Bentley Systems, Incorporated

Good morning. Thank you for joining Bentley Systems Q1 2024 results webcast. 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 Berner Andre. This webcast includes forward-looking statements made as of May 7, 2024, regarding the future results of operations and financial position, business strategy and plans, and objectives for the future operations of Bentley Systems Incorporated. All such statements made in or contained 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 on May 7, 2024. I would like to mention that the 2023 Infrastructure Yearbook, which explores the world's top infrastructure projects, is now available online at Bentley.com forward slash YII forward slash yearbook. You can also order a printed version from the same link. Additionally, we have published our 2023 ESG report, which is available on our investor relations website. After our presentation, we'll conclude with Q&A. 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 continued interest in BSY. Eric, thanks for setting the stage for our focus today. For all that we characterize and think of Bentley Systems as a no-drama company, we do realize that we've made news over the two-plus months since we've last been together. And of course, I'm talking about our press release and announcement in London of our CEO transition plan. After this quarter, I will retire from CEO responsibilities to become executive chair. As I will continue to oversee investor relations, I expect our quarterly operating results presentations to continue foreseeably with the same format and lineup as today's. Given that I will turn 69 years old next week, I believe that my retirement as CEO has been reasonably anticipated. The timing purposefully follows the completion of transitions throughout our senior executive ranks since the IPO in 2020 in favor of a literally rejuvenating new, and I consider improved, cohort of leaders. The generational improvement at my current position, handing the reins to a first-time CEO, is de-risked for everyone, I think, by virtue of an incoming executive chair. In that role, my priority will be to support Nicholas Cummins through and beyond the transition stage. And in addition to management of our board activities and investor relations, I will continue to be responsible for capital allocation decisions, including platform M&A. By way of capital allocation, for now I am overseeing the asset analytics initiative, which we introduced this year. A transition to executive chair is probably unsurprising upon retirement of a founding tech company CEO and And most of you have heard me looking forward over the past few years to this change at BSY. But I find it interesting to see that this seems to be becoming the norm more generally, as reported by board-level authority Spencer Stewart. Of all CEO transitions in the S&P 500 last year, the average age of incoming CEOs increased to over 56. So by contrast, we at BSY, with Nicholas at age 47, have purposely prioritized the capacity to perpetuate our long-term continuity. But our CEO transition is otherwise in common with the S&P 500 norm, as 78% of incoming CEOs like ours had never been CEO of a public company, and 74% were internal promotions like ours, And the former CEO became executive chair, as will occur in our case, in 41% of all S&P CEO transitions. Now, I should say that for our CEO selection, the Sustainability Committee of our board over the past year conducted a full assessment of candidates from first principles, including engaging top professional advisors. although I'm not going to recount all of our criteria, of particular importance to me is the roundedness of our next CEO. You may have heard me admit to wanting to upgrade especially our marketing orientation for better balance with our established engineering DNA. Suffice it to say about Nicholas that his education was in law. although he correctly recognized the highest and best use of his talent and capabilities in software. He left SAP for entrepreneurial opportunities in a couple of startups, including in programmatic advertising technology, before returning to SAP to lead its marketing cloud, including integrating major acquisitions. But those of you in our audiences today have by now come to know Nicholas in the capacity of chief operating officer, to which he was promoted on my part, anticipating this subsequent transition at the beginning of 2022. And what you have come to know him for has been our consistent and continuing steady execution under Nicholas's leadership of our collaborative and effective operating council, from which I have absented myself since entrusting our operations to Nicholas and his team. As chief operating officer, our colleagues everywhere have already been reporting into Nicholas, except those in the corporate functions of finance and legal, who will do so beginning on July 1st. Consistent with the planned nature of our transition, Nicholas has already announced internally his pending organization structure as CEO. Beyond execution, Nicholas has also brought structure and rigor to our planning functions. as we reprogram annually to optimize growth subject to our institutionalized annual margin improvement. Nicholas' remarkable capacities to learn and lead have been literally demonstrated through our coinciding track record as a public company. Reflecting our global footprint now extending to a European CEO designate, We chose to announce the transition during the opening for our new office in London, the UK being our second largest country in revenues. In keeping with our post-pandemic strategy to create magnetic offices to convene collaboration among colleagues and for visitors, in London we now occupy a top floor in one of the most significant new buildings in the city. The project managers of builder Lendley's enthusiastically keynoted our opening event by explaining how our software made the construction of eight Bishopsgate successful, despite the ambitious design and the construction challenges they noted here. They showed here how our 4D construction modeling software Synchro within Bentley Infrastructure Cloud was uniquely instrumental to the project delivery of Eight Bishops Gate. Like construction itself, as you can see, 4D is about the interaction of space and time. With Synchro, Bentley Systems' strategy for going digital in construction enlivens infrastructure digital twins for their full potential from design through operations. Rather than regressing from 3D to 2D digital paper, we believe that adding intelligence from 3D to 4D, which we lead across infrastructure sectors globally, will steadily preempt and advance the future of digital construction. And Nicholas will have more to say about Synchro's momentum. Turning back now to 24Q1, the quarter was quite consistent with our overall expectations for 2024. As Werner will further detail, our profitability and cash flow are for now well ahead of that pace with subscription revenues on track. When we were last together, I described our objectives for cohesive rather than growth per se of a professional services business. as a means toward the end of validating the business model potential for an ecosystem of digital integrators to create and curate comprehensive infrastructure digital twins for owner-operators. In fact, to the detriment of our overall revenue growth and owing to delays in accounts implementation of upgrades of IBM's Maximo, the incumbent enterprise asset management system for most infrastructure owner-operators, the cohesive digital integrator business is off to a slower start than in 2023. Accordingly, within our prevailing 2024 revenue growth outlook, our revenue mix this year will be more subscription-intensive, starting at 91% in 24Q1. Our key metric of year-over-year ARR growth merits a closer look in light of the factors we have planned to be different in 2024. Lower contributions from programmatic acquisitions, intentional cannibalization in China, and the glide path of pricing escalation with inflation subsiding. And indeed, in 24Q1, year-over-year ARR growth business performance, including acquisitions, ticked down to 11%. Because over the trailing year, ARR onboarded with programmatic acquisitions has now become insignificant, the downtick in organic terms is of lesser extent. Further excluding China's impact on ARR growth, likewise shows more sustained momentum in the other 97% of our ARR. And back to our reporting metric, business performance globally, our 2024 outlook of 10.5% to 13% ARR growth takes into account the evolution of parameters now generally governing our E365 consumption subscription contracts. First, to report as usual on the quarter's growth in the scope and proportion of the E365 plurality of our ARR. Here in green is the incremental magnitude of E365 accretion and expansion. Also, as usual, a relatively small portion of E365 growth was from select accounts upgrading, with the majority from accretion, or NRR, net revenue retention, in E365 accounts. Last quarter, I observed that the 23Q4 decline in our overall NRR from 110% to 109% would not have occurred excluding China and Russia. In 24Q1, China and Russia again factored in to the same extent, but NRR declined to 108%. As with ARR, this is also influenced by the direction of inflation, which impacts not only our annual pricing escalation, but also the background expectations, which mutually inform negotiations of the step-ups in E365 floors and ceilings that now often extend over multiple future years. Moreover, this year a change in the seasonality of E365 consumption accretion particularly affected the first quarter. We alluded to this directionally last quarter, and I'd like to now illustrate more quantitatively this phenomenon. Apart from any change in consumption, what we charge and recognize as revenue and ARR growth is increasingly attenuated by the ever greater magnitude of E365 ARR that has recently become subject to an annual floor. First, see here that in 2024, a greater proportion of our overall ARR is consumption charged E365 than in 2023. And the proportion of E365ARR with no annual floor is now even smaller. Incidentally, where there is a floor, there is almost always a ceiling, as that's generally the incentive for the account to agree to a floor. And more or less institutionalizing floors and ceilings to reasonably share with accounts the risks of consumption extremes has been essentially neutral in its impact on our overall E365 revenues and ARR, as at any given time there has been relative symmetry between levels of usage below floors and levels of usage above ceilings. For the small portion of E365 ARR without floors or ceilings, any and all increases in consumption will immediately increase ARR, not subject to reset seasonality. And while aggregate consumption tends to grow throughout the year, at an average trend rate consistent with our NRR, the floors and ceilings don't adjust quarterly, but rather only once per year in advance, coinciding with annual renewal and resets, which tend to be clustered in certain quarters. So the skewing of ARR growth across the quarters of 2024 is affected by the increasing prevalence compared to 2023 and the reset timing of floors and ceilings. Here's the distribution of the floor-bounded E365 ARR entering each of 2023 on top and 2024 on the bottom by quarter of annual reset. For the darkest portions, which reset longest ago, it is most likely that typically growing consumption will be by now above the floor levels and hence will constitute ARR growth. But that magnitude and proportion, as you see, is lower than last year. More of the E365 ARR in 2024 in lightest blue on the right, has just reset and will not reset again until Q4 of this year, so trending consumption growth under those contracts will likely result in a concentration of ARR growth from rising above the annual floors later during this year. Moving now within ARR growth from existing accounts NRR to new logos that would most naturally start within small, medium business under our criteria, which classifies as SMB those with ARR of less than 100,000 per year. I'm pleased to report that the indicators which I attribute to our success in competitive displacements are distinctly headed up in 2024. After five straight quarters of contributing 3%, in 24Q1, new logos for the first time contributed overall ARR growth of 4%. By the end of 2023, Virtuoso subscriptions, targeted primarily at SMB through direct digital experience, had captured over 600 new logos for eight straight quarters, and that count was steeply increasing. In 24Q1, the exponential growth of Virtuoso subscriptions continued, thanks to a record number of new logos, with the cumulative number of accounts with Virtuoso subscriptions almost all new over the last three years at now over 9,000. Finally, as to incremental growth, within our new asset analytics initiative that I previewed at length last time we were together, which is for instant-on digital twins monetized per asset, it has been a quarter of steady behind-the-scenes progress in technical, portfolio, and business development, and towards a concerted marketing launch with significant announcements still to come. What you see here is a new Blink-See offering to enable roadway owners to efficiently comply with new federal highway requirements, effective in 2026, to continuously maintain sufficient lane-striping retro-reflectivity. For asset analytics, the largest new deal so far this year brings seven-digit ARR. You should expect to hear throughout 2024 much more about growth and new investments in asset analytics. And now for operational perspectives and our congratulations over to Nicholas. Thank you.

Thank you, Greg. First, I want to thank again the board of directors for entrusting me with the responsibility to lead Bentley. I am deeply honored to follow in Greg's footsteps as CEO. Greg's leadership for more than 30 years has delivered remarkable success for Bentley Systems, positioning the company for continued growth as we help address infrastructure sector's biggest challenges. I look forward to working with Greg as he transitions to executive chair. Q1 was a continuation of the same strong and steady macro trends that we discussed through thought last year, the most notable being the ongoing engineering resources capacity gap driven in part by high demand. In the most recent ACEC quarterly survey, U.S. engineering firms across all sectors once again highlighted lengthy project backlogs of one to two years with expectations of higher backlogs 12 months from now. This optimism is supported by their increasingly positive views on the U.S. economy, the design and engineering sector, and their own firm's overall finances. Higher backlogs and engineering resource constraints continue to dominate conversations around the world as well. In April, I attended FedEx Global Leadership Forum in Geneva, Switzerland, FIDIC, the International Federation of Consulting Engineers, represents over 40,000 firms globally, and the forum brought together an exclusive group of senior leaders from among these organizations. The resource capacity gap remains an underlying theme, with a sea of one major firm commenting that the problem is getting worse, reinforcing the need and opportunity for digital solutions. Moving to our performance in Q1, it remained very consistent with last year. Starting with our infrastructure sectors, once again, public works and utilities, our largest sector, was the main growth driver for the company. We continue to benefit from strong global infrastructure spending across transportation, water utilities, and electric grid. In terms of resources, we are also seeing trends consistent with last quarter. Sequent performed as expected given the slowdown of new mining investments, but long-term mining sentiment remains strong. We continue to invest in new products and capabilities, especially in mining operations. This will further differentiate us from our competition and help users become more efficient, which is critical given the larger pressures they face. As I highlighted last quarter, we are very excited about the growth opportunities for Sequent and Civil as well. And we saw continuous strength in Q1, including our first seven-digit deal for Leapfrog Works with a major civil engineering firm. Industrial remained mixed and the commercial and facility sectors remained relatively flat. Moving on to regions, North America continued its steady performance with market sentiment nothing but positive. As Greg mentioned, consumption growth was impacted by recess in Q4, but we expect it to strengthen in Q2. Transportation continues to experience strong momentum from IJA and also from states spending more. We have momentum with USDOTs adopting our software for digital delivery across design, construction, and into operations. This includes Synchro, which I will discuss in more detail shortly. Beyond transportation, there was movement in the U.S. with electrical transmission permitting reform. The Department of Energy will work to consolidate environmental reviews for energy transmission projects within a standard two-year schedule. We are cautiously optimistic that this will help facilitate faster build-out of new electrical transmission infrastructure within the U.S. over the long term, which our power line system business is uniquely qualified to support. EMEA had a good start to the year, especially in Northern Europe, and was led by a particularly strong quarter in resources, followed by public works. We see continued investments in infrastructure across Europe, and there are calls for even more in the face of climate change. In Asia-Pacific, India was once again the main growth driver, with continued momentum in water, now expanding from product delivery into operations with digital twins of the water networks. The rest of the region experienced steady growth. China performance was consistent with Q4. The headwinds remained the same with difficult economic conditions and continued geopolitical tensions. However, we did see renewal rates improving, which is encouraging. Back to Synchro, which is part of Bench Infrastructure Cloud. As an open, collaborative, and data-centric environment, Benefactor Cloud is the key to digital product delivery, unlocking digital workflows that help firms increase efficiency and productivity from design through construction and handoff. Our focus in construction is on digital delivery versus a general construction management software. That is, leveraging a digital twin to sequence and digitally rehearse every step of the construction process. This includes enriching the digital twin throughout that process so that it accurately reflects the as-built asset when handed over into operations. One reason for this focus is the clear ROI it can deliver for users. A recent standout project is EcoWater, a large wastewater treatment facility in California. Engineering firm Project Controls Cubed leveraged Synchro to develop a digital twin to manage 22 engineering projects across the facility. Various users, from designers to contractors, leveraged the Digital Twin, working in real time to prepare for and carry out all activities. The Digital Twin streamlined coordination and optimized construction sequencing, reducing overall program costs by an astounding $400 million. As the planning director said, it was an overwhelming success and really proved to everyone the power of Bentley's digital construction platform. Results like this will further drive the uptake of Bench Infrastructure Cloud, especially as the silos between design and construction break down and engineering and construction teams unite in a collaborative digital twin environment. As users add model-based workflows to their traditional file-based workflows, they will increasingly benefit from digital delivery and gain a competitive advantage in delivering higher quality, sustainable projects. Before I hand over to Werner, I want to thank Bentley colleagues for a strong start to the year. Thanks to their efforts, we are well positioned to take advantage of the many infrastructure opportunities before us in 2024. Over to you, Werner.