In our last blog we discussed the recent trends in increased service revenues for industrial companies which typically result in higher margins.

In this edition we examine how one of the world’s largest capital goods companies, Siemens, is seeking to expand its share market valuation, through an increase in actual software sales over traditional hardware, and where subscription based copilot revenue may further this trend.

In a recent report, James Moore, Capital Goods Analyst with Rothschild Redburn, argues that industrial companies are repositories of massive data associated with IOT systems, PLC’s, CAD models, and smart buildings while product manuals, maintenance procedures, training programs, parts systems and service tickets represent a wealth of additional intellectual property.  Furthermore, many decades of industrial know-how are leaving industry with the retirement of aging boomers.

Open AI and similar LLM’s rely on scraping the internet for free content but industrial companies maintain their data behind restrictive barriers, hence the term “gated data”.  In the Industrial AI world of the new expertise economy, the challenge is how to capture all that gated expertise and deliver it into the hands of the younger less experienced customers, without seeing it leak out into the hands of your competitors.

Industrial copilots are a new and innovative way to deliver all of this information, and the experience of your most tenured technicians, directly into the hands of your customers, via a single mobile interface, while generating high value recurring subscription licensing revenue. At very least, this revenue likely delivers much improved margin and profitability over OEM.

Of greater financial impact, the report argues that raising the proportion of software sales also materially expands the valuation multiple.  In the recent Rothschild study, Moore looked at 8 companies that have transitioned from hardware to software dominant revenues including names like Palo Alto Networks and Hewlett Packard, averaging a rise in software sales from 21% to 71%. The EV to sales revenue multiple rose from 2 to almost 8 times. 

Readers may wonder how is this relevant to their company which specializes in pumps or electric motors?  Rothschild predicts that even a huge industrial company like Siemens,  is on target to raise its percentage of software sales from 12% to 21% by 2029. The report further anticipates the EV/Sales multiple of Siemens could rise from 2.4 times towards 3Times, leading, they claim, to a possible doubling in the share price by 2029.  How much high value sales revenue could copilots deliver to your business?

No investment advice given or implied.