I hope everyone enjoyed their lunch and that hasn't put anyone into a food coma for this afternoon. We're delighted to have our great friends from Bentley Systems back, Nicholas Cumins, the CEO, and welcome. Thank you for joining us at the Nasdaq Investor Conference. My name is Bob McCooey. I'm the Vice Chairman of Nasdaq, and Nicholas and I are going to have a quick chat here, and maybe if we have some time at the very end, we'll have some questions from the group, so you just became CEO in July. Congratulations.
Thank you.
Can you give me a little sense of your journey to the CEO job and what attracted you to come to Bentley? You haven't been at Bentley your whole career, so you've only been there about four years or so.
Good afternoon, everyone. Maybe first of all, let's quickly explain what Bentley does, because this is actually what attracted me to the company in the first place. We are the infrastructure engineering software company. Our software is used to design, build, and operate better, more resilient infrastructure around the world. I am a software leader at heart. I spent my entire career in software. I worked at SAP twice. I worked in a couple of startups as well. What has always been a passion of mine is the impact that software can have in taking industries to a whole different level.
That is clearly the potential here at Bentley. There is so much impact that infrastructure has itself around the world. Infrastructure is really what makes all these things possible. Infrastructure is needed for the economy. It's needed for a better environment. It's needed for energy transition, energy security, you name it, and the impact that software can have in that industry with digital twin technology, with cloud computing, with artificial intelligence.
This combination of a higher purpose and a great purpose and great technology is what attracted me and is attracting so many people to the company and motivating them to stay, so I joined the company four years ago as a Chief Product Officer. My background is very much product. I became the Chief Operating Officer in January 2022, and Chief Operating Officer in that context meant running all the business functions, and then I was indeed promoted CEO just July this year.
Again, congratulations to you, so does something like—I mean, we talk about it in the U.S., the declining infrastructure around the country, and obviously, just a few years ago, they always referred to it as the Bipartisan Infrastructure Bill. Does something like that help to boost your business because people need to have the software to make those builds?
That's the heart of our business. About 60% of our business is related to public works and utilities. I think transportation, roads, bridges, tunnels, rail. Think also about the electric grid, the water infrastructure. That's about 60% of our business. The remaining 40% is resources: mining, energy, production, and then industrial, so process, discrete manufacturing, commercial facilities. 60% public works, utilities.
Yes, we've benefited a lot from large infrastructure investments in the U.S. and around the world. What's quite exciting about infrastructure is it's one of the few nonpartisan topics. It's one of the few topics where everybody agreed, yep, we need better infrastructure.
That's why they call it the Bipartisan Infrastructure Bill, right?
That's right. That's right.
That's the only thing they probably could agree on in the past four years, maybe longer than that.
Longer than that.
Yes. So I guess one of the curious things to make sure that everyone understands, how do you charge for something like this? What's the business model? Do you sell on a license basis? Do you sell on a per seat? And how do you grow it from there?
We offer software for the full lifecycle of the infrastructure assets. Project delivery, which is the design and the construction of the infrastructure assets, and then operations. The pricing model for project delivery tends to be user-based. It's per engineers. And when it comes to asset operations, it tends to be asset-based, number of assets or the size of the assets, right? We think when it comes to product delivery, our total addressable market is about $10 billion.
It could easily be $30 billion if infrastructure engineering organizations were spending as much on software per engineer as product engineering organizations do, easily. This has been actually a big growth driver for us, which is the upselling of more sophisticated software, the cross-selling of software to existing engineers.
Wonderful. So let me pull it back. We got deep into the business and the business model. But can you talk about some of the major themes that you're seeing in the market across the globe these days?
We were talking about the large infrastructure investments that are nonpartisan. We do see them around the world. It's an interesting situation. On one end, there's never been so much demand for better, more resilient infrastructure. It's the Infrastructure Investment and Jobs Act in the U.S. It's the NextGenerationEU program in the European Union. It's the National Infrastructure Pipeline in India, and so on and so forth. Never has there been so much demand for better, more resilient infrastructure. On the other hand, there's not enough engineers to do the work.
There's a growing engineering resources capacity gap. We're simply not creating enough new engineers coming out of the university to compensate, overcompensate for the engineers that are going into retirement. That's a widening gap. So if you talk to engineering firms pretty much around the world, they will tell you the same thing, which is their backlog is extending further out. More than a year, they are in this very unique position where they can really handpick their projects. They can handpick their clients. They're refusing work. They just don't have enough engineers.
So that in itself is a fantastic opportunity for software. We've always been in the business of making engineers more productive from our founding 40 years ago, where instead of doing drafting on paper, maybe you want to do it on a computer, and maybe you could do it on a personal computer, from 2D to 3D, from 3D to digital twins to now artificial intelligence. It's a fantastic time for software to be here to help.
Then the other trends I will mention are a deep appreciation for the fact that the infrastructure sector is a very large contributor to carbon emissions, one of the largest in terms of how much carbon is emitted in the production of the material that is going to be used for the infrastructure asset, concrete, metal, during the construction process itself, and then, of course, during the lifetime of the infrastructure asset.
So there's this deep realization, which for us is a call for action for infrastructure engineers and for us as software providers to these infrastructure engineers to equip them with the tools that are needed in order for them to have a better understanding of the potential carbon impact of their design and be able to optimize against it as early as possible in the process. And then the last one is infrastructure resilience.
Infrastructure is under immense stress with climate change around the world, whether it's rising temperatures or very low temperatures or rising levels of water. It's under immense stress. And there's here as well a need for software to better simulate what could happen and to be able to take preemptive measures to make infrastructure more resilient. Those are the big themes.
Great. So from a financial standpoint, you've had tremendous and a very impressive double-digit ARR growth. Can you talk about your path to sustain that in the years to come? I mean, is this infrastructure focus a blip, or do we see this as something that will go on for a long period of time?
We see it going on for a long period of time because it's really countercyclical. It is really indeed needed for the economy. It's needed for the environment. It's needed for quality of life overall. So we see that going on in the foreseeable future. Our long-term financial goals are to keep increasing our ARR in the low double-digit percentage. We guided towards that for 2024. And as we commented in our last earnings call, we don't see any reason to change that going into 2025. This is built on a solid foundation of an account retention rate of 98%, 99%.
And then the big growth drivers that we have had for the past since our IPO are going to remain, which is, on one hand, for large accounts, a consumption-based commercial model called Enterprise 365, where they have access to all of our software and package services, where we take all the procurement out of the equation so we can really focus on how we can help firms grow their business. And then SME.
We've had great traction in SME in the past few years, and we see SME as an important growth driver going forward. And maybe on top of that, it's still very small, so it's not that meaningful yet from an absolute revenue standpoint or ARR standpoint. But going forward, we see asset analytics, which is AI-based software for asset operations, becoming a more important part of our business. We see a lot of potential there.
Great. So one of the things that we've seen, we just saw it in France over the past week or so, and then obviously last month in the U.S., has been some political changes that have happened. We talk about the fact that this is a long build, but the reality is that politics can play a significant part in that and changes. Do you think any of these political changes will have an impact on Bentley?
I will say, so again, infrastructure is a nonpartisan issue. Everybody agrees we need better, more resilient infrastructure. Now, the type of infrastructure could change based on political preferences. Maybe there could be more emphasis on the road network versus the rail network, depending on the administration. Emphasis could be on greener or less green sources of energy, again, depending on the administration.
Our portfolio of products is wide enough that we can fulfill any of these needs. So the mix could change, but whether it's going in one or the other direction in terms of the type of infrastructure assets that will be built will be there to support. So that's that. So now, when it comes to the U.S. more specifically, which is about half of our business, IIJA, we don't see any slowdown. What we could see potentially is an acceleration of the funding from the federal to the state level. The way it has been going on with the current administration is states competing for awards.
And now we're thinking maybe more programmatic block grants by the federal governments to the states based on the length of their road network, for example. So an acceleration of the demand flowing through, which might not necessarily help because, again, the issue we have here is not demand. It's capacity. It's engineering resources. So there's just not enough engineers for the industry. For us, it will still help because we're here to help make engineers more productive. There could be impact on IRA if for those of you who are familiar with IRA, we have IRA itself has had no impact on our business.
So this will not impact us in one way or the other. We do think that the new administration is going to accelerate permitting reform. And that in itself can accelerate our growth with the electric grid as we have new electric corridors that are being approved and new transmission lines are going to be created. Our software will be used for that. So that's great. And then the focus of the new administration on efficiency, in theory, could create a pool for software to be used to make asset operations in particular more efficient.
So you look at your business being super diversified in that way. So depending upon where things move, you're already covered there.
That's right. Because of the very wide range of engineering disciplines, we support the wide range of infrastructure assets that are being designed, built, and operated with our software.
If things go to red states versus blue states, it's not going to matter. Engineers are going to be in each of those states having to do something.
Exactly. That's right.
Exactly. OK, so I've gone through 14 minutes, and I haven't asked you about AI. So now I guess here comes the question. So tell us how Bentley's using AI and what your strategy is around that going forward.
AI is a paradigm shift for sure. It's our generation's paradigm shift. We are delivering AI capabilities in two areas. The first one is for asset analytics, which is how do we help owner-operators and the firms helping the owner-operators have a better understanding of the exact physical conditions of their infrastructure assets and do it at scale. Instead of sending people, literally people, to inspect bridges or you can fly a drone, we can process the footage in order to create a millimeter-accurate digital twin of the asset. We can detect cracks, spalling, vegetation.
We can use our own infrastructure engineering software to understand whether the structural integrity of the asset is endangered. There's an enormous opportunity there to make asset operations more efficient, more effective by using AI-based asset analytics. We've been doing this for a number of years now. We've done our own developments when it comes to telco towers, for example. We've done acquisitions as well, and we've been very open for the fact that we want to do even more acquisitions.
Ultimately, we want to offer asset analytics capabilities for all asset classes and all key data capture techniques, satellite imagery, drone footage, dashcam data, you name it. We see a huge potential for AI also in the design phase, so that's more, let's say, more of a recent development in our space, so just a few months ago, we've launched our first AI-based engineering application for site engineering, and AI is here not to replace engineers. Nobody wants to replace engineers right now because we just don't have enough of them. It's more about making them more productive.
So AI more as a co-pilot, if this word hasn't been overly abused already, but AI to help the engineers better understand the requirements, better check their new design against the requirements, AI to generate options of site layouts, and then AI to take over all the very mundane tasks that engineers hate, like drawing production and annotations and automating all of that.
And that can easily save them 20%, 30%, 40% of their time. And that's gigantic. In the grand scheme of things, with this widening engineering resources capacity gap, being able to shave off 30%, 40%, 50% of an engineer's time is truly a game changer.
Yeah, especially when there's not enough engineers.
That's right.
It's like creating more engineers by saving the time with the current group of engineers.
Exactly.
I was on a call this morning about data centers. One of the big things around data centers and the big theme has been, obviously, power generation. You need the power to get to the data centers in order to literally run these LLMs and others that are all about AI. Do you, Bentley, play a role there? What can you do to help with this area?
Yeah, well, we play a role from the production of the energy all the way to the point of consumption. Let's start with the electric grid so we've made a big acquisition many years ago of a company called Power Line Systems, which is really the gold standard in terms of software for the design and simulation of transmission towers, and since the acquisition, this business has continued to grow at least twice as fast as the rest of the company, so it's been a very successful acquisition.
We do hope, by the way, that with permitting reform, then there's going to be even a further acceleration of that business, but that is needed in order to transmit the energy all the way to the data centers. As I mentioned briefly before, so our software is being used across all sorts of sources of energy, whether it's hydrocarbon or geothermal or wind, solar, our software is used. So depending on the source, even nuclear, so depending on the source of energy that you want to use to power those data centers to then power AI, we'll have the software to help you.
So let's stay on that same theme. You talked about the acceleration of that acquisition and how successful it has been for you. Talk about your philosophy around M&A in the industrial and design software space. How are you positioned? How do you think about M&A? Is that something that you are engaged in regularly? Do you use your free cash flow? Explain to everybody about that.
Yeah, this has been a big part of our success. We've been very acquisitive as a company and will continue to be. We've made two types of acquisitions. The vast majority are more programmatic, we call them. They're more like tuck-ins. And they will be to acquire some capabilities that either accelerate our vision and our strategy or complement our portfolio. So we are in a pretty unique space where engineering applications are quite entrenched. It takes a long time to develop them. It takes a long time for them to be adopted, for their efficacy to be proven.
Once it's established, they're very sticky. So owner-operators might require the use of certain engineering applications. Engineering firms themselves will require the use of certain engineering applications. So very often, we're in the situation of debating whether we should build or buy. And buy is for sure the fastest route. Let's go and buy a software that has been well established. Its efficacy has been well proven. This will potentially accelerate us by 10 years or so. We've done that in the past.
We'll continue to do so. The latest acquisition we've made is more of an acceleration of our vision and our strategy. We've acquired the standard for 3D geospatial visualization. It's even used by Google. It's a company named Cesium. But we've made two large acquisitions so far, and we now have the financial means to do another one as needs be. One was this Power Line Systems acquisition I mentioned for the electric grid. Also, great example, by the way, of a gold standard, fully established. It will take at least a decade to be able to replace it. We are quite happy we're able to acquire that company.
And then the other one, Seequent, that was the largest acquisition so far, $1.1 billion. And it is the leading software for subsurface modeling. Their core business is in mining, but we acquired them not because of mining. We acquired them because subsurface modeling is of greater importance for the design and the construction of civil infrastructure. Both companies have been hugely successful as part of the broader Bentley Group. So we've proven also our track record now and been able to ingest large acquisitions and keep them as growth drivers for the company.
Do you keep them running separately? Do you try to cross-fertilize across your different parts of the software?
Typically, we integrate. Yeah, so Power Line Systems, because it's really in our core business, it's for electric utilities. So this one has been fully integrated. And then Seequent is slightly different. Their core business is still mining. So in order to keep the focus of the broader company on infrastructure, we keep them as a subsidiary dedicated to the subsurface. Their brand is very well recognized in mining. So we don't want to dilute that. But it's the only exception. In general, we integrate fully.
So one of the things the SMB market has been a very, very nice growth driver for you. How are you adding so many new logos, given that Bentley is a 40-year-old company? And now it seems like you're accelerating the business of a, many people would say, a mature company. 40 years old is.
That's right. So 40 years, yet we've only really targeted SMB in the past five years since the IPO. It's rather a recent endeavor for us. We've been in SMB all these 40 years, but more as a byproduct of serving large infrastructure organizations, whether owner-operators or large engineering firms, where they will mandate the use of Bentley software to their ecosystem, which is comprised of smaller companies. So as a byproduct of that, we had smaller companies using our software. And until four or five years ago, we were not focusing on SMB because we thought the better play there is indirect.
And we don't like that. We prefer to be direct. More than 90% of our business is direct. But in the past four or five years, we've been targeting SMB directly through our online channel. So we have a low-touch to zero-touch sales approach to SMB. And this has proven very successful because, indeed, we've been adding more than 600 new logos every quarter for the past 2.5 years. And we don't see any slowdown. And those are smaller engineering firms that we're targeting directly.
Those are higher margin clients.
It's a higher margin way of attacking them, addressing them. That's right. Because it's all digital, or most of it is digital. That's right. That's right. We've been also very impressed with the high retention rate. We were concerned going after SMB that they will use us just for one project, and that was it. Now that we see that they tend to use us from one project to the next, which is great. Then we are approaching them again to position additional software from us. Then we further increase the retention rate. Yeah, it's a great growth driver. We'll continue to be in the foreseeable future.
Wonderful. Last question from me. What excites you about Bentley for the next few years to come? I mean, you're barely a few months into your. New role. Your new role as CEO. You wake up out of bed every day, and you're excited about what?
First of all, the purpose of the company. I mentioned to you right before this conversation that I was in India last week. Just the shared scale of the investments for infrastructure around the world, like in India, and how it helps improve the quality of life, that is truly motivating. Their project to have absolutely every house in India with access to clean water, these brand new roadways in order to open up new economic areas in the country. It's just absolutely fascinating.
That's highly motivating. Building on both a very strong product portfolio and very strong long-term relationship with accounts is super motivating. Then as a software person at heart, artificial intelligence, as our generation's paradigm shift, also very motivating, very thrilling.
Good. Well, I went through my questions quickly. So aren't you guys all lucky? I have about three or four more minutes. We can have a couple of questions from the audience.
Can we talk about the M&A strategy going forward? I think in the past, you used to do smaller deals. Then you went to very big deals. Now you're acquiring technology. Are we going to go back to a bigger deal maybe? Or what's the strategy for the next couple of years?
No change, actually. We also had done technology moves in the past. So we won't hesitate to go for an acquisition if we see an asset out there that can help us accelerate our vision, our strategy, or fill some white spaces, either by engineering disciplines or asset classes. So we won't hesitate. We've been quite open in our recent earnings calls that one priority for us is asset analytics. So we want to make acquisitions there. And those will be small acquisitions. It's a very emerging market. The companies out there are all quite small.
So there will be definitely more programmatic tuck-in acquisitions. And then when it comes to very large, well, it's not like they are running around. So we keep a close eye on potential big moves we could make. We have the financial means to do it. If the opportunity arises, then we'll do it. Yeah.
Can you talk a little bit about the competitive landscape? Who are your main competitors, and who do you bump into the most?
So we are the infrastructure engineering software company. There's no other company of our scale which is dedicated to infrastructure. We're going to run into other global companies who happen to be in infrastructure, among other things. The biggest one is probably Autodesk. But then infrastructure is going to be a subset of their business. They are in media and entertainment, in product engineering, and they are in what they call architecture engineering construction. And within that, there is a subset which is infrastructure where we'll run into them.
In general, when it comes to large infrastructure projects, accounts will tend to use multiple software from multiple vendors and not use software from any one vendor. So we never make the assumption that for large infrastructure projects, for the operational infrastructure assets, only our software is going to be used. One of the ways we are differentiating ourselves from others out there is that we are fully embracing openness.
We make it as easy as possible for data from non-Bentley software to be used in Bentley software and vice versa. Our recent acquisition of Cesium just further established that. Cesium is widely adopted across the industries. Its core software is open source. They managed to establish a true standard. They were very aligned with us philosophically on the need to be open.
Nicholas Cumins, thank you again for joining us here at the Nasdaq Investor Conference.
Thank you.
Congratulations on all the great success that Bentley continues to have.
Thank you.
Thank you all for joining us.