Nemetschek SE

XETRA:NEM

Earnings Call Transcript 2022-Q3

[Operator]

Welcome to the earnings call of Nemetschek Group. At our customer's request, this conference will be recorded. [Operator Instructions]

May I now hand you over to Stefanie Zimmermann, VP of Investor Relations, who will lead you through this conference. Please go ahead.

[Stefanie Zimmermann, executive]

Thank you, operator, and hello, everyone, and a big welcome. Thanks for joining our earnings call today to discuss the results for the third quarter 2022 with us. With me today are our CEO, Yves Padrines; and our CFO, Axel Kaufmann. Today's conference call is being recorded. A replay of the call will be available at our website after the call. Additionally, you will find a report, the presentation and the press release on our Investor Relations website as well. But now let's get started. I would like to turn over to our CEO, Yves. Go ahead, Yves.

[Yves Padrines, executive]

Thank you, Stefanie, and welcome from my side as well to the Nemetschek Q3 and 9 Months 2022 earnings call. As usual, we have prepared a short informative slide deck that our CFO, Axel Kaufmann and I would like to briefly walk you through so that we have enough time for your questions at the end. So let's start with an overview of the key business highlights of the third quarter '22 on Page 3. In Q3, we continued our double-digit percentage growth in revenue and earnings. From July to September, our revenue increased by almost 20% to EUR 203 million, driven by the strong performance of our Build and Media segments, which grew by 31% and 37%, respectively.

In addition, we once again enjoy a substantial FX tailwind of almost 800 basis points, thanks to the stronger U.S. dollar. In line with recent quarters, the main driver was once again the dynamic growth of our recurring revenues. This impressive development is also reflected by our new KPI, ARR, the annual recurring revenue of our business, which is an important indicator that the group's future revenue and cash flow growth potential. With an increase of 29% and almost 22% on a currency-adjusted basis, our ARR grew almost twice as fast as our total revenue. With recurring revenue becoming an ever more important part of our business, which is ARR, industry-standard KPI, is providing a higher degree of visibility and transparency during our transition journey to a subscription and SaaS-based company.

The reported EBITDA growth to almost EUR 63 million corresponds to a margin of 31%, a continued high level despite a return to normal levels of traveling and trade for spending. And in addition, we are able to accelerate again our hiring in the recent months. Looking at the bottom line, our earnings per share increased to EUR 0.34 per share.

Moving on to Page 5. You can see an overview of the most important financial highlights after the first 3 quarters of the year. In summary, we had an outstanding first 9 months with record results. Our revenues increased by 21% to almost EUR 600 million, mainly driven by a very strong subscription growth of 58%. In line with our high top-line growth, our profitability showed a very good development as well with an EBITDA of EUR 201 million, a plus of 26% year-over-year, which corresponds to a margin of 33.6%. Both figures mark new records for the Nemetschek Group after the first 9 months of the year. In addition, we were also again able to further increase our already solid balance sheet with an increase in the net cash position to EUR 120 million as well as an improvement in the equity ratio. I will now hand over to Axel, who will dive a little bit deeper into the important aspects of our financial results.

[Axel Kaufmann, executive]

Yes. Let's do so. Thank you, Yves, and a warm welcome also from my side to our third-quarter earnings call. On this Page #6, you'll find the development of our 4 segments during the first 9 months of the year. Starting on the left side, the Design segment recorded an increase in revenues of 11.5% and 7.7% on a currency-neutral basis, which show in Q3 in a slight deceleration in growth and prolonged sales cycles in some pockets of growth in Europe. Looking at the profitability level, we were able to expand the already high margin of the previous year by another 40 basis points to now 33%. We're very pleased to see the very strong growth in our subscription and SaaS revenues of 60%, a clear sign that the acceptance and preference for subscription solutions continue to increase also among our customers in the Design segment. This bodes well for our long-term growth. The main growth driver during the first 9 months of the year was again our Build segment, which mainly targets construction companies in the U.S. and German-speaking countries.

Bluebeam was once again the largest contributor, helped by continued strong growth in the U.S., but also by successful internationalization strategy. For the whole segment, this translated into a significant growth of 32.8% on a reported basis and still 22% at constant currencies, while the profitability stayed at record levels. In addition, Bluebeam successfully, as Yves mentioned, proceeded with its long-awaited subscription and SaaS transition in the third quarter, in line with our internal plans. Our Media segment continued its stellar performance in the third quarter again, which resulted in a record growth of 51.4% on reported and 44% on a currency-adjusted basis after the first 9 months of the year. Maxon's growth was supported by Pixologic, remember, the provider of the world's leading sculpting software, ZBrush, which was acquired end of last year. The strong growth is accompanied by a substantial margin uplift of more than 5 percentage points.

Last, not least, to manage by far, our smallest segment with less than 6% of group revenues, we saw a continuous cost investment behavior by some of our customers. We continue to strongly believe that the promising long-term growth potential for this segment remains unchanged. That's why we reinforced the segment leadership with César Flores Rodríguez as the new Chief Division Officer as we call it. He will particularly focus on the topics go to market, growth acceleration and cross-selling. Additionally, César will oversee the new business unit for digital twin and drive the development of an open cloud-based digital print platform. Let's move on to the next Page #7. As you all know, one of our main objectives and -- as always, there has been an important discussion point is our goal to increase the share of recurring revenues. As you can see on the right-hand side, we're once again successful in our efforts and recorded an over-proportional growth across the different KPIs for our recurring business.

Our reported recurring revenues grew in the third quarter in line with the first 6 months of the year and recorded a very strong increase of almost 30%. In line with the previous quarters, the revenues from our subscription and SaaS offering with a plus of 58% were once again the main contributor to this development. In addition, our newly introduced KPI ARR, as Yves already mentioned, which includes all of our different various recurring revenue streams, so subscription and SaaS sales as well as maintenance contracts also increased by almost 30%, a strong indication for the continued high growth potential of our business in the next 12 months. This high growth translates into an increase of the share of subscription and SaaS revenues by 6 percentage points year-over-year to now 25%.

The total share of recurring revenues to subscription and SaaS, along with our maintenance contracts now accounts for almost 2/3 of our total reps, a new record for the group. With the start of subscription transition of our biggest brand, Bluebeam, the share of recurring revenues will continue to substantially increase in the coming quarters and years.

To conclude the review of our 9 months figures, we here provide an overview of our most important P&L, balance sheet and cash flow position on Page #8. We have already addressed our main P&L KPIs, revenue and EBITDA in detail. However, going further down the P&L, you'll notice that our EBIT and earnings per share increased somewhat over proportional during the first 9 months of the year, and that even despite a return in Q3 to pre-Covid levels for traveling, trade fares as well as accelerating in hiring. Our earnings growth and the increased internal efficiency is therefore reflected throughout the entire income statement and results in a 32% increase in the earnings per share level. Looking at our cash flow development after the first 3 quarters of the year, you'll notice that the increase is a bit smaller than usual.

The main reason, however, for this is a new U.S. law, which mandates a mandatory capitalization of R&D costs just for the tax balance purpose, which in turn leads to significantly higher tax prepayments. If you adjust for this effect, which according to the mechanics of how this works will, to a large degree, reverse in the future, the underlying growth of cash is more in line with our profitability. Last but not least, we improved the quality of the balance sheet once again represented -- and Yves mentioned this already an important metric, such as the equity ratio, which is now at a record high of 57% compared to 51% last year, and a net cash position of more than EUR 120 million. Therefore, our extremely probably the best solid balance sheet and virtually no debt we ever had provided with a high degree of safety and flexibility going forward. And with that, I'd like to hand back to Yves.

[Yves Padrines, executive]

Thank you, Axel, for the details of our financial results. And before we come to the end of our presentation with the outlook for the financial year 2022, let me give you an update regarding the highly anticipated start of the subscription transition of a brand Bluebeam. In short, the rollout in Q3 went exactly according to our plans, and we are very happy to announce that starting from last quarter, new customers are only able to buy one of our different subscription package, which I will present to you in a minute. But to start, let me briefly introduce our new Bluebeam Cloud solution, which is on Page 10. One of the guiding principles for the subscription transition is the following: we first add more value to our products before we start a mandatory subscription move. This was also one of the main success factors of our highly successful maximum tradition to subscription, and we applied the same strategy in the case of Bluebeam.

We are, therefore, proud to announce that Bluebeam reached a milestone in its corporate history with the rollout of Bluebeam Cloud. Bluebeam Cloud is our new product suite, which consists of cloud-based and mobile application, which make it possible for teams on construction sites to interact and access important data and work from anywhere, including from their mobile devices. To name just a few of its key features, apart from the new real-time collaboration capabilities, Bluebeam, new projects and construction management tools will also allow our customers to manage an entire construction project from start to finish. In addition, the Google maps, if you want, for construction sites.

So the ability to map your plans to global GPS is a powerful tool, especially for large infrastructure projects. We introduced this new Bluebeam Cloud solution offering as our annual XCON conference, which happened end of August in San Diego, which is Bluebeam flagship Conference, which was attended by over 1,000 customers. The initial feedback from customers are very positive. And the different cloud features are an integral part of each of the 3 product package, which you will find on the next page.

So on Page 11, you can see these 3 structured subscription product tiers. Each of the packages consist of a combination of Bluebeam's desktop flagship product review as well as a varying range of the existing new cloud features that I just presented. These different packages are not only helping us to specifically target different customer groups, but also enable us to grow our Bluebeam revenues per customer even after the initial sale was made by upselling a higher-tiered product. Lastly, if you compare the price of our new subscription package with Bluebeam legacy license products, you will recognize that the subscription package accounts for roughly 50% of the old license price. That compares to an industry average of between 35% to 55%. Another indication of the substantial value we added with the introduction of Bluebeam Cloud. Moving on to Page #12. Bluebeam subscription and SaaS transition progressed exactly as planned with a phased rollout of the subscription offering over the course of Q3.

As of September, all new customers only have the option to buy subscription while we offer existing customers, especially the large one a few months up to a year transition period when purchasing new seats. The customer feedback continues to be very encouraging and the interest in our new subscription offering is high as a strong evidence by different indicators such as website traffic or number of trial downloads. Apart from our continued marketing initiatives to attract new customers in the next step, we will also intensify our focus on the migration of existing customers via specific incentive programs. So to summarize, everything is going according to our initial planning, and we continue to be very confident that this transition will be a strong success.

Moving on to Page #13. Recently, there have been a lot of discussion about the potential recession in 2023. While Nemetschek will certainly not be completely immune in the case of a global rotation, we strongly believe that we can be much resilient than other companies and other industries. I would still like to use this opportunity to highlight how well-diversified and resilient our business has become over the last few years. As the chart nicely illustrates, you can see that we have a well-diversified portfolio across different end markets designs, which currently accounts for only 47% of our business.

The rapidly increasing share of the media segment further diversifies our business due to the exposure to an industry with a completely independent business cycle versus the ACO industry. In this call, we have already discussed the perhaps most important development and regions. In addition, with the operational expansion along the entire life cycle of the building, the Nemetschek Group has become less dependent on a single customer group or segments. In this case, in the recent years, the strong increase in the share of our recurring revenues.

Along with our high customer retention rates, this revenue provides a more stable and better plannable revenue stream even during more challenging economic condition. I believe that based on our high profitability as well our extremely strong balance sheet, the Nemetschek Group is in an excellent position to take advantage of potential emerging opportunities in the coming months and years.

And now as we come to the end of the presentation, I would like to turn to our 2022 outlook, which is on Page 14. With a very successful first 9 months of the year already in the books, we continue to be very confident to achieve our outlook for the current year. We, therefore, fully confirm all of our financial targets for the fiscal year 2022 despite the increasing uncertainty regarding the global macroeconomic environment. In particular, this means that from today's perspective, we expect our revenue growth at constant currency in the range of 12% to 14% for the financial year 2022. In addition, we target an EBITDA margin between 32% and 33%. Let me just highlight why we are so confident in our business and in our ability to achieve our set goals. First of all, we see that especially in the currently challenging environment, the efficiency shortcoming of the construction industry and real estate sectors are becoming more visible than ever.

Digitalization and the usage of intelligence software solution across a building life cycle are essential requirements for making the construction more cost-efficient and less resource-consuming and, therefore, ultimately ensure the survival of our construction company. This need will lead to a continued demand for our solutions. Secondly, as I have just highlighted, the Nemetschek Group business has become much more resilient and better plannable over the last years based on our well-diversified portfolio. And lastly, based on our various optimization initiatives, investments in highly innovative start-ups, but also M&A activities in the last few years as well as leadership in the less technological trends such as digital twin. All of this demonstrates the Nemetschek Group ambition to not just participate in these markets, but to continue to be a market leader and to share the industry with our best-in-class solutions. And with that said, I would like to thank you for your attention, and we are now happy to take your questions. So operator, please, back to you.

[Operator]

[Operator Instructions]. Our first question comes from the line of George Webb at Morgan Stanley.

[George Webb, analyst]

A few questions to kick off with. Firstly, just drilling into the demand environment for the design business. Overall group license is down 6% in Q3, constant currency in Germany, growth rate only 2%. I wonder if you can add some color on what you're seeing around overall demand levels and perhaps how that also trended through the quarter. And just coming on to the Bluebeam subscription transition. So firstly, we've got the subscription pricing levels for new customers, which is helpful. Can you talk about the other side of that equation and what you're expecting in terms of average value uplift you expect to see when you move a customer from maintenance to subscription? I was looking at the Bluebeam website and there's a section on there that says that you can transition existing maintenance seats for subscription for a price comparable to the current renewal rates, but I presume there will be some average uplift and keen to understand the scale of that. And then just secondly, can you talk about any specific marketing strategies you're putting around the transition from here?

[Yves Padrines, executive]

Thank you, George. So on the design side, clearly, there has been some hiccups, especially at the beginning of the quarter where July was slightly lower than our expectation. But then August and September were in a higher growth than the average growth of the full quarter. So there has been a better trend than positive trends in August and September versus July. Design, clearly, the issue are some pockets in Europe, especially where we are seeing some delays in decisions and a little bit more difficult markets. But clearly, on the design side, if we look internationally, there has been some very strong double-digit growth, especially in North America and in Asia Pacific. So we do not anticipate any deceleration on design in Q4. We believe that we will still have something stronger. And design obviously had also some impact due to the subscription effect. There has been less perpetual license sold.

And there has been better acceleration of subscription than anticipated, which is positive, but obviously, which is impacting the revenue, but of course, helping on our total recurring revenue and, of course, in our ARR growth. So then on the Bluebeam aspect, clearly, strong momentum, we see very well acceptance as a state of Bluebeam Cloud and also on the move to subscription. Clearly, for existing customers, we will see now how this will evolve in the next few months. But we can see that with the subscription move, there is a significant higher lifetime value for them. And maybe if you can please repeat again your third question, sorry.

[George Webb, analyst]

Sure. That's helpful. to just if you're doing anything specific around marketing strategies from here to get people involved with this subscription transition or to increase the new customer acquisition?

[Yves Padrines, executive]

Yes. So there are a lot of marketing activities going on, especially online and e-commerce is a strong focus, not only for the Bluebeam brands but in general for all our brands. So we refreshed, for example, a lot of our design, e-commerce activities in the last few weeks and months to monetize, which are more modern, et cetera. Also, if you look at XCON, which was, as I said, it is very large customer event for Bluebeam in San Diego end of August, that's something that we didn't have for almost --, for 2 years during the pandemic session, which was extremely well received with a very strong positive feedback.

And now there will be different marketing activities that we are launching in the course of the next few months to really also push not only new users growth for Bluebeam but clearly helping our existing customers to move to subscription. And of course, there will be also case-by-case because if you look at -- remember, 1/3 of the Bluebeam customer revenue is done with large customers and sometimes very large customers where we are talking about thousands of seats and license that they have. So obviously, with them, it will be a different type of negotiation and incentives to move them to subscription than a small or medium-sized existing gluing customer. So different type of marketing activities.

[Operator]

Our next question comes from the line of Sven Merkt of Barclays.

[Sven Merkt, analyst]

Firstly, I was wondering if you can comment on how you plan to run the business if you would enter a recession. Would you cut existing costs or maybe just new spend? Would you consider investing maybe a bit more in some areas than your peers to take a share? Any color really on how you're thinking about your financial strategy in a recession would be helpful. And then secondly, media slows down Q3 from the performance in H1. And I was just wondering if you can share what drove this? Is this just a comp effect? Or have you also seen lower demand here?

[Yves Padrines, executive]

Sure. So for the moment, obviously, we need to look at any possibilities, and we are also planning potential risk for next year. But I can tell you that our main plan is to not count on a recession for our own business, and we still see some strong growth coming for next year because of clearly as the current situation of the construction industry and the 4 main challenges that they have which as you know is, first of all, the fact that 90% of projects are either late or over budget. Second, that 40% of the CO2 global emission is due to the construction industry. Third, the fact that over 20% of material used in the construction projects are wasted, but also last but not least, there is a huge issue of manpower, lack of manpower in the construction industry. And then if you take all of that and you know that for the moment, lately, the average is between 2% to 3% gross margin for our construction project.

At the end of the day, if they don't wake up, if they do nothing, if it is still business as usual for this construction company, a lot of them will go in the red very quickly and out of business. So as we have seen during the pandemic period, there has been a 3-year acceleration of digitalization in the construction industry. We believe that if there is a recession coming up and acceleration of that, this should help digitalization, especially -- or an acceleration of digitalization, especially in the construction industry. So now if really we see that there is a huge recession, obviously, we cannot be completely immune. And then we are planning -- obviously, we will plan some different activities. We are not planning to cut significantly costs. Obviously, if this is needed, we will look at. But of course, we can decelerate the level of hiring and also of some investment in some areas. But we are not planning any big OpEx cost reduction or whatsoever like that.

[Axel Kaufmann, executive]

Sven, Axel here. Just to add, I think a very good question, and it is right that we've seen also during corona. It's rather an opportunity than really a downside. To your question, how we plan to run the business? I think it's crystal clear that we have a reputation and are aiming to continue to keep that in a positive way to very cautiously run the business overall, driving on-site in that environment in terms of continuing with the strategic initiatives. But then on the cost side, do everything that is necessary and maintain the margin level, definitely. I think that is where we've proven several times and we're going well prepared with measures if we would need them into such an in potential period at that time. So continuing the strategic initiatives, continuing investing to grow and take care, but at the same time, also be careful and prepared to be agile and potentially pivoting of the plans.

And then on your second question of media, maybe if we can highlight the Pixologic impact there. So media, Sven, thanks for the question because we've been spoiled over the last quarters, and the business is doing very, very well. As Yves pointing out several times now recently also the market is almost equally as large and the potential is there in the classical construction software A where we play traditionally. But here is the acquisition that we fully account into our books since the start of the year, Pixologic with a famous [indiscernible] product, ZBrush, and we've been realizing that there is a real opportunity to turn this into the part of the package of what we call the Maxon One and turn this also into subscription. So the Q3 numbers in Concrete were impacted on that end a little bit. That is the main reason why the growth comes down a little bit, but still on a very attractive level in that regard.

[Yves Padrines, executive]

No, no. Clearly, we have seen also a nice acceleration of Maxon One subscribers. -- thanks to the fact that we integrated ZBrush, so Pixologic at no extra cost for Maxon One customers. So Maxon One, we saw a very nice growth in terms of subscription. And in terms of new user and demand, there has been no deceleration even clearly the opposite. I mean, still a very strong demand on Maxon. So really the impact is just the fact that we acquired Pixologic. It was a perpetual license business even with no maintenance. And we moved completely to our subscription model now ZBrush.

So we are very happy with the performance of Maxon, which is still continuing in a strong growth. Maybe just to come back very briefly on also the recession topic. Also, what is clear is that our strategy, if there is a recession, we will not change our strategy in terms of subscription move. So just to make it clear, increasing the recurring revenue is part of our strategy even if next year, we see a big recession coming up. And this is going to help us in order to become even more resilient for the future. And by the way, a lot of customers even prefer subscription in a downturn.

[Operator]

Our next question comes from the line of Andreas Wolf at Warburg Research.

[Andreas Wolf, analyst]

Congratulations on the quarter. My question would be on the subscription in general. So obviously, the shift to subscription at Bluebeam helps you to upsell into the client base or increase the ARPU, if you will. Would that be a strategy that you might also consider for the future to implement new features on the client side, which might be of high value for the clients, which would then in turn help you to increase subscriptions that you generate for the clients? That would be my first question. And then also related to staff, obviously, there is more and more tech companies in the Silicon Valley that are either not [ having ] anymore or even paying off. And as we recall from the past, Nemetschek has had difficulties to find IT developers at reasonable prices. So does this improve your situation? And would this provide an additional boost for your innovation strengths?

[Yves Padrines, executive]

Thanks, Andreas. So clearly, on the subscription side, we are planning to launch on a regular basis, new features. That's why, for example, with Bluebeam, we launched first Bluebeam Cloud. And as you know, to launch new features, it is sometimes easier or definitely easier to do it in a pure SaaS model with a cloud-based solution where you can add features on a regular basis and not only, for example, once a year where you do only one new software upgrade or software releases. So this is definitely a must. That's why even with our -- some of our design brands, some of them are already very cloud-centric like Solibri, for example. But even if you look at Allplan or Graphisoft with Archicad, they have also hybrid solution.

They have also cloud solutions like for Graphisoft, BIMcloud or for Allplan BIMPlus, which is also going to help to add additional features on a regular basis, which is a must when you are on subscription to make sure that your customers are still continue to subscribe to your solution and that they will get benefits and new features from their monthly subscription. So second question on the staff aspect, definitely. We were able to hire in a better way in Q3 than in H1. I think as a situation, it's much easier now as you stated, also because there is less competition. And so for example, this quarter, we were able to acquire and to hire over 80 new employees. So yes, that's quite going in a very positive way.

[Operator]

Our next question comes from the line of Florian Treisch of Kepler Cheuvreux.

[Florian Treisch, analyst]

I have 2 questions building on topics we have already touched on. So the first is around the licenses. So I think we have seen that other peers as well that licenses were probably a bit weaker, but at the same time, clients are obviously willing to go faster for subscription or SaaS. Do you think this is more like a near-term reflect to limit upfront investments? Or do you really think this is a start of a period of faster cloud adoption? And if so, do you have to spend more on making your product portfolio cloud-ready in that scenario? And the second is around how much you can really protect margin in a downturn or to frame it in a different world, would you put out like a red line when it comes to profitability where you do not want to go below, let's say, 30% EBITDA? Or would you go to 25 if you can grow or gain market share in that context?

[Yves Padrines, executive]

So thank you, Florian. So on the license part, clearly, yes, there is a strong move to more cloud adoption to more SaaS solution and definitely to more subscription. This is a huge trend. It is a short and midterm trend, and that's going to accelerate, especially I think in 2023. So it is not only us pushing our customer and our market to be aggressive to time to transition. There is also a demand from the end user and from the market to go more for a subscription model than a license model. We can see that globally, even in markets which are more traditionally not big fans of subscription models.

Now obviously, when you do that, yes, you need to have in terms of technology, some investments because you need to have more SaaS solution, cloud-based solutions. So yes, we have still some work to be done, and there is a road map. And of course, this is a nonstop development, as you know, in terms of engineering. But also when you move to a SaaS model, it's not only a pure engineering technology investment, it is also overall how you operate with such model, also on the operational aspects and customer success aspects, et cetera, et cetera.

So yes, there are some investments needed with such move to a more SaaS and cloud company for the Nemetschek Group. Now regarding profitability, I think definitely as you move to more subscription during this transition period, there is obviously an impact not only on revenue, but also de facto on the EBITDA. It is a pure mathematics. So yes, that means that there will be probably not -- definitely not the same level of EBITDA margin that we used to have, especially this fiscal year. But we are not expecting, obviously, to go with something like 20%. Or if we do so, that means that we would have huge opportunities of growth, which, for the moment, yes, I believe we have strong growth momentum. But -- so you should not expect us to come with a low margin. But for lower than where we are today, for sure.

Now, of course, as it is still under work in progress to see exactly what will be the range for next year. But long term, that's only -- but obviously, just to make it clear, it's only during this transition period that there was an impact on the EBITDA, obviously, while you are doing this transition impact is on the revenue and EBITDA. But once you move to 90%, 95% recurring or subscription and SaaS model obviously long term, you have very higher margin impact, which is going to be very positive for the group.

[Operator]

Our next question comes from the line of Nay Soe Naing of Berenberg.

[Nay Soe Naing, analyst]

I've got two questions. Firstly, on the very strong subscription and SaaS performance in design, 60% year-to-date or even overseas and year-to-date. I just wanted to understand what are you seeing as drivers behind this threat into subscription, particularly in define segment? Is it possibly because going into the recessionary period, customers are opting for a lower more regular payments or IT spend that you get from the subscription deals?

[Yves Padrines, executive]

Yes, definitely. So -- so clearly, it is more and more in demand from the end user to have subscription, which is probably, yes, the fact that some of them are afraid of the potential recession. That's one reason. And the second reason is that we pushed more aggressively our subscription model via e-commerce, e-marketing, but also we have, for example, Filo, one of our structural engineering and analytics brands here in Germany, which started also a full move transition to subscription this quarter, exactly in Q3, so during the summer. SCIA is planning to start a full move to subscription in January. Vectorworks, as you know, which is one of our large BIM brand headquarter in the U.S. is planning to also do a full move to subscription in their direct markets, which are North America, United Kingdom and Australia, and New Zealand, starting from January.

So it doesn't mean that starting from January 1, if you're a vectors customers or new vectors customers in this region, the only option will be only subscription. So to answer your question on the design, why the performance of subscription is so good, it's because of 2 factors. One, because we are accelerating on our side, the move to subscription to becoming more mandatory. And second, it's also because there is a demand from the end user to buy more subscriptions and perpetual license.

[Nay Soe Naing, analyst]

That's really helpful. Thanks for all the information there. One more question, if I may. You also mentioned about the elongation of sales cycles in pockets in Europe. Just want to get a sense of how -- what is the extension of the sales cycles here? Are we talking in a couple of months? Or is it possibly even a couple of quarters?

[Yves Padrines, executive]

So for the moment, we believe more in a few months. So we are not talking about quarters. That's what we are seeing. Now obviously, we need to see how the market is evolving. But clearly, depending also on the region. So it's not really the same trend in all markets. And even within the market, within the country, it is depending also on the size of the customers and also the specialties of the customer, the customer is only working on small residential projects or if it is customer more also working on infrastructure, on commercial, on public buildings or its customers only focusing on new builds or also on existing renovation. And as I think we mentioned to you also last earnings call, we can see a lot of more and more demand, especially in Continental Europe for a lot of new renovation projects, especially for large buildings.

And while renovation projects, it's mainly linked to energy savings activity that some companies and some people are currently working on. So overall, there are some delays, but they are not like huge delays of multiple quarters of delays. And what is also transporting us in this trend, as I said before, is that in Q3, we saw that, yes, July was weaker than we anticipated, but then it came back to something better in terms of growth higher than our average growth for the quarter in August and September, which, by the way, it's also confirmed for the moment with October. So October is aligned with our plans as of today on design.

[Nay Soe Naing, analyst]

Did you say October is carried on the same level activities from August and September?

[Yves Padrines, executive]

Yes. We're having a good trend for October overall and also in design. So it's as expected as we planned.

[Operator]

Our next question comes from the line of Deepshikha Agarwal of Goldman Sachs.

[Deepshikha Agarwal, analyst]

The first one is basically on top line growth outlook for FY '23. We just wanted to get a sense from you, especially like there is increased transition in design, as you just highlighted in the brands, especially like you have Vectorworks coming in the beginning of the next year. And then you have the macro -- the pockets of macro slow down and then you have Bluebeam transition like going full swing in terms of the transition in that year. So what do you think -- like how are you thinking in terms of growth there? Then second one is basically on Bluebeam when existing customers will shift to subscription, what an uplift are you expecting to get from it? And the last one would be on cost or cost for next year, please, can you throw some light on how costs would trend especially from the standpoint of spend on the cloud products that you've been -- you talked about unusual areas like areas of spend like travel marketing and overall hiring?

[Yves Padrines, executive]

So on fiscal year '23, so this is still work in progress. Of course, we are in the middle of our budget discussion internally, where we have obviously different scenarios in place. We will only provide such guidance as every year in our earnings call in March. So it's only March 2023 that we will provide you that. Now just to make it very clear, again, we are not moving 100% of our business to subscription from January. Obviously, if we would do so, then I will already highlight now today that, well, we are going to have a flattish term of growth for next year, which is definitely not what we are planning and not the case.

So yes, we have 25% of our business with Bluebeam, which is moving to subscription. Now yes, existing customers have still the opportunity to buy some perpetual license for the next few months. And in Q3 next year, they will not be able any longer to buy subscription. All new customers for Bluebeam, especially larger customers since July of this year and then from September, also all the small customers on the website. It's the only option they have for new customers is only subscription. But then we are doing it in a segmented approach.

So Allplan, for example, in Graphisoft, which are 2 very large brands that we have overall. I mean, yes, they will accelerate the move to subscription. Yes, we can already see that this year. And yes, it's going to be more accelerated next year, but it's not like we do a full immigration next year of Graphisoft and Allan Vectorworks, it is true that it's going to be a big part of their market, a big part of their revenue because we are talking about North America, U.K. and Pacific countries, which are moving to subscription only from January 1. But you still have all the rest of the world, especially Continental Europe, which is also quite strong for Vectorworks, Japan, which is very, very strong for Vectorworks in Asia, which we are going to move to subscription only towards the end of '23 or mainly in 2024.

So it's a very segmented approach. So that's why it has been always our strategy that is not going to be a huge being bank for all our business to move to subscription next year. Now regarding your questions, on Bluebeam existing customers. The uplift is clearly substantial, especially in the long term. So -- and then on the cost side, maybe, Axel, do you want to comment?

[Axel Kaufmann, executive]

Yes. Thank you, Deepshikha, I fully understand where you're coming from. And I think the current run rates are a good indication, I would say, in terms of how we run the business overall. We've been investing by intent and to a large degree, in the third quarter, Eve mentioned it in terms of hiring, but also customer events, trade shows, updating web pages, marketing, travel, all kinds of these things -- there was an impact also from the currency side, given our extended U.S. dollar-based footprint in terms of the OpEx in the meantime, how the company grew. All of that, to me, is a good indication.

And as mentioned, I mean, we're going into the fourth quarter and early next year, and we're not making crazy moves unless we see the strategic intent in that sense that we're continuing the initiatives there. But again, cautious, careful the way you know us, I think we've been proving this to you and our shareholders overall that we drive the shift in that direction. So cost levels overall. Anything on the top line, as you mentioned yourself, is accounting in terms of deferrals, revenue recognition, subscription. But the machine room, so to say, be it those divisions we've been talking to already in this call or the rest of the group will be strengthened and continue going forward. So that I think quarter is also the Q4 will be a good indication for going forward. Not much of a change there given the parameters that are parable.

[Operator]

Our next question comes from the line of Martin Jungfleisch of BNP Paribas.

[Martin Jungfleisch, analyst]

Two questions from my side, please. First one is on design and subscription. Again, can you quantify the impact on revenue growth in Design segment from the increasing shift to subscriptions and what the rough share of subscription in terms of revenue is today? And then would you expect the shift in design to become an accelerated headwind to revenue growth in 2023? Or would that be similar to this year? And then the second question is on cost. You mentioned that you're working on a cloud-based digital twin platform. Could you provide some detail on the size and phasing of the development cost that we should expect for this and what segments these should or would be allocated to?

[Yves Padrines, executive]

Okay. So the impact -- the current impact on design because of the move -- the subscription on the top line growth is probably a bit over 1% around. Now on the digital twin topic, this is something that we are currently working on. This digital cloud platform, digital twin cloud platform is going to be an asset and data, digital twin for the overall building life cycle. And we will target mainly large complex building owner and people operating such complex buildings like hospitals, airports, large universities, et cetera.

So today, where you will see such cost impact is going to be more centralized and not really specific to our brand because that really have centralized solution. So it's not linked to our current existing brand. It's a Nemetschek Group cloud solution initiative, which, by the way, is based on a common cloud infrastructure, too, which [ holds ] other brands which are benefiting from. So for example, Bluebeam Cloud and digital twin cloud platform are based on the same common cloud infrastructure. We are planning to have already some proof of concept and MVP towards 2023. So more news in the coming weeks and months from this topic.

[Axel Kaufmann, executive]

Would it be fair to -- maybe just to add, Mark, I think it would be fair to say that like I was saying on the cost side going into such an initiative like digital twin. Today, we can use much more synergies than in the past, leverage those what we have. So on the cost side, that's going to be hangable and not dramatic. But in terms of business potential and market and customers that we address, that's actually really on top of that sense. So that business case looks very promising.

[Yves Padrines, executive]

Yes. But obviously, there are some cost increase and incremental costs to develop such digital twin cloud platform, which we started already this year, but the impact will be more present in '23 and beyond on the cost side. You had another question, Martin? Or...

[Martin Jungfleisch, analyst]

No, I just had a follow-up. So on the impact on subscriptions. Can you share what's roughly the share of subscriptions in design, please, today?

[Yves Padrines, executive]

So it's already 15%, around 15%.

[Operator]

Our next question comes from the line of Knut Woller at Baader Bank.

[Knut Woller, analyst]

Just looking at the license decline of 6% at constant currency in the third quarter. Can you give us here some more color what is due to the shift to subscriptions and what is due to the current macro? Also looking at the Build segment, looking at your comments, which I interpreted it quite positively regarding the demand momentum in the Build segment. Is it fair to assume that the sequential growth decline in the Build segment purely reflects the transition to subscription? And then a final question also on Bluebeam. Can you give us some update on which packages are seeing currently the highest demand from the 3 that you have shared with us?

[Yves Padrines, executive]

Sure. So clearly, on the design side, there are 2 factors. The main factor is the fact that it's a move to subscription, which was the main impact. Now obviously, there have been some pockets, as I said, especially in Europe, where the growth was not as we expected with some delays. And then on the build side, clearly, Q3 is really linked to the transition. In terms of net new users, we still see and are forecasting a very nice growth in Q4, and we are anticipating the same for '23. Then on the Bluebeam packages, really, the demand is more on the mid and high tiers. So remember, we have 3 criteria mainly, so the basic, the core, and the complete; basic at $250 a core at $300, and complete at $400. It's really the middle one, so at $300, which is the most popular but also complete -- so these are the 2 where we see most of the demand.

[Operator]

Our next question comes from the line of Victor Cheng at Bank of America.

[Hin Fung Cheng, analyst]

Just 3 questions, if I may. Just building on the question on Bluebeam. Can you help us understand the actual underlying growth of Bluebeam in Q3? What was the headwind in Q3 due to subscription? And how should we think about this headwind for Q4? And then in media, that the Pixologic shift to subscription has that been fully complete now? So media is close to 100% subscription. Has it only started in Q3 and therefore, should we expect to take impact in Q4? And then just to build on that point, what's the mix of media customers paying monthly versus paying early? So potentially monthly users have a different depot effect potentially?

[Yves Padrines, executive]

Sure. So on Bluebeam first. So Q3 impact was around 2% around, probably a little bit more. For the next quarters, probably the same or but it was only for 1/3 of the quarter. So Q4 will be for the full quarter, for the 3 months. And then on Maxon, clearly, as a Pixologic move to subscription with their ZBrush products, this has an impact only for now. So Q4, we will see again a full acceleration of the growth. And I think here, we are 95% is -- of the Maxon business is currently on subscription. So I think we have a strong basis now in terms of a subscription transition, which is more or less concluded on the Maxon side.

[Operator]

And we have one final question concludes from the line of Chandramouli Sriraman of Stifel.

[Chandramouli Sriraman, analyst]

Can you hear me?

[Yves Padrines, executive]

Yes.

[Chandramouli Sriraman, analyst]

So just a couple of things. Firstly, I thought you took your time to get the transition to subscriptions on the Bluebeam side of things. I was quite surprised that Vectorworks is moving to subscriptions already. So I was just wondering what was the rationale for the UC customers asking for this? Or you chose a difficult macro to get this thing done. Any thoughts on that would be super helpful. And in terms of price increases, obviously, we see a lot of software vendors raising increasing prices. How do you think about price increases on the maintenance side of things and even on the license side?

[Yves Padrines, executive]

Sure. So on the move to subscription, clearly, as I stated, beginning of the year after I joined, my strategy was clearly to accelerate the move to subscription for the group, which, for all the different reasons that what we talked about, we want to move to a much higher recurring revenue model. So that's why the idea was to see which brands can we accelerate this move to a SaaS and subscription model. And Vectorworks was one of the candidates. But again, we did also Frilo in Q2 this year. We are doing SCIA starting in January. Vectorworks as it has a strong presence in Anglo-Saxon markets where subscription is more, let's say, accepted than other markets. That's why we are starting with North America, U.K., New Zealand and Australia. And we will continue in this journey in a segmented approach also with all the brands within the next few months, quarters, and years.

Then the other question, Solibri, was, I think, on the price increase. So here, we have done some small price increase a little bit easier, but clearly, the growth that we have is mainly on new users and new seats and volumes. It's not really linked to price increase for the moment, no. We haven't done any major big price increase.

[Chandramouli Sriraman, analyst]

Perfect. And maybe a quick follow-up. I think it was asked previously. I just want to double check. Do you have a minimum profitability level that you are thinking of in terms of this transition because you're doing now multiple product transitions, how do you think about profitability through this process?

[Yves Padrines, executive]

We are not communicating for the moment on a minimum EBITDA. It is on our side work in progress for the next few years to try to see how we can minimize the impact. But of course, there will be an impact on the EBITDA. We should not expect the same level of EBITDA.

[Operator]

And as there are no further questions at this time, I'll hand the floor to our speakers.

[Stefanie Zimmermann, executive]

So if there are no further questions, I would like to thank everybody for dialing in. Thank you for your attendance. If you have any follow-up questions, please do not hesitate to contact us. So then I would like to conclude the call. Thanks again for joining.

[Axel Kaufmann, executive]

Thank you very much.

[Yves Padrines, executive]

Thank you, everyone.

[Operator]

This now concludes the conference. Thank you all very much for attending. You may now disconnect your lines.