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

[Audio Gap] investors for joining us as well. And Greg, I was doing some diligence getting to know the company better ahead of this. And I thought it would be great to start off with just a high-level overview of your own background and the company has a fairly unique background and then we'll dive into maybe what people -- would Bentley be just for those that are unfamiliar with the company.

Samad, thank you. And by the way, as far as first time, this is our company's first attendance at an investor conference, of any sort. So I appreciate your indulgence. So the company was founded by 5 Bentley Brothers in 1984. And since then, we've worked hard to become the leading provider of software for the engineering of infrastructure, infrastructure underlies our economies and our environment. And so our colleagues consider that the highest and best use of our talent and investment. The rest of us care about ESG and improvements to the world, but it's the work of civil and structural and geotechnical engineers that determines the quality of our lives and they primarily rely on Bentley Systems software. So we just -- by applying ourselves over that period of time, we've developed a portfolio that is most comprehensive across infrastructure, disciplines and assets. The majority of our users work, the majority of infrastructure spending is in what we call public works and utilities, and we consider that we're the leader in roadways and railways and metros, in water networks, in power transmission and distribution networks, generally the horizontal infrastructure, if you like. And then we also are comprehensive across commercial and facilities, that would be buildings, but that's a small portion of our work. And industrial is another relatively small portion compared to public works and utilities, and then resources, which includes mining and the subsurface generally, we are #1 there as well. So it's important to work 2/3 of our business are from modeling and simulation applications used by engineers and then another 1/3 from the collaboration environments that they use to work together and the majority of our revenue and ARR were about 90% subscription are from large accounts, the large engineering organizations and owner-operator organizations of infrastructure in the world, and that has enabled us to be rather efficient in going to market and have accumulated profitable margins and the intention and ability to increase our margins measurably each year going forward.

Great. That's very helpful. So it sounds like we've all probably been impacted by Bentley's software even if we don't know it, just because of the pervasive use of it. Maybe just as a follow-up to that, is it primarily focused on the U.S. side? Or is it international? And maybe how does that mix look like for the company?

Well, so glad that you would ask that. I should say the U.S. is about half of our business, whether it's more than or less than half depends on the exchange rate at the moment. But the U.K. is a very important country. It's second in the world for us. We have 400 colleagues here. But the U.K. is sort of our international headquarters because it is the thought leadership and infrastructure in the world occurs here in the U.K. and projects like Crossrail now the Elizabeth line and so forth in terms of construction, we have learned a lot from. We do a great deal here in the U.K. with network rail, with high-speed 2, with national highways, and with all of the network of contractors, water side also that serve them. And digital twin advancement is occurring here in the U.K. also. It's a great place to be. I have a home in the U.K. because of the focus of infrastructure as something that's a concern to everyone in the U.K. And as a matter of constant discussion. There's a national infrastructure commission here. There's a national Digital Twin Day. Our Annual Year in Infrastructure Conference alternates between Singapore and London and will be back in London this year in person as well. So it's an exciting place. I'm aware that we think in the U.K. of infrastructure being a challenge. The challenge is it's aging, and we need to extend its lifetime and maintain its fitness for purpose. It's resilience to climate change its energy adaptation and so forth. But that's what we our accounts are finding new opportunities and doing that better all the time, I think.

Great. So I had digital twins later on in my question pack, but I'll go ahead and jump to it just because you mentioned it, and so the audience might be wondering. So there's a lot of talk about the subject of digital twins. Why is this now an opportunity for infrastructure engineering. And how has Bentley Systems addressing that?

Well, the subject of digital twins, you've heard about for a while, but it wouldn't have pertained to infrastructure, a digital twin of a product, maybe this glass or your microphone is a digital twin of a notional abstraction. But a digital twin of an infrastructure asset needs to capture the actual as operated 3D reality of the water treatment plant or the tube station or the intersection and that requires that it be continuously surveyed. So I'm showing a drone, which creates overlapping images in a video, and then our software processes, those overlapping images into a reality mesh model that can be as engineering accurate so that you actually engineer to it. So that's only been recently possible. And the -- it's only a twin if it has that continuous surveying, but it's only a useful twin to the extent you also bring in the intelligence of the modeling and simulation, the models and drawings that will enable the -- that's the ET, if you like, the engineering technology to make sense of the IT, the IoT observations and the visual surveying I've described and then the IT to keep track of the changes over time. So it's an evergreen digital twin. The work of engineers previously had been only during the deliverable phase of the project to start with. And then the modeling and simulation would never get queried or looked at again because it could only be opened by the specialized application that created it may have been our application. But now with the digital twin, we have software architecture to reflect and semantically align it up into a cloud service so that it is subject to analytics and a digital chronology over time. It's a live useful digital twin, so that when -- to meet the challenge of extending the lifetime of our infrastructure assets and maintaining their fitness for purpose and resilience, the work of the engineers in the first place will continue to be useful.

Great. I want to maybe step back here for a second. I know we kind of dove in -- just as a follow-up on the digital twin side, but -- and this is for either 1 of you. I know the company has talked about measuring their TAM as $30 billion. I think it would be helpful just to maybe help unpack how you think about Bentley's products mapping to that addressable market? And maybe how is that addressable market changing? Is it growing? Is it fairly fixed? How should we think about that?

Well, we calculate that TAM by working out how many infrastructure engineers there are in the world and how much they individually spend compared to the number of product engineers in the world and how much they spend, which is about 3x as much per engineer. The engineers cost the same, and you would think over time with greater digital adoption that the infrastructure engineers will catch up to be using digital tools as well. That was going slow in the world until the pandemic came along, and now every infrastructure engineer was virtualized and the digital twin phenomena, for instance, that we've just been talking about made it possible for autonomous inspection to allow them not to need to go to the work site and to work on projects anywhere in the world and now with new government spending, especially for infrastructure there as busy as they can possibly be, and going digital is a new priority to accomplish the greater amount of work that is available and that the rest of us need in terms of meeting, for instance, UN sustainable development goals, what we call ESDG, Empowering Sustainable Development Goals that has all the infrastructure engineers fully occupied now. We can't produce new ones very quickly, and going digital is a way in which we'll finally catch up to the expenditure over time that product engineers spend already because they're all working in R&D functions, if you like, but the importance of infrastructure for -- in a protection engineering for decarbonization and so we make a priority that we think will pick up the pace of closing that gap now.

So I think there's a lot to unpack there. Infrastructure has obviously been in focus, whether it's just even in the U.S., thinking about improving our infrastructure there or whether it's supply chain issues that are highlighting some infrastructure-related issues as well. How should we think about the company's visibility into infrastructure spend especially like how reliant it is on increased government spending? Or is there long-term projects that you guys have good visibility into that, then translates into visibility on the revenue side?

Well, it is the case that the projects and infrastructure are long-term projects, programs, such as the -- you mentioned that we finally have incremental infrastructure expenditure, 5-year program in the U.S. In the U.K., there's a National Infrastructure Commission, an infrastructure road map and long-term projects, I speak to is an example of 1 at the moment. So there tends to be visibility in that respect. And when we, of course, all would be concerned now about macro economic cyclicality, but the cycles of infrastructure spending have tended to be countercyclical, if you like, from government spending. And 1 might worry that government spending will have reached its limits here after the pandemic, but the committed programs are multiyear programs that are in place now, infrastructure engineering organizations regard that their backlog in general, is as high as they would like it to be and would rather in fact, have a longer extended period of predictable projects than a big bulge -- bigger than it is already at the moment.

Great. And Werner, maybe just as a follow-up before we dig into more of the growth drivers. But just on the revenue model, is it based on the number of engineers that are using it? And is it a -- I know the revenue model is recurring. But how does the pricing maybe work just I think it would be helpful to understand the revenue model?

So the escalations are coming into the pricing like every year once we have escalation starting as of April 1. So as agreements renew for the annual cycle, the escalations find itself into the contract.

And the nature of the agreements are enterprise agreements on the 1 hand for the larger accounts. And we have traditionally had annual renewals we have, over the past several years, introduced a contract form we call E365, where, although we're paid annually in advance based on an estimate, the actual charging is based on daily consumption of our applications. For us, the good thing about the E365 program is that what we're paid in that case, bundles in our cost of supplying our own virtual experts. We have 1,000 of our 4,700 colleagues whom are civil and structural and geotechnical engineers in their own right, a success force that help each quarter with the E365 accounts for blueprints for new digital workflows. So they use more specialized products and help close that gap also in our TAM. And then we also have practitioner subscriptions for the SMB businesses who spend under $100,000 a year with us. And generally, we have not gone through a subscription transition. We have been subscription-oriented is our preference as a private company all along.

Great. And then you mentioned on the macro side. So it's -- let's just strip that band-aid right on off. I think there's a lot of investor consternation, the markets have been volatile. Just how should we think about maybe again, your visibility with what's going on in the macro environment. And if we were to experience a slowdown, how would that manifest in maybe some of the KPIs of the company reports.

Well, economic worries in general couldn't be good for anyone's business, but the public works and utilities mainstay of our business being publicly funded is subject to different cyclicality, which in the past has been somewhat countercyclical, as I said. I do worry that, that can't continue indefinitely, the wherewithal of government spending. On the other hand, infrastructure investment, the reason it's the best stimulus spending is it's very worthwhile investments and necessary ones, especially with the energy transition and energy security imperatives at the present. So the cyclically vulnerable portions of our business are relatively small and commercial and facilities buildings is perhaps 10% of our business, some of that on the OpEx side, which isn't so cyclically sensitive. But I expect there will be softness to come in that sector of infrastructure, commercial and facilities, especially as there's new patterns of usage of buildings after the pandemic. And on the industrial side, and that may be another 20% of our business, but half of that, again, is on the OpEx side, which isn't vulnerable to the same cycles. It's the cyclicality related to interest rates and economic macro conditions would be about new project starts, the CapEx aspect. On the industrial side, there would be that concern. On the other hand, for the 10% or so of our business that is the CapEx aspect of industrial. However, we are in the beginnings of the impetus for industrial capital projects to help with energy security and energy transition, LNG, import and export and so forth are things obviously of importance here that are -- it seems to be likely to be pervasive for several years and are probably going to be an offset there. So all considered has among software companies and enterprises at large. I feel relatively resilient at this point in time, certainly more so than ever in our own history. Now I do bring to your attention that we have concerns related to macro events, geopolitical issues, not even so much in Russia, that's only 1% of our business, but China, kind of an echo from Russia and trade tensions between the U.S. and China are a worry for us. China is only 4% of our business at the moment, but it's a much larger portion of our potential business because 30% of infrastructure spending takes place in China. China does have an R&D approach to infrastructure. Infrastructure is the national strategy in China, everything we develop is used first and fastest in China. And there's a robust demand environment there that we would hope to be able to address, but it's under some threat of discouragement in terms of doing business in China at the moment. So that worries me a bit more. It's not quite cyclical, it's geopolitical, however, but I think it's must be acknowledged.

Understood, and I appreciate that. I want to maybe pull on threads related to more just where Bentley sits in like the landscape overall with some of the other software companies that may be in your category. Just for the audience, how should we think about who is Bentley competing against? What are the alternatives? And why does the company win and what it does?

Well, we are much more comprehensive in especially horizontal infrastructure and projects require all disciplines to work together and they are often are many aspects involved. No other company has nearly the modeling and simulation virtuosity that would suit the whole project as we do. Our principal competitor is Autodesk. And of course, we compete only with a portion of what Autodesk does as they are in many other areas than infrastructure, and they would say construction. So their particular focus on a life cycle stage and we say infrastructure across the whole life cycle, including the digital twin opportunity. But essentially, we win, we deserve to win because of our technical merit, which has to do with having focused on a platform of approach, so that you can have a common platform across all of civil and structural and geotechnical and modeling in -- 3D and 4D modeling above the ground and below the ground and throughout the project. So the more demanding the project, the more natural it would be to choose our solutions. And the reason -- and we just have a long attention span, if you like, the nature of infrastructure projects are multiple years and of course, assets, multiple generations, you could open today any project done in our software over our 38-year history and go on to do the retrofits and refits. And of course, the -- so the software maintains that continuity. It's been replaced many times from underneath along the way to stay current and ahead of the curve in terms of software architecture. But it probably takes and attentions fan corresponding to a family and technical brothers and so forth to have applied them for that to be the case.

So you gave me a little bit of a lab because it was on my list of questions to ask the company is unique from a cultural standpoint in that is started by you and your brothers. And so I'd love to maybe understand how the way it's been run even though you've gone public now, but how that's allowed the company to make long-term oriented decisions and maybe how just the ownership structure impacts the decision making and maybe your long view on investing?

Well, our philosophy at Bentley Systems won't change and hasn't changed becoming a public company, which is to make all decisions to benefit the future. And -- perhaps it's a bit unusual among public companies where we are a controlled entity. The 5 brothers constitute now 4 of us, the majority of our Board of Directors and 60% of the ownership and more of the economics of the stock of the company. So we're ingrained to think about the long term. Now being a public company was sort of ordained when we began from the start of broad-based stock option program and our colleagues had earned 1/3 of the ownership of the company as of a few years ago and to be a public company, the reason for it, because otherwise, we generate cash and haven't needed further investment is for sake of liquidity upon retirement of those colleagues. But being a public company has had 2 further benefits for our shareholders, including ourselves. And 1 of them is that we hold ourselves to getting better at things that we relatively neglected we were better at engineering than we were at marketing. And as a public company, we had a bit of a higher profile and that doesn't itself help us do better marketing, but helps -- it causes us to hold ourselves to a higher standard of improving our execution in that regard. So we've focused in particular on smaller accounts, engineers and smaller accounts need the same products as engineers and larger accounts, and we had tended to focus on the larger organizations now focusing on SMB for us, accounts under $100,000. That has turned into about 40% of our new business, and we see much potential there. There are as many engineers in smaller firms as in larger firms. So we are working harder at that. Our approach there is also direct go-to-market. 92% of our business is from direct and with the smaller firms, we'll focus on e-commerce. We had no e-commerce until going public in 2020. But the other respect in which being public has benefited us, and we think our shareholders is access to capital markets. So we have made some platform acquisitions for over $1 billion last year, our acquisition of Seequent, a company just like ours with a history like ours, which was globally comprehensive, except it did everything for 3D and 4D modeling below the ground. So the geotechnical foundations mining where 3D modeling is of the essence and where all the risks exist in terms of environmental. So it brings us into environmental digital twins in a big way. And then we have earlier this year, done a second platform acquisition with Power Line Systems, the leader in the world in energy transmission structural modeling including here in the U.K., and that is a tremendous opportunity because electric transmission is the bottleneck to the renewables projects connecting up the grid in a different way and a grid digital twin and bringing in where we already were strong in substations that connect to the distribution network and the communication towers, where 5G devices can be in shared use for electrical structures as well. So those are 2 -- that was a $600 million acquisition, and we wouldn't have been able to do either of those except for the financing capability that being public has brought us. And that kind of completes, if you like, the competitive moat around infrastructure, engineering in the world. Those together are the subjects of the ES or I would say, ESDG imperatives in the world that the infrastructure engineers focus on and which we can be complete in both mobility with road, rail, metro and bridge and environmental, including mining and renewables and now grid digital twins. It feels like we had it all together for that purpose now.

Great. I think just we have a couple of minutes left. So I do want to talk about maybe some of the near-term results. You guys have maintained double-digit ARR growth for the last several quarters. How should we think about just the durability of that double-digit growth? And what's been driving it?

Well, our -- we have increased our growth rate since being public. However, that also has correspond to pandemic, if you see, I think going digital has been more important for the reasons I mentioned earlier to the infrastructure engineering professions. And we -- and I believe that to be permanent now that going digital is ingrained every engineering organization wants to do more work than the people they have available enables them. They face retirements. It's not possible to recruit new people and so forth. So that will help catch up on that TAM as we earlier said, in our own execution, the E365 program to increase the accretion within our existing accounts, that the bulk of infrastructure engineering is done in our existing accounts, adding new consumption, more specialized products. Those are the digital workflows I mentioned. We didn't have that function, that success function until being a public company or coincides with that, and then focusing on the SMB markets. Those are initiatives that are about execution on our part, where we've perhaps learned from other public companies, by the way, and brought in some talent. We -- I think we have a good executive team, but we couldn't have created experience in public companies without now recruiting some new executives. And then there is this digital twin opportunity that ultimately will be more significant even. But Werner, maybe you would like to comment on the shorter-term aspect of ARR.

Yes. So maybe to put numbers to it, like so we exited Q1 at $960 million of ARR. 90% of our revenue is recurring. We expect, on average, 8% to 9% growth in our existing business, existing book of business, 2% to 3% from new names, new logos, and then we have an average of 1.5% -- 1% to 1.5% of programmatic acquisitions that we add every year to our portfolio they are individual, not significant. And even like consolidated, it's 1.5%. That gives us between 11.5% to 13.5% of expected ARR growth for the current year. And then there's incrementally the onboarding of PLS, which gives us like 2.5% for this year, approximately.

No, I might say that we provide a financial outlook for the year as a whole and not quarterly. And we'll update that when we -- when there is sufficient reason to do so, but we won't do that just for exchange rate changes and inflation is not included in or changes in inflation are not included in our financial outlook for this year.

Understood. Well, gentlemen, we're out of time. Thank you so much for joining us. I appreciate it, and it's great to get to know Bentley better.

Thank you, and thanks for everyone for their interest.

Thank you.