Being a VAR is tough: updates from Mensch und Machine, Addnode, and Rand
Mensch und Maschine (MuM) reported preliminary Q4 and 2023 results yesterday, and that prompted me to look: Addnode‘s results came last week, and Rand Worldwide published an update last month — so, let’s take a look at the value-added reseller economy, at least, as it reflects Autodesk’s market moves.
Autodesk, as I’ve written about, has been messing with its contract terms, last year giving pretty sweet discounts for 3-year terms, which bumped up sales for a bit. It is also changing how customers transact, testing a new buying process in Australia that will likely roll out worldwide over the next year or so. This change for VARs is significant: Autodesk will bill customers and collect payments from customers, with channel partners handling everything else in the relationship. Today (except in Australia), VARs handle billing and collection, reporting the sale as income and then the payout to Autodesk as a cost of goods expense. The net result is the same —the VARs will still get their commission— but how money flows through their financials will change.
Why did Autodesk choose to do this? To have more of a relationship with the users of their products, of course, but also to make pricing more consistent and to be sure who buys which license is part of its effort to get off-license users to pay up.
Autodesk has a history of changing packaging, pricing, promotions, and how it works with its channel partners — and often, it’s to the utter frustration of the partner who is relatively powerless in the relationship. That led MuM, famously, and other VARs to focus on its proprietary software and consulting offerings to control more of their future.
Anyway, MuM reported preliminary results, with total revenue of about €322 million, “just slightly above previous year’s €320 million … with a contribution of €105 million (up 8%) from [MuM’s own] Software and €218 million [flat year/year] from the VAR Business.”
MuM Software is doing great; the question is what is happening in the VAR business, which looks challenged. In Q3, the VAR business slowed by 9% year/year as Autodesk ended its discount program for buyers who extended their contracts into longer terms. And the Q4 decline might have been a bit steeper.
Over the last eight quarters, MuM’s VAR business has seen peak revenue of €74 million (Q1 2023) and low revenue of €43 million (Q3 2023). How do you staff for that variance? MuM seems to be managing it well, saying in the Q4/FY 2023 press release that “Gross profit [for the year] climbed disproportionately [to revenue] to approximately €169 million with €95 million (up 9%) from [MuM] Software and €74 million (flat ) from the VAR Business.”
Addnode is a very different company, still in the phase of buying up and absorbing smaller VARs. It reported total Q4 total revenue went up 16% (down 2% in constant currencies) to SEK 2,078 million but a 1% decline in organic revenue. Within that total, the Product Lifecycle Management division (mainly reselling Dassault Systemes’ products and delivering related services) reported revenue up 10% (up 4% cc) to SEK 499 million. For the year, total revenue for the group was SEK 7,412 million (up 19% as reported), and total revenue for the PLM division was SEK 1,884 million, up 19% as reported.
Addnode’s Design Management division (mainly the Autodesk-related Symetri business) reported revenue up 24% (down 6% cc) to SEK 1,246 million on stable demand in Europe but weak demand in the US from the construction and real estate sectors. “This trend continued throughout the year and is deemed to be a result of uncertain economic conditions and the customer transition in connection with the change in Autodesk’s payment model for three-year agreements, introduced in March 2023. Although Symetri’s sales improved compared with the second and third quarters of 2023, its sales cycles remained longer, and its sales of three-year agreements were significantly lower than in the same period last year in terms of both new sales and renewed volumes. However, the comparative figures for the division are high following record-breaking sales of three-year agreements in 2022, mainly driven by demand in the USA and the UK.” For the year, Design Management revenue was SEK 4,292 million, up 23% as reported (and with several acquisitions, so not organic).
In its Q4 material, Addnode said that “Half of Symetri’s gross profit already comes from its own services and products” — meaning that it is not entirely dependent on Autodesk’s products and pricing — and that it will also be affected by the changes Autodesk makes to its billing: “[Due to Autodesk’s new transaction model] net sales and cost of goods sold will decrease significantly, but gross profit is expected to remain unchanged. This means that the EBITA margin (%) will increase. Cash flow is expected to remain unchanged compared with the current reseller model.”
Europe has spoken. What about North America?
Rand Worldwide was, for a time, the biggest of the big of Autodesk VARs. I remember years ago when the principals of smaller VARs would chase Rand’s CEO around Daratech events, hoping for a meeting to discuss an acquisition or partnering. Rand Worldwide is still possibly Autodesk’s biggest partner in North America, with total product sales of $71 million in Q4, up from $59 million in Q3 — but down from $96 million in Q4 2022.
Rand operates as IMAGINiT Technologies (the Autodesk-related business that also resells some Hexagon Leica Geosystems gear and Epic Games’ Twinmotion visualization tools), Rand Simulation (ANSYS-related software and services), Facilities Management (ARCHIBUS), ASCENT (developer of training materials), and Rand 3D (training for Dassault Systèmes and PTC products).
Anyway, Rand didn’t disclose IMAGINiT’s portion of that $71 million in Q4 2023 product revenue (it follows limited disclosure policies) but does say this: “A significant portion of revenues from the Company’s IMAGINiT division are from the resale of Autodesk software subscriptions. From December 2018 through March 27, 2023, Autodesk offered incentives which included pricing advantages and 0% financing offers to customers who purchased three-year subscriptions rather than annual subscriptions. Many of its customers took advantage of those incentives thus boosting levels of three-year deals … Beginning on March 28th, 2023, the Company began offering annual installment billing arrangements to customers who purchase or renew licenses with multi-year terms. For the three months ended December 31, 2023, the Company’s revenues from three-year deals were approximately $27.3 million lower than in the same period in the prior fiscal year.”
TL;DR. What does it all mean? This is an unusually complicated blog — sorry about that — since each of these companies reports at different levels of detail and has a complex business to tease apart. But it’s interesting to see how Addnode and Rand explain Autodesk’s moves to their investors, so I included more quotes than usual.
What does it mean for VARs? Autodesk’s changes make sense for its business. Still, the stresses these changes place on the VAR companies are real and significant. The VARs that diversify from one OEM to several and, perhaps even better, build product lines independent of OEMs will have more control and flexibility.
What does it mean for Autodesk? The news from Addnode about lengthening deal cycles and AEC weakness in North America isn’t great; we’ll hear more about that when Autodesk reports results at the end of February. But that’s short-term pain. Longer-term, Autodesk needs to ensure that its consolidating VAR ecosystem remains viable. Its direct sales teams can’t possibly reach the millions of smaller and geographically difficult accounts it currently has, and an e-store isn’t suitable for everything—VARs create real benefits, and the PLMish world can’t work without them.
More from MuM here: https://www.mum.de/investor-relations/investor-relations-english. More from Addnode here https://www.addnodegroup.com/en/investors. More from Rand here https://www.otcmarkets.com/stock/RWWI/disclosure