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

Good morning and good afternoon, everyone. I'm [ Garrett Well ], Relationship Manager at NASDAQ. I'm pleased to be here joined with the team of Bentley Systems, including Greg Bentley, CEO and Chairperson of the Board; and David Hollister, Chief Financial Officer. [Operator Instructions] We will have time at the end of the presentation to answer any questions that come in. Without further ado, here is Greg to discuss the latest news and insights of Bentley Systems. Greg?

Garrett, thank you. And to each of you, thanks for your interest in Bentley Systems; now busy as BSY, a public company. We regard that what we do is the highest and best use of our talent and investment because infrastructure underlies both our economy and our environment. Infrastructure depends on infrastructure engineering, all of these professions whom we support, their work depends on their software such as these titles from Bentley Systems. And we regard ourselves as the infrastructure engineering software company by virtue that it's what we've been doing since being founded by 5 Bentley Brothers for 37 years, during which we accumulated and developed the most comprehensive portfolio for infrastructure, engineering software. We've penetrated everywhere in the world, as we'll discuss. We think we've become a dependable supplier to infrastructure engineers, and they've helped us become a dependable growth company, including through last year, when we crested $800 million in revenue. 87% of our revenue is contractually recurring, generally paid in advance annually. The majority of those revenues from accounts will spend over $250,000 per year with us, and that has enabled us to be securely profitable, achieving 30% adjusted EBITDA and gross margins and with confidence to improve that on the order of 100 basis points per year definitely. To break down our business by the end market, we define infrastructure as everything constructive to improve our world. And as you see in the upper right, that starts with commercial and facilities infrastructure vertical buildings. That's only about 10% of our business. And then industrial and resources for process plants, mining and so forth, is about another important 20%. But then we get to what we call public works and utilities, the largest sector for us and an integer proportion of GDPs, roads and bridges, energy grade and other percentage of GP, rail and transit, water and waste and the disciplines of structural and geotechnical engineering and together in public works and utilities. And we reckon, we are the market leader in software for this category of infrastructure and very large portion of GDP. But how large would the software market be, it happens there are 22.5 million infrastructure engineers in the world. There are only half that number of product engineers, but they each spend more considerably per engineer on engineering software. And if and I think when the infrastructure engineers would spend as much as do already the product engineers individually that will then be the $29.2 billion market. To address it more completely, this is our own history, the life cycle -- the life of our company corresponding to the life cycle of infrastructure. So we started with one product MicroStation from infrastructure 3D and a 4D modeling, but each of our specialized applications for infrastructure disciplines and assets are built on the MicroStation platform, which, of course, has been refreshed many times in the meantime. And we have the most comprehensive portfolio of simulation engines infrastructure engineers rely upon for structural analysis, pedestrian simulation, traffic simulation, pipe stress, offshore wave motion and so forth, each are the proportions of our revenue that I'm showing here. And then we introduced our collaboration environment ProjectWise to tie these disciplines together. And then in 2009, when new capital projects stopped, we realized we could add value doing operations and maintenance cycle of infrastructure as well as completing the life cycle and representing much of our investment since then. So it happens that the modeling and simulation offerings are on-premises desktops, but we connect them together with cloud services to love what our users, what functions they're using to update the software and to help them in windows to assist them. And then our ProjectWise and AssetWise environments are cloud systems, generally Azure, provision increasingly native SaaS. And we became one of the top 25 users of Azure in 2019. So we're most comprehensive in software for infrastructure engineering across the disciplines, sectors and life cycle. And in terms of geography, we're everywhere in the world. Here's the distribution of our revenues and of our colleagues whom correspond. It happens that 50% of infrastructure spending in the next 20 years will occur in Asia, Greater China. It's a particularly good opportunity for us. 30% of all infrastructure spending in the world will occur in China. China is about 5% of our revenues now and a greater portion of our opportunity. Everything new that we introduced is used first and fastest in China, and our users nominate their projects for year-end infrastructure going digital competition each year, and 30% of the winners judged by international juries are tend to be from China projects at the scale that you see here. So we've grown steadily over our history. You'll hear more about that, but that included in the year 2020. This is our revenue breakdown for 2020. We do sell perpetual licenses, still our main competitor, Autodesk, does not. That's the reason that we do. We have some episodic professional services. And we had a subscription program for users with perpetual licenses, but it's not just maintenance. It entitles them to pool their licenses and to trade them each year for a title they might prefer as their own mix changes. We had an enterprise license subscription, our traditional program for our largest accounts and a new program for them, E365, to which we are deliberately upgrading the enterprise license population. And then we have quarterly and monthly term licenses. So 87% of our revenues are recurring. And within that ARR most recent annually, of course, we had the monthly and quarterly term licenses, but the E365 program charges our users per application per day rather than per year, if you like. So it's most volatile. And I call it yellow here because in the year 2020, we experienced a downturn in particular, for certain segments. So what occurred during 2020 was that the commercial and facilities sector was most affected to start with than the industrial and resources sector even more so. But by virtue of our diversification happens that the public works and utility sectors were less impacted. The very most impacted were the so-called EPCs, engineering, procurement, construction contractors who serve the oil and gas markets where new projects stopped. And they tend to be users of our E365 program, and we have reported on the volatility that cost for us. But the 2020 so far are years of acceleration in going digital for infrastructure. In particular, by virtue of the pandemic, our software for work sharing ProjectWise became necessary to virtualize every engineer's work from home across the world. And they also didn't have to go to their project since by virtue of our reality modeling to work from drone surveys increasingly. And every infrastructure engineer is energized by working on climate mitigation and resilience and adaptation and that is a -- requires our full comprehensive portfolio. Infrastructure projects are too expensive with solutions to industrialize and modularize requiring 3D and 4D simulation and benefiting our portfolio. And then ultimately, whatever is spent by governments, the solution to close the infrastructure funding gap is private investments in infrastructure. There's more than enough such investment waiting for greater derisking of such projects, as going digital can help with. So particular initiatives for us to increase our historical growth rate are the program to introduce a success group, 1,000 of our 4,000 colleagues are themselves, civil and structural and geotechnical engineers. We can organize to help our users introduce new digital workflows by including their services virtually in our E365 program, where what we charge for an application per day affords that. And then a particular opportunity for us is to expand in smaller accounts. So here, our accounts by size and on the left in dark, the engineering and construction firms on the right, the owner operators of infrastructure, 2 different populations completely, but you see there are over 100 of those who spend each over $1 million a year with us and several other hundred more spending $250,000 and more. So 2/3 of our business are from accounts who spend $100,000 per year and more with us. So that makes us a direct sales and very efficient organization in terms of going to market. But the remaining portion of our business are those who spend each $100,000 a year or less. And we've determined to focus there, likewise, differentiating ourselves from our competitor Autodesk channel programs. We do have a indirect channel, but it's only 8% of our revenues. Our determination is to reach the smaller accounts through direct inside sales, through e-commerce, through direct marketing and self-service. And although, again, that's only 1/3 of our business now, we focused on it since going public and in the first quarter of this year, it represented 2/3 of our new business and 3% growth opportunity over last year in our revenues. The generational opportunity we have is called digital twins. We have a cloud service, which can be added to any of our accounts and products to reflect the engineering content created in our applications for modeling and simulation to be used throughout the life cycle of the infrastructure asset to be aligned with its physical reality, which is captured through drone surveys and our software, which processes that into a reality mesh that's engineering-ready and can be immersed. We do machine learning to recognize the digital components and that digital context relate that to the modeling and simulation and that had a digital chronology would synchronize the changes, both in the physical and engineering information for the assets over time. So an example would be a project, digital twin. Here was a success story in the Wall Street Journal for the bridge that collapsed tragically in General Italy was replaced in under 2 years architect-designed bridge, thanks to our portfolio and what we describe as a project digital twin approach. Construction is always about the occupancy of space and time. So it's like a 4D digital twin. And again that digital chronology time slider across the evergreen life cycle of infrastructure. So in asset performance digital twins, example is at Cambridge University. We start with this reality mesh model from drone surveys and handheld cameras internally and relate that the infrastructure IoT to these digital components and their operating trajectory. So our final growth initiative is to continue our programmatic acquisitions and now as a public company, add opportunistic acquisitions. So we expect to announce this week the closing of our acquisition of Seequent, the leader in what we could say self-surface digital twins. All infrastructure depends on the foundations. The environmental vulnerabilities and resilience has to do with conditions below the surface, and we now can put that together for 3 and 4D living digital twins. Below the surface, you need sensors we can't otherwise see in our acquisitions this quarter of sensemetrics and Vista Data Vision will help us with that. And then finally, we announced an acquisition yesterday, a typical programmatic acquisition here the leader in utility poles, the edge of the grid, if you like, putting that all together. So David Hollister will talk about our financial overview.

Thanks, Greg. Just a couple of slides and a couple of minutes here to give you what I think are salient aspects of our financial profile. First, being scale. As Greg mentioned, over $800 million in scale, $800 million in 2020, expecting as you see borrowing the neighborhood of $900 million for 2021. Excluding the Seequent acquisition, which on a run rate, if you couple that together, I think you'd see we're knocking on the door of $1 billion. Scale brings us some obvious advantages, not the least of which, as you might imagine, is some operating expense efficiencies, and I'll talk about that in a moment. We've historically been an 8% grower, whether you look back 5 years, 10 years, 20 years, as you can see here, on average, it's been an 8% compound annual growth rate business. About 7% of that has been organic and 1% maybe a little bit more have come from those programmatic acquisitions that Greg has mentioned that we've done over the years. The next thing I'll note here with the green bars is the quality of the revenues. We have 87% today of our business, it comes from recurring revenues, high visibility, sticky subscriptions. And that transition occurred long ago that has been a mainstay of our commercial model for decades. The last thing I'll highlight on this page with the blue -- with the light blue bars here is our profitability history. I go back only until 2008 when measuring it here. And as you can see, as we've scaled, we've continued to harvest those operating efficiencies. As I mentioned, we hold ourselves accountable to improving on average 100 basis points a year as we grow. And we've historically been successful in doing that today better than 30%. 32% margins are expected for 2021. And expect that to continue. We're committed to make it continue well into the 40%, and there's no reason why that won't occur. Next slide, Greg. Thanks. So again, historical 8% growth rate. We're working hard to turn this into a 10% growth business. We're not there yet, but we're working hard on that. And we believe we're inflecting in that direction on the strength of the initiatives that Greg articulated, the SMB initiative, the user success and adoption science investments we're making; the digital twin opportunity; and again, an increased pace and scale of programmatic acquisitions, even exclusive of the unique to us, larger Seequent acquisition. So we're working hard on that. Again, it's a high-quality visibility, commercial model, 87% recurring revenues. On the strength of an account base, 80% of which has been with us for 10 years or more, and the strength of that drives a 98% gross retention rate. But it's also a basis for growth. We grow those existing accounts on average, such that our net retention rate on average is 108%, which, not surprisingly, corresponds fairly -- fairly closely with our historical growth rate. Again, it's a profitable business. We turn that EBITDA into cash flow at a conversion rate of 85% to 90% on average. We have a very efficient and nimble global tax structure where we're delivering, on average, 20% effective tax rate. It's obviously a low CapEx business, and it's working capital efficient with 70% of our revenues grown annually in advance. So all that cash flow has funded. Obviously, our internal organic growth initiatives, those historical acquisitions, over 100 of them in our history. We also pay a quarterly dividend. It's modest at $0.12 a share per year. Today, we expect that to grow into a 0.5% to 1% dividend yield, and we're committed to continuing with our quarterly dividend regime. And it also provides sufficient cash where we make and intend to make periodic share repurchases to attenuate stock-based compensation dilution. So hopefully, that gives you a good picture of our financial profile. Garrett, I think we're ready for some questions.

Great. Thanks, David. [Operator Instructions] Greg, David, we did have one question come in. Do you ever pay with your own shares when acquiring new companies, in particular, the 2 companies in the pipeline?

Yes, you may note that, for the first time, we paid headline valuation for the Seequent deal, which was a transaction for $900 million in cash. Again, we're expecting it to close imminently, plus 3.1 million shares of Bentley Systems common stock. So we have done that. Historically, we've used our shares more as incentives for retention of management teams and founders of businesses we acquire. So we do put retention bonuses in the form of equity, often even in our smaller programmatic acquisitions.

Great. Thanks, David. We did have another question come in. Can you please discuss the competitive landscape of Autodesk, particularly in context of Autodesk's significant acquisition activity in the project management arena?

Yes, our principal competitor is Autodesk. Infrastructure isn't the majority of their business, but it's comparable in scale to what we do. It tends to be that Autodesk is stronger in vertical buildings, if you like, the commercial and facilities space. But they are also present in public works in utilities, less so and industrial resources. Their recent acquisition of Innovyze brings them a water and wastewater business comparable to ours. The opportunity they speak of in regard to that and motivation toward is the digital twin opportunity. We're glad to have Autodesk help market the potential for digital twins. Digital twins will increase the value of information engineers create. So it isn't used just to create one deliverable during design or construction and is there ever after dark data today because it's sequestered in the obscure engineering formats, in which it's created. It's not open to any analytics. But we work on synchronizing that now to the iTwin Cloud Services. Autodesk will have a digital twin cloud service as well apparently. It always has benefited us for their terrific marketing horsepower to be added to creating demand for this. It's an opportunity for us to multiply our businesses over time. So we have an energetic competition with Autodesk. I must say each company deserves credit. Each provide to the other, a library of our -- to read and write the format of our own products that the other is welcome to distribute it and does do in each product. So we compete to have more and more of a project done with our applications, but neither requires that the whole of the project be done only with either Bentley or Autodesk applications. We've tended to be present. We date back to UNIX. Autodesk came along on the PC. It still tends to be that the largest projects and the largest data requires our offerings, but we are focused again now as a public company with a bit of a higher profile on the opportunities and smaller and medium accounts. Autodesk has been aggressive in their pricing and commercial actions over time, discontinuing a perpetual license in the sand and now not allowing their subscriptions to be shared and that has created competitive opportunities for us, but it's a vigorous and a competition that benefit users considerably. And they understand that we have aspirations to do more in infrastructure than they should. They speak of the construction opportunity. And you said project management. For us, construction area, if you like, is the opportunity 4D. All design for every project is done in 3D. The process of construction should be about expanding that to the 4D sequencing of time and space. There are many competitors working on dumbing down 3D designs to 2D digital paper in construction. And our focus is not so much on the administrative aspect, but the engineering aspect. In heavy civil construction, you could say that robotic construction already occurred because the first autonomous vehicles on any new roadway, for instance, are the machine-controlled graders and excavators and pavers, which report back their as operating conditions to a digital twin cloud service. And this -- at that level of construction, things are going digital quickly. You hear a lot about the smaller end of the general contractors and so forth affect. That's an administrative opportunity. It's not nearly so much our particular focus on Bentley Systems as a constructioneering opportunity for 4D digital prints.

Great. Thanks, Greg. We've got a lot of questions coming in, so that's good. So a couple more on the competitive landscape. Next question, besides Autodesk that you just spoke about, who else do you compete with? And do customers typically sole source? And therefore, a lot of your growth is organic within customers as they hire new engineers and competitive displacements are rare as one needs to be retrained? Or do customers dual source to keep vendors honest by switching spend from one to the other?

So I'll highlight that in our applications, our modeling and simulation applications are procured on seat at a time, if you want, even in large accounts. So discipline by discipline, project by project, the engineers choose their preference and frequently even in the same engineering firm used both Bentley and Autodesk applications and, to some extent, interchange between them. But in ProjectWise and AssetWise are faster-growing Azure-based services. Those are enterprise decisions. And because they are for collaboration across the enterprise, they will choose either a ProjectWise or a different project delivery collaboration system. And then AssetWise, here again, we don't compete with Autodesk in AssetWise. They don't focus on the asset performance life cycle prior to their acquisition of Innovyze, which has some small offerings for that purpose. But those are enterprise decisions that do tend to be binary. And our -- the go-to-market motion is different there. That's responses to RFPs and enterprise procurements and so forth. But the modeling and simulation applications that are the bulk of our business are chosen individually by the preferences of the engineering tool leaders and disciplined heads from firm to firm. And we can grow one by one without enterprise decisions there. Civil engineers will tend to prefer what their -- the applications they trust for modeling. In terms of simulation applications, they never switch. They come to trust an analysis engine to -- for the seal they put on the product, the quality and trustworthiness of the simulation applications are secure and sticky. But there is some back and forth on the modeling applications. And I would say most large projects use a different proportion of A versus the applications. And we have opportunity in every one of them to gain more of those projects.

That's great. I know we just have about a minute left or so. So maybe one final question for the group, again, on the competitive landscape. Can you comment on the competitive landscape in the process industries design software space? And how are you positioned compared to Hexagon and AVEVA? Are there pockets where you're better positioned?

Well, what a great question. Indeed, in general, Hexagon, Intergraph and AVEVA split that market, especially in oil and gas. The pockets where we're successful would include certain geographies. Water and wastewater treatment plants is a strong position for us and where we are the leader in asset reliability software. This is the ARC market study shows that. And so therefore, where emphasis on life cycle, including operations and maintenance, we tend to hold our own there as well, but it is, as I said, 20% or so of our business, but an important aspect of it. I've used an example, like a hydro project, the comprehensiveness wins for us because there you have buildings, civil, water and plants all together. That's true, a lot of the projects in the world, involving energy transitions we're the leader in wind tower, tunnels and so forth. So we pick our spots even there.

Great. Thank you, Greg. Well, this brings us to the end of our session. I would like to thank Greg and David for your time and for everyone for joining us today. So thank you again.

Cheers all. Thank you.

Thanks.