Bentley Systems, Incorporated

Good morning and thank you for joining Bentley Systems Q1 2023 operating results. I'm Eric Boyer, Bentley's Investor Relations Officer. On the webcast today, we have Bentley Systems Chief Executive Officer Greg Bentley, Chief Operating Officer Nicholas Cummins, and Chief Financial Officer Werner Andre. This webcast includes forward-looking statements made as of May 9th, 2023, regarding the future results of operations and financial position, business strategy and plans, and objectives for future operations of Bentley Systems Incorporated. All such statements made in or containing during this webcast, other than statements of historical fact, are forward-looking statements. This webcast will be available for replay on Bentley Systems Investor Relations website at investors.bentley.com. After our presentation, we will conclude with Q&A. Just a quick administrative matter before we begin. You can now find our 2022 annual report along with the CEO letter and our inaugural ESG report on our Investor Relations website. And with that, let me introduce the CEO of Bentley Systems, Greg Bentley.

Good morning, and thanks to each of you for your interest and attention. With the retirement of our chief investment officer, David Hollister, and the division of his responsibilities among the rest of us, our presentation sequence starting this quarter is meant to be simpler and more concise. I will offer observations about directions in our business, will report on corporate developments, and provide updates on our capital allocation. Then-Chief Operating Officer Nicholas Cummins will provide expanded operating perspectives, now including in my stead, tone of business by sector and commercial model, as well as by region and by brand. CFO Vanner Andre will conclude with our financial performance as usual. Robust operating results for 23Q1 echo what I think has come to be expected of Bentley Systems' end-market resilience, predictably accretive business model, and the consistency of our execution, and thankfully absent last year's unfavorable drama in Russia and China. We met or surpassed expectations for our financial performance metrics, most significantly including operating margins measured now by adjusted operating income with stock-based compensation. Our operating cash flows were even higher than expected, but as Werner will explain, we expect consistency here on a trailing 12-months basis. As Nicholas will elaborate, all operating trends remain directionally strong. And as he will explain, even though this year has started appreciably better in China than in other recent years, That probably will serve to accelerate our intentional localization pivot there at some increasing cost to existing ARR. All considered, our across-the-board strength in 23Q1 duly increases our confidence in our annual financial outlook for 2023. And as to what I consider our key metric, ARR growth, Indeed, this expanded sequentially to a first quarter high of 13% year-over-year constant currency business performance. With net revenue retention over trailing 12 months remaining consistently high at 110%. This new business strength is consistent with external benchmarks, as the Dodge survey of U.S. civil engineering firms continues to show that their current backlogs have kept increasing continuously. Broadening to ACEC survey of U.S. engineering firms generally, not limited to civil, such firms are confident about backlogs continuing to increase over the coming 12 months. And as to that 12-month horizon for their expectations about macro conditions at large versus their own environment, U.S. engineering firms' sentiment has generally improved over the last quarter, but again, more so for overall engineering and design services, and especially for their own firms' favorable prospects. And this latest ACEC survey of US engineering firms' current sentiment by industry, here mapped to BSY's infrastructure sectors, correlates with our own new business resilience, with quite favorable sentiment for water or wastewater within our resources sector, broadly leading sentiment for industries within the public works slash utility sector, satisfactory sentiment for industrial, and industries within the commercial facilities sector, that is, vertical infrastructure, generally lagging. For U.S. AEC firms, the most significant annual survey was just published by Engineering News Record earlier this month, ranking the U.S. headquartered top 500 by design billings. They report their design billings to ENR in accordance with this breakdown. So their aggregate design billings here can likewise be generally grouped within BSY's infrastructure sectors in these proportions. For resources, including at least water networks, the mainstay for us and for these top design firms overall, public works slash utilities. For industrial, and for the commercial facilities sector, which leaves some reported design billings not eligible to infrastructure sectors. Of course, each year the top 500 are a somewhat different set of firms, so the year-to-year growth in the total of their design billings does not per se correspond to an organic growth rate, but note the conspicuous inflection now underway in the top 500 firms' design billings as, along with somewhat greater inflation, design-intensive infrastructure projects for resilience, adaptation, and energy security are being increasingly prioritized. ENR does not annually report the top design rankings for those largest headquartered outside the US until early summer, so the latest analytics for the global top design firms are still using the combined 2022 rankings, when the consolidated top 637 firms reported aggregate design billings of $216 billion. I have been reasonably asked why, when China represents only a few percent of BSY revenues, we are allocating so much attention and emphasis on our determinedly new China-specific go-to-market strategy, particularly as everywhere else in the world we relatively uniformly apply our proven direct sales formula. The ENR top firm rankings show the answer in terms of magnitude. Just the top 29 firms in China perform 27% of the design billings of all the world's top firms. This proportion is not an abstract future projection, nor is it derived from murky economic statistics. Rather, this reflects the here and now proportion that China already represents among our top accounts and prospects. If and when we can earn the same share of design billings in China as elsewhere, our overall scale of usage and revenues could grow at comparatively little incremental cost by almost 25%. To quantify BSY's current penetration rate outside China, consider that our project-wise enterprise collaboration system is particularly well established in these top firms to distribute their engineering workflows across their globally virtualized talent resources. Such work sharing has become increasingly essential for these firms throughout the pandemic and since then in light of their staffing challenges to meet the backlogs we were just looking at. We know from our consumption log analytics the number of users of ProjectWise within these firms as we charge them each calendar quarter per unique user. Based on the middle-of-the-road assumption that these top firms' design billings are performed by full-time employees, FTEs, each estimated to generate an average of 200K of design billings annually, it turns out that about 14% of these FTEs in a calendar quarter are project-wise users. While I am sure this makes us by far the leader in enterprise collaboration for these top firms, the remaining opportunity for firms and projects to further standardize on project-wise is a compelling priority for our product, sales, and success organizations. Collectively, these global ENR top design firms alone account for about one-fourth of BSY's ARR. And of course, within this, we log each hour of each firm's users' BSY application consumption. And most of these firms are E365 accounts that we charge per day of such use. So how does our revenue compare to the design firm's revenue for each such design hour? as to which an educated assumption is that these ex-China firms bill at about $150 on average. For each such hour using BSY applications, the average expenditure by these top design firms is $1.41, or less than 1% of that hour's rate of billing. And apportioning these firms project-wise expenditures over their BSY application usage hours adds on average about 39 cents in cost per such design hour. While there are other additional costs of going digital, among others hardware, Microsoft, communications, internal support, I think there would be general agreement that BS-wise application software, and project-wise if used, most largely determine the actual value of that design hour, yet presently account for only a few percent of the total cost to the design firm. At this juncture, when such firms face record backlogs but are constrained from adding hours by the limitations of skill shortages, I think this makes the case that there is a long upside runway ahead for us to provide and be paid commensurately for more valuable, more specialized applications, enabling a continuously increasing rate of application mix accretion. Now, by way of reporting corporate portfolio developments in the last two months, we announced during 23Q1 our investment in WorldSensing, up-and-coming global independent leader in integrated infrastructure IoT hardware connectivity solutions. In exchange for the thread connectivity hardware, which we acquired with Sensometrics in 2021, and a financial investment in WorldSensing's Series D Capital Round, we have acquired a low double-digit equity stake. But even more importantly, our Sensometrics software within iTwin IoT will be closely, though non-exclusively, integrated with WorldSensing sensors and network connectivity hardware and our freemium trial license subscription will be included in all new world-sensing installations. For this quarter's observations about capital allocation, I will next show how I think about measuring and optimizing debt leverage within our capital structure that's dominated by convertible securities. I think this is significant because you can look at a Bloomberg screen that shows BSY as a highly leveraged outlier as a result of not distinguishing between convertibles and straight debt. Now, I recognize that accounting rules do treat convertible securities 100% as debt, but for leverage assessment, I believe it's appropriate to look more through a finance lens, as would the holders of the convertibles, as they are intrinsically and intentionally a dynamic mix between debt on the one hand and equity on the other. Obviously, our bank debt, which was incurred early last year to finance our highly accretive platform acquisition of Powerline Systems, and which net of cash was down to $340 million at the end of 23Q1, anchors our debt leverage. But how should we think about our unquestionably attractive convertible debt, with coupon rates of one-eighths and three-eighths percent covenant-free, which financed our highly accretive platform acquisition of Sequent in 2020? It consists of an issue maturing in 2026, which one can view on this Bloomberg page, including here a computed delta statistic That's for the embedded equity option. The delta changes constantly based on the BSY stock price, volatility, interest rates, and the remaining time to maturity. And this snapshot reflected the market on a recent day. The other issue maturing in 2027 has a different delta statistic corresponding to its different parameters. In any prevailing market condition, these delta statistics Look, here I admit to being a recovering financial engineer, as the first company I founded 35 years ago was in the business of software for derivatives modeling. The delta can help us to conceptually apportion each convertible issue between debt and equity. The delta is the hedge ratio, the degree to which the value of the convertible issue moves in relation to the value of the underlying shares as the stock price changes. The delta would range from zero at the maturity date if the stock price would be lower than the strike price such that the security then behaves as if all debt to one if at maturity the stock price would be higher than the strike price such that conversion to equity would be certain Accordingly, at the delta of 0.43 for the first issue, we can ascribe 43% of its face value to be acting as if approximately 4.5 million shares of equity and the remainder to be acting approximately as if $400 million of debt. And at its delta of 0.39, doing the same for the 2027 issue results as if $350 million of debt. Now, we reckon our leverage ratio on the basis of our adjusted EBITDA, as that's what our bank syndicate does for pricing and covenants. And for the last 12 months through 23Q1, our adjusted EBITDA was $383 million, which implies a net bank debt leverage ratio of 0.9 times. And for the delta adjusted debt portion of both convertible issues, additional leverage of 1.9 times. for a total current effective debt leverage ratio of 2.8 times adjusted EBITDA, tolerably approaching the range which I think we would consider optimal. Now, I'd welcome feedback on this apparently novel delta-adjusted approach to monitoring leverage that includes convertibles. But now, over to Nicholas for his informed operational perspectives on 23Q1. Nicholas.

Thank you, Greg. We had a strong start to 2023 and we see momentum continuing into Q2 with healthy pipelines and many upgrade and expansion opportunities. The demand environment continues to be very positive and the pace of business is brisk. Incrementally, we see more evidence of funds from infrastructure investment programs flowing through to our accounts around the world. And this will continue to be a tailwind for the foreseeable future. Let me now provide some color commentary starting with infrastructure sectors. The trends in Q1 were consistent quarter over quarter. We saw very strong growth in resources, strong growth in public works and utilities, solid growth in the industrial sector, with commercial and facilities somewhat flat. We continue to hear from some accounts, concerns about interest rates and inflation. But in Q1, there were no surprises. Our horizontal infrastructure remains very resilient. Turning to commercial models, our E365 and virtuosity growth initiatives continued their upward inflection. In Q1, we upgraded to E365 almost twice the number of accounts than we did in Q1 of 2022. Bear in mind, however, that the accounts remaining to be upgraded tend to be those with lower ARR to start with. Over the last three years, we have grown E365 primarily with global enterprise accounts, and we increasingly view the regional mid-market as a significant opportunity for E365. We were excited to upgrade to E365 a number of regional mid-market accounts in Q1, and we are on pace to hit our target for the year. As you know, E365 is a consumption-based commercial model, and post-upgrade, our user success teams pay particular attention to the adoption of our software through success blueprints that are designed to achieve business outcomes through more efficient and effective use of digital delivery workflows. Q1 was a very strong quarter in terms of consumption growth by E365 accounts. In SMB, the tone of business was very positive and we saw a continuation of a growth trajectory across the board. In fact, Virtuosity achieved its highest number of new logos in a single quarter. We see our SMB pipelines growing day in, day out. And the good news is that a lot of Virtuosity business is closing within 30 days. Next, looking across regions. India was a bright spot. The National Infrastructure Pipeline is funding large transportation and water projects. These projects are ecosystems of their own and we've been very effective in driving adoption of our software by owner-operators and their value chain of project delivery firms, large and small. Global project delivery firms also continued to tap into India's engineering talent to support projects around the world and to help close their capacity gap. We also saw continued solid growth in Europe with more evidence of EU funding flowing through, for example in transportation and water projects in Italy. Growth was solid in the Americas too, with abundant project backlogs across multiple business lines, including projects from owner-operators extending to project delivery firms, primarily for design. And we saw more IIJ funding flowing through to DOTs, which is very positive news for us. As we have mentioned on previous calls, infrastructure engineering in North America is characterized by a very tight labor market with an aging workforce, and project delivery firms simply cannot attract talent fast enough. Interest rates and inflation are also making infrastructure projects more expensive, and as a result, owners are very focused on managing costs. Both of these factors, productivity and efficiency, align very well with our value propositions. Middle East and North Africa showed some softness, but this was due to very specific account situations and one-time effects, and we do not believe these constitute a trend. In China, the impact of COVID is now in the rear view mirror, and the Chinese government is very focused on bringing the economy back. We had a better start to the year as revenue retention stabilized in the quarter, although we continue to be cautious for the remainder of the year due to the geopolitical and business environments. Last week, we officially formed Eastwise, our joint venture with Power China HDEC. The focus is on engineering applications for the hydropower and water conservancy industries that leverage our platform but are developed and distributed domestically. As with our other joint venture, TGGX, and their product iLink, our net revenue proportion will decline for the accounts that transition to the new localized offerings. However, we expect that the depth of the market for autonomous Chinese solutions will eventually more than make up for this. In the meantime, especially because the joint ventures will cater to the preference of Chinese state-owned enterprises for perpetual licenses, the faster the JVs take off, the greater the erosion of our existing ARR in China. With respect to products, the performance of open roads, open bridge, macro station and asset-wise was notable in Q1. Of particular interest in transportation in North America, we saw strong growth in Bentley open applications, especially open roads and open bridge, as well as micro station, a reflection of our strength in the DOT ecosystems. DOTs are resource constrained, but the usage of our software accelerated with the engineering services firms that are part of their ecosystem. This was a result of the training and over-the-shoulder mentoring our user success teams have been giving to engineering services firms to put them in a better position to deliver in the DOT market. The instances of DOTs requiring models in deliverables showed extensive growth in Q1, and we do not see that slowing down in Q2. DOTs are looking to do more with less through going digital. Digital delivery tools and techniques can streamline processes across infrastructure engineering lifecycle and enable seamless collaboration across DOT ecosystems. Digital delivery advances design intent to construction using digital twins for collaboration among project stakeholders. Digital twins created and updated through the digital delivery process can then be leveraged in asset operations and maintenance to take advantage of engineering data. In this context, we announced in Q1 a new collaboration with design and consulting firm WSB aimed at leading civil infrastructure owners and contractors to adopt digital delivery and model-based digital workflows. WSB launched a new digital construction management solution and advisory service based on Bentley Synchro, leveraging the power of construction digital twins. WSB joined the Bentley Digital Integrity Program, which provides programmatic go-to-market support and knowledge transfer to eligible project delivery firms that are creating and curating digital twins for their clients' infrastructure assets. Before I hand over, I want to thank all Bentley colleagues for a great start to the year and for your commitment to consistent execution. More infrastructure is in the works now than at any previous time in history, and the infrastructure sector is relying on Bentley software to help it deliver a more sustainable and resilient future. And with those operational perspectives, I will now hand the call to Werner to go over our financials in more detail.