Bentley Systems, Incorporated

Good morning, everyone, and thank you for joining us for Bentley Systems Q1 2021 operating results webcast. I'm Kerry Mann, Bentley's VP of Investor Relations. On the webcast 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 webcast, including the question and answer portion of the webcast, may include forward-looking statements related to the expected future results of 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 investors.bentley.com. Greg will begin by reviewing business developments and our progress over the last quarter. David will then take you through a review of the financial results. We will then conclude with Q&A. With that, let me introduce the CEO of Bentley Systems, Greg Bentley.

Good morning, as the case may be. As in each of these quarterly operating results discussions, this being our third, I will start by reviewing the tone of business from perspectives behind and beyond the reported financial numbers, and then we'll put in context our acquisitions and other corporate developments. Our CFO, David Hollister, will follow to explain the reported figures including where arcane accounting rules obscure our otherwise straightforward business progress, and then we look forward to your questions. In both of the previous quarterly reporting occasions, we presented annual outlooks, respectively for 2020 and 2021, and explained our ongoing medium-term initiatives. In reporting on 21Q1, we are adhering to the financial outlook for this year that you've already digested. There's particularly no need to go over those numbers again, as we expect the sequent acquisition to close during the remainder of this quarter, so when we report on 21Q2, we will update our 2021 financial outlook, as acquisitions will have accordingly become financially significant rather than merely, as we say, programmatic. That's a reminder that even after our March 2nd report on 20Q4, We saw most of you again on March 12th when we announced Seafront. In the short time since then, there have simply been no changes in the directional business trends since that last update. The same observations still apply equally, so I will not repeat them. Our first two quarters as a public company spanned choppy periods during 2020, which were each unique, but 20Q1 represented relatively unremarkable continuity. In general, each year's first calendar quarter appears undramatic for us in terms of business volume, primarily because of the seasonal pattern of scheduled annual contract renewals, as David will quantify. Some differences this year from the usual first quarter are worth remarking upon. Upgrades to E365, where we always bill an estimate annually in advance, from ELS, where we have sometimes billed quarterly, contributed to our disproportionately high operating cash flows this past quarter. And underlying our 21Q1 P&L numbers, beyond the largely offsetting commercial model nuances which we will next go through at length, most of our colleagues and our users have remained locked down from office work. The related cost savings account primarily for our inordinately high profitability in the quarter. Thank you for watching. Thank you very much. As confidence throughout our sector increases, I would like to explain the reasons that mere expectations of post-pandemic usage increases don't tend to contribute yet to our revenues nor ARR through 21Q1. Under our ELS commercial program, where our ARR and revenue is fixed for the coming year, only a renewal can provide an accretion opportunity and there don't happen to be many ELS renewals during a first quarter. The ELS renewal is a function of the trailing 12 months of usage, specifically the second highest such month for each product, so the 2020 trough in usage would weigh down renewal accretion throughout 2021. To have more immediate revenue in ARR upside from upward trends in enterprise utilization is one reason we have been promoting steady upgrades from ELS to the E365 program, and more on that in a moment. Our select commercial program covers all perpetual licenses owned by subscribers, to which they of course can add at any time. But given our preference for subscription licensing, We have consciously reduced the incentive for select subscribers to purchase incremental perpetual licenses. Select coverage entitles subscribers to pool their licenses for full utilization, but they are able, unless they configure otherwise, to exceed their license pools as their needs grow, in which case we charge them for term licenses only to the extent and for the period of such overuse. So that takes us back to E365, where we charge per application per day, administered quarterly in arrears, and increasingly subject to collared ranges which we've mutually agreed with accounts to balance risks. As we've made clear, since mid-2020, this has generally worked against us in revenue and ARR, mainly because of the continuing lapses in the workloads of industrial EPCs. New upgrades to E365 from ELS, generally upon annual renewals, can add to ARR even before usage increases because we implicitly charge more than we otherwise would per application day to compensate us for the cost of our embedded success colleague resources. Embedding those success plans are our primary motivation for preferring E365 since our experience is that they accelerate usage growth and Application Mix Accretion, all else being equal. And here is where we finally have a glimmer of momentum from anticipated growth in infrastructure engineering. We think expectations for post-COVID recovery are increasing the interest of ELS accounts in E365 because they want this expert assistance so that by going digital, they can expand their productivity faster than increasing their staff as they resume their own business growth. So, all considered, E365 is ultimately win-win, notwithstanding the lingering pandemic volatility. And in our now familiar comparisons of application usage versus a year earlier, the baseline 2021, excuse me, 2021 period was of course a hybrid, different in each region, of pre-pandemic normal and eventually locked down. Overall, usage of our applications was flat versus a year earlier, but not surprisingly trending ahead by quarter end. By infrastructure sector, the picture hasn't changed from our March report, with slight decline year over year in the commercial facilities sector, the greater decline in the industrial resources sector, and continued slight increases in our public works and utilities mainstay. But here's another cut on application usage, which is consistent with the overall hypothesis we've been expressing. Project delivery accounts, engineering and or construction contractors, now have slightly lower application usage than in 20Q1, while owner-operator accounts have higher application usage now. For another perspective, we've acknowledged that among both contractors and owners, our accounts who spend under $100,000 per year with us, let's call them SMB accounts, aggregated together presently fall way short of the base of a pyramid. Focusing on this SMB opportunity is one of our growth initiatives for the 2020s and where I'd like to report some headway today. To start with, in terms of their application usage trends, The larger accounts usage is slightly lower than a year ago. I think that's because almost all of the industrial resources sector's work, being inherently of large scale, is performed by these large accounts. Conversely, the application usage of our SNV accounts has increased appreciably over the past year. Even more notably, even though SNV accounts represent only about a third of our revenues, In 21Q1, about two-thirds of our new business growth occurred within SMB accounts. As to our overall new business growth, perpetual license sales were not particularly strong, but term licenses tend to more than make up for this from our standpoint. Though revenue in the quarter suffered somewhat as a result, you may recall that the quota plan weightings that I showed last time institutionalized our preference for subscriptions. Our virtuosity initiative is now scaled up to offer virtuoso subscriptions, which include expert assistance as well as software licensing via low-touch e-commerce. Our channel partners are each important, even though they collectively contribute only 8% of our revenue. Thank you for joining us. For yet more competitive differentiation, we've recently determined to add to Virtuosity's offerings perpetual licenses combined with virtuoso expert assistance. We just announced another initiative to also go broad in reaching students, future infrastructure professionals. Phasing in geographically throughout the world during 2021, our new learning licenses are now available at no charge, including for schools and faculties as well as students. Many investors have pointed out that this strategy has worked successfully for our competitors. We believe that over time, this broad promotion to attract and reach our future users will help us to increase our brand recognition and reception, especially in SMBs, will also help our accounts recruiting. Our new higher profile and our investment in self-service fulfillment now makes this democratization of Bentley education feasible and important for BSY, as well as for infrastructure constituencies at large. The Bentley Education Program will cost us most of our revenue from universities, but we have factored that into our financial outlook for 2021 as one of the investments, such as for SMB generally, that will pay off in higher growth over the longer term. By product line, subscription growth from a year earlier was led in 21Q1 by, project-wise, asset and network performance, which also had the strongest new business growth order, our civil design applications, and our Plaxis geotechnical offerings, voting well for our forthcoming sequent consolidation. By way of geographies and subscription growth over the past year, Russia was a standout. Europe, including the UK, has rebounded notably. By contrast to the Middle East, which is still bottoming out, Greater China is back to great growth year over year, although each new year starts slowly there, and the U.S. has been growing solidly. In short, we regard 21Q1 as quite satisfactory in the context of our expectations for the full year 2021 as it is further emerging. To put our corporate developments in the We believe that our initiatives to advance infrastructure digital twins can uniquely improve both global economies and environments. Far beyond the usual connotation of ESG and reaching substantively toward the UN Sustainable Development Goals. I refer to our potential for ES-D-G. So far beyond merely reducing our environmental footprint, we can and should especially prioritize BSY's ESDG handprint. As investors are appropriately requesting, we're working on many ways to help track improvements and to give credit to infrastructure engineers' efforts, innovations, and results in going digital to accelerate ESDG progress. particularly in relation to those sustainable development goals to which we can best help our infrastructure engineering users to contribute. This month, Fast Company announced that our project with Microsoft for the City of Dublin's digital twin project To make a virtue of necessity in pandemic resilience was a finalist in its 2021 competition for world-changing ideas in the spaces, places, and cities category. This project, combining our Open Cities applications with Teams and Azure, is one of our joint initiatives that Microsoft CEO Satya Nadella spoke about at our Year in Infrastructure 2020 conference. At Microsoft's annual developer conference Ignite, This keynote speaker showed our initiative together for increasingly autonomous bridge inspections, applying and advancing mixed reality. Because a generational opportunity on the scale of digital twins takes an ecosystem, Microsoft was instrumental in formation last year of the Broad Digital Twin Consortium, and continues to work with us directly in the particular case of infrastructure digital twins. NVIDIA is another ecosystem partner leveraging its omniverse visualization environment. NVIDIA CEO Jensen Huang highlighted the collaboration with BSY for integration of our iTwin platform at their GTC conference last month. We're particularly enthused about our corporate developments year-to-date in 2021, and I would like to explain the rationale for and the significance to us of the acquisitions we've announced since we were last together. Our captive digital integrator Cohesive Companies added OnTrax Consulting and its 60-plus colleagues, primarily in Alberta, Canada, for yet more comprehensive critical mass across capabilities and geographies. The cohesive companies are increasingly profitable leaders in implementation services for IBM's Maximo, for our asset-wise asset performance solutions, and ultimately for digital twins in these infrastructure enterprise environments. Construction management differs in India and elsewhere in Southeast Asia because of the region's distinctive labor economics, but going digital is nonetheless a priority for meeting the burgeoning and backlogged infrastructure demand there. To take advantage, our Acceleration Initiatives Group added the 30 experienced colleagues of Nadi Information Technologies to bootstrap new opportunities for our growing synchro construction modeling software and cloud offerings throughout Southeast Asia and ultimately to export construction digital twin integration services more globally. Our vision and plan is for our iTWIN platform to enable and underlie digital twins for all infrastructure asset types. To break this ground with powerful examples, Our Acceleration Initiatives Group selectively enters into internal incubation combined with external joint ventures, because it takes an ecosystem, to put together complete iTwin-powered solutions which prove and inform the platform's advancements and fitness for purpose. An important announcement during 21Q1 was the release of OpenTowerIQ, A comprehensive solution which is being stress tested in live adoption for infrastructure digital twins of the world's communication towers. The ownership and management of communication towers have rapidly been consolidated into global or regional specialized and often publicly traded tower codes. In addition to, in effect, being responsible for the pace of going digital in the world at large through 5G additions to existing towers, The Tower Co's have themselves declared and are acting upon their own priorities for going digital in their capital programs and operations. And what I believe is a harbinger for the widespread future They are urgently demanding digital twins, literally, in their proliferating RFIs and RFPs for the purpose, not for experimentation through limited pilots, but in production for their full fleets to assure safety, quality, and compliance as they competitively increase capacity and its utilization, including for the 5G fit-out race. I would like to bring this development to your full attention because I think this current developing case study for communications powered digital twins presages the adoption cycle for infrastructure twins in all infrastructure asset types in turn. We intend to learn a lot from it. As we have explained in our definition and in our experience to date, infrastructure digital twins necessarily combine three essential characteristics in enabling technologies. Let's consider how Open Tower IQ illustrates this. As we just saw, to be a twin of the physical asset, the 3D reality must be captured for intuitive immersive navigation. For communication powers, as for most infrastructure assets, only drone UAV surveys can do this safely and relatively continuously during operations. In the case of communication powers, which are often on roofs as well as freestanding, the needed digital context includes the surrounding terrain to enable the engineering of sight lines and accessibility. Centimeter or even millimeter accuracy is possible. Machine learning creates and subsequently improves the stored flight paths for each tower. But the first operations TowerPose want performed on their tower digital twins is their inventory, applying machine learning upon the 3D reality mesh and 2D imagery to recognize and classify the placement of equipment from their digital component libraries, including their serial numbers as applicable. Among the purposes for this intelligent veracity, this then enables the engineering modeling of structural integrity, wind loading, electromagnetic fields, and hence the capacity for additional revenue generation so the tower digital twins continually increase ROI. and of course the TowerCo's digital twin objectives include automated inspection through machine learning and AI for corrosion, breakage and installation and vegetation problems. Far beyond what's possible from merely static imagery, the evergreen digital chronology maintained over the Tower's history through change synchronization of both repeated surveys and engineering updates provides the fidelity to confidently identify trending maintenance issues and to prescribe recommended interventions. So the compelling benefits of infrastructure digital twins as in the forerunner case of communication powers depend on converging their reality, veracity, and fidelity as Open Power IQ does. Another way to describe this convergence to enliven digital twins is that the cloud services at the heart, if you like, needed to maintain the digital chronology of the synchronized changes and to provide intuitive mixed reality environments for immersive visualization and semantically aligned analytics visibility are IT technologies. This term appropriately connotes as well integration with enterprise transaction systems, typically SAP and Maximo, for instance, for maintenance records. But for communication towers, as for all infrastructure digital twins, the greatest value comes from the engineering modeling, which captures and sustains the semantic understanding and relationships between their functioning digital components. For communication towers, as for most of infrastructure, construction never ends, as continued adaptation for resilience and fitness for purpose is vital. By virtue of the digital twin, the design-validated engineering simulations and trade-offs can be continuously applied to the ever-changing as-operated asset. No matter its reality and fidelity, an evergreen digital twin is only as useful as its evergreen E.T. engineering technologies, which happen to be our competitive mainstay at BSY. To interject a commercial message, We do not need to worry about even our much larger ecosystem partners, such as those I've named, going it alone, because as they learn about infrastructure digital twins, they realize that our ET provides the indispensable, substantive frame of reference, if I only had a brain. However, let us consider the sources of digital context, having established that photogrammetry and scanning from UAVs are essential for our communications towers' examples. But these surveying modalities are just a special case of operational technologies, OT. And a tower digital twin also makes good use of what we would all know as IoT inputs, such as sensors for real-time conditions of radiation, wind, seismic activity, and or water, if I only had a nervous system. This convergence of ET, IT, and OT In and through an infrastructure digital twin is what is required to realize the full potential of analytics, leveraging machine learning and AI to advance infrastructure by going digital. Here the potential contribution of an ecosystem comes to mind again as, of awareness to investors I'm sure, so much attention and investment has been cumulatively attracted to the industrial internet of things. We believe IoT could add comparable value, as that which has merited such investment, to infrastructure, but that it takes a digital twin, with its intrinsic ET and IT, making sense of what would otherwise be IoT data overload, to make this breakthrough broadly worthwhile. In fact, one could say that the combination makes an infrastructure digital twin indeed a living digital twin. That's the infrastructure IoT opportunity opened up by our acquisitions announced last month of Sensometrics and Vista DataVision. Though these bring us only about 40 new colleagues, we consider them the leading experts, furthest up the learning curves, in closing the gap between infrastructure assets and the existing IoT ecosystem of sensor devices and edge connectivity solutions and data environments such as Azure IoT and Siemens MindSphere. Rather than duplicating existing ecosystem capabilities, our priority with infrastructure IoT is extending our iTwin platform so that every infrastructure digital twin can add appropriate connections to sensor instrumentation and data management with what I think of as drag-and-drop simplicity. Sensometrics from its outset has been uniquely focused on cloud-based platform standardization for the sensor categories and device providers pertinent to infrastructure environmental monitoring, and Vista DataVision has literally pioneered the leading-edge infrastructure IoT applications. As a pure software and cloud services vendor, we at BSY do not have intentions to be in the businesses of proprietary infrastructure asset data, nor proprietary analytics, nor aggregate benchmarking acting upon such data, though we very much aspire to be the digital twin cloud platform provider supporting these activities. Our ideal is for our engineering and project delivery accounts to become the digital integrators and analytics proprietors for the owner operator accounts. The engineering firm's future depends on introducing such recurring revenue business models, where they would be paid for the value of outcomes rather than for their hours of input. While creating and curating infrastructure digital twins are to them a conceptually appealing opportunity, our iTwin platform progress within engineering firms has been constrained by slow development of business cases. With our iTwin platform now the entry point for infrastructure IoT and vice versa, we can now offer every engineering firm an immediate opportunity, without their incurring substantial software development risks, to offer ongoing environmental monitoring services for every infrastructure asset they have delivered. Their expertise and resourcefulness is needed to determine what and how to instrument, and how to configure triggers and recommendations from real-time inputs through iTwin-powered digital twins to make the most of our joint ET, engineering models and simulations which they've created with our applications or with the many others that our iTwin platform supports. A case in point is Schnabel Engineering, a leader in the geotechnical engineering of dams and tunnels, ranked number 203 among the ENR top 500 design firms. Their proprietary infrastructure monitoring service, IMS, cloud platform, is enabled by Centrometrics, improving Schnabel's business at the same time as we together improve environmental sustainability. A now well-known case in point for the priceless importance of critical infrastructure monitoring is at the Oroville Dam in California. Thank you very much. The Oroville Dam owner, California Department of Water Resources, has standardized non-centrometric solutions for its dams and across its supply chain of local and global engineering firms with the intended opportunity for us to I-twin power this broad new opportunity to increase infrastructure safety and environmental resilience. For subsurface digital twins, deepened by our pending acquisition of Sequent, It happens that, of course, UAVs, cameras, and laser scanners don't function underground where these serious environmental risks originate. So sensors and infrastructure IoT will be instrumental in further accelerating subsurface digital twins through new iTwin-powered environmental applications such as these examples. Now, anticipating potential questions. It's too soon to speak knowledgeably about the causes of last week's catastrophic collapse of an elevated transit section, effectively a bridge, in Mexico City, but subsurface conditions may have been a factor. In any case, this underscores that ESDG potential were imperative. for infrastructure digital twins and infrastructure IoT in averting such failures. A relevant demonstration of what's becoming practical for this purpose of broadly propagating critical infrastructure IoT is this special recognition awarded 2020 year in infrastructure project in Korea. You can find it on page 17 of your 2020 infrastructure yearbook. It met the challenge of a $10,000 budget limit to instrument a typical highway bridge by combining video and affordable sensors for OT with BSY applications for ET. I think governments need to bear in mind these vulnerabilities in existing infrastructure when allocating funding for new infrastructure investment programs as the U.S. is now debating. Notwithstanding whatever can be afforded for incremental capacity projects, it is clearly essential to extend the lifetime of existing infrastructure assets while improving their adaptability, including energy transitions. to sustain fitness for purpose and increasing their environmental resilience. The most advantageous and far-sighted investments would prioritize infrastructure digital twins, enabling infrastructure IoT for existing assets. An immediate opportunity is for mobility digital twins, where we at BSY are already a world leader in traffic simulation, but which we can timely advance through our recent acquisition of InRow, Rather than utilizing mobility modeling only for new capital project planning, Mobility Digital Twins should work continuously and comprehensively to maximize throughput of existing transportation networks. Our ET for Mobility Digital Twins already includes Legion for leading pedestrian simulation and Cube for metropolitan planning. Now, Inroad and its 35 colleagues headquartered in Montreal, Canada, bring us any simulation for a world-leading multimodal simulation of transit and roadways together, and Dynamec for dynamic simulations at the level of individual vehicles. An example of what can then be enabled with continuous IoT traffic inputs is better dynamic optimization of urban congestion pricing, whose time has come now, even in the U.S. So now, over to David to review our financial results.

Thank you, Greg, and good morning, everyone. I'm going to jump right in, starting with revenues. Our first quarter revenues of $222 million grew 14% over the same quarter last year. Of course, most of that growth comes from subscriptions, which represent 85% of our revenues, and grew 10.5% over the prior year. Very little of that subscription growth comes from acquisitions, and a little over 4% of that subscription growth comes from the currency tailwinds of a weaker U.S. dollar on average this year relative to the same period last year. As Greg mentioned, several product lines led that subscription growth, with each of project-wise, asset and network performance, civil and geotechnical noted as standouts. Our perpetual licenses revenues, which are now less than 5% of our total revenues, declined by about $700,000, likely influenced by the ongoing progression of our various subscription offerings, including term licenses and virtuosity subscriptions. Our professional services revenues, now about 10% of our total revenues, increased by 10.1 million, or 74% over the same quarter last year. Effectively, all of this was stimulated by acquisitions concluded throughout 2020 and fully informed our full year 2021 guidance previously shared. Our recent first quarter 2021 acquisition of OnTracks did not contribute materially to 2021 Q1 results. Nor do we consider it material to our expected full year of 2021 results. Our acquired digital integrator businesses are growing even since we acquired them. Hence technically there is some organic growth here, which in effect I am classifying as acquisition growth. So I'll offer a further comment on our services, revenues, and recent acquisitions. We obviously don't have an ambition to become a professional services business. That said, these digital integrator service business acquisitions have brought scale to our existing service offerings and are profitable, as you will note a favorable trend and finally positive services margins on the face of our income statement. to have the benefits of scale, capability, and profitability from these acquisitions while also addressing our underlying primary strategic objectives of digital twin software pull-through and a learning curve for digital twin integrator ecosystem is a compelling combination, we think. I'm presenting here on the right a reminder of our full-year 2021 revenue outlook as was provided during our year-end 2020 earnings call. You'll recall we provided a range of $895 to $920 million for revenues, representing growth of 11.7 to 14.8%. We believe our Q1 performance firmly supports our four-year outlook. Our last 12 months recurring revenues, which include primarily our subscription revenues, but also will include certain services revenues delivered under contractually recurring success plans, increased by 10.7%. This is supported by our recurring revenue retention rate of 107%, which is reflected here on a Rev Rec 606 basis in 2021, as we are now required to present. The preceding data points on this chart are based on 605 revenue. Had we presented this metric on a 605 basis for Q1 2021, it would be slightly better, but would still round down to 107%. To further quantify the new account growth that Greg highlighted, new accounts contributed 3% of our year-over-year quarterly revenue growth, which is growth occurring in addition to these recurring revenue retention metrics. Obviously, we're not excessively losing accounts, as you can see by the consistent 98% account retention metric. But there is an observable, modest decline in existing account growth, clearly influenced by largely pre-pandemic Q1 2020 dropping out of the metric, which is tending to be offset by new account growth and some observable momentum from our SMB initiatives that we've discussed at length. A significant KPI for us is our annual recurring revenue, or ARR, which has grown by 10% over the same period in the prior year. Of this growth, 9% is organic and 1% is the result of the various programmatic acquisitions we've concluded in the last year and this year to date. Our ARR growth is seasonal and has a high correlation to contract renewal dates throughout the year. Sequential ARR growth metrics are consternated by the meaningful seasonality patterns in our ARR growth, and I'll speak more on seasonality in a moment. Our GAAP operating income was $55.6 million for the first quarter of 2021, up 21% and also to the same quarter last year. As you know, there is a bunch of noise in the GAAP results, which we endeavour to filter and to provide more meaningful commentary and analysis via adjusted EBITDA, which grew 43% over the prior year to 82.8 million. This yields an adjusted EBITDA margin slightly better than 37%. I went to some lengths to explain our recent history and full year 2021 EBITDA margin outlook during our call last quarter, and I encourage you to revisit that. Our margin performance for Q1 2021 is strong, and I again admonish that it is unusually strong due to pandemic-related cost savings that continue to accrue to our benefit. Although compensation levels and incentive plan payouts are returning to normal for 2021, there are seasonal patterns to this expense recognition which I will discuss. Further, our travel savings continue to be significant. We are resolved and committed to reinvesting such savings going forward into growth, that being people, go-to-market investments, and acquisitions. In summary, our profitability and margin performance was strong in Q1, but we expect some level of reversion based on reinvestment plans ahead. Thus, I am reminding you of our full year 2021 performance targets, which we are not yet prepared to adjust. As you can see here, our GAAP operating cash flows are up over 80% for both the first quarter of 2021 relative to 2020 and for the trailing 12 months that ended. We've consistently presented our business model as highly cash flow efficient, with a conversion ratio of adjusted EBITDA to cash flow in the 85-90% range. However, recent and current cash flows are particularly strong and unusual. As I've mentioned, we don't have appreciable multi-year contracts, so there are no upfront multi-year windfalls. However, the conversion of certain ELS contracts with quarterly paying cycles into E365 contracts, where we seek to collect as a deposit the estimated consumption for a full year at the outset of the contract, has accelerated our cash flows. Further, continued expansion of our term license program, where we also seek to collect and maintain a year of consumption on deposit in the form of a CSS, has also generated stronger cash flows. As these programs grow, their cash flows outpace the historical usage and resulting revenue recognition. We are focused and efficient on cash flow, but I don't represent the current bulge in performance to be long-term sustainable. As a quick review of what we discussed in our last call, during our Q1 2021, we successfully executed some substantial financing transactions. The results of both our newly secured $850 million senior secured revolving credit facility and our $690 million convertible notes issuance and the related capped calls are now reflected in our financial results and position as of March 31, 2021. All of this was undertaken to avail of a receptive market and to enhance our capital structure for continued growth, and notably to position us to potentially pursue acquisitions on a larger scale, as we subsequently did with Sequent. As of the end of March, our net debt was $103 million, and net debt total leverage was quite low at 0.4 times. Cash on hand and full revolving credit availability position us well to conclude the Sequin acquisition and the cash purchase price of $900 million, and to support our ongoing investment for growth and quarterly dividends. Initial leverage after Sequin is still estimated to be well below four times, and our long-term total net debt leverage target continues to be ideally in the two to three times range. In lieu of quarterly guidance, I thought it would be helpful to offer some commentary on our seasonality. It is historically and still the case that perpetual licenses are most prominent towards the end of our year. You just heard Greg mention that China, although delivering a solid Q1, typically has a stronger last half of the year for us. It is also the case that relative to other geographies, perpetual licenses in China remain a more prominent commercial choice for users. The new for us in 2019 606 Revenue Recognition Standards introduced in quirkiness, as Greg sometimes references. Essentially, any of our ELS contracts that renew and bill annually require upfront revenue recognition of approximately 80% of the contract value, with the remaining 20% recognized radically over the year. This upfront revenue recognition scheme is more impactful in each year's first and fourth quarters for us. I highlight here the directional pattern of our quarterly revenues for the last several years, which reflect this trend. Although it could be somewhat masked by the growth in services from acquisitions, we should all expect the same general pattern this year. That's not backing off of our outlook, which I'll address in a moment, just educating as to normal and expected intra-year volatility due to accounting rules. Also on the issue of accounting quirks. As we convert annually billed ELS subscriptions into E365 subscriptions, we leave behind that upfront revenue recognition and introduce a RevRec pattern that follows the actual consumption of the software and more closely approximates a roundable pattern throughout the year. But when we do that, we compare apples to oranges when looking back to compare year-over-year revenue. For example, an ELS that renewed and booked upfront revenue of 85% in Q1 2020 and then converted to an E365 in say Q1 2021 will reflect only a single quarter of consumption measured revenue recognition in that initial Q1 2021 period. Of course, then in subsequent quarters, the year over year comparison reflects a full quarter in the current year compared to only 5% of the contract recognition during the same quarter of the prior year. Analysis of these dynamics is complicated given the ongoing migration from ELS to E365. To date, the effects have not been worth much mention. I will comment now, however, that in this particular Q1 2021, had the portfolio of our converted E365 contracts been normalized for the aforementioned scaling effect, Our subscription revenues would have reflected 2% greater year-over-year growth. We don't get overly excited about it. It will all normalize. And we're just as happy to leave the lumpy ELS upfront recognition behind us as we continue our E365 migration. I teased before that our ARR growth follows a seasonal pattern, which is impacted by the timing of normal annual renewal cycles for our subscription contracts. Historically, the approximate average pattern of ARR growth in a given year presents as 10% of the growth in our Q1, then 25% of our growth in each of the second and third quarters, then a heavy fourth quarter of renewals, which yield 40% of our annual ARR growth. This seasonality is likely to temper going forward as more annual ELS contracts renewing in Q4 become E365 contracts, which effectively renew each quarter and get reflected in ARR throughout the year. Lastly, just a few comments on operating expenses. We try to concentrate annual raises for our colleagues to occur as of April 1st of each year. Although significantly abated for 2020, full normalcy will return in 2021. Since approximately 80% of our cost structure is people and related support costs, annual raises are non-trivial, and the effect on operating expenses in Q2, Q3, and Q4 relative to Q1 is meaningful. This is further compounded by variable incentive compensation, which is historically higher in the last half of our year. There is also a seasonality to certain of our larger promotional and event-related costs, which are historically highest in the last half of our year. And lastly and generally, we are growing. Those cost savings that we have been almost apologizing for are being steadfastly reinvested into growth initiatives, people costs, go-to-market costs, and acquisitions. That's a good segue into re-sharing here exactly what we shared last quarter related to our financial outlook for 2021. Our Q1 2021 was at least as good as we expected when we shared our guidance, but not so extraordinary that we feel compelled to modify the full year outlook at this time for any of these metrics. Related to CEQA, as Greg mentioned, we continue to navigate the administrative process of gaining regulatory approvals. but at this point expect no stop-set of issues. We continue to anticipate a second quarter closing, subject of course to regulatory pace. I remind you here generally what we expect from Sequent in terms of scale and contribution. Once Sequent closes, then we will update our 2021 outlook, hopefully when we report our second quarter earnings. And before I wrap up and reopen up for questions, I am also resharing here our views on what we are targeting in our long-term financial performance. What we consider a solid P1 is generally consistent with our views and ambitions for these targets, and we'll keep working to deliver them. With that, Kerry, I think we're now ready for any questions there may be.