Bentley Systems, Incorporated

good morning and thank you for joining bentley systems q2 2024 results webcast i'm eric boyer bentley's investor relations officer on the webcast today we have bentley systems executive chair greg bentley chief executive officer nicholas cummins and chief financial officer bernard andre This webcast includes forward-looking statements made as of August 6th, 2024, 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 contained during this webcast, other than statements of historical fact or forward-looking statements. This webcast will be available for replay on Bentley Systems' Investor Relations website at investors.bentley.com on August 6th, 2024. After our presentation, we will conclude with Q&A. And with that, let me introduce the Executive Chair of Bentley Systems, Greg Bentley.

Good morning, and thanks to each of you, as always, for your interest in BSY. In this first operating results reporting in new roles, our lineup will remain the same. but the format is updated to correspond to new responsibilities. In particular, I bequeath to Nicholas, as CEO, the charts to review our operating performance numbers, especially ARR growth as our key indicator, along with his expanded commentary on the underlying tone of business across all notable dimensions. As now Executive Chair, My perspective on directions and developments will, here and henceforth, be qualitative and comparatively succinct. While I think our 24 Q2 operating results should be recognized as commendably robust on their face, my qualitative characterization of the quarter is even more favorable. In all-around pace and balance, it seems to me, with now perhaps the benefit of a broader perspective in my new role, that everything has come together more so than ever. Hence some observations on our busyness directions, in keeping with my new qualitative focus. For me... BSY Busyness describes the unprecedented stride now being hit both in our infrastructure engineering and markets and in our own efficient execution, which of course will be further detailed in turn by Nicholas and Vern. And speaking of quality, rarely, if ever in my experience, has our ARR growth shown as much balance, visibility, and linearity as it has of late. In fact, I consider the fundamentals of our business to have further improved year over year, as would be reflected in ARR growth, net of subsiding inflation-based escalation, intentional commercial model changes in China, and onboarding from programmatic acquisitions. Likewise, I think 2024 revenues have significantly grown in quality, with recurring subscription revenues surpassing 90% of the total by virtue of mid-double-digit year-to-date growth in subscription revenue that is virtually all organic. And my new focus on qualitative observations leads me to also emphasize the transparency and accounting quality of our revenues, rare or unique, among even software peers with likewise subscription preponderance. Our distinction is that we have virtually no multi-year recognition or billing, as is elsewhere booked at the expense of the future. Moreover, by virtue of our ever-growing E365 plurality, over three-quarters of our subscription revenues are recognized strictly radically throughout the year, for which we collect in advance, with only the shrinking remainder of less than 25% still subject to any 606 obscurity, even just across quarters. Our what-you-see-is-what-we-get revenue quality, in turn, makes our profitability margins meaningful and consistent. And as you know, for further financial transparency and usefulness, our key profitability metric is Adjusted operating income, inclusive of stock-based compensation, tracks reliably with cash flows after stock repurchases to offset the dilution which would otherwise result. Incidentally, for the first half of 2024, all of these measures thus follow suit with subscription revenues in significant favorable variances. Lastly, among qualitative observations of our unprecedented busyness, recall my high hopes for our asset analytics initiatives to make a mark in 2024. In this incremental opportunity, beyond our existing commercial model where ARR is charged per user, our asset analytics subscriptions are charged per asset for insights derived through AI from digital twin cloud services. While still not quite moving our overall ARR growth needle, I'm pleased to say that in 24Q2, asset analytics did reach the pace of ARR growth, a rate of eight digits for the year, which I posited last quarter as a reasonable aspiration. Turning now to such long-term prospects... The Asset Analytics Initiative is characteristic of the auspicious expectations I have for our new generational leaders to explore and develop incremental opportunities. While I am confident that we have the right leadership, I regard it as my responsibility as executive chair to make sure that our board structures the appropriate incentives and rewards for success in succession, given what we've organizationally learned. And it happens that in a month, we will officially celebrate the 40th anniversary of Bentley Systems. Coinciding as this does with our CEO transition, it has been natural and important for me to reflect on the factors that I think have contributed to BSY remaining, in my humble assessment, sufficiently entrepreneurial for so long. and what we can do to perpetuate that growth mindset culture and its sustained compounding performance. Significantly, I think, a stalwart constant ever since our founding 40 years ago has been our unusual executive bonus plan for top management. Having been a primary beneficiary of that plan for the last 33 years, and still remaining so as per this recent disclosure filing, I feel entitled to say with some authority that the design and operation of this plan, on the one hand, and BSY's continually compounded growth in profitability and hence share valuation, on the other hand, have not been just coincidental. The plan has incentivized just that. by paying me an established fixed percentage of operating income each quarter for the very long term. At the outset of the plan, of course, our operating income magnitude was insignificant compared to today's. But, knowing that the parameters of this plan would prevail indefinitely, as CEO, I could, and did all along the way, make intentionally long-sighted resource allocation decisions to benefit the magnitude per share of future profitability, sowing the seeds for incentives reaped more recently. These days, the same underlying premise tends to be enshrined in the market as a rule of 40. At BSY, where this plan set our compass to ingrain a growth mindset, as we reach our 40th anniversary, And even in our conservative way of calculating operating income after stock-based compensation, we have reached the rules 40 and counting, as this chart shows. So on this occasion of our first CEO transition, our shared priority to further perpetuate this compounding likewise needs to underlie our new CEO's incentives. by way of long-term visibility into his compensation opportunities, comparable to what worked for me and for BSY to date. During 24Q2, our board's sustainability committee finalized this new CEO compensation plan, anchored by what is indeed meant to be a career stock program for Nicholas. It incorporates the distinctive and proven philosophy of our historical executive bonus plan, but refactored and modernized to begin now with our current profitable public company point of departure. Career stock awards and appreciation are designed to provide the increasing majority of cumulative CEO earnings over what we expect to be another tenure of double-digit years. As in our original plan, the career stock program pays out, in this case as an annual restricted stock award, an established fixed percentage of operating income, but now only to the extent of growth above an also fixed threshold annual growth rate. Each such annual grant does not vest until after five years of continued service to assure a sufficient rolling horizon for everyone to plan for. But importantly, during those rolling five years, the percentage parameters of the career stock program can't be changed. Probably won't be changed even thereafter. This is of the essence. The CEO needs and deserves visibility to know how their resource allocation investment returns will be duly rewarded. it immunizes the CEO from the perverse disincentive otherwise of their goal posts being raised to the very extent they succeed. By continuing and compounding BSY's dependable growth, the CEO's career stock will accumulate and compound to result in a competitively benchmarked and deserved reward over the course of a desired decade plus at the helm. But as importantly, the career stock program appropriately contemplates our next CEO retirement. Though we believe in the value of continuity, recent events, and I'm not talking about my retirement mainly, reinforce the virtue of a top leader not being incented to outstay their effectiveness. The vesting of all earned career stock accelerates upon an expected tenure as CEO that we have mutually agreed, facilitating the decision then to retire. Through career stock, our first generation of BSY leadership, now as board members, has in mind to program our new generational leadership to benefit much and most from the long-term thinking which we believe has served us optimally and as much in the capacity of owners as executives for our 40 years so far. And speaking of our confidence in such succession, may I introduce for the first time as CEO, Nicholas comments to cover operating perspectives and operating performance. Thanks.

Thank you, Greg. Having completed my first month as CEO, I want to start my prepared remarks today by reiterating my enthusiasm for Bentley's role in the world of infrastructure, and for the many opportunities that lie ahead of us. Infrastructure sectors have benefited greatly from the massive capital investments in projects and jobs post pandemic. But much more remains to be done to make infrastructure more resilient, from retrofitting aging infrastructure and mitigating the effects of climate change to closing the gap in engineering resources. Our collective ability to overcome those challenges will determine the quality of life for generations to come. Fortunately, a paradigm shift in software is reshaping the landscape. AI is going to be a major driver of our business moving forward, helping engineering services firms to increase their productivity and own operators to better understand the condition and improve the performance of their assets. The traction we are generating in the market with our AI-based solutions for asset analytics is worth noting. The vast majority of costs are incurred during the operations phase of the infrastructure lifecycle, which represents a significant growth opportunity for us. With asset analytics, we can transform the way organizations monitor the condition of roads, bridges, dams, water networks, and telecommunications towers. As Greg referenced in previous quarters, we're seeing increased adoption of our AI-based solution for roadway maintenance, and our AI-based offering for cell towers is also ramping up globally. Of course, this all builds on our broader strategy of bringing data to life, federating it, enriching it, reusing it through digital twins. Our first 40 years as a company were successful because we saw opportunity in paradigm shifts to the personal computer, to the cloud, to digital twins, and now to AI. The foundation laid over the last four decades has uniquely positioned Bentley for success, and it ensures we will be there to help the world's engineering firms and owner-operators answer the call for more resilient infrastructure for decades to come. Now to our business performance for the quarter. Q2 was another strong quarter with very positive end market and operational momentum. ARR performance was broad-based across industries and geographies. Our E365 and virtuosity growth initiatives continue to be strong contributors as well. The two headwinds for our overall performance continue to be China, in particular for ARR, and Cohesive, our digital integrator business, with respect to professional services revenues. Cohesive continues to be impacted by the slow uptake of the next generation of IBM Maximo for enterprise asset management. Throughout the first half of 2024, we delivered very strong profitability and cash flow. Moving to AR growth, our key metric of business performance year over year. In Q2, this remained at 11%, including contributions from programmatic acquisitions, which have become negligible. We expect AR growth to benefit from significant E365 renewals towards the end of the year, based on the impact of floors and ceilings, as explained last quarter. Excluding the impact of China, AR growth was 11.5%. China now represents only 2.5% of our total AR. Moving to our growth by commercial models, our E365 program remains a major growth driver. With continued conversions of accounts from the select subscription program, an application makes a creation, upsell or cross-sell, within existing E365 accounts. In terms of our SMB accounts, which we classify as accounts less than $100,000 of AR per year, we continue to add new logos at a strong pace. In Q2, new logos contributed 4 percentage points to AR growth for the second consecutive quarter, and at least 3 percentage points for the sixth quarter in a row. Our virtuosity subscriptions, targeted primarily at SMBs through our 9th store, continue to add a strong number of new logos in Q2, the 10th straight quarter of more than 600 new logos. Moving to industry dynamics, which continue to be robust. In the most recent ACC quarterly survey, the main themes continue. U.S. engineering firms across sectors expect higher backlogs 12 months from now. They also continue to express optimism regarding the outlook for the U.S. economy, the design engineering sector, and their own firm's overall finances. Looking at our performance by infrastructure sector in Q2. Public Works Utilities, our largest sector, was once again the main growth driver for the company as we continue to benefit from strong global infrastructure spending across transportation, water utilities, and electric grid. Seville is also the largest growth driver for Sequin. Growth in resources remained solid with Sequin strengthening its position in mining, despite new mining investments remaining subdued. The industrial and the commercial facilities sectors had modest growth. Moving on to regions, the Americas was the fastest growing region, again led by North America. We continue to see tailwinds from the IGA with only 38% of the overall funding having been announced today, and primarily for transportation. We are also benefiting from increased spending for highways and bridges by the state themselves, estimated by trade groups at 13% this year. As another positive development in the U.S., the Senate Energy and Natural Resources Committee just proposed a bipartisan reform bill representing the biggest change to federal permitting in years. The President recently signed into law the ADVANCE Act, a bipartisan nuclear energy bill to ease permitting restrictions. And the House passed the Water Resources Development Act, which delivers critical water resources infrastructure improvements and streamlined processes and permitting. We believe this bipartisan support for infrastructure will continue in the US, regardless of election outcomes in November. Moving to EMEA, Q2 performance was steady, driven by public works, utilities and resources. The Middle East had a particularly strong quarter, driven by municipalities and mining. We are monitoring the recent political developments in Europe, but at this point, we do not believe there will be major implications for infrastructure priorities. Asia Pacific continues to be a growth driver with strong performance across sectors, with Australia and New Zealand standing out. India had a solid growth despite the expected slowdown, given the elections. We expect growth in India to re-accelerate in the second half as the government is keen to resume funding infrastructure projects. President Modi's third-term government published its budget, which remains unchanged from an earlier version and still foresees a record $133 billion in infrastructure spending in the financial year ending March 2025. The rest of the region experienced solid growth. China's performance was consistent with recent quarters. The headwinds remain the same with soft economic conditions and geopolitical tensions intensifying the shift in preferences by state-owned enterprise accounts for perpetual licenses and local software. Moving on to another operational highlight. In previous quarters, we have talked about our efforts to help U.S. state DOTs in going digital. This quarter, I want to highlight a recent example in our headquarters home state of Pennsylvania. Earlier this year, we hosted PennDOT's top executive team, the Commonwealth legislative leaders, and engineering firm CEOs at our campus to discuss digital product delivery. This exemplifies the outreach we look to do within the ecosystem of our state DOT partners. PennDOT had already upgraded to Bentley's OpenRoad 3D design software and product-wise for data management to support roadway, bridge, drainage, traffic, and geotechnical engineering. During Q2, we expanded our scope of business with PennDOT by more than half to advance digital product delivery through Synchro for 4D construction modeling and broader user product-wise, both part of Bench Infrastructure Cloud. At the same time, PennDOT is transitioning to become platform inclusive, largely to expand their design supply chain to smaller civil engineering firms, given the capacity constraints of established DOT consultants. In our experience, in other states where DOTs have also taken steps to broaden their supply chain, this opens up an opening for us to reach these smaller firms as potential new SMB logos. To conclude, I am pleased with the strong quarter and the operational momentum entering the second half, which puts us on track to deliver another year of strong and consistent results. Before I turn it over to Werner, I want to thank our colleagues around the world for their continued hard work and dedication in achieving a very successful quarter.