2023-03-28 16:22:24 ET
Summary
- Nemetschek SE reported a core performance for Q4 2022 in line with the pre-release, but growth in Design was disappointing at 1.8%.
- The 2023 guidance for Nemetschek SE is largely in line with the consensus, but macro headwinds in the Design and the Bluebeam subscription shift may impact growth in the near term.
- Nemetschek SE management guided for double-digit revenue growth and an EBITDA margin of at least 30% in 2024, with growth to pick up speed and hit the mid-teens levels in 2025.
Thesis
Nemetschek SE ([[NEMTF]], [[NEMKY]]) is a supplier of software for architects, engineers, and the construction industry. NEMTF enables users to conduct better forward planning, information sharing, and teamwork.
Core performance for Q4 2022 was in line with the pre-release, but growth in Design was disappointing at 1.8%, reflecting a tougher demand environment that might spillover into 1Q23. Since the results were already public, I expect the main focus to have been on targets for FY24 and FY25 as well as guidance for FY23. In my opinion, the 2023 forecast is in line with the consensus; however, the direction of the macroeconomy in the second half of the year will continue to be crucial, as there is always the chance that growth will be stronger/weaker than anticipated.
The 2024/25 goals reveal the expected acceleration in growth over the mid-term. This is also much in line with what consensus are expecting. Overall, I think consensus has already baked in all the potential upside in the stock as seen in their estimates, and I see no major catalyst that could drive Nemetschek SE stock up in the near term. In fact, the shift in subscription pricing is likely to have a greater impact on Bluebeam's growth rate in 1Q23, and I anticipate the macro headwinds in Design to become more apparent in the same quarter. Thus, a hold recommendation for Nemetschek SE is warranted at this time.
Results
The Design segment grew by 1.8% year-over-year, the Build segment fell by 5.4% year-over-year, the Manage segment grew by 19.5% year-over-year, and the Media & Entertainment segment grew by 35.6% year-over-year in 4Q22. There was a 22% year-over-year increase in recurring revenues, and they now account for roughly 2/3 of total revenues in FY22. Similar to the previous quarter, ARR grew by 22% y/y in 4Q22. (All Growth is Ex-Forex impact)
Guidance helped calm the market
Nemetschek SE 2023 guidance was largely as expected, and I believe it to have provided some relief to investors that are worried about growth outlook. However, I would caution that the guided outlook is at the mercy of how the macro environment develops. Revenue growth of 4-6% in constant currency is expected, with an adjusted EBITDA margin of 28-30%, according to management projections. In light of my earlier comments about my worry about macro headwinds in Design and Bluebeam subscription shift, I anticipate that NEMTF will employ a greater number of product pricing levers in 2023 than in 2022 to offset these growth headwinds.
With Q1 is almost done, I would think the FY23 guidance has much higher creditability. All in all, I think the guidance took some risk off FY23 consensus figures. Additional information about FY24/25, including specifics on the benefits of its subscription shift, has been provided by management. In 2024, they guided to double-digit revenue growth and an EBITDA margin of at least 30%. The forecast for 2025 is for growth to pick up speed and hit the mid-teens levels. I don't think there are any surprises here (given consensus are already expecting this).
However, I would point out that this also means NEMTF has little room to wiggle about and "let things go wrong." I view FY24/25 guidance as a double-edged sword. As NEMTF inches closer to 2H23, where the market will focus on FY24, the guidance would give further valuation support, and if management executes on FY24, the credibility of the FY25 guide would increase. This chain of events would drive positive narrative and hence the stock price up.
However, one could easily argue the flipside as well. If things turn for the worse in 2H23 (for example, due to macro events), the guide for FY24 and FY25 would be deemed as impossible to achieve. From there, Nemetschek SE stock would lose any current valuation support, and the share price would fall. Given that consensus has priced in the upside case (NEMTF hit guidance), I would say the odds are not 100% in the favor of NEMTF.
Bluebeam
With the momentum it has gained during its Bluebeam transition, I believe Nemetschek will be successful in the long run. New customers in the SMB (small and medium-sized business) market have been very receptive to Bluebeam's Cloud and mobile offerings, and management has received encouraging feedback from these early adopters. The majority of current customers prefer to subscribe rather than license for additional seats, according to management.
However, the transition may cause some short-term drag because, in my opinion, it will take more time to persuade the larger existing customers to switch to subscription mode. This is especially true now, when minimizing expenditures has become a priority. This headwind will be exacerbated by the fact that some of these customers will likely already be making use of functionality that is identical to the new cloud features, albeit in a different software application. Therefore, there is currently no pressing need to make a change.
Conclusion
Nemetschek SE reported core performance in line with pre-release for Q4 2022, but growth in Design was disappointing at 1.8%. While the 2023 guidance is largely in line with consensus, macro headwinds in Design and the Bluebeam subscription shift may impact growth in the near-term. The 2024/25 goals reveal expected acceleration in growth, which is also in line with consensus.
However, there is little room for error, and the success of the Nemetschek SE subscription shift will take time to persuade larger existing customers to switch. Therefore, a hold recommendation for Nemetschek SE is warranted at this time, as I see no major catalyst that could drive the stock up in the near-term.
For further details see:
Nemetschek: No Immediate Catalyst In The Near Term