Bentley Systems, Incorporated

Moat: 3/5

Understandability: 2/5

Balance Sheet Health: 4/5

Bentley Systems, a global infrastructure engineering software company, empowers professionals to design, build, and operate sustainable infrastructure.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Bentley Systems, headquartered in Exton, Pennsylvania, operates as a global infrastructure engineering software company. The company provides software solutions for designing, building, and operating infrastructure assets, enabling engineers and related professionals to enhance their productivity and collaboration. BSY’s suite of software solutions caters to a diverse range of infrastructure projects, with notable focus on:

Public works: This includes roads, bridges, rail, and power distribution.

Industrial: This includes infrastructure for oil and gas, mining, and process manufacturing.

Commercial: Includes buildings, retail facilities, and educational campuses

Recent focus: Bentley Systems is placing a significant emphasis on infrastructure digitization with sustainability, project performance and resilience being the core focus.

Revenue Distribution

BSY’s revenue model is based on a recurring subscription model with multiple streams. As of its most recent 10-Q filings, the disaggregation of revenues is as follows:

Subscriptions and Licenses: Primarily includes recurring licenses and subscription revenues for various software products.
Services: Includes revenue from consulting, implementation, training, and other related professional services.
Other: Comprises revenues from other sources, and are very minimal to compare with others.

Recurring Revenue Strength: The recurring subscriptions and licenses contribute a high amount to revenue, which provides stability and visibility. They were 82% of revenue in 2022, and 84% for the three months ended September 30, 2023.

From a geographic perspective, revenue is broadly generated from three main regions:

Americas: Includes the United States, Canada and Latin America. This was approximately 47% of the total revenue in both the nine months ended September 30, 2023 and 2022.
EMEA: This includes Europe, the Middle East, and Africa. EMEA constituted 38% of total revenue in the nine months ended September 30, 2023 and 39% in the same prior period.
APAC: This includes Asia and the Pacific Rim. APAC makes up 15% of total revenue in the nine months ended September 30, 2023, and 13% in the same period in the prior year.

Industry Trends & Competitive Landscape

The infrastructure engineering software market is characterized by:

High barriers to entry: Large initial investment requirements and expertise make it challenging for new entrants.
Ongoing technological change: A constant need for firms to update their technology offerings.
Integration needs: A company has to have all its various software packages working smoothly together.
Increasing Focus on Digital Twins & BIM: There is a growing industry adoption of Digital Twins and Building Information Modeling (BIM).
Focus on sustainability: Sustainability is becoming a focal area.
Growing adoption by government projects: Government projects are increasingly requiring digital workflow solutions, like those BSY offers.

Competitive landscape: Bentley Systems operates in a competitive industry, with other significant players including Autodesk, Trimble, Hexagon, and Nemetschek. They compete primarily through their unique offerings in their specializations, geographical reach, and client satisfaction.

What Sets Bentley Systems Apart

Bentley Systems differentiates itself through:

Deep Industry Focus: A strong focus on infrastructure, which has allowed it to create very specialized solutions.
Emphasis on comprehensive end-to-end solutions: Offers a broad suite of solutions covering the entire project lifecycle, from design to operation.
Interoperability: Solutions are developed to interact well with various formats and systems that the clients may be using.
Geospatial data: BSY has a niche in geospatial data, analysis, and modeling software.
Investment in Digital Twins: BSY has a strong focus in the industry and has a proven track record in this area.
Focus on Sustainability: BSY has made a commitment to sustainability to be a core feature of its products.
Expanding platform approach: BSY provides a platform for partners and clients to build applications, create solutions, share data and enhance workflows by leveraging its digital ecosystem.

While the industry’s moat may not be “wide”, the company is leveraging a focused strategy and a niche product offering.

Financials in Depth

Income Statement Analysis

Revenue has increased consistently, with the most significant portion coming from subscriptions and licenses.

Revenue trends: The increase has been primarily due to an increase in recurring revenues. Cost of revenues has also grown, due to the increased growth in service operations. Gross margin is slightly decreasing. Operating profit and net income have generally increased year-over-year as revenues have increased.

Looking at the last quarter reported results ending Sept. 30 2023:

Total revenues for the nine months ended September 30, 2023 were $863.9 million, an increase of 13% year-over-year
Subscription and licenses revenues were 84% of total revenue, coming to 731.2 million. In the prior year, they were 637.2 million.
Operating income was $191.1 million for the nine months ended September 30, 2023, increasing from $173.1 million from the prior year.
Net Income for the nine months ended September 30, 2023 was $143.7 million which is significantly higher than the prior year period’s $91.2 million.

Balance Sheet Analysis

BSY is in a strong financial position and has a generally healthy balance sheet.

Cash and Cash Equivalents: Has cash of $232.6 million at the end of September 30, 2023 and $141.0 million on Dec. 31, 2022. A slight fluctuation in cash is normal.
Accounts Receivable: This has varied in the last three quarters. It was $77.9 million in the 2023 Sept quarter, $161.8 million in the last year’s Dec 31 and $66.4 million in the most recent 10-K reporting in March 2023. This is fairly consistent with the company’s seasonality.
Total Assets: $3,395.6 million as of Sept 30, 2023 and $3,118.0 million in Dec 2022.
Total Liabilities: $1,737.9 million as of Sept 30, 2023 and $1,465.5 million as of Dec 2022.
Long Term Debt: There is $1.297 billion outstanding at the end of September 30, 2023 and $1.174 billion at the end of December 2022. Most of the debt is due in 2028 with a smaller portion due in 2025 and 2027
Total Equity: $1,657.7 million as of Sept 30, 2023 and $1,652.5 million as of Dec 2022.

The company’s balance sheet is in good standing with a substantial amount of current assets and a manageable level of debt.

Key Financial Ratios and Trends

ROIC: Consistently good.
Debt-to-equity ratio: Increasing (as a result of acquisitions in last few years), but manageable
Recurring revenue: High and increasing.
Margins: Relatively stable
Sales Growth: Good

Moat Analysis (3 / 5)

Bentley Systems possesses a narrow economic moat. Here’s a breakdown of its moat and the factors influencing its rating:

Intangible Assets: BSY benefits from significant intellectual property and patents surrounding its software. They also have a reputation for quality in its software solutions. The large installed customer base, coupled with recurring subscriptions, is a benefit to maintaining the brand. This contributes towards the moat. But unlike pharma, brand is not the main deciding factor, as large enterprises make these decisions more logically
Switching Costs: Customers who use Bentley’s software, particularly in large-scale infrastructure projects, face high switching costs because of the high data integrations and the complex workflows that must be setup. This leads to high stickiness, and contributes towards moat.
Network Effects: The network effects for BSY are present, especially for some applications of its software which are used by large teams. The benefit of more users comes with better collaboration, and it makes BSY’s products stickier. But it is far from network effect of other tech companies, and the network effect is less pronounced for non-project management software. It doesn’t affect all of their business which is a significant draw back
Cost Advantages: There is no evidence to suggest that BSY has a cost advantage over its rivals. They often compete with software giants, so it’s hard to maintain a superior cost structure.
Regulatory and Niche advantages: These are where BSY has an area of strength with their industry focused strategy. Many of its clients face strong governmental regulations and the approvals associated with this means it’s tough to make a switch. They are also building their core businesses in smaller niches and they have some regulatory advantages in the niche, so that’s another moat. However, it is hard to estimate the durability of these advantages.

Given all this, BSY has a narrow moat, because their revenue is somewhat sticky, and they have some structural advantages, but these are not as powerful or extensive as that of a wide moat company. They have some sources of moat but not across the board, with some weaker areas.

Risks to the Moat and Business Resilience

Competition: The competitive landscape of the infrastructure engineering software market is intense and ever-changing, which can lead to significant price pressures on BSY and make the moat less strong.
Technological Disruption: The company faces the risk of technological disruption, as competitors could develop new technology or strategies that render existing solutions redundant. They need to innovate quickly to keep ahead. Also, there is threat of disruptive innovation that comes from open source tools, and these could have potential to harm the long-term value creation.
Industry Specific Risks: Government regulation can change, which is both a moat and risk for the business, since changes in regulations can lead to losses or a slower growth for BSY. Also, a reliance on infrastructure projects means they’re prone to boom and bust cycles, and this could significantly affect them.
Acquisitions: With acquisitions becoming a core part of BSY’s growth, integrating various acquisitions is proving difficult, and this could become a moat issue if they spend money on companies that cannot bring positive returns on investments.

While Bentley Systems has a strong position in the infrastructure engineering software market and possess a decent degree of stickiness through client relationships, it’s essential to recognize that the company operates in a dynamic and competitive market where the moat could face erosion from unforeseen competition, technological disruption, or regulatory changes.

Understandability (2 / 5)

BSY’s business model is complex. Here are the reasons behind a rating of 2/5:

Specialized Industry: Their business is focused on a single niche of engineering software. This has it’s own jargon, complexities, and needs which is usually unfamiliar to investors. So, a thorough understanding requires in-depth knowledge on this industry which is something most people do not have.
Software Company Complexity: Software companies are not as simple to understand as some other companies, and you have to be aware of the specific aspects of software revenue like subscriptions and other metrics.
Acquisitions and Intangibles: The nature of their growth can be a bit difficult to analyze because they achieve much of it through acquisitions, and they need to amortize a large amount of intangibles (acquired goodwill) which can obscure the underlying business’ performance.
Revenue recognition: Understanding what types of services are considered subscriptions, licenses, or services, and the revenue related to each type can be confusing and hard to follow.
Financials: Financial statements have many elements which need adjusting and cleaning, to provide an overall clear picture. Some might find it difficult to keep track of the numbers given the non-recurring items that are often shown on the financial statements.

It would require some time and effort to understand this business thoroughly. The company operates in a complex industry, which has some unique economic nuances that make it hard for the average retail investor to fully grasp its drivers for profitability.

Balance Sheet Health (4 / 5)

BSY’s balance sheet is good, with strong finances, as stated below:

Solid liquidity: The company has a substantial amount of liquid assets, including cash and short-term investments, to meet its obligations and make use of opportunities.
Reasonable Debt: BSY’s long-term debt is relatively high, but it is generally manageable in line with the industry.
Good Current Ratio: The current assets compared to current liabilities is fairly good and shows the short-term liquidity is healthy.
Positive Equity: There is a significant equity portion which is far greater than negative retained earnings, and shows the business has positive assets.

The balance sheet is very healthy with a strong liquidity position. Their asset management seems well done, and the debt, though is relatively high, seems to be under control. However, it should be noted that their long-term debt has increased because of some recent acquisitions.

Recent Concerns and Management Commentary

Acquisition Integration: Management has mentioned several times in their earnings calls that they have made multiple strategic acquisitions and these take time to integrate. A slower integration period could lead to reduced synergies and benefits, so it’s a risk to watch out for. The management believes they are on track, and are continuing to improve integrations.
Recession and Economic Instability: The general global slowdown and economic downturn could have an adverse impact on the projects of BSY and the revenue. In their earnings calls they have stated they are not immune to it and they could see slowing down of projects and a reduction in new projects. They are continuing to try to diversify their geographies and have become more prudent in operations.
Inflation: Even though they provide software services, they are also impacted by inflation because of expenses related to compensation, travel, infrastructure, and other core expenses. They have stated they are monitoring the effects of inflation, and are implementing cost savings initiatives to ensure there isn’t an adverse effect from inflation.

Conclusion

In summary, Bentley Systems is a solid company with a narrow economic moat, offering exposure to the infrastructure engineering software sector. The company has demonstrated strong financial health, although not without its unique risks. However, for an average investor with limited exposure to the sector, and a fairly technical and complex business model, it may not be the best option. You need to follow the company closely to determine if the company can manage to create superior long-term returns or if they get overtaken by unforeseen economic or competitive forces.