Bentley Systems, Incorporated

Good morning and thank you for joining Bentley Systems Q2 2023 operating results. I'm Sandrine Morenci, Bentley's Investor Communications Manager. On the webcast today, we have Bentley Systems Chief Executive Officer Greg Bentley, Chief Operating Officer Nicolas Cummins, and Chief Financial Officer Werner André. This webcast includes forward-looking statements, made as of August 8, 2023, regarding the future results of operations and financial positions, business strategy and plans, and objectives for future operations of Bentley Systems Incorporated. All such statements may not contain during this broadcast other than statements of historical facts or 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, which I will moderate in Eric's absence. And with that, let me introduce the CEO of Bentley Systems, Greg Bentley.

Good morning, and as always, thanks to each of you for your interest. I will start today by sharing my observations of some notable directions within our strong 23Q2 operating results. And then, as usual, I will briefly remark upon some corporate developments. In preview, our growth in the quarter was more broad and balanced, which I consider to be better, ranging from E365 accretion across our largest enterprise accounts through broadening and compounding penetration within our large SMB opportunity. Among infrastructure sectors, Resources, by way of mining and hence Sequent, slowed down and lost its lead for now to strongly growing public works slash utilities. Despite the countervailing dip in global capex for new mines, Sequent remains growing considerably faster than DSY otherwise, following only our other platform acquisition power line systems. And as to our key metric year-over-year ARR growth, This all nets out, while broader and better, to a narrower full year 2023 range, considering that in China, which is where all relative obscurity is concentrated, virtually any second half new business outcome will continue to erode our ARR there. In 23Q2, we were BSY busier than ever before. meeting or surpassing our own expectations on all corporate outlook metrics. Of course, we all primarily focus on constant currency business performance ARR growth year over year, which we sustain within the robust level of 13%, our high watermark. However, going behind this headline, I consider that our ARR growth has directionally improved. One aspect in the math is that programmatic acquisitions happen now to be contributing only minimally. But while acknowledging this year's favorable end market conditions, I think that stronger operational execution by Nicholas's teams is ever broader and better. Although such balance and consistency increasingly characterize virtually every axis of our business, an example is the breadth of new business momentum ranging from our largest to smallest accounts. Recall that we use this term, new business, to factor in license sales as well as ARR growth, though for quotas and achievement, we multiply recurring revenue by an appropriately higher weighting factor. By virtue of our main growth initiatives since going public in 2020, this quarter, the bulk of our new business was divided almost equally between our E365 program and our virtuosity-led growth in SMB. E365 ARR growth is a combination of one-time uplifts from accounts upgrading to the program, where our consumption charges per application per day are meant to cover our costs of the enterprise success team, digital workflow experts that we dedicate to each E365 account, and what is now most prevalent, accretion in these accounts' consumption and application mix. Within 23Q2, our ARR proportion from E365 increased very largely from this accretion in existing E365 accounts for whom going digital through E365 blueprints is a more urgent priority than ever. Constrained by skill shortages, these accounts need to improve the quality and throughput of their engineers' work as they face substantial and growing backlog. In fact, this quarter's ACEC survey of all U.S. engineering firms shows that the median backlog is now a full year as demand for infrastructure engineering continues to outstrip capacity. The same survey shows that While these firms are not so sure about the macro U.S. economy 12 months from now, each firm tends to be ever more confident in their own resilience a year from now. As to a greater degree than ever, they expect their backlog then to be even greater. These firms' year-ahead market outlook by infrastructure sector tends to correspond with our own 23Q2 tone of business, led in growth sentiment now by public works slash utilities, then resources, followed by industrial, and lastly, commercial slash facilities. This quarter, ACEC also surveyed the extent of the labor shortage brought about by this unprecedented workload. Across all firms, there is one unfilled infrastructure engineering position for each 10 full-time positions. This is a motivator for our E365 accounts to prioritize blueprints for new digital workflows that entail upselling users to more specialized applications, better fit for purpose for their particular project work at any given time. This leads to the greater spending per day holding constant pricing for each product, that we annually measure as application mix accretion. I can directionally confirm that our steadily expanding E365 program is continuing to broaden and accelerate our application mix accretion driving directionally better ARR growth. Our overall net revenue retention rate in turn reflects this progress in going digital within our existing accounts, led by E365 consumption and upsell, even or particularly as our accounts deal with workforce constraints. I'm pleased to report that NRR was sustained for the quarter at our 110% high water mark. Getting from these 10 percentage points of NRR accretion in existing accounts to this year's 13% ARR growth is attributable to sustaining, at our 3% high watermark, ARR growth from subscriptions in new logos, of course, mostly in SMB. Because the SMB share of the overall infrastructure engineering market substantially exceeds the SMB share of our own ARR, I believe that our investments and improvements in SMB are bearing fruit to make our ARR growth sustainably broader and better. In particular, our SMB-focused virtuosity subscriptions for individual practitioners have grown exponentially in new and cumulative ARR, including in 23Q2, and again including a record number of quarterly new logos for virtuosity, which is now approaching another digit. Now, obviously, this magnitude of continued ARR compounding depends upon the renewal rates for these subscriptions. And I have previously mentioned that we would quantify this at such time as we would have statistically sufficient experience. Within smaller businesses and for individual practitioners, we cannot expect retention rates comparable to those of subscriptions used widely and diversely across an enterprise account. This is particularly the case for specialized virtuoso subscriptions, which may be entered into for a particular infrastructure project with a finite duration. So I am pleased to now be able to report that after much hard work, our virtuosity renewal rates have stabilized at about 80%. We believe that with our digital experience automation to make self-serviced renewals even easier, we can improve this somewhat. And by the way, given that the absolute ARR numbers are still relatively small, we won't report this renewal rate regularly. But even beyond ARR, our license sales new business is generated mostly in SMB accounts. For 23Q2, about one third of these SMB license sales are to almost 300 new logos. Recalling that we continue to offer perpetual licenses principally because our main competitor does not, I believe that a significant proportion of these SMB new logos, including The many more for virtuosity subscriptions must be competitive takeaways. Finally, SMB's broadening and bettering contribution to our new business extends globally. In China, with geopolitical factors overhanging our prospects with our historical mainstay stay-down enterprises, The majority of our reasonably improved net new business in 23Q2 was thanks to perpetual license sales in SMB. Among the axes of directionally broader and better growth, I would like to turn now to infrastructure sectors, where, as Nicholas will provide our usual color, we saw in 23Q2 the normalization that is, the convergence toward the mean of resources, and mining in particular, its major impetus for us, down from its extraordinary global pace setting. You may have seen reports that this phenomenon is another reflection of an overlaid cycle of reduction in demand from China. I don't think there's much doubt anywhere that the economic and environmental factors driving the current mining super cycle are still long-lived, but the momentum won't be consistently sustained at the maximum. Most recently, the mining majors are confronting pricing fluctuations and are thus acting more cautiously in their procurements, and the mining juniors are considerably fettered by tighter equity markets, higher interest rates, and inflation. These factors mainly impact capex for new mines and major extensions, rather than the OPEX for throughput of existing mines, which accounts for most of the volume and growth for sequence. But sequence subsurface modeling is also used as a precursor to new mine development. So on the margin, these factors are impinging upon what have been sequence consistently very high growth rates. Since acquisition over two years ago, while growing organically, more than twice as fast as BSY otherwise, Sequent has in fact doubled in scale, including incorporating, along with many subsequent programmatic acquisitions, our previously acquired geotechnical engineering software. During the past year, we have prioritized sequence integration generally into our corporate systems, processes, and commercial models, including into our E365 accounts and blueprints, and by virtue of lots of attention, this is going well. One purpose has been to extend the benefits of and opportunities for subsurface digital twins in the civil infrastructure market, which will also serve to bring SeekMent and environmental modeling counterbalance to their historical concentration in mining. The predictable result of these maturing and integration factors has been a direction toward convergence between sequence growth rate and the increasing fundamental norm for BSY otherwise, which reflects largely the successful growth initiatives I've been discussing. A footnote is that the inflation factor since the beginning of 2022 would make it mathematically harder for sequence rate of growth to remain at an integer multiple. The result, as in 23Q2, is a broader, better balance and consistency across our company and market sectors. And that takes me to our mid-year updated outlook for the full year 2023. Our established 2023 outlook ARR growth range, of course, constant currency business performance, has been 11.5% to 13%, which we are now reasonably prepared, given the consistently robust first half, to narrow to 12% to 13%. Most of our initial caution about ARR growth for this year had to do with China, and visibility there remains relatively limited. While China now represents only about 3.3% of our overall ARR, and despite a welcome turnaround in SMB-driven new business there in Q2, over the course of 2023 to date, the Chinese proportion has fallen by about 0.4% of total ARR. This has correspondingly reduced what would otherwise have been our overall ARR growth rate had China merely kept pace with the rest of the world. This ARR growth drag is likely to continue or to increase as traditionally in China each year's fourth quarter accounts for most of the year's new business. This year we share with the rest of the world and for instance with the mining market obscured visibility into China's direction. But in our case, it's amplified by our own intentional go-to-market pivot in China, which, as I described last quarter, will tend to relatively reduce our ARR even if and as it hopefully becomes successful. After only one quarter so far, it's too soon to report on the net impact. But by the end of the year, presumably, this will have become apparent. And in comparison to previous years, which have generally included more ARR acquired with programmatic acquisitions than in our current outlook for this full year, Again, I consider our sustained ARR growth to be, behind the numbers, directionally broader and better. As I have discussed, this is true across commercial models and account signs and across infrastructure sectors. Nicholas will reinforce this from the standpoint of regions and products as well. First, by way of corporate development, And related to these subjects, we announced during the quarter the recruitment of Alan Lee, formerly Chief Operating Officer of SAP China and a wise veteran of creative alliances there, as our only general manager anywhere in the world, with responsibility for on-the-ground leadership of our new and unique-for-us go-to-market strategy in China by way of joint ventures in China. Alan is now aboard in China and is enthusiastically at the helm. And we'll have more to say about this at the Year on Infrastructure 2023 conference. The conference will be in Singapore in October this year. And to make up for the time zone difficulties of travel or even live streaming for most of you, I have asked Eric to compile concise video excerpts of the proceedings relevant to investors. The independent juries are presently judging our accounts, 300 plus going digital award nominations, and the finalists who will present in person in Singapore will be announced next week. Their case studies will help us all to assess the pace and distribution of infrastructure digital twin advancements in the world, which I can't wait to see and report upon. And now over to Nicholas, for fuller operating perspective on 23Q2.

Thank you, Greg. We had a strong quarter and a strong first half of 2023. Demand remains very positive, and we continue to build pipeline with market dynamics and government investments playing in our favor. Project that reforms are dealing with an extremely tight labor market, an aging workforce, and increasing costs due to high interest rates and inflation. all factors that lead them to seek new ways to improve productivity and efficiency. Bentley Systems is well positioned to help. Additionally, government programs around the world continue to invest in the resilience and sustainability of critical infrastructure. We expect this to be a long-term trend that benefits our markets. Looking at related performance across infrastructure sectors, Q2 reflected some reordering from previous quarters. Leading the way, growth in public works and utilities remained very strong, the sector being the biggest beneficiary of infrastructure investments around the world. Industrial improved, while resources normalized from record levels, with commercial and facilities remaining flat. Next, looking across regions, growth remained very solid in North America. The trend followed the direction of the previous quarter, with strength in public works and utilities, indications of IHA funding flowing through somewhat more broadly, and project delivery firms having more work that they can handle with their project backlogs extending further out. We achieved steady growth in Europe with EU funding of transportation, water, and green initiatives, and purposeful targeting of the ecosystems of large infrastructure projects, which drives our software adoption across both owners-operators and their project delivery firms, large and small. We're also getting good traction and achieving notable wins with water utilities in the UK. In Asia Pacific, India remained a major growth driver, even after many quarters of accelerated growth, as it continues to benefit from strong tailwinds, in particular, large investments from the government into local infrastructure and global project delivering firms continuing to tap into the large population of engineers in India to supplement their workforces for projects abroad. The SMB segment is also performing well and virtuosity revenue in India year to date has already surpassed the 2022 total. In China, ARR continue to show signs of stabilization Q2. We continue to do well there in the SMB segment, which is encouraging. However, as Greg mentioned, we believe it is prudent to be cautious for the balance of the year. Growth in Australia is benefiting from large investments in public works. The Australian government's five-year pipeline for major infrastructure projects is valued at more than $150 billion, and it is mostly focused on transportation, our sweet spot in Australia. One example is Brisbane's cross-river rail project, a publicly funded mega project with digital twins at its core. The project comprises a 10.2-kilometer section of rail that includes 5.9 kilometers of tunnel under the Brisbane River, four new underground stations, and we built for eight above ground stations. Significantly, it was a key component of Brisbane's successful bid to host the 2032 Summer Olympics. Digital twins enabled them to plan for the whole life of the project with a full digital representation from construction through operations and maintenance. With virtual versions of stations, team members and stakeholders can bring the product to life, walking across concourses, traveling down escalators, and even riding the network. In addition, they're working to develop technically accurate and immersive environments that will assist with infrastructure acceptance, assurance, testing, and commissioning. The team can even attach information to stations and overlay real-time data feeds, such as air quality, to geospatial locations for ongoing monitoring and analysis. While Cross River Rail is the largest project in Queensland history, the state has 400 to 500 major projects slated over the next 10 years, As with all the regions, these projects not only provide opportunities for owners-operators, but also with entire ecosystems. Moving on to products, notable strong product performance in the quarter included STAD, or General Structural Analysis Software, SACS for offshore structural analysis, and Powerline Systems. Open roads and open bridge also perform well, standalone, and as part of a broader open civil offering for SMEs. One topic that has been top of mind recently and which I'm sure you have questions about is AI. Let me take a couple of minutes to explain our position. AI is not new to Bentley. Our primary focus to date has been on computer vision for asset condition monitoring and inspection use cases. A great example of that is our bridge monitoring solution, which became generally available in Q2. The solution leverages AI to automatically identify potential issues in bridges, such as cracks and spalling, and to prop interventions. You're going to see more and more of this type of solution in operations and maintenance, starting with bridges and dams, and then for other critical infrastructure. But AI has a lot of potential for design assistance. We already have generated design capabilities for the concept phase, primarily parameter-based in civil site engineering. and our users see low hanging fruit in the form of generative components, which facilitates the programmatic reuse of modular digital components. One thing I will say is that for AI, you need data. All engineering services firms realize how valuable their data is. The issue is that their data is typically locked into files. Digital twins are the key to unlock that data, surface it, and make it available for AI. The good news is that adoption of digital twins has significantly increased over the past few years, thanks largely to our iTwin platform. iTwin is strongly positioned to enable the endless ways that AI may be applied. And remember, most of the data that we're talking about is already in ProjectWise, part of Bentley Infrastructure Cloud. We believe we are just starting to tap into the potential for our iTwin platform and products for AI, and we look forward to providing more details at our Year in Infrastructure 2023 conference. And with that, I will now hand over to Werner to go over our financial results.