BSY - Bentley Systems Sees Increasing Industry Project Backlog Supporting Growth

2023-09-22 12:01:37 ET

Summary

• Bentley Systems, Incorporated, provides software applications for infrastructure and building design analysis.
• The global market for infrastructure software is expected to reach $282 billion by 2030.
• The U.S. engineering industry is in strong demand, with increasing project backlogs and growing government spending over time.
• I reiterate my Buy opinion on Bentley Systems, Incorporated.

A Quick Take On Bentley Systems

Bentley Systems, Incorporated ( BSY ) provides a variety of software applications for infrastructure and building design analysis and related data management.

I previously wrote about BSY with a Buy outlook.

The Infrastructure Investment and Jobs Act is starting to increase spending in the U.S., and the engineering industry is seeing a growing backlog of projects.

I reiterate my previous Buy outlook on BSY due to the potential for increased infrastructure spending and a growing infrastructure industry backlog.

Bentley Systems Overview And Market

Based in Exton, Pennsylvania, Bentley was established to create workflow software tailored for infrastructure engineering in public works, industrial facilities, and commercial establishments worldwide.

The company is led by Chairman and CEO Mr. Gregory Bentley, who joined the firm in August 2000 after working as the founder and CEO of Devon Systems.

Co-founders Keith Bentley (EVP and Director) and Barry Bentley (Director) also play significant roles in the company.

Bentley Systems provides a wide range of software and services designed for infrastructure design, construction, and management, including:

• Asset performance improvement tools
• 3D modeling applications
• Engineering analysis programs
• Surveying software, mapping and visualization systems
• Simulation tools for design coordination and collaboration
• Plant engineering and operations applications
• ProjectWise for project data exchange
• Connected Data Environment for system interoperability enhancement
• Digital twins to facilitate real-time asset monitoring
• OpenRoads technology designed specifically for civil engineering design and construction projects.

The company mainly employs direct sales channels to generate most of its revenue.

In regions where Bentley lacks a physical presence, they collaborate with local specialist channel partners to expand their market reach.

According to a 2022 market research report by Grand View Research, the global market for infrastructure software was estimated at $136 billion in 2021 and is forecasted to reach $282 billion by 2030.

This represents a forecast CAGR (Compound Annual Growth Rate) of 8.4% from 2022 to 2030.

The main drivers for this expected growth are increasing infrastructure projects in emerging economies and continuing demand from developed economies for infrastructure advancements.

Also, the chart below shows the historical and projected future growth trajectory for the U.S. infrastructure software market through 2030:

Major competitive or other industry participants include:

• Autodesk
• Trimble
• Hexagon
• Dassault Systèmes
• AVEVA Group
• Nemetschek
• Oracle
• Aspen Technology
• Environmental Systems Research Institute
• General Electric.

Bentley Systems’ Recent Financial Trends

• Total revenue by quarter has continued to grow at a moderate rate of growth in recent quarters; Operating income by quarter has varied within a range more recently:

• Gross profit margin by quarter has varied within a narrow range; Selling and G&A expenses as a percentage of total revenue by quarter have varied seasonally and within a narrow range:

• Earnings per share (Diluted) have remained positive in recent quarters, as the chart shows below:

(All data in the above charts is GAAP.)

In the past 12 months, BSY’s stock price has risen 48.69% vs. that of Autodesk, Inc.’s ( ADSK ) rise of only 6.05%:

For balance sheet results, the firm ended the quarter with $82.7 million in cash and equivalents and $1.64 billion in total debt, of which $7.5 million was categorized as the current portion due within 12 months.

Over the trailing twelve months, free cash flow was an impressive $339.2 million, during which capital expenditures were $23.2 million. The company paid $89.7 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:

(Source - Seeking Alpha.)

BSY’s most recent unadjusted Rule of 40 calculation was 34.6% as of Q2 2023 results, so the firm’s results have dropped a bit recently, per the table below:

(Source - Seeking Alpha.)

Sentiment Analysis

I have prepared a chart visualizing the frequency of key terms included in management’s most recent earning conference call with analysts:

The negative terms indicate questions from analysts regarding macroeconomic uncertainties from customers.

Management responded that while it is seeing expressions of concern about the macro environment from clients and prospects, they are more positive about their own situation, so it isn’t obvious that there is a slowdown in activity from the firm’s perspective.

Analysts also questioned management about U.S. IIJA (Infrastructure Investment and Jobs Act) spending. The firm sees initial spending occurring in water infrastructure activities.

Commentary On Bentley Systems

In its last earnings call (Source - Seeking Alpha ), covering Q2 2023’s results, management’s prepared remarks highlighted the firm’s ‘broad and balanced’ growth pattern, although mining sector activities slowed, offset by strong growth in public works and utilities.

Notably, the current ACEC survey of the engineering industry indicated that the median project backlog is now a full year in length ‘as demand for infrastructure engineering continues to outstrip supply.’

Hence, the firm’s software solutions feed into the growing need for engineering firms to maximize the productivity of their engineers to keep up with demand.

The company’s net revenue retention rate was 110%, indicating solid sales and marketing performance and product market fit across its various solutions.

Total revenue for Q2 2023 rose 10.6% YoY on an as-reported basis, and gross profit margin slid by just 0.1%.

Selling and G&A expenses as a percentage of revenue decreased by 0.5% year-over-year, and operating income fell 9.3%, likely due to seasonal revenue drop.

The company's financial position is reasonably solid, with limited cash and significant debt but very strong free cash flow.

BSY’s Rule of 40 performance has been moderate, but has dropped slightly in the most recent period, probably due to seasonal factors.

Consensus estimates for full-year 2023 revenue growth suggest an 11.9% increase over 2022.

If achieved, this would represent a reduction in revenue growth rate versus 2022’s growth rate of 13.9% over 2021.

In the past twelve months, the firm's EV/EBITDA valuation multiple has been volatile, but net-net hasn’t changed much, as the chart from Seeking Alpha shows below:

A potential upside catalyst to the stock could include a contribution from increasing U.S. infrastructure spending.

Although an economic downturn could affect the currently rosy outlook for demand, infrastructure spending in the U.S. looks to be promising in the quarters ahead as the IIJA spending grows further.

I reiterate my previous Bullish outlook on Bentley Systems, Incorporated, due to the potential for increased infrastructure spending and a growing infrastructure industry backlog.

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