Infrastructure design software provider Bentley Systems (NASDAQ:BSY) reported Q1 FY2023 results beating Wall St's expectations, with revenue up 14.1% year on year to $314.4 million. Bentley made a GAAP profit of $45.5 million, down on its profit of $56.4 million, in the same quarter last year.
Bentley (BSY) Q1 FY2023 Highlights:
- Revenue: $314.4 million vs analyst estimates of $298.7 million (5.28% beat)
- EPS: $0.14 vs analyst estimates of $0.14 (1.82% beat)
- Free cash flow of $171.9 million, up from $30.6 million in previous quarter
- Net Revenue Retention Rate: 110%, in line with previous quarter
- Gross Margin (GAAP): 78.6%, down from 79.8% same quarter last year
Founded by brothers Keith and Barry Bentley, Bentley Systems (NASDAQ:BSY) offers a software-as-a-service platform that addresses the lifecycle of infrastructure projects such as road networks, tunnel systems, and wastewater facilities.
The company's key product suite consists of software applications such as MicroStation, OpenRoads, and ProjectWise. MicroStation is CAD (computer-aided design) software that enables the creation and editing of 2D and 3D designs. OpenRoads allows engineers to design and model roadway networks (roads, streets, highways, and their interaction with other infrastructure). ProjectWise provides a collaborative platform for team members to work together on on projects so communication is seamless.
Bentley’s software helps manage infrastructure projects more efficiently, reduce costs, and improve overall outcomes. The software does this by addressing the specific needs of infrastructure design professionals, which the company is intimately familiar with because it only serves this market. It is a one-stop shop to manage all aspects of a project–from planning and design to construction and maintenance–in a single platform. Additionally, the platform also enables collaboration and project maintenance, which means that less is lost in translation across different teams involved in a project and deliverables/budgets can be managed and tracked.
Bentley Systems generates revenue through the sale of its software licenses and subscriptions. The company also offers training and consulting services to its customers to ensure long-term user satisfaction and success.
Software is eating the world, and while a large number of solutions such as project management or video conferencing software can be useful to a wide array of industries, there are industries that have very specific needs. Whether it is life-sciences, education or banking, the demand for so called vertical software, addressing industry specific workflows, is growing, fueled by the pressures on improving productivity and quality of offerings.
Competitors in engineering and design software include Aspen Technology (NASDAQ:AZPN), Cadence Design Systems (NASDAQ:CDNS), and Altair Engineering (NASDAQ:ALTR).Sales Growth
As you can see below, Bentley's revenue growth has been decent over the last two years, growing from quarterly revenue of $222 million in Q1 FY2021, to $314.4 million.
This quarter, Bentley's quarterly revenue was once again up 14.1% year on year. We can see that the company increased revenue by $27.5 million quarter on quarter. That's a solid improvement on the $18.6 million increase in Q4 2022, so shareholders should appreciate the re-acceleration of growth.
Ahead of the earnings results the analysts covering the company were estimating sales to grow 10.2% over the next twelve months.
Product Success
One of the best things about software as a service businesses (and a reason why they trade at such high multiples) is that customers tend to spend more with the company over time.
Bentley's net revenue retention rate, an important measure of how much customers from a year ago were spending at the end of the quarter, was at 110% in Q1. That means even if they didn't win any new customers, Bentley would have grown its revenue 10% year on year. That is a decent retention rate and it shows us that not only Bentley's customers stick around but at least some of them get increasing value from its software over time.
Profitability
What makes the software as a service business so attractive is that once the software is developed, it typically shouldn't cost much to provide it as an ongoing service to customers. Bentley's gross profit margin, an important metric measuring how much money there is left after paying for servers, licenses, technical support and other necessary running expenses was at 78.6% in Q1.
That means that for every $1 in revenue the company had $0.79 left to spend on developing new products, marketing & sales and the general administrative overhead. Despite the recent drop, this is still a good gross margin that allows companies like Bentley to fund large investments in product and sales during periods of rapid growth and be profitable when they reach maturity.
Cash Is King
If you have followed StockStory for a while, you know that we put an emphasis on cash flow. Why, you ask? We believe that in the end cash is king, as you can't use accounting profits to pay the bills. Bentley's free cash flow came in at $171.9 million in Q1, up 76.2% year on year.
Bentley has generated $330.2 million in free cash flow over the last twelve months, an impressive 29% of revenues. This robust FCF margin is a result of Bentley asset lite business model, scale advantages, and strong competitive positioning, and provides it the option to return capital to shareholders while still having plenty of cash to invest in the business.
Key Takeaways from Bentley's Q1 Results
With a market capitalization of $13.2 billion, more than $93.6 million in cash and with free cash flow over the last twelve months being positive, the company is in a very strong position to invest in growth.
We liked to see that Bentley beat analysts’ revenue expectations pretty strongly this quarter. And we liked the strong free cash flow. On the other hand, there was a slight deterioration in gross margin. Overall, we think this was a strong quarter, that should leave shareholders feeling very positive. The company is flat on the results and currently trades at $42.07 per share.
Is Now The Time?
Bentley may have had a good quarter, but investors should also consider its valuation and business qualities, when assessing the investment opportunity. Although we have other favorites, we understand the arguments that Bentley is not a bad business. However, its revenue growth has been mediocre, and analysts expect growth rates to deteriorate from there. But on a positive note, its bountiful generation of free cash flow empowers it to invest in growth initiatives.
Bentley's price to sales ratio based on the next twelve months of 11.1x indicates that the market is definitely optimistic about its growth prospects. There are things to like about Bentley and there's no doubt it is a bit of a market darling, at least for some. But we are wondering whether there might be better opportunities elsewhere right now.
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