Nemetschek SE
XETRA:NEM
Earnings Call Analysis
Q3-2023 Analysis
Nemetschek SE
The third quarter of 2023 stood out as a period of significant success for the company, featuring a return to double-digit growth coupled with remarkable profitability. This performance, while reflecting solid operational strength, also gained from one-time effects in the Design and Build segment and catch-up effects from Q2, setting the stage for potentially softer growth in the subsequent quarter.
The company revised its financial outlook upwards, now expecting a currency-adjusted revenue growth of 6% to 8%, an enhancement from the previously anticipated range of 4% to 6%. Furthermore, targeting the upper echelon of the original EBITDA margin projection of 28% to 30%, clearly reflects a confident stance on future profitability.
The Annual Recurring Revenue (ARR) is forecasted to surge beyond 25%, with recurring revenue's share exceeding 75%. Midterm ambitions for fiscal years '24 and '25 remain firmly in place, signaling a steady expectation of continued growth and resilience.
In aligning with contemporary market dynamics, the company has achieved currency-adjusted revenue growth of 7.1% and an EBITDA margin of 29.8% while actively transitioning towards a subscription and Software as a Service (SaaS)-focused business model. This transition is considered a strategic pivot to secure future growth and profitability.
The company's shift to a subscription and SaaS model is evidently bearing fruit, evidenced by an ARR increase of more than 48% on a forex-adjusted basis, underscoring potential for sustainable growth over the next 12 months.
The reported revenue for the quarter ending in September was EUR 220 million, marking an 8.4% increase, with constant currency growth reaching 12.6% when adjusted for forex volatility. The Design and Build segment's unique transactions, such as the one-time sale of perpetual licenses, contributed to this uptrend. EBITDA soared to EUR 71 million, translating into an impressive margin of 32.5%.
The company's earnings per share saw a notable rise of 16% to $0.39, suggesting a healthy financial performance. When adjusted for specific charges, EPS even achieved a higher value of EUR 0.44.
The company has restructured its executive team, crafting a new leadership that includes seasoned experts focused on strategic areas such as artificial intelligence, customer-centric solutions, and international expansion. This revamped team structure aims to enhance agility and drive the company's growth in the upcoming periods.
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Hello, everyone, and a big welcome. Thanks for joining our earnings call today to discuss the results for the third quarter 2023 with us. With me today are our CEO, Yves Padrines; and our CFO, Louise Ofverstrom. Today's call is being recorded. A replay of the call will be available at our website after the call. Additionally, you will find the report, the presentation and the press release on our Investor Relations website as well.But now let's get started. So I would like to turn over to our CEO, Yves.
Thank you, Stefanie. Welcome to our third quarter 2023 earnings call. You have probably all seen our pre-release on Monday evening with the main headlines of our Q3 results and our increased guidance for the fiscal year 2023. We therefore have prepared a short slide deck containing additional information with regard to our third quarter, as well as the results for the first 9 months of the year, as our Chief Financial Officer, Louise Ofverstrom, and I would like to briefly walk you through, so that we have sufficient time for your questions afterwards.As usual, I would like to begin the presentation with our key messages on Page #3. Q3 2023 was a successful quarter, with a return to double-digit growth and combined with a very high profitability. However, I also want to highlight here that, in addition to the strong operating performance, the high growth in the third quarter was also supported by some catch-up effects coming from Q2, as well as from onetime effects in the Design and Build segment. It also means that we expect that our fourth quarter growth and profitability will be below the levels we saw in Q3.If we look at our performance year-to-date, we had strong achievements in the first 9 months of the year, in particular, in the current challenging environment, with a currency adjusted revenue growth of plus 7.1% and an EBITDA margin at 29.8%. We were able to deliver an attractive top line growth combined with a high profitability while transitioning our business to a subscription and SaaS-centric business model.Therefore, following the strong and even better-than-expected first 9 months of the year, we have decided to raise the guidance for the current fiscal year 2023. This means, in particular, that we now expect a currency adjusted revenue growth in the range of plus 6% to 8% compared to the previous 4% to 6%. In addition, we are now also targeting to achieve the upper end of our previously communicated EBITDA margin range of 28% to 30%.The remainder of our 2023 guidance, such as ARR growth of above 25% and a recurring revenue share above 75%, as well as our midterm ambitions for fiscal year '24 and fiscal year '25, are fully confirmed and unchanged. However, let me emphasize here that our updated guidance does not take into account any material deterioration in economic conditions as we see them today, nor does it reflect a possible escalation of the crisis in the Middle East or the war in Ukraine of any potential related adverse impacts on our business.What enabled us to achieve this impressive growth even during economically challenging periods, is Nemetschek Group's highly resilient business model, which is based on a high share of recurring revenues or innovative solutions, as well as a [ well-dispersed ] geographical exposure. In addition, we enjoy a multitude of long-term structural growth drivers, such as the low degree of digitalization and construction, regulation and the ever-increasing need for green Buildings. As you know that the construction industry represents 40% of the global CO2 emissions.Now coming to the financial review of the third quarter as well as the first 9 months of the year 2023. As usual, we will begin with a short summary of the last quarter on Page #4. In sum, I think the overview shows how very successful third quarter is also reflected across all our main KPIs. The main contributor to our high growth in Q3 was once again the recurring part of our business, which is represented by our annual recurring revenue KPI, that increased by 25.4% on a constant currency basis to now EUR 664 million. The strong increase in ARR underpins once again the good third year growth potential for our business in the next 12 months.Looking at the different components of the ARR growth, it becomes clear that in line with our strategy, our subscription and SaaS revenues were the main drivers with a plus of more than 48% on an FX adjusted basis. Our reported revenue for the months from July to September increased by 8.4% to EUR 220 million. Adjusted for the substantial FX headwind of almost 420 basis points that we faced in Q3, our constant currency growth was even at 12.6%.In addition to the good operational performance as well as the higher pricing component, this strong growth is partly also attributable to catch-up effects stemmed from Q2 as well as one-off effects in the Design and Build segment. For instance, the last time sale of perpetual licenses of existing customers at Bluebeam. The overall proportional EBITDA growth to EUR 71 million corresponds to a very strong margin of 32.5%. Our strong margin in Q3 is a function of the high growth, a highly operating leverage, as well as a focus on our cost base.Looking at the bottom line, our earnings per share increased by 16% to $0.39 per share, adjusted for [ PPA ] chargers, earnings per share even reached EUR 0.44.I'm delighted to announce that in the third quarter, we also successfully completed the reshaping and strengthening of Nemetschek's executive team for the company's next period of growth. For test purpose, a new executive leadership team, which can be seen on Page #5 has been formed. To be even more agile and powerful on future topics like Artificial Intelligence and other key strategic focus areas, such as customer-centric solution offerings and the internationalization of our business. Apart from Louise and myself, the executive leadership team includes the Chief Division Officer of the group strategic segments.Allow me to briefly introduce them and briefly touch on the complementary expertise, skills and experience that each of them brings to the team. So first, Cesar Flores Rodriguez, who you know, joined a little bit over a year ago. He is now in charge since July of the Planning & Design division and is also continuing to head our Digital Twin business units, which represents an important cross-sectional functions in the Nemetschek Group. Cesar has more than 23 years of experience in industrial software and cloud space, especially in solutions for the ACO industry. He was Co-Founder and Managing Director of Conject, the then leading common data environment for the construction industry in Europe, which he successfully sold in a trade sale to Aconex now part of Oracle, where he became COO EMEA.Then we have 2 new executives who joined earlier in September. Usman Shuja joined Nemetschek as the Chief Divisional Officer of the Build and Construct division, and also served as CEO of Bluebeam. Most recently, Usman led Honeywell's Connected Buildings, one of Honeywell's largest software business as Vice President and General Manager. He originally joined Honeywell as Chief Commercial Officer for Honeywell Connected Enterprises, where he was responsible for organic and inorganic growth for the company's entire software portfolio. Before joining Honeywell, Usman was a founding member of the AI Unicorn Spark condition in the U.S. Usman worked also at the Boston Consulting Group, IBM and Dell.Then the other new executive is Marc Nezet. Marc has 2 hats. First, he is our Group Chief Strategy Officer -- for the group, including M&A, venture investment and strategic partnership. And additionally, he is also in charge of the Operate and Manage division as Chief Divisional Officer, taking over from Cesar Flores Rodriguez. Marc joined the company from Schneider Electric Group, where he spent more than 23 years in various senior management and strategy position, including Senior Vice President, Energy Management, software transformation. In this role, he managed 5 major strategic acquisitions, which positions Schneider Electric among the leading software players in Building and Infrastructure across engineering, construction and operations. Most recently, he held the position as Senior Vice President for the Industrial Cloud platform ecosystem of AVEVA Group.And last but not least, on the Media & Entertainment division, we have David McGavran, who is the CEO of Maxon. And Dave has decades of experience in the media and entertainment industry and joined Nemetschek from Adobe, where he worked for more than 20 years and held several senior management positions. He has established Maxon as a leading player in the industry, and significantly accelerated the brand growth in recent years. Dave is a subscription native, and as Nemetschek first major brand, led Maxon through a highly successful transition to a subscription-based business model.Before Louise will dive deeper into our financial results of Q3, as well as the first 9 months of the year, I would like to use this opportunity to give you an overview on Page #6 of the progress we have also made in each of our 5 defined strategic focus areas. Our clear #1 priority, in the last months continue to be on journey to a subscription and SaaS-centric business model, and it will continue for the next few months and quarters to be our priority #1.As Louise will present to you in a few minutes, we once again made good progress in this focus area in our 2 biggest segments, Design as well as Builds, where our brand Bluebeam had a very successful third quarter. The resulting over proportional growth of our subscription and SaaS revenues translated into a new record high share of our recurring revenue with now 75%. While Nemetschek will certainly not be immune in the event of a global recession, our current operational performance shows how resilient our business has become in the recent years. One of the main reasons for this, apart from the higher share of recurring revenues, is a well-diversified portfolio across different end markets and regions.One goal of our go-to-market initiatives is to make Nemetschek even more resilient, by focusing on the further internationalization of our business, in order to become less dependent on a single market or region. In addition, with Nemetschek's operational expansion the entire life cycle of a Building, the Group has also become less dependent on a single customer group or segment.An important pillar of success here at Nemetschek, is that what we strive not only to be leaders in our respective industry, but also to offer the most innovative solutions on the market.With the launch of D-Twin, we have once again demonstrated the innovative strength of the Nemetschek Group. This new Digital Twin solutions is a horizontal open platform that delivers data-driven insights and help customers to efficiently manage facilities and Buildings from Design to operations. It is the first solution in the industry, that uses all data sources of a Building in one overarching view. It combines all the historical data of a Building from the Design phase, construction phase, up to delivering the keys to people operating, managing owning Buildings, with a combination of live data with sensors and IoT.In the third quarter, we also introduced new and highly innovative releases of several of our major brands, namely Graphisoft with ArchiCAD 27, new releases at Allplan, Vectorworks and also Maxon.Lastly, in addition to the ongoing development of new cloud features across all of our brands, we have continued to work on several artificial intelligence initiatives that will be introduced in the coming quarters. As you know, in addition to our traditional M&A activities, Nemetschek has invested and will continue to invest in highly innovative startups.In addition to our own internal R&D capabilities, these start-ups will not only help us to stay at the forefront of the latest technological developments, but also have the potential to disrupt our entire industry.In order to leverage this value potential, we combine the competencies of our start-up investments with stores of our own brands. For instance, through a technical integration, as in the case of Imerso with Solibri, or through core cross-selling, as in the case of Reconstruct and Allplan, for example.And last but not least, in the area of business enablement, we continue to make progress in the further harmonization as well as the continued Buildup of our organization, which is important to ensure that we will be able to make the most of our tremendous growth opportunities going forward as well. A key initiative in this area is therefore our continuous effort to further enhance our operational excellence.And with that, I would like to hand over to Louise, who will walk you through our financial highlights of the first 9 months of the year.
Yes. Thank you, and welcome also from my side to our earnings call for the third quarter of 2023. And as usual, I would like to begin with taking a brief look at the key financial highlights of the first 9 months of our financial year 2023, which can be seen on Page 7. All in all, I think it's really fair to say that we have had a very successful first 3 quarters of the year, with a strong and profitable growth. And this is especially true considering our ongoing transition to a subscription and SaaS-centric business model, and the associated short-term accounting impact on our financial results.Well, starting with our accumulated revenue year-to-date as of September, which grew by 5.5% and to EUR 632 million, driven in particular by a very strong performance in the third quarter, as you've seen. If we adjust for the FX headwind that we had of some 160 basis points in the first 9 months, mainly stemming from a weaker U.S. dollar, our growth even reached 7.1%.In line with our strategy, the main contributor to our growth was once again the recurring part of our business, which is represented by our annual recurring revenue KPI, that increased by 20.6% and even 25.4% on an FX-adjusted basis to EUR 664 million. But this strong growth in the ARR shows the continued very good growth outlook for our business in the upcoming 12 months, despite the still challenging environment for the European construction industry in particular.And as one would expect as well, the key driver of this strong increase in the ARR were our subscription and SaaS annual recurring revenues, which sustained an impressive growth of 48.6% on a currency adjusted basis to EUR 310 million. The slight decline that you can see in the EBITDA of 6.4% on a reported, and only 2.2% on an FX-adjusted basis, must again be seen in the context of our ongoing transition and the changed revenue recognition pattern that is going in consideration with that, for our subscription and SaaS offerings.Well, nevertheless, thanks to our very high profitability in Q3, which was the function of the high growth, as mentioned, a healthy operating leverage as well as a focus on our cost base we were even able to reach the upper end of our guidance range of 28% to 30% with 29.8%, and we expect to be at the upper end of our guidance also for the full fiscal year.On the right-hand side of the slide, you will also see our continued high cash generation with a cash conversion of 99% as well as the superb quality of our balance sheet.If we move forward to Page 8, you'll find an overview of the developments of our 4 segments. Let us start on the left side with our Design segment, which recorded an exceptionally strong third quarter with a reported growth of 11.8% and even 14.5% on an FX-adjusted basis. In addition to the favorable operating performance, the higher growth was partly also driven by catch-up effects from the second quarter, and the Design segment also benefited from onetime effects in the form of stronger-than-planned license sales in the third quarter since one of the larger Design plans in our portfolio intensified its transition, to a more recurring business model by ending the stand-alone sales of its perpetual licenses in September.Driven by a favorable operational leverage, the EBITDA margin expanded substantially to 32.4% in Q3 and after the first 9 months of 2023, the total revenues amounted to almost EUR 312 million, a plus of 9%, while the segment recorded a margin of 27.5 percentage points.In our Build segment, we also recorded a very strong third quarter. The reported revenue grew by 4.5% and even 10.9% at constant currency and was driven both by a continued good customer demand, important in our transition to the subscription, but also especially in the important U.S. market that is our strongest home market here, and by the last time buy of perpetual licenses for existing customers, at Bluebeam.In sum, our third quarter clearly shows that we have passed through to the subscription move to Bluebeam very successfully, and therefore, expect continued good growth in the fourth quarter as well. The cumulative 9-month revenue of EUR 202 million was essentially flat compared to last year, while the margin contracted to 35.9% due to the aforementioned impact of the changed revenue recognition pattern for our subscription and SaaS offerings and as expected.In the Media segment, we were able to continue the growth dynamics we saw in Q2, plus 13.6% on an FX adjusted basis in the third quarter as well despite the adverse impact of the ongoing strikes in the film and TV industry in Hollywood. For the first 9 months, our reported revenues increased by 8.5%, while underlying subscription growth continued to be over 20%. In addition to this, the segment's profitability with an above group average margin of 37.1% continued to be on a high level.So last but not least, our smallest segment managed reported revenues of EUR 42 million after the first 9 months of the year, a growth of 7.4% at constant currencies and the continued investment that we made into future growth opportunities, weighted on the segment's profitability, as Yves was already highlighting at the beginning. And we have reached an important milestone with the launch of our D-Twin solution, an open and data-driven cloud-based Digital Twin platform.So coming to Page 9, and as you all know, one of our main strategic objectives, I would say, 3 key strategic objectives and always an important discussion point in this earning calls, is a topic of recurring revenues and in particular, the development of our subscription and SaaS business. And as mentioned previously as well, we are very pleased with the development of our subscription and SaaS revenues in Q3, as well as also during the first 9 months of the 2023 fiscal year.Starting on the right hand of the slide, with one of our most important operational KPIs, I mentioned it before, our annual recurring revenues or short, ARR. The ARR grew as said over proportionately with 25.4% on a currency adjusted basis to EUR 664 million. And as a reminder here, according to our definition, the ARR includes all of our different recurring revenue streams, so that both subscription and SaaS as well as maintenance context as well. So that means if we would have excluded the maintenance contracts, the ARR growth of almost 50% at constant currency would have been even substantially higher.In line with our strategy, our license revenue continued to decline in Q3, albeit at a lower rate given the stronger-than-anticipated license business in our Design segment, as I mentioned before. So nevertheless, with the ongoing very successful transitions of Bluebeam and in the Design brands, Frilo, Scia and Vectorworks, this revenue category accounted for only EUR 44 million at the end of the quarter and as said, perfectly in line with our strategy.On the left-hand side, you can see the results of the high growth in the recurring part and the corresponding shift in the composition of our revenue base. The share of our subscription and SaaS revenue increases of more than 800 basis points year-over-year to now 33% of the total portfolio. Combined with our maintenance contracts, the entire recurring part of our business now, even accounts for 75% of our total revenues. Both figures marked new record highs for the Nemetschek Group.So in summary, I therefore believe that we have taken a big step forward in the last 9 months on our way to a subscription and SaaS centric business model. The benefits of this transaction are clear. So let me just mention a few. With this, we are able to address completely new customer groups. We increase the customer lifetime value, we tap into new core and cross-selling opportunities. And ultimately, we have a more resilient and better predictable revenue stream.The first result of this development have already become visible in the third quarter, as you have seen in the figures, but they will become even more evident in the upcoming years, as indicated by our midterm ambitions.Let's move forward to Page 10; here we provide a more comprehensive overview of our most important P&L items. We have already addressed our revenue development in detail previously. However, going further down in the P&L, you'll notice that and as outlined in our last earnings call as well, we have ensured that our OpEx-based increased at a reasonable rate only. For example, if we take a closer look at the largest component of our overall cost base, that is our personnel cost, you will see that after very strong growth of 13.5% in the first quarter, we managed to limit the increase just 4.5% in Q3, through a greater efficiency and also our various ongoing operational excellence initiatives.During the first 9 months of the year, the increase amounted to only 9.1%, even despite a slight increase in our headcount and the generally strong wage inflation we are seeing in very many industries and countries in our portfolio.So we have already discussed the main reasons for the year-on-year decline in our EBITDA, namely the short-term accounting impact due to our transition to a subscription and SaaS-based business model, and in line with our strategy. However, you might have also noticed that our earnings per share decreased slightly over proportionally by 10.8%. And the reason for this development can be found in our financial results, while our interest income increased sharply by EUR 2 million year-on-year, as one would expect in these times.Given today's high interest rates and also our net cash position, our financial result nevertheless declined from EUR 5 million in 2022 to just EUR 600,000 this year. An explanation for this decline can be found when looking at our other financial income, which benefited strongly from a positive FX effect in 2022. So the resulting delta of almost EUR 6 million compared to the previous year, is the sold and also nonoperational reason for this decline in this position.Looking at our cash flow generation; after the first 3 quarters of the year, you'll notice that despite a decline in earnings, we still managed to grow our free cash flow substantially by 18% year-on-year. And this increase was driven by a slight reduction in CapEx compared to last year, as well as by a strong improvement in working capital due to an increase in our recurring revenues. This once again does not only underpin the high quality of our earnings, something Nemetschek is will be standing for, but also shows one of the very many benefits of our strategic #1 priority, the transition to a subscription and SaaS centric business model.So lastly, we once again improved the quality of our balance sheet. We presented in an important metrics such as the equity ratio, which is now at almost 60% and a net cash position of EUR 223 million. Combined with our strong cash flow generation, this provides us not only with a high degree of safety, but also substantial financial firepower should value-accretive M&A opportunities come up in the coming months and quarters.So with that, I think that's a good wrap up, and I'll hand it back to Yves.
Thank you, Louise. To conclude our presentation, I would like to turn to our updated outlook for the current fiscal year 2023 as well as our ambitions for the subsequent years, 2024 and 2025 on Page #12. So as a result of our very strong operational growth in the first 9 months of the year, our successful subscription and SaaS transitions in the Design and especially in the Build segments with Bluebeam. As well as a highly resilient business model based on the high share of recurring revenues, and the well-diversified product portfolio and geographical exposure, we've decided to increase our guidance for the financial year 2023 after the third quarter.In particular, this means that from today's perspective and based on the current portfolio, we increased our revenue guidance for 2023 and now expect a growth at constant currency of 6% to 8% versus 4% to 6% previously. Furthermore, we expect the EBITDA margin to be at the upper end of the previously communicated range of 28% to 30%. With regard to the remaining part of our 2023 guidance, expected ARR growth of 25%, as well as the targeted share of recurring revenue above 75% are very well on track to also reach these targets. And therefore, we confirm both of them.However, again, let me emphasize here that the guidance is based on the assumption that the global macroeconomic and sector-specific conditions will not deteriorate significantly in 2023. Furthermore, no additional potential negative effects from the current developments in the Middle East conflict and the ongoing war in Ukraine are reflected in such outlook.Looking at the bigger picture, we can clearly see that all of our long-term structural growth drivers, such as the very low degree of digitalization in construction, increasing beam regulation and the need for more energy efficient and environmental-friendly construction are intact and offer substantial growth potential in the coming years and decades. We are convinced that our strong market position, our new executive team and great overall talent across all our brands and the group as well as our innovative products and close customer relationships, will further support this growth.Consequently, we also fully confirm our long-term ambitions. For 2024, we already expect our growth to return to the low double-digit percentage range, while the EBITDA margin will be slightly above 30%.Due to the significantly over proportional increase in subscription and SaaS revenues, we expect that the recurring part of our business will represent around 85% of Nemetschek's total revenue. Following the successful transition of the majority of our business to subscription and SaaS models by 2025, we expect a further acceleration of growth, to a range that is at least in the mid-teens, so significantly above the market.And with that, I would like to thank you all for your attention, and we are now happy to take your questions. So operator, please, back to you.
[Operator Instructions] And our first question comes from the line of George Webb from Morgan Stanley.
I'll kick off with a couple of short-term guidance questions, please. Firstly, on the revised growth guidance of 6% to 8%, you've kept that 2-point corridor going into Q4, which implies a pretty wide range, if my math is right, somewhere between kind of 3% and 10% growth in the fourth quarter. Can you add a little bit more clarity on how you see the underlying growth rates developing as you go into Q4, perhaps touch on how Q3 started versus how it ended on an underlying basis? And therefore, which -- what side of that range is perhaps more likely?And then secondly, you've maintained your 2024 growth target despite the higher base now for 2023, and noting that some of those effects were one-offs, do you feel you have enough buffer in that 2024 double-digit growth target that you didn't need to revise it lower? And how stretching is that target now?
Sure. So first of all, if you look at Q4 and already a few weeks in now, we still see a strong momentum. Of course, there is -- we do not see any big significant changes in the market regarding demand. So it is not much better than what we anticipated, but it's also not lower than what we anticipated so far in October.Of course, as you know, Q4 for us, especially with some of our brands, there is always at least a hockey stick in December. But overall, if you look at some of our biggest divisions, clearly, we see that -- we are going to be aligned with what we expect. So clearly, the foundations, especially at Bluebeam, is the fact that the user growth is still quite strong. And as you can see in terms of figures, Q2 was extremely strong, but also Q3, more than expected in terms of user growth, which means new sales, new customers, additional users also for existing customers. And we see that it's still the case, that the momentum is still strong for Bluebeam also in October.On the Design brands, clearly, we have launched now also new releases of some of our large brands, especially if you look at ArchiCAD27, where we got excellent feedback from the market, and it is seen as the best release of our ArchiCAD ever. So clearly, very, very strong feedback and positive feedback from customers and potentially new customers, too. So let's see how that evolves.Allplan also launched, as you know, a new release, Vectorworks 2. So here on the Design side, as you know also, Vectorworks is planning to launch a subscription-only offering starting in January 2024. So we see also that there are some last time buy of perpetual license, which came already the last couple of quarters, because that's something that, especially the distributors and resellers that we have didn't put that as a last quarter, last month type of things, but they are really having that across the year.And therefore, if you look at 2024, yes, of course, the comparable is now higher than what we expected. So of course, there is kind of a stretch, but we are still highly confident, that we will be able to manage double-digit growth. But yes, it will be, as said, in the low double-digit growth, so 10% plus type of growth. And this is mainly coming from Bluebeam, which is going now to be in full subscription mode, will benefit from the subscription move from 2023. So we're expecting to be in the mid-teens revenue growth for Build in general, which is mainly coming from Bluebeam, as you know.Then in Design, in 2024, we are not expecting that the market will get much better in general in terms of conditions, but we are also not expecting that it will get much worse. So for the moment, in Design, we are forecasting that for 2024, we should be in a range between the mid to maximum high single digits.And then in media, especially now with is a few months now ongoing strikes in Hollywood. Clearly, this has an impact for the overall media industry, as you know, especially in the U.S., and we see more low double-digit type of growth in media for 2024. So if you combine all of that, we are still confident in our guidance of plus 10% revenue growth, and also plus 30% EBITDA margin for 2024, George.
That's super helpful. Can I just ask on the Bluebeam side of things, when you've referenced strong user growth, if I remember thinking back, you've already got a very strong share of the large enterprise contractor market in the U.S. and some of the growth more recently have been driven by the SMB chains perhaps taking up the product. Is that still the case? SMB...
Yes, clearly, I mean, the growth, of course, is also coming internationally. But internationally, we can do much, much, much more at Bluebeam. But what is interesting is that the growth is very big in North America and in the U.S. I mean, for both type of customers, a large one. But of course, the SMB sector is so low in terms of digital penetration. And Bluebeam is almost becoming a verb now in the construction industry in the U.S. So we hope that this is -- continue in the right direction. But so far, so good.
And our next question comes from the line of Sven Merkt from Barclays.
This year, you have significantly improved the monetization of your products. You have increased the pricing bundled products, maintenance mandatory for some products. Can you comment, please, on the opportunity you see to further improve monetization next year? Will it become more difficult or you see sufficient other levers you can still pull? And then secondly, you mentioned earlier that you expect to be slightly over 30% on the margin next year. So is my interpretation right that you plan to meaningfully step up hiring and investments next year? And then finally, just one question on Bluebeam, can you give us the license revenue still generated from that product over the last 12 months, and that is still -- needs to migrate over the coming year?
Okay. So regarding, first of all, your first question on monetization. So as you know, most of our brands, and also in the culture of the company for many, many years, we didn't do so much price increase. So yes, we have done slightly some, especially this year. But we still have room to still continue on the pricing adjustment in general.Then in terms of bundling and packaging, especially cross-brand on the cross-selling side, we have not done anything yet. So here on the monetization, it's Stage 0. We still have everything to do, and we have, therefore, huge opportunities on the cross-selling, repackaging of the different products, cross-brands going after larger type of accounts, medium-size plus enterprise and license, enterprise license agreements, ELA type of things, which have not done yet. We have not done anything around that for the moment.So in terms of monetization, just on the packaging and price adjustments, we see still a lot of opportunities for quite some time. And then in addition to that, again, internationalization, I mean, the level of digitalization is super low. So first of all, in terms of penetration, in terms of users and new customers, even in the region that we are present at the moment, if we continue to grow significantly. And then geographically, again, 50% of our revenues in Europe, very small in Middle East and Africa, and here, we see huge opportunities in the Middle East. I mean we were again at this week, some of our team in Riyadh, where we have some presence also with some of our products with some big projects like [indiscernible], for example.But -- we also see that in North America, yes, we are strong. But if you look at Latin America, we can still do a lot of things where our presence is very small. And then in APAC, again, yes, we are more in PAC than A. So Australia and New Zealand, we are okay. Japan, we are good. Singapore, we are small, and almost our presence in the rest of Asia, especially in India, is not significant, and you will see that we are going to invest much more in [ this area ]. So that's for the monetization topic. So price adjustments, packaging, cross-selling and, of course, internationalization.Then the second topic on the EBITDA. Clearly here, I mean, yes, of course, we want to invest. We are not here to just milk our business. We are here for the long term, we have a very strong growth strategy. We have many initiatives that we are currently looking at on the innovation front, on new products, on new solutions. You will see that we are going to innovate and release some new solutions, which are based on generative AI and artificial intelligence, generative Design solution within the coming months and quarters.But in addition to that, we also need investments on the go-to-market on the internationalization part, to invest also in key account management, enterprise selling. But of course, when we say enhancing business enablement, yes, it is to harmonize our processes, et cetera, but we need also to invest in terms of IT on common tools, CRM, ERP, et cetera, et cetera. So there is clearly a level of investments that will continue to be there.
And I think, in general, just to that, you should continue to expect attractive profitability and margins from Nemetschek, as you used to and to say it's also part of our guidance. But Yves was saying we have a vast array of investment opportunities. So we should invest because the value creation of the Nemetschek business model is clearly in the growth. We have so much growth that will generate a lot of value. However, also in order to fund that, we are also having a lot of synergies within the group as we are growing and as we are harmonizing, et cetera. So it's definitely not a cost reduction program in the Nemetschek Group, but we have economies of scale, et cetera, that we use to reinvest into those areas where we can continue to fund our own growth with, so to say. So that's also an effect that we balance carefully.
Yes. And then for your last question on Bluebeam. So the transition continues to be successful and according to plan. So we are very pleased with that. And we have now transitioned more than 40% of the Bluebeam customers to subscription, which is very successful.
Okay. That's very clear. And can you quantify all the license that was still generated from Bluebeam over the last 12 months. So we just have a sense what still needs to be migrated there?
We are not communicating on that, no.
And our next question comes from the line of Nicolas David from ODDO BHF.
I have 3 actually. 2 first on Bluebeam. The first one is, are you confident to generate a positive growth at Bluebeam level or Build level, let's say, if it's easier for you to comment that. So are you comfortable to reach a positive growth in Q4 on this segment, thanks to the fact that you are probably reaching the inflection point of the move to subscription. And despite the fact that you had some very high exceptional license in Q3 that may [ cut ] you from some potential subscription deals in Q4? And also, by the way, could you give us a sense of the amount of exceptional license you signed for Bluebeam in Q3?And my second question is also on Bluebeam. Could you give us an update on the client behavior regarding the subscription notably in terms of ASP? And now -- the evolution of ASP in the recent months? And also now that you are also transitioning the installed base, did you see a different behavior from existing clients regarding this transition and maybe did you suffer a bit from higher attrition on this installed base?And my last question is more on the Media & Entertainment segment. Could you elaborate a little bit on the generative AI strategy for the segment? Do you plan to make partner or buy? And when do you think you'll come on the market with interesting new features regarding that?
Sure. So first of all, on Bluebeam, so yes, for this quarter, we are expecting positive revenue growth. So we will be back to positive growth at Bluebeam. As you know, now it will be over 1 year that we have done the push to subscription. And so far, we see, again, some very good traction there.Regarding client behavior, I mean, as you know, the most popular package that we have, is the core one, which is our mid-tier package and also complete. So the majority of new users and subscription customers are really going to the mid and high tiers package. Basic is also here mainly for web store. So if you look at web store e-commerce selling, it is mainly coming from Basic, which is also positive because as it is web store, we don't have any intermediate commission for resellers or whatsoever. And that's why we still have this very nice mix, which is quite high in terms of average price compared to what we had with the perpetual license.So on Media and Entertainment, clearly, I mean, generative Design is making a lot of noise there. As already mentioned, this is something that we are looking very, very seriously. So we are currently working with some start-ups for -- to see how we can potentially do a partnership. It is true that it's really depending on the type of solutions that we are talking about. If it is mainly on 3D animation, generative AI has less impact. But definitely, when you talk about rendering, et cetera, we see some very nice opportunities of innovation, and we are currently working on it.
Okay. That's helpful. And any estimate of the Q3 exceptional license you may record -- you may have recorded?
So at Bluebeam, you mean the...
Specifically, yes.
Yes. Bluebeam, so there has been a big push from also our channels to go very, very pushy. So some of our distributors were pushing until last time buy of a perpetual license, which was much higher than what we expected, and also what they expected so far. So of course, then you may say, yes, part of it could be a little bit also some pull forward from Q4 to Q3, which is a little bit the case. But when we see the first few weeks of October, again on Bluebeam, I mean, demand is still strong, and it is still according to plan.
And our next question does come from the line of Knut Woller from Baader Bank.
3 questions. The first one, just looking at your German market growth accelerated by 2 percentage points versus the first half. Was this growth acceleration driven by the exceptional impacts you highlighted for the Design segment? Then just secondly, looking at your end markets, you just highlighted that your guidance increase is based on the assumption that there won't be any deterioration in the environment? Can you just give us an update here on what you're seeing in residential, which seems to suffer currently and how infrastructure and other projects or segments are leveling that off?And then lastly, on Digital Twin and the launch here, can you share with us some insight already in how this launch went and what kind of expectations do you have for Digital Twin and in which time frame you believe that you can harvest this opportunity?
Sure. So regarding Germany, yes, you're right. And the growth part of the growth was clearly due also from this onetime effect on perpetual license, especially in the Design segment, but also Bluebeam partially. And then interestingly also, across the brands, even if you -- I mean, you're German, you also noted, that when you open the newspaper over the last few months in Germany, you have the tendency to read a lot of things, which are highly negative around the construction industry. But the fact is that the demand is still there, for more digitalization and software.Yes, of course, there is hesitation in the market. No doubt that Design and Planning is impacted since last year, with a slowdown in the economy and the slowdown in construction, especially in residential. So the residential market is definitely deeply impacted for now a few quarters, and this is not only in Germany, but in Europe and even in the U.S. and globally. This is something that we see everywhere.And we are not expecting that the first half of 2024 will be much better. It could be that residential market might be slightly better by the end of next year. But for the moment, our expectation is that 2024 will be similar level and not much better in residential than in 2023. Nevertheless, clearly, infrastructure, there is some nice growth. It is true that infrastructure is not the biggest part of our business and revenue. But as you know, we have few solutions which are linked to infrastructure. Even Bluebeam has a lot of infrastructure customers, Solibri has infrastructure customers, of course, Allplan, with all our transportation solutions around Allplan, with Allplan Bridge, Allplan Road, et cetera. And also on the pure engineering side, some of our products are also used in infrastructure.Now renovation on the other end, if you look at the Building side, that the demand is still there. Again, since the beginning of the year, there has been a lot of renovation projects, especially in Europe due to the energy crisis.Then your last question Knut, regarding our Digital Twin solution called D-Twin. But of course, we're at the beginning. I mean, we are now launching our first version of the product, which is our MVP. We are showing it in different trade shows. So we are presenting it -- we presented it in New York. We presented it in London. And we are going to present it in November also in Asia, with a big event in Hong Kong. And also myself, I'm going to be there, not only in Hong Kong, but also to present it to a few company and also the authority of Singapore and the government there.And our goal is to now test it with a handful of customers, like pilot customer, within the next few months and quarters. So do not expect big revenue coming from D-Twin next year. I mean next year for us is really to shape the product, target it, price it properly and also do these pilots in a proper way in different segments, so that we can have a good product for a [ big bang ], commercial launch probably towards the end of 2024 to start generating some revenue in '25.
And our next question does come from the line of Deepshikha Agarwal from Goldman Sachs.
This is more on EBITDA margins as in like -- because now you're alluding to the high -- like the top end of the guidance in 2023, and you still reiterated the guidance for FY '24 being like above 30%. So how should we think about like the cost development in -- like in the fourth quarter as well as like 2024, if possible, given all these initiatives on innovation and internal like -- entry into a lot of new markets. And basically, that would involve some investments?
Yes. Thank you for the very good question. And I think I alluded a little bit to that before, let me reiterate that. Of course, we are continuously investing into our -- already now also into our business model. And as we alluded to, AI initiatives, the Digital Twin, but also internally in structures, et cetera, in order to enable the growth in order to build that layer. But we also -- while doing so, where we have to reinvest in some areas, we also draw upon the synergies that we have, the economies of scales, because it's not only that we as a Group have reached a certain size now, also all our brands have reached a certain size. And as we go into more combined solutions, et cetera, we have a lot to benefit from each other.And the Nemetschek Group has done that in the past. So we have we have good potential there. So that's why it's balanced by the reinvesting as you're alluding to, absolutely, but we can self-fund that by the efficiencies that we have in our operational excellence. So you should continue to see the investments, that should also drive the growth, and that's what we are doing continuously. But you shouldn't see an enormous overlay as to say that, we've also reiterated that for next year as well, and of course, the additional growth that we are seeing is adding on that operational leverage as well, and we continue to be very, very cautious on our spending to make sure that we have a high effectiveness in our spend. I hope that helps a little bit.
And our next question comes from the line of Nay Soe Naing from Bernberg.
Actually, most of my questions have already been asked here. I've just got one more, hopefully a quick one. I think Louise, you mentioned earlier [indiscernible] is the fact that you are now sitting on a very strong balance sheet position and enough firepower for any potential M&A as well. So if you could maybe share the types of opportunities or targets that you are looking at and potentially pursue in which segments of the business and that potential target will be and also the size of the potential targets, well that will be really helpful.
So clearly, on the M&A front, I mean, as mentioned in previous calls, we are really scouting different type of opportunities and targets. First of all, targets and companies which can help us to complement our offerings. So we need to go and complement what we can do. Here, clearly, on the Build and Construct segment, there are some opportunities. They are also in operator managed, a little bit in media, and then slightly also in Design. But clearly, Build and Construct and is one of the segment where we see more opportunities to complement what we do.Then overall, there are also some opportunity that we are looking at, when we need to make some decision on the technology front, buy versus make. And here, there could be also some M&A activity that we may do, regarding mainly technology buy. And then we are also looking still and scouting at more adjacent solution, but still in [ ATO ] than what we currently have in general.And then in terms of size, again, it's different type of size. It is just a technology buy, it could be small or then to complement our offering medium-sized, but we are also looking at larger size. So we are scouting the overall spectrum.
[Operator Instructions] And our next question comes from the line of Balajee Tirupati from Citi.
Balajee Tirupati from Citi. Two questions from my side, if I may. Firstly, in terms of monetization, if I may have a follow-up, while the Group is going through a subscription transition at varied rates across different plans, do you expect to be more proactive to improve maintenance attach rate across brands, which are still early in the transition? And second question would be on the subscription transition Design segment, would it be possible to share where you are at percent and the target going forward? And while you are transitioning brands like Vectorworks, are you also adding additional features like you have done in Bluebeam in Design segment to incentivize subscription transition?
Sure. So let me start with your last questions on Design. So clearly, the Design brands, as you know, they have different solutions, different target customers, and each of them have their own plan on the move to subscription. If you look at Vectorworks, they've decided to really push for subscription only. And now what they are going to plan for next year is yes to add new functionalities in their subscription package than what you would have in the past with perpetual license.If you look at Graphisoft and Allplan, so Graphisoft also in their subscription package, what they are trying to do now is to combine more being cloud, which is a different additional offering than our ArchiCAD. And therefore, here also, it is going to -- it is bringing additional functionality. You will see that we are also going to announce soon more new functionalities on the Design front with all our brands, which are going to be mainly linked to a subscription package then, if it is only on perpetual license.So perpetual license, as you know, for Allplan and Graphisoft will be still around. We're not planning for the moment to do a stop of this perpetual license. Nevertheless, the subscription product and package will be more interesting in terms of feature sets for all the brands in Design.So that's the first thing. Then on the monetization side, not sure I understand completely your questions, but we are currently in Design in the mid-teens of subscription -- share subscription. Overall, recurring share in Design is around 75%. So this is where we stand today.
If I may clarify question on the monetization part. My question was, do you see potential for making maintenance attached with license purchases mandatory in multiple brands going forward?
So as an example, Allplan, they announced that you won't be able to buy any perpetual license of Allplan without SSA attached. So SSA maintenance is mandatory for any perpetual license buy from Allplan starting October 1 of this year, as an example. Then Allplan, they have a good plan also now to start migrating some of their maintenance and SSA customers to subscriptions. Like also what Bluebeam is currently doing, which is to really start migrating their subscription -- their SSA maintenance customers to subscription. So...
Yes. And as you can see by the share that Yves was just mentioning to in the Design segment, we are around 75% of recurring share in that segment, and that shows us that we have been very successful also on attaching maintenance contracts to our perpetual, that's part of the business model. And that's also why we are moving to subscription and SaaS-based business model, we are also at the same time to say, where we are not still on a subscription -- we are, of course, working very, very strongly with the recurring model, and that's why you see such a high share there already.
Again, in Design, the attach rates, Balajee, is over 80%.
And our next question does come from the line of Victor Cheng from Bank of America Securities.
Congrats on a solid quarter. Couple if I may. I think first of all, just look at the one-off effects you talked about in this quarter, especially in Design. Are you talking about Vectorworks specifically? And given they're migrating -- well, they're only pushing for subscription sale for the remaining 50% of the market next year, should we expect again some one-off Q4 perpetual license sale in Design? And on other Design brands, any change in price increases or accelerating subscription push that we should expect? And I have 2 follow-up questions.
Sure. Thanks, Victor. So first of all, regarding the one-off on Design, we are not expecting any special additional new one-offs in Q4. As I said before, if you look at Vectorworks, the onetime buy of perpetual license in their indirect markets, excluding Japan, is not really going to have a big, huge impact on Q4. This is not what we are sourcing, because again, they started to do that since the beginning of the year. So obviously, there will be -- as always, in December, we are expecting a small hike there.But then Allplan is one of the brands who decided on October -- on October 1 to only have perpetual license attached with maintenance. So maintenance is mandatory. And this is why Allplan had a strong boost of last time buy of perpetual license, only in September, which we are not going to have any longer in Q4.In Q4, of course, we will not have any more big, huge books that we had of perpetual license for Bluebeam, because it's not there anymore, the option. So there is no big price increase coming up on January 1 or these type of things, which are going to boost any perpetual license, one-off type of effects in Q4. No.
Very clear. And then as I think about Bluebeam, where does the maintenance ending for Bluebeam customers that have just purchased -- purchased last perpetual licenses? So I guess, how long can they hold on to, before being moved to subscription? And then my last question is, when I think about the end customers, maybe particularly in Design in Germany, I think you have previously talked about their long fat tail of small customers with maybe 1 to 2, 3 seats per firm. Think about these companies and when you talk about the hesitation and Design segment, is the hesitation more about not renewing this year and holding on to old licenses for longer, or are they reducing seats kind of -- what's causing kind of the slowness in Design?
Sure. So regarding Bluebeam maintenance, so clearly, people who have maintenance, they can keep it. But we are going to -- we are influencing them strongly to move to subscription. So there is a big push on the move to subscription there. And what they have is that if you're a management customer of Bluebeam, you have kind of a special price when you move to subscription because the only thing that we do is that you keep your maintenance price, we do a 10% increase on a yearly basis, until you reach the market price of subscription. So that's the plan on how Bluebeam is planning to migrate their SSA customer to subscription. And of course, why you would like to move the subscription as a customer that you would like to have all the additional nice features that you can get on subscription, that you will not get any more, because -- with just maintenance, that's not going to happen.So that's on the Bluebeam maintenance topic. Then if you look at Design and this long tail of customers. So why there is an hesitation and why -- how we define this type of hesitation. The growth of Design, especially with architecture firms, is mainly coming from the fact that we get new customers, that's the big thing. So customers who are still using 2D or 2.5D, who were SketchUp and AutoCAD type of customers, who wants now to have a 3D modeling and beam solution to have an altering tool, which is more advanced. That's the first thing.Then it is add-on of new users. And as there is less projects for some of these architecture firms, well, they don't need to hire new architects, and therefore, there is no need of new user seats. But in terms of churn rates, I mean, as it is still heavy perpetual license, as you know, Design, we do not see any big churn, because the churn would be mainly only on the maintenance side, and here on maintenance, it's very low, I mean it's below 5%.
[Operator Instructions] And as we have no more questions registered, I hand the conference back to our speakers.
Perfect. Thanks, everyone, for attending. If you have any follow-up questions, please do not hesitate to contact us, so Patrick or myself. Thank you once again for dialing in, and have a nice day.
Thank you very much, everyone. Bye-bye.
Thank you. Bye-bye.