Bentley Systems Inc Q1 FY2022 Earnings Call

Good morning, everyone and thank you for joining us for Bentley Systems Q1, 2022 operating Results Webcast. I'm Carey Mann, Bentley's VP of Investor Relations. On the webcast today, we have Bentley Systems Chief Executive Officer, Greg Bentley, Chief Financial Officer, Werner Andre, Chief Operating Officer, Nicholas Cumins, 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 forward-looking 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 due to a number of risks and uncertainties. The risks and uncertainties that forward-looking statements are subject to are described in our operating release and other SEC filings. Today's remarks will also include references to non-GAAP financial measures. Additional information, including reconciliation between non-GAAP financial information to the GAAP financial information, is provided in the press release and supplemental slide presentation. This webcast will be available for replay on Bentley Systems Investor Relations website at investors.bentley.com. After the presentation, we will then conclude with Q&A. And with that, let me introduce the CEO of Bentley Systems, Greg Bentley.

Good morning, as the case may be and thanks to each of you for your interest. Our operating results presentation will follow our now standard sequence. I will now briefly cover the tone of business and will be back after Nicholas for commentary about corporate developments. When we last met it was already March, but much has happened in the world since then. Our '22 Q1 operating results signify BSY's overall resilience, but with significant developments to remark upon which we will do briskly today. This includes not only the war between Russia and Ukraine, but also related effects that I term counter-globalism impacting our business as a U.S. company in China. These developments and our responses to date will be covered today, as to Russia by our Chief Operating Officer, Nicholas Cumins, based in Europe, and as to China, by our Chief Investment Officer David Hollister and colleague, Chris Lou. Chris was until this year our Territory Executive for North Asia, within which he helped grow greater China to reach 5% of our business. And he's now heading Glocalization Initiatives for BSY investments. Net of these '22 Q1 ARR impacts in Russia and China, an incremental to year-over-year constant currency ARR growth of 15% from platform acquisitions, Sequent and Power Line Systems. We will also hear shortly from the Head of TLS at Lynch; our business performance year-over-year constant currency ARR growth was 12%, and net recurring revenue retention also in constant currency for the trailing year was 108%. I consider these operating results to thus reflect some degree of over-performance globally with respect to post-pandemic seasonal expectations when excluding China and Russia. In light of this resilience, which will be the subject of my review of corporate developments in a few minutes, we haven't changed our general expectations since in March we provided our financial outlook for the full year 2022. This slide, which has become a fixture since the second half of 2020, is a reminder of the recurrent drag on our business from the industrial portion of the industrial resources infrastructure sector. So it's great to report now that industrial usage has finally turned around in the right direction. Although still far from the pandemic levels against which our directional colors are benchmarked. You will likely have heard plausible arguments that industrial CapEx is now being kick-started even in western countries by new imperatives for energy security. We are now positioned resiliently for immediate accretion in ARR and revenue from these upticks in usage and application mix. And in 2022 Q1, we continued our measured pace of account upgrades to E365 and specially to foster ARR growth through E365's embedded success services.

Thank you, Greg. From a regional standpoint, our new business continued to accelerate in the Middle East, as well as in Australia and New Zealand as indicated in Q4. Our new business also accelerated in India, benefiting from renewed investment infrastructure, including industrial, and bounced back in Southeast Asia, in particular with firms. Our new business down, notably in Europe from a year-to-year, mainly due to lower consumption growth in our E365 accounts. Reflecting the general economic conditions in the region impacting infrastructure investments, with a shortage of labor, raw construction material, and increased energy costs. We mentioned in March that Russia represented about 1% of our globally ARR. We decided to pause marketing ourselves in Russia in light of the war in Ukraine, effectively hurting our new business. We also continued to strictly apply export controls and restrictions impacting our existing ARR. For instance, oil and gas accounts are already under the sanction representing 10% of our ARR in Russia. We are expecting more sanctions and other restrictions to impact the remainder of our ARR. Now we've therefore decided to reduce our theme recurring ARR substantially to reflect this, as Werner will quantify. David will cover China in his section. From a product standpoint, our new business accelerated electric utilities, especially with the recent acquisition of PLS and SPIDA for transmission and distribution, as well as in water utilities with open flows or product line for water infrastructure. Our new business also accelerated with open roads or design and modeling application for roads, as well as STAAD, our main simulation application for structural analysis. A key pillar of our product strategy is to drive engineering excellence. The acquisition of ADINA exemplifies this. ADINA was founded in 1986 by Dr. Klaus-Jürgen Bathe, a world-renowned professor at MIT, who literally wrote the book on Finite Element Analysis. We are delighted to welcome to Bentley Dr. Bathe and his dream team of PhDs with deep scientific and technical expertise. Historically, ADINA has been primarily commercialized in a process and industrial analysis context. However, it is highly regarded by infrastructure engineers as the industry standard to study the response of infrastructure in detail. We see opportunity to leverage ADINA in the analysis workflows of infrastructure engineers by offering the possibility to extend almost every application in our engineering formulation portfolio with non-linear analysis and advanced simulation capabilities. ADINA will have engineers analyze with greater precision the impact of events that induce non-linear or otherwise extreme responses in built infrastructure, such as hurricane-force winds, storm surges, earthquakes, blasts, and extreme temperatures. Back to you, Greg.

Thank you, Nicholas. Moving now from new business, I will focus this quarter review of corporate developments on the makeup of our ARR, the growth of which depends on in business. While in 2022 Q1 there turned out to be unanticipated developments that setback certain territories significantly, BSY as a whole demonstrated resilience, which to me was fully satisfactory. As other potential macro uncertainties seem to loom now, I think it is timely to consider the extent to which our corporate developments over the past two-plus years have improved not only our top-line growth rates but also our predictability and resilience. During the last two years, corresponding not only to our debut as a public company, but also to the pandemic, our initiatives to reinvest pandemic savings have, and I think enduringly, increased our growth rates of new business ARR and revenue while adhering to our steadfast commitment to steady annual improvements in our normalized operating margins. To start with enterprise new business compared to the pre-pandemic early days of our 365 programs for our largest accounts, today, much more of our ARR resets are based on daily consumption rather than lagging annually. However, during this period, we have also institutionalized collars on E365 contracts to reasonably constrain ARR volatility. But most significantly through E365 expansion, we can consistently and constantly benefit from the usage growth and application mix accretion, which our enterprise success blueprints for new workflows and going digital are advancing. As I reviewed last quarter, we can now quantify the improved new business and ARR growth rates which result under E365. And as I showed earlier, we are steadily upgrading more mid-sized enterprise accounts to E365 as we had success force capacity with headroom for years of further momentum. But next, our other new focus since 2019, on the SMB segment also provides ongoing upside opportunities that don't depend on market growth.

Thank you, Greg. I will quickly review some topical highlights related to our BSY investments activities. On the topic of acquisitions, our year-to-date progress notably includes PLS as a platform acquisition, which we'll discuss in some depth, as well as the ADINA of programmatic acquisition we completed last month. Nicholas has just shared why we're excited to add ADINA to our portfolio. It's a textbook example of our programmatic acquisition strategy. It brings us relatively little historical revenue but the tech and talent that we onboard, call that accelerated R&D, if you will, brings us future commercial opportunity, strengthens our product portfolio, and deepens our account relationships. I'd like to take a minute to talk about China. Growth in Asia, including and in particular China has been a priority growth strategy for us for many years. While greater China is still representing less than 5% of our revenues, until recently, our growth rate in China has been a positive outlier for us. As you've heard on this call, that star has lost a bit of shine, and in fact, our revenue in China actually declined in the first quarter of 2022 relative to the same quarter last year. That said, we remain considerably invested and interested in infrastructure opportunities in China. We've always been forthright about the challenges to succeeding in China, which can require customizing solutions or creating new solutions first and specifically for the Chinese market, as well as the preclusion from provision and cloud solutions and challenges to navigating data residency restrictions, and even a preference for accommodating commercial model and licensing uniqueness. It is the case that we've enjoyed the most success in China, where we've adapted our solutions specifically for China, tailored our commercial model, and accommodated more flexible licensing and provisioning. Recently, China's domestic policies are becoming increasingly challenging. And you'll hear more about that momentarily.

Thank you, David. As David alluded, our growth in China has been hampered by a few headwinds, namely the preference by State-owned enterprises, design institutes, and the ecosystem to use software developed by local companies and commercial models, including licensing and On-Premise versus Cloud that don't necessarily follow traditional practices. I have had the privilege of running Bentley China for over a decade and have seen the widespread adoption of our desktop applications and project collaboration products namely ProjectWise. Through the use of trusted partners, working alongside our own sales team, we have been able to see the market resulting in some of the largest projects in the world using Bentley software, like the auto SF Express A cargo terminal, which is the FedEx equivalent, building Tibet High-Speed Rail Design and Construction, digital selling development of Shanghai Economic Zone in Southern China, many of which won our WYI awards, a pinnacle achievement in our industry. However, the current state of the market pretends the usage of locally produced software, where the core is domestically developed, controllable and autonomous. In many cases, special budgets are being apportioned to create domestic solutions on named infrastructure projects, with reliance on foreign software projected to decrease by 20% in the coming years. Thus we have created a retreat of our most trusted channel partners, to build a local solution for project collaboration. ProjectWise, which is our design integration and work in progress solution, is the glue that binds all of Bentley applications along with third-party vendor apps, by creating a local version of ProjectWise for China. We not only assure the concerns of being a foreign software company, but we can expand the reach of our user base to include non-engineers, like owners, estimators, and financial personnel who need access to the project information. Since a lot of these non-engineers use other local products in their workflow, such as which is a Zoom or team's equivalent, Baidu cloud storage like Dropbox. The JV will create integrations with these tools and services as part of their offering. All pricing and licensing would also be controlled by the JV to allow for local flexibility. This localization of ProjectWise and soon other of our technologies for the Chinese market through joint ventures will create new opportunities while simultaneously abating attrition from customers looking for a local solution.

Thanks, Chris. And now on to PLS, which has hit the ground running for us, contributing quite favorably to our February and March results since the acquisition on January 31st. In fact, it is exceeding our expectations. Since onboarding the initial PLS ARR, it has grown impressively over just the two months through March 31st, including new names, developing geographies, and with our new PLS grid solution. We ended March with ARR growth over the prior year of 25%. Certainly that's a pace likely to at least deliver our previously provided guidance for PLS contribution of 30 million in first year subscription revenue of which 27 million we expect to occur in this calendar year 2022. Of course, it's only two months, but momentum is strong. PLS continues to generate a very high margin contribution, which we're reinvesting into Bentley Systems growth initiatives, including into our Grid Integration Group strategies.

Thank you, David, and good morning, everyone. We're off to a strong start in 2022, and we are very pleased with our resilient results in the first quarter. I'll start with our revenue performance. Our total revenues for the first quarter are $275.5 million and grew 24% over the prior year. Most of that growth comes from subscriptions, which now comprise approximately 88% of our revenues and grew 28% over '21 Q1. The acquisition of Seequent Power Line Systems onboarded 18% of growth. Foreign currency headwinds offset 4%, and therefore, our business performance, inclusive of the organic performance of our platform acquisitions, comprises 14% of subscription growth on a constant currency basis. Our Perpetual License revenues, which now represent approximately 4% of our total revenues, are relatively flat in absolute terms and continue to reflect the preferences for subscription offerings. Our Professional Services revenues at approximately 9% of total revenues, increased by 3% over '21 Q1, on a constant currency basis. Within our Services Business, we see continued growth from our investment into the Cohesive Digital Integrator business, partly offset by the shift and redeployment of our Traditional and more episodic service business to support recurring success services embedded in our E365 subscription offerings. Presenting here on the right, the reminder of our full-year 2022 revenue outlook, as was provided during our year-end 2021 operating Results Call in the range of $1.11 billion to $1.14 billion, representing GAAP revenue growth of 15% to 18%. Overall, our Q1 revenue performance was consistent with our expectations and our financial outlook. Most notable are our platform acquisition, Seequent and PLS for the first two months since acquisition are showing very strong business momentum and growth rates with solid contributions in new business and our business performance. In March, in response to the Russia-Ukraine war, we announced the suspension of new business in Russia and Belarus. While the impact including sanctions on overall revenue performance during Q1 was minimal, we reduced our rated ARR by $5 million representing an approximately 50% decrease in estimated recurrence of business in those countries. As we do expect the corresponding impact on revenues in the remainder of 2022. On the FX front, our 2022 outlook is based on current exchange rates, when issued in March. So while our Q1 revenue performance was negatively impacted by currency headwinds of about 4%, such headwinds were already affected into our 2022 outlook.

I believe we are now going to hear from Werner about Bentley's numbers for the quarter.

We'll start with Joe Vruwink from Baird.

Great. Hi everyone. Is the right way to think about performance in the quarter 12% was the Organic Business performance? And then was the combination of Russia and China, about 200 basis points? I guess my question is, compared to your guidance, did you start the year maybe closer to 14%? And if that's true, can we just walk through maybe some of the upside drivers relative to the 11.5 to 13.5 forecast you presented?

Well, I'm going to ask Werner to go through the quarter-by-quarter way that the full-year outlook came about. I don't think that Russia and China together are 200 basis points, but they're at least half that. Over to you, Werner.

For Russia in Q1, the impact was quite minimal. It did not affect ARR, which we reduced by $5 million. Similarly, China also saw a reduction in ARR, contributing about 101% to our ARR growth rate drag. Revenue impact for Q1 in Russia was also less significant. There was a slight reduction compared to last year, but it's more about assumptions for future agreements. In China, the reduction mainly stems from project rates. We're exploring ways to address this. In Russia, we anticipate some revenue impact for the rest of the year based on recurrence probability, but overall, the effect on growth wasn't substantial.

In revenue, it was an ARR that the impact occurred because we in effect wrote down the ARR because we don't regard that it can incur, unfortunately.

Okay. The second question when you start to appreciate the strength out of PLS on the quarter growing by 25%. I think that's quite a bit faster than maybe the original assumption. Does that, in any way, just exposure to utilities and thinking about how infrastructure investment is likely to unfold across your other sub-sectors. Does the strength there, in any way, inform a view about how the rest of the year might play out? I know open roads was good. Hot-water was also good. Is it a leading indicator of any sort of how the rest of the year might go?

It's important to remember that the 25% growth mentioned by David is year-over-year and represents just a small portion of data from which we don't feel confident extrapolating insights based on two months. However, the factors that drew us to this integrated grid opportunity and to Power Line Systems are quite significant. We believe the growth rate will positively shift, especially as we adapt Power Line Systems' historical focus from the U.S. to other global markets as well. We can't predict how long this will take, but we definitely see potential in the grid Digital Twin opportunity for this year. Additionally, I want to point out that our business segment, which we've managed for a longer period than PLS, is performing on a percentage basis significantly smaller than PLS, yet even better in percentage terms. Thus, the combined opportunities in distribution and transmission grids appear to be gaining momentum.

Great. Thank you very much.

We'll next go to Matt Hedberg from RBC.

Morning guys, can you hear me okay?

Yes, Matt.

Hey, thanks for the time and the prepared remarks. Greg, I think, I really appreciated your comments on the prepared remarks adjusting the businesses far more resilient even than around the IPO given some of your vertical distribution and new businesses. I'm wondering though as a point of reference, can you talk about how Bentley performed during maybe prior downturns, obviously, recognizing that this were occurring and durable this time? But just some frame of reference on prior economic downturns?

There are a couple of significant downturns that I remember. In 2009, during the great financial crisis, our revenues decreased by 10%, mostly due to foreign exchange impacts, but our recurring revenue remained stable. However, the crisis drastically affected new license sales, which were a larger portion of our revenue back then compared to now. This experience led us to focus more on operations and maintenance, and we've since shifted our strategy to the operational expenditure life cycle, which is evident in our current performance. Another downturn that stands out was around the time we filed to go public in 2014, which was largely influenced by fluctuations in oil prices and instability in the industrial sector. Unlike other sectors, industrial is particularly volatile, and this affected us significantly. Despite this, we have not diminished in that sector; instead, we have expanded in others. If there was a downturn in 2020, it primarily impacted us in the industrial sector by about 10%, which reinforces our confidence that other sectors are more resilient. The commercial and facilities sector also saw a 10% decrease, but it wasn't as severe, and I believe it won't rebound as much as public works and utilities will in the future.

The only other thing I would add is that we learned during these downturns that having visibility and control over our cost structure is crucial. We continued to deliver EBITDA and improved EBITDA margins, even in challenging times.

Yes. Our head cost alignment model is calibrated twice per month against our current ARR book and including the ARR from consumption of our E365. So we tend not to be able to be surprised very much when it comes to sustaining our margins. Who's next?

We'll go to Matthew Broome from Mizuho.

Can you hear me?

Now, yes please.

Okay. Hi, guys. I guess, mostly just curious, how is linearity during the quarter in terms of the underlying fundamental demand and pipeline growth? Was March relatively stronger than January or how did that go?

Let me ask Nicholas. If you have an impression about that and as it might compare to other quarters and other first quarters. I don't.

I think it's quite similar to what we've observed in the past. It hasn't been as linear as I would prefer. There's still quite a bit that seems to be back-loaded. We hope to see improvements as the quarter progresses.

And of course, we were talking to you in mid-March or March 11th or so. Of course, we weren't talking about the first-quarter at the time. But a lot of the disruptions occurred after that, but did impact the first quarter when it comes to the counter-globalism aspect especially.

Right. And actually, I guess on that, and specifically in China, do you expect the environment to continue to deteriorate than what's your outlook there? And to what extent and in what timeline do you expect you're new JV to counter those geopolitical headwinds?

I'm concerned that the situation could worsen. When we discuss counter-globalism, I'm referring specifically to the dynamics between the U.S. and China. This issue is not just on China's side; the U.S. is also discouraging bilateral trade. Over the past year, I've mentioned preparing for this, and I appreciate the term "glocalization" that we're implementing in China. We're not starting from scratch; we're announcing joint ventures that have been in development for some time. However, these will take significant time to launch because they are just being established. Both parties are contributing personnel and capital, but I worry that the decline may occur more rapidly than it can be remedied. The solution of developing local Chinese offerings that can generate revenue and annual recurring revenue for us is a more sustainable answer, and I hope it will be effective. This process is incremental, and we are not planning to halt any of our operations as Bentley, the American company in China. Bentley in China is still part of the American identity, but I believe there is an opportunity for continued growth. To seize this opportunity, we need to implement these incremental glocalization strategies. Nicholas, do you have anything to add?

I would say that yes, the joint venture will help us compete more effectively with local providers, but we are not reducing our efforts to revitalize our existing business there, focusing on our products with state oil companies and design institutes. The challenge we've faced for a few years is that these companies prefer onsite software rather than cloud services. As a result, many of our innovative capabilities weren't accessible to them. Therefore, we are going to provide our solutions on-premise in China through a core team to reinvigorate that market.

Of course, this is only the first joint venture. There are others in the works that we'll be announcing during the balance of the year.

Okay. Perfect. Thanks, guys.

The next caller, Jason Celino.

Can you hear me?

Yes.

Perfect. Okay. So I understand the concern on macro and the changing political backdrop. But when we think about your core infrastructure end market seems to be doing okay, your SMB seems to be up performing and your PLS acquisition seems to be doing well. How would you describe your confidence in the business pipeline today versus maybe 90 days ago?

I agree with everything you've mentioned. Our business relies heavily on the activity levels of civil and structural engineers and their readiness to embrace digital tools. Currently, they are extremely busy, which limits their capacity but increases their willingness to adopt digital solutions. Unfortunately, there’s no way to expand capacity in civil, structural, and operational engineering given the current workload. These global disruptions are a concern for us and may impact our annual recurring revenue growth this quarter. However, we believe we can maintain some level of momentum. As we evaluate our financial outlook for the year, it's important to remember that we consider three elements in our forecasts. When discussing constant currency annual recurring revenue growth, it’s crucial to also reflect on the effects of foreign exchange and the associated disruptions. Constant currency ARR growth naturally excludes these FX considerations.

And then there, we talked about adjusted EBITDA. And there as you know, we manage our margins. You could say, well we manage our margins in constant currency, they will be somewhat subject to FX. But our hedge is very good. Our natural hedge is very good. And then there is revenue, of course, and our revenue, financial outlooks should be regarded as subject to foreign exchange. But when we considered this one day the dollar index, went down by a percent. In the next two days, it went up by a percent-and-a-half, so we just have to say, please understand that our financial outlook is in real economic terms and you will have to do your own adjustment for the gyrations of foreign exchange. But overall, in fundamentals, we're observing things are pretty strong. Europe is a bit notably down in the first quarter, which doesn't seem surprising to us given what's going on there. And we hope that we'll be short-lived as there is even new work to be done for energy security in Europe.

Okay. And then when we think about PLS, the outperformance, you can attribute that to maybe before where they've got acquired, right? So, or what do you say is from revenue synergies from being part of Bentley for two months?

It's challenging to separate those aspects, so I will ask David for his perspective. However, it is clear that PLS was a strong development and transmission engineering organization, but it did not prioritize sales and marketing to the same extent that we do. This coincides with favorable trends in transmission engineering in general, and we still don't feel we have the experience to fully analyze those factors yet.

We had twice the experience for just one quarter. Go ahead, Dave.

Well, we had twice the experience. One quarter for now. Go ahead, Dave.

Yeah. I guess, I'd add to take exception to say it all happened before our acquisition, Jason, because what's new is the PLS grid product, yes, developed by talented PLS team, but really taken to market for the first time for the main, this first quarter has contributed significantly. This is the Digital Twin for grid design. And we're really excited about it; we think it's going to contribute to more growth this year than even the international expansion opportunities that we can also bring to PLS.

Jason, to clarify there, the transmission engineering products are one tower at a time, if you like. PLS grid looks across the network of transmission and can help answer questions like FERC's questions about overall capacity under varying conditions, and it's very well-timed to come to market now.

Okay. Perfect. Thanks.

We'll next go to Kash Rangan from Goldman.

Hey, congratulations on the quarter despite all the turmoil. Despite the world going digital, David Hollister's background has a nice analog clock on the screen pendulum, which is a timeless reminder. Greg, as you look at the structural forces in the industry, you've certainly positioned yourself through acquisitions to be more enduring as a business model through PLS, Seequent acquisitions, etc. On the cyclical front, you have lived through many downturns before. What is it that you see on the leading edge with respect to project financing, affordability, etc., given inflation, higher rates? And on the company-specific front, as a result, are you looking to maybe pause hiring a little bit or bring down operating expenses just because we don't know certain things today that we thought we knew about three to four months back or so? Just on the flexibility side of the financial side. Thank you so much.

Let me address the second question first. No company can stop hiring right now due to the scarcity of talent, so we have more recruiters working harder than ever. Our attrition rate is up, but not excessively so, and our engagement and retention levels are better than many others. However, we cannot pause recruitment and hiring. Additionally, as I mentioned, our cost alignment model for headcount is linked to our ARR, but we do not impose a specific direction on it. We aim to invest as much as possible in growth, including expanding our enterprise success headcount to support E365, as its growth rate is quicker for the portion of ARR that it represents. We also plan to rapidly increase our SMB direct sales headcount without hesitation, regardless of the forecast. We will achieve our margin targets due to our management strategies, and we are not currently concerned about future uncertainties. Now, regarding your question about finance interest rates and financing, it was indeed a time when you could say there was effectively no interest rate. In 2009, no project could be financed at any interest rate.

And that caused us to change our relative balance between CapEx which was everything then to OpEx now or is a significant portion of our business. But also in favor of publicly financed projects, which have this counter-cyclical as effect. And then on the privately financed projects, interest rates, you would say are relatively high compared to where they were in the past couple of years. But they're still relatively low compared to where they've been then, and hurdle rates for projects, especially for energy security. The projects don't seem to be speculative at this point, but necessary, so we just say visibility is a little obscured when things can come along and change what you think about a year as a whole in terms of predictability, I can hardly imagine a business that's more predictable than ours, the way we manage it and what we're sensitive to.

A quick thought on competition each change with respect to Autodesk to so and I will wind up thank you so much.

No, I don't think so. Autodesk concentrates on construction, which relates to infrastructure. While infrastructure is connected to construction, construction is inherently more susceptible to supply chain and labor challenges than our ongoing focus on design, operations, and maintenance, unlike Autodesk's construction aspect. This remains largely irrelevant to most of what we observe. That is not to undermine their impressive business in discrete manufacturing, but we moved past that for a time in China, and we no longer do. Nicholas, do you want to add anything?

I have nothing to add.

Thank you.

We'll next go to Griffin. Thank you. Good morning. For Greg and Nicholas, first as the scope of your business has evolved, broadened, that is, and your end markets. Could you comment on how your software engineering infrastructure or processes have evolved or might yet have to evolve? Your DevOps, if you will. And as the output to product development, how are you thinking about future changes to your product release cadence, and or product packaging and configuration model? Then a follow-up. Thank you.

I would like Nicholas to address this. He mentioned in China that much of our development is focused on Cloud capabilities. Every desktop software user can access these Cloud functionalities, especially now with the iTwin platform that we are diligently working to integrate across our products. However, in China, the situation is different since they don't have access to or are inclined to utilize Cloud capabilities. Nicholas, it's your turn.

The main change in the way we are working is exactly what Greg explained. It's the fact that an increasing percentage of our revenue is coming from Cloud services, and even with our desktop products, we provide Cloud qualities to these products by complementing them with Cloud services, or being able to release new capabilities on a more frequent basis. So that's the main reason why we're changing. We have been changing the way we've been working within our product organization for the past few years. More than the companies, are the fact that we have extended our portfolio and we've acquired more companies. Now the companies we acquire are either on the desktop side of the house like Arduino, or there will be a combination of desktop and Cloud. And when they fall in, when they are joined and we harmonize the way we work together with the Cloud services, and then with those desktop products.

Okay. Thank you for that. You mentioned earlier that PLS could be thought of as a kind of Digital Twin for the grid. Could you comment more broadly on your Digital Twin business in the quarter in terms of pilots or production? Deployments that you saw or what you're anticipating for the rest of the year? And Nicholas, if you recall back in December, when you spoke about Digital Twins, you referenced a variety of use cases. Here, half a year later, what do you see in terms of perhaps the two or three use cases for Digital Twins, that are becoming most common?

Obviously, remark first that the Digital Twin, in addition to being comprehensive across the life cycle and bringing together ET and IT and OT, that from any part of the life cycle to maintain fitness for purpose for an infrastructure asset, the Digital Twin stuff we do is also the same iTwin platform for our whole portfolio itself, so it helps for coherence across products as well. An example, when you mention PLS, PLS have been desktop applications, but PLS grid should be part of the Digital Twin cloud solution that includes the reality modeling and the infrastructure IOT. So PLS doesn't bring us an integrated grid, it brings the transmission aspect and the PLS grid product to look across transmission assets to a transmission grid to an integrated grid, which integrated grid should include substations and distribution as well of our existing products. So when we say PLS as a platform acquisition, it doesn't bring us a platform, but it completes what our platform can now make comprehensive across the grid. Over to you, Nicholas.

When we think of our Digital Twin business, we primarily consider the iTwin platform and the various products that utilize its capabilities. Our platform is increasingly being used by third-party organizations, including software vendors and engineering firms that are developing their own products and solutions. In terms of revenue for Q1, the contributions from the iTwin-powered products are consistent with my previous comments from the last quarter and the preceding year, indicating healthy growth. The growth trajectory remains strong. Digital Twins continue to be central to our product investments. Furthermore, many complementary services that enhance our desktop products are increasingly based on the iTwin platform. For instance, in a couple of months, we will be releasing a modal validation service for Open Roads, one of the products that performed well in Q1, which will be powered by the iTwin platform. Regarding use cases, we are expanding our coverage as well as that of our ecosystem. In Q1, we launched a new digital twin solution for storm and wastewater networks, complementing our existing solution for portable water networks, and we are seeing significant interest from water utilities in digital twin solutions. Similar to the traction we are experiencing with electric utilities, utility companies are interested in digital twin solutions that facilitate integration across different systems, enabling them to perform operational analytics and simulation analysis.

Thank you. And Carey, I know you want to us to wrap up.

With that, we'll end the call. Thank you, everybody, and we'll see you next quarter.

Cheers. Thank you.

Thank you.