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

Good morning. Thank you, everyone, for joining us at the NASDAQ conference. My name is [ Elizabeth Porter ]. I'm an Equity Analyst on the Morgan Stanley U.S. Software Equity Research team. I am very pleased to have with us today, Bentley's CEO, Nicholas Cumins. And we are taking audience Q&A, and then mic will be going around after. For important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/research disclosures. With that Nicholas, thank you so much for joining us today.

Thank you for having me.

Of course. So just to start it off, would be great for you to give an introduction to Bentley for those that may not be familiar with the company. Just the product of -- the portfolio of products that you guys have and the end customers you serve.

All right. Okay. So good morning, everyone. Bentley, we are the infrastructure engineering software company. We deliver innovative software to advance infrastructure to sustain both the economy and the environment in order to improve the quality of life. Now those are big words. I'm going to unpack that for you a bit. So first of all, what is infrastructure. Infrastructure is what makes other things possible. Infrastructure is what you take for granted, and you typically only notice it when it's not working or when it's under attack. So roads, bridges, tunnels, rail or the infrastructure of moving people and goods. The water infrastructure, the water network, and electric utilities is the infrastructure of our modern way of life. The 5G network, the broadband access, that's the infrastructure of the digital economy. Now we help infrastructure organizations in individual engineering practitioners, better design, build and operate better infrastructure. So we actually serve both the people who design and build, typically called the contractors and the people who own and/or operate the infrastructure. We have about 90% of the top 250 engineering firms using Bentley software. And we have about 2/3 of the top 500 infrastructure owners, also using our software. So when we say we are the infrastructure engineering software company, we say that because we are totally dedicated to infrastructure engineering. And we have the broadest, deepest portfolio of infrastructure engineering software out there. We cover pretty much all the engineering disciplines, like civil engineering, structural engineering, geotechnical engineering, hydrolic -- hydrology engineering, you name it. We cover all the stages of the infrastructure life cycle. We have software for the design stage, software for the construction, software for the operations. We serve different types of assets -- infrastructure assets, roads and bridges and electric utilities, et cetera. In fact, where we're the strongest, we are typically #1 when it comes to transportation. So infrastructure like roads and bridges and tunnels, we will be #1. Electric utilities, transmission and distribution, in particular. Water utilities, the water network, water -- potable water and wastewater network and telecommunications. And I will say most of the mega projects around the world for infrastructure, whether it's in China or India or Europe or the U.S. will use Bentley's software.

Great. And then when we think about just the challenges that are in the infrastructure market, kind of what is Bentley solving? And what is it so unique about infrastructure that has you guys in the market?

So taking a step back, what's unique about infrastructure itself. I think that is a very important context. So if you compare it with product engineering, for example, for any infrastructure projects, you have a very wide variety of engineering disciplines involved. So think about a road project that cutting across a city, you will have, of course, civil engineers, you have structural engineers, geotechnical engineers, you will have traffic engineers. Of course, you have the city planners themselves. So there's a very wide variety of engineering disciplines that are involved. Second is the infrastructure projects, especially the mega projects are in themselves very complex supply chains. The mega projects can be sometimes 5 levels deep in terms of organization, lots of different companies that are coming together to create those temporary organization for the duration of the infrastructure project. So 5 levels deep. You can imagine the difficulties and making sure that everybody is aligned in terms of timelines and what's expected in terms of quality, et cetera. But we're talking about organizations that are thousands of people put together in 12 or 18 months. And the kind of operational challenges that you will face in those mega projects are similar to what you'll see in very fast-growing startups or scale-ups, right? And then the life cycle in the infrastructure asset itself is very long. So it takes 1 to 4 years to plan. It will take up to 10 years depending on the products to design and then to build infrastructure asset. And once it's built, then it will last, hopefully, for 50, 70, 100 years, if not more. It's important to note, by the way, that about 80% of the TCO of the infrastructure is during the operations phase. This very, very long period after it's been constructed. So now if you think of infrastructure, you will typically think of construction crews, people wearing hard hats and protective gears. They have shovels. They're ready to pour concrete. But infrastructure is more and more about data, right? There is a growing need to make sure that data is aligned across all of these engineering disciplines. There's a growing need to make sure that the data is fully shared across the full supply chain of that mega project, that everybody is on a single view of truth, right? And there is a growing need to be able to mobilize the data from 1 stage of the infrastructure life cycle to the next from design to construction, where you enrich with even more data to operations when we enrich with even more data. But the truth is that the infrastructure sector is still catching up when it comes to digitalization. It is not as advanced as it could. And of course, for the longer period, I mean, our company was created in 1984. So of course, since 1984, our software has been used to help individual engineering practitioners but software has been used and data has been created for discrete tasks. The problem is that most of the data that has been created is not leverage. So I'm sure you all know these stats, right, that about -- when you ask CIOs across industries, they will say that about 70% of the data that the organizations create is never used. It becomes a dark data. It's generated, but it's never used. They only use 30%. It's even worse in infrastructure sector. It's estimated that 95% of the data that is being created is never used again, right? It's only created for that particular discrete task for that particular design of that piece of the bridge and then it's -- and then that's it, it grows still. So why is that? Why is that? The infrastructure sector is very file-based, and it's not a surprise because the file at the end of the day is the main deliverable of a design firm or an architecture firm or an engine firm, right? Provide a file at the end, and it has their step, it engages their liability. They stand behind the design there. So it's all very file-based, but the problem is that the data remains in those files and those files exist in very different file formats depending on which software you've been using from what vendor, it's locked into systems, and it grows dark, it grows still. That's why 95% of the data is just not used. So thinking about it, it means that only 5% of the data is being analyzed, only 5% is used to derive insights, which also means that the decision makers in the infrastructure sector are potentially under informed when they're making design decision, construction decisions, operations decisions, right? All of that is context to explain the opportunity for Bentley. And I will say to also explain the opportunity for technology, which is getting quite a bit of traction right now, which is the digital twin technology. The digital twin technology enables to reach into the data that is in those files, surface it, align it with some ski mask so that we can understand it, align it across engineering disciplines, making it available for engineering workflows going forward, so it can be reused from 1 project to another so that overall, the infrastructure organizations are becoming more productive.

Great. Yes. When you think about a construction site, the amount of people that I just see walking around with pens and paper still and then not really leveraging the data as a really big opportunity and just secular tailwind to use more data systematically.

That's right.

When we think about some of the headwinds and tailwinds that the industry is facing, the secular tailwinds and using more data, even like the Infrastructure Investment Act is something that many people look to as an opportunity. But on the headwind side, we are worried about macro and kind of a slowing economy. So can you just run us through what are some of the headwinds and tailwinds that the infrastructure sector is experiencing right now?

It's a lot of tailwinds, actually. So it is a great time to be in infrastructure. It's a great time to be in infrastructure sector, and it's a great time also to provide infrastructure engineering software. And why am I saying this is because the tailwinds are strong and they're getting stronger. So you mentioned it. The first 1 is massive public investments in infrastructure. And those investments are needed in order to support the economic growth, create jobs, of course, but infrastructure itself plays a big role in supporting the economy, enabling the economy, enabling the easy transfer of goods and people, et cetera. Infrastructure investments are needed to secure our energy and this is, of course, very, very hot topic in Europe, in particular. Infrastructure investments are needed in order to address our decarbonization goals. So massive investments. In the U.S., it's the IIJA, the Infrastructure Investment Jobs Act, of course. It is slowly making its way into the different infrastructure organizations. It's slowly percolating down. It's slow and phases is on slow, meaning it's a growing tailwind. There's more that it's coming. I think in this fiscal year about the capital spending of the states have grown by about 15%, right? So that's a tailwind that is there and that is coming. We cannot see a direct correlation right now between the investments in infrastructure and increased use of engineering software. What we can see, however, is that the infrastructure organization are as busy as ever in the U.S. There's a lot of activities going on. In a recent report, the infrastructure organization, the engineering firms, in particular, in the U.S. are saying that the backlog right now is 50% more than their ideal backlog, which means there's more demand than they have capacity, right? So massive investment in the U.S. , slow to procure it down. Massive investments in Europe, of course. We had the next-generation EU plan at the end of -- really tail end of 2020. There's a repower EU plan that came in May 2022, of course, in the context of what's going on in Ukraine and in order to secure our energy. There is investment plan similarly in India. This one is actually directly impacting projects right now and driving more usage of our software. So lots of investment plans. Now what is interesting is in a study from Goldman Sachs, a recent study, they're basically saying that in order for all of us, as the world to meet our 2030 goals in terms of zero carbon goals or clean water or all the infrastructure goals, we will have to invest something like $6 trillion a year in infrastructure. And right now, we're only investing $3.2 trillion, right? So even though those investments are massive, it is still not enough in order to achieve our goals when it comes to decarbonization, when it comes to clean water. So there's even more that is potentially coming. So the second tailwind, you touched on it as well, is digitalization. There's a net acceleration of digitalization or digital transformation of the infrastructure sector. For sure, the pandemic help convince more and more organizations to adopt cloud services. So we saw a net acceleration of the adoption of cloud services. We start with our own solutions. What's interesting, of course, is the uptake of digital twin as technology. We may want to expand on that later. What's also interesting, when we talk about digitalization, is how the infrastructure organizations themselves are evolving their business model to be more and more digital. So now I'm referring about the engineering firms. The engineering firms are offering more and more digital services to the owners operators as opposed to just once the infrastructure asset is delivering then moving on to the next project. They're saying, no. We've created this digital twin of the infrastructure asset, now we can offer you services to keep that digital twin evergreen. And to help you detect if there's any potential issue with infrastructure to immediately trigger some remediation work is needed. In a recent analysis from AC Advisors, there was a survey actually of CEOs of large AC firms. They're saying that in the next generation of their firm, about 50% of the value of those firms will come from digital services. So it speaks a lot to the digital transformation of those things themselves. So now there are some tailwinds -- sorry, there are some headwinds, of course. The first one is the overall economic conditions. I don't have to elaborate too much on that with inflation, rising prices of labor, of material, the destruction of the supply chain, et cetera. We do have a natural hedge as a company because we are very diversified, in terms of assets that we cover, stages of the infrastructure life cycle, et cetera. Another headwind is culture globalism and that is specifically, I will say, in China. In China, there is a -- there's more and more incentives to license Chinese software. And the data residency rules are even stricter there than in other parts of the world. And the companies we typically sell to the state-owned enterprises need quite a bit of convincing to use cloud services. Typically, they want to run the software themselves on their own premises. So the way we're tackling that is we're creating joint ventures in China, right, with companies who are then Chinese and they offer software with Chinese IP that is then also leveraging Bentley's software. That's how we're tackling that. And then the third headwinds, sorry, will be this growing gap between the demand and the capacity, the ability for engineering firms to be able to deliver on that demand. And that gap is growing. So in the U.S., about half of the engineering firms are saying no to new projects because they don't have enough people. Wow. Now in a sense, this is actually an opportunity for Bentley, right? Because we can help bridge that gap between this very high demand and the available capacity at hand. And in fact, we believe the only way that, that gap can be closed is not by throwing more people at it. They just don't exist. They're not enough infrastructure engineers. It's by making the existing infrastructure engineers more efficient, more effective. And there's no better way to do that than software.

Yes, totally. We already hit a bit on kind of the U.S., the Infrastructure Investment Act, kind of what you're seeing in Europe. But I want to touch on Asia and like how important is Asia for Bentley?

Asia is a fantastic growth opportunity for Bentley. So just looking at the macro picture, right? By 2030, about the forecast for construction spending is around $15 trillion. And almost half of that will be in Asia Pacific, right? There is interesting circumstantial evidence. We had our annual conference a couple of weeks ago, it's called a Year in Infrastructure. And then we host what we call Going Digital Awards, where we have independent jury panels who gave awards of very innovative use of software for awesome infrastructure projects around the world. And it's quite interesting to track year-over-year, what's going on, what's the composition of the people who submit, what's the composition of the people who actually are finalists and win. So more than half of the finalists this year were from Asia Pacific. And exactly half of the winners were from Asia Pacific. What's also interesting is when you look at those projects, you can see that in Asia Pacific, they are absolutely leapfrogging. They're jumping ahead. They're going straight to where the infrastructure sector is going overall, which is the adoption of digital twins, right? So it's just a massive market and very much at the cutting edge when it comes to the usage of software. Now of course, within Asia Pacific, China is still a formidable opportunity. About 30% of the world's infrastructure spend is in China. In China, in the next 5 years, those are amazing numbers. In the next 5 years, they're planning at 25,000 kilometers of new roads, 3,000 kilometers of new rail, 30 new airports, just in the next 5 years, right? So China is -- it's gigantic. Now of course, I mentioned the counter globalism that we see here in China. The market -- the economy overall is quite soft because of all these lockdowns, but we really believe in the long-term opportunity in China. This is an important area of growth for us. We've been there for 20 years. We have hundreds of people there so we keep pushing to help support infrastructure over there. And then 1 last 1 I'd like to mention is India because India is 1 if not the fastest-growing country that we have. And there is an interesting turn of event in India. There's a combination of, on 1 hand, massive infrastructure spend. I mentioned that earlier. So $1 trillion was decided back in August 2021. And we really see it happening. We see all the money that is flowing into projects, then into infrastructure organization and therefore, more usage of our software. We can hear. We can really see the direct connection. And at the same time, because of this shortage of talent I mentioned, there's a lot of global engineering firms that move their work into India to tap into the large local engineering talent there in order to support infrastructure projects that are happening around the world, right? The combination of the 2 is like a perfect storm for India. That's why India is growing quite fast every operating resource call -- earnings call. We talk about India as with noticeable growth.

Yes. Great. I'll ask some other question, and then we'll turn it over for audience Q&A, and then mic will go around. So before we do that, you guys have products that are serving kind of multiple different pieces, whether it's the design side, the build side, but then also the managing side. And so are those different personas that you're selling into? And how does the overall go-to-market strategy work at Bentley?

There are very different types of organization, whether we talk about design, construction on the 1 hand and then people who own and operates the infrastructure. So in terms of growth opportunities, maybe we bucket it in 2. So we have enterprise and SMB. So within enterprise, I mentioned that we have 90% of the top 250 engineering firms. Well, there's still 10% to go, of course. But within those engineering firms, there is always more opportunity to get to more users. There is always more opportunity to get to more projects. There's also more opportunities to go and sell more advanced solution to existing users. So as we keep developing our portfolio, we are able to reach to more users. We are able to offer more advanced solutions to existing users. A couple of examples. In 2021, we made our largest acquisition to date called Seequent. And Seequent is, by far, the leader when it comes to geoscience, so geo modeling and the understanding of the subsurface. And this allowed us to go and sell software to geo professionals within those engineering firms, right? And then earlier this year, we made a much small acquisition called ADINA, which is advanced structural analysis, which allowed us to sell advanced structural analysis software to structural engineers, right? So more growth with new users, geo professionals, more growth with existing users, like structural engineers by giving them more advanced capabilities. So that's on design. Construction is in, I would say, net growth opportunity for Bentley. We've been in construction in a sense that some of the firms we're serving do both design and construction. We have project delivery software, but going into construction workflow that is still quite new for Bentley. We made also some acquisitions there, and this is all like a net new growth opportunity for us construction. And in operations, I said we have 2/3 of the top 500 infrastructure owners operators. There's another 1/3 to go, of course, and then within that 2/3, our focus so far has been primarily on still infrastructure engineers working for large transportation agencies, et cetera. But there is so much more opportunity by going after all sorts of other users, stakeholders, think of city planners or citizens or who are in great need to get access to data about infrastructure assets, which we can now provide. So that's an enterprise. One last thing in enterprise. We have a new commercial model for the past few years called Enterprise 365. It is a consumption-based commercial model. There is a lot of growth for us to convert our accounts to that consumption-based commercial model. There's a lot of growth as well once they're in the commercial model by driving more usage. So we're making a real science of success management within Bentley. We have about 600 people who are dedicated to support our Enterprise 365 accounts to become successful using our software that, of course, it drives more usage of our software and therefore, more growth. So that's enterprise. SMB is also a big growth opportunity for us because our focus has been, for the most part, for enterprise accounts. And SMB is about 1/3 of our revenue. Yet when you look at the total addressable market, SMB is half, if not more than half, right? So there's a lot of growth opportunity there. We always had SMB companies who were part of those mega projects that were using the same software as the big enterprises that were already using our software. Of course, we already have the synergies. But now for the past 2 years, in particular, we've made a concerted effort to go after more and more SMB. We're using inside sales. We're using an online store in order to drive growth there and with great traction. Last quarter, we talked about 600 new logos and 3% part of our ARR growth which was exactly the same in the previous quarter. So it's a muscle that we've developed that is now quite reliable.

Great. Do we have any questions from the audience? One back there.

Just keen to understand from a competitive perspective, how the business compares with the software side of Hexagon and other similar providers, they seem to have a similar software model in terms of how you've described. So I just want to understand the differences there, please?

Yes. So our -- we do overlap for some industries, especially when it comes to energy, I would say, energy production process. We would overlap with them. But you need to understand that our remedy is much broader, of course. We cover way more infrastructure, what we call infrastructure sectors. Again, we are the strongest when it comes to transportation, when it comes to electric transmission dismission, the electric grid when it comes to water utilities, the water network, when it comes to the telecommunications network. Also understand that our focus is on every phase of the infrastructure life cycle. It's not just design, it's design and construction and operations. And within those organizations, we will cover pretty much all the engineering disciplines you can think of, right? So our focus is on infrastructure and so we're extremely deep from that standpoint and quite brought as well in covering all of these enduring disciplines.

Great. Any other questions? Great. One that often gets asked is just -- we hear a lot about the metaverse. Is this kind of hype or is it reality? And how does kind of Bentley innovate around that opportunity?

Yes. Okay. We have 2 minutes. This is a broad question, but I'll be crisp. So the metaverse, we cannot really ignore it. There's a ton of investment going into the metaverse across the software industry overall, of course, right? So we can see the outlines of it. What I will say is the digital twins are the fundamental building block of the metaverse. What the metaverse will add on top of the digital tool will be this very immersive experience, right? So if you're interested, I invite you to just Google, you go on YouTube and you Google ITER and Bentley. And you will see, I think, a really good example of what could be the infrastructure metaverse. It's -- ITER is this fusion plant, which is being built in the South of France. And what we've done is we've plugged a digital twin into a real engine. So you can have a very immersive experience of ITER that fusion plant as it being built. And you might say, well, that's great technology, but what value does it provide? It is actually used to plan the construction. So people at ITER are doing full, what we call digital rehearsals of the assembly of the most important part of the fusion reactor, which is the tokamak. They're doing full digital rehearsal to optimize the assembly plan before any work gets done, right? So when the work does get done, it is as efficient, as effective and as risk-free as possible.

Great. Super interesting. Well, there's a lot of kind of interesting things to be looking out for, whether it's just the need for infrastructure kind of more broadly, kind of this gap between demand and be able to deliver on that and just the capacity you have. Just distribution of kind of data and being able to use that only 95% that goes dark. So thank you so much for sharing your insights with us today, and we look forward to watching the future.

My pleasure. Thank you, Elizabeth. Thank you for seeing me.