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

Right. We can go ahead and get started. Hello. My name is Clarke Jeffries. I'm the software analyst here at Piper Sandler. I'm very pleased to have Greg Bentley, Executive Chair and Co-Founder of Bentley Systems here. Thank you for making the trip to Nashville.

Thank you, Clarke. And thanks to each of you for your interest.

All right. So let's maybe start about the ethos of Bentley Systems. What is the company all about? Who are your customers? And what's the problem you're solving in the market?

Well, we are the infrastructure engineering software company. To me it means we're the quartermaster, we supply the tools for civil and structural geotechnical engineers. The problems they work on are the capacity and resilience of the world's infrastructure, in particular the horizontal networks of infrastructure and our economy and our environment depend on those networks, and we are, we think, the leader in the world in software for roads and bridges, rail and transit, water and wastewater, resources and mining and...

Maybe -- let's make sure -- Perfect. That's better. Well, congratulations on 40 years. You know in celebration of that 40th anniversary of the company. Maybe you could talk about building a 40-year business, building a $1 billion ARR business, growing double digits organically with a track record of margin expansion. What are the elements that, you know were -- the ingredients to build that kind of business?

Well, over 40 years, consistency has made a difference, and I think that's been -- our consistency, fortunately, has been -- has corresponded to the longevity of infrastructure projects. Forever the life cycle of infrastructure assets and the fact that infrastructure engineers have built their careers if they can to a set of tools that they get to use that are better and better. So, staying the course has corresponded to where we're creating opportunities.

Absolutely. It's fantastic. So we'll -- 40 years of operations and over $1 billion of ARR. I'm sure that the product set has evolved over time and expanded significantly. Maybe we can walk through the functional areas the company addresses with its products today, what that really looks like. I get the question a lot from people that are maybe not familiar with the industry. What tasks and functions does an engineer use the system for? Where are they living each day within the software?

Well, we started with the modeling in 2D and then 3D and engineers and then the -- and that's still about half of our business, that's [indiscernible]. Then the simulation of which they work out [Technical Difficulty] of the infrastructure solution. And then we added cloud services for project delivery collaboration and information management for -- as if performing over [indiscernible]. And in doing that we've come to be the most comprehensive supplier for infrastructure and engineering organizations, just cumulatively over that 40 years that they benefit by having consistent tools, where the data compounds the value across disciplines involved in projects and over the life cycle of the assets. And we are the largest supplier to most of these organizations. There are over 150 of our accounts who spend over $1 million per year with us, and another $750,000 that spend over $250,000 a year for us. So comprehensive across all of those aspects has become our differentiator.

Yes, absolutely. We've touched on this, but in this marketplace, why does a large engineering firm go with Bentley? There are options in terms of CAD and modeling. But what are the facts, infrastructure engineering that leads to sector leadership and their choice to pick you...

Well, if there -- to the extent their work is for horizontal infrastructure networks, roads and bridges, rail and transit, water and wastewater, utility grids. We have the most advanced and most comprehensive solutions that improve the quality of their work and compound their value over time.

Yes. So specific to the type of work that they're doing, and that specificity is helpful. So let's maybe talk about product vision. I think it's been interesting to look at the way that you frame the evolution of modeling software in this space. There's march of progress from 2D blueprinting software to CAD 3D software and those 3D software tools eventually are going to evolve into something that looks like a digital twin as we call it today. So wondering if you could talk about the pockets of the market that are getting close to having that adoption of digital twins, that next stage of where the software will go? Where is the most appetite?

Clarke, the advancement is from using modeling and simulation, the work of the civil structural geotechnical engineers only once when the project is delivered. And then never opening those files again to where there will be an evergreen digital twin. The relevance of the modeling and simulation continues to maintain the fitness for purpose the resilience of the infrastructure and to optimize its maintenance over time. So the digital twin opportunity is to continue to get value from the work of the engineers through cloud services and a digital twin, of course, always needs to correspond to the operating reality. So you need to resurvey with drones and imagery and so forth as we now do. So those things have all come together to make the digital twin an opportunity now. It is, however, the case that it's been adopted in pockets so far. One pocket would be Asia actually which isn't held back by traditional work processes and where they simply need to get the benefits soonest. And they've been open minded to complete digital twin approaches. Another pocket is where infrastructure is owned by private capital, such as communication tower codes now that are owned by public companies, perhaps some of the folks here have investments there. And then finally, in construction, 4D modeling of the construction processes is another pocket. But most of the digital twin opportunity beyond those pockets lies ahead still.

Yes, certainly interesting. I think in talking about this space, there's -- maybe an underappreciated. How much of the cost will be over the lifetime asset, not on the creation of the asset and so this idea of having some sort of common thread from creation of the asset to continue operations, and not having that information lost is very important. Maybe we could talk about the inverse of -- the parts that maybe we'll see big progress within 5 years or 10 years, but they're sort of hard nuts the crack in terms of getting to real evolution of the software or the adoption of digital twins. Where is the earliest parts and what's the limitation?

Well, all the benefits occur over -- all the benefits of infrastructure occur over the operating life cycle. So the digital twin advantage is for the owner operators. But it can be a slow process to evangelize those life cycle benefits, especially to public owners of infrastructure. What has accelerated -- this actually is the buzz around AI and even public owners of infrastructure have understood that they had a lot of data valuable, engineering data. The question has become how can AI help me and we have an opportunity now, thanks to AI for instant on digital twins that, for instance, can use crowd and source data even, an example, we call this asset analytics that is instant on digital twin opportunity where roadway operators can use our AI that we apply to crowd-sourced imagery from dashcams actually and our AI filters can recognize situations that require maintenance, then guardrails along roadways or when does that paint -- pavement markings need to be repainted to be reflective enough for the cars to stay in their lanes, a new federal requirements and so forth. And here, we can have digital twins the next day, thanks to AI. And demand for that because of the understanding that all of these enterprises should be taking advantage of AI. So we're breaking through to -- thanks to the acceleration that AI provides.

Reduced implementation costs, reduced sort of the opportunity costs of saying no, and see the value more immediately?

Ultimately, you do want to include all of the modeling and simulation details in the digital twin. The advantage there is for existing infrastructure, if you can monitor conditions with IoT sensors and then rerun the modeling and simulation to make sure they're still safe. And if you bring in the -- along with that ET and OT, the IT, the information about what maintenance has been done, and you can reassess what maintenance is optimally sufficient and yet keep the infrastructure safe and spend less on maintenance by virtue of the digital twin.

Yes. So we've talked about a lot of the reasons why the pay purchaser goes with your solution, the sort of incremental product opportunities that will happen long term, but 40 years in operation, a very, very high account retention. What continues to drive that double-digit growth? What's incrementally the biggest drivers of growth? I'm surprised every earnings that you're adding them as many logos as you are, and you have 10 straight quarters of 600 new logos. So what do those new customers look like to the company, why might these firms not have been a customer before?

Well, Clarke, first, the bulk of our ARR growth will come from our existing accounts. And there, we're a factor of production for their project throughput in their asset performance, but they have a bigger backlogs than ever and there's a resource capacity gap. There aren't more civil engineers and structural engineers and geotechnical engineers nor are they in schools. So going digital is the consensus priority now to meet those requirements. And the point of departure is that our accounts on average spend less than $2 per hour on our offerings, an hour for which the engineer is worth $150 and the software is what makes that hour valuable. So there's lots of upside to use more specialized products and we have those more specialized products. So that will still be the bulk of our ARR growth. But it is the case that new opportunities since going public has been with SMB smaller accounts. We are 92% direct in our revenue mix and have been. And so we focused almost exclusively on these enterprise accounts, as I mentioned earlier. But half of infrastructure engineers work in firms with 50 or fewer engineers and we were relatively neglecting those. So with our IPO for the first time, we introduced the very first e-commerce and a new group of inside sales, and of course, during the pandemic all sales were inside any way. And we found the tremendous market opportunity in the smaller firms through digital enablement, and that has grown to be 3% and now 4% of our ARR growth -- 3 and 4 points of ARR from SMB prospects, new names. It's as if when we reached them, they said, well, if you're making it that easy, I will try driving a Bentley, and it turns out that the products are the same products as the larger firms used and we're now reaching, if you like, a market twice as large.

Yes. Do you find that those -- you also are seeing those smaller firms. You've been able to grow with them at a faster rate than the enterprises, just maybe background information on how that's -- this market works? Do you see a lot of graduation of those firms, or is there just an overwhelming amount serviced by the larger players?

Well, over these past 3 years, it's still a little early to judge that, but I do find it a reasonable hypothesis is that when they start with an individual subscriptions, that can grow at a faster rate, given any of their firms are new to us and have as many as 50 engineers.

Yes. So maybe let's talk about the owners of business. I've always found it very interesting that 50% of the business is the owners rather than the construction firms and how we typically think about the architect, the engineer, whoever is breaking ground. You have a substantial proportion of the business that is the ongoing owner and operator of the asset. So maybe if you can talk about how did that come to be, is that a fairly natural journey? And going forward, what are the big priorities of the owner and operator business?

Well, Clarke, the owner-operators of infrastructure had already been self-performing the project work for their smaller projects. And so in most cases, we already have been an incumbent with our modeling and simulation applications and project-wise to some degree. But the opportunity in digital twins is all for the owner-operators. And we would like to enlist the engineering firms to be the digital integrators of data and add their own analytics to our own offerings for serving better the owner operators. But we -- it has helped us to be incumbent and established there as a trusted vendor and owner-operators have been our focus since 2009 of our own investment and R&D and our -- the significant digital twin opportunity for the future.

So maybe we can talk about infrastructure spending. I mean looking at market forecasts, it seems that all the governments of the world have decided that they can't upgrade the societies without the significant investment in infrastructure and so there is a backdrop of prominent infrastructure stimulus programs globally. How much does Bentley benefit when the infrastructure spending is strong? And where are we at today in some of those stimulus programs actually materializing in downstream economics and downstream business?

Well, our software is a factor of production for all of that infrastructure investment. And as I say there are -- on the one hand, higher backlogs now than ever. The imperative of course is not so much the demands of government but of constituents of infrastructure who want resilient, we need to extend the life of our infrastructure in general. And it needs to adapt the changing climate, we need to be changing the energy mix and so forth. That's the work of civil infrastructural and geotechnical engineers. The geotechnical engineers work below the ground on the environmental aspect and it's worthwhile investment, necessary investment. You used to hear the word stimulus attached to infrastructure, that's -- we are going to understand even in the United States the importance of the infrastructure for our quality of life, and I think we can understand that it will only become a greater requirement as our infrastructure otherwise continues to age and where digital twins can help us maintain the fitness for purposes and resilience.

So there's certainly developed economies where there is extension of the life and there was an investment in maintaining these assets. But in terms of the net new, there's an incredible opportunity in some of these developing economies and then it's just the large portion of the infrastructure. Spending is going to come from a couple of regions in APAC. And so maybe we can talk about your current business in APAC. How confident you are, you'll be able to address these markets that represent such a large proportion of the incremental infrastructure spending over the next 10 years?

Well, we're fully scaled out after 40 years everywhere in the world and we're well positioned to take advantage. As I mentioned, in pockets, Southeast Asia for instance, is, we've been moving faster than anyone in the world, we'll take advantage of digital twins. In China, infrastructure is very important, but we face geopolitical challenges there. We have had a successful business into China, which at one time with almost 5% of our ARR. It's down about half of that now. Because the Chinese are averse to subscriptions with American companies for critical infrastructure. We've engineered around that and have high helps for the future because that's fully 30% of the world is infrastructure engineering and is done in China. But it will take some while to get to that potential. We think that it will happen. But today, the countries of India, Malaysia, Indonesia, Australia are where digital twins are growing fastest. And by that way, projects there help to quantify -- last year finalists in our growing digital work competition to achieve the 18% savings of project effort by going digital, and we will be updating that this year at our year-end infrastructure conference in the next month. But yes, we're very well positioned and glad to be taking advantage of those opportunities in the developing world especially.

Maybe we could talk about the factor for production that sort of the mechanics of monetization and how to get usage to match to the demand of engineer's time and the billable hours. One of these -- initiatives of the company has been Enterprise 365, this is 43% of the ARR. Can you maybe talk about that offering why you pursued it, and at over $500 million of ARR growing 20% plus, what has been the success story of that monetization effort?

Well, enterprise subscriptions have been our focus for a long time, the E365 program is a few years old and we jumped all the way to pure consumption to charging per application per day. And of course that avoids issues of shelfware or otherwise. It's fair to us and to the account, both, but when we -- and in account likes it by that way, because the engineering firms are able to be reimbursed for their software cost because they're clients, as they are the owner operators know it improves the quality of their project. They can't be reimbursed unless they can substantiate what they're doing and paying for each day. We do like E365 because when we calculated the daily prices for our applications, we added in a factor to cover our cost of providing our 1,000 experienced civil and structural geotechnical engineers, we say a success force that are dedicated to the accounts to help them and explore and implement new digital workflows every quarter that increases their consumption -- to everyone's satisfaction because it increases their productivity as well, and that's their priority at this point in time. So our -- we call it application mix accretion, the opportunity for our users to use more specialized products each hour is growing and is a component of our ARR growth that we'll continue to increase, we think.

Yes. I think it's fascinating because this is certainly -- there's a utilization issue with an annual [ C-PACE ] license, I think for a lot of models, and we're trying to think about in the world of AI, what monetization model might emerge, and this seems like -- an early step to considering better aligning utilization to, the number of users. Any other things that you're sort of seeing that show the industry is ready to think about something else besides C-PACE?

Yes. Beyond our existing, reliable, growing business for serving the users of our tools, our asset analytics initiative, we monetize by charging per asset. So per cell tower per year for the digital twin, when we get 3 digits and there's 3 million cell towers outside China. And all of these tower [ codes ] are going to hit digital twins within the next couple of years. I mentioned roadway miles as an example earlier. We charge as per roadway mile per year. So it's incremental revenue stream beyond what we charge for new users per application per day. And I think ultimately the costs have enhanced to [indiscernible] improving the throughout and operations and maintenance, it can be as large or larger business over time. All incremental however, not a replacement.

Yes, It's certainly -- and it is only these two sort of initial sectors that you're exploring today, the cell towers and the roads, they'll be...

They set the stage.

Yeah, set the stage for other categories. You know, maybe here in the last minute, what are you most excited about going into the next year? 2025, 41 years, what are you most excited about?

Well, our new generational leadership, our new C-level folks are all in their 40s. We've changed, for instance, our acquisition priorities from traditionally being interested in acquiring more mature companies to younger companies. And we announced just Friday a very significant acquisition of Cesium, which is a household name for those who are doing 3D geospatial immersive environments, for instance, for infrastructure digital twins. This is about 50 folks who have -- who are helping tens of thousands of developers on an open-source model all the way through enterprises like Komatsu, the second-largest equipment supplier in the world who are using Cesium for modeling their Smart Construction Earthworks. So it's a natural combination with what we do with engineering models, with sub-surface models and putting that all together for digital twins. Accelerating what I mentioned earlier in asset analytics...

Stitching for fabrics for this kind of next stage of digital twins, complete divisions.

Exciting. Here's to 2025.

Absolutely. Well, Greg, thank you very much for joining us.

Thank you, Clarke. Thank you, all.