Q4 2020 Bentley Systems Inc Earnings Call
Enable to do the hard work of consummating smaller deals to fill white space.
But at the same time, the historically high valuation multiples, which pertained presently are reducing potential sellers, including private equity funds to test the waters with prospective strategic acquirers by virtue of our capital races, while we will retain our discipline. We now have the wherewithal to consider deals which would be <unk>.
Both substantial and accretive.
No promises.
And speaking of acquisitions since last we were together.
Late last year cohesive companies, our main captive digital integrator acquired SRO solutions headquartered in Manchester U K. This adds geographic and industry scope to our retinue of consulting and cloud services around Ibm's Maximo enterprise asset management system, which we are working to advanced.
To infrastructure digital twins.
<unk> is a global leader in maritime and industrial applications with Maximo and.
It has developed specialized product offerings for remote environments, which are challenged by inconsistent network connectivity and stringent regulatory requirements for safe Opex in places such as offshore oil and gas platforms shipping and Antartica.
We have just announced the acquisition of Australia based E. Seven a leader there and software for the heavy civil construction workplace.
The integration of this proven technology will extend our synchro for day construction modeling portfolio to include site and equipment logistics and progress capture.
Our digital construction works joint venture with Tata and will help to further globalize its reach.
We are acting upon our vision for construction digital twins, which advanced three D designs to for D models of time space and cost.
Other than competitive alternatives, which for actual construction performance tend to dumbed down three day to digital to day head.
A civil construction performance contractors can immediately apply our advancements accelerated by the Virtualized lessons of 2020.
Back to operating results, even though 2000 Twenty's fourth quarter is our subject today, we have already presented some aspects back to you.
Had presented some aspects to you back in mid November.
We're also here to provide you today, our first full year financial outlook.
So I think we all look forward to future normal years, where greater visibility can be expected in this year.
After I offer my qualitative observations about 2020, and some plans and expectations for 2021, David Hollister will go through all the financial numbers and then there will be ample time for your questions.
My own objective for these sessions is to share my understanding and interpretation of what's behind the operating results numbers themselves.
As of last quarter, we had seen a notable shift in the pattern and trends of usage of our applications, which could have been belied by just focusing on the overall totals.
So I went to great lengths and integrate detail to explain and quantify the changes from the first half of 2020.
Which had entirely to do then with the primary geographic progression of the pandemic into the second half where the secondary impacts diverging across infrastructure sectors became prevalent I.
Our reported the actual degrees of usage impact by sector and called out in particular, the sudden downturn in the engineering workload of the industrial centered engineering procurement construction contractors epc's, among our accounts, which correlated with dislocations in the fossil energy markets.
Now the bulk of our revenues in <unk> are associated with annually reset contracts paid in advance and thus not sensitive to short term usage fluctuations. So in general we remained resilient throughout the year, even though overall application usage had in Q3 declined from year earlier levels.
However, it happens that the epc's tend to be large global accounts, who were early takers of our <unk> hundred 65 commercial program, where we charge per application per day. So they are relatively large proportion of the usage decline has suppressed our revenues are a R. R and.
Thus net revenue retention somewhat.
They almost offsetting gains in other sectors and accounts being less concentrated in the <unk> hundred 65 program did not similarly flow into these operating results.
Now we favor the <unk> hundred 65 program because it virtually embeds our success force of subject matter experts to help our accounts with their priorities to instill digital workflows and thus to increased usage of our software.
This has tended to lead to more or less steady growth in <unk> and revenue from <unk> hundred 65 accounts in normal times.
So we have pressed on with the incremental upgrade of our existing enterprise subscriptions to <unk> hundred 65, including throughout 2000 Twenty's fourth quarter.
And attraction of our program versus the enterprise agreements of our principal competitor Autodesk is that the commitments autodesk requires or use it or lose it so especially in times like these accounts naturally prefer our contracting economics, where they pay for only what they actually use.
Nevertheless, having observed the case in point of our new cyclical vulnerability from the EPC. We are now preferring to agree with many new <unk> hundred 65 accounts that a collar.
Symmetric and negotiable, but typically say, 10% up or down will pertain from each year of an <unk> hundred 65 contract to the next.
That way, we still have the right healthy incentives, which drive our opportunity to grow substantially while at the same time being protected on the downside from too much portfolio volatility exposure to macro trends.
Going back to reporting by infrastructure sector I'm going to cover only a very brief update for each rather than all of that previous detail. This is because from Q3 to Q4 and frankly foreseeably for all of the sector directional trends that I explained last time have generally continued I will just highlight anything there.
Now getting on to specifics the EPC drag has only become somewhat more pronounced I do not believe we can expect the workloads of these accounts to recover until they have updated their own project mix to work more so on energy transition and that will probably take at least multiple quarters.
However, and now finally to get to the more current tone of business I am glad to report that the global Green shoots that we sniffed in November has continued and by the end of 2020. The overall rate of application usage had grown back to surpass the pre pandemic levels of a year earlier.
Obviously the year over year comparisons now get easier throughout 2021, and I don't anticipate that application usage will continue to warrant such a minute focus but to close out the comparison by sector recall that in the pandemic debt commercial facilities infrastructure lagged the most.
With industrial resources infrastructure, not much better while public works and utilities infrastructure remained most resilient in terms of application usage.
Also recall that we have a central proportion of products and accounts that are not specific to an infrastructure sector. Because they are applicable or participate in all sectors consisting of applications for general modeling, including Microstation for general project delivery, including project wise and for the structural and geotechnical disciplines.
In our experience these applications tend to be applied in the same proportions to projects within particular infrastructure sectors as the proportions pertaining to our products and accounts that are sector specific I bring this to your attention because I want to highlight the particular brands among our many here, which grew most notably in the relatively pros.
At year of 2020.
Where run rate is defined as a RR, including annualized term licenses plus last 12 months of license sales, where applicable and by growing notably in run rate I mean by millions of dollars and by double digit percentages.
Among the products used across all sectors I would call out for notable run rate growth project wise, which came into its own for Virtualized infrastructure engineering during 2020, primarily as an Azure cloud service now.
Incidentally, we don't Count project wise within application usage as it is typically used along with an application either ours or other tasks.
I'd also call out plexus, our flagship brand for geotechnical engineering, the analysis of sub for surface foundations could be called the infrastructure of the infrastructure.
And our continued and increased investments in geotechnical are resulting in a greater proportion of geotechnical engineers work being done through <unk> digital twins redo.
Reducing project in asset risk and increasing environmental resilience.
Turning now to the particular infrastructure sectors.
After the third quarter commercial facilities had been the most impacted by application usage decline from a year earlier.
But in the fourth quarter commercial facilities improved somewhat to be down only by mid single digit percentages from the fourth quarter of 2019 and in fact, among our applications open buildings achieved notable run rate growth during 2020, and the industrial resources sector.
The year over year decline in application usage intensified to reach double digit percentages below the fourth quarter of 2019 how.
However, among our simulation application brands, Saks, and Moses, which we regard as particular to the industrial resources sector. As they are used for offshore structural and wave motion analysis.
Chiefs notable run rate growth. During 2020. This is by virtue of their widespread and we consider market leading application, including in China to offshore wind structures and now for floating as well as fixed offshore platforms. This is also an example of the energy transition I mentioned earlier from these.
Products being used previously for in the main for offshore oil and gas production facilities.
And to conclude with our mainstay in the public works and utilities infrastructure sector for accounts and products, respectively application days increased from the fourth quarter of 2019 by low and mid single digit percentages.
And among application brands, particularly the public works and utilities.
<unk> increases in run rate were achieved by open roads and open rail.
Which we considered to be the global market leaders in their respective domains and by open site and open bridge.
Finally for <unk> cloud services, which introduced digital twins functionality for any user or accounts. We did reach our 2020 goal to end the year with RR in eight figures above $10 million.
Today, we're reporting 2000 twenty's actual growth in revenue.
<unk> and.
And run rate, which obviously exceed these flattish trends in daily usage of our applications.
Of course, almost a third of our revenues are from project wise and asset life for cloud services that grow faster than our traditional on premise applications and again, we don't include them in the application days I've been quantified but.
But I would like to highlight a driver of our revenue growth, which for 2020, we measured for the first time.
When we quantify application usage, it's in aggregate, we're counting a day of any application is equivalent to any other for this purpose.
Among our application universe. Some are much more specialized better fit for purpose more valuable and thus more expensive per application day than those that are more generally purposes, such as at the extreme microstation.
Were they all began.
So a constant source of new business growth for US is the upsell of a particular user to a more specialized product for greater fitness for purpose to their infrastructure Engineering project work.
Our longstanding example would be users advancing from Microstation to open roads.
Our newer example would be advancement to open windpower.
Again, that's just been introduced in the past year for energy transitions.
Most of this application mix accretion to give it a term still lies ahead of us.
So focusing on the makeup of our new business growth.
This application upsell phenomenon results in apparent attrition from the incumbent product.
But more than offset net by the accretion in the incremental product.
We have previously not been able to quantify this growth rate factor that I've vaguely referred to as increasing specialization for 2020 application mix accretion accounts for about two 5% of our applications revenue growth.
Now speaking of new business growth. It is an explicitly defined measure in our company the.
For formulation of which is shared and the incentives for every quota carrier and every territory executives in every operating and corporate executive.
As I suppose every company does we weighed our dollars of new business growth. That's all accretion net new sales net of attrition by co efficient, which reflect our assessment of their relative commercial value.
Generally based on their degree of recurring nature.
We fine tune. These factors at the beginning of every year to equate to create what we regard as the appropriate incentives.
Here by way of example is our new business growth waiting for 2021.
The highest coefficient correspond to our priorities cloud services for a project wise and for asset of network performance C&I Twins and.
And for virtuosity and <unk> hundred 65 subscriptions.
So to report on our 2020, new business growth by region.
Laggards in terms of our quoted achievement were middle East and North Africa, presumably because of their energy market exposure.
And to a lesser extent southern Europe.
On the other extreme.
While southeast Asia did not quite achieve its ambitiously set new business growth quota the region did surpassed 2019, new business growth.
The U K, both exceeded quota and 2019 in new business growth.
And the region, which led the way in new business growth, surpassing both quota and 2019 was greater China.
Thanks to strong performance in the fourth quarter, and probably because physical business reopened there earlier than elsewhere.
It's worth noting that our company did not set materially lessened new business quotas for 2020, nor reset lower quotas after the pandemic deepened.
Our new business growth budget set early in 2020, but after the pandemic accounts there was very nearly the same as 2019 actual new business growth.
Pleased to say summarizing 2020 that we came very near to achieving our new business growth budget for the year.
Thanks to a strong fourth quarter in which we did achieve our budgeted new business growth.
While David will shortly review, our 2020 revenue growth results I would like to point out that during the year, we improved what I could call for quality of our revenues.
Just as in the relative coefficient, we apply to wait new business growth for our quota carriers and executives, we all would give preference to growth in recurring revenues and.
In 2020.
As our perpetual license sales declined from 2019.
Rather surprisingly by only mid single digits. Despite what one would have considered an economic environment, where accounts would be less likely to make capital purchases and has our episodic professional services also declined by mid single digits.
Our recurring revenue proportion indeed correspondingly increased.
So turning to page now to 2021, the obvious challenge for this financial outlook is that we can be fairly confident debt by the end of the year economic growth prospects will have improved but we can't be very confident about how soon that turnabout will take effect.
So we must rather fully expect to be updating our annual financial outlook after each quarter as this year actually unfolds.
And our annual business planning at Bentley systems.
Work out what we can and wished to afford spending in each caption of our discretionary costs and expense in relation to our forward looking IRR updated monthly this we call our head cost alignment model.
We accordingly manage to what loosely corresponds to our EBITDA margin percentage.
Now, we do that at our budgeted constant currency exchange rates throughout the year. So we don't zig and zag and a resource commitments just because of something FX rates that we can't control.
But we are not very vulnerable to changes in the demand environment. In this respect because that's constantly reflected in our <unk> book on which our head cost alignment discipline is based.
So as to our targeted operating margin improvement of 100 basis points per year.
That could happen that because of FX volatility adhering to this at budgeted exchange rates for Nonetheless resulted in a somewhat different indicated an improvement at actual FX rates, particularly as our natural currency hedge.
Our colleagues are approximately distributed in relation to our revenue currencies, that's good but it's not perfect.
But to get to the point in the year 2020, the sources of margin noise for a much larger than foreign exchange rate volatility and include the outsized favorable and compounded impacts of decreased spending on travel physical events and out of caution colleagues raises and incentives.
It.
As David will explain most of 2000 Twenty's operating margin improvement is of this windfall nature, rather than as a consequence of our intended and cost alignment hence.
Hence we've modeled a normalized 2020 operating margin scenario as he will show next from which to base. Our annual 100 basis points improvement objective for a correspondingly normalized 2021.
Put another way while committed to achieving what amounts to our annual EBITDA improvement goal.
We otherwise wish to benefit the future as much as possible through thoughtfully targeted spending even at the cost of what otherwise could have been yet higher current margins.
Considering this our planning exercise for 2021 has centered around how best to allocate the investments two initiatives, which we believe will sustainably improve our organic growth rates.
As afforded by spending in 2021, just these windfall 2020 points of margin.
Incrementally and outside our financial outlook here, we do also expect to inflect our growth further upward through increased acquisitions as I mentioned at the outset.
Because the majority of our sand can be achieved through accretion within our existing accounts. The highest priority. We have is fully funding our new success Advancement group.
We did not have this organization nor most of its functions a year ago and it is already at a head count of 169 positions and growing.
If direct SAR <unk> hundred 65 success plans delivered primarily by our product advancement groups thousands strong success force of credentials subject matter experts through.
Through its success managers and support account managers, all accounts, including SMB small and medium sized businesses are served by its frontline success managers and licensing success communications and learning content teams.
The second new initiatives that we're fully funding in 2021.
As to sharply increase and to digitally enable our sales resources directed at SMB accounts.
Has smaller engineering organizations positioning themselves for increased opportunities in infrastructure.
And as they react to autodesk aggressive pricing measures.
We're already competitively stronger products would be favorably considered if we could gain their mind share.
Having a higher profile as a public company has helped to open a store for us, but we have also needed to increase our own mind share dedicated to F N b.
Now one could say that during 2020, all companies have de facto pivoted to inside sales, but we experimented creatively and successfully I think.
We originated virtuosity, Inc. As a captive reseller offering a unique virtuoso subscription primarily for SMB engineering practitioners.
<unk> offering combines virtually delivered expert assistance with our applications all available through our first ever ecommerce website.
This net new business has grown steadily for that for 2021, we are determined to mainstream and globalize. These virtuoso subscriptions and <unk>.
To add to virtuoso is offering the combination of perpetual licenses and such expert assistance for.
From startup a year ago virtuosity is now up to 90 inside sales colleagues with another 10 currently being recruited.
And we are at work on a full program of marketing and self service systems investments to support them.
Beyond virtuosity throughout every function and mentally systems, we are reorganizing to newly focus on this SMB opportunity.
The third initiative that we've increasingly prioritized in 2021 is our investment in digital integrators.
We think that all infrastructure owner operators will benefit from and will ultimately apply evergreen digital twins for their projects and assets, but we realized that most will not be self sufficiently capable of digital twin creation and curation.
The requirements for this are to combine.
E T and through continuous surveying improving the quality of newly opened previously dark engineering data.
And introducing newly enabled machine learning and analytics.
Long term debt providers of the digital integration services should be for infrastructure engineering firms.
They increasingly realize that their survival depends on evolving to a better business model than their current default of selling services by the hour.
And 2020 has driven home debt going digital is of the essence for improving their economics.
For a constantly growing number of the most enlightened firms are working with our <unk> platform to develop proprietary analytic services, but there do not yet exist commercial templates for digital twin integration services let.
And we regard debt it is too much to expect the engineering firms, which in general are not R&D minded to discover how to make this business work, both technically and economically.
As the first mover, we have a lot to gain from accelerating that rather than waiting for the stars to align hence our self help digital integrator program of captive trailblazers.
Digital construction works is our 50 50 joint venture that we co founded with top current positioning systems in 2019 is.
Its business plan, including a strong proficiency in applying our synchro software for advanced work packaging.
Has been disrupted by the same slowdown in industrial Capex, which affects our EPC accounts.
So it has pivoted to the heavy civil for day construction modeling opportunities, which I mentioned in conjunction with our <unk> software acquisition.
We started digital waterworks from scratch to extend our market leading open flows water modeling software and our <unk> platform to operations digital twins for water utilities.
Which require digital integration within their enterprise environments.
Initial projects are now underway, but we will accelerate this in 2021, you likely have seen Autodesk recently announced acquisition of <unk> for $1 billion to begin to try to catch up.
During 2021, we plan to incubate further domain specific digital integrators, starting with digital tower works to embed our eye twin powered open tower software within the enterprise environments of major communications infrastructure operators, enabling them to expedite their five G rollout to telecom.
Tower digital twins.
Our cohesive companies' acquisitions enable us to hit the ground running with promising digital integrator skill sets and existing enterprise relationships.
Both cohesive solutions in SRO, which I reviewed earlier, our leading integrators of Ibm's Maximo asset management system, and our aspiration is to enhance each maximal installation with infrastructure digital twin functionality.
Tcs G acquired last fall and now globalizing from the U K assets.
Leaders for digital twin advisory services to owners.
And completing the picture our twin acceleration ventures fund seeks to extend the reach of our <unk> platform and of our digital integrator experience curve through minority investments, where we can ultimately benefit as well from investment gains.
So this new digital integrator portion of our business consists of several startups, which of course are initially unprofitable and these established companies delivering primarily professional services, which even at full maturity are not capable of generating operating margins comparable to our software.
Profitability expectations.
Lastly, many of our acquisitions are of earlier stage companies, which necessarily are initially relatively diluted to our ongoing operating margins.
In general we undertake to absorb and offset these dilutions in stride.
But acquisitions of greater scale could cause us to somewhat reset our point of departure for operating margin improvements.
My point in going into detail about these 2021 objectives is to explain our rationale for reinvesting the majority of 2000 Twenty's windfall operating margins into these initiatives.
We are working to generate gains and growth for periods, which do include 2021, but range as well into the 2000 twenty's future.
But I'm grateful that we had a CFO with a track record and the authority to newly solve each year the financial combination, which has been a hallmark I think of our Prudential family stewardship to date.
Investing as much as we can to benefit the future while at the same time by virtue of scale leverage and efficiencies for which we hold ourselves accountable improving our operating margins steadily and incrementally.
Now before turning over to David to quantify this.
Unusually for a CEO speaking to investors in our case it PSY that includes all of our colleagues.
I would like to acknowledge their contributions throughout 2021.
We all shared sacrifices and raises and incentives, which along with the pandemic itself lasted longer than we expected.
We have largely managed to make that up already in and for 2021.
But it is significantly due to the resilience and resourcefulness of our colleagues that by year end 2020, we got back to pre pandemic rates of not only global application usage, but also overall new business growth generation I consider this an excellent outcome and a springboard for 2021.
We can't know when presumably during this year the macro demand environment will snap back.
In our commercial models, we only get paid for the actual elapsed consumption of our software not for anticipated growth.
So our financial outlook for top line growth reflects a relatively wider range than we would expect for a typical year.
I would emphasize our operating margin is not similarly exposed because of pandemic recovery to physical infrastructure activities are delayed.
So with Dr costs of travel and physical events.
But most importantly, with and for recovery. There is every indication that infrastructure engineering will be fully prioritized.
And that going digital is the key to the improved resilience and adaptation that the world now more fully values.
To quantify that and the other details our financial operating results for 2020, and our financial outlook for 2021 over to David Hollister.
Yeah.
Thanks, Greg and good morning, everyone.
I'm first going to discuss our fourth quarter and full year 2020 results and then I'll provide our financial outlook for our full year 2021.
Also comment briefly on our liquidity and significant capital structure transactions, Greg mentioned.
I'll also close with a few thoughts on our long term financial targets before getting to Q&A.
I'll begin with revenue performance.
Our fourth quarter revenues grew eight 2% year over year to reach $220 million bring.
Bringing total revenues for the year to $801 5 million growth of eight 8% for the year for.
Breaking that down further subscription revenues, which are 85% of our total revenues grew nine 4% year over year for the fourth quarter and 11, 7% for the full year with.
With strong organic growth across all regions led by the Americas and APAC.
Obviously that growth is stronger for the year and for the fourth quarter.
With the impact of <unk> 365 consumption based short term subscriptions still temporary and overall growth.
And some momentum there and again this is disproportionately manifest in users with industrial and resources and market exposure.
Our perpetual license sales improved during Q4 to be flat for the same quarter last year, bringing total year to date license sales for $57 4 million down $2 4 million or three 9% for the year.
Professional services, while only about 8% of our total revenues.
It's still our most volatile revenue source.
Professional services grew seven 7% during the quarter, but remained down five 5% for the year.
Professional services in particular benefited from the 2020.
Cohesive solutions acquisition, the <unk> acquisition and the SRO solutions acquisition. Each of these are professional consulting businesses added to our digital integrated portfolio.
Without the benefit of the acquisitions are professional services declined by $20 8 million from 2020 relative to 2019.
The organic decline was twofold.
Firstly other than our digital integrator businesses, we continue with a concerted effort to migrate episodic professional services from days in rates and fixed fee arrangements and into recurring subscriptions.
This migration accounts for approximately half the 2020 organic decline.
The remaining organic declines in professional services, primarily related to pandemic induced cancellations deferrals and slowdowns with a disproportionate concentration in our industrial resources and markets.
We've previously noted these episodic professional services revenues are typically for us where we will feel softens in the face of macro headwinds and cyclicality.
To a lesser degree, we'll also see any macro softness manifest in a perpetual license sales and certain of our shorter term subscriptions in particular those E 365 daily consumption based subscriptions.
Greg discussed, while we were resilient and growing we're cautious about the lingering effects of the pandemic in particular within the industrial and resources sectors.
Which represents about a fourth of our of our revenues.
Book works in utility sector, our largest end market representing about two thirds of our revenues, while it's not unattractive it still remains relatively robust for us.
Our last 12 months recurring revenues, which include primarily our subscription revenues.
But also includes certain services revenues delivered under contractually recurring success plans increased by 10, 4%.
For 2020, this outpaced our net recurring revenue retention rate of 108% due primarily to new account growth both organic and acquired.
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 significant source of growth in an area, where we continue to invest from our user success adoption initiatives as Greg articulated.
A significant kpis for US is our annual recurring revenue or <unk> for 2020, our <unk> grew by 8% on a constant currency basis and ended the year at $752 7 million at the end spot rates.
Our GAAP operating income was $54 3 million for the fourth quarter of 2020 compared to $42 7 million for the same periods last year.
For the year 2020, our GAAP operating income was $150 2 million compared to $1 $41 9 million the preceding year.
In order to understand our GAAP operating results you have to take the time to understand all the significant and unusual activity we undertook in 2020.
I'll highlight the most significant of those here.
Firstly, our GAAP results include a charge of $26 1 million for costs directly associated with our IPO in September.
Is equally 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 don't flow through the issuers operating results.
With no primary shares being issued in our IPO those same costs for charge to operating expense.
Also during the third quarter of 2020, but in advance of our IPO, We issued a one time stock bonus award essentially to all Bentley systems colleagues.
These awards vested upon completion of the IPO and resulted in a $15 1 million charge to operating expense.
And as mentioned last quarter during the third quarter of 2020, we initiated an approved a restructuring plan.
As a result, we accrued and recorded a $10 million charge to operating expenses in the third quarter of 2020.
The charge was almost exclusively related to severance assets. This was not a cost savings motivated plan, rather we align resources to support our growth initiatives and reinvest it accordingly, as you've heard Greg discussed.
Also during 2020, we incurred unrealized foreign exchange gains from intercompany financing transactions of $22 3 million. These.
These transactions are being translated into their functional currencies at the rates in effect on each balance sheet date, and they fully eliminated in our consolidation.
As do our peers, we exclude foreign exchange gains and losses from our adjusted metrics as they are not reflective of our ongoing business and results of operations.
So for better analysis and understanding of underlying performance.
Remove the skewing in non recurring nature of these transactions by guiding and reporting on adjusted EBITDA, which was $77 1 million for the fourth quarter 2020.
$266 million for all of 2020, an increase of 41% over 2019, and representing an EBITDA margin of 33, 2%.
Even with this adjusted EBITDA metric, there's still a lot going on inside of 2020 that needs to be understood. So next I want to double click on that and share some further insights.
So.
Clearly 2020 was anything but a normal year for us.
In addition to everything both Greg and I have discussed so far I believe theres more to understand about our operating expenses to better understand our margin performance.
This analysis is intended to show a normal margin profile for 2020.
Related back to 2019, which is the best and most recent proxy we have for a normal EBITDA margin year.
And show a normalized margin performance for 2019 and 2020.
Which then informs what we expect for 2021.
So in this analysis are normalized for two circumstances.
The first adjustment I would make here is to reflect the fact that pre IPO certain of our top executives were paid only in cash.
Post IPO those same top executives will be paid in a combination of cash and stock specifically approximately $30 million per year.
Previously paid in cash will now be paid in stock.
This re characterization as stock becomes an add back adjustments when arriving at adjusted EBITDA.
Again, we're seeking no margin improvement credit for this re characterization.
It's done to better align us to comp structures and margin profiles of our peers and competitors.
<unk> had this re characterization has been in place for all of 2019.
And also for the first three quarters of 2020 before the IPO.
Our EBITDA margins would have been higher by these amounts.
The next adjustment I'll make here is related to expenses not in our cost structure in 2020 that.
And that we expect will be in our cost structure in 2021 Cigna.
Significantly this is related to some fairly substantial pandemic related cost savings in 2020, which.
Which we expect are not sustainable as we anticipate easing into a post pandemic normal DC.
These savings relate to curtailments in 2020 incentive compensation.
Travel expenses and incremental costs associated with promotional activities and live events.
To be clear this is not all of our cost savings in 2020, many of which we have reinvested into our business to stimulate our growth strategies as we've discussed.
This includes only those savings we expect not to be benefiting our cost structure in 2021.
For a much lesser degree we include in this $42 million normalizing adjustment from incremental public company costs now fully absorbed.
And so our cost run rate and permanently zone to the future.
2021 margin outlook includes such costs.
So normalizing for all his trauma as best we can I put this year in the context of our long term history and our continued commitment into the future targeting careful methodical and disciplined margin expansion in the neighborhood of 100 basis points per year.
And here showing our first <unk> into our 2021 outlook, which I'll now discuss.
As a reminder, our guidance policy is to provide our financial outlook annually for a full year and updated quarterly as and if our views for the year change as we move through the year.
Our outlook is obviously informed by what we know about our business and prospects.
Our reasonable expectations for progression in our growth strategies, our current sense for tone of business.
And a cautious optimism towards lesser direct and indirect pandemic induced macro headwinds as we progress through 2021.
Our outlook assumes stability in foreign currency exchange rates and it does not contemplate any significant acquisitions not already concluded.
So accordingly, we are expecting revenues between $895 million to $920 million.
Representing growth over 2020 revenues of 11, 7% to 14, 8%.
This expected growth does benefit from last year's acquisitions as well as a favorable foreign exchange environment, notably a weaker U S dollar today than last year.
Of course, the opposite is true for our cost of expenses, given our fairly extensive natural hedge.
The favorable impact on margins is somewhat negated.
We are projecting constant currency <unk> growth to be between 8% and 10%.
And we're expecting adjusted EBITDA to be between 285 and $295 million approximating a 32% EBITDA margin.
I also include here some additional expectations on interest and taxes Capex dividend then outstanding shares.
I won't speak to each of those now unless there are questions I'm, just posting them here as a takeaway.
Greg previewed several significant transactions, which have impacted our capital structure since we reported last quarter adjusted.
Just after our IPO.
I'll run through some details on those and show the effect on our capital structure.
And just a moment.
But first a few comments about cash flow.
As you can see here our GAAP operating cash flows are up 57% in Q4 and 51% for the full year relative to last year.
We don't have multiyear contracts. So there's no upfront multiyear windfall such as that it's just really solid operational efficiency and working capital focus.
Even if I normalize for the $42 million of windfall savings and net of our $10 million restructuring charge, our operating cash flow is still up over 30% from 2020 relative to the prior year.
As Greg mentioned, we hit the market very quickly after our IPO with our first follow on in November.
This was mostly primary shares for the company and raised $294 4 million net of fees and expenses there.
There was also a modest amount of secondary participation in the follow up.
Then in January 2021, we undertook a pretty substantial overhaul of our debt structure first.
We secured an upsized, new $850 million revolving credit facility at very attractive terms at.
At the same time, we placed $690 million of convertible notes the net.
It's mature 2026, if not converted earlier in the conversion strike after giving effect for the capped call, which we purchased with the proceeds is $73 per share.
Reflecting all of these capital transactions and.
And applying the pro forma effect of the January 2021 financing transactions to our December 31, 2020 capital structure.
We would've had $519 million in cash $690 million of debt for a net net debt position of $1 71.
This reflects total.
Total debt net leverage of six times and of course, no senior secured leverage given the full $850 million senior secured revolving credit facility remains fully available.
And lastly, before Q&A I'll offer some transparency into our thinking and expectations about longer term financial model targets.
We expect our historical revenue growth to inflect towards 10% representing modest increases for ongoing growth initiatives.
And a modest increase in patient scale of our normal historical tuck in buy versus build acquisition cadence.
We expect a continuation on average of 100 basis points per year of EBITDA margin expansion.
And Theres No reason why this will continue well into the 40 percents.
Some years may reflect more or less in this target based on our then informed views of where to invest and generate the best returns.
I continue to highlight that outside of our pure software business, we're still investing in digital integrators and incubating an ecosystem to stimulate adoption of infrastructure digital twins.
Ultimately to create incremental pull through of our software solutions.
By design, the digital integrators are service oriented and lower margin businesses.
Similarly investments we may make in early stage businesses for initiatives also are obviously pre profitability and may be margin dilutive.
We've absorbed the dilutive effect of these investments into our margin expansion history, but continue to invest in incremental investment here may apply some pressure on margin expansion from time to time.
But obviously to the benefit of long term incremental growth not otherwise contemplated.
We will continue to anticipate a steady state global effective tax rate of approximately 20% low <unk>.
May be impacted by any future tax law changes in the U S or elsewhere.
We've historically been and expect to be nimble and efficient in our tax planning strategies to help mitigate any such effects.
We expect to remain cash flow efficient and a low capex business, we will remain committed to a modest quarterly dividend.
Which may increase over time, eventually expected to settle into the one half for 1% dividend yield range, we expect to attenuate dilution from stock based compensation with periodic periodic stock repurchases.
And as for debt levels, we acknowledge the current low levels of leverage which are well under onex at year end and today.
And the significant incremental debt capacity afforded by our recent capital structure transactions.
We do expect to acquire for continued investment in our business organically and via acquisition.
Optimally, we're very efficient and comfortable operating in a <unk> three X and sometimes even forex net leverage position.
As investment opportunities come and go we may be less leveraged as we are today are more leveraged to accommodate unique opportunities.
So with that I believe we're now at the end of our prepared remarks, so I'll turn it over to the operator to facilitate some Q&A. Thanks.
Operator.
Thanks, David and Greg.
We'll take our first question from Keybanc, Jason Seidl.
Okay.
Hello can you hear me.
Hey, Jason.
Great.
So I guess first question.
The uptick on the growth guidance for <unk>.
For time.
What gives you the confidence to raise the outlook.
Soon after maybe spending the initial targets.
David its Craig if you can hear me or Mark and I'll start and my camera, but go ahead.
You want to take the first pass.
Sure sure.
So the law from the long term guidance and collecting upwards from.
No our historical 8% average growth, which you could you could.
C is the compound annual growth rate over the last five years 10 years 15 years. However, you want to measure is pretty steady at 8%.
The confidence to raise it to 10%.
Ah.
On the Walter just giving long term.
Guidance to our long term expectations comes from again.
An increased pace for.
Acquisitions and trends a number of them.
I can see in our pipeline as well as the scale of them.
Which were.
Prepared to.
We began investing in larger scale acquisitions relative to our historical package. So that's part of it the other part of it is as.
We're just going to get some momentum from these very specific growth initiatives that Greg.
Greg articulated during this session.
Okay.
But the guidance for two on one is more specific.
And that's asking for environmental.
R R.
And again were getting some tailwind from currency from 2021.
And there are some.
Higher than normal tailwind also from 2021 from the acquisitions that we completed.
Okay and then maybe for my second question and then I'll pass it on I know you've talked at length debt infrastructure across the country aging.
Needs, replacing and it became pretty real last month with all the power outages from one water issues across the country.
Bentley positioned to help here.
And then maybe what does this do for.
Near term demand trends.
So, it's Greg I'll jump and it highlights.
The contributions that digital twins could make that day.
It'll twins are continuously survey their evergreen, they're always up to date ethane to the extent they can represent.
Existing conditions and their record of changes and for instance, our our grid, our water resources whats vulnerable to flooding and weather and so forth. The decisions one can make about maintenance and and remediation and adaptation are better decisions.
<unk>.
The case in point.
P G&A in California.
Sure.
On annual year on infrastructure that day.
Then submitters as many nominations that show their reaction to problems in their grid with applying innovations. We can say digital twin innovations to continuously survey drawing survey and so forth.
What theyre doing and make better decisions.
As to immediate.
Demand.
We are prepared to offer.
Quality assurance services for.
And our open utilities and asset and network performance.
But in general.
Increased awareness precedes increased demand, but everyone can be better off in digital twins are the way to think about how to be better prepared and make better decisions to avoid these problems.
Great. Thank you.
We'll next take RBC, Matt Hedberg.
Alright, thanks, guys for the questions.
I appreciate all the color here, maybe following up on that question.
David You said that digital twins exited the year at an eight figure run rate I believe it had a doubling previously can you kind of give us a sense for what your expectations are for digital twin embedded in that 8% to 10% IRR guidance here.
So can I take that Matt we've been discussing whether to have an explicit.
Sure.
New business growth.
Consistent with the sort of doubling we've been talking about and I'm not sure we're going to be as explicit as that because our objective in 2021, we say I twin powered.
Want more and more of our offerings to be based on.
Underlying <unk> technology like St Cryo, EM and the asset of network performance offerings, and so forth in which case it may be with the bundling a little harder to to break it out.
But in spirit.
We are confident.
About that and yes.
A portion of both of our.
Our financial outlook revenue growth here and.
And its increase has to do with the take up of <unk> services, not only adds a platform in isolation, though underlying the advances in all of our products at this point.
That's great and maybe just one more quick one for David.
For a long term growth outlook always assume some level of M&A I believe one to two points historically I just wanted to be clear, though in your 8% to 10% IRR guidance here that isn't organic guide in other words anything M&A related to effectively raise that debt level.
So so so again the guide for 2021.
Is actually higher than 10%.
<unk>.
And there's a there's an organic assumption in there of 7%.
There is.
And acquisition of function just from acquisitions, we did last year of about 3%.
And there's a.
Our currency assumptions between two and 3% just because of the dollar is weaker now than.
And then one last year. So there are 7% organic in 2021 Guy.
Got it thank you for them.
Well next go to Baird jewelry, Inc.
Hey, everyone. Thanks for the presentation today.
Greg If I followed the Bentley annual reports accurately going back for the 2000.
I think the mid to late two thousands was the last time, there was reliably higher infrastructure spending in the U S.
And that also was a time badly.
And not organic but all land that was growing at I think a low to mid teens revenue pace.
And so the question is as you look ahead, what is the likelihood that we're about to return to that environment.
How is that going to be different this time for Bentley or is that the right rate of growth to contemplate.
While all of us in the U S of course are paying attention at that same finally as if there is a.
Question.
Whether there will be a focus our federal spending on an infrastructure that seems to be for sure, but what will make it up certainly it's going to be more fundamental this time.
What's especially.
Interesting about it is the emphasis on as I say energy transitions on an on spending.
Ending differently on things that are going to keep infrastructure engineers.
Occupied and and are creating their mix of specialized software for.
As I mentioned, the example of wind power and metros and so for that is different than has ever been the case. However, it more sell resembles the rest of the world If you would like and especially.
Asia Pacific, where this is already underway and our growth rates are already higher so so we're not in the business of.
Political soothsaying, but but the fact that you have this concerted resolve.
To make our infrastructure.
Our and smarter.
It has it has made.
Infrastructure engineering organizations.
For confidant and resolute about going digital now that doesn't benefit us until they actually increase the consumption of our of our products but.
We are.
We are well positioned to take advantage of there.
Enthusiasm and we share.
And then maybe just a follow up.
The idea of going digital.
There is clearly going to be however, the stimulus unfolds.
Based on new considerations Youre already.
Well project owners, whether they're public or private.
Stipulates digital handover.
You are also I thought the mix accretion.
Variable you outlined that's going to be a bigger factor to your revenue growth going forward and so when you just think about the environment. All day again kind of working with history. In this type of environment. It is Matt that's for Bentley systems is there going to be a natural organic growth.
It's up a lot that I know were talking about your long term targets.
A bit higher than 8% compound rate, you've done historically, but any sense of how much better it potentially could be just because of the digital aspect.
Well I I am informed by our our Tam analysis, which showed how much is spent per engineer by.
Product in part.
Sure.
On product in part engineering software already.
And the engineering cost the same so I believe there is that headroom to spend more I believe the path to it involves.
More specialized software for specialized functions.
The infrastructure engineering is behind on that.
I think it's been stimulated by by the environment in 2020.
<unk>.
As I say the organizations are not R&D organization. That's the difference from those two product in parts in effect, we are in the R&D organization, but increasing the emphasis on digital twin and raising the aspiration than for instance to improve resilience against weather and climate and so for that that's all.
Part of raising the.
The ambitions that I think will slowly gravitate to.
Two.
Two to increase what's spent here certainly it's well worthwhile for all of us but that is why we have to discuss the long term because of the conservative history.
Civil and structural engineers.
<unk> and digital twins.
We're excited to see for instance, Autodesk validate the concept of digital twin Spain announced their first offering we don't we don't see it yet in this respect that there Autodesk University, but we have all have very much to gain.
Bye.
<unk> being set higher to what would.
Not create deliverables for one purpose, but rather this evergreen digital twin that can keep keep infrastructure more fit for purpose, better adapting and and safer and longer lasting.
Thank you very much.
Well next quarter Bank of America, Brad Sills.
Oh.
Might be on mute.
Great.
I will come back to Brad.
Goldman Sachs, Brian Essex.
Hi, Good morning, and thank you for taking the question Greg even noted in one of the prior responses you mentioned way back and I was just wondering maybe if you could give a little bit of color in terms of.
What youre seeing in that region with regard to project your operations and pipeline development and how that might be changing from what we saw over the past few years.
And which region Brian on APAC.
Yes.
So APAC.
Isn't all strong.
India was was in particular are.
Hit hard with not being ready I guess to Virtualized.
But.
As I say, China at the other extreme literally led the way again by virtue of a strong for.
Fourth quarter here and.
Since it went back to two physical business sooner. It gives us some encouragement as to what can happen when the rest of US go back to.
Physical business, but.
There is there.
There is.
Sort of the story for 2020 is kind of an interesting region to region, because everyone was kind of in the metal accept the examples.
I mentioned.
But.
But where there are.
Where there are the strongest commitment to leaping ahead to digital twins. It turns out to be Asia Pacific If I cannot I would like to do a commercial for our infrastructure year book iPad. Some examples here, but any of you will find it worthwhile you can index by <unk>.
Country Index by project category, and so forth search by digital trends by sustainability and so forth often the exemplary project are in Asia Pacific and we will be here in the U S advocating that when we focus on infrastructure as a country now we focus ongoing digital and infrastructure.
Two.
To achieve the same.
Breakthrough Theyre doing there.
Alright, thats helpful and maybe to follow up with David.
Any.
Progress you can illustrate with regard to migrating Eos equaled 65, and what your expectations would be equal contribution per hospital.
Enabling greater application usage on our platform with that migration in 2021.
Yes.
Yeah, we are.
Not even halfway through the potential.
Our large <unk> book of business that we consider.
Potential candidates for migration from the last day increased 65.
So where we're less than halfway through we won't get we won't do the rest of it in 2021.
We will continue to migrate.
As Greg mentioned, when we do that where we're being a little more cautious now and we're putting some some.
<unk> around.
Unanticipated outcomes for both us and the user.
So theres still from incentive within the guardrails to inflect usage.
Upwards for us and where we are.
We're going to be working hard to do that and the success.
Access teams that we that we put into play every time, we secured one of these <unk> hundred 65.
Our opportunities.
Is all that much more opportunity to grow and inflect upwards, we just have to.
Overcome the drag if you were all debt, we've been pretty transparent about.
On the on the <unk> hundred 65 intersection where.
The industrial and resources sectors, which has some pretty big ones.
We have to we have to whether we have for whether that drag for them and overcome overcome it with the others in the year, we're confident in our guidance.
Yes.
Okay helpful color. Thank you very much.
I might just add what's heartening about the <unk> hundred 65.
Migration is that the accounts are enthusiastic about the success plant debt.
The fact that we embed R R.
Subject matter experts to help them with digital workflows, that's more so than ever what they want out of it at this point in time. They have they have made it their own priority and this has turned out to be an effective way for us to work together.
Got it very helpful. Thank you.
Thank you.
<unk> been able to figure out your video.
Great can you guys hear me okay, yes.
Okay, perfect excellent sorry about that well thanks, so much guidance.
Wanted to ask about.
China, you called that out as an area of strength for this quarter and for the year.
Is there or is there any color you can provide on kind of where youre seeing strength there or are there any.
Particular segments of the business that you're seeing some strength, whether it's commercial industrial or public.
And it's just the result of some of the investments you've been making there just if you could just comment on the environment and the results we're seeing in China that'd be great. Thank you. So much well go to China are strong across the board and of course, you might recall I said after Q3 hasn't turned out to be the case as it usually is every year that China growth.
Or is on and becomes our second biggest source of new business growth at concluded the year on exactly that.
And Tom and it's kind of across the board.
We're strong in China in electrical grid.
We're strong in.
Increasingly in water and wastewater large scale projects, but.
Again.
You'll find the Chinese projects well well.
Sorry Representatives here.
Wind power.
Especially true.
Trash to waste.
Huge important groundbreaking projects and then the business in China is chunky and cash.
Constant.
A difference as we work more so with the channel in China than we had then than elsewhere.
In the world, but but there's a lot of momentum in China as a place where digital plans are literally the ambition and every project starts with the reality modeling survey of existing condition, the digital context, and and has maintained evergreen throughout the project.
It's just.
Exciting to the meeting the needs in China and to see that we're just scratching the surface.
That's great. Thanks, Greg and then one more if I may for you David Please embedded in your guidance for the year.
Sounds like it's a 7% organic growth assumption. Your net revenue retention is still tracking to that want to wait very very solid healthy levels. There want to wait so it would seem that there is a pretty conservative assumption for new business I'm sure that.
Your guidance reflects conservatism across new and expansion activity, but.
Where could you see upside potential if you look at those two areas of growth could it be more on the on the upsell, perhaps there is some <unk>.
Product cycle that we could see that could generate some upside there more so or is there a region, particularly maybe it's China, where perhaps new business could surprise to the upside. Thank you.
Yeah.
In my view, but Greg feel free to add what you what you see on my view of the upside is more the macro.
How quickly does the world open up.
And.
Yeah.
Projects and users are returned to normal so I see more of the upside on just usage of our applications.
Then.
Specific specific new opportunities those are going to be those are going to be.
There are obviously assets for it to happen, but the upside for my guidance.
All right.
As more and more in the macro conditions and we don't have a lot of control over.
We'll certainly be there to take advantage of it.
<unk> asked for them and we anticipate.
And I don't think it breaks down so much by region and our view of it now for all of our regional territory executives are cautiously optimistic about two.
2021.
I'd call out our new focus on SMB.
We are already seeing.
Faster growth there with the.
100 people in inside sales focused on it.
Uh huh.
Sort of a picture in my mind is that with with this magnate us increased spending on infrastructure roadways Railways metros.
Smart adaptation resilience flood.
Flood resistance and so forth that that more firms change.
Changed their growth plans in favor of that and that tends to favor theyre increasing in there.
Their use and interest in our portfolio.
Vs.
Total desk and other providers.
Hopefully and likely that compounds itself over the course of.
Of this year, because I don't think people are acting on net yet but.
But we have the chance for that certainly this year.
So I understood that.
I would also add.
Might ask.
It does.
Does.
For the potential for an infrastructure spending bill add to our upside.
And obviously that would be a good thing for us, but in my experience that's more of an indirect longer term longer term.
I don't know that you would see any dramatic uptick to our accounts.
As a result.
Understood. Thanks, Greg Thanks, David.
Well next go to bear and Bert Gal Munda.
Yeah, Hi.
I Hope you can see me okay.
Awesome well. Thank you for taking my questions. The first one Greg.
Greg maybe just.
I found it really helpful for you to breakdown the performance range between.
Between the incumbent product incremental product and then the new accounts of this backup.
Considering the fact that you ended the year pretty much.
Close to the budget on the quarters.
How are you how did you see performance against the growth in each of those segments if that makes sense.
For the expansion in the.
New accounts I would have imagined with a hard year to kind of grabbing share comp and thats, maybe something that we'd likely to kind of perform better.
So new accounts for us tend to occur with asset wise and project Bacino asset wise and in.
Owner operators.
With the potential for digital twins.
<unk>.
Rather on penetrated in and our.
Proportion of.
Of all owner operators the top 500 debt, we track in our own top owners.
Or are there more to go and where we are now.
But those are procurement those are enterprise procurements with.
Rfps and typically.
Outside sales and.
And those cycles.
And most of the World did.
It did slow down.
And in 2020, when I ask our sales folks are.
Are they able to be as effective in those opportunities. They say they can be even with.
With lockdown conditions, but I think there are fewer.
Such opportunities.
On the on the project delivery side.
There are not new.
New name opportunities because we're in all of those accounts, but there are opportunities to expand project wise and for project wise too.
To become.
For the standard throughout an organization rather than only for portions of it land.
I think that does.
Continue to be a good opportunity, but we but that wouldn't show up as a new name.
Opportunity.
Hopefully 2021 is a better new name here.
I think everyone at an enterprise software would expect that.
So hey, Kyle I would also add debt one of our key growth initiatives is the.
For the digital approach small medium sized businesses.
This this tends to be a.
When we start restart things here in the U S with that that's been our focus in North America. So I would expect as that takes traction you will see the benefit in the U S earlier.
Earlier than elsewhere, so we're hopeful and see some upside there.
That's right and also thank you and then just as a follow up maybe a little bit of an expanding them.
What you said in your prepared remarks upon great interesting about the per time, so I tend to really penetrate.
One cash base, but at the same time, our competitors like Autodesk, so effectively to become the common data environment around those.
In the center of debt workflow management.
What is the penetration within maybe the current accounts.
And then most specifically is that any penetration within the competitive cash solutions today from ice women, it's all debt.
Is it all pretty much a greenfield for you. So I'll start with project life. So its the case debt, it's still a minority of our own application users, whose organizations use project lines for their work sharing.
And and so there is upside there but project wise.
The use of project wise includes Autodesk applications, and we've done pretty well there.
The the opportunity with adding <unk> is to federate in aggregate across projects across.
Domains across separate software tools so that.
If the organization cares about what the quality of the projects they deliver health how many how much concrete do they use per.
Whatever mile or bridge abutment or whatever with <unk> you can measure that you can introduce analytics everything can be rectified change managed.
Aligned with.
Previously we're separate opaque objects created by the design tools can now be aggregated and and and.
And open to analytics, so the opportunity to extend to the enterprise for sake of this machine learning and analytics is is one that will be important for.
Project wise going forward as something that can be added even where there is a mix of different design tools.
Thank you so much congrats again.
For our final question will go to.
Mizuho macro.
Thanks very much.
So I guess, firstly and I definitely appreciate the additional color on the 'twenty one outlook.
But just for comparison purposes, how much of <unk> revenue growth was low.
Organic.
About half.
Half of our growth.
Okay. Thanks, and then and then on 2021 guidance.
So I know you don't provide quarterly guidance.
But how should we be thinking about the sort of linearity that that so the acceleration. That's implied there is it is it likely to be more backend loaded as the comps get easier in annual growth initiatives gain traction or given that usage has already picked up this is the growth likely to be more sort of consistently true I think.
It's mostly seasonality, but I'll, let David great data.
Dan.
Yes.
<unk>.
Yes.
It is multiple multiple things to bring together there. There is some there is some seasonality and we're going to be as we have historically been.
Okay.
Stronger in the last half and the first half.
So that's that's positive for quick which is because of renewal cycles not not.
Not just its just thats fine.
Annual contracts.
Turnover, yes.
So there is also the acquisition effect and the outlook.
Which again the acquisition tail winds are going to benefit the first half.
More than Alaska.
Of course to the extent that we have new acquisitions in 2021.
Zero.
Decorating wassa versa. So then there's the pandemic effects also in from the outlook, which is indeed.
Look where we are where we are in the first half.
And do you expect.
More.
Our pace of recovery as we move through the year in the last half as a result of that strong first half.
Right, Yes that makes sense alright, that's very helpful. Thanks very much.
Well. Thank you for everybody that concludes our call for today. Thank you.
Sure.
Yes.