Q3 2020 Bentley Systems Inc Earnings Call
Our net recurring revenue retention rate of 110%, our deep and long relationships with our accounts again, our proven with our 98% account retention rate and growing and expanding those accounts continues to be our most prevalent source of growth and an area, where we continue to invest with our user success adoption initiatives.
A significant capex for US is our annual recurring revenue or are as of September Thirtyth 2020, our has grown by 9% on a constant currency basis since the same time last year.
Our GAAP operating income was 5.3 million for the third quarter 2020, compared to 41.4 million for the same period last year Theres a significant distortion in these results and I'll next highlight several of these items.
Firstly, our GAAP results include a charge of 26.1 million for cost directly associated with our IPO in September uniquely our IPO did not include the issuance of any new shares for Bentley systems.
Normally IPO costs are netted against the proceeds from primary share issuances and do not flow through the issuers operating results with no primary shares being issued in our IPO. These same costs were charged to operating expense now.
Next during the third quarter 2020, but it in advance of our IPO, we should a onetime stock bonus award essentially to all Bentley systems colleagues. These awards vested upon completion of the IPO and resulted in $15.4 million charge to operating expense.
In addition, during the third quarter 2020, we initiated an approved restructuring plan, you'll see this labeled as a realignment plan in our financial statement footnotes.
As a result, we accrued and recorded a $10 million charge to operating expenses in the third quarter 2020.
Almost exclusively related to severance benefits.
The plan impacts about 1100 of our 4000 colleagues and is not a cost savings motivated plan, we're investing and we'll continue to invest any savings to stimulate several of our growth initiatives you will hear Greg speak about momentarily.
Our GAAP net income of $5.8 million for the third quarter was similarly distorted by the significant and unusual items accordingly.
Accordingly, we also present, our non-GAAP adjusted EBITDA, which normalizes for these and other items to facilitate useful analysis and comparison.
Our adjusted EBITDA for the third quarter was $73.6 million up 39% year over year and up 43% year to date 2020 versus last year.
Continues to be an unusually profitable year for us as our cost savings initiatives undertaken as a precaution against pandemic uncertainties continue to generate the expected savings.
Contributing to unusually strong levels of profitability, even beyond what we would have expected in an ordinary year and even beyond a concerted reinvestment of certain of these savings into the growth initiatives. We're highlighting today certain of these 2020 cost savings are temporary in nature, while we expect a portion of the savings to permanently benefit our cost structure.
Our resulting year to date adjusted EBITDA margin of 32.5% is nearly 800 basis points of improvement over the same year to date period last year.
Of course due to the expected return of certain 2020 cost savings this level of margin in the pace of margin expansion is not sustainable.
However, we've historically delivered and expect to continue to deliver steady margin expansion from a normalized baseline of approximately 100 basis points per year for many years to come.
We also present adjusted net income aimed at similarly, normalizing outlier items to facilitate analysis and comparison.
Adjusted income net income for the third quarter was $51.4 million up 31% year over year.
Before I turn to our capital structure I'll offer a quick diagnostic on our unusually high 62% effective tax rate for the third quarter. This.
This anomaly results from the Nondeductibility, but much of the 26.1 million in IPO costs, we expensed during the quarter in.
In addition, as a public company certain of our executive compensation for all of 2020.
It becomes non deductible and upon our IPO in the third quarter, we trued up our tax provision accordingly.
These permanent differences were partially offset by some windfall deductions for stock based compensation.
However, the overall effect was an abnormally high third quarter 2020 tax rate.
Turning to our balance sheet capital structure and liquidity I highlight that we finished the quarter with approximately 138 million in cash and cash equivalents and $590 million of long term debt.
Net leverage based on trailing 12 months adjusted EBITDA was thus 1.8 times.
Our debt levels reflect borrowings incurred to support the payment of $1.50 per share special dividend declared and paid in the third quarter 2020.
Adding this to our ordinary recurring quarterly dividend of three cents, we paid $397 million in dividends in the third quarter 2020.
Obviously in the third quarter, we completed the initial public offering of our class B common stock.
Our secondary selling stockholders completed the sale of 12.4 million shares, including 1.6 million shares issued pursuant to the full exercise of the underwriters' overallotment option.
As mentioned there were no new primary shares operating our IPO and accordingly, the company did not receive any proceeds from the issuance of shares in the IPO regarding cash flow our cash flow from operating activities year to date third quarter 2020 was $176 million up about 49% compared to the same period last year, and we don't present, a non-GAAP free cash flow.
Metric, but it might be useful to know that our year to date Q3 2020 operating cash flows reflect the payment of approximately $4 million of the $26.1 million in IPO costs with.
With the remaining $22 million outflow expected to be reflected in the fourth quarter.
In addition, the year to date third quarter 2020 operating cash flows reflect the payment only have about 400000 of the 10 million in restructuring charges with again, the remaining 9.6 million of these costs expected to be reflected in our Q4 operating cash flows with some of this potentially deferring into the 2021 period.
Turning now to our expectations for full year 2020.
We expect total revenue in the range of 790 to 800 million.
This represents growth of 7.2% to 8.6%. We also expect they are our growth at 7.5% to 9% on a constant currency basis.
And given our strong profitability performance, we now expect adjusted EBITDA in the range of 250 million to $265 million representing growth of 33% to 41%.
Here are some additional modeling details you might find useful.
We expect full year interest expense of approximately $7.5 million, which declines in the event of any follow on offering to the extent that is reduced by the proceeds from the issuance of primary shares.
We expect our effective tax rate for 2020 to be 23% to 25%.
Normalized for the unusual IPO related activity I've mentioned, our effective tax rate is expected to be approximately 20% our rate we target prospectively.
We expect fourth quarter diluted weighted shares outstanding of approximately $304.7 million and full year diluted weighted shares outstanding of approximately $299.1 million.
And we expect full year outlays for capital expenditures, including minimal amounts for certain capitalized software development activities to remain less than 2.5% of sales.
As they have consistently been in the past.
Overall, we're pleased with our performance, while we're cautious given our visibility into some marginal pandemic induced softness and usage of our applications relative to last year and these are concentrated in certain sectors as Greg will further discuss overall.
Overall, our business and revenues have demonstrated relative resiliency and we continue to grow we're prudently managing our costs and delivering improved profitability. Despite these macro headwinds and have steadfastly reinvested in future growth initiatives, including our normal acquisition cadence.
And we remain intent on continued investment has clearly demonstrated by our just announced $100 million corporate venture capital initiative Bentley Joint ventures.
Greg I think now you are going to comment on new business developments and provide some further commentary on cone business.
Thank you David for covering the financial results and we.
From a range of financial performance and expectations for 2020 as a whole obvious.
Obviously based on our assessment for this fourth quarter that were now almost halfway through.
Had we instead had been a publicly traded company for the whole of the year. We would have first provided such annual guidance along with the operating results for the previous full year in March.
Then.
As you know we declined to ever provide financial guidance for individual quarters.
In such a volatile year and as these screens.
I believe we would have been updating those annual expectations for new upon such occasions as this after the end of at least the second quarter as well as men.
I am momentarily going to cover at some length, our current soundings regarding the tone of business.
This will also be more protracted than I expect to normally be the case because of the confluence of exaggerates cross currents now unfolding around us.
I want to share an abundance of the underlying observations to which we are managing soda and under these volatile circumstances, you can be best prepared to draw your own interpretations and I will conclude with some plans in announcements for going forward.
First I'd like to cover our DS why corporate news since the IPO in September.
There is more such news then will tend to be the case for most such quarters, because we've just completed our annual year in infrastructure conference and we tend to bunch up announcements to coincide with that.
Of course, our conference format was all virtual for the first time this enabled us to expand attendance by a multiple of the 1500 or so thought leaders that we could invite to our traditionally alternating Singapore and London venues, but it also will enable you to our Bentley Dot com website.
To browse in at least sample that presentations, which I hardly document.
The conference is annually anchored by our year and infrastructure rewards for advancements in going digital.
You may recall that we featured all the 2019 award winners in our EPS one document.
This press release announcing the 2020 lenders.
And the presentations for each of them are accessible now on demand.
For me the keynote highlight was my interactive discussion with Microsoft CEO Sachin Adela.
Our infrastructure digital twins, and our expanded strategic alliance initiatives to accelerate not only technical but also go to market collaboration.
We discussed why and how the events of 2020 to date have created imperatives for going digital to improve infrastructure projects operations and especially their resilience.
Joint initiatives with Microsoft include our project why 365 with Microsoft teams.
City scale digital twins for smart cities.
And our IP 20 platform integration with Azure digital twins and Azure Aiotv.
The resident theme of the year and infrastructure 2020 was that infrastructure digital twins are now practical and versatile thanks to our eye twins platform into our applications, which are increasingly I twin in April.
Rather than for Bentley colleagues to evangelize the benefits this.
This year the digital twin presentations were made by user organizations covering a full range of use cases and as you see here and as you can watch on line.
Our determine emphasis now is to get across the digital trends are inaccessible technology and strategy, even for smaller projects assets and organizations and that it's easy to get started.
To summarize the current point of departure in propagating digital twin aspirations across our user base.
Within the about 400 projects nominated by our accounts for these going digital awards.
Must be acknowledged that these are considered their exemplary projects by them rather than merely being representative.
The following proportions credited these digital advancements in 2020 by comparison to prior years seven.
17% credited for deconstruction modeling up from 4% in 2019. This is uniquely enabled by our twin enabled synchrony software.
35% credited reality modeling up from 28% in 2019.
This is enabled by our context capture software and cloud services, which produce three d. reality meshes from photographs and scans typically from drones.
23% up from 20% credited a connected data environment by which we mean combining project wise and asset wise.
27% up from 23% credit I models used to semantically aligned deliverables.
Often I models are behind the scenes enablers, which users don't see for digital workflows.
13% up from 7% credit asset performance modeling and which modeling and simulation applications are we used during the lifecycle of asset operations.
And finally, 33% up.
Up from 24%.
Digital twin.
Although that can be interpreted as aspirationally in many cases, if not literally I twins platform cloud services yet.
At the top of the scale with greatest potential benefits for infrastructure digital twins.
We released at the conference our 2020 Bentley infrastructure 500.
Unique global ranking of the largest owner operators ranked by their balance sheet infrastructure asset value net of depreciation.
Shell is number three shell Qgc in Australia was the winner in the jewelry category of utilities and industrial asset performance.
For their connected data environment, which over the last five plus years has taken full advantage of project wise and asset wise and now the I. twin platform for this world class Mega project and resulting assets.
But I find it particularly significant that this year shall showcased their groundbreaking I twin platform adoption for deepwater project digital twin.
All of which has occurred during 2020 to date this.
This extends the plant site cloud service that we have co developed with Siemens to include conceptual stage engineering.
Shells commitment during this austere period for them reinforces that industrial and resources owner operators recognize that going digital is necessary to effectuate the step changes in economic effectiveness on which their future depends.
But turning now from our corporate news to the tone of business, we do see a perceptible change from the second quarter of 2020.
During the first half of the year, we saw progressively by month and in turn four regions across the world.
A reduction compared to the same period in 2019, and the number of days that our applications were used.
And which generally returned to parity by the end of the quarter.
This is the slide from our IPO Roadshow presentation, which summarize today.
In this next slide from that Roadshow presentation, we expressed our directional expectations in degrees reflected by a different color for each sector about the potential direction for the trend of application days and.
In a nutshell during the third quarter of 2020. These directions has essentially.
Of particular significance for impingement on our overall revenue and they are our growth.
In the industrial slash resources sector.
Where I have just noted that owner operators seem generally to be continuing their initiatives and going digital to improve the operations and maintenance performance that.
That's as we say the opex of their existing assets.
There has been a detrimental impact for the workload of some of our users of the decline in capital projects activity, we say capex.
And that has shown up for the first time, presumably after working off backlogs in the third quarter.
Because these affected apc's engineering procurement construction contractors are individually very large enterprises.
They have tended to be early adopters of our E 365 daily consumption based enterprise licensing, which.
Which indeed helps them to manage just such cyclicality and so provides us a competitive advantage in their software budget allocations.
But commensurately in Q3 under Athree hundred 65. This has reduced our revenues from these EGPC accounts and annualized has also reduced our related eight our our relative to earlier in 2020, and even more so relative to.
2019.
Since this relates to macroeconomic conditions that are expected to prevail for longer than the direct pandemic consequences, we want to particularly bring this year attention.
But on the other hand, we do not now see the same downturn in the majority of our business has in industrial resources Capex.
So to help you more fully way and understand our interpretation of these crosscurrents.
Which seem to have never been harder to predict.
And the impact of which we think depends on our business mix both.
Both with respect to macro conditions by infrastructure sector, and with respect to our different commercial contracts sensitivity to short term consumption.
I will now provide many more observations about our software usage than we would normally find it useful to report.
And thus we do not undertake to update these measures in future.
Before breaking out each of the three infrastructure sectors that we measure.
Keep in mind that about a third of our revenue is from accounts, who can't be reliably classified into any of these.
Generally because layer diversified engineering firms, who variously work in all these sectors, but it is our belief and experience that the sector weightings within all of their businesses tend to correspond in aggregate to be EPS wise overall proportions and thus to reflect the same you.
Such patterns that I will next year.
To start with with respect to the same period in 2019, our overall application days declined in 2000, Twentys third quarter by about 4%.
After being essentially level year over year in 2000, Twentys second quarter.
In late arriving usage logs were factored in.
Application days for our accounts within the commercial slash facilities sector.
That's about 8% of our total we're down most deeply from 2019 at about 9%.
For commercial slashed facilities Capex accounts.
Engineering architecture and or construction contractors.
Application days were down about 14%.
Accounts in this sector do not tend to be on E 365 contracts.
Application dates for our accounts within the industrial slash resources sector.
Which is about 19% of our total application days were down from 2019 about 8% after being down from 2019 in 2000, Twentys second quarter by about 4%.
For industrial resources Capex accounts E.
Pcs, the largest of whom tend to be on Athree hundred 65 contracts application days were down about 11%.
Application days for our accounts within the public works slash utility sector were down from 2019 about 2%.
For public works Slash Utilities' Capex accounts.
Application days were up about 4% from 2019.
For public works last utilities, Opex accounts owner operators application days were down about 7% representing more than half of our overall decline in application days from third third quarter 2019.
We believe this is because many of these organizations reduce their workforce schedules to effectuate partial furloughs and suspended field work.
Many German utilities for instance adopted half time work in conjunction with pandemic Lockdowns.
In general.
Although obviously no one seems able to authoritatively predict future pandemic severity, we do not believe these policies will be extended or repeated.
And we are considerably less concerned about an enduring overall downturn in public works slash utilities.
Application days for our products rather.
Rather than for our accounts that are specific to public works last utilities and this is about 24% of our total application days for these products.
In the third quarter were up from 2019 by about 3%.
While modeling and simulation applications still represent the majority of our revenues.
Our collaboration systems have consistently grown faster.
In the public works last utility sector users of our mainstay project lies design integration in the third quarter of 2020 were up from 2019 by about 4%.
During 2020 accelerated by work from home virtualization overall users of project lives through our Azure cloud services income.
Including design integration managed services as well as our native SaaS project, why 365 have increased about 23% over.
Overall project wide revenues for 2020 year to date through the third quarter are up from 2019 by about 17%.
New business for asset wise faces the challenge of completing enterprise scale procurements during travel Lockdowns.
Usage of asset wise in the third quarter of 2020 increased over the same period in 2019 by about 4% over.
Overall asset wise revenues for 2020 year to date through the third quarter are up from 2019 by about 6%.
Finally, as to our new iteration platform.
Our our has grown throughout 2020, consistent with a reasonable chance to reach our goal of eight figures by year end.
Significantly I think as to new business in general.
Through the third quarter of 2020 year to date, we have achieved 89% of our overall new business quota.
Which after the pandemic handset, we set and seasonalize to be the same as 2019.
Within the new business Kroger, we doubled the wait for our cloud services project Wise asset Wise twins.
To sum this up for 2020.
During the third quarter because of the Eathree 65 application days downturn led by the APC accounts.
Which decremented IRA ARR into that same extent, therefore, new business.
We fell behind for year to date, 90% of 2019, new business pace.
We hope to catch back up to that pace during the fourth quarter and thus the full year and they're generally appears to be sufficient pipeline to chase, but obviously this can't be taken for granted.
What I can say is that we are quite confident in the relative resilience of infrastructure engineering and B S y and about our anticipated future.
To speak now about going forward as we announced last month.
Were going public process has helped us in recruiting world class software executive talent.
While I believe that we have self developed an excellent pipeline of executives internally during our 36 years as a privately held company. We obviously were not able to internally develop public company experience.
I am pleased to say that we welcomed over this summer.
First Nicholas Cummins as our new Chief product officer from S&P, where he had charge of SSH keys marketing cloud businesses and over time also successfactors and concur all of which we fully utilize Nick.
Nicole. This also has entrepreneurial experience is based in Munich, Germany. The majority of our colleagues are in our product Advancement group reporting up to Nicholas who reports to me.
And we welcome Catriona lowered 11, our first Chief success Officer, who led user and enterprise success initiatives at Autodesk over multiple decades.
Excellent results that we ruefully observed first hand.
Cat based in San Francisco is inaugurating, our user success and enterprise success functions reporting to me and we welcome to Chris Bradshaw as our new Chief Marketing Officer coming most recently from Blue prism, but having been at Autodesk through 2017 in senior roles.
Including Chief Marketing Officer.
This is based here on the East Coast and reports to Grasberg mine, our Chief revenue Officer.
Our restructuring charge in third quarter 2020 for colleague severance is not to cut our costs, but rather the opposite we are enabling Nicholas cat and Chris to Reprioritize, New talent needs has we resolutely reinvest a large portion of our 2002.
20 cost savings into our public company era growth strategies.
Mr accretion in existing accounts.
Force multiplying inside sales to better reach small and medium sized accounts.
Focusing on Asia, and joint cloud services with Microsoft and Siemens.
And addressing our final two growth strategies programmatic acquisitions and digital integrators.
We announced at our year and infrastructure conference that cohesive companies.
A digital integrator, which we wholly owned but manage independently within our Bentley acceleration initiatives acquired the UK based going digital advisory firm PC SG.
We are increasingly thinking of our Bentley acceleration initiatives as a second segment afforded by our increased resources as a public company.
And today, we are excited to announce a further initiative, we are committing to invest over a period of years $100 million in corporate venture capital through the new Bentley I Twin Ventures fund, which in turn will invest in entrepreneurial and emerging companies participating in the infrastructure digital twin.
An ecosystem being cannibalized by our high twins platform.
The first such high twin ventures investment.
Representative of many more anticipated has been in the future on a EPS, so Norwegian developer of subsea digital twins, including for shell.
And that closes the loop on our prepared remarks, and we look forward to your questions.
Thank you, Greg and David well I'll take the first question.
From Joe Vruwink from Baird.
Great Hi, everyone.
I, maybe wanted to start with just how it trends evolve specifically in the third quarter and Greg.
The commentary on the industrial natural resources was really helpful. You've also seen some comments from some of your peers.
That maybe things started to improve a bit and the month of October specifically with SC customers Ellie.
Natural resources I'm wondering if that was evident in your book of business at all.
Joe Thanks for the question, we do have.
Excellent telemetry and.
In the fourth quarter so far.
Everything has tended for the better.
We talk about new business new business for US is what we're selling it's the accretion in A.R.R., it's not our whole IRS just on the margin how much it grows and if it doesn't grow that I'd be traction from our new business.
So that's that's looking back.
Then the third quarter looked at any point than and usage has turned in the right direction I don't think Thats true however for the Pcs for the industrial.
Industrial resources firms that they use our software for really large projects. If you look at these.
Tcpcs and their own the ones that are public companies and their own reporting their down 15% to 30% on the previous year and.
Anyone on the call would be as well able as native predict when capital projects come back in the.
Process plant and energy sector, but we don't see it yet I'm afraid.
Everything else more than makes up for that thank goodness.
Okay, Great that's helpful.
And then.
One other thing that I'd say.
And it seems to be occurring maybe in this space.
Kind of divergence or.
Ross.
Backlog of work with civil Engineers.
Holding up comparatively much better.
Contractors.
Yes.
I think it's still going on project work is out there theres still a good pipeline.
If you're a civil engineer I suppose that Steve.
But how does that type of environment.
To that type of budget, you're likely to see for Q with your civil public works customers.
And the degree of visibility that provides for your 2021.
Well I think what you say is is quite observable.
It happens I was just on a panel during the past week with AC advisors. They are they.
Two surveys of all of these firms in the world over HCC for them is not construction, but rather consulting as they say so these are the infrastructure engineering firms the world over and they serve a most of them. They believe they have most of dollars and they are a result of the survey for 2020 as deferment of late expense.
Correct.
To grow slightly in 2020, now an AC advisors weighted it than not average or median but by farm size there.
The growth came out to zero for the year, but compared to what's going on with GDP and the economy. It is a relatively resilient.
Dr and of course is spending more ongoing digital which was the subject of the panel.
That I was on.
You know in this country.
And remember the United States is a little under.
Path for a bit under half of our red.
Revenue.
We look like we'll be welcoming a new administration.
And it's likely that we will join the rest of the world and.
Focusing on infrastructure investment as a means of fiscal stimulus because it's thought to that which has long there's the most enduring and best return on investment much of the world has already determined to do that and is part of the.
The reasons were.
Courage to about 2021 in particular.
But in the in the US we think.
That will that factors in and in fact these firms that I'm talking about are expecting to grow in 2021 about in to the extent they have grown annually prior to 2020 and as I say 2020 is a flat year, which which looks pretty good for that population you're talking about.
Great. Thank you very much.
We'll next year from Brian Essex from Goldman Sachs.
Brian you're muted I think area.
Hey, Brian Yes, great great. Thanks, and congrats on the results and emerging as a public company.
I was wondering if you could touch on you.
You've spoken previously about initiatives penetrate some of the smaller customers on your platform. Obviously the larger customers are are are pretty substantial in terms of their contribution.
Any any thoughts that you'd like to outline in terms of those plans for the other 33000 or so smaller customers or mid mid market customers on your platform and.
If your January that might expect from penetration of those accounts.
Well, it's very much our priority for 2021 has everything to do with the Reinvestments where were making now of our of our cost savings we want to be going digital in the way that we developed ecommerce capabilities.
We didn't have an E commerce capability until very recently, our new Chief marketing officer is very much dedicated to the had and are we mix of resources will help us with.
Direct engagement.
And and increasing.
Marketing effort and effectiveness as a public company and we have a very significant appetite to.
Improve our penetration there.
Some of our initiatives are underway, but more so.
We will be in in 2021, the engineers and the smaller firms need the same superior software has done the engineers in the in the larger firms.
It's just late in the game that it's getting our full attention, but it has that now.
I might just add Brian.
As a as a proof of concept for us on a head start one of our acceleration initiatives virtuosity.
Where were targeting.
Individual practitioners, which tend to be of course, the small to medium size enterprises.
Through an E commerce platform and embedding expert services with them.
It was actually.
Performing as expected.
And something that's going to.
Served to light the way for us as well.
Going in for the small and medium size accounts.
Great.
Well, maybe just a follow up.
You know in terms of.
Our expectations.
Actually as we saw yesterday with these vaccines Mcgrath.
You think about the scenario, where you might start to open up a little bit, particularly with respect that.
A little.
Little better.
Sean utilization from some industry. The question is it macro.
Macro environment are there any kind of the economic war or macro indicators that you typically look at let's just say what the impact or the legacy.
Reopening Mike outlined utilization on your platform in our meetings will that might be kind.
Hello.
One.
Well I do want to emphasize that other than in.
And just you on resources, and perhaps commercial and facilities all that that's relatively small for us thats why we havent dwelt on that.
The in public works and utilities any.
Any decline in application days, we think is kind of institutional about scheduling changing and I don't think application weeks or months would have would be down.
In some of these organizations that literally have responded to all.
Lockdowns with changing their their work schedules.
The most significant aspect of reopening are they.
Infrastructure plans.
Around the world and if I look at Asia in particular, we say focus on Asia, because it's been such a reliable source of new business growth for us this year so far.
It's it's not been better.
Better than last year as it normally is.
A lot of that depends on the fourth quarter. The fourth quarter is always a strong quarter for Asia.
Asia and countries like China has just done a new five year plan that emphasizes digital plan than digital cities and.
Uh huh.
Environmental initiatives and so forth all of which are are great for US then and open up new opportunities Australia.
Their new budget has a 10 year infrastructure plan for transport infrastructure were particularly strong and and the same is true in most countries in the world.
Anyone can handicap, it but likely to be also true.
In the United States.
We think.
And and focus on energy adaptation also is good for the.
The work of infrastructure.
Engineers.
And if I come down to another factor that that could be.
Helpful.
Looking forward it is that in our own country to be less antagonistic about globalization.
Will serve us well for instance.
And in China. So these factors are coming together to two.
As you say make us a rather.
Rather optimistic about 2021.
Great very helpful. Thank you.
Well next hear from Brad Sills from Bank of America.
Okay, Great Hey, guys. Thanks, so much for taking my question here and.
Maybe just a follow up to the comments you just made Greg on China, I think it might be helpful.
Hello.
To talk about how that lease position whats your presence in China. You mentioned this five year infrastructure investment plan.
How is better positioned to participate in some of these projects. Thank you.
We are really well positioned in China fully invested there it's only about 5% of our revenues now, but a lot higher portion of our.
Potential the the.
Question in China, the challenge for US while there is an immediate challenge that there are not.
Has your cloud services.
So were engineering around that and.
Chinese accounts need to do their own private.
Private cloud stack, and so forth, which they can and have accomplished with with fair I twins ambitions and so forth.
But we really have to.
Scale up to that.
Our opportunity in the cities of China for instance have assigned industrial design institutes to be responsible for their ban and digital cities. So.
Strategies, and we often have experience with them already so there's there's just a lot of headroom in China over 2020 to date.
It hasn't it hadn't gotten easier by there are some export controls now that slow things down.
And generally trade tensions.
Have not been helpful, but I think.
All changes for the better as as far as that and we really are very well positioned.
And in China in terms of talent and resources and.
There is a very good pipeline, there and we stand a good chance we think of reaching.
Reaching.
Last years, new business level.
By the end of the fourth quarter and we are applying ourselves.
Said, you asked me to do that.
Great. Thanks, so much and David one for you. Please if I may.
Gross margin came in quite a bit better than where we remodeled can you talk a little bit about the puts and takes there what's what's driving.
The upside in the gross margin at least our model.
Okay.
Sure.
If I assume you're talking about adjusted for the yes the nonrecurring.
Items that I've highlighted.
Yes, it's.
Part of it part of it is cohesive the acquisition.
Is is a strong margin performing services business for us. So that's a that's a bit of a lift and.
As I said, we have the other piece of our cost of goods that goes into that gross margin is our cloud costs, our cloud delivery costs and we continue to find efficiencies.
In delivering our cloud services so.
It's not that's contributing to some some improvements there as well.
Great. Thanks, so much guys.
Our next year from Matt Hedberg from RBC.
Hey, guys. Good morning, Thanks for taking my questions.
So I wanted to ask about 365, it's obviously as you alluded to Greg been a great competitive advantage for you guys over the years.
When you think over the next several years, what's the right way to think about the pace of adoption of East reached 65 in your base what that mix look like longer term and then when a customer moves to be 365, what typically happens to their spend.
So really Athree hundred 65, you might say Oh, Greg you've taken on this risk.
Yes, so sure about that.
Our predecessor, LSW program also had a mark to market based on consumption, but was only once per year. So it was lagged and now we don't have that lag, but it's so much preferable to the account for us to share the risk and cyclicality and and were prepared to share that risk it isn't a large risk in proportion to our Q.
The bulk of annual resets if you like the reason we prefer the Athree hundred 65 format. Despite taking on a bit more immediate volatility is it includes the success plan component, where we really competitively distinguished by having more civil engineers and structural engineers.
And Geo technical engineers, who can help in digital workflows that our accounts want them and taking full advantage of the software we embed them.
And we charge for that in the application day charge, so typically the spend.
Does go up.
Somewhat.
But from our standpoint, that's not the opportunity we are seeking it's the more if the accelerated accretion from application usage growing faster went in effect, we can virtually embed our experts to help the software get better use we can with our with our cloud services.
As for our applications, we can see what functions are being used and not use than be helpful.
In direct engagement going digital ourselves to embed our success for us and better enable them that that's what it is for us for the the motivation. So we suppose it will take another several years, but we'll end up migrating the LSW book to 365 and a year like this.
Doesn't deter us because a combination of forces that creates economic challenges and so forth.
We're we're pretty well able to say to absorb this additional volatility on the margin and we have an appetite to do more of it.
So just does just that thats, great just to frame the scale of that for you Matt.
So about a third of our EMR is these enterprise scale subscriptions and were give or take about halfway through it.
In terms of Ngls, the 365 migration.
Super helpful, David and actually just one more quick one for you on the margin side services revenue I believe it's been about 8% of year over year year to date revenue can you talk about the long term trend of services revenue in your overall mix and do you think you are going to be able to leverage channel a bit more for some of the lower margin services work.
Well.
If we do the better job, we do with our project lies an asset wise offerings. The less services would be required in the scheme of things.
The the future growth of services for US is the digital integrator opportunity to literally helped with the data in the case of an infrastructure digital twin when you open up what's been dark data. So you can bring the 80, along with the ITC and the OTI for this evergreen digital twin opportunity.
You see there needs to be improvement in data quality. It's a good job before engineering firms. When you say channel I encouraged in the panel at I described I said the future for the engineering firms is to be the creator and the curator because it's all it's never done you need to maintain the digital twin up today and to be in that.
Business of the analytics, and the benchmarking and so forth, which.
Which we don't wish to be in those businesses that those are opportunities for digital integrators and the best channel for us would be the engineering firms themselves to bring that digital twin opportunity to the owner operators. That's the that that would be that the long term way in which that occurs as you know we need to incubate some digi.
It'll integrator experience and so we have that under our Bentley acceleration initiatives, but we sort of compartmentalize that so we manage that differently than the.
And the software business, but yes, we do not wish to grow professional services within our core business, we wish that could be an opportunity for others, especially for engineering firms, who need to improve on their business model of selling their hours and which very much to do so and our S. A virtualized this year.
They have much more receptivity and motivation to do that and ever.
Thank you.
Well next hear from Matt Broome from Brazil.
Greg and David.
So during the quarter, you announced an expanded relationship with Microsoft I guess more broadly how did your strategic partnerships and benches with the likes of Microsoft Siemens and Topcon outperformed during the quarter.
Well with with Microsoft and Siemens both.
We sort of.
Transformed our relationships in each case, because weve for the past years focused on technical collaboration and now that has blossomed into these what I call digital co venture. These cloud services that are ready for market and we need to focus on joint go to market, where either of us can can sell them. So.
That's not just one initiative, but a bunch of initiatives, which happen at the same time to be occurring with each of Microsoft and Siemens transforming from merely technical collaboration to also go to market collaboration with Topcon.
Our joint venture is digital construction works and that's not the best place to be at the.
At the very moment and needs probably to diversify itself footwear, where we're working on focusing on heavy civil construction, where there are particular opportunities for we call a construction hearing where in design build approach is consider the the design and construction.
At the same time and innovate in that respect yes. The these tw Topcon joint venture is just right in the crosshairs of capital projects.
Delays and implications.
I think we picked up.
About a half a million dollars loss in the quarter relative to our.
Equity method investment in a joint venture.
There.
Because there has shifted from.
Revenue generation in the face of some pretty severe headwinds towards demonstrating some.
Referenceable successes and building out.
Building out their capabilities.
Okay. That's definitely helpful. Thanks, I'm just interested if you could maybe provide a little more color on the sort of regional trends that that you sold playing out during the quarter, especially in Europe.
Well Europe has been a bunch a separate.
Regions. It is tough to generalize I will say for US India. We include Middle East and Middle East.
Is still depressed in terms of.
Application usage really hasn't come back as has most of the world after the.
After the Lockdowns, which we think is now not regional but a matter of of the sector the injunction resources sector.
Affecting that.
And we've done all right year to date and our our.
In in Europe, New business, I think is regaining momentum but.
And if I just turn my attention to Asia for a moment Asia.
Our in Asia, there are economies that depended most on face to face travel.
And and even for a procurement processes, they weren't ready for being digital in India and other parts of South Asia. There were not the cultures of working from home and.
Tops and so forth all that has been surmounted now in general I think all of infrastructure Engineering has virtualized successfully is better off for it can now everyone can work on projects anywhere with collaborators anywhere and I think they're energized by it and we will never.
Give up that level of virtualization with the collaboration tools that they've learned in and honed.
But but Europe.
Has the.
Has.
Thats tough to generalize, but but has still some improvement to returning to.
It's on one side on your.
Okay, alright, thanks very much.
Thanks, Terry Jason So they know from Keybanc.
Yes can you hear me all right, yes, we can Jason great.
Really appreciate all the color on the different businesses, but looks like renewal rates are still pretty strong, but how should we think about the relationship between some of your usage trends and revenues for the non easily 65 business.
Well I'm going to let David add more but if they are unrelated but when when we count application days that has a direct bearing on Athree 65 revenue and therefore on a R.R. and therefore on what we call new business I realize new business new business, our own quota, it's not something we we measure for you necessarily but we.
Here, where we're not far from last years, new business and we can catch up even than we think.
But all of that is impinged upon by application days.
That's on a 365 otherwise it makes no difference for the great bulk of our renewals that that are not based on application days.
You live there there isnt a direct impact and renewals are recurring and accounts are not expecting too.
Spend less and I think are all expecting to spend more.
Yes, I would throw into the category of Apple.
Application day usage, that's already manifest in our our revenues these.
Our term license business, the monthly and quarterly term licenses, obviously would have been.
Picked up in the results you see already but.
With with the majority of our business being annually.
Renewing.
You know the implication is a matter of how prolonged is.
Is the.
The impacts of the pandemic and.
If it if it carries on for another year, you'll start to see that in summer in some of the annually renewed contracts.
Great and then maybe a quick follow up on.
Operating margin so if I look at our adjusted operating margins of 34%.
Hi, its watermark in company history.
Any particular thing about expense management and then how sustainable are these margin level.
Yes so.
A good question.
I'm not I'm not here to provide our 2021 margin guidance, but I would like to at least comment directionally on on some of the trends you're seeing and.
Where we're headed so 20 as I said 2020 is.
Fairly opaque.
Unusual year in terms of our in terms of our profitability because of some pretty significant cost savings initiatives.
So so even backing up from there and looking at 2019.
As a as a normalized baseline to start thinking about.
Margins.
You would have expected us to see our normal a 100 basis point or so embedded.
Embedded improvement just from.
Efficiencies and scale.
And then.
We have a pretty significant cost savings in 2020.
[music].
In the neighborhood, Jason AFFO of $40 million.
And at least at least half of that is going to return to our cost structure in 2021.
The.
The other thing I will point out for.
2021 relative to 2020.
Is that effective October onest, we're taking three.
$30 million annually of compensation to the executives that previously was cash based.
And we'll be stock based going forward I'm, not we're not seeking or expecting margin expansion credit for that but I just want to make sure it's understood that.
In the fourth quarter, you'll see $7.5 million and for the full fourth quarter 2020.
Moving from cash based stock base.
And then in 2021, a full year of 30 million, which is given.
Give or take.
Three and a half margin points.
And we'll we'll add that back when we're reporting adjusted EBITDA just to be benchmarked and align to our peers.
Then of course in 2021, you can also expect.
Normal scale efficiencies of a 100 basis points or so coming back to our improve our margins and we're committed to do that and we demonstrated ability to do that.
Regularly annually going forward.
Okay, Great appreciate the color and for our last question will Girton go window from Berenberg.
Yes, hi, good morning, Thanks for taking my questions first.
The first one is just a reluctance shot example, you gave are correct and I was wondering.
If you could talk a little bit more about the usage what happens between the more advance owner operators like shell versus an average cost of Richard you have on the owner operator side today, maybe specifically you know how much of the uplift and there is one day to adopt other parts of the technology all the way to the digital twin versus just the modeling side.
Well in the shell of course is a.
Private company is in the private sector and.
Wouldn't be so surprising innovation happens faster in the private sector.
As in the case of shell than in the case of publicly owned infrastructure.
With departments of transportation and government.
Government management, so, but but they the great thing about selling to owner operators and public works and utilities, if they don't compete with one another so they're glad to share advancements and so forth. So the single thing that I'm. Most pleased by this year is that the year and infrastructure conference again, I Hope you will all watch at least some of the SEC.
And is there, but the the the fact that you have some of these owner operators wanting to present and share with the affinity group about our owner operators.
Around the world. It's one of the reasons, it's so important to watch the Chinese we sometimes say, they're in public and infrastructure, who does R&D that and in China. They do they wish to adopt everything as quickly as possible in terms of the digital claims and its great to see those examples one week.
Come back to the United States sand and are changes that we may expect here, we hope we may be able to influence.
And infrastructure spending bills, so that it would encourage digital twin approaches to improve the economics for the whole lifecycle and I think thats not out of the.
Not out of the question.
Generally of what what what holds us back as levels of ambition and levels of ambition to go and going digital has decidedly improve that's my take on it.
On our year and infrastructure this year and the and the owner operators themselves sharing these success.
Success stories I know, we're at the end of our time and we've used more time than usual because of this notion that we had to include our introduction to the company and then this kind of business and in conclusion I would like to thank our Bentley colleagues.
The 4000, whom are now all shareholders, but I want to thank all of them for their sacrifices to start with and then commitment and resourcefulness in this year, so far and we all look forward to 2021 as I've said, but first let's deliver which is in our sights a terrific end to the.
Year.
Of resilient Twentytwenty.
Kerry was I supposed to say that now are you going to sign off. Thank you everybody. Thanks, Greg Thanks, David.
Okay.
Thanks, All bye bye.