BSY - Bentley Systems Is Well Positioned For U.S. Infrastructure Spending Ramp

2023-06-21 15:08:55 ET

Summary

• Bentley Systems reported its Q1 2023 financial results on May 9, 2023.
• The firm provides an array of engineering workflow and related software worldwide.
• Bentley Systems' revenue growth looks solid with the onset of the U.S. IIJA infrastructure spending and is well positioned for further profit growth.
• My outlook on Bentley Systems stock is a Buy at around $52.40.

A Quick Take On Bentley Systems

Bentley Systems, Incorporated ( BSY ) reported its Q1 2023 financial results on May 9, 2023, beating revenue and EPS estimates.

The firm provides an array of software applications for infrastructure and building design analysis and related information management.

With the Infrastructure Investment and Jobs Act ("IIJA") beginning to make itself felt in the U.S. and the company's positive operating leverage, my outlook for BSY in the near term is a Buy at around $52.40 per share.

Bentley Systems Overview

Exton, Pennsylvania-based Bentley was founded to develop workflow software for infrastructure engineering for public works, industrial and commercial facilities globally.

Management is headed by president, Chairman, and CEO Mr. Gregory Bentley, who has been with the firm since August 2000 and was previously founder and CEO of Devon Systems.

In addition, the firm was co-founded by Chief Technology Officer/EVP Keith Bentley and Director and EVP Barry Bentley.

Bentley offers a portfolio of software and services for the design, construction, and operations of infrastructure. Their offerings include:

• Asset Performance software to improve asset management and performance.

• Applications for 3D modeling, engineering analysis, surveying, mapping, and visualization.

• Software for simulation, design coordination, and collaboration.

• Software for plant engineering and operations.

• ProjectWise for project information sharing.

• Connected Data Environment [CDE] to increase interoperability between systems.

• Digital twins to enable real-time monitoring of physical assets.

• OpenRoads technology for civil engineering design and construction.

The firm sells primarily through the direct sales channel, generating the majority of its revenues through this channel.

In geographic regions where it does not have a physical presence, BSY relies upon local specialist channel partners.

Market & Competition

According to a 2018 market research report by The Business Research Company, the global market for infrastructure software was estimated at $231 billion in 2017, with Western Europe as the largest region accounting for $83 billion (36%) and the U.S. representing $49 billion (21.4%) of global demand.

The main drivers for expected growth are the continued development of infrastructure in both the developed and developing regions of the world.

Also, the delivery of software through cloud, whether public, private or hybrid, has gained acceptance from customers.

Major competitive or other industry participants include:

• Autodesk.

• Trimble.

• Hexagon.

• Dassault Systèmes.

• AVEVA Group.

• Nemetschek.

• Oracle.

• Aspen Technology.

• Environmental Systems Research Institute.

• General Electric..

BSY's Recent Financial Trends

• Total revenue by quarter has grown recently; Operating income by quarter has also turned up in the most recent quarter:

• Gross profit margin by quarter has trended slightly lower; Selling, G&A expenses as a percentage of total revenue by quarter have decreased materially in the most recent quarter:

• Earnings per share (Diluted) have been volatile over the past two years, as the chart shows below:

(All data in the above charts is GAAP.)

In the past 12 months, BSY's stock price has risen an impressive 47.98% vs. that of Autodesk, Inc.'s ( ADSK ) rise of only 9.8%, as the chart indicates below:

For the balance sheet , the firm ended the quarter with $93.6 million in cash and equivalents and approximately $1.7 billion in total debt, of which only $6.3 million was categorized as the current portion due within 12 months.

Over the trailing twelve months, free cash flow was an impressive $330.1 million, during which capital expenditures were only $18.7 million. The company paid $73.1 million in stock-based compensation in the last four quarters.

Valuation And Other Metrics For Bentley Systems

Below is a table of relevant capitalization and valuation figures for the company:

(Source - Seeking Alpha.)

As a reference, a relevant partial public comparable would be Autodesk; shown below is a comparison of their primary valuation metrics:

(Source - Seeking Alpha.)

The Rule of 40 is a software industry rule of thumb that says that as long as the combined revenue growth rate and EBITDA percentage rate equal or exceed 40%, the firm is on an acceptable growth/EBITDA trajectory.

BSY's most recent Rule of 40 calculation was 37.8% as of Q1 2023's results, so the firm has performed well in this regard, per the table below:

(Source - Seeking Alpha.)

Commentary On Bentley Systems

In its last earnings call ( Source - Seeking Alpha ), covering Bentley's Q1 2023's results , management highlighted its growing operating margin and operating cash flows exceeding expectations.

The company noted growing backlogs from U.S. civil engineering firms and confidence from those firms that the trend will be higher over the next 12 months.

Management also expects considerable growth opportunities in its China focus and capital allocation decisions.

BSY's ProjectWise system enables large engineering companies to distribute their workflows more advantageously, especially in a labor-constrained environment. Management views its system as setting the stage for:

"a long upside runway ahead for us to provide and be paid commensurately for more valuable, more specialized applications, enabling a continuously increasing rate of application mix accretion."

The company's trailing twelve-month net retention rate was 110%, indicating good product/market fit and sales & marketing efficiency.

Total revenue for Q1 2023 rose 14.1% year-over-year, and gross profit margin increased by 1.1 percentage points.

Selling, G&A expenses as a percentage of revenue fell 1.5 percentage points, a good sign and operating income grew by 5.7% YoY.

Looking ahead, for full-year 2023, management guided to 11% top line revenue growth at the midpoint of the range and an adjusted operating income with stock-based compensation margin of 26%.

The company's financial position is sound, although its cash position is somewhat low as the firm has nearly $1.7 billion in long-term debt.

Its free cash flow is more than ample for its debt position; the company's net debt leverage is 4.2x, per management.

BSY's Rule of 40 performance has been acceptable in the most recent calculation.

From management's most recent earnings call, I prepared a chart showing the frequency of key terms mentioned (or not) in the call, as shown below:

I'm most interested in the frequency of potentially negative terms, so management or analyst questions cited "Uncertain" two times, "Challeng[es][ing]" once, "Macro" two times, "Drop" once and "Volatil[e][ity]" three times.

The negative terms refer to various macroeconomic uncertainties the firm faces with its clients.

Analysts questioned company leadership about its China activity, to which management discussed the unpredictability of the current business environment in China.

However, in the U.S., the firm is just starting to see the positive effects from the Infrastructure Investment and Jobs Act, which authorized $1.2 trillion for transportation and infrastructure spending.

Regarding valuation, the market is valuing BSY at a significant premium to Autodesk as well as to the general SaaS market's valuation multiples.

In the past twelve months, the firm's EV/EBITDA valuation multiple has dropped slightly, as the chart from Seeking Alpha shows below:

The primary business risk to the company's outlook is the slowing macroeconomic environment which may expand to a synchronized slowdown between major global economies in the quarters ahead.

However, with the IIJA beginning to make itself felt in the U.S. and the company's positive operating leverage, my outlook for Bentley Systems, Incorporated in the near term is a Buy at around $52.40 per share.

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