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

Welcome, everybody. I -- as I reflect on this conference, it's like I've got a lot of favorite conversations that I look forward to. And -- but Greg, this one, in particular, is one that I circled, and I'm really grateful for you being here and then just the continued partnership, even as you stepped into a new role within Bentley. And I was saying to Greg off-line like, these are called fireside chats. And who else -- or who better? We need a -- Penny, can we get a fireplace up here next year for this conversation? We need an actual fireside chat with Greg.

Matt's not satisfied to grill me. He wants to put a fire in here.

Exactly. Well, yes, so listen, for those who don't know Greg Bentley, kind of goes without saying the company that you've built and the legacy that you've created has been really fun to watch over the years.

And you've transitioned into a new role. Executive Chair is the title. I guess you still seem very active in the company despite not being the CEO. Could you talk about sort of just reflect a little bit on your journey? And you're still involvement as Executive Chair, what does that mean?

Well, it would appear that I still have a major role because I continue to be involved in Investor Relations. And that's where you'll see me. And so my activities are, at the Board level, in Investor Relations because I like doing this and getting to know all of you. And then I have some responsibility still for capital allocation and especially for acquisitions, especially in asset analytics, which has been a particular interest of mine. And I know, Matt, that you were interested to ask about transition of ownership of our stock from our family to our shareholders. And I would say the retirement now of all of the Bentley Brothers including me, I think, does not portend that. Over the 4 years since our IPO, we report annually the family's ownership level in our proxy statement or associated with our proxy statement, and I researched what it will show for this year as well. So in each such year, the family has sold shares amounting to 1.5% of the shares outstanding. And this year, it's been a little more than last year but less than the year before, and that's to do with distributions from our deferred compensation plan amounting to about half the shares that the family has sold because those are subject to ordinary income taxation and the family continues to hold the majority of the outstanding shares. So -- and I don't see why that trend of some modest sales over time wouldn't, if anything, decrease over time. So there isn't, I think, anything underway, in particular in an ownership transition even though we've had successful executives.

Okay. So the point is don't expect now that you've stepped away from the CEO role to see the family's ownership drop significantly or...

That's my own expectation is not to drop significantly.

Yes, yes. And so we should think about more as a kind of like a steady, if not decreasing, liquidation?

Yes, driven largely by tax and charitable interest but in a graduated way that helps our float a bit.

I asked you this when I first met you. There -- because I get asked all the time and I kind of give the answer and I just want to make sure I'm giving the right answer, there's not a next-generation Bentley siblings that are going to move up at some point in senior leadership and...

Well. I have a son, and Barry has a son who are part of our executive ranks, but they're at the level where they would be in their mid-30s. And our new executive generation, we worked hard to have a group in their 40s. And Nicholas Cumins in his 40s. Okay, Werner Andre, whom our CFO, is 40, 12 or whatever. But we want that group to be in office for 15 years or so. And there may be a chance for others depending on how that works out. But importantly and seriously, we programmed in -- we have a dual-share structure, and our Class A shares owned by the family -- and the family mainly owns Class B shares, but the Class A shares are all owned by the family, and they have super voting. But they're super voting ratchets down considerably at the point where one of the founding brothers won't be on the Board any longer and then goes away entirely to 1:1 if the family's ownership would go down below, I think it is 30%. So we -- the brothers are all engineers, and we engineered in the opposite of a dynasty in the company. We want it to be a meritocracy.

Yes. Well, it really feels like your culture and employee -- treating employees right and customers right has always been core to Bentley. It feels like that will continue on for generations.

I feel that with this particular generational succession, and of course, Nicholas Cumins has been our Chief Operating Officer since the beginning of 2022 and was the Chief Product Officer prior to that. So he really has engineering chops. And -- but generally, you may have heard me say, we want our new leadership generation to have both right and left halves of their brain and our -- we acknowledge that under family leadership, we've been more engineering oriented and less so marketing oriented over time compared to our competitors. We ought to get better at marketing and program that in as well. But I would rather be -- I'd rather come from having better engineering and needing to improve the marketing than the other way around as our -- as we think our competitors, that's our competitive advantage with them.

I neglected to say this at the top, but we'll save a little bit of time at the end of the questions from the group. It's a pretty good group here. The -- so that's kind of one elephant in the room. The other one, there's been a lot of M&A activity. I don't have to tell you about that in the space. We've seen Altair, and we've seen Ansys. There was -- you guys were in the press earlier this year as well. How do we think about like how this all plays out? Because this is -- obviously, it's a really exciting space, and we see a lot of industrial players interested in acquiring into the design-based category. What does that mean for sort of the independent players that are left?

Well, we love being a consolidator. And our platform acquisitions of Seequent and Power Line Systems, billion-dollar magnitude deals, we couldn't have done without being a public company. And they have been fantastic acquisitions. Each of them has already grown by more than -- or about twice our company's rate of growth over the years we've owned them. Power Line Systems, in particular, is poised to grow, I think, by a multiple now that a new administration in the U.S. will quickly enact permitting reform to allow us to build the new transmission capacity, for which only Power Line Systems' software in the world can be used to do that. And there's a great backlog of need to connect up the renewals capacity to the electric usage, including data centers and so forth, and that's pretty strategic to this administration coming in. So those are examples of benefits in our comprehensive portfolio from being a consolidator. And we are positioned now to be able to consider having paid off our bank debt that came about from those acquisitions to be responsive if such opportunities would arise. And of course, they can't be planned for. In the case of Schneider Electric and what was reported in The Wall Street Journal, their interest was in spinning out their own billions of dollars of industrial software, which had come to be focused on asset operations and maintenance, which is really the future for the digital twin opportunity and to spin that into Bentley Systems and such a transformative opportunity as that I've said to our shareholders that our family wouldn't be so arrogant as not to pay attention to such a thing just because we would lose control in the process. But we have in mind to prefer to be a consolidator as maybe all of those represent.

Okay. Well, so that's a pretty bold statement. I mean the fact that yes, you think you guys are the potential to continue to get bigger and bigger and consolidate. And even now that you paid off debt, maybe look at some additional deals following Seequent and PLS.

I want to be clear, we still have outstanding convertible that I -- speaking of M&A deals, one of the things you could look at are the valuation multiples that's attached to those. And when I step back to ask the question of might our convertible debt, our 2026s be converted or not at $64 a share and when -- if we look at how we value the company, we say free cash flow, less stock-based compensation because our practice is to prioritize first in our cash flow, repurchasing enough shares to offset the dilution from stock-based compensation. So if you look at free cash flow less stock-based compensation is truly free cash flow, then our evaluation on that basis is only -- if it would be in the middle of the pack for our design software peers on that same basis and if we continue to grow our free cash flow less stock-based compensation at the same 15% compounded annual growth rate that we have during the 4 years of being public, which corresponds for us to our growth rate in margin dollars because our accounting is so straightforward. It's 70% absolute ratable and 30% almost ratable that there's no differences between our profit and our cash flow substantially than those convertible -- converts might convert. And to reiterate, I wanted to be clear, we haven't paid off all our debt. We still have the outstanding convertibles.

Well, just kudos to the way you guys talk about free cash flow. With stock-based comp, you guys are one of the only ones out there that, I think, recognize the impact.

Well, we're investors ourselves, and as I explained earlier, that's how we would -- we think we should look at it economically.

Yes, kudos. Let's talk IIJA. It's obviously been topical for some time now. And I hear a lot of questions from investors push back saying, "Oh, more of it's been deployed than you think. Or what's left, Bentley won't benefit from that." Can you level set the audience on what has been deployed. And especially under a Trump administration, what could we expect from additional releases there? And how could that benefit Bentley?

Well, it's really almost the best of all worlds. About 40% has been awarded, but the remainder, there's 2 years of advanced authorizations that are not subject to being preemptive. Remember, it's a bipartisan bill to start with. Unlike the IRA, which was not bipartisan and is likely to be substantially dismantled, but we don't particularly benefit from the IRA. That's mainly for R&D and not things that get built. In the previous Trump administration, there was a greater focus, and likely there will be again, on traditional highway and bridge investments, and there will certainly be less focus on public transit, bike lanes, capping interstate highways and cities and so forth. Or it may be outright block grants to the states because the new administration is less interested in micromanaging where the investment occurs in all of those scenarios. And then finally, the new administration is more interested in private investments and infrastructure, which is where going digital is always a great priority because the private concessions are design, build, operate and maintain. And the digital twin is how you are going to optimize that maintenance and is where most of the opportunity was in P3s. So that's, by the way, something that even a new Labour government in the U.K. is saying we need more private investment in infrastructure. So those are actually good things that are happening with change. But I guess I have to say it should be exciting to all of us who invest in and work on economic growth to have an incoming administration for whom faster economic growth is kind of a compass setting. And then who can't like Elon Musk coming into the picture as an engineer and an entrepreneur, perhaps to accelerate. In the U.S. where we create the software and the AI for digital twins, why should we be the last to adopt it? It's going faster elsewhere in the world. And would an Elon Musk say, "Hey, we should have digital twins of our existing infrastructure. Then we can use AI to do only the necessary optimal maintenance and spend less on a line item with big zeros after it on maintenance of infrastructure by virtue of digital twins." So we live and hope, and I'm excited for the change.

Yes. So that preempted a question. So yes, you think the Department of Government Efficiency, or DOGE, that could actually benefit Bentley in terms of how government is allocating funding.

Well, a mindset, just because it's public works and utilities spending, does it have to be slow and traditional elsewhere in the world? And the fastest implementation of digital twins for infrastructure project delivery is in Asia. And they don't have established practices and guilds and so forth that are put out as impediments to -- something can go digital, shouldn't it go digital? And maybe that can be a mindset that even our governments can have.

Yes. And I appreciate that. The other -- you and I chatted when you reported, but I'm interested in PLS and especially with the build-out of data centers, perhaps the acceleration of permitting there. Talk about what the administration and just more or less GenAI and data center both could mean for Bentley and with PLS, in particular.

Well, in general, there is a backlog of need for transmission capacity. The high-voltage capacity is the bottleneck everywhere in the world. And what's particularly notable in the U.S. is there's bipartisan support for streamlining the permitting delays that are decades long. Yes, each party has gained it because they want to attach something else to something that the other party wants. So that should not be the situation going forward here now with the several branch -- both branches of Congress and the executive branch. So we should quickly -- and by the way, there's no funding lack for -- there's not a funding challenge. It's a permitting challenge to authorize new transmission corridors. So Power Line Systems focuses on that. So it's a company that's -- that was just as old as Bentley Systems founded the same year we were founded. And it's the only set of tools for civil and structural and geotechnical engineers that we never had at Bentley Systems, and it was because they covered that market. They solved the problem. It's a specialized structural problem because the conductors between the towers are part of the structural system if you think about it. And it's a complex -- so the university professor solved that and created Power Line Systems. So the company has grown, as I say, on the order of twice as fast as Bentley Systems in the 2.5 years we've owned it. But now that's all been in the work just for catching up our existing transmission. In our Year In Infrastructure book for last year, there were 25 pages of grid projects. Only one of them was a new transmission corridor, and that was in the country of Cameroon. So we have -- and elsewhere in the world, in the U.K., new renewables capacity that's been bought and paid for and built is having to wait 5 years to connect up to the National Grid. So it's an opportunity worldwide that, I think, finally will grow by a ratchet.

Yes. That's great to hear. The other question -- we could sit here for an hour, and we -- I'm sort of skipping some questions because there are some ones that I'm interested in. China has been a drag for you guys. It was at one point, I believe, 5% of ARR. Now it's 2.5%, is it, -ish? 2.5%? Some of that's been China-based economic lack of growth. I'm curious, do you think we've seen the worst from a headwind perspective there? I know you talked about spinning up some JVs that could help maybe reengage China indirectly. How do we -- how should we think about China as a country and as a potential? Maybe the headwinds are slowing. Maybe it turns into some tailwinds eventually. How should we think about that over the next couple of years?

Well, I used to think I could answer somewhat authoritatively on that. And of course, the obstacles have been, even before the geopolitical situation, there's no public cloud infrastructure. But with the U.S. sanctions against Russia, the Chinese state-owned enterprises said we won't use any American software if we have a domestic alternative and, in any case, not on a subscription. You have to be autonomous, where we can't be turned off by the West. And those have been the sources of the headwind. And I can only say now that there may be -- while we have done a restructuring of our go-to-market in China so that we can have a way to come to market as qualifying autonomous software in China through joint ventures, including with state-owned enterprises that are slow, but we've made progress on them. Now the problem is the economic situation in China.

So that's the bigger problem right now.

A win for losing. And I don't think anyone expected that, and it just drags on stubbornly. So the only reason to say it can't be much of a headwind for much longer is it's down to 2.5% of our ARR, and we have our -- in China, they're enthusiastic about our software. Some years are going digital awards, half of them would be won by China. So we have a good standing in China. We even repatriated profits from China. We've been a software company that's had success in China in the past. So I think we'll drift down to some asymptote below 2.5%, but I don't know how much more it can be. But as to the economic situation in China and especially infrastructure investment. So by the way, our software is not involved with any of the residential or empty high-rises or empty cities and so forth. It's all been made for very good purposes in China, yet I've stopped predicting it.

Yes. So now it's less -- you -- Bentley has done what it needs to do to sell software into China. It's more of an economic discussion now.

Yes. I thought I would be reporting. We'd turned the corner in total business, not in ARR. The business will shift to royalties and on licenses. But we're stuck in the only place in the world where infrastructure engineering isn't booming as never before.

And despite all these -- that headwind, you guys have still delivered very strong ARR growth. When you look forward for the next couple of years, what would excite you the most that while this could -- for sitting here a year from now by a fireplace or 2 years from now, and you were like reflecting back on the last year or 2, and you're like, wow, I didn't anticipate this. That actually was a bigger catalyst to growth than I thought.

Well, as to what you first said there, ARR growth is stronger than it ever has been, except in real terms, if you adjust out the inflation spike of 1% or 2% a year ago. And the -- I believe the demand for infrastructure engineering is bound to continue given the need for resilience, given the quakiness of the infrastructure and the need to adapt to client situations and so forth. But what I'm most excited about our initiatives that our new management will -- has prioritized. And I want to mention our most recent acquisition and our largest one for a while, Cesium. Cesium happens to be a household name for geospatial software developers -- 3D software -- geospatial software developers who are doing things that could turn into digital twin opportunities, and we, Bentley Systems, have taken advantage of the open-source Cesium. And it has, on the one hand, grown the way open source does to attract the users to opt in to the pay versions. We've done that well. It's become a standard endorsed by the Open Geospatial Consortium, which is what all the governments use for their tiling formats for geospatial data, and governments have most of the geospatial data and by Google. So that kind of ushered in our new alliance with Google to bring Google data to use it, including an asset analytics, where crowdsourcing now doesn't have to be just dash cam data, for instance, for roadway maintenance, but can also be from the Google vehicles and the Google history. So it's very exciting there. But then finally, Cesium is established at an enterprise level, and Komatsu, the second largest equipment maker in the world, having chosen it and invested substantially in it has the foundation for their earthmoving simulation, which is the leading edge of robotic construction for heavy civil earthmoving. You might say robotic construction sounds like a futuristic thing. It's already possible with machine-controlled grading and excavators and so forth. So that completes the picture Cesium for us. And it is the type of acquisition that's the first one spearheaded by our new generation of executives. And I'm very -- I think it's a great example of something that's going to pay off in 1 of all 3 of these ways that I described here. And generally, I expect and encourage our new executives to break new ground. Our existing business of software for users, we're sort of the quartermasters in the world for civil and structural and geotechnical engineers. And with the E365 program, the floors and ceilings, the multiple-year negotiations, none of which has anything to do with accounting for us, but it's all made it more visible and linear and of even higher quality. And that business has become so predictable, I hesitate to say automatic, but safe that I'm all for taking some -- making some bets and putting some markers down on these opportunities like asset analytics that may only add 1% of ARR growth this year but should double each successive year and where we can make acquisitions in that space. And asset analytics, where we charge per asset per year, I believe that can ultimately be a business of comparable scale to what we do in charging per user, per engineer.

I'm going to pause here for a second. Is there a question from the group out here? No? All right. All right. So yes, it feels like we really haven't even talked about E365. We haven't really talked about Virtuosity. What are -- what would you tell investors to kind of think about broad trends within both of those? Because I've always felt like the marriage of that has been like key, especially if maybe more projects go on the private side, Virtuosity could benefit a bit more from that.

Well, that's true. Let me start with E365. So -- and E365 for our enterprise accounts, we charge per application per day, which everyone regards as the fairest way to compensate for software. But it sounds like it would be very volatile because who can predict that consumption. The other thing about E365 is we charge enough per application per day to cover our cost of dedicating a team of civil and structural and geotechnical engineers to the account to help them with new digital workflows. And that is the reason that the accounts under E365 grow their ARR significantly faster than the rest of our ARR base. So we need to have a sufficient capacity for these success teams. They need to get upskilled in our own company and equipped. So there's a constraint for how many accounts we can move on to E365. But we've, by now, done more than half of the enterprise base, and we're working down from the largest accounts to the smallest. But a development in these enterprise accounts is they know going digital has become their priority as they have bigger backlogs, can't bid on new business and so forth. Going digital is the priority, especially when they only spend $1.50 per hour on average. For an hour, they wish to build at $150 or fixed price even better. So they have asked, would you be willing to cap what we'll spend over future years? And we have said, well, yes, if you're willing to have a floor on it. And in between, we have all the right incentives, we and they to -- for consumption base. So it's a good arrangement. The development in the past year or 2 has been -- they've said and can we do that for multiple years in the future because they had experience with multiple-year deals with other software vendors because other software vendors are doing multiyear leases that are consternating and accounting in 606 and so forth. We have none of that, but we agree that we can share the risks in the future in an equitable way, and it has really made our business much more visible and predictable and, frankly, easier. So that's the good development because -- and ultimately because the proportion of our ARR on E365 grows faster than the ARR at large. And then in SMB with Virtuosity, there are as many engineers, it turns out, who work in smaller firms, firms with 50 or fewer engineers as there are in the larger firms. We had only focused on the larger firms until going public and being a bit more open minded to other things we should do that are marketing oriented. It's marketing oriented because we do it through direct sales and direct engagement and self-service. But likewise, there's -- we should buy rights to be able to have as big a business in that -- we say SMB, for us, that's accounts up to $100,000 as the bulk of our existing business over time.

One last question. Do you see Autodesk more of these days in deals? They seem to be getting more aggressive on product development and even marketing.

Well, if I were them, I would get more aggressive in infrastructure engineering because it's a good -- it's less volatile, and it has a greater predictability and so forth. But we -- so far, as I can tell, we're competitively winning. And water is an example where they now, by virtue of big investment, are principal competitor in water engineering, but we think we're gaining share there and generally throughout infrastructure and engineering. But competition is a good thing.

Yes. Good. Well, we're unfortunately out of time. That was a fascinating conversation, Greg? So...

This says 0.

It says 0, yes.

And the fire is coming up, I know. We said we'd give up the stage.

Thank you. Best of luck and congrats on your new role.

Thank you, Matt.