Mensch und Maschine Software (MUM GR) is a provider of technical software solutions used to create blueprints and digital models of physical products.
Before continuing, a glossary of acronyms is required:
CAD = Computer Aided Design
CAM = Computer Aided Manufacturing
CAE = Computer Aided Engineering
PDM = Product Data Management
BIM = Building Information Modelling / Management
Headquartered in Wessling, Bavaria and with approximately 1.000 employees in 75 offices in 22 countries (mostly across Europe but with a sales presence also in Japan, China, Taiwan, Singapore, India, USA and Brazil), MUM is not a recent start-up, as it was founded in 1984 by Adi Drotleff (who is its CEO, Chairman and largest shareholder). The company listed on the German Neuer Markt in 1997 and it’s one of the few “hype companies” from that period that not only survived the dot.com bubble but actually managed to generate decent growth over the following years. As the chart below shows, the stock price was essentially flat for a long period after the bubble burst before multiplying by 5x since early 2016 (and it was even higher until September last year).
Business strategy evolution
MUM operates today through two divisions:
M+M Software, which develops proprietary software
VAR (Value Added Reseller), where it works closely with Autodesk as its largest European reseller
Over the last decade its business model has been going through a transition process with the objective of strengthening the proprietary software part and significantly improve scalability.
Since its foundation and until 2008, MUM acted mostly as a Value-Added Distributor (VAD) for Autodesk software (approximately 90% of sales in 2007 and 2008) and it was in a constant head-to-head race with Tech Data Group for the title of largest Autodesk distributor in Europe. On the side, it also developed its own CAD/CAM solutions in order to build up an individual market profile and to be clearly distinguishable from the competition. While much smaller in terms of revenues, the pure software segment already had at the time higher margins and contributed nearly half of gross profits and EBITDA.
In 2009, however, a third segment called Value Added Reselling (VAR) was formed: the MUM subsidiaries in Germany, Austria and Switzerland were transitioned from indirect business to direct selling to end customers, and more than a dozen of former reselling partners were acquired.
The third stage of the business transformation was set for completing the VAD/VAR transition groupwide: as a first step, the distribution business was sold to Tech Data Group in 2011, with MUM keeping the subsidiaries in France, Italy, UK, Poland and Romania. On this foundation the VAR Business was built up, accompanied by a further consolidation of reselling partners.
This transition allowed MUM not only to move into higher margin segments, but also to adopt a subscription model. This was in part “forced” by Autodesk decision to shift its own licensing model from the standard “perpetual licence plus support and maintenance” contract to annual subscriptions, with the annual cost of a subscription licence roughly 40% of the list price of a perpetual licence.
Needless to say, once customers are moved over to the new subscription plans, revenues and cash flows become more predictable. Once signed, clients are very sticky and rarely change suppliers: indeed, two of the three barriers often cited for the difficulty of scaling operations in this business are technical complexity and integration challenges.
A deeper dive into the two market segments
M+M Software: roughly one third of group’s revenues (but over 60% of operating profits), with the vast majority coming from Europe (46% Germany, 19% Switzerland/Austria, 27% other European countries) and the remaining 8% from the rest of the world.
Approximately two thirds of the segment’s revenues are derived from the industrial sector, with the rest coming from AEC (architecture/construction/engineering), a breakdown that is quite similar to the global CAD/CAM/CAE market.
Altogether, the active installed base consists of more than 100,000 seats and 30,000 end customers sites of all sizes, from small engineers’ and architects’ offices to international large-scale enterprises. MUM is a pure B2B (business-to-business) direct sales vendor with no B2C (business-to-consumer) activities.
The product portfolio covers a wide price/performance range, from simple 2D drawing software (for less than €1.000) to mid-price 3D design solutions (in the four-digit range) and up to high-end systems with investment levels from €10k to €100k and above. Most of the CAD/CAE/PDM sales are generated in the mid-price range, while the self-developed CAM software as well as customer specific infrastructure and facility management solutions are in the high-end range.
OPEN MIND: a CAM software solution from the wholly owned subsidiary OPEN MIND used for the process control of milling, drilling and turning in industries such as mechanical engineering; automotive, aerospace and shipbuilding; hydraulics; medical technology and toy making, as well as watch, clock and jewellery manufacturing. The selling point is the significantly faster machining of complex parts, in particular for 5-axis milling processes.
Over 6,000 customers worldwide use this high-end solution, with revenues of approximately €30k per seat.
DATAflor: offered by another subsidiary, it’s a niche solution for gardening and landscaping with a strong position in the German-speaking markets with several thousand customers. DATAflor software not only allows graphical planning, but also the calculation, tender, quoting, construction site controlling and project billing.
eXs: introduced in 2020 to replace its predecessor ecscad (which was a MUM product since the 1980s, was sold to Autodesk in 2008, licensed back in 2014 and finally discontinued in 2019), it’s a specialist solution with more than 1,000 customers that enables the quick and precise digital design of electrical engineering plans.
SOFiSTiK: a leading technology provider of structural analysis and reinforcement software for civil engineering (bridges/tunnel construction design, facility management). Over 3,000 customers in 5 continents use the software, with the new Bosphorus bridge and the Brasilia National Stadium just two recent examples of successful projects over more than 30 years. MUM increased its shareholding in SOFiSTiK from 13% to 51% in 2019 (the remaining 49% is still owned by the original founders).
Value-Added Reseller: accounting for two thirds of revenues (but less than 40% of operating profits), MUM is a platinum partner and Autodesk’s largest European reseller. Today it operates from roughly 50 locations with c. 500 employees spread across three competence teams: Industry, AEC and Infrastructure.
As well as reselling Autodesk products, the division provides training and support (which is experiencing increased demand across all sectors) and customer specific projects (in which standard software modules are connected to individually tailor-made project solutions, adding functionality where necessary and making sure that Autodesk’s products comply with local regulations and standards). These customer specific projects can range from few man-days to several man-years.
The customer list includes all sectors and size categories across Europe.
Digitalisation in practice: some recent examples
CAD Industry 4.0 meets BIM
Project: Automatic climbing formwork
Customer: Doka GmbH (Austria)
Doka is a global leader in formwork manufacturing with 160 locations in more than 70 countries with solutions for all kinds of buildings: Residential and Administration buildings, Hospitals, Factories, Bridges, Tunnels, Power plants etc. While the development of formwork parts is mainly a mechanical engineering task (Doka uses the 3D-CAD software Autodesk Inventor), they also carry a large amount of metadata, for example indexing in up to 34 languages for customers all over the world, or the “family intelligence” (e.g. providing the part with information regarding which other parts may or may not be located in its immediate vicinity). The special Inventor to BIM format migration tools, as well as the underlying data management, have been developed by MUM, serving as a long-standing Doka software partner since 2005.
Product Data Management (PDM) for industry customer
Project: Connecting design data and commercial information
Customer: Otto Zimmermann GmbH (Germany)
Connecting design data and commercial information is a standard request from industry customers; however, each of them has very individual challenges and complexities. As one way to resolve this, MUM has developed the product line PDM pinpoint, which is currently in use in thousands of customer seats. For example, at Otto Zimmermann GmbH (OZS), a medium-sized vendor of hydraulic systems, PDM pinpoint connects the CAD systems for Mechanical and Electrical Engineering with the ERP software INFOR, enabling smooth exchange of item data and bill of materials and providing the designers with thousands of repeat parts from the database. This avoids superfluous duplicate work and results in up to three times higher work performance.
Infrastructure for Municipalities: helping reach ambitious sustainable targets
Project: a data hub for the ‘Digital City’
Customer: Stadtwerke Emden GmbH (Germany)
The City of Emden unites tradition and modernity with carefully restored buildings and modern residential and industrial areas. Innovative thinking inside the municipal utilities helps the city to reach its ambitious sustainability goals. In this context, infrastructure data play a significant role. MUM’s application MapEdit links municipal utility data with other sources creating the basis for decisions. For example, the solar potential calculator enables all citizens to check via the Internet whether an investment in solar panels on their own roof would be beneficial. Other solutions are available, for example to check the optimal positions for electric car charging stations or the efficiency of thermal insulation for commercial or residential buildings.
The addressable market
The biggest player in the industry are Autodesk (US), Bentley Systems (US), PTC (US), Trimble (US), Aveva Group (UK), Dassault Systèmes (France), Hexagon (Sweden) and Nemetschek (Germany), with Mensch und Maschine being the smallest of this group in terms of revenues. Other companies include Graebert (Germany) and CNC Software/Mastercam (US), both private, as well as Siemens Digital Industries (part of Siemens) and Schneider Electric (via its Digital Transformation and Energy Management Software division).
Most companies operating in the CAD/CAM market do so as part of a wider Product Lifecycle Management (PLM) offering, and therefore detailed market data split on individual functionalities is difficult to find. According to Jon Peddie Research, the CAD software market is worth c. $10bn in 2022 with 7.3 million users worldwide, for an unspectacular but steady CAGR of ~5% over the last 12 years.
The arrival of CAD along with standardised network protocols signalled the birth of digitalisation for design and engineering in the 1980s. The CAD market today is stronger than ever thanks to the engine of digitalisation. The large CAD customers in the automotive, aeronautics, construction, machine design, plus process and power industries are all gravitating towards system design. The market is transitioning from packaged software tools to building systems to support projects from conceptualisation to implementation. Frequently, customers opt for integrated products from the same vendors to build their systems, but often they need more than one supplier: no one vendor does it all, though they aspire to develop more comprehensive offerings. Customers now have the upper hand and are pressuring suppliers to ensure software tools from different companies are compatible.
Nemetschek, another German provider of software solutions for architectural and building construction projects and MUM’s most direct competitor, estimates that the global AEC software market could continue growing by ~10% over the next few years.
This is because the construction industry is benefitting on a global scale from the tailwinds of growing population and ongoing urbanisation, but it has nevertheless fallen significantly behind other sectors when it comes to IT spending: it is a largely unpenetrated market, and this trend will reverse as it has lots of catching up to do which will raise demand for software products like the ones that MUM offers.
Digitalisation will transform the construction industry as it will significantly improve efficiency by reducing construction time and costs, and it will also improve the quality of work.
In addition, all companies operating in this sector stress the need for improved sustainability and waste reduction.
Some financials
Compared to the other listed companies, MUM is neither the fastest grower nor has the best margins: quite the opposite due to the reselling nature of the still dominant VAR segment.
But it is still showing decent growth: after suffering in 2020, total revenues were up 9% in 2021 (with M+M at +11% and VAR at +8%). While a 13% increase in 2022 seems a bit ambitious (that’s the consensus from Koyfin, and almost always analysts’ expectations are too optimistic, for all companies), an average growth of ~10% for the next few years is definitely achievable (over the last five years M+M has grown at +13% p.a. and VAR at +9% p.a.).
More important, the increased focus on proprietary software is pushing operating margins up (EBIT in 2021 was 25% higher than pre-pandemic), a feat that not all other companies have been able to accomplish.
In addition, the business transformation undertaken a decade ago is today showing a marked improvement in ROIC (up from 6% to over 20%) and ROE (now stable at 25% to 30%) while simultaneously reducing the debt load to almost a net cash position (all competitors with exceptions of Nemetschek runs much more leveraged balance sheets). With no stock-based compensation (SBC) or other non-cash elements to obfuscate free cash flows, cash conversion has been steadily at well above 100%.
The Board of Managing Directors consists of Adi Drotleff (CEO), Christoph Aschenbrenner (COO) and Markus Pech (CFO): their total remuneration in 2020 amounted to just €1.1 million, half as fixed salary and half as variable component.
CEO and founder Adi Drotleff owns ~45% of the shares, with other managers owning a further 8.5%. Considering the shareholder-friendly distribution policy (dividends have gone up 6x over the last 7 years and are currently around 90% of net profits), Adi Drotleff gets much more in annual dividends than from his salary: as such, his interests are very much aligned with those of all other shareholders.
A back of the envelope valuation
While not cheap in absolute terms (EV/EBIT of 21x on 2022 forecasts is not what I would call value territory), MUM is the cheapest of this basket of companies competing in the CAD/CAM space on all metrics.
Nemetscheck is 2.5x MUM in terms of revenues, with a much larger installed base, more focused on proprietary software, more diversified geographically but also more reliant on the build/design industry (80% of revenues): ROIC and ROE are very similar, and yet NEM trades at doubles MUM’s multiples.
Part of MUM’s lower valuation is certainly justified by the lower growth and margins; but in part is probably also a consequence of its smaller size, low free float and lack of interest from big international funds. As far as I’m aware, only 3 sell-side brokers cover the company: two are German and one is UK-based (and is a paid-research provider, by the way).
The European market has gone through a strong consolidation phase over the least few years, with
Schneider Electric the most active acquirer. It started in 2017 with 60% of Aveva Group, which it then merged with its own industrial software business. It followed in 2018 when it bought a €170 million controlling stake (71%) in IGE + XAO: the total enterprise value of €240 million was approximately 8x sales. Finally, in 2020 it acquired another German company, RIB Software, for €1.4 bn: with the target having €215 million in sales and €55 million in EBITDA, the transaction implies a 6.5x sales multiple and a 25x EBITDA multiple. [When MUM increased its participation in SOFiSTiK, it invested €25 million at an estimated 3x sales multiple.]
Should MUM become a takeover target (there are currently no indications that the CEO is willing to sell, but its size makes it an attractive candidate for both competitors and private equity buyers), it could easily fetch much higher multiples than those it is trading at.
So: deal or no deal?
It is important to note that MUM is not a flashy or speculative software concept hoping to scale to profitability “sometime in the future”. It is rather a leading player in software design in Europe with tens of thousands of customers and a track record of strong profitability and cash flow generation.
The transition to the new operating model is largely complete, which allows for a more scalable business and sustainable profitable growth. The company is well positioned to take advantage of the digitalisation of the construction industry as IT and software budgets increase: further mandatory implementation of BIM legislation for public projects and increased adoption by the private sector uniquely benefits MUM. Further, with the new eXs software MUM has a modern product for an attractive market in which there is nothing comparable on offer.
On the plus side:
Largest European Autodesk value-added reseller plus a fast-growing, highly profitable proprietary software segment
A decent market share in attractive and under-penetrated markets with a strong position established over decades
High degree of recurring revenues over a large and loyal installed base of users: years of continuous innovation supported by investments in R&D result in high barriers to entry
The business benefits from operating leverage and there is still considerable potential for margin expansion, including in the VAR business if present trends continue (= further digitisation of projects)
High continuity at management level and very low employee turnover
Solid balance sheet structure with low debt
On the other hand, things to consider:
The VAR business is largely reliant on Autodesk’s technology development, channel strategy and pricing policy
There is strong competition and the targeted further increase in margins is not a foregone conclusion: as for any software company, leadership requires intensive development activities and carries the risk of technological failures
Large exposure to DACH economies and still very little outside of Europe: the geographic expansion of the VAR business requires the expensive establishment of additional offices (or further consolidation of smaller resellers)
While current growth (~10%) is not what usually makes investors salivate, not all companies have an infinite TAM: it is perfectly fine to remain small but very profitable, pushing for hypergrowth at all costs is indeed what is currently ruining some good businesses!