Bentley Systems, Incorporated

Good morning, everyone, and thank you for joining us for Bentley Systems Operating Results webcast for the third quarter of 2022. I'm Michael Fichette, Bentley's Vice President and Deputy General Counsel. On the webcast today, we have Bentley Systems Chief Executive Officer Greg Bentley, Chief Financial Officer Werner Andre, Chief Operating Officer Nicholas Cummings, and Chief Investment 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 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 and our forward-looking statements due to a number of risks and uncertainties. These risks and uncertainties 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 a reconciliation of our non-GAAP financial information to our GAAP financial information, is provided in the press release and supplemental slide presentation. This webcast will be available for replay on Bentley's investor relations website at investors.bentley.com. After the presentation, we will conclude with Q&A. With that, let me introduce the CEO of Bentley Systems, Greg Bentley.

Hello, and thanks, as always, for your interest in Bentley Systems. Our 2022 Q3 operating results presentation will follow our usual sequence that starts with the tone of our business. In the past, I've used the description no drama for BSY, and by contrast to the dramatic impacts of Russia echoed in China during 22Q1 and our resolute response during 22Q2 to fully exit Russia, 22Q3 can be characterized as rebalanced business as usual, absent Russia, and in fact sufficiently improving as we had hoped to be back on our annual targets. Because throughout 2022 to date, the loss of Russia and associated impact in China has tended to be offset by multiple favorable factors, we don't consider that there has been a sufficiently material change to warrant amending our established financial outlook for 2022. This is particularly the case given that what we and I think you consider to be our key operating performance indicator, business performance year-over-year ARR growth rate, is expressed in constant currency unaffected by ambient FX oscillations which consternate comparisons to the outlook. It happens that our annual financial outlook for total revenues included the constant currency growth range which continues to pertain. And Werner here quantifies, as we did last quarter, the impact of actual 2022 Q3 FX rates being different than the rates assumed at the time of our outlook, and cumulatively assuming current rates remain in effect for the balance of the year. Although adjusted EBITDA dollars are exposed to reported currency FX, our annual financial outlook for adjusted EBITDA margin of 33% is relatively resilient thanks to our natural operating hedge with tolerably matching revenue currencies and expense currencies. Back in constant currency, the 22Q3 business performance ARR growth rate year over year and again after absorbing the Russia and related China setbacks during the year, remained nominally stable at 11.5%, which again doesn't include 2.5% of ARR growth from the onboarding of PLS during 22Q1. But to better understand our 2022 Q3 tone of business, I would like us to look more closely at this year-over-year business performance ARR growth rate compared to the same rate in 2022 Q2. We measure this KPI on a year-over-year basis because of intrinsic seasonality due to the historical deliberately unequal distribution by quarter of contractual renewal dates of our annual subscriptions that would otherwise obscure sequential quarterly trends in ARR growth. By always including all four calendar quarters to abstract from such seasonality, sequential changes in year-over-year business performance ARR growth rate are meant to signal real trends in the tone of business rather than other noise. And hence, one would expect that year-over-year ARR growth to trend, whether up or down, relatively smoothly rather than abruptly. But looking back at 2021, we see that unusually in 21Q3, the year over year ARR growth rate jumped from 10% to 13%. In retrospect, this seems to largely reflect pandemic lockdown volatility. But it is also the case that compared to our many programmatic acquisitions throughout 2021, this year's have been few and small. while our business performance ARR growth in other respects has been comparatively stronger in 2022. And for the baseline of 2022 Q2's trailing four quarters of year-over-year growth, 2022 Q3's year-over-year progression has to make up for the dropping out of that aberrantly high 2021 Q3 growth. Accordingly, although 22Q3's year-over-year business performance ARR growth reads nominally the same at 11.5% as 22Q2, in effect it's more than comparable, implying an incremental uptick in tone of business, which we also can confirm subjectively. and indeed, adjusting for the earlier Russia and related China one-time ARR losses, business performance ARR is effectively growing year over year at the highest levels we have experienced. A quantitative summary is that this year after three quarters, and after absorbing the Russia-related ARR losses and at the appropriate constant currencies, we have reached cumulatively about 70% of the ARR growth implied by the mid-range of our annual outlook. Our 22Q3 uptick in new business momentum leads into our seasonally strongest fourth quarter of renewals and ARR growth opportunities. All considered, in light of the risk of more geopolitical disruption such as in 22Q1, especially in China, as shown here, and not including 2.5% from the PLS platform acquisition onboarding, we continue to reaffirm the range of our full-year 2022 constant currency business performance ARR growth outlook. While Nicholas will follow me by reviewing the tone of business at the level of products and regions, the headline is Accelerating New Business Momentum in the U.S., which constitutes fully half of our business at current exchange rates, consistent with longstanding expectations about the inception of funding from the Infrastructure Investment and Jobs Act. To drill down on the tone of business for U.S. civil engineering firms, many of us track the Dodge Engineering News Record quarterly survey of trends in their backlog, which looked like this last quarter. And here we can see this quarter's further expansion in the current multiple of the backlog these firms consider ideal. Given this dilemma, their preference is certainly to increase their infrastructure engineering capacity by going digital, rather than to reduce their intake of this new business. Turning now to the latest ACEC quarterly survey of engineering firms not limited to civil, one can see the magnitude of these current backlogs tending around one year. The point is that this bulge in backlogs provides these firms with perhaps unprecedented visibility. In fact, the ACEC survey includes these expectations about the level of backlogs a year from now. I think the increase expected here corresponds to these engineers' tracking of the IIJA flows. And I believe this crowdsourcing can help us to anticipate BSY's forward tone of business also. We took note last quarter of this dichotomy between engineering firms' skepticism about the overall economy and their optimistic sentiment about engineering workloads and their own prosperity. which has only become more extreme in each direction since then. And finally, back to the survey of civil engineers, this confidence significantly extends throughout the next two years, the extent of the survey timeline. I turn now from the U.S. engineering firm's tone of business, as that is so thoroughly surveyed, back to our own usual color by infrastructure sector, which last quarter showed a rather gratifying balance of green in terms of our new business productivity, and for us that refers to the proportionate ARR growth by sector. The industrial sector continues its recent modest improvement to its modest rate of new business. While EPCs overall particularly improved, but haven't nearly recovered to pre-pandemic levels, to a greater degree, this was due to the EPCs business in the resource sector rather than industrial. The commercial facility sector continues to surprise me with its directional resilience. But in our mainstay sector, public works and utilities, new business continues its sustained dependability, led by civil engineering in the U.S., as we've already covered. The resources sector continues to lead as to relative new business strength in sequence mining and other environmental modeling and in offshore engineering, increasingly for wind power. All in all, I think we are seeing a pleasingly sustainable balance of new business across all infrastructure sectors. From sectors, let us now move on to review tone of new business and ARR growth by account segment and commercial model. Starting with the SMB segment, among our 2020s growth initiatives, virtuosity has already propelled our new business productivity in SMB to now be comparable proportionately to our enterprise comfort zone and is still literally taking off. Again this quarter, we sold over 600 new logos, which continues to amaze me, contributing again 3% within our business performance ARR growth. But of course, most of our new business opportunity is for accretion in our existing accounts, where our net retention rate is now 110%. Our most productive source of accretion, by far, continues to be our E365 consumption-based commercial model. which again in 2022 Q3 contributed the majority of our ARR growth and to which we again upgraded dozens of enterprise accounts by invitation upon their annual renewals. In turn, the majority of E365 ARR growth comes from consumption increases, including application mix accretion to use of more valuable products. Within E365, we appropriately share the consumption risk with our E365 accounts. It is to our advantage that these accounts are prioritizing going digital more than ever before. Last month, I attended the annual CEO conference organized by AEC Advisors, which literally brings together the top executives of the firms who do the great majority of infrastructure engineering in at least the Western world. As the only sponsor, Bentley Systems helped again this year in the preparation of the second annual Going Digital survey of these CEOs. I will now briefly go through AEC Advisors' report of the results to share these firms' perspective on Going Digital as that establishes the potential for our E365 success. In fact, here are the infrastructure engineering CEOs' ranked priorities for going digital. It's good for us that winning more business and increasing capacity are now more important to the CEOs than merely reducing costs. Importantly, high priority is also assigned to quality improvement, new business models, and automation, which only going digital can accomplish. The conservatism of infrastructure owner-operators is reflected in this breakdown by the CEOs of the deliverables their clients prioritize today. Going digital helps in generating more value by moving to the right. So note how much change is finally expected by the CEOs as to their clients' priorities within three years. Going digital is a relatively urgent necessity for their firms to remain competitive. Here are the most common digital investments reported as underway in their firms by the CEOs, including the comparison to last year's survey. I highlight the greater emphasis over just the past year in the prerequisites for infrastructure digital twins, investments in drone surveying capabilities and in data sets to train machine learning for proprietary analytics. These active investments bode well for us. And as to the theoretical ROI on going digital to even greater extremes, I find it very interesting that only 38% of the CEOs say that they would not invest in a putative digital AEC disruptor. And here are the most common digital offerings that the CEOs consider that their firms already can offer, although I find this assessment of their current readiness a bit optimistic. And I note the significant increases over the past year in offerings that our iTWIN platform cloud services can better expedite and institutionalize, helping these engineering firms evolve towards becoming digital integrators for owner-operators. This is a key part of our strategy to improve the engineering firm's business models while also helping us to extend digital twin advancements to all infrastructure owners. Finally, as to their galvanizing priority, consider the AECO's consensus as to the proportion of their firm's market value that they expect to be attributable to their success in going digital. 10% so far, 20% in three years, 36% in 10 years, and in the next generation, a majority of their firm's market value. So that's the range of views from the CEO's office in a typical E365 account. I think their aspirations tolerably correspond to Bentley Systems' own priorities and advancements. But their firms tend to be managed at the next level by fairly staunch adherence to the status quo, with going digital having been more deliberate than urgent. That's the challenge for our enterprise success teams, led by our Chief Success Officer, Catriona Lord-Levins. In introducing new digital workflows within E365 accounts, we need to operate at a level sufficiently strategic to respond to and discernibly help towards these C-suite aspirations, but at the same time, we need to operationalize and organize our success force to communicate the potential down the ranks and to steadily advance in practical steps with palpable benefits that pay off each quarter. Nicholas. After covering your operational perspectives on the tone of business across regions and brands, would you please introduce Cat to tell us what it is that's demonstrably working and why and how, ideally in ways we can measure and count and institutionalize, for E365 success?

Thank you, Greg. Let me provide an operational perspective and add some color commentary, starting with regions. You already mentioned the most notable development in Q3, the clear acceleration of our growth in North America. We tend not to talk about North America as it has become as reliable as it is large. It represents about half of a business and half of a new business, so its direction correlates with Bentley overall. But in Q3, the region achieved strong performance across all sectors, in particular those that are poised to benefit from incremental IHA funding. Our accounts are busier than ever. They are constrained only by the available talent that they have. The word balance that Greg used to describe a performance across sectors applies across regions as well. In every region, market conditions remain positive for infrastructure engineering software. India, Southeast Asia, and Middle East continue to stand out. Europe is trending favorably overall. Growth picked up in Northern Europe remains steady in Central Europe, with Southern Europe lagging this quarter. In China, lockdown restrictions against COVID continue to weight on the economy. President Xi Jinping called for an all-out effort to boost infrastructure back in July, and we expect funds to be released following the Communist Party Congress in October. For all other regions, Q3 was business as usual. In Q3, we announced a strategic alliance with Fukui, a leader in civil engineering software in Japan. Civil infrastructure projects are substantial and critical in Japan, given the terrain and seismic risks. The Japanese government's high construction mandate is to accelerate going digital in infrastructure engineering and project delivery. The unique opportunity is a combination of global software with domestic leadership for the needed localization and on the ground distribution. Fukui has adapted OpenRoads for Japanese requirements, following the same playbook we used successfully in China. And Fukui will leverage our iTwin platform to offer new digital twin solutions in Japan as another strong example of our ecosystem approach to iTwin. Switching to products, OpenRoads and other civil engineering products perform very well in Q3, in North America and India in particular. Our growth remains strong with our structural analysis products, in particular STAD and SACS in energy production, including offshore wind platforms, and PLS and SPIDA for energy transmission and distribution. Our growth continues to accelerate with open flows for the water infrastructure. When I joined Bentley more than two years ago, I was impressed by the breadth and depth of infrastructure engineering expertise in the company across engineering disciplines, including civil, structural, and geotechnical. Greg likes to call these colleagues our success force, and they're indeed instrumental to the success of our users. But what we were lacking, however, was the science of success management, a function which is now well-established in cloud companies. It is that science and experience that we brought into the company by welcoming Kat Lord-Levins as our Chief Success Officer. Kat, could you please take a few minutes to describe how we are ensuring the success of our users, especially with the E3C5 program, which is becoming such an important part of their business and ours?