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

It feels like the Olympics, which goes on for like 2 weeks and last day is when you have the most prestigious thing, like 100-meter dash or a Marathon, whatever. It feels like this could be -- this could be the home stretch. Well, thank you so much to the Bentley management team, Bentley is a company that I think we were talking about it. I first got to know in 2002, 2003 time frame, and it's been great to watch the evolution of the company over the past several years. Maybe a quick comment since you went public in the last 2 years or so, in the middle of the pandemic, right? If you can just give us a brief recap of the Bentley story. Everybody knows at a high level what you guys do. But if you wouldn't mind giving us the salient investment points, first of all, introductions, round of introduction.

Werner Andre, I'm the CFO.

I'm David Hollister. I'm the Chief Investment Officer for Bentley.

And the former CFO.

Former CFO.

The tactic is deep financial questions, right?

So I'm a younger and I think better looking version of Greg, less articulate, but we'll do our best, Greg sends his regrets that he could make it.

Absolutely. So David, it will be helpful if you could just give us an overview of the company and the long-term vision if Greg were here, how do you describe what he wants Bentley to be in the next 4 to 5 years. If you had to come back to the Goldman conference in 2027, not revenue projections or anything, but what does Bentley look like? What are the things you're going to be doing that are exciting and challenging?

Sure. Sure. So just by way of overview, yes, we're now coming up actually next week on our 2-year anniversary of the IPO.

That was pretty close.

So we're relative newbie in terms of familiarity with the investment community, but we've been around for 38 years, compounding pretty predictably in terms of our solution portfolio, our geographic expansion, our revenue scale, our profitability. And we're certainly well known by the engineering -- infrastructure engineering community for decades. And when we say infrastructure, we mean things that -- things that get built as opposed to things that get produced or made. Large projects, roads, bridges, water systems, electrical grids, soccer stadiums and the like. And we serve the engineers that design, model and simulate and construct and then operate these infrastructure assets. And notably, those engineers are the civil and structural and geotechnical engineers of the world. We think our total addressable market is about $30 billion. We think we measure that pretty conservatively. The promise of going digital and the digital twin opportunity, which I'm sure we're going to talk more about it potentially compounds that by an order of magnitude. So for now, we're focusing on getting our share and more of the $30 billion TAM, which we break out into end segments starting with commercial buildings and facilities, which is for us, our smallest segment. Next would be the industrial segment, which is also for us relatively small. Resources segment is bigger for us. Resources being mining and renewables and the like. But our wheelhouse, and that's about 1/4 of our current revenue base, our wheelhouse is public works and utilities, and that's about 2/3 of our business. And by public works and utilities, these are large and largely horizontal infrastructure projects, roads and bridges, rail and transit systems, energy grids and so forth. We're sort of at an interesting and exciting time. There seems to be a growing global consensus that infrastructure underpins and is critical to both the economy and the environment, which are both very topical right now. And there's increasing funding in support of that and political unity in support of that as well. The challenge is that there's a fixed number of engineers to get these projects done. And we don't see a tsunami of that changing anytime soon. So the challenge here for us is to make those engineers more digital and more efficient. And that's where we fit and that's the opportunity we pursue. So in terms of the long-term version of that, it's really the evolution of digital twins. And that's taking and extending the value of traditional design and analysis into and through project delivery and construction, and into the as-built infrastructure asset and operating it in an ever-greening fashion. And our iTwin digital twin platform, we think, leads the way for that. We're in a good situation with that. I heard it described in our Board meeting last week that we were, in terms of the digital twin opportunity, in the first inning. And in fact, the second batter of the first inning. But the stands were full and the crowd was cheering.

Who is better?

Well, we think our -- introducing the iTwin platform was a pretty good effectively first batter. So, but anyway, we think we're well positioned in terms of our comprehensive solution set, the iTwin platform, the flywheel of relationships and reputation that we have to take advantage of that for a long time.

Got it. Got it. So moving over to you, Werner. You had -- in your earnings conference call, you talked about some -- a lot of metrics, one of which caught our attention, or I actually feel that caught our attention business activity, new business activity in Southern Europe and Central Europe, you saw some improvement. And then you exited Russia and you saw some headwinds in China. Can you just talk about the geographic mix, unpack those items a little bit, and then I can follow-up with your comments on backlog and...

So, we had some volatility in the first 2 quarters. I don't think that mic works -- does it? Okay. So the exit out of Russia impacted our ARR growth rate by 1% during Q1 and Q2, but that is behind us. We saw some increased cancellations, if you will, in China in the first quarter, which we believe was a response in China to the Russian sanctions, but Q2 in China actually was growing nicely again. So the team locally in China is pretty enthusiastic about the opportunity. And China also recently announced a new infrastructure program that they plan to put for the channel actually pretty quickly. So, we're excited about that. And hopefully, we see already some traction later this year going into next year. With regards to Europe, yes, we saw a deceleration as you said in Q1 across Europe. But that being said, last year, so year-over-year last year was pretty high. And there was still a good growth in Europe, but it was a little bit less than the Q last year. In the second quarter, the deceleration was limited to Northern Europe, if you will, which for us is predominantly the U.K. And the, U.K., as we all know, they have the perfect storm like politically, economically. And there is some disruption, if you will, but we believe that when the dust settles, we believe like there's a strong pipeline, and we believe our offerings are very much aligned with their priorities locally in going digital in infrastructure.

Central Europe and Southern Europe.

Central and Southern Europe is back to growth acceleration, if you will, so it did pretty well.

Yes. Sure. So since you gave guidance, you've not seen any changes.

So as a matter of policy, like we don't talk about the current quarter, if you will, before we talk about our earnings in November.

Got it. Okay. You also talked about backlog, backlog growth in civil engineering, let's talk about that and pipeline strength. What are we to make of that, given the context of the macroeconomic environment?

That is for us like one of the most exciting topics, I think, the engineering firms across are as busy as they have ever been. During our last call, we had some presentations on like their backlog development over time and their backlogs are at historically high. I think we said like beyond ideal there.

What are their backlogs beyond ideal?

Well, it -- again, it comes back to the fact that there's a fixed sum number of infrastructure engineers.

We need robots.

We need them to digital, work smarter with software. Like they're pretty bullish about the industry. They're pretty bullish about their business. And I feel like they are highly motivated to invest into going digital. So that the backlogs are at that high level.

So this backlog at your customers and with respect to projects that they've been...

Working on, yeah.

Okay. Got it. But these projects have not commenced yet. Obviously, there's still -- they've won these contracts, they're waiting to start working on it, but there's not enough engineers, as David said, right?

This is why we believe like the only option is to go digital and to do more with less, if you will, and to apply like the best available applications and so forth. So, I feel like that, this will be a tailwind for us foreseeably as they are going to work through these backlogs. And -- if you think about like IIJA and other infrastructure programs that we'll just add to the current backlogs and just the direction. And they need, of course, they need to run it through their processes for the projects for the backlogs, but it's not translating like immediately into revenue, but it just pushes the firms to go digital and to adopt technology.

Got it. Got it. Got it. And do you see any trends in the backlog growth? Is it U.S. or Europe, civil infrastructure, non-civil, nuclear power, nonnuclear, electric SUV. I mean, SUV meaning the battery plants that power the SUVs, not SUVs themselves. Are there any trends you're noticing?

Yes. I mean I'll just focus on electric utilities for example, because it's topical for us. It's a business for us, the Power Line Systems acquisition, which is great to talk about which I'm still very close to, it's got specific allocation from the IIJA. And it's...

Sorry, IIJA. What does it stand for?

Infrastructure Investment and Jobs Creation Act, it passed late last year.

Got it, it's $700 billion. So it's a big number.

Yes. Yes.

I just know the number. I don't know the...

Yes, there's -- we have lots of -- we're not going to go into it here, but there's lots of detail on how it gets allocated to our end markets with our solutions.

I would like, if you don't mind, for you to talk about that at some point how that breaks down into budget for software, people, if you have a view, I mean how do you benefit from that.

Yes. So, I'll just break down the Power Line Systems acquisition, which we closed in January for about $600 million plus tax benefits. But it's really timely because of the funding -- specific funding from the IIJA because there's this need for energy transition, renewables, those renewables need grids to get to the population, sustainability of these grids is in dire need of improvement. And that gets coupled with this new issue of energy security, to make sure we can support ourselves with energy as Europe is learning the hard way. And it has just created a huge backlog of the need to improve our -- we have the funding -- the funding is there. The projects are lined up. It's creating this backlog. There's a potentially even a -- call it a bottleneck at this point. And it's a good opportunity for us to help those infrastructure engineers become more efficient and attack that bottleneck.

It's -- the amount of money comes down from the Congress through like the special agencies, state, state agencies, local governments, local agencies for the contractor. So it's pretty -- so as it trickles down, it's pretty difficult to follow, it becomes less and less transparent, how much has been spent down to the contractors. We believe that -- the last that we have seen the spend from that entire program like a small fraction, maybe to date, less than 5% has been spent. And it's considerably different between the different funding programs. So the surface transportation for the DOTs, that's almost half of the programs, it's the biggest piece of the program. We expect that to be distributed the first. There are like 2 different ways to allocate, one is a formula-based allocation that's already done. And then there is a grant-based application where you go for a granting process, they have established granting processes. So it goes quicker than other funding. So we expect that piece to be distributed first. Then the water funding for the APAs has established programs, if you will, but they are a little bit lengthier than the DOTs. And then the Department of Energy for grids, the Department of Commerce for broadband, they're lagging behind.

That's a lot. So wondering what rates have to do with the cost of financing in your end market? Is that a relevant item of discussion? Do customers come back and say, well, rates are going up, I need better return on this investment? Or given the nature of the funding where it's coming from because the government is giving money -- does it matter? Does it even matter?

I think it might in maybe in like our commercial sector where it's more impacting it, but that piece is like less than 10% of our entire portfolio. Otherwise, we don't see a lot of pressure from the interest rates.

Yes. Your business mix is more favorably exposed to the end market dynamics, even in a rising rate environment. But we're just waiting for more engineers to apply for jobs.

Yes. And we track that there's many more engineers coming through there for the ranks because you can see already how many go to school? How many are going to retire?

Bentley University.

Yes. I mean the tailwind really is here that the industry is forced to go digital and to adopt application and to adopt like the most powerful applications. In terms of just exploring the rates a little more -- and the impact of economy and inflation and stagflation, things slowing down. Again, our wheelhouse is this public works and utilities, which is 2/3 of our business. And these tend to be longer-term projects, long-term commitments that have gone through multiple layers of government and regulation and support, and they're just -- they're going to be multiyear projects. And there's even a plausible explanation that, that sector of the end market is countercyclical. So it's -- we're sort of insulated to that extent, somewhat hedged to economic macros.

I mean, in a challenging economic time, the monetary policies are restrictive with the fiscal. We can offset that. And so you guys are very well exposed to it. We appreciate that. You have -- let's talk about the high exposure to public works and utilities. What makes it more resilient relative to the other end markets? You sort of answered that. Is it just the duration and the visibility that you get that continue for multiple years, right? You said the higher to pick up.

Right, right. It's -- again, it's long-term projects, countercyclical where we mentioned it's a tailwind for a long time.

So have you been -- since the company has been over 38 years. Are there other points in time when you have the fiscal stimulus. I remember quite a few times in the last several years, there was always this talk of, hey, there's going to be -- we're going to be -- I think there was a joke, we're just to nowhere. I don't mean that actually, but this was the 2008 cycle. But some of these programs ended up not really percolating down to where they needed to be having impact. How have you seen that play out in past cycles? And are you appropriately careful about not letting expectations, not that you kept conservative expectations. Is there a scope for some mild disappointment.

So we can -- yes. I would say that's probably a fair characterization of some of the fits and starts and challenges of past stimulus funding. And we wish it were even better now, but we learned from that, and we've invested in our government relation function, and we've tried to encourage that funding be tied to infrastructure projects and making them digital and smarter and evergreen. So we're trying to embed what we do into legislation. To what degree we're successful, I think we've made progress. I'm confident it could be better, though.

Got it. Werner, this is a question you're going to just knock it out of the ballpark. The model transition to E365, like E365, like Office 365, E365. Can you just give us a quick recap? It's consumption oriented, which I suppose, it's a double-edged sword when things are improving, people love consumption rather than when things are not improving. So can you just briefly recap for us the E365 consumption model. How much of that is variable versus fixed? And then I want to ask you about the transition. Maybe you can just tick it on.

So the entire E365 program is variable, if you will. So it's -- E365 is for Enterprise 365, so it's available for our enterprise accounts, which are accounts that spend more than $100,000 with us on an annual basis. We charge in that program, per application per day. So daily consumption, if you will, accounts, fund, refundable, so it's not use it or lose it. They fund the refundable deposits with us, and that deposit is based on their estimated annual utilization of the program based on the estimated consumption. And then as we go through the year, every quarter, we bill them towards that -- against that deposit based on actual consumption. The key benefit, if you will, I think it's relatively a key benefit, if you will, from the program is that it embeds virtually our enterprise success organization. This is, in the meantime, like a team of like 600 experts. They work with the accounts. They're very close to the accounts. They have like quarterly check-ins. They determine what their needs and the priorities are for our accounts. And then they would work on a plan to deliver something that we call success blueprints and success blueprints, digital workflows that we would like to see our accounts adapt to be more effective and efficient using our software so that they can increase their productivity, if you will. And E365 embeds that team into the offering. And there's consistent interactions between accounts and the team and that goes very well for us and now where we see, if you will, like the growth driver as we convert accounts on to E365. There's a premium for the services that we incorporate for the success services. And mostly, the most uplift is through the increased productivity of the accounts within the E365 program, because as they increase the productivity, they use more. And a key factor like that going digital is to use the right application. So we have like, if you will, one of our generic modeling applications is MicroStation.

That's the...

Yes. But if you get accounts to if they were going to bridge, if they were going to roll and they are like specialty applications that make them so much more productive then we would like to see them use that specialty application. They save a lot of time and then can work on other projects. And the return for us is like the more specialty, the more expensive the application is, so it's a win-win situation on both sides.

I'm wondering does E365 give you equal access to all applications under the portfolio, and if it does how do you recognize the revenue, is it based on number of hours? Or does a certain application get better metering than the other?

So it's payer application per day, and then we look for the entire quarter and say how much was utilized. And then this is the bill on the quarterly basis, then we bill against that deposit. Pure consumption. Pricing per application is based on the price based on the value application.

Application pricing as well. But does it not disincentivize the customer to ramp up. You said, what do they say, I'm just going to stay in this module and try to not ramp up. How do you get people to use more of something that they know they're consciously being billed for?

So I think it goes back to what we talked like at the very beginning. There is no other choice. There are big backlogs. They need to work for the backlog. They need to be as efficient as they possibly can be. And it's in everybody's interest that they use the best tool for the purpose.

And when -- how often do these contracts as opposed to we had Datadog yesterday, they said, people do it for 12 months and they come back after 6 months and say, I finished using all my credit suite.

So it's not a -- there are no credits. There is no use it or lose it. They use their applications as they see fit based on their purpose and then they get a bill for the quarter. They could use more. They could use less. This is -- this creates some volatility, but based on the tailwind, it's just like consistently more usage. As we went through the pandemic, if you will, we did see like with EPCs that usage dipped, and this was like early in the program where we also continue to learn how we want to commercialize it. And our reaction at that point was to introduce like ceilings. So floors and ceilings. So the ceiling is set at the way that it's still like incentivized more consumption and that we push the program through and encourage more consumption, but it protects us from the downside and symmetrically, it's got to be around for the accounts.

So there's no issue with respect to you have a contract with a certain customer for $100,000 of E365 if people end up using it during that time period.

But there's no contract for $100,000 there's like if the account -- there's a conversation at the beginning of the year. So it's an annual agreement, if you will, there will be renewals. At the beginning, there's a conversation and we estimate what the usage will be. But then the usage is the usage. And if the prepayment deposit is not utilized, then it gets rolled over into next year or it gets refunded with the bill. We don't see the situation that has ever been refunded, it is used.

Yes. Thanks for the clarity. I asked the same question of the CFO of Datadog and I thought I was being very naive, but people after the presentation came and I said I was so ashamed to ask that question. I'm so glad you asked it. We learned something that we didn't know before.

We are doing this now for 3 to 4 years that we work with the accounts -- the enterprise accounts for that conversion. And a little bit less than half of our entire enterprise revenue is already on E365. We believe that all of our enterprise accounts would benefit from the program. So we believe they will like prospects but it will take a couple of more years to get through that.

So we should be watching hiring. If hiring picks up at these engineering contracting firms, then the consumption will start to pick up and you'll start to see that.

Yes. But we probably see limits of the hiring. So they got to just do more with -- based on technology with the people that they have already.

Yes. Okay. Got it. Got it. Back to you, David. You made some acquisitions. I think Seequent was one. You talked about Power Line Systems. What are customers saying with respect to the gaps that these acquisitions filled? And can you just give us an update since it's been a while since you made these acquisitions, to the benefit of Bentley distribution, what kind of demand -- new demand are you seeing for these acquisitions in your customer base and prospects?

Sure, sure.

So you said you're growing twice as fast as before.

Yes, yes. So Seequent was a transaction that extended the reach of our solutions to the subsurface. So until that point, our solutions were focused on the visible on what you could see above ground. Of course, every infrastructure project has to be built on a foundation, the subsurface sciences are pretty critical to being efficient in delivering a quality outcome there. So Seequent does that for us. It extends our reach to the subsurface, which is very complementary and fully new for us. So that's the benefit there. Power Line Systems, I think we've talked about with Power Line Systems, its focus was on transmission. And we already had a previous acquisition, a solution called SPIDA, which was for distribution, the last mile, if you will. And in between there, there are substations. So the 3 of those solutions together help us complete the whole picture and the life cycle of the structural energy grid. So it also was very complementary. And again, timely because of the funding and in fact, with respect to the electric utilities opportunity. I've seen a Goldman Sachs research report, in fact, that says that in order to meet the UN's sustainable development goals that's $3 trillion annually is going to be needed to be invested in energy grids and renewables and utilities over...

It's a big number. The guy who wrote that report, he's literally around here. You should definitely meet Brian Singer.

Yes. Yes. So it's pretty exciting. Yes, I think you characterized correctly that these 2, we call them platform acquisitions because they're larger than our normal acquisition cadence. And they are growing at least twice as fast as Bentley Systems otherwise grows. Demand is good. They're performing at least as well as we expected when we concluded the acquisitions. And profitability-wise, Seequent is about at the margin performance of Bentley Systems. So it's conservatism there.

I mean -- your margins are at mid-30s.

Mid-30s, yes. Yes. Power Line Systems margins are twice Bentley Systems margins, otherwise. So we're reinvesting that into more growth. We're reinvesting...

How do you find these acquisitions?

Yes, yes.

Go under the surface.

Yes, that's what we do.

You're really going under the surface to find hidden gems. So it brings us to M&A. This is the market to do it, you got on the public side, yes, but you've not done many public acquisitions. Are you rethinking that at all given that you have some tremendous values?

Yes. So I mean I think the acquisitions of Seequent, which was $1.1 billion, $1.2 billion total. So we spent a couple of billion on those 2 acquisitions. That's pretty unusual for us. Those were first -- we're -- we're thrilled with the performance. We're reinvesting there. But our normal acquisition strategy, if you realize is more what we call programmatic and we've been very prolific about it over the last 3 decades. We've done literally over 100 of these programmatic acquisitions. It's just sort of a natural heartbeat of our portfolio evolution, do we build it or do we buy it? So we're constantly looking for that. Our product teams, our sales teams, our accounts are all feeding us information, and we're -- most of those programmatic acquisitions where businesses that were not for sale. We've just developed relationship and a proposal for a compelling combination that turned into an acquisition. They're below the radar screen because they're smaller. They're not commercially mature. These things that have typically added maybe 1%, 1.5% of revenue to us -- to our revenue growth to us.

But they grow faster than Bentley in over a period of time, then they become larger and larger businesses.

Yes. So we're looking at them for their -- the value of the tech and the talent. We have the commercial machine. We can plug that into our commercial machine and realize that opportunity. But we're focused on tech and talent. And because they're not commercially mature, they're not -- they're just not hitting the radar screens for others and we're fine with that.

I wanted to -- in the few minutes that we have, I mean, I cannot believe we actually spent 34 minutes already. This has been a good discussion. I wanted to ask you more about the digital twin opportunity. I'm just fascinated by that whole evolution. I watched a video, this is Microsoft talking about how a wind turbine in the middle of the ocean in -- somewhere in the Nordic region was facing corrosion. It's just a really cool story, facing corrosion. They send people on helicopters flying all the way down, right? Now they do it using drones and they digitally simulate the whole thing. There's so many of these things are happening. What is your take on digital twins? And is there something potential -- when you come back here next year, next year and come back in 2027, are we -- how much digital twins or digital triplets or quadruplets, what are we going to talk about.

Yes, it's -- like I said, it's early but it's pretty exciting. We have in the back of the room here, a box full of what we call our infrastructure -- year-end infrastructure year book. And there are dozens of examples, case studies, if you will, of the projects that our users have undertaken, including there's a whole section on digital twins, which is...

Grab one for me as well.

Plus the more you take, the less we have to carry home. So it's also available on our website, of course. But the uses today are reality modeling and 3D surveying, we're seeing that. Construction visibility, we're seeing that. Remote inspection, again, through autonomous drones and drone flights. 4D construction modeling, interactive design reviews, remote -- IoT, condition monitoring of as-built infrastructure assets and even for example, water system leak detection is an example of a digital twin in action. But I think one that is really interesting is communication towers. And I think it's interesting for us because it's this intersection of the asset that is privately owned. It's a profit-seeking long-term return-oriented owner of the asset. So they're incented to make it evergreen and more efficient. And that's coming together with the 5G broadband opportunities. And they need to quickly adapt their communication towers and add this 5G. And you can't just send it out and bolt -- it's a structure that needs to be certified. You take weight off of this site and you put a piece of equipment on the site. It's pretty controlled and certified process. So we have this solution called our OpenTower iQ, which again, is taking advantage of autonomous drones flying around, taking inventory, georeferencing the towers, using AI and machine learning to recognize an inventory, the equipment that is on the towers, bringing that then together with the actual original design of the tower and the structural elements of the design. Once you've done that, it's monitoring its condition, monitoring vegetation encroachment, erosion and corrosion as you described. So it's real. And I think it's just interesting because the profit-seeking owners of these assets are embracing it because of its long-term value. Got it.

With that, any questions from the audience. No question? So why don't we just wrap it up with a final observation, the longer-term evolution of the business model. I mean you're very profitable right now. How should we think about the growth profile of Bentley and the margin profile of Bentley, is there more margin leverage in the business as high as it is. And how should we think about the growth algorithm, M&A plus organic?

Yes. So where we focus on top line growth, we focus on margin, and there's a clear trade-off. Within that trade-off, we hold ourselves accountable to grow adjusted EBITDA margin by 100 basis points annually and foreseeably. So we are like a nice margin, but we see that grow from where we are. The goal for this year, the target is 33% and then would be 100 basis points more annually as we go forward. And we are pretty comfortable that we can do it because our revenues are fairly predictable. 88% of our revenues is recurring and it's with long-standing accounts. And we have a history just to expand that recurring revenue base consistently year-over-year. And the best measure to track this is our ARR growth rate, our annual growth rate. And cost structure as well is very stable. We have invested everywhere. We have scaled up. FX is not a big topic for us with regards to margin, it is for revenues, but the margin as a percentage of revenue is protected with a natural hedge where lower revenues and cost in the various foreign currencies are not perfectly offsetting but offsetting each other enough to protect the margin. So as we grow, we just grow like with a little bit more focus on cost efficiency year-over-year-over-year, and we are pretty comfortable that, that margin growth commitment that we can fulfill that we -- the management team is incentivized to hit that margin goal, but the team is not incentivized to go above. So if we -- 33% is the target this year, if we bring 34% that's not necessary. The goal is like get 33% and grow as fast as you can by delivering 33%. And the growth opportunities is what we talked earlier that it's like E365, that program to get like to the engineering firms, help them go digital, consume more, it is SMB. We didn't talk a lot about SMB, but SMB and our Virtuosity growth driver, they are underrepresented, if you will, within the SMB space, and we think that that's a great opportunity for us to grow. And then the iTwin opportunity. So there are like 3 big growth drivers, if you will, that we see over the next few years to really let's say, again, it's like it's a tailwind, but we will see where it goes, but, yes.

Well done. Do you think Greg might be listening on live. There's a chance he might. Did it look like it's their first ever fireside chat as a public company, no, right? I believe this is your first time in person in the fireside chat. You guys are great. Thank you. It meant a lot. Thank you so much.