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

Good morning, everyone, and good afternoon. I'm Karen Snow, Head of East Coast Listings and Capital Services here at NASDAQ, and we're thrilled to have you with us today for our second presentation of the conference with Bentley Systems Inc., and I'm joined by Greg Bentley, CEO; and David Hollister, CFO. And today, we're going to talk a little bit about acquisitions, digital twins, ESDG, find out what that means. China and a little bit about the U.S. infrastructure bill. So with that, why don't we kick it off with you, Greg. We've heard that Bentley Systems is a no drama software company. Can you describe just what that means?

Well, we were founded by 5 Bentley brothers 37 years ago and have applied ourselves to becoming a leader now in infrastructure engineering software. And that may not sound like the most exciting thing. However, genuinely, there's never been a time when it's been actually more exciting than it is now to work on and help with and benefit from advancing infrastructure engineering. On the one hand, infrastructure is the subject of conversation throughout the world. Its resilience and adaptation is at the crux for our economy and environment and that depends on the work of infrastructure engineers. They've all been fully virtualized during the pandemic including thanks to software such as ours. And they've learned they can collaborate on projects anywhere with anyone and the advent of digital twins has enabled them not to be on project sites and do remote inspections and so forth. But I heard the CEO of the largest engineering firm say that he reckons the whole of the industry can only add about 1% to its workforce foreseeably, that's the number of available civil and structural and geotechnical engineers, those who use our software. And as the workload is going to go up considerably to accomplish everything that's important to all of us, going digital is the priority now. And yes, it's an exciting time.

That's awesome. So why don't we move over to digital twin since you brought it up. So investors hear a lot about it in various economic domains. What makes infrastructure digital twins unique and what types of use cases will they address?

Well, one can hear about digital twins, digital twin of the product would be a digital twin of an abstraction, not a particular thing, but an infrastructure asset. So that's a train station or water treatment plant, that's a particular asset that has a physical reality that's always changing. So a digital twin and infrastructure digital twin has to start with the digital context, the actual survey reality. Now I'm showing a drone flying around that captures overlapping video and we have software that processes that into a reality mesh 3D representation of the as operated asset. Now that's not the digital twin. That's just a prerequisite for a digital twin. The digital twin needs explanatory power. So it needs the engineering models and drawings and information, the ET, if you like, to go with that OT and then there needs to be a change ledger over time because both the engineering information and the physical reality are always changing. So you need a cloud service that maintains that, if you like, 4D evergreen reality. So a digital twin is a cloud service that we can add to -- for any infrastructure asset to any of our users and accounts so that the information they create, the modeling and simulation they do with our applications remains viable and valuable over the whole life cycle as that infrastructure asset lives for generations and needs to be maintained fit for purpose for energy adaptation, resilient to environmental threats and so forth. The digital twin is a generational opportunity to increase the relevance and the usefulness of the work of infrastructure engineers.

So when you think about 3D, how does that work into the whole concept of the digital twin. And is that a threat at all to Bentley?

Well, so physical reality is 3D. So a digital twin needs to be 3D. Now some investors may be starting to get versed on the Metaverse, the Omniverse and so forth. These are immersive 3D visualization environments, and there could be this question, is that going to overtake the opportunity for infrastructure digital twins. Actually, it's a great expeditor and facilitator to have the 3D environment, the 3D visualization become widely available and frankly, commoditized is a good thing. So in the NVIDIA CEO's presentation earlier this month, he revealed the collaboration with Bentley Systems showing the NVIDIA Omniverse used to visualize what we call a 4D modeling of construction projects. So construction is about the occupancy of space and time. And what you would want to use a tool like the Omniverse in industrial and infrastructure digital trends is to be able to have access to the history, the plan schedule and, for instance, predicting into the future, what happens if it's not maintained and so forth. So the digital twin is the information source behind this visualization environment, it has become mainstream now. We were, this year, the partner of the year for Microsoft and mixed reality for remote bridge inspection using drones and HoloLens and so forth. And it's great to see that this will become a commonplace expectation to be able to find and utilize the information in digital twin. But we say 4D visualization is where the value will be further added.

Okay. So let's talk a little bit about your recent acquisitions Seequent earlier this year, and I think it was your largest acquisition ever. Can you tell us a little bit about that, what it adds to Bentley overall and how it's been performing since you closed?

When we talk about digital twins, I've been using examples above the ground where we can survey and see things but infrastructure assets depend in their foundation. The risks are largely what's below the ground, the quality of the foundations, the risks to flooding and seismic risks and so forth. Seequent is the leader in the world comparable to what we do above ground in subsurface digital twins, 3D modeling. And it has been applied to start with in mining, and that's a very good thing to be working on now. The electrification of everything depends on new mineral sources and geothermal is another energy source that depends on 3D modeling below the surface. But ultimately, everything environmental involves the subsurface. So bringing together a digital twin 3D and 4D above the ground and below the ground that involves sensors and what we call infrastructure, IoT and so forth, it will infrastructure IoT is very promising for investors. I know industrial IoT has perhaps been a disappointment. But when you have a digital twin with the ET and the IT and the OT together, you'll have a frame of reference to understand what the sensors are conveying. So Seequent is doing very well. We sort of disclosed that it grows twice or more as fast as does Bentley Systems. And a case in point is their ARR is a pure subscription business from second quarter to third quarter of this year grew by 7% to example. So bringing together above ground and below ground digital twins is now uniquely possible and very exciting in its own right.

That's great. And then tell us a little bit about your most recent acquisition, Power Line Systems and what that brings to grid integration?

So that's an acquisition we've announced and hope to close before the end of the year. Power Line Systems is by far, the leader in the world in power transmission engineering, and that's the subject of all of our priorities and imperatives when we talk about energy transition, renewable, centralized renewables generation is really centralized. It takes place where the wind and sun is, and we need to extend our transmission grid to reach those sources. And then we need to fortify and increase the capacity of the power transmission grid to support electric vehicle charging and the electrification of everything. And the essence of increasing the productivity of power transmission engineers because there's no greater supply of them is the tools from PLS. The company has focused on the United States or North America so far. So we have great opportunities to expand to the rest of the world where these requirements are even larger. And for us, the grid integration opportunity to combine the transmission, the high voltage with the low-voltage distribution in which we're already in rather well represented in the world. And then finally, the convergence of an integrated grid with communications for broadband, where we have a great start on digital twins for communication towers, but communications for 5G is in the localized places, including power distribution poles and so forth, putting all of that together for shared use is a grid integration opportunity as I think it couldn't be more exciting than what we will be able to bring to that with the Power Line Systems acquisition.

That's very exciting. So let's shift a little bit to public policy. The COP26 recently coalesced directly bearing on sustainability goals. I think you referenced in your Q3 operating results webcast that results in green CapEx spend. Can you talk a little bit about that and what that means for Bentley?

Well, this category that the investment banking houses are calling green CapEx. That's an estimate of the spending that it would take to accomplish the goals, for instance, in the conference that's just ended and those that have to do with sustainability, generally, that would require $6 trillion per year of annual spending over the foreseeable future. Now that's the need, not committed spending, but it all maps to what we call the public works and utilities sector. That's the main stay, it's 2/3 of our business and where we're the leader in the world. So all of these green CapEx spending categories are terrific opportunities, of course, to improve the world. On the one hand, that's the global consensus we're talking about, but to increase the capacity and throughput of infrastructure engineers in each of these areas is how we can help, and it is just the most interesting and effective you could say, ESG, I say ESDG, maybe we'll talk about that opportunity that we have. Examples are Well, I'm just going to talk about European example. In Europe, the net 0 goals can't be accomplished in any country without electrifying the remainder of its diesel rail. And an example we talk about with Siemens is our joint development in addition to our hope and rail designer for overhead line electrification in a way of 3D and 4D that makes it much easier and more effective to do that. Then I mentioned the examples of Seequent with -- mining for electrification and then Power Line Systems for grid modernization and so forth. It all is right in our wheelhouse, and we are -- we feel a great responsibility to invest and improve in this respect. But it's a great opportunity for us as well.

So you mentioned your ESDG. Why don't we elaborate on that a little bit? How does Bentley think about ESG?

Well, Karen, of course, everyone is focused on ESG, and they should be. And of course, companies like ours get rated for that purpose. But the ratings tend to focus on one's environmental footprint. And as a software company, mainly working from home and so forth, that's kind of negligible in our case. But I'd like to talk about our handprint, how we're helping infrastructure engineers of the world. And what we're helping them with, I'd like to say, corresponds to the UN sustainable development goals. So we're the leader in water and road and rail and grid, metros, things that are absolutely of the essence in improving the quality of life that are represented by the sustainable development goals. So I like to say that footprint is one thing, but the handprint can be signified I say, ESDG and that would mean empowering sustainable development goals. And it is a focus for us at Bentley because it's a focus for infrastructure engineers. They are very zealous and effective and committed in this work and deserve to be supported and their work appreciated. The rest of us talk about sustainable development goals. It is really the work of civil engineers and structural engineers, geotechnical engineers and those who work with them that make a difference in this -- in the sustainable development goals ESDG.

Yes. That's a great way to think about it. So feeding off your global footprint. Let's talk a little bit about your footprint in the U.S. and what you see is the opportunities now that the infrastructure bill has been signed in [indiscernible], let's talk about U.K. and China, where things are definitely heating up on the infrastructure side. So do you want to start with the U.S.

Well, in the U.S., it's exciting and different for us to have infrastructure now as a funded national priority. We've been obviously talking about it for a long time. What's different about the infrastructure investment in Jobs Act. By the way, we're talking about the jobs of our users and our own, if you like, is that half of it is sort of more of the same with investment in highways and roads -- highways and bridges, which is what infrastructure tends to have meant in the U.S. up until now. But the other half of the funding is incremental at the federal level and new for water, for rail, including metro and high-speed rail orders of magnitude more funding for that and for grid including broadband as well as power transmission things that I mentioned earlier. Those are new programs requiring new structures, but everyone is in a hurry to get them underway. So I don't mean by that, that they'll necessarily take a long time to make a difference, but we have an experience in this country of going through this sort of thing. Many of the programs take the form of grants, and we will be helping our users to, we hope, successfully apply for these grants for lighthouse projects that can help us to catch up in the U.S. I have been asked, for instance, rail and metro, high-speed rail even, will you need to create new products for that. And I sort of laugh and say, no, they're in the rest of the world, that's what our business consists of to sort of a prototypical new account for us is a new metro system in Asia. There's more new metro systems in Asian cities every year than there are in the West cumulatively. So I say, no, we have excellent software for that, but it's gratifying to be able to apply it here in our headquarters country in the U.S.

Great. And let's talk a little bit about China as well in terms of what's going on there as it relates to infrastructure. And I just want to highlight we're going to take questions in about 4 to 5 minutes here. If anybody has any, please put them in the chat or the e-mail that was provided, and we will make sure that they get asked. So go ahead.

Well, I don't know if we'll get to Europe or not, let me just say that our business is satisfactory there, but the U.K. is a particularly important place for infrastructure thought leadership in the world. There's a national infrastructure commission and infrastructure funding priority. And for instance, this year, in our going digital awards that are in judging by independent juries. There are 56 finalists in 19 categories 12 of them are from China, which we'll get to momentarily and then 10 from the U.S. and 5 from the U.K. So it's way over represented. I have a home in London by virtue of its importance and infrastructure thought leadership haven't been able to get there this year or last. And looking forward to that, and I look forward to being able to meet in person with investors in London when we can. But China is at the top of that with because of the infrastructure is the national priority in China. And it isn't for economic stimulus. It's for the density and ambitions of the people in China. Everything that we introduced that's new is adopted first and fastest in China. It's only about 5% of our business at present, but a large portion of the potential opportunity for us. And what we do in China sort of has the profile of what we do in the world at large. It's mainly public works and utilities. It isn't subject to the current cycles in China having to do with housing development and commercial buildings. So it's full steam ahead. Now geopolitical issues are not a help to us. And our answer to that is to carefully adapt and work on becoming more Chinese in the way that we go to market on Chinese cloud services with Chinese partners, and you'll be hearing a lot more about that in 2022. But it has been a good market for us. It's important as you see they lead the world and want to be the engineers for the world at large. Industrializing is the approach they take to everything they do in infrastructure they do in such a way it's [ repeatable ]. Serving China well means we can serve the rest of the world well. Now even the U.S. as we catch up on some of the ambitions.

How are you partnering in different ways in China, to make sure that you are serving them well and that you won't see business disruption in the future? Or how are you thinking about that?

We need to partner in incremental ways. We have over 200 colleagues in China. I'll mention in the U.K., we have about 350 last time I checked. But we have come to -- we've been there for a long time in China, 20 years. We have some trusted relationships with organizations that will bring to market some products for our platform that are localized appropriately and are able to be certified in terms of their Chinese content, and it will be for us a smaller part, but of a very large and promising tie, so we are optimistic about our business in China.

Yes. Great. Good. So Carey, I'm going to turn it over to you to field some questions here.

Perfect. Thank you, Karen. So yes, we did have a few questions come in, Greg. First question, given that charging structures are based on the number of professionals using the software, how do you think about the impact of the industry's labor pressure on Bentley?

Well, it is the case that new civil engineers and structural engineers and geotechnical engineers are pretty busy in the world at large. And the -- as I mentioned, the competition for them is already a factor. It isn't the case that our revenue potential is limited by that, of course, we could gain share and share of mind. But the opportunity is to provide them with more and more specialized software applications that improve their productivity and throughput. So an example would be, well, among our finalists this year, 13% are working on renewable energy projects explicitly. So for them, we have, for instance, new open wind power applications that's our brand name that cater for not only offshore fixed but now offshore floating wind structures. And those are -- so you could design those with generic civil engineering and structural engineering tools and geotechnical engineering or you could use specialized products that cater explicitly for that for which the cost may be in order of magnitude more, but the throughput improvement is worth it. So we have this opportunity, even if application days increases slowly to have the application spend by virtue of greater specialization increase more rapidly. So we call that application mix accretion, and we're reporting here how we're doing on that. But that opportunity is limitless.

Great. And another question. So there are established players moving into infrastructure software business such as Autodesk. So when you think about the competitive dynamics in the industry now, how do you think it might evolve over time?

Well, Autodesk applications and Bentley applications are the choices that most engineers make. And incidentally, we try to make sure both we and Autodesk that there can be a mix of these applications on across the disciplines in each project. We are more comprehensive. We're particularly more penetrated in what we could call horizontal infrastructure. So vertical infrastructure where Autodesk is more concentrated would be vertical buildings. Horizontal infrastructure are that networks of road and rail, land, water and grid and so forth that connect them. So we have different concentrations, but the -- we each work on making our applications better and better connected to cloud services, and that is what I foresee as the principal competitive dynamic is each working on our particular specialties. In our case, we try to be comprehensive for all things and to have a platform approach so that -- there's no discontinuities from discipline to discipline and between aspects of major projects, and we seem to be successful at that. What is new for us is we're focusing since becoming a public company and also as SMB, the smaller businesses who had -- we are a direct sales company in the main. So that's an inside sales direct engagement initiative on our part and it seems to be working out pretty well for us.

Great. Fantastic, Greg. And then on today's chat, we talked a bit about Seequent, Power Line Systems. Maybe you could talk a little bit about how you look at capital allocation as you think about growth, M&A, share buybacks and dividends?

I'm going to ask David Hollister to take that.

Thanks, Greg. Yes, we have historically -- our acquisition strategy has been focused on what we call programmatic tuck-in acquisitions, over 100 of them. And those are not nearly the scale of the last 2 that we've done, the PLS that we've announced and the Seequent that we closed earlier this year. And our operating cash flows historically, have funded all of that acquisition activity. It's also funded a regular dividend, which we have paid quarterly for I suppose at least 5, 6 years now, and we're committed to continuing to pay a quarterly dividend. It's not a lot, but it's a commitment that we're comfortable with. Obviously, our cash flows have funded for 35 years, our investments in organic growth as well. But when it comes to a large transaction like a Seequent deal, it is the case that we looked outside of our normal ordinary operating cash flow generation to fund that acquisition. We did that with some -- taking on some debt this year. We've done 2 convertible note issuances, which were very efficient for us. It is the case that our business carries debt pretty well with predictable cash flows and a recurring revenue base, highly visible. I look to leverage in the 3% to 4% range as optimal for us. Less than that is not optimal, more than that, we start to think about -- does it have an impact on our ability to make the next opportunistic PLS type of acquisition. So around the 4x range. I look at assessing our capital structure and deciding whether or not we need to raise more equity. So as a result, it is the case that with both the Seequent deal which we took on some debt to do that, but we also issued some equity with the Seequent deal. And we've programmed into the structure of the PLS deal the opportunity to either pay for it in cash or settle as much of the consideration at closing in shares as much as half of it in shares, if that's the route we chose to go. And we retain that option until closing and we'll continue to review it. But -- It's -- it will -- we'll assess our leverage at the time and decide how many shares to issue, if any, with respect to the PLS transaction.

And maybe I'll just conclude by saying each of these acquisitions, the larger ones opportunistic from Seequent and Power Line Systems are accretive to our growth rate and our margin rates.

Well, thank you very much for the time, Greg and David, and for all of our participants, Enjoy the rest of the conference.

Thank you.

Cheers on...