The PLMish VAR economy: mixed Q2 so far
As PLMish earnings start, it’s helpful to look at the results reported by the (very few) publicly traded value-added resellers (VARs). They’re the canary in the coal mine, on the front lines with the buyers of PLMish solutions. They’re also a middleman, buffeted by their software developers’ demands and business model changes on the one side and by their customers —and the economic forces they face— on the other. Not easy.
First, a quick recap: Why VARs? Initially, because they were local feet-on-the-street, reaching customers the software companies couldn’t. The accounts might be too small to interest a direct sales force (all that flying around for expensive lunches costs money, ya know) or occupy a market niche that wasn’t the developer’s core focus. It was also a great way to offload the selling and account support onto others and allow the developer to focus on research and development. Today, with online, self-service sales, SaaS software delivery, better products requiring less customization, and a much more educated buyer, VARs are reinventing themselves yet again to offer far more than boxes of software.
But given the technology trends I listed above, it’s reasonable to ask: how can VARs succeed when anyone can buy a product from an online self-service store, use social media or help pages to get set up, and start using the software? How long can VARs last? My opinion: Any tool can be used well or poorly; making a PLMish solution sing requires training. Need to learn BIM or CAE? Take a VAR training class targeted at your specific need. Moving an enterprise to the cloud requires skills that most enterprises don’t want to keep on hand permanently (hopefully, they do this once). Enter a VAR. Not everyone will need a VAR, but those who want to get the most from their IT investment can benefit from the right VAR. VARs aren’t going away anytime soon.
Successful VARs today focus on the V —value— when they work with their vendor and user clients. Specialized services such as training or defining simulation, additive manufacturing, or digitalization strategies boost the value of a software purchase, as does scale. Cover more territory with the correct number of the right people, and you can serve a broader set of users while managing the risk that one industry or economy will lag. Many VARs also create offerings that layer on top of their software partners’ toolsets. For example, Mensch und Machine (MuM) offers BIM tools that work with Autodesk’s Revit. MuM also markets the very successful Open Mind CAM software, diversifying from its pure VAR roots.
But the life of a VAR is challenging, especially as their software vendor partners keep tweaking business models and customers look at PMI and other data to plan their software acquisitions and training programs. Q2 results are just starting to come out, but we’ve already heard from two public PLMish VARS.
Let’s start with MuM’s Q2 results:
Mensch und Maschine (MuM) reported Q2 revenue of EU71.3 million, essentially flat year/year; that’s quite a slowdown from Q1’s 21% year/year increase. Even so, MuM characterizes Q2 as “solid.”
For the half-year, MuM’s revenue was EUR 174.38 million, up 11%. Its proprietary software business, M+M Software reported revenue of EUR 54.58 million, up 12%. Its Autodesk VAR business reported revenue of EUR 119.80 million, also up 11%. In its Q2 report, MuM wrote: “After Q1 sales had been up +21% due to Autodesk’s 3YR final peak, the sales curve in Q2, which was more dominated by proprietary M+M business, was nearly flat at +0.2%, as expected”. We’ll see more about that below.
CFO Markus Pech and Chairman Adi Drotleff are optimistic for 2023/24, focusing on what investors care about profits. They wrote in the earnings press release: “After the strong first half year, we believe that our 164-181 [Euro] Cents/share net profit target for the full-year 2023 is clearly underlined … When attaining this goal, we shall increase the dividend to 155-165 [Euro] Cents. For 2024 we also expect EPS to grow by +14-20% or +24-34 [Euro] Cents and plan for +15-25 Cents dividend increase.” You can see more here: https://www.mum.de/investor-relations/investor-relations-english
Notice that they don’t mention revenue — over 2/3 of that is Autodesk-related and responds to Autodesk promotions and license changes. Q1 was so strong partly because Autodesk ended the discounting for its three-year licenses; many buyers wanted to lock in that pricing, fearing annual increases. MuM doesn’t mention it, but it’s likely that many buyers who would generally have transacted with MuM in Q2 pulled their purchases forward to take advantage of these promotions.
Let’s move on to Addnode, which sells its own solutions, and partners with both Autodesk and Dassault Systèmes. Addnode gives much more detail on its results, letting us dive deeper.
Addnode’s total revenue in Q2 was up 4%, as reported to SEK 1,554 million (roughly US$150 million). On a constant currency (cc) basis, revenue was down 3%. Since this company has been making a lot of acquisitions, it’s especially important to note that organic growth was just 1% in Q2.
- By revenue type: License revenue was up 40% to SEK 94 million; recurring revenue was down 2% to SEK 1,004 million; service revenue was up 12% to SEK 432 million, and the ever-popular “other revenue” was SEK 24 million.
- By business area: Design Management (Symetri, mostly Autodesk-related) revenue was SEK 778 million, down 3%, “mainly due to lower sales on Autodesk agreements, due to a slower construction cycle and longer sales cycles.” The company added, “Due to an uncertain cyclical phase, investments in construction and civil engineering projects are now increasingly being deferred. This means that although most customers are renewing their agreements, some are deciding to downscale volumes. The share of three-year agreements sold was lower than previously, which may also be a result of greater caution impacted by economic conditions. We also perceive that Autodesk’s change to its payment model for three-year agreements at the end of March 2023 had a negative impact on sales in the transition to the new terms.”
- Product Lifecycle Management (Addnode’s TECHNIA division, mainly a Dassault Systèmes partner) was SEK 468 million, up 19% (up 6% cc, up 13% organic), on “stable demand for PLM systems and associated services in Germany, the UK and USA, while the Nordic market was somewhat slower … The trend of customers increasingly demanding time-finite leasing of licenses instead of the previous license purchases with perpetual right of use continued. Service revenue was somewhat higher than the previous year.”
- Process Management sells mainly to the public sector in Sweden. Business here “remained good, although some restraint from municipalities and public authorities was noted on investments.” Total revenue was SEK 320 million, up 8% (up 5% organic).
- By geo: 33% of revenue was from Sweden, 17% from the US, 20% from the UK, 14% from Germans, and 16% from the rest of the world.
More details from the company’s report, which you can find here: https://www.addnodegroup.com/en/media/press-regulatory-news?page=/perma/press/2144573
TL;DR. That’s a lot of info presented at varying levels of detail. What can we learn from it all? Three things:
- Messing with business models makes life hard for VARs, who typically lack the scale to withstand the tinkering. Both VARs saw their Autodesk-related business suffer in Q2 because of the change from three-year to annual contracts. It’ll even out over time but affected Q2 sales and profitability.
- These are lukewarm results for Autodesk and could mean that Autodesk won’t report a huge Q2. DS-related PLM sales and services are “stable,” so that’s neutral news for DS. The move away from perpetuals continues, which means less initial revenue — we shall see how this all affected the software vendors’ results they report in a few weeks.
- Addnode mentioned that construction and civil engineering projects are being deferred, and sales cycles are lengthening. This could be localized geographically or global —not enough info— but may also affect other PLMish vendors. Another thing to look for as more companies announce.
Canaries in a coal mine, people. Important elements in the PLM ecosystem.
One of the oldest PLMish VARs is Rand Worldwide, which used to do all of the public-company reporting and earnings calls but in 2015 decided to de-register from the filing requirements of the US Securities and Exchange Commission. Its shares are still publicly traded on the OTC Bulletin Board, so the company still issues quarterly information here: https://www.otcmarkets.com/stock/RWWI/overview. It hasn’t released info for the quarter ended June 30, 2023— if/when they do, I’ll post a quick update.