Bentley Systems, Incorporated

Good morning, everyone, and thank you for joining us for Bentley Systems Q3 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 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 operating results 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 .bentley.com. Greg will begin today by reviewing business developments and our progress over the last quarter, and then David will 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, and thanks to each of you for your interest in Bentley Systems' quarterly operating results. Our prepared remarks today will follow our usual format, as I will discuss the tone of business and certain corporate developments, and over to David Hollister to review our quarterly financial performance. Our operating results press release is one of two we issued today. By way of tone of business, we consider that 21Q3 was a quite satisfactory quarter in tracking towards our previously expressed expectations for the full year 2021, particularly in terms of new business growth and ARR growth, which by virtue of our subscription preponderance tend to be closely correlated. With US federal infrastructure spending legislation having only just finally moved forward from its status when we last announced quarterly results, it is too late for our full year 2021 expectations, or those of infrastructure engineering organizations, to be materially impacted or adjusted. But our user organizations seem already more receptive to going digital in order to be able to increase their workload more rapidly than they expect to be able to increase their workforce. As happens to have been the case throughout our now year plus history as a public company, the tone of business differs considerably by infrastructure sector. In each case, we monitor application usage, which for most of our business tracks tolerably closely with new business growth and ARR growth. For the third quarter of 2021, the pattern continued to correspond with what I reported for 21Q2 in accordance with the stoplight relative color coding here. This refers to the trend direction since pre-pandemic in terms of unit volume abstracting from almost two years of some commercial changes. The consistency with last quarter's report enables me to be brief today in touching on only what's discernibly different or newly discerned. As before, I will start with the seemingly chronic infrastructure sector laggard, industrial slash resources. Traditionally, this represents only the portion shown here of our revenue by sector. But recall that last quarter, we showed the new breakdown of our ARR by sector now including Sequent. We have not sufficiently integrated Sequent into our systems and metrics such that we regularly break out revenues by sector. But when we can do that next year, it is our intention to separate industrial and resources into two sectors. Industrial will primarily consist of process plants, including for power generation, along with discrete manufacturing facilities. Resources will then become the larger sector shown here by virtue of sequence, concentration, and mining, and will include our substantial footprint or should I say ESDG handprint for offshore structures, increasingly for renewables rather than only oil and gas production, and for geothermal and other environmental opportunities. Sequent is thriving, primarily with mining growth including for the electrification quest, and it added 7% to its ARR from 21Q2 to 21Q3. This does not include either our geotechnical offerings such as Plaxis, which we have reverse integrated into Sequent and which continues by the way, it's notably strong new business growth, nor the acquisition of Minolitics or other acquisitions by Sequent. Minolitics was in September to fully incorporate the MX deposit drill hole data management cloud platform. On the whole, I consider that our new mix within the resources sector positions us rather favorably for the world's energy transition imperatives. But back in our traditional combined industrial slash resources sector, the drop off in fossil fuel capex appears to have continued based on our application usage readings, in keeping with the fact that typical affected EPC contractors, based on their own public company filings, have reduced their workforce by on the order of 20% since the middle of last year. Their usage of our applications is down by a percentage in low double digits, but we are realizing other knock-on impacts. Our last 12 months subscription revenue from EPCs is now down year over year by a high single digit percentage. If not for this EPC decline, our 21Q3 recurring revenue retention rate would have been .5% rather than our reported 106%. Moreover, our ProjectWise collaboration service has been the workforce for work sharing across EPC's global resource centers, and their reduced workforce has made a substantial dent here as well. While new ProjectWise usage was a growth driver during the first year of the pandemic, as going digital made working from home more productive, by now this first time virtualization of talent has of course slowed down. In industrial resources, infrastructure engineers within owner-operators, besides accounting for almost all the OPEX usage, also work on CAPEX projects. It has occurred to us that owner-operators' use of ProjectWise provides us a proxy to measure this project delivery proportion of their work. Corroborating our observations for EPCs, this usage is also down in low double digit percentages since pre-pandemic. Overall, this accumulated drag from industrial resources' CAPEX project delivery curtailment, plus an even larger proportional curtailment in commercial facilities' CAPEX, also inferred from lower usage of ProjectWise, is tending to almost offset new business growth for ProjectWise. Similarly, within our consumption-based E365 program, where industrial resources accounts represent a greater proportion than of our overall ARR, because of EPC's preference for E365 to share with us their intrinsic cyclical volatility, industrial resources' CAPEX usage declines somewhat more than offset all other usage gains during the pandemic today. Overall, our new business growth in industrial slash resources, again excluding Sequent, has declined by half since pre-pandemic. However, these CAPEX headwinds are somewhat mitigated by notable new business growth in asset-wise -to-date, led by industrial slash resources' lifecycle information management. For assessment of the tone of business across world regions, we use the measure of new business growth rather than application usage. This corresponds to our regional management of our Account Advancement Direct Salesforce. As a footnote, for us, the connection between application usage trends and new business growth is stronger than for competitors whose enterprise subscription programs are based on -lose-it commitments. However, our E365 program does increasingly include some symmetric collars which serve to somewhat attenuate the correlation. And by region, there is better related news than within the traditional industrial resources sector per se. Last quarter, we had continued to observe that while whole regions such as the Middle East, where economies substantially depend upon industrial resources' fossil fuel revenues, had abysmal new business growth across all infrastructure for the past year. So it's gratifying now to observe that for 21Q3, new business growth has significantly returned in the Middle East. Presumably, this is a result of the rebound in energy prices, which hopefully will be sustained. Latin America also significantly turned around with notable new business growth, and Russia in this case, uniquely led by industrial slash resources, was relatively the best region in new business growth performance for 21Q3, presumably capitalizing on Russia's energy export opportunities. Rounding out the tone of business by region based on other drivers of regional performance than the industrial slash resources sector, India rebounded to new business growth for 21Q3, though not yet back to pre-pandemic levels. In August, India announced a four-year, $1 trillion build back better program for transportation and telecom to start next year. Australia and New Zealand have brought up the rear in new business growth this year, but from an unfortunate combination of unrelated institutional factors, we think, in spite of relatively positive fundamentals, which we think should turn this region around foreseeably. In Greater China, where we called out geopolitical issues that seemed to come to a head last quarter, it's good news that attrition during 21Q3 was down to globally normal levels, with resulting new business growth seasonably comparable to prior years. This region's year still depends characteristically on a strong fourth quarter, but we do think demand fundamentals remain strong. Back to infrastructure sectors, in commercial slash facilities, the decline in project-wise usage that I mentioned indicates an even greater proportionate decline in capex projects than there was in industrial slash resources. However, in commercial slash facilities, growth in up-ex usage fully makes up for this, recovering overall to pre-pandemic usage levels. And to get to the most sustained and significant trend of all, concluding with our mainstay public works slash utilities sector, all indications by region and globally continue to confirm advancement from pre-pandemic usage and new business growth levels. By way of example, for notable growth during 21Q3 and -to-date, credit in particular goes to all of our products for provisioning and asset performance of utility grids. Open flows for water, wastewater and sewer networks. Open utilities for energy networks. Open comms for telecom networks. And open tower for communication tower digital twins. This new business growth results from the extraordinary opportunity I described at length along with our 21Q1 operating results in May. And indeed, during 21Q3, we won new open tower contracts for multiple millions of ARR dollars. Together, I think these quantitative and qualitative data points make the case that we are succeeding and becoming capable of faster growth than our traditional trajectory. I don't think the principal drivers for this are so much our new products or initiatives on the margin or even the sequent acquisition, but rather some fundamental investments. While they happen to coincide with our having become publicly traded, I think the only relationship to that is indirect, holding ourselves more accountable to reach our potential. And while these fundamental investments happen to coincide with the course of a pandemic, which has made our markets more receptive to going digital faster, I think the more direct relationship in this case is that we could reinvest pandemic-induced travel and event savings. So as not to compromise our committed target to annually improve my margins by a measured and sustainable 100 basis points. So to reprise these fundamental investments, first we now have about 600 colleagues within our user success organization, which didn't exist at the beginning of 2020. Not all of these colleagues are incremental, as this now includes all of our now consolidated technical support and traditional professional services resources. Every day reinforces how much more effective we've become as a company in supporting our users advancements and adopting and expanding the usage of our products and cloud services now that we have a dedicated success force who work on nothing else than when we previously assumed this could be done as a small and amorphous and unmeasurable part of every colleague's job. I think our user success organization, though still so young, has already made an impact on nearly every existing and new account, improving their sentiment, capacity and progress in going digital by using more of our offerings better, especially through the new digital workflows that our success blueprints introduce in accordance with the priorities of our E365 accounts. So to underscore the importance of our user success investment, consider the extent to which our ARR now varies directly and immediately with consumption through term licenses and especially our E365 program where we charge per application per day. This slide from last quarter shows our point of departure for the proportions of revenue by commercial model. And here are those proportions at the end of 21Q3. The major increase in term licenses reflects the first-time inclusion of Sequent for a full quarter. More significantly, 21Q3 was another quarter of substantial growth in ARR under E365, mainly attributable to accounts opting to upgrade from our traditional ELS program in order to secure the virtually embedded assistance of our success force, including through success blueprints in going digital. We are now offering E365 by invitation to the larger accounts whom are currently select subscribers with more than ample pipeline for years of further upgrades. The majority of our ARR growth upside potential depends on accretion within our existing accounts after they upgrade to E365. And the palpable results of our success program investments to date have steadily increased my confidence in this upward inflection. In recent quarters, I have described at length our other fundamental investments since the start of 2020, so a brief update should suffice. Virtuosity offers primarily to SMB prospects our virtuoso subscriptions, which uniquely combine software access with success key assistance from our substantive engineers. Virtuosity began as a captive reseller, which we quickly determined to mainstream and now more than 200 colleagues work, for example here in Dublin, in its direct sales, digital engagement and e-commerce activities, competing primarily with our competitors in direct channels. Largely as a result, and aided by new specifically targeted user success initiatives, our new business growth in SMB accounts has more than doubled from its level in 2020 or 2019 to reach in 21Q3 fully 43% of our overall new business growth. In the case of each of our user success and virtuosity SMB investments, even greater ROI can be achieved through further investment in our ongoing digital to support each of these colleagues through greater and better automation and self-service for our users and prospects than our competitors. Unfortunately, our internal IT and supporting resources, for whom this otherwise would be their highest and best use, are constrained this year by the extravagant compliance ritual of our first time Sarbanes-Oxley 404 deadlines as we exit the emerging growth company exemption at year end, but we plan to more than catch up starting in the new year. To conclude the tone of business, I would like to highlight our brand which leads in new business growth year to date, our Synchro 4D construction modeling offerings. In particular, I note that its new business growth is equally balanced between SMB accounts and larger accounts, which indicates that both virtuosity and our user success organizations deserve considerable credit. Our construction strategy is not to try to be all things to all participants. Rather, we want Synchro to become the solution on projects which realize that construction is intrinsically about the occupancy of space and time. So going digital is not about dumbing down 3D designs to 2D digital paper, but rather constructioneering in 4D. As a measure of where this awareness and potential penetration stands in the marketplace, I think it is significant that among this year's going digital awards finalists, and more about them in a few minutes, at this point, 28% of the projects credit Synchro. I'm also frequently asked about the pace of take up of our iTwin platform, which adds digital twin cloud services to any of our user environments. I think it's also notable that this year, fully 26% of the going digital awards finalists credited our iTwin platform enablement. So now on to corporate developments to relate to what's occurring externally. And indeed, starting with our going digital award finalists, we call that independent expert juries, and many jurors are the world's infrastructure journalists, spent the summer assessing the hundreds of project entries submitted by our users for going digital award consideration. You will see all these nominees in our forthcoming 2021 infrastructure yearbook and our online gallery searchable across all past years as well. The three finalists in each category has been announced and have recently been presenting their projects virtually to their categories jury in a recorded format. You are invited to watch these finals through our year and infrastructure website. For the mobility categories, this has been available since November 1st, and for the project delivery categories since November 8th. City categories finals will be available November 15th. The energy categories finals will be available on November 22nd. And the water categories finals also on November 22nd. This all builds up to our year and infrastructure virtual event keynotes, including on December 2nd, when Nicholas Cummins, currently our chief product officer and chief success officer at Lord Levin's will talk about going digital for infrastructure project advancement, and will finally announce the winners selected by the juries. On the previous day, December 1st, our chief technology officer Keith Bentley, our ESDG director Rodrigo Fernandez, and I will speak about going digital for the advancement of infrastructure assets and of infrastructure engineering organizations. My guest keynoters will be Mathias Rebellious, CEO of Siemens Smart Infrastructure and member of the managing board of the Siemens parent company, and Andre Avelini, president of AEC advisors, which you will hear more about shortly. We would like to include each of you in what I call a concierge virtual event for analysts and investors on November 29th. Carrie Mann and Shannon Clemens will be your guides for most efficient participation throughout the year and infrastructure 2021. Please expect an invitation to register. But speaking of CEO keynotes and about 4D digital twins, earlier today from Europe, Nvidia CEO Jensen Huang presented their GTC 21 keynote, which I have heard that seven million people will watch. This included the slide here promoting our new offerings, which work with Nvidia's RTX hardware and Omniverse services. And we will all want these days, I know, to be fully versed as to 4D visualization, of course. 3D visualization is made better with mixed reality devices, which use their graphics computing power for real time photo realistic rendering quality. And our i-twin platform supports all of these, including popular game engines for immersive experiences. The challenge for actual infrastructure engineering, however, is that both designs and as operated physical reality are constantly changing. And much of the value of infrastructure digital twins is in understanding, perhaps extrapolating these changes and their implications. 4D visualizations uses the computing power of Nvidia's Omniverse to interactively move backward and forward, not only in 3D, but also by way of our i-twin platform's time slider, backward and forward in an asset's digital chronology to immersively review, for instance, the design history and or as here, the 4D construction sequence. This killer application for Omniverse is only possible by virtue of an i-twin's unique change ledger, which assures that the digital twin can be synchronized with the evolving reality. An early adopter of this technology combination for digital twins is global infrastructure engineering firm Jacobs, one of our largest accounts. To gauge such progress and aspirations, we and AEC advisors, a leading investment banking and corporate finance advisory firm for executives and boards of architecture engineering and consulting firms, collaborated on a first going digital survey, which was completed by over 150 CEOs of most large such firms, together estimated to perform more than half of the whole world's contracted infrastructure engineering work. I presented the survey results by way of these AEC advisor slides at their in-person CEO summit last month with my annotations. In this slide, as to their collective expectations about the pace of change and the deliverable requirements of their infrastructure owner-operator clients, I reported that these CEOs already consider 3D models as more important deliverables to clients than 2D drawings, and within three years do not expect 2D drawings to be significant in comparison to 3D models. But many think that even the combination of models and drawings will not be nearly sufficient within three years, expecting infrastructure digital twin deliverables to be significantly prioritized by their owner-operator clients by then, and I think that the simulation results that many more significantly expect to deliver will also be produced by digital twin environments, implying expectations for overall demand for digital twin deliverables to grow steadily, if not immediately. These AEC firms generally participate now only in CAPEX project delivery, but those who most expected digital twins to be required within three years expect the greatest value to be for infrastructure operations, offering the prospect of attractive new longitudinal and even new subscription business model opportunities for these firms, whose roles would include i-twin platform-enabled services for proprietary analytics, data quality improvement, surveying and monitoring, and benchmarking. But as you can see, and as we acknowledge, going digital twins is a long-term ramp. And it is interesting to consider the AEC CEO's expectations about the contribution of such going digital initiatives to their own firms' market valuation, respectively compared to today in three years, ten years, and in a generation. On the one hand, it's gratifying to see significant percentages that presumably motivate the continuation of investments in going digital that had accelerated with the pandemic and are demonstrably already providing good returns. But on the other hand, I think we can all observe other economic domains, retail or autos, for instance, where it's understood that multiples of market valuation are at stake in going digital with greater urgency than seemingly in AEC. In fact, turning to the news of the day with the biggest of all economic figures attached, of course, the Climate Summit in Glasgow has the full attention of infrastructure engineers, as their work is what can make a difference. In terms of economic opportunity, this slide from Goldman Sachs shows the distribution of $6 trillion in annual green capex spending required to meet all of the global goals under discussion. Whatever are the amounts that can and will be over time incrementally allocated, these green capex priorities correspond closely to the categories of BSY's public works and utilities sector market leadership in going digital for infrastructure engineering, including the largest expenditures by sector for roadways corresponding to our roads and bridges leadership, and the largest grouping of expenditures for renewables and the energy grid corresponding to our market leadership in energy grids and in mining and offshore resources needed for these renewables. As to needed expenditures in rail corresponding to our market leadership in rail and transit, and as to water quality corresponding to our leadership position in water, wastewater, drainage and treatment plants, and needed expenditures in telecom ports and airports tending to correspond with our municipal market category. While green capex dollars are measures of need, so can by no means be put in the bank, in the finally advancing US infrastructure spending legislation, $550 billion of the headline $1.2 trillion is actual incremental spending over and above historical baseline funding that is about to become actually committed. The incremental spending can be apportioned approximately along the same lines as to roadways where this new funding is incremental to the existing gas tax funding program for roads and bridges and for energy including renewables, as to passenger and freight rail, and as to water and the needed expenditures in telecom ports and airports. This final corporate development is significant but should not be regarded as a surprise. This year I reorganized what had been a monolithic executive cabinet into two groups. Our operating council takes responsibility for our business as usual and works on improving our execution in coordinating from product to market to user success, increasing our precision in making our numbers. I had already asked Nicholas Cummins to lead this activity of late and am now formalizing Nicholas's promotion to chief operating officer effective for 2022 with our revenue marketing success and operations slash information officers then reporting into Nicholas. You had the chance to meet Nicholas last quarter as he introduced as a Bentley company Sequent, which has reported to him from the outset of the acquisition. I think it's reasonable for us all to expect this just that this change will result in improvement to our business as usual. The operating council has already been working cohesively together but now we'll have more degrees of freedom to double down on initiatives that for too long as a private company we by that I mean I failed to sufficiently take a board. To the obvious examples of the explicit success organization and SMB new business focus we will add a new priority or a step change advancement in marketing automation and integration and this is also a very welcome change for me personally as it will afford me more capacity to concentrate on external investor activities and communications. The public software company CFO function, particularly upon graduating from emerging growth company status as we're now doing is a full-time job and I'm very confident that our current chief accounting officer Werner Andre who has been mentored with this promotion in mind by David Hollister over the last seven years will serve me and all of us well in this capacity reporting to me. Werner is available today to help us answer questions I know you will all warmly welcome him throughout this year he has been very occupied needless to say and completing our Sarbanes-Oxley compliance well ahead of the year-end deadlines and as I suspect David Hollister will tell you himself he is very pleased to be able to soon focus fully on the increasingly significant activities of the second management group that I created this year for corporate development this include responsibilities among other potential initiatives for our acceleration activities in which we nurture new businesses and in some cases we'll be creating new joint ventures for our i-twin ventures fund and for our cohesive captive digital integrator and respect of these investment activities since last quarter in to the sequent acquisition already covered there have been announced the acquisition by the cohesive companies of ox plus combining presence in central europe and in road and rail owner operators sewer ai's announcement of the investment by our i-twin venture fund along with the most recent announcement by unearth of another significant i-twin venture fund investment and we're very pleased that our i-twin ventures investing company future on headquartered in norway today announced the significant growth investment by kdi kungsberg digital now before handing over to david hollister to cover our 21q3 financial performance may i explain how our deferred compensation plan change during the quarter relates to this overall subject of executive talent as you know the bentley brothers believe that our long-standing equity sharing program has been the secret sauce for our company's sustained progress for much of our history before 2015 our executives equity incentives were primarily earned through phantom shares in this dcp the mainstay of our executive management today are among this cohort of company security and recall that our principal motivation for becoming a public company last year was to provide liquidity for our colleague shareholders and most have accordingly become able indeed to choose or not to diversify the value of their bsy investments however the dcp executive cohort have lacked flexibility as the phantom shares representing the bulk of their holdings could only be diversified after being distributed most of these executives distribution elections were made years ago and in most cases distribution is either not possible for many years or significantly is triggered upon or after separation from service without a change in the plan for these executives to effectuate even a modest near-term diversification of their substantial and deserved wealth concentration in public bsy shares their only recourse would have been to resign rather than continuing to ask them in effect to choose between loyalty and reasonable investment prudence we offered these active executives a one-time only election for a limited reallocation within the dcp and the result is that they have been able i think gratefully to diversify about a quarter of their phantom shares and as representative of these executive talent qualities now over to david holister thank you thanks greg

i'll start with our revenue performance our third quarter gap revenues of 248.5 million grew 22 over the same quarter last year because of the purchase accounting for revenue primarily related to sequent we have a haircut which serves to deflate normal results and accordingly we also present adjusted revenues which were 251.4 million up 24% in the same quarter last year there happens to be new accounting guidance which formally brings gap accounting up to pace with this more enlightened view of the historical acquisition haircut unfortunately we can't adopt that guidance until our q4 which we intend to do and apply to our full year 2021 which will render this adjusted revenue concept unnecessary other than for the current quarter of course most of that growth comes from subscriptions which grew 23 over the prior year representing 85 of our revenues given this preponderance i offer much of my business commentary here as it relates to subscriptions we attribute the acquisition of sequent to represent 10 of those 23 percentage points of growth over the prior year foreign currency effects account for just under two of those 23 points and thus our business business performance comprises just over 11 growth as has been the case all year our public works and utilities and market has led the way in macro induced drag on our performance in the industrial resources sector where our footprint of e p c accounts continues to suffer declines induced by capital project delays and cancellations we also see the effects of capital project delays on our commercial and facilities sector and markets on a product and solutions dimension we continue to see strong performance with our utilities offerings for electric and communications grades as well as water and wastewater utilities similarly our 4d sync road construction offering continues to perform well even despite the capital project delays we've mentioned and again asset-wise information management and inspection solutions all had notably positive contributions during the quarter on the other hand those oil and gas industrial capital project headwinds are now decelerating growth in the portion project wise which enables major capital projects on a geographic dimension there are really no outliers from our trends here today good or bad reflected in our gap in our gap revenue results greg has shared his tone of business commentary within that some geographies where new business growth trends are no really and new business growth which is primarily growth in arr is of course a precursor for us to future subscription revenue performance therein we saw improving new business growth trends in geographies presumably benefiting from positive sentiment from rebounding oil prices including russia south america and the middle east we also noted some stability and modest return to growth in china with still some work to do in q4 for it to hit its targets a and z had a license revenues are again down one million for the quarter relative to the prior year and now represent less than five percent of total revenues we can continue to observe ongoing cannibalization of perpetual licenses into term license subscriptions and virtuosity subscriptions which of course is an encouraged trend for us our professional services revenues are 10 of our total revenues and increase 7.4 million over the same quarter last year representing 43 growth most of which can be attributed to cohesive related acquisitions again cohesive companies is our digital integrator business we operate to ultimately stimulate Bentley system software product pull through and digital twin adoption -to-date gap revenues are about 693 million and 19 improved over the year adjusted revenues of 697 million are up 20 percent similarly subscription revenues adjusted for acquisition haircuts are improved 18 percent over the prior year with about three percent coming from currency child loans five percent from sequent and the balance from business performance perpetual licenses are off 2.6 million year to date reflecting the trend towards subscriptions that i described for the third quarter and professional services are up 65 percent year to date also primarily reflective of the cohesive companies dynamics i described for the quarter our last 12 months recurring revenues which include primarily subscription revenues but will also include certain services revenues which we deliver under contractually recurring success plans together increased 15.1 relative to the same ltm period last year the onboarding of sequent contributed about three percentage points of this improvement our subscription revenue performance our recurring revenue performance and our arr performance are each net of the industrial cap x capital project headwinds we've discussed all year and again this quarter and and of course are exacerbated by our e365 consumption based commercial model these double growth rates even net of acquisition and currency effects were achieved by virtue of our comprehensive portfolio in our diversification as well as growing momentum with our focused snb initiative this snb initiative disproportionately delivers new account growth and new account growth is excluded from our net retention rate thus our net retention rate again rounds down to 106 percent is disappointing because of the trailing 12-month nature of this metric it moves slowly it has our full attention and eventually will benefit from our ongoing investments in user success a final comment here on arr which is up 26 over the same point in time last year as mentioned last quarter sequent onboarded 13 of this growth since this is a constant currency metric business performance accounts for the remaining 13 growth this is an acceleration in growth relative to our q1 and q2 performance but i remind you that due to seasonal patterns our q4 is our most prominent and important quarter in terms of arr growth our gap operating income and got and gap net income each unusually reflect a loss during the quarter this loss is directly the result of an 89 million dollar one-time accounting charge related to the recharacterization of a portion of our non-qualified deferred compensation plan from an equity settled arrangement to an eventual cash settled arrangement greg has explained the executive retention dynamics that directed our determination to undertake this recharacterization so let me just go through some of the financial effects of the transaction first and most significant we have a total accounting charge during the quarter of 89 million dollars this is for the most part and predominantly the fair market value of 1.5 million shares converted from equity settled to cash settled obligations of the plan effectively this is a share buyback with the cash outlay for that buyback occurring far in the future of course this portion shifted from equity to liability within the plan reduced our outstanding share count by 1.5 million shares going forward from the point of conversion this portion of the plan converted into a cash settled liability will be indexed to actual market performance for various mutual funds that the affected participants in the plan have chosen as tracking indices the performance of require a presumably nominal mark to market each quarter and will result in a corresponding non-cast charge or credit to operating expenses during this third quarter for example that mark to market was one million dollars a reduction to the liability and a reduction to operating expenses prospectively we will also be highlighting these nominal mark to mark to market charges and also excluding their effects in our non-gap measures particularly in this initial quarter of impact the quirky accounting required to establish the arrangement is obscuring true underlying performance so we've adjusted to neutralize it with non-gap measures and that is best reflected here in adjusted EBITDA which for the third quarter is 85 million and an EBITDA margin of 33.6 percent this brings -to-date adjusted EBITDA to 237 million and a margin of 34 percent this -to-date adjusted EBITDA is up 25 percent over the same period last year as a reminder the seasonality profile of our operating expenses is heavier in p4 than other quarters further we continue to invest for growth to the extent we can still achieve our measured margin expansion targets accordingly i refer you to our previously shared financial performance expectations for the year which we don't endeavor to modify at this time with respect to liquidity our third quarter gap operating cash flows are 47 improved over the same period last year and also reflect an improvement of 18 -to-date compared to the -to-date period last year and 27 improved for the third quarter ltm period compared to the same ltm period last year notwithstanding a great cash flow quarter for us there can be a fair bit of short-term volatility and seasonality in our in our cash flows i also refer you to our operating results call last quarter where we highlight some -to-date cash flow trends and cash wind flows as well as some unusual acquisition related cash ways we continue to expect that on average our business will efficiently generate cash from clack cash flow from operations at a ratio of 85 to 90 percent of adjusted evita as of the end of september our net debt was 1.18 billion and net total debt leverage pro forma was 3.4 times our net senior debt leverage rounds to zero times given 156 million in cash on hand and only 68 million drawn on our 850 million dollars senior secured revolving credit facility 782 million dollars remains fully available to borrow on the revolving credit facility i had previously projected less than four times total leverage after the sequent acquisition and we're actually slightly more favorable at present and trending towards further de-leveraging as i mentioned i think leverage under three times is optimal for us but our business with its predictable and visible cash flows carries debt very tolerably our capital structure is in great shape and we're fully able to support our business strategies including ongoing programmatic acquisitions which we do intend even opportunistically a final comment or two on our annual outlook or guidance if you prefer which we're not changing at this point we continue to work hard to deliver on the upper end of ranges and maybe with excellent performance get ahead of some of the metrics but a significant part of our annual ball game is the fourth quarter we still have lots of work to do and lots of opportunity also i remind folks that we have a fair bit of q4 expense seasonality and we're reinvesting in our business for growth beyond our normal margin expansion targets which we regard as a very high priority it's not our highest priority to eke out short-term margin gains beyond this we'd rather see investment for growth and higher future returns and i suppose the last year i'll give on our annual guidance is to look towards the low side of the range we gave for outstanding shares this is the result of the 1.5 million dollar share repurchase with the deferred compensation plan which we've talked about at length here and with that kerry i think we're now ready for some questions

all right we'll start with matthew broom from the zoo

thanks very much for taking my questions uh so it's great to hear about improving new business growth in the middle east and latin america but to what extent do you anticipate this will translate into a broader rebound for resources customers and given that many of those customers are on consumption contracts is it possible that a rebound could happen quite quickly if and when eps start rehiring

but matthew i think it it would correspond to eps starting rehiring um i think that you know my guess is that depends on their changing business mix to do with energy transitions as far as rebounding energy prices it's certainly clear that even fossil fuel opex is really important and is not in jeopardy and that's a great opportunity for us for instance with asset lifecycle information management that we mentioned is on a on a good upward direction but the nature of capital projects for fossil fuels i do not think we can i don't think i know enough to be sanguine about that uh but yes if eps resume hiring for projects of any sort that will immediately put our project wise and applications back to work we have terrific new applications for wind power tunnels and so forth directions that the eps would like to move toward but they've got to you know change the direction of their ships and and build up new backlog and those directions and i don't feel qualified to to uh comment on how quickly that can be done in the countries the energy prices are helping them spend money on public works and utilities that that's the immediate impact we already see

i see okay um and then uh it sounds like uh virtuosity uh you know had a had another strong quarter um do you anticipate further increasing the size of your inside sales force um and are other ways you can sort of further accelerate uh virtual seas momentum

yes i think one of the spending directions david hollister referred to toward the end of his remarks here where if we of course are going to be sure to meet our margin target for the year but when if we can add faster to headcount in virtuosity while doing that we would because it's it's a fairly you know we're not at the point of diminishing returns in in new application usage prospects in snb so yeah we want to put that accelerator closer to the floor over the coming

year indeed it's at the front of the line for resource allocation um and it's it's not just headcount it's also continued investments in technology and uh marketing marketing tools and google adwords and we're we're seeing success so we're going to keep feeding the leader that

that makes sense and then maybe uh just one last song for me uh just in terms of uh mna does your does your current focus remain the geotechnical environmental opportunity or are you looking at other opportunities as well

i think the the opportunity set presented by the uh infrastructure spending bill and energy transitions are very significant and should have everyone's attention in terms of uh potentially turn on new investments

perfect thank thanks guys and david best of luck in your new role

thank you

next

we'll go to

jason soleno from keeping

perfect good morning thanks for uh taking the time today uh maybe just a couple for for for david um you know the the slight acceleration in ar r constant currency ar r the 13 you know nice to see it sounds like the business is doing well maybe help us unpack you know that acceleration over last quarter

yeah it's it's very much uh along the dimensions of the the the the um tone of business sentiment that that greg described um in all of those areas um again it's an acceleration from you know i think we we showed 10 percent -over-year growth in arr constant currency uh net of on-boarding sequent um in each of the first and second quarters so this 13 percent um is pretty impressive it includes it includes uh some fairly nice wins uh related to uh communication towers solution um which contributed uh uh close to three million of that arr growth during the quarter which wouldn't have been included in prior quarters um so yeah it's it's across the board it's it's really impressive um but i'll again caution it's the third quarter uh we need to do that again in the fourth quarter because so much of our uh arr growth opportunity happens in the fourth quarter it's just the uh the business cycle we have and seasonality we have so uh i'm i'm cautiously optimistic about the acceleration but i'm i'm also cautious uh in particular that the fourth quarter is much more important for us than the third quarter

gotcha and that's probably the main reason as to why you're keeping you know the guidance you know unchanged but you know giving us some of those hints on direction

yeah

okay

perfect i'll uh i'll keep it there and uh get back in queue thank you

yes we'll next go to matt swanson in for matt hedberg from rbc

all right i'm having a little trouble getting my video going but that's that's okay um greg esg certainly been a big topic since you guys came out and especially timely like you mentioned with the infrastructure bill the climate summit could you just talk to us a little bit about how this theme is tangibly driving your business today as well as maybe like any qualitative changes you've seen in customer conversations that might you know give us some idea of the impact we could see in 2022 well

um even with what can be spent under new government programs not only in the u.s but elsewhere it's a fraction of a percent of our infrastructure capacity that we that can be new so extending the lifetime of existing infrastructure assets is necessary but they now need to be resilient for uh environmental uh adaptation uh and the and energy transition and digital twins are uh are the way to to do that i think when these aec ceos we referred to their going digital survey when they when they recognize that digital twins are going to help them participate in the upx life cycle of the assets they they engineer and everyone's doing that for sake of safety and resilience and energy transition it's sort of what's the digital twin opportunity uh front and center in a digital twin opportunity and the esg imperative are closely linked because uh we can't engineer enough new infrastructure to make a difference it's improving and increasing the fitness for purpose of the infrastructure we already have that is uh not only our focus now but i think opportunity as the engineering firms see it on behalf of the owner operators so remember we want to help the owner operators get to digital twins for better asset resilience and throughput with the engineering firms being developing for our i-twin platform their cloud services that will be a new a new business opportunity for them and and helping cover the owner operators so it's not limited to our sales but sales by the engineering firm so having surveyed the ceos of the engineering firms for the first time we're we're glad to see some alignment in the recognition of that opportunity because we need all that help to uh to get to the owner operators

yeah that that's fantastic i guess kind of building on that same theme we've talked about the pandemic going digital faster so as we see recovery kind of progress at different states for different regions are you starting to get a better sense of the durable trends that are emerging from the pandemic especially in terms of you know the long-term pace of going digital i guess as people go through the recovery are you seeing any sort of um hesitancy to continue the progress or is it kind of a newfound emphasis that will continue on

i think it's a newfound emphasis that will continue on but particularly for infrastructure engineers a portion of their work had been on job sites you know not to not not limited to company offices and when they had to virtualize everything they realized they can virtualize that too with with digital twins of the job sites and for remote inspection of the assets and so forth it was a necessity during the pandemic but it's an opportunity hereafter for them to work on more projects anywhere and have a greater set of opportunities they also can grow their workforce by adding people anywhere and that is already a huge focus for instance for these aec co's they they realize that competition for talent is never going to end it's all the more intense and being virtualized through our collaboration methodologies less than add the talent wherever they can find it so those are things i think are are never going to go back

yeah fantastic thank you guys for the time

well let's go to galmundo from barenberg

perfect can you hear me now yes that's awesome hi guys uh thanks for taking my questions um the first one is just i'd like to expand a little bit on mad um rims question earlier when you said um when when he was asking about the um trends in the underlying business especially on the on the on the um on the energy side so david you mentioned that if you didn't have the headwind from e365 usage you'd probably have about two and a half percentage points better a better net retention rate with to what you're seeing today my question there is um at what stage do you an adversary that kind of headwind where the current trends normalize so that headwind year on year like for like isn't a headwind anymore maybe not a tailwind let's forget about requiring just if the current trends continue at what stage you feel like you've you've cleared you've cleared the path for kind of a normal run rate of what you're seeing

yeah if you if you look at uh sort of the the quarter by quarter progression of the uh net retention rate we've now got two quarters of 106 which is uh we we certainly acknowledge is is disappointing certainly is for us but it's a trailing 12-month metric so um there's there's we're not going to bounce back to 110 next quarter it's just going to sort of gradually pick up and what will help is um yeah we we anniversary uh usage reductions from the the e p c accounts that were affected by those match macro headwinds um where they're going from really great performance to the the lower performance but we also begin to include the effects of new accounts right so so our our ar seems to be going in the opposite direction as the net retention rate and that's because the new accounts they're not part of the net retention rate

yet um

so when those when those start to to to roll in as well as the anniversary fully 12 months behind us uh the the good performance from the e p c's then we will then we will see that start

to come back it's a modest caveat to that is we don't have experience the smb subscription annual renewals yet and we will uh six months from now

and i i would also add that just i probably more fundamentally and thinking about this long term our our investments in user success 600 600 people focused on retention and adoption and uh expanded adoption um we'll we'll continue to build and grow momentum going forward

right now we're doing the 365 we we see the difference in greater accretion in the accounts that are in 365 than the universe of other accounts uh for that reason but it's obscured by the is all being on e 365 still

right gotcha um as a follow-up um we talked quite a bit about the opportunities on the infrastructure bill in the past but now to thinking about the climate uh incentives that that are coming it almost sounds like there could be a new era a new opportunity of investment of capex that will go into the green um capex side so maybe greg for you if you think about um the green capex opportunity today the way you see it maybe from a total exposure of the business versus the growth contribution to the business and how do you imagine that kind of shifting over the next five years is it fair to assume that traditional opex is the one that provides subscription revenues for you from that side but a growth especially in utilities and stuff comes mostly from the green in the in the future because that's kind of a trend that will i

think it is most that's why i wanted to show the mapping between the green capex priorities and the public works and utility sector plus resources which i which for us is going to be environmental mainly in the uh in in the future so i think that there is a a strong correspondence between what civil and structural and geotechnical engineers work on and and green capex and it doesn't have to take long you know for for everything that's done industrially for renewables you need to connect up the grid and that needs to be considerably expanded and fortified and you know there there there isn't yet enough uh funding allocated for it but it won't happen that we add renewables and not capacity to use the power where where it's needed for electrification so uh you know i think our our accounts feel uh very good about their backlog for years to come not only is it good business but it's but it's good for getting green and getting safer

do you think that could be a super cycle in terms of the capex investment that drives you know a very long term opportunity

uh so so this gets into well for for a super investment cycle we would need to have private investment in infrastructure as well but there's more than enough private investment that would like to invest in infrastructure and how that gets enabled and and facilitated is a is a question for policymakers but uh the enthusiasm in esg investing uh easily translates to an enthusiasm for infrastructure and green capex investing i guess you hear some of that coming out of glasgow with uh banks supporting uh green capex investment so forth uh together if we get private investment uh added to the government investment instead of either or uh that that could lead toward a super cycle i suppose i i believe it's necessary also i just don't know how quickly that can come about

thank you so much well let's go to bear

okay uh great hi greg and david um you know other than just for to being an important quarter in terms of magnitude and wanting to appreciate that appropriately in the forecast is there anything you're seeing from either a pipeline standpoint or hearing and customer conversations that's giving you pause as it relates to uh execution here at your end and new business growth targets

joe there was something i was hearing that gave me pause it was at the aec advisor's ceo summit so you had the firm the ceo's there who did half who do half the infrastructure engineering work in the world and there was there were murmurs of apprehension that this infrastructure bill in the u.s might get put off for a year that is to say from previous experience on roadway bills and so forth if it's not going to happen sometimes a year extension occurs that would have been very a very big concern to the expectation everyone has of of their you know order books filling so it's a great relief that uh we now know that doesn't that doesn't need to be a concern that infrastructure isn't law yet but but the obstacles are are out of the way of course it mainly refers to next year and years after at this point but there was a weight of some worry from the experience that if you put something off for a year it could end up getting put off forever we don't have to

be my follow-up without quantifying anything because i know that's still tough to do what would be your expectation for timeline uh you know if funding gets allocated one queue of next year when might be the earliest bentley starts to see activity as it relates to just your customers planning you know if they're going to have to spend or hire to support increases in their backlog when does bentley see that in your own new business growth

well i don't think it needs to take many quarters or a couple quarters after that but the uh the most prescient thing i think i heard at that aec advisors ceo conference and we're going to have the head of aec advisors be with us in our keynote on december 1st as i mentioned but um the head of the largest firm said look as an industry in aec we're only going to be able to add to our workforce one percent per year that's based on every all the available engineers in school and coming into the pipeline or back out of retirement or whatever and obviously the the ambitions just to continue the growth rate let alone increase the growth rate require much greater productivity therefore and going digital is everyone's best idea for that there's just no impediment to it as once there was the uh well some will present some of the findings of this survey but generally the uh ceo said that the the the impediments to taking to going digital in general are people in their own firm who haven't adapted yet to to that not not constraints on funding or demand or needing to meet client deliverables as we talked about

great thank you very much let's go to cash rangin from goldman okay

i just unmuted myself uh congrats on the results uh greg curious to get your perspective on uh the economic headlines uh that have that have been in in vogue lately which is labor uh demand uh being very high relative to supply and also inflation how is that impacting your customers or maybe it's not impacting your customers what is your overall view on those forces as it pertains to your end markets willingness to invest in technology but also secondly i'm curious to see what are the milestones that we should be looking at as this infrastructure bill really takes hold and leads to actual tangible business uh what are the things that you're looking for that we should be looking for therefore to see how that could start impacting mentally even more possibly thank you

well on the first question the labor supply constraints are already affecting infrastructure engineers there there are not uh you know the engineering firms are hiring from one another but but there is not a fresh supply possible to do the increased work of structural and civil and uh and geotechnical engineers so that's why going digital is important as far as in inflation and materials and supply chain constraints and so forth that that doesn't as much affect uh the the portion of the project cycles where where we're involved which is closer to the front end i might say with the infrastructure bill the port half of it is is is about uh of course roads and and bridges and there's a template for that that's happened in the past um but but the other half of the expenditures are in these other categories where i think the milestones would be that the legislation directs the government to set up new programs for grid for transit and and so forth some of the programs explicitly encourage uh digital investment uh not in big tangible ways you know but uh but how do those get organized and when they get organized and who's leading them up uh will will will make a difference they're new there's not you can't look at the history to see how that's going to happen

this is a fun thing this metaverse uh thing that potentially more consumer how does does mentally have a take on metaverse is it basically digital twins your way of playing the metaverse concept or is there other broader implications uh for for your business if metaverse to take off

well reasonably enough it's going to start with immersive 3d environments for consumer things but the technologies for greater immersion and performance are going to be great for ways of experiencing digital twins um so we want to with our i-twin platform support any of these visualization environments in other words it's way beyond the hollow lands and so forth there's tremendous investment going into but the content you will want to be immersed in on the industrial side on the infrastructure side has to do with immersing yourself not only statically through a rendered image but using that computing power to say what was the history and the construction the design alternatives that were considered and what's the path of construction and time and space and what's going to happen if we don't maintain this asset and so forth that's the time slider we say the digital chronology and that's where you don't get that from an immersive environment you get that from a ledger of change in our i-twin platform to bring together the et the it and the ot so we think you know we we we never have had in mind specializing on the last mile of how that immersion experience occurs and it's just great that there's going to be lots of investment in making that better and better it will make the content in a infrastructure digital twin all the more valuable because it can be experienced in these better ways that's the that's what in the case of nvidia was being demonstrated today to show the potential of their omniverse

good to see you greg thank you

all right everybody we're going to wrap it up there thank you for attending the call and we'll see you next quarter

cheers