Bentley Systems, Incorporated (BSY) Earnings Call Transcript & Summary

Okay, great. Hello, everyone, and thank you for joining us today. I'm Joe Vruwink from the vertical software team at Baird. Our next presentation comes from Bentley Systems. Bentley is the leader in infrastructure engineering software. Joining us from the company today are Greg Bentley, CEO; David Hollister, CFO; and Carey Mann, Vice President of Investor Relations. Management is going to provide an overview of the company. And then afterwards, we'll transition to Q&A. So thanks, everyone, for joining.

Joe, thank you. In turn, it's Greg Bentley. And we do reckon that what we do is our highest and best use here at Bentley Systems by virtue that infrastructure is critical for both our economy and our environment. It depends on the work of civil and structural and geotechnical engineers, among others. Their work is determined by the quality of their software. So when we think of ourselves as the infrastructure engineering software company is because it's what we've done since founding by 5 Bentley brothers 37 years ago, during which we've built up the most comprehensive portfolio for the purpose penetrated everywhere in the world to become, we think, a dependable supplier to these engineers. We have enabled our revenues to grow over $800 million, 87% of it contractually recurring, generally paid in advance annually, the majority from accounts who spend over $250,000 a year for us. And that scale has enabled us to surpass 30% in adjusted EBITDA margins and to be confident in growing our margins at least 1% a year each year foreseeably. So this is the breakdown of our business by end market and revenue proportion. And here are -- where we regard that we are the leader in the world in infrastructure engineering software for road and bridges, for energy grids, for rail and transit, for water and waste and in the disciplines of structural and geotechnical engineering. And together, in this sector we call public works and utilities, which is the majority of our business, although commercial and facilities, that's vertical buildings and industrial resources, are also each important. So we began with one modeling product, MicroStation, but now that is the platform underlying our modeling applications. And then we focused on the simulation engines, which are mission-critical for infrastructure engineering, ranging from pedestrian simulation, structural simulation, pipe stress and so forth. And then the ProjectWise environment for collaboration across projects. And finally, the AssetWise environment to complete the infrastructure life cycle. And so our modeling and simulation applications run on-premises, but are connected by cloud services to keep the software up to date and enable us to see what users are doing and to help them. ProjectWise and AssetWise are cloud systems, increasingly native SaaS and we became, in 2019, one of the top 25 users of Azure. So we're comprehensive across disciplines and sectors and the infrastructure life cycle, but also geographically. And in fact, our colleagues are distributed across the world, and we are very well positioned in Asia. Half of infrastructure spending in the next 20 years will occur in Asia, and everything we knew that we do was used first and fastest in China, for instance. So we do sell perpetual licenses because our competitor, Autodesk, does not. But the bulk of our revenues are contractually recurring, that's at 87%. And among our ARR, the majority resets annually, but our new E365 enterprise program involves daily resets. And of course, during the past year, has encountered some volatility from the industrial and resources segment, especially, which still lingers. But we benefit generally from diversification and especially from our focus on public works and utilities. The 2020s, I think, will be very good for our business. Certainly already in this decade, every user's work has been virtualized to our advantage. And the focus on sustainability depends on the work of civil and structural engineers and requires our full portfolio and has the full attention and zealous dedication of all of our users and accounts. Infrastructure projects need to benefit from greater industrialization, modularization for better economics. And ultimately, although there's government stimulus looming now, we can only close our infrastructure investment gap through private investment in infrastructure, which is always in a design-build-operate format that best benefits us with our full life cycle focus. So our growth initiatives in this decade include success programs for accretion within our existing accounts and expansion to SMB accounts. So here are our existing accounts, over 100 spend over $1 million a year for us. On one side here, you see the engineering firms and construction firms, and on the other is the owner/operators of infrastructure. They are very different in their characteristics, and then the hundreds who spend over $250,000 a year with us. So 2/3 of our revenue are from these enterprise accounts. So not surprisingly, we are a direct sales organization in domain. And this is where we have added -- we have 1,000 of our colleagues who are themselves civil and structural and geotechnical engineers. And our E365 program embeds their services to help our users with new digital workflows. As to the accounts smaller than that and what we call, say, SMB, it's account to spend up to $100,000, our approach there is direct inside sales in e-commerce. We had our first e-commerce ever last year. And in the first quarter of 2021, even though SMBs are only 1/3 of our business, they were 2/3 of our new business in the past quarter. So the biggest opportunity we have now, a generational opportunity, is to add a cloud service, we call digital twins, to any of our accounts end users. They don't have to start over, they add it to what they do. So for instance, a project digital twin, an example, is the replacement of the bridge that collapsed in Genoa, which was done in under 2 years. architect designed bridge and credited our digital twin approach. Our construction digital twin, construction is about the occupancy of space and time. So this is the example of a time line of digital chronology by which the project is planned and managed in 4D. And then an asset performance digital twin, this example, in Britain, you start with drone flights and what we call the reality mesh from drones and handheld scanners and then integrate the infrastructure, IoT inputs. So our final growth initiative is we have done acquisitions programmatically over 100. And we can now, as a public company, also do opportunistic acquisitions. An example of programmatic acquisitions are our recent announcement of the leaders in infrastructure IoT and an opportunistic acquisition we will close shortly, Seequent, enabling us to expand digital twins to the subsurface. So may I introduce our CFO, David Hollister, for some description of our financial characteristics and then back to Joe.

Thanks, Greg. Just a couple of slides here to orient you to our financial profile. I can make a number of points here on this slide, the first being scale, $800 million in revenue. Last year, based on our outlook, we've given a range where $900 million comes right in the middle of that range. That's excluding Seequent, which we've communicated is about a 10% version of Bentley Systems. So on a run rate basis, I suppose we're excited to be knocking on the door of $1 billion. We've been a consistent grower at 8% on average over our history, fairly predictably. Of that 8%, about close to 7% has been organic and 1%, maybe a little better, depending on the year and the pace and scale of acquisitions has come from acquisitions. The growth is, in domain, come from growing our base of recurring revenue. We made the transition to subscriptions many years ago. I showed that here in the green bars. And today, as Greg mentioned, we're 87% recurring revenue relative to our total revenue. We have historically been profitable. I show this in the light blue bars at the bottom. Better than 30% EBITDA margins now. They're a little bit unsustainably large last year in 2020 and again here in 2021 as we have pandemic-related cost savings, not all of which are going to be sustainable. But nonetheless, we have a history of eking out modest margin improvements year-over-year, comes from that scale I mentioned. And it also comes from our discipline and our commitment to continue to do that. And we expect to continue to work on improving our margins 100 basis points, give or take, per year. And there's no reason why we can't continue that and won't continue that into the 40% margin, EBITDA margin rates. Next slide, Greg. So again, we've historically been an 8% grower. We're working hard on becoming a 10% grower. This is the result of the growth initiatives that Greg mentioned. Again, that's the small- and medium-sized business, the SMB initiative, which is new for us, a new focus for us; our user success and adoption science initiatives, which is also new for us; the digital twin opportunity, also new; and the pace and scale of M&A, which is increasing in terms of both since we've become a public company. Again, highly visible, 87% recurring revenues. 80% of our revenues come from accounts that have been with us for 10 years or more. 87% have come from us -- to us with -- from accounts with 5 years or more with us. Net recurring retention rate of 107%, 108% depending on how much of our growth is coming from acquisitions and new accounts. But we grow significantly by growing our existing revenue base from existing accounts. It's a really efficient cash flow business. We've got a 20% global effective cash rate. We convert that adjusted EBITDA into cash flow at a conversion rate of 85% to 90% on a normalized basis. It's been unusually high in the last year and year-to-date for us. But on a normalized basis, it's about 85%, 90% cash conversion rate. It's a low CapEx business, obviously, and it's a very efficient working capital model with 70% of our revenue is billed annually in advance. And that cash flow has supported those 100-plus acquisitions in our history. It supports all of our internal growth initiatives. Obviously, it supports our quarterly dividend, which we have paid for several years and are continuing to pay. It's modest. We expect it to modestly increase and level out in the 0.5% to 1% dividend yield rate over time. And it also affords us sufficient cash flow to attenuate stock-based compensation dilution with stock repurchases from time to time. So I guess we'll stop there, Joe, and happy to address questions.

Yes. That's great. Very good. If anyone on the webcast wants to ask a question, I think you can use the prompt and those will get e-mailed to me. I wanted to start and really, I want to walk through some of the main growth drivers that, Greg, you walked through. But before we get to that, I think Bentley Systems, the company, has a really fascinating history because there's been decisions at various points in time around commercial models. You showed you were an early mover to the subscription format. There's been progressive product strategies. Are there certain seminal decisions when you look back in time that you feel like are important to appreciate if you're new to the Bentley story, but trying to get a sense of kind of innovation and this constant drive that has existed at the company?

Well, Joe, I'll go so far as to say that in a company managed by those whose name is on the company, we ought to hold ourselves to 2 things that should be advantages for us. We should be able to make resolute decisions to change course when we see something on the horizon that makes that opportune rather than getting bogged down in risk aversion. And next of all, on the other hand, we should have the consistency at the rudder to stick to it so that the long-term investments do work for the long term. We don't need to zig and zag for the fad of the day. I think that's been the case. So your question prompted me to think about that. So at one point in time, we had 100% indirect channel distribution. And what we learned is that in that business model, you're a full-time referee in turf battles. And we really wished to have direct proximity to our accounts and especially to be able to respond in commercial innovation to what they preferred. So we determined to become direct overnight. It was a very unpopular decision, has turned out much for the better. It's the reason we have the profile of the majority of our revenue today from these trusted account relationships, and that gives us the scale and profitability to be able to innovate on the margin now. So the relevance of that decision today is as we are holding ourselves now to focusing on SMB opportunities where there is considerable opportunity at the moment because our competitor, Autodesk, has stirred things up with their aggressive commercial policies on their part, we are doing that not through channel. That's the competition from Autodesk, but through direct sales, inside sales, direct engagement and e-commerce, something we can engineer, we think, better than the Autodesk channel can do. And we did manage, as a result, to add 1,000 new names in the past year as a result of that. So another example of commercial innovation that being direct let you do is this new E365 commercial program, which is a consumption-based model, but where we can include in what we charge per application per day, a provision for our success force. So we have 1,000 structural and civil and tech -- geotech engineers to be embedded virtually in our users' work so that we and they can grow faster. But we could only do that by being as direct as we are. So early on, in terms of collaboration, we helped our -- these large accounts in their work sharing across their offices globally and their value engineering centers and so forth. And that set up our ProjectWise environment to be the answer during the past year to virtualizing everyone in every size of term to work from home. And then another sort of resolute decision we took when the global financial crisis occurred in 2009 and new capital projects stopped, of course, our business, which was focused on infrastructure project delivery took a relatively big hit buffered by our diversification. But we said we're missing an opportunity, and we have ever since then devoted at least half of our R&D and acquisitions to the asset life cycle, asset performance life cycle in operations and maintenance. And then it all comes together in its digital twin opportunity, which is an evergreen life cycle opportunity to reuse the modeling and simulation across the life cycle and infrastructure assets and these investments. And technical virtuosity, I think, have set us up to meet that opportunity. But again, it's a long-term opportunity. Hopefully, we have the staying power and the concentration to realize that opportunity by virtue of our making an important decision and sticking to them.

That's great. So the key growth drivers, the flagship civil design applications, are still a significant contributor. A question came in on just how a potential infrastructure bill in the U.S. potentially changes the growth drivers at Bentley. Maybe I can just inject, what is driving growth in the core business? As you showed, David, you're standing at long-tenured existing accounts might lead people to believe this is a well-penetrated mature business, but it's still driving a lot of growth pre-stimulus. Why is that? And then how does stimulus potentially change the dynamic?

Well, maybe again, I'll start with the long term. So there are twice as many infrastructure engineers, civil and structural and geotech in the world as there are product engineers. But the product engineers spend twice as much, so 4x per engineer on software. So there's a lot of headroom in going digital on the infrastructure side, and we're behind them and catching up because R&D hasn't been a priority for infrastructure owner-operators. They're often government agencies and the engineering firms don't have an R&D agenda historically. So we are it. And we can push and we can't pull, it hasn't been growing as quickly. But there is lots more potential because the engineers cost the same, and the software helps them just as much or even more. So there have been, if we go back to the U.S. now and focus for once on infrastructure in the U.S., it -- it's not the case that our civil engineers in the U.S. are not busy, but a new backlog of work will benefit our users and our accounts for a long time to come in a -- in road and rail and water and transit, a majority of that work will be done with our software. So there is opportunity that so far is creating not new work because it's only discussion at this time, but is creating greater confidence on our accounts. And especially adopting something like the E365 program so that these engineering firms, especially, can grow their work faster than they grow their workforce by going digital and being more productive since they're going to run out of engineers to do the work if they don't get more productive. What we're suggesting, and there were some reports yesterday, we made political and whatever it is, The Hill, the political because we've started a coalition that's arguing for smarter infrastructure investments so that we don't just spend on new capacity that can't make very much difference. But on digital twins for existing infrastructure assets to help with their energy transition to make -- to extend their life and fitness for purpose for longer when something comes along like a pandemic and so forth, the modeling and simulation and the fact that you can continuously survey and monitor them and avoid catastrophes as you extend their life, an example of a catastrophe was in Mexico City, those don't cost much. And you can have a digital twin, a 3D or 4D digital twin for every existing infrastructure asset by flying drones and using our software to create an engineering-ready reality mesh. So we're making that case. And not only on new capacity, but on extending the -- and mitigating the resilience to climate change and so forth, there's a wonderful opportunity. And we can make the U.S. more competitive in this world market for engineering and infrastructure engineering going digital. So those are all opportunities in front of us at the moment.

That's great. A question came in on digital twins. So the technology can be pervasive across through all the Bentley applications. What is the business model for the digital twin initiative? And then what maybe is the longer-term ambition? Not just growth, but how does that influence maybe the cash flow characteristics of Bentley?

Well, the digital twin opportunity adds a cloud service. No one needs to start over from what they're doing already. The digital twin reflects all of the modeling and simulation information that already is being done and created. But today it's ensconced, it's trapped in the obscure formats of the engineering tools that created it. There is no way to address engineering data with analytics because it's dark. It's -- so opening up that dark data, aligning it, reflecting it to a cloud service, synchronizing it so that you have a time slider over the history and anticipating the future asset performance is the opportunity for the digital twin. We say it includes the digital context, that is the actual survey reality from here, again, actually drones especially. And the digital components, that is the -- what the engineers work with and have created already and semantically relating those and then this digital chronology over the history. Put that all together and you have something that can make every infrastructure asset more valuable, more resilient, more fit for purpose, more adaptable and so forth, and it's all incremental subscription opportunity. It's especially an opportunity for the engineering firms whose business model today is to sell their engineering hours, a terrible business model, to instead have a longitudinal business by creating and then curating the digital twins, improving the information quality and so forth. And for them to be the channel who provide that service to the other half of our business, the owner-operators of infrastructure who benefit, and we all do as their constituents for digital twins of infrastructure, but whom are not going to be able to be the creators and curators of it in their own right. So it's a virtuous opportunity for everyone. It is a longitudinal subscription opportunity by nature. The information it's making valuable already exists. The work of the engineers is simply sequestered. It needs to be opened up. So the business model for us is to be a platform that enables that. But we don't ourselves aspire to be in the business of the proprietary analytics that will then be possible. That should be the business of the engineering firms, for instance, for them to brand and offer their services through cloud services. So we wish to be the open platform that enables that. We have an open source strategy to make, to follow suit with what has worked in other sectors for the fastest movers there. And we're -- our own business model ultimately will be based on API calls, the actual throughput and engineering information being utilized in operations and maintenance. And it's very early days for that, but there are some sectors of infrastructure assets such as communication towers which are quickly on the move to take full advantage of what I'm describing.

Okay. Maybe time for one more question. There's been a lot of interesting acquisition activity with Seequent. I think some investors were surprised to learn, because when you think about near surface infrastructure, Bentley has a position. But the potential application is much broader or maybe I should say deeper than that. And then, David, you also brought up just the digital integrator strategy. So maybe you can touch on some of the inorganic opportunities you see out there.

So I want to do a quick commercial for what brings this all together to answer some of these questions, which is Joe, you and Baird put together a product showcase for our applications and you work directly with our product groups. I was not involved, and that is still available on your Baird website, the product showcase to help imagine how digital twins extend everything we do. But if we talk about deepening digital twins below the subsurface, so that's the business of Seequent. They are the leaders, you could say, in subsurface digital twin. So every infrastructure asset that we see on the screen here depends on its foundation. Its foundation is where the risk occurs. And that, in turn, depends on the 3D layers and stratas that are below it. And everything having to do with water has to do with permeation and percolation and so forth. So the industry that led the understanding of the 3D subsurface was mining where Seequent started. And that's still important. If you think about a mine, it's a 3D factory and construction project that never ends. But Seequent has been applying that, and we will together apply it to every infrastructure asset to minimize that risk. And then to have not only a 3D subsurface digital twin corresponding to everything above the surface is always done in 3D, and they ought to be done and engineered together in an integrated way. But now with sensors for infrastructure, IoT and our most recent acquisitions to make it a 4D subsurface digital twin. And again, we don't all -- it's too soon to comment on what went wrong in Mexico City, where in effect, the transit section of bridge collapsed. But it probably had to do or was contributing by the factors that had to do in the deep subsurface below Mexico City and improving that at the same time as we make infrastructure more resilient to environmental effects generally. And make our environment better is the opportunity with Seequent, which we expect to close shortly.

Okay. Unfortunately, I think we're out of time. But I did want to mention to everyone, there will be a breakout session with Greg, David and Carey immediately after this. So I hope some of you can join us for that. And in the meantime, just thank the Bentley team. Thank you all for joining us today.

Cheers.

It's a pleasure. Thanks.