Bentley Systems Faces Sector Growth Variation As Pandemic Delays Projects

Summary

• Bentley Systems went public in September 2020, raising $237 million in a U.S. IPO.
• The firm provides a wide range of software for infrastructure project design, analysis and management to a global customer base.
• BSY has navigated the pandemic well but faces continued project delays while the stock appears fully valued given these conditions.
• My short-term outlook on BSY at around $46.00 is Neutral.
• Looking for more investing ideas like this one? Get them exclusively at IPO Edge. Learn More »

Paul Bradbury/OJO Images via Getty Images

A Quick Take On Bentley Systems

Bentley Systems (NASDAQ:BSY) went public in September 2020, raising approximately $237 million in gross proceeds in an IPO that priced at $22.00 per share.

The firm provides a large number of software applications for infrastructure and building design analysis and related information management.

Given various sector crosscurrents, it is difficult to ascertain Bentley's near-term growth trajectory. As the stock appears to be fully valued compared to the broader SaaS industry, my outlook for BSY at around $46.00 is Neutral.

Company

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

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

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

Below is a brief overview video of the firm's 'Digital Twin' approach:

(Source)

Bentley is investing in a 'digital twin ecosystem' that can work to improve the performance of infrastructure assets.

The company's primary offerings include:

• Project Delivery - ProjectWise

• Asset and Network Performance - AssetWise

• Design Integration

• Digital Cities

• Analysis

• Information Management

The graphic below shows the firm's systems and applications breakdown:

(Source)

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

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

Market & Competition

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

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

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

Major competitive or other industry participants include:

• Autodesk (ADSK)

• Trimble (TRMB)

• Hexagon (OTCPK:HXGBF)

• Dassault Systèmes (OTCPK:DASTY)

• AVEVA Group (OTCPK:AVEVF)

• Nemetschek (OTC:NEMTF)

• Oracle (ORCL)

• Aspen Technology (AZPN)

• Environmental Systems Research Institute

• General Electric (GE)

BSY's Recent Financial Performance

• Topline revenue by quarter has grown at a moderate rate of growth over the past five quarters:

• Gross profit by quarter has followed the same trajectory as topline revenue:

• Operating income by quarter dropped to significant loss in Q3 2021 due to a one-time, non-cash accounting adjustment:

• Earnings per share (Diluted) have followed a similar trajectory as operating income:

(Source data for above GAAP financial charts)

In the past 12 months, BSY's stock price has risen 19.3 percent vs. the U.S. S&P 500 index' rise of 28 percent, as the chart below indicates:

(Source)

Valuation Metrics For Bentley

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

Measure	Amount
Market Capitalization	$14,880,000,000
Enterprise Value	$16,080,000,000
Price / Sales	16.13
Enterprise Value / Sales	17.61
Enterprise Value / EBITDA	89.96
Free Cash Flow [TTM]	$330,850,000
Revenue Growth Rate [TTM]	16.32%
Earnings Per Share	$0.33

Click to enlarge

(Source)

As a reference, a relevant public comparable to BSY would be Dassault Systèmes; shown below is a comparison of their primary valuation metrics:

Metric	Dassault Systèmes	Bentley Systems	Variance
Price / Sales	13.76	16.13	17.2%
Enterprise Value / Sales	14.09	17.61	25.0%
Enterprise Value / EBITDA	54.69	89.96	64.5%
Free Cash Flow [TTM]	$1,540,000,000	$330,850,000	-78.5%
Revenue Growth Rate	6.7%	16.3%	143.9%

Click to enlarge

(Source)

Commentary On BSY

In its last earnings call, covering Q3 2021's results, management highlighted its new mix in the resources sector which it believes positions the firm positively within the energy transition sector.

However, the company has been seeing a drop off in activity in the EPC (Engineering, Procurement and Construction). This reduction was in the high single digit percentage over the past 12 months.

Additionally, new business growth in the Industrial / Resources CapEx sector has dropped by half since before the pandemic.

Conversely, the Middle East and Latin America regions returned to business growth, with the Middle East likely being driven by a rise in energy prices.

And, the Public Works and Utilities sector has produced growth as well.

As to its financial results, subscription revenue accounted for 85% of the company's revenue and grew by 23% year-over-year.

Professional services revenue grew 43% year-over-year and represented 10% of total revenue.

However, net revenue retention rate was a disappointing 106%, negatively affected by the firm's SMB new account growth.

The quarter's loss was due to a 'one-time accounting charge related to the recharacterization of a portion of our non-qualified deferred compensation plan,' which is effectively a share buyback liability into the future and is a current non-cash item.

Looking ahead, management kept forward guidance unchanged while stating that Q4 is a big quarter on a seasonal basis but that it also includes 'a fair bit of Q4 expense seasonality.'

Regarding valuation, compared to competitor Dassault Systèmes, the market is valuing BSY at higher revenue and EV / EBITDA multiples, likely due to a higher revenue growth rate.

The primary risk to the company's outlook is the continued delay environment for industrial & resources CapEx projects as a result of the ongoing pandemic, which continues to produce negative effects with new virus variants, especially the highly contagious Omicron variant.

However, in other ways, BSY is seeing an increased openness from its mainstay public works & utility sector for 'going digital' at a faster rate.

Q4's results will be very important for its 2021 year results as will the continued integration of the Seequent acquisition.

Management's discussion included use of the word 'caution' and the tone of CEO Greg Bentley was sober about the various headwinds the firm has been facing in various sectors, most notably, industrial & resources CapEx.

BSY is currently trading at around a 16x Price/Sales multiple, which is at the higher end of the average for a primarily SaaS company, given that the recent contraction for the broader SaaS industry was at 13.3x (current run rate annualized) as of November 30, 2021.

Given various sector crosscurrents, it is difficult to ascertain Bentley's near-term growth trajectory. As the stock appears to be fully valued compared to the broader SaaS industry, my outlook for BSY at around $46.00 is Neutral.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

This report is intended for educational purposes only and is not financial, legal or investment advice. The information referenced or contained herein may change, be in error, become outdated and irrelevant, or removed at any time without notice. You should perform your own research for your particular financial situation before making any decisions.

Comments

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(or google for tons more cases)

[David Rahnis]

Good article. Thanks for keeping track of BSY. I think it's an innovative company with a great company culture. Just need to be very patient in my opinion. They pay a nice little dividend too, which is a bonus while we all wait for the pandemic to end.