MuM sees subs growth resuming in H2 2017

Earlier this week, Germany’s Mensch und Maschine Software announced preliminary results for 2016 — and they were solid, even with the perpetual to subscription transition it and its customers are working through. Total revenue in 2016 was €167 million, up 4%; M+M software revenue was €46 million, up 13%. The VAR business contributed €121 million, up 2%, helped by promotions run by Autodesk earlier in the year.

Towards the end of the year, MuM says, the proprietary software business dominated activities. The Open Mind CAM brand continues to drive that business. which contributes roughly 24% of group revenue but 42% of the group gross margin — in other words, it’s a nice, profitable business. CEO Adi Drotleff commented in the press release that MuM saw ‘[m]ore than 14% organic growth in proprietary software and service [which] is really exceptional.”

MuM also issued guidance for the next few years that shows how it, at least, sees Autodesk’s move to subscriptions playing out in the VAR ecosystem.

• For 2017, the “rental transition still retarding” sales, leading to a “weaker Q1”. Mr. Drotleff told German media that conditions should improve in the second, leading to growth for the year as a whole. “From August, when Autodesk is finally moving to the rental model, growth will pick up, as Autodesk’s business is back on track. On the whole, however, we see 2017 as being at the bottom of our current growth path.”
• By 2018, then, MuM expects to see a “positive rental impact” and a return to “stronger growth” for the business as a while of 11% to 12% (per the German interview)
• And, by 2020, MuM expects that the EBITDA contribution from both segments “should be equal”. MuM has long said that it sees M+M Software’s EBITDA leveling off at 25% (it’s at 23% in 2016); the VAR segment has the long-term potential to hit an EBITDA margin target of over 10% (was 4.2% in 2016).

Think about that trend line. We’ve got Autodesk-related software revenue declining through 2017 (as a result of the smaller-than-perpetual payments from existing clients) while revenue from the proprietary products grows. In 2018, MuM expects all software brands to be selling strongly again so that, by 2020, both parts of the business are contributing similar amounts to the bottom line.

Let’s talk EBITDA, earnings before interest, taxes, depreciation and amortization – in other words, the profitability of the business without factoring in taxes and financing decisions. In order for the two businesses to contribute equally to EBITDA, the VAR business will have to be large by 2018, with good margins, to equal the contribution of M+M Software. How does MuM get there? By supplementing and then replacing the low-margin software resale business with an increasing proportion of high-margin service business. This is everything from software user support and training to implementation to custom software development. And it’s going to have to be significant by 2020 to hit that target.

Let’s not underestimate how difficult this reinvention is. Many PLMish companies have struggled to develop profitable service businesses and we’ve seen them periodically outsource then insource then outsource again in an attempt to strike a good balance of customer responsiveness and software-company profitability. Investor expectations for MuM are different, since it’s supposed to have a strong services business, but that statement about equal EBITDA contribution is intriguing …

MuM will release final 2016 figures on 13 March 2017 (and cautions that the final audited 2016 figures might differ from the preliminary figures).