BIM Plus product so that all participants have the latest information available, and there is no loss of data anymore. We will keep you in the loop about the progress and further steps, but this is really great news, and I'm proud to report on them today. Moving on to Page #13, where we list some important cornerstones of our success and why we think Nemetschek as a group is well positioned in today's market. We have attractive end markets with still huge untapped potential for growth; a unique and widely spanning solutions portfolio, and hence, a unique market position for customers; a strong business model, creating great returns for our shareholders; a strong financial position, plus our proven ability to grow in parallel, both organically as well as via M&A, I'm sorry. With our leading global brands, we have best-in-class solutions along the entire construction life cycle and across all regions. All of those aspects we run in an operating mode through 4 strong divisions and with a fully committed and highly ambitious management team under one joint roof. Slide #14 is supposed to give you an overview of where we stand in terms of the COVID-19 impact on our business after the first half. As already mentioned, we experienced a certain phasing in the effects of COVID-19 in our divisions and geographies. While Asia was impacted first, Europe and the U.S. showed a strong slowdown already starting in Q2. Also as expected, our license business was hit the hardest, while our recurring revenues showed a pleasantly resilient development. I believe our solid first half also shows that our initial and quickly implemented measures, in particular, our cost-saving efforts as well as our adapted sales and customer support measures to be more online than ever before, proved to be key in coping with this crisis. In addition, we even further increased our financial flexibility, as mentioned before. We therefore leave our set working assumptions, which also built a foundation for the 2020 guidance mostly unchanged. We continue to expect a further normalization of the market conditions in the second half. However, in contrast to our initial assessment in March, and after the better-than-previous second quarter, we believe that due to the postponement of some COVID-19 effect from Q2, and especially the high degree of uncertainty in the U.S. market, the slowdown could last into the third quarter at least. And also going forward, our responses will be guided by a clear set of principles, which are undoubtedly, the safety of our employees and customers was and is our first priority. Then in addition, all of our brands continuously see to improve -- seek to improve our measures to support and be with our customers with a great sense of creativity and strong commitment. And last but not least, also in the second half of this year, we'll continue to steer our business on-site and react fast and flexibly as new developments might arise, just as we have done in the recent months. We need to be prepared to always be able to pivot and adjust more than ever before. That we can do so, we have shown and as we come to the end of my presentation, I would like to turn to our 2020 outlook on Page 15. As a result of the very solid first half of the year, intact long-term growth trends in our relevant markets, our high proportion of mode and better plannable revenues as well as the broad regional and market-related diversification, we fully confirm our outlook for 2020. In particular, that means from today's perspective, we expect at least stable to slightly growing revenues for the full year despite a still certain environment. In addition, we're optimistic to comfortably reach the target profitability of an EBITDA margin of more than 26%. Our assessment is certainly based on the assumption that reluctance on the part of our customers will also continue in the third quarter before business development should gradually improve again. Rest assured that we will continue to monitor the situation very closely and that Nemetschek is well prepared to also take market opportunities out of the current situation as we are convinced that in our products, they have the right fit, and we have the agility and financial strength to act. And with that, I'd like to thank you for your attention, and I'm happy to take your questions now. So operator, please back to you.

[Operator Instructions] So we have the first question from Sven Merkt from Barclays.

Congratulations on the good quarter. I would like to first come back around the H2 expectation, and I appreciate that there's still a lot of uncertainty, and that you expect a weakening in the U.S. But just as a base case assumption, do you still expect a modest growth improvement in H2? I remember you mentioned at the Q2 results that you expect -- at the Q1 results, sorry, that Q2 should be the top? And related to that, it's great to see that you brought out some new products on the Design side. Do you already expect a contribution from them in the second half? And then I also have a follow-up question.

Thank you. I wonder if you -- your question probably was referring to the second half, not the second quarter. So if I understood correctly, the question was whether we would still expect a modest growth in the second half. And after the 7.6% in the first half, you can assume that there will be at least a flat, if not a modest growth in the second half for the group's total revenues. Then on the question of the new product, I'd be careful to substantially expect already a financial return as we just step-by-step, bring these products to the market.

Okay. And then my other question is related to one of your competitors, which reported -- Hexagon, which reported quite strong growth in its design product, Bricsys. And I just wondered to what extent you see any change in their competitive landscape? And if any of the smaller players gaining any more traction against you or Autodesk?

No. I think it's a good question. We don't have, at this point, specific information about Hexagon taking market share by any means more than some of the other markets are placed as Nemetschek or Autodesk.

So the next question is from Andreas Wolf from Warburg Research.

It's Andreas Wolf, Warburg Research. Great job in a difficult environment, I think, in the second quarter. I have a couple of questions also regarding the new Design/Collaboration solution that you're offering. Who will be the ultimate payer of the solution? Will it be the big construction/AEC companies? Maybe you could provide some insight here and what the actual growth driver is. Because as far as I know, all your software is already BIM able. And obviously, there was -- there has been some reluctance to really use BIM model. So obviously, you are trying to accelerate this trend. Yes, maybe you could shed some light on this new solution from that perspective. And then also on the Q2 performance in Design. So that was probably somewhat below its traditional performance. As far as I know, some smaller architects, for instance, had smaller demand, or had less demand. Do you see a recovery of their demand going forward? And is it sufficient to assume that the low interest rate environment would already trigger higher demand? Or what's the actual bottleneck here? What were the issues? Was it that smaller investors have higher financial uncertainty? If you could provide some insights here as well, that would be helpful. And the last question is on the SaaS transition, would it be right to assume that you would then be able to increase your revenue per customer while transitioning to SaaS?

Okay. Thank you very much, 3 excellent questions. I would say the first one, it would be a misunderstanding if those new products or functionalities that solutions that we have brought out in the recent weeks would really target the big construction companies. We're talking architectural and engineering companies, really as the main target group for those. So thank you for allowing me to clarify. Then second, the smaller architects, which in a country like Germany, we have thousands of them being in team size of less than 5 or 10 people, absolutely spot on. I think the interest rates would not really play a big role, as you mentioned in your question for them to buy or buy not license. I think it's more overall the uncertainty whether there is project from their end customers to be popping up or coming up or being launched in the second half. And that uncertainty, I think, is still in the market. I think even in Europe, it would be too optimistic to believe that this uncertainty was removed during -- just by the announcement of some stimulus programs. They still have to hit the road, I would say, personally. And then last not least, SaaS, I mean we're talking more really about the subscription than the true full-fledged SaaS models, which still is the minority in the Nemetschek portfolio. But yes, in general, this, of course, is the goal that we will go through a certain value wherever you change or you introduce subscription as opposed to previously perpetual license, and that will have an impact on the revenues. But per customer base, I mean, this is the ultimate goal to really get the win-win established for also the customer to give the customer also a different and alternative and more flexible bundling of functionalities, features and products. And by doing so, also to upsell as a benefit here for Nemetschek, clearly, so to create the win-win.

The next question is from Martin Jungfleisch from Kepler Cheuvreux.

Congrats on a solid set of numbers. I have 3 questions, please. First of all, to come back on the macro side, again in the second half. Can you comment again a bit what you have seen during the last few months was, for example, June, much better than May and April? And have you seen, for example, European demand come back in June and July and U.S. demand weakening or so from May onwards? And is this weakening momentum there just an expectation or an effect? Then the-- and the second question is on the margin. I think your EBITDA margin was quite strong in the quarter and also in the first half. And you now need a margin of just 23% or so to make the guidance. You also mentioned that the strong margin was driven by Bluebeam partly and your peer, Autodesk hinted in their call that we may have some catch-up to do in terms of capabilities. So should we expect any significant increase in sales and marketing or R&D expense in the second half and potentially also 2021? And if so, what would the magnitude in terms of margin reduction be? And then the third question is on partnerships. Recently, your peer Procore has signed a partnership with DocuSign to integrate e-signatures, for instance. Can you comment if you're also actively looking at some partnerships with other software vendors or resellers to integrate some products?

Yes. Thank you for the question. So on the first aspect, the margin, I think you're right in assuming that there is going to be a lower margin, which is also what we assume in the second half because of, for example, investments, risk mitigation or personnel expenses going up by a bit more active hiring, which really we have almost paused and clearly start in the past few months. Then on the second question of the month of May and June, you're right, spot on. I think that is what we observed as well. And your question was hitting, I think, the nail on the head in regards to the development in the prefix for Europe as well as in the U.S., that is exactly what we also observed and that's continuing currently. And then last but not least, the partnerships, yes. I don't know if there's going to be 1 answer to this question because each of the brands and the business units has their own ecosystem of potential partners or existing partners already. If that question also was related to Bluebeam, which I'm not sure, please correct me if I'm wrong, then yes, some of our big brands are going in exactly that direction, which is already the case that you could find them in some of the -- on some of the platforms or partnerships, portals as well to be integrated there as well. And that to me is also the right philosophy, and it fits very well to the open philosophy that we, in general, try to advocate to the market and to customers.

The next question is from Knut Woller from Baader.

Three questions. The first one on the operating cash flow, you highlighted the strong performance in H1, which is true still. The operating cash flow was only growing 1% in the second quarter. So can you share here some light on the development? And then secondly, also on your expectations for the second half, particularly, are you seeing also customers asking for extended payment terms to weather the current slowdown in their demand? Secondly, on deferred revenues, we also saw, I think, a sequential slowdown or decline of 5% compared to Q1, and also slowing growth in absolute terms, 13 -- down to 13%, still good. But can you shed here some light -- shed some light on the development and also your expectation for the remainder of the year? And then lastly, in the Design segment, can you give some insight into the development of the different brands or the major brands in Design? I would assume based on your comments that Allplan fared a bit better than, for example, than potentially also looking at Graphisoft in some regions like the U.K.? And can you give here some insight into the development of copies of Vectorworks and Allplan?

Okay. There was a lot of questions. You guys are giving us a hard time to keep track with all the questions. So first, in terms of the operating cash flow, I think no surprise that in the first quarter, typically, the way our -- many of our service contracts, for example, are structures that we would get them prebuild and prepaid mainly upfront. So that's typically hitting the first quarter if you compare quarter-over-quarter and if you compare the first with the second one. Then also in the second quarter, I think you will remember that we would have paid the dividend, for example, out of this as a major effect in that quarter as well, and that was higher than the previous year. Then on the deferred revenues, well, also, I mean, due to a slowdown, if we only grow without the foreign exchange gain, basically having a flat development in the second quarter, no surprise, the deferred revenues also would go down as a consequence from the last quarters before that.

And additionally, perhaps, we always have the strong increase at the beginning of the year. And then, of course, we also see a slight increase again in the first -- in the second half, at the beginning of second half. And that's why usually second quarter and deferred revenues are a little bit, I would say, weaker.

Excellent. And are you so kind to repeat the third question? We got lost in terms of the outline, the Graphisoft and what you had exactly?

Simply insight into the development of demand for the different brands within the Design segment. So for the major 3 brands you're having, how they developed in the second quarter?

I'd be surprised if we break out individual developments and financial performances on the business unit and brand level. Please understand that we would probably not do this in this call.

Okay. Surprised, but I take it that way.

Thank you. I mean, they all follow basically -- the ones that you mentioned follow really in the category of the Design segment, and I would not say there was a big difference from the overall design development and those specific ones because they make up 80% of the Design in terms of volume.

So the next question is from Florian Treisch from Commerzbank.

Yes. I have 3 questions as well, if I may. The first one, if you can remind us on your sensitivity to the euro-U.S. dollar FX rate on revenues and EBITDA, anticipating whatever you have TCF in place? The second one is, if I look at the P&L, I believe, in the other line, the EBITDA was negative EUR 6 million after EUR 4 million in Q1 and probably a similar level closer to EUR 4 million in the quarters before. Have you booked here some kind of special costs, whatever relating to M&A, book provision one-off? Any comment you can make here? And the last one is on -- if I look at your revenue mix, given lower share of license revenue, higher share of subscription, I believe, this, in theory, must mean a clear negative mix effect on EBITDA. Still, you were able to keep it, i.e., costs are well under control. The question is a bit, can you quantify this level? And can you say if a good portion of that might be sustainable also in the coming quarters, i.e., you will also going forward, not any longer travel as much safe on real estate or whatever to really get the feeling if that was like a longer-term positive effect?

Thank you for the good questions. So we'd like to start, we're trying to answer the sensitivity aspect of the USD. I mean, clearly, the -- for us, the most important currency. We're not hedging that currency currently at all, I have to say, other than the natural hedge that we have from the U.S.-based operations. Therefore, we can assume that between EUR 2 million and EUR 3 million per cent against the euro, that is the translation into the P&L. And as we've seen the development, was it $1.18 or $1.19, even this morning, this is quite extreme, and that's partially also factored into our projections here for the second half to be more on the careful side, knowing that this can change quickly again. But just being a bit more careful. Then on the cost side, yes, of course, I think it's a good point that if we were just to continue the run rate where we operate the company at -- currently into the coming months then, of course, we could take some of those savings into also the second half. However, as we indicated that we are getting a bit more confident than what we used to or what we were in February, March back then. We're also encouraging the teams to look at specific investment opportunities and also hiring opportunities a bit more proactively than what was done in the last 3 to 4 months. That having said, again, we have not yet seen anything related to the payment terms. There was no indication that the DSO, for example, did worsen a lot. If that was part of their -- of the question that when we were going to the market, so far that was not visible. However, it's a good point because it's also on our radar screen to carefully watch the business development and just be prepared and maybe also factor into the simulation in the models for the second half, something in there that could get exactly go in that negative direction. But again, so far, knock on wood, not really materialized. Did that answer the...

The question.

The questions.

Yes. One more last, maybe just on the other EBITDA, this negative EUR 6 million to negative EUR 4 million in Q1. If that is like a one-off or something fishy in it.

I'm not sure, but I think this is partly related to some risk mitigation that we also took on the balance sheet here on the company's group level related to some of the points that we touched in this call already.