Bentley’s S-1 shines a light on how private companies grow, “with engineers in charge”
As you probably know, Bentley filed to go public a few weeks ago. I put up a quick blog about the filing that evening and promised to read the whole thing and write about the highlights in a subsequent post. But I hit a snag. A Registration Statement, the S-1 a company submits to the SEC, is … boring. And long. There are nuggets, but there are SO. MANY. DETAILS. All I can say is, it took a while to work through.
Bentley is filing under a provision of the Jumpstart Our Business Startups Act (the “JOBS Act” – those legislators are funny, no?) of April 2012 that sought to reduce the regulatory burden on some newly-public companies, for which Bentley says it qualifies. (This isn’t nefarious; Altair did the same thing in 2017.) This means that Bentley doesn’t have to report as much data as other companies do — in particular, it has to report only two years of financials in the S-1, and it doesn’t have to share some details like executive compensation.
Bentley did throw in this handy chart, to show how it has consistently grown over the years:
The S-1 is chockablock with data, including a few years of Bentley’s financials. This is a screencap of the table of page 15:
As you can see, Bentley reported total revenue of $629 million, $692 million, and $735 million in 2017, 2018, and 2019. Main takeaway: it’s substantial and growing, with revenue up 7% and 17% for 2018 and 2019. Through June 30, 2020, was up 9% with software revenue up 12% — not bad given everything.
Let’s put that in some context. Bentley in 2019 was roughly half the size of Autodesk’s AEC business but nearly $200 million larger than Nemetschek. Why does that matter? Because some buyers still follow the Jack Welch maxim and only work with the #1 or #2 player in a space — Bentley is clearly that #2. But that may be the wrong comparison since the companies are now heading in different directions. Autodesk, in AEC, focuses on the design and make parts of a project, while Bentley looks more at design and operate — and, increasingly, design in the context of operations and maintenance. It’s looking to answer questions like, how would I design this better if I knew I had this maintenance plan/budget? Over the asset’s lifecycle? (More on this in another post.)
Indeed, Bentley cites reports that show it holds the #1 position in several industry and application area slices, as determined by The ARC Advisory Group: “In August 2019, for Engineering Design Tools for Plants, Infrastructure, and BIM (building information modeling), ARC ranked us #2 overall, as well as #1 in each of Electric Transmission & Distribution and Communications and Water/Wastewater Distribution … [and] Collaborative BIM. In December 2019, for Asset Reliability Software & Services, ARC ranked us #1 overall for software, as well as #1 in each of Transportation, Oil and Gas, and Electric Power Transmission and Distribution”.
Bentley’s always been proud of its R&D — saying things like, “We’ve invested over a billion dollars in acquisitions and R&D in the last 10 years.” We can’t verify that exactly since we’ve only got three years of data, but it’s likely true — Bentley spent $184 million on R&D (25% of revenue, on par or slightly ahead of other PLMish companies) and another $34 million on acquisitions in 2019.
On the topic of acquisitions: Bentley has bought LOTS of small companies over the years, more than technology tuck-ins but nothing as splashy as arch-rival Autodesk. In 2019, it completed four acquisitions for the $34 million I mentioned above; through June 30, it has acquired four more companies for nearly $70 million. The filing says that “[Bentley’s] average historical annual revenue growth rate from acquisitions over the last six years has been approximately 1.1%” — it’s clearly not acquiring revenue, but rather technology and, perhaps, specific customer accounts.
If you’re keeping track of the various companies’ race to recurring revenue, Bentley says that in 2019, “subscriptions represented 83% of our revenues, and together with [reucrring] professional services revenues bring the proportion of our recurring revenues to 86% of total revenues.” That’s on par with other companies that haven’t gone all-subs-all-the-time.
I also found this fascinating: “In 2019, 96 accounts, each contributed over $1 million to our revenues, representing 32% of our revenues. 53% of our 2019 revenues came from 424 accounts, each contributing over $250,000 to our revenues. During 2019, we served 34,127 accounts … No single account provided more than 2.5% of our 2019 revenues. Additionally, we believe that we have a loyal account base, with 80% of our 2018 and 2019 total revenues coming from accounts of more than ten years’ standing, and 87% of our 2018 and 2019 total revenues coming from accounts of more than five years’ standing.” We often wonder if any one account pulls the strings at a vendor, and in Bentley’s case, at least, that’s a no. But the ability to keep 80% of its accounts for 10 years or more — I find that impressive. I am often asked how sticky these tools are — here you see, very sticky,
Let’s talk Siemens. I’ve met with Bentley and Siemens separately and together, and they are 100% in on their technical partnership. The business relationship, perhaps not so smooth. Here, according to the S-1 is the backstory and then some present/future stuff (I edited this for readability):
“In September 2016, we and [some of] the Bentley brothers entered into a Common Stock Purchase Agreement with Siemens, pursuant to which Siemens was authorized, and agreed, to acquire up to $100 million of our Class B common stock from our existing stockholders. Subsequent amendments increased this amount to $250 million (which, if reached), increases by $20 million on each subsequent anniversary of the date of the Common Stock Purchase Agreement so long as the Strategic Collaboration Agreement remains in effect on each subsequent anniversary. The next increase is set to occur on September 23, 2020. … As of June 30, 2020, Siemens beneficially owned 34,764,592 shares of our Class B common stock” and had paid a total of about $250 million for these shares.
A bit of math shows us that this is 14% of the total Class B shares. Why, you say, does this matter? Because each Class B share carries one vote at a shareholder meeting. Class A shares, mostly owned by the Bentley family, have 29 votes each, and there are 11.6 million Class A shares in total. 35 million-ish votes for what Siemens wants versus 336 million-ish votes for what the Bentley family wants (assuming they agree). Siemens does not drive this bus, though it clearly has input.
But the real thing about Bentley+Siemens is the strategic element mentioned above:
“In conjunction with the Common Stock Purchase Agreement, we entered into a Strategic Collaboration Agreement with Siemens … The initial term of the agreement lasts until December 31, 2026 and automatically renews for successive one year terms unless either party elects to terminate the agreement … In addition, Siemens has the right to terminate the agreement and any related collaboration projects if the Bentleys no longer own a majority of our voting power or if we otherwise undergo a change of control”.
Note that last sentence: Siemens can walk away if Bentley Systems changes ownership. And there’s more (again edited down with bold added by me for emphasis):
“we … entered into the Common Stock Purchase Agreement with Siemens in September 2016, pursuant to which we … granted Siemens a right of first refusal with respect to certain deemed liquidation events, offers, sales or certain issuances of our capital stock, … Pursuant to the terms of the Common Stock Purchase Agreement, Siemens’ right of first refusal expires upon the effectiveness of a registration statement in connection with an underwritten initial public offering. Siemens contends that this right of first refusal applies to sales of common stock in an initial public offering by the Company or the Bentley family members party to the Common Stock Purchase Agreement. While we disagree with Siemens’ contention, our initial public offering of Class B common stock will be exclusively by existing holders whose transfers of capital stock are not subject to Siemens’ right of first refusal, and we have not included any shares to be issued by the Company or any shares held by the Bentley family members party to the Common Stock Purchase Agreement in the offering pursuant to this prospectus.“
“Following the effectiveness of the registration statement … Siemens’ right of first refusal will terminate. Following the completion of this offering, we intend to evaluate opportunities to then undertake a primary offering of our Class B common stock by the Company, subject to [a bunch of stuff] … We have not engaged in any formal discussions regarding any such offering and we have not undertaken any steps to pursue such an offering. The Company lock-up contained in the underwriting agreement to be entered into by us with the underwriters in this offering will permit us and selling stockholders to sell shares of Class B common stock in an aggregate amount equal to up to 20% of our total Class B common stock outstanding at such time beginning on December 1, 2020, and such lock-up agreement expires 180 days following the date of this prospectus. “
I may be the only person who finds this interesting. I draw no conclusions but I would think armies of lawyers would have ironed this out in 2016 … And I’ll tune in on December 1, 2020, to see what happens then. After all, the rumors persist that Siemens may want to acquire all of Bentley, to add it to the DIgital Industries part of the AG.
Leaving aside whatever that is with Siemens, it’s important to note that this IPO is about creating liquidity for existing shareholders and not raising money for the company. Who those “selling shareholders” are isn’t clear to me, but very explicitly does not include the four Bentley brothers who have, for years, been the face of the company.
This is explained in an unexpectedly funny bit of the S-1, on page 107, where they write,
“Barry, Keith, and Ray are respectively chemical, electrical, and mechanical engineers who have spent their entire careers in software. Even Greg, prior to joining the rest of us, was a successful developer of software for what he characterizes as “financial engineering.” Having engineer types in charge seems to have worked for us, perhaps because of the correspondence to our end market of infrastructure engineering.“
And this important bit follows:
The four of us are not selling shares in this offering, nor do we contemplate any “exit” other than (as we are all aged in our early 60s) in due course following the example of Barry, who retired at the beginning of this year but remains active on our Board. We plan to continue our modest regular dividend, which will serve to encourage this orderly progression.“
OK. So what did I learn? That Bentley is a significant and thriving software vendor, confidently stepping out into new areas like asset operations and maintenance. That many of the people who made it so plan to stay on. That it’s profitable and generating lots of cash. None of that is surprising — we didn’t have the details before, and now we do. And that ethos of “by engineers for engineers” is 100% true to the company’s character, and has been for decades.
What happens next? The offer needs to be priced, meaning the underwriters and Bentley figure out what the market will bear and line up buyers. There’s no date for that yet — but I’ll write about it once it is set.