Bentley Systems, Incorporated

Good morning everyone, and thank you for joining us for Bentley Systems Financial Results webcast and conference call for the third quarter ending September 30, 2020. I'm Kerry Mann, Bentley's Officer for Investor Relations. On the call today, we have Bentley Systems Chief Executive Officer Greg Bentley and Chief Financial Officer David Hollister. Before we begin, allow me to provide a disclaimer regarding forward-looking statements. This call, including the question and answer portion of the call, may include forward-looking statements related to the expected future results for our company and are therefore forward-looking statements. Our actual results may differ materially from our projections due to a number of risks and uncertainties. The risks and uncertainties that forward-looking statements are subject to are described in our earnings release and other SEC filings. Today's remarks will also include references to non-GAAP financial measures. Additional information including reconciliation between non-GAAP financial information to the GAAP financial information is provided in the press release and supplemental slide presentation. This webcast will be available for replay on Bentley Systems Investor Relations website at www.investors.bentley.com. Greg will begin with an overview of Bentley Systems. David will then take you through a review of the financials, and then Greg will review business developments before we proceed to Q&A. With that, I'll turn the call over to Greg.

Good morning. I'm going to briefly reprise our Roadshow presentation from September in order to set the stage for our first quarterly update, which will be next. But first, in introducing Bentley Systems, infrastructure supports our economy and environment. That's supported by the work of infrastructure engineering. they depend upon infrastructure engineering software and we go so far as to think of BSY as the infrastructure engineering software company and that's because it's been our mission for these 36 years since our founding during which we've developed the most comprehensive portfolio for going digital and infrastructure engineering we've invested everywhere in the world become dependably growing and compounding including through 2020 By virtue, in particular, that the majority of our revenues, 87% are recurring, the majority of those revenues renewed annually, paid in advance, and the majority from accounts with whom we have enterprise relationships, they spend at least $250,000 per year with us and our EBITDA margins are comfortably ahead of 30%. But it's particularly important to understand our end market footprint if you like. They are the sectors of infrastructure. I'm going to show The proportion of our revenues in each sector, each segment within a sector, based on accounts specific to those sectors or products specific to those sectors. So the first of those, commercial and facilities. So that would be vertical infrastructure buildings, if you like, which is the proportion shown here. The next sector, industrial and resources. And then the remainder of our revenue are segments within the sector we call public works, and utilities and you see that those include roads and bridges, utility transmission and distribution, municipal and mapping, rail and transit, water and wastewater and then together that's public works and utilities. We have also accounts and products that are generalized that are not particular to one of these sectors and that makes up the balance of our revenue footprint. The portion in public works and utilities including ports and airports alone is three percent of GDP and we believe we're the market leader in roads and bridges and utility transmission and distribution and rail and transit in water and waste and in the disciplines of structural and geotechnical engineering and in the sector of public works and utilities overall. But how big a market can that be? It happens there are 22.5 million infrastructure engineers in the world. They recently have spent $8.3 billion annually on software, which works out to $369 per such engineer. But while there are only half as many product engineers in the world, they spend more on software, in fact, $1,250 per year. So our total addressable market, if and I think when each infrastructure engineer would spend as much as already do the product engineers, would be $29 billion. Now we think of that product engineering market in investment terms as the PLM segment where the L is for lifecycle and indeed expanding toward our TAM can depend on that. In fact, in our company's history, we started in 1984 with the modeling of infrastructure. We had one product, MicroStation, but it was the platform for what are now all of our specialized products for modeling by sector and discipline. We began developing and acquiring the simulation engines that infrastructure engineers depend upon. And since 1999, we've also been in the business of the collaboration systems for project delivery, our project-wise environment. and then in 2009 it happened that we had a very comprehensive portfolio for project delivery then new capital projects stopped as you can recall in the great financial crisis and we realized we were missing an opportunity to add value during the operations and maintenance lifecycle of those same projects as they became assets. So we have since then invested in our asset wise portfolio representing now the proportion shown here of our revenues. So the majority of our revenues recently are still modeling and simulation applications. These generally are on-premise seats that we connect together with cloud services to keep them current. Our systems are faster growing. Of course, they're strictly by subscription and Azure managed services or still some on-premise hybrid, but increasingly native SaaS and we became in 2019 one of the top 25 users of Azure for the purpose. So that continues now, if you like, the consecutive nature of these functions. If we introduce now what we call digital twins, a cloud service to connect together an evergreen environment for the full lifecycle of infrastructure assets, then the functions of modeling and simulation especially can be repeated and add value to maintain Adaptive Fitness for Purpose for Infrastructure Assets, whatever would come along, including resilience challenges like a pandemic. So these 36 years have made us the most comprehensive across sectors and disciplines. That matters because most substantial infrastructure projects require all of the sectors and disciplines to work together interoperably. And uniquely, we cover the whole infrastructure lifecycle and geographically The majority of our business is outside the United States. The majority of our colleagues are in the world where the opportunities for infrastructure are greatest. By commercial model, we still sell perpetual licenses. Our principal competitor Autodesk does not, is the reason we do. We have some episodic professional services but more and more of our professional services are part of success plans, we call it, that are part of our enterprise relationships and recurringly build. Our select subscriptions are for those with perpetual licenses but more than just maintenance. Our enterprise subscriptions are either enterprise ELS enterprise license subscriptions or E365 which we'll look at at greater length today and we offer quarterly and monthly term licenses so that's the recurring majority of our revenues. Within our ARR most by far renews annually as I say we have term licenses that are monthly and quarterly The E365 program, enterprise program, is based on daily consumption and of course that would be subject to the greatest volatility which we'll report on today. So our growth strategies, we primarily grow within our existing accounts because after 36 years there are few new names among infrastructure engineering organizations. We have a priority to multiply, force multiply, are inside sales efforts to grow in smaller and medium accounts in particular. We focus on Asia and we're bringing to market new cloud services jointly developed and jointly sold in particular with Microsoft and Siemens. Acquisitions are programmatic for us and we're particularly investing and will report today on investments in digital integrators to help to create and curate infrastructure digital twins. and now David Hollister will report on our third quarter 2020 financial metrics.

Thank you Greg and good morning everyone. I'm first going to discuss our third quarter 2020 results and then we'll offer some views on our full year 2020 performance expectations. I'll start with third quarter revenues which grew 8.8% year over year to reach $203 million. This is fairly consistent with our year-to-date growth of 9%. Breaking that down further, subscription revenues, which are over 85% of our total revenues, grew 11.6%, while our perpetual licenses and services revenues declined by 7% and 3.5%, respectively. These more episodic perpetual license and services revenues are typically, for us, where we'll feel softness in the face of macro headwinds and cyclicality. To a lesser degree, we'll also see any macro-induced softness manifest in certain of our shorter-term subscriptions, and in particular our E365 daily consumption-based subscriptions. As Greg will further discuss, while we're resilient and growing, we're cautious about the lingering effects of the pandemic on capital project starts, in particular within the commercial and facilities sector and industrial and resources sector, where the combination of these end markets represent about one-third of our revenues. The public works and utilities sector, our largest end market, representing about two-thirds of our revenues, while not unaffected, remains relatively robust for us. You will have noted that our last 12-month recurring revenues, which include primarily our subscription revenues, but also will include certain services revenues delivered under contractually recurring success plans, increased by 11%. This is consistent with continued strong performance in our net recurring revenue retention rate of 110%. Our deep and long relationships with our accounts again are proven with our 98% account retention rate, and growing and expanding with those accounts continues to be our most prevalent source of growth and an area where we continue to invest with our user success adoption initiatives. A significant KPI for us is our annual recurring revenue or ARR. As of September 30th, 2020, our ARR has grown by 9% on a constant currency basis since the same time last year. Our GAAP operating income was $5.3 million for the third quarter 2020, compared to $41.4 million for the same period last year. There is a significant distortion in these results, and I'll next highlight several of these items. Firstly, our GAAP results include a charge of $26.1 million for costs directly associated with our IPO in September. Uniquely, 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 do not flow through the issuer's operating results. With no primary shares being issued in our IPO, these same costs were charged to operating expense. Next, during the third quarter 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 $15.4 million charged to operating expense. In addition, during the third quarter 2020, we initiated and approved a restructuring plan. You'll see this labeled as a realignment plan in our financial statement footnotes. As a result, we accrued and recorded a $10 million charge to operating expenses in the third quarter 2020, almost exclusively related to severance benefits. The plan impacts about 100 of our 4,000 colleagues and is not a cost savings motivated plan. We're investing and will continue to invest any savings to stimulate several of our growth initiatives you'll hear Greg speak about momentarily. Our GAAP net income of $5.8 million for the third quarter was similarly distorted by these significant and unusual items. Accordingly, we also present our non-GAAP adjusted EBITDA, which normalizes for these and other items to facilitate useful analysis and comparison. Our adjusted EBITDA for the third quarter was $73.6 million, up 39% year-over-year, and up 43% year-to-date 2020 versus last year. It continues to be an unusually profitable year for us as our cost savings initiatives, undertaken as a precaution against pandemic uncertainties, continue to generate the expected savings. contributing to unusually strong levels of profitability even beyond what we would have expected in an ordinary year and even beyond a concerted reinvestment of certain of these savings into the growth initiatives we're highlighting today. Certain of these 2020 cost savings are temporary in nature while we expect a portion of the savings to permanently benefit our cost structure. Our resulting year-to-date adjusted EBITDA margin of 32.5% is nearly 800 basis points of improvement over the same year-to-date period last year. Of course, due to the expected return of certain 2020 cost savings, this level of margin and the pace of margin expansion is not sustainable. However, we've historically delivered and expect to continue to deliver steady margin expansion from a normalized baseline of approximately 100 basis points per year for many years to come. We also present adjusted net income aimed at similarly normalizing outlier items to facilitate analysis and comparison. Adjusted net income for the third quarter was $51.4 million, up 31% year over year. Before I turn to our capital structure, I'll offer a quick diagnostic on our unusually high 62% effective tax rate for the third quarter. This anomaly results from the non-deductibility of much of the $26.1 million in IPO costs we expensed during the quarter. In addition, as a public company, certain of our executive compensation for all of 2020 becomes non-deductible, and upon our IPO in the third quarter, we trued up our tax provision accordingly. These permanent differences were partially offset by some windfall deductions for stock-based compensation. However, the overall effect was an abnormally high third quarter 2020 tax rate. Turning to our balance sheet capital structure and liquidity, I highlight that we finished the quarter with approximately $138 million in cash and cash equivalents and $590 million of long-term debt. Net leverage based on trailing 12 months adjusted EBITDA was thus 1.8 times. Our debt levels reflect borrowings incurred to support the payment of a $1.50 per share special dividend declared and paid in the third quarter 2020. Adding this to our ordinary recurring quarterly dividend of $0.03, We paid $397 million in dividends in the third quarter 2020. Obviously, in the third quarter, we completed the initial public offering of our Class B common stock. Our secondary selling stockholders completed the sale of 12.4 million shares, including 1.6 million shares issued pursuant to the full exercise of the underwriters over allotment option. As mentioned, there were no new primary shares offered in our IPO, and accordingly, the company did not receive any proceeds from the issuance of shares in the IPO. Regarding cash flow, Our cash flow from operating activities year-to-date third quarter 2020 was $176 million, up about 49% compared to the same period last year. We don't present a non-GAAP free cash flow metric, but it might be useful to know that our year-to-date Q3 2020 operating cash flows reflect the payment of approximately $4 million of the $26.1 million in IPO costs, with the remaining $22 million outflow expected to be reflected in the fourth quarter. In addition, the year-to-date third quarter 2020 operating cash flows reflect the payment only of about $400,000 of the $10 million in restructuring charges, with again the remaining $9.6 million of these costs expected to be reflected in our Q4 operating cash flows, with some of this potentially deferring into the 2021 period. Turning now to our expectations for full year 2020. We expect total revenue in the range of $790 to $800 million. This represents growth of 7.2% to 8.6%. We also expect ARR growth of 7.5% to 9% on a constant currency basis. And given our strong profitability performance, we now expect adjusted EBITDA in the range of $250 million to $265 million, representing growth of 33% to 41%. Here are some additional modeling details you might find useful. We expect full-year interest expense of approximately $7.5 million, which declines in the event of any follow-on offering to the extent debt is reduced by the proceeds from the issuance of primary shares. We expect our effective tax rate for 2020 to be 23% to 25%. Normalized for the unusual IPO-related activity I've mentioned, our effective tax rate is expected to be approximately 20%, a rate we target prospectively. We expect fourth quarter diluted weighted shares outstanding of approximately $304.7 million and full year diluted weighted shares outstanding of approximately $299.1 million. And we expect full year outlays for capital expenditures, including minimal amounts for certain capitalized software development activities, to remain less than 2.5% of sales, as they've consistently been in the past. Overall, we're pleased with our performance. While we're cautious given our visibility into some marginal pandemic-induced softness and usage of our applications relative to last year, and these are concentrated in certain sectors as Greg will further discuss, overall, our business and revenues have demonstrated relative resiliency and we continue to grow. We're prudently managing our costs and delivering improved profitability despite these macro headwinds and have steadfastly reinvested in future growth initiatives, including our normal acquisition cadence. and we remain intent on continued investment as clearly demonstrated by our just announced $100 million corporate venture capital initiative, Bentley Eye Twin Ventures. Greg, I think now you're going to comment on new business developments and provide some further commentary on tone of business.