Bentley Systems Inc Q3 FY2022 Earnings Call

Good morning, everyone, and thank you for joining us for Bentley Systems' Operating Results Webcast for the Third Quarter of 2022. I'm Michael Fischette, Bentley's Vice President and Deputy General Counsel. On the webcast today, we have Bentley Systems' Chief Executive Officer, Greg Bentley; Chief Financial Officer, Werner Bernerd 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 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 and our forward-looking statements due to a number of risks and uncertainties. These risks and uncertainties are described in our operating results release and other SEC filings. Today's remarks will also include references to non-GAAP financial measures. Additional information, including a reconciliation of our non-GAAP financial information to our GAAP financial information is provided in the press release and supplemental slide presentation. This webcast will be available for replay on Bentley's Investor Relations website at investors.bentley.com. After the presentation, we will conclude with Q&A. With that, let me introduce the CEO of Bentley Systems, Greg Bentley.

Hello, and thanks, as always, for your interest in Bentley Systems. Our 2022 Q3 operating results presentation will follow our usual sequence that starts with the tone of our business. In the past, I've used the description 'no drama' for BSY. By contrast, due to the dramatic impacts of Russia echoed in China during Q1 of 2022 and our resolute response during Q2 to fully exit Russia, Q3 can be characterized as rebalanced business as usual, absent Russia, and, in fact, sufficiently improving as we had hoped to be back on our annual targets. Because throughout 2022 to date, the loss of Russia and its associated impact in China has tended to be offset by multiple favorable factors, we don't consider that there has been a sufficiently material change to warrant amending our established financial outlook for 2022. This is particularly the case given that what we and I think you consider to be our key operating performance indicator, business performance year-over-year ARR growth rate, is expressed in constant currency, unaffected by ambient FX oscillations, which complicates comparisons to the outlook. It happens that our annual financial outlook for total revenues included the constant currency growth range which continues to pertain. Werner here quantifies, as we did last quarter, the impact of actual Q3 2022 FX rates being different than the rates assumed at the time of our outlook, and cumulatively, assuming current rates remain in effect for the balance of the year. Although adjusted EBITDA dollars are exposed to reported currency FX, our annual financial outlook for adjusted EBITDA margin of 33% is relatively resilient, thanks to our natural operating hedge with tolerably matching revenue currencies and expense currencies. In constant currency, the Q3 2022 business performance ARR growth rate year-over-year and again, after absorbing the Russia and related China setbacks during the year, remained nominally stable at 11.5%, which again doesn't include 2.5% of the ARR growth from the onboarding of PLS during Q1 of 2022. To better understand our Q3 2022 tone of business, I would like us to look more closely at this year-over-year business performance ARR growth rate compared to the same rate in Q2 of 2022. We measure this KPI on a year-over-year basis because of intrinsic seasonality, due to the historical deliberately unequal distribution by quarter of contractual renewal dates of our annual subscriptions that would otherwise obscure sequential quarterly trends in ARR growth by always including all four calendar quarters to abstract from such seasonality. Sequential changes in year-over-year business performance ARR growth rate are meant to signal real trends in the tone of business rather than other noise. Hence, one would expect that year-over-year ARR growth to trend whether up or down relatively smoothly rather than abruptly. Looking back at 2021, we see that unusually, in Q3 of 2021, the year-over-year ARR growth rate jumped from 10% to 13%. In retrospect, this seems to largely reflect pandemic lockdown volatility. But it is also the case that compared to our many programmatic acquisitions throughout 2021, this year have been few and small. While our business performance ARR growth in other respects has been comparatively stronger in 2022. The baseline of Q2 2022 trailing four quarters of year-over-year growth, Q3 2022's year-over-year progression has to make up for the dropping out of that aberrantly high Q3 2021 growth. Accordingly, although Q3 2022's year-over-year business performance, ARR growth reads nominally the same at 11.5% as Q2 of 2022, it is effectively more than comparable, implying an incremental uptick in tone of business, which we also can confirm subjectively. Indeed, adjusting for the earlier Russia and related China onetime ARR losses, business performance ARR is effectively growing year-over-year at the highest levels we have experienced. A quantitative summary is that this year after three quarters, and after absorbing the Russia-related ARR losses and at the appropriate constant currencies, we have reached cumulatively about 70% of the ARR growth implied by the mid-range of our annual outlook. Q3 2022 uptick in new business momentum leads into our seasonally strongest fourth quarter of renewals and ARR growth opportunities. All considered, in light of the risk of more geopolitical disruptions, such as in Q1 of 2022, especially in China, we continue to reaffirm the range of our full year 2022 constant currency business performance, ARR growth outlook. While Nicholas will follow me by reviewing the tone of business at the level of products and regions, the headline is accelerating new business momentum in the U.S., which constitutes fully half of our business at current exchange rates, consistent with long-standing expectations about the inception of funding from the Infrastructure Investment and Jobs Act. To drill down on the tone of business for U.S. civil engineering firms, many of us track the Dodge Engineering News Record quarterly survey of trends in their backlog, which look like this last quarter. Here, we can see this quarter's further expansion and the current multiple of the backlog these firms consider ideal. Their preference is certainly to increase their infrastructure engineering capacity by going digital rather than to reduce their intake of this new business. Turning now to the latest ACEC quarterly survey of engineering firms, not limited to civil, one can see the magnitude of these current backlogs tending around one year. The point is that this bulging backlogs provides these firms with perhaps unprecedented visibility. In fact, the ACEC survey includes these expectations about the level of backlogs a year from now. I think the increase expected here corresponds to these engineers tracking of the IIJA flows. We noticed last quarter the dichotomy between engineering firms’ skepticism about the overall economy and their optimistic sentiment about engineering workloads and their own prosperity, which has only become more extreme in each direction since then. This confidence significantly extends throughout the next two years, per the survey timeline. I turn now from the U.S. engineering firms' tone of business back to our own usual color by infrastructure sector, which last quarter showed a gratifying balance of green in terms of our new business productivity. The industrial sector continues its recent modest improvement in new business. However, EPCs as a whole have improved but haven't nearly recovered to pre-pandemic levels. This was largely due to the EPC's business in the resource sector rather than industrial. The commercial facilities sector continues to surprise me with its directional resilience. In our mainstay sector, public works and utilities, new business continues its sustained dependability, led by civil engineering in the U.S. The resources sector continues to lead as to relative new business strength sequentially, with mining, other environmental modeling, and an offshore engineering increasingly for wind power. All in all, I think we are seeing a pleasingly sustainable balance of new business across all infrastructure sectors. Let’s now move on to review tone of new business and ARR growth by account segment and commercial model. Starting with the SMB segment. Among our 2020s growth initiatives, virtuosity has already propelled our new business productivity in SMB to now be comparable proportionately to our enterprise comfort zone, and is still literally taking off. Again this quarter, we sold over 600 new logos, which continues to amaze me, contributing again 3% within our business performance ARR growth. Most of our new business opportunity is in accretion in our existing accounts, where our net retention rate is now 110%. Our most productive source of accretion by far continues to be our E365 consumption-based commercial model, which again, in Q3 2022 contributed the majority of our ARR growth and to which we again upgraded dozens of enterprise accounts by invitation upon their annual renewals. The majority of E365 ARR growth comes from consumption increases, including application mix accretion to the use of more valuable products. Within E365, we appropriately share the consumption risk with our E365 accounts. It is to our advantage that these accounts are prioritizing going digital more than ever before. Last month, I attended the annual CEO conference organized by AEC Advisors, which literally brings together the top executives of the firms who do the vast majority of infrastructure engineering, at least in the Western world. As the only sponsor, Bentley Systems helped again this year in the preparation of the second annual going digital survey of these CEOs. I will now briefly go through AEC Advisor's report of the results to share these firms' perspective ongoing digital, establishing the potential for our E365 success. Infrastructure engineering CEOs ranked priorities for going digital show that it's beneficial for us, as winning more business and increasing capacity are now more important to the CEOs than merely reducing costs. High priority is also assigned to quality improvement, new business models, and automation, which only going digital can accomplish. The conservatism of infrastructure owner-operators is reflected in this breakdown by the CEOs of the deliverables their clients prioritize today. Going digital helps generate more value. Note how much change is finally expected by the CEOs concerning their clients' priorities within three years. Going digital is a relatively urgent necessity for their firms to remain competitive. Here are the most common digital investments underway in their firms by the CEOs, including a comparison to last year's survey. I highlight the greater emphasis over just the past year on investments in drone surveying capabilities and data sets to train machine learning for proprietary analytics. These active investments bode well for us. Regarding the theoretical ROI of going digital to even greater extremes, it's interesting that only 38% of the CEOs say they would not invest in a putative digital AEC disruptor. The most common digital offerings that the CEOs consider their firms already can offer, although I find this assessment a bit optimistic. Significant increases were seen last year in offerings that our iTwin platform cloud services can better expedite and institutionalize, helping these engineering firms evolve towards becoming digital integrators for owner-operators. AEC CEOs’ consensus on the proportion of their firm's market value attributable to their success in going digital is 10% so far, 20% in three years, 36% in 10 years, and in the next generation, a majority of their firm’s market value. This range of views from the CEO's office in a typical E365 account tolerably corresponds to Bentley Systems' own priorities and advancements, but their firms tend to be managed at the next level by fairly staunch adherence to the status quo, which has made going digital more deliberate than urgent. That’s a challenge for our enterprise success teams, led by our Chief Success Officer, Katriona Lord-Levins. Introducing new digital workflows within E365 accounts, we need to operate at a strategic level to respond to and help toward these C-suite aspirations. At the same time, we need to operationalize and organize our success to communicate the potential down the ranks and steadily advance in practical steps with palpable benefits that pay off each quarter. Nicholas, after covering your operational perspectives on the tone of business across regions and brands, would you please introduce Kat to tell us what is demonstrably working and why and how ideally in ways we can measure and institutionalize for E365 success?

Thank you, Greg. Let me provide an operational perspective and add some color commentary, starting with regions. You already mentioned the most notable development in Q3, the clear acceleration of our growth in North America. We tend not to talk about North America as it has become as reliable as it is large. It represents about half of our business and half of our new business, so its direction correlates with Bentley overall. In Q3, the region achieved strong performance across all sectors, in particular, those that are poised to benefit from incremental IIJA funding. Our accounts are busier than ever. They are constrained only by the available talent that they have. The word balanced that Greg used to describe performance across sectors applies across regions as well. In every region, market conditions remain positive for infrastructure engineering software. India, Southeast Asia, and the Middle East continue to stand out. Europe is trending favorably overall. Growth picked up in Northern Europe and remained steady in Central Europe, while Southern Europe lagged this quarter. In China, lockdown restrictions against COVID continued to weigh on the economy. President Xi Jinping called for an all-out effort to boost infrastructure back in July, and we expect funds to be released following the Communist Party Congress in October. For all other regions, Q3 was business as usual. In Q3, we announced a strategic alliance with Fukui, a leader in civil engineering software in Japan. Civil infrastructure projects are substantial and critical in Japan, given the terrain and seismic risk. The Japanese government's eye construction mandate is to accelerate going digital in infrastructure engineering and project delivery. The unique opportunity is a combination of global software with domestic leadership for the needed localization and underground distribution. Fukui has adopted open roads for Japanese requirements following the same playbook we used successfully in China. Fukui will leverage our iTwin platform to offer new digital twin solutions in Japan as another strong example of our ecosystem approach to iTwin. Switching to products, Open Roads and other civil engineering products performed very well in Q3 in North America and India, in particular. Our growth remains strong with our structural analysis products in particular, STAAD and SACS in energy production, including offshore wind platforms, and PLS and SPIDA for energy transmission and distribution. Our growth continued to accelerate with open flows for the water infrastructure. When I joined Bentley more than two years ago, I was impressed by the breadth and depth of infrastructure engineering expertise in the company across engineering disciplines, including civil, structural, and geotechnical. Greg likes to call these colleagues our success force, and they're indeed instrumental to the success of our users. However, what we were lacking was the science of success management, a function which is now well established in cloud companies. That science and experience is what we brought into the company by welcoming Kat Lord-Levins as our Chief Success Officer. Kat, could you please take a few minutes to describe how we are ensuring the success of our users, especially with the E365 program, which is becoming such an important part of their business and ours?

Thank you, Nicholas, and thank you all for your time. I joined Bentley a little over two years ago, and as Nicholas said, Bentley long believed in the importance of putting customers at the center of the company. To be frank, it is one of the reasons that I joined Bentley. The leadership team had ambitions to do even more, and this was the inception of this iteration of the success force. A use of success organizations made up of a team that is more than 670 industry and product subject matter experts, as you just heard from Nicholas. People who came from within the industry, who are the boots on the ground, who understand our users, and understand the industry. Their very purpose is to have a relentless focus on creating loyal users by helping them realize their business goals. We're very proud of this team. They understand how to keep the users front and center from our voice of the customer teams who have many touchpoints along the user engagement corridor, listening to our accounts to our support people who respond to the issues impacting our users in a timely manner, all the way through to the consultants and success managers who walk alongside our accounts, understanding the problems they face and representing these concerns back in Bentley’s halls with our product leaders, giving our users a unique seat at the table. As Greg explained, our E365 program is an increasingly important part of our business. In building out the E365 program for enterprise accounts, we created a tailored program that gives them easy access to the software they need when they need us, with transparency, reporting, and insights into their engagements. A plan that delivers real-time help to get users up and running fast, helping them transform to the new ways of doing business and helping their teams embrace new technology. Our engagements start with a joint success plan based on the business problems that our accounts are looking to solve, leveraging the great values of our E365 program, our blueprints. Accounts in our E365 program had a defined number of credits to spend on blueprints. Blueprints are targeted engagements designed to accelerate the business outcomes of our accounts, helping them tackle specific business problems and transforming their business practices. Blueprints have been well received as they navigate change. When we talk about proven, 50% of blueprints have been executed at least 5 times by our enterprise accounts, all with proven outcomes, which we validate through our exit surveys. Our library of blueprints is designed to be the rinse and repeat, leveraging lessons learned every time, lessons we pass on to our accounts. We track progress with our accounts through quarterly business reviews, engaging with leadership teams to determine how well we are jointly meeting our goals. The program is working as designed; it’s helping our accounts transition, grow, and win more business. Overall, we're seeing the results of our user success programs for our accounts translating into increased projects, revenues, and efficiencies. For Bentley, through our relentless focus with those accounts and users, we're getting great insights, feedback, and, of course, higher consumption and usage. E365 is a program that works, the success force engagement works, and it works because great service matters. Great service delivers for our accounts, our users, and for ourselves. Thank you.

Thank you, Nicholas and Kat. Along with Chief Marketing Officer, Chris Bradshaw, they are top-level members of our operating counsel, which Nicholas leads, who have joined Bentley Systems during and since our IPO, with public company experience. To me, our most important corporate development during Q3 of 2022 was Mike Campbell joining us as Chief Product Officer, to succeed Nicholas in that role. Mike has had a significant impact throughout his 27-year career at our peer, PTC, transitioning from managing PTC's mainstream products to spearheading its cloud services from startup and acquisitions, just as we will be asking and helping many of our developers and product managers to do. Of particular interest to investors, as a proxy for the pace of adoption of digital twins and infrastructure engineering, we report annually on the proportion of going digital award finalists, of which there are 36 presenting here next week, selected by independent juries in 12 categories, who credit digital twin advancements in their project playbooks. In each case of context capture for reality modeling, generally from drone video, and SYNCHRO 4D construction modeling, there is steady progress but still mostly upside in the digital twin potential, even among these best projects. You will have the chance to meet not only Mike Campbell but also these finalists if you can make it to London next Tuesday, November 15. Our keynote sessions will be live-streamed for all, but investors and analysts are invited to attend in person for a concierge experience of the event and for an interactive lunch with many of our management and Board members. Our colleague, Simon Horsley, who retired after more than 25 years at BSY most recently as our U.K. regional executive and who now helps part-time with Investor Relations in Europe will be your host. I look forward to seeing many of you there. I will conclude my report of corporate developments with a non-development on the corporate front regarding insider ownership. Our S1 prospectus back in 2020 contained a table detailing the Bentley family majority economic ownership at the time. I think the long-term orientation assured by this economic alignment between ownership and management is to the advantage of all of us as shareholders. However, I have heard recently from investors new to BSY that their impression, based on this Bloomberg page, is that our insider holdings are only on the order of the 22% shown. While the brothers do own only 22% personally, as a result of years of stake planning, our immediate families own a further 37% for a total Bentley family economic ownership interest of 59% presently. That consists of a similar number of shares as in the S1. So it's a lower ownership percentage, mainly because the company has issued new primary shares in our capital market offerings and acquisitions. This is not to say that family members won't go about some diversification, but that has been relatively immaterial. We will further explain ongoing beneficial ownership in our next proxy statement to be updated regularly. I will now hand over to David Hollister to cover the quarter's Bentley investment developments. David will also, as usual, introduce Werner to review our Q3 numbers. Then, after Werner, I will be back for your questions. Thanks.

Thank you, Greg. I'll first give a rundown on iTwin Ventures activities and developments. Then I'll update on the performance and opportunities in our acceleration group, particularly focusing on our grid integration solutions. Finally, I will close out with a few comments on acquisition activities. We're nearing the 2-year mark since launching our iTwin Ventures corporate venture capital fund, which we formed to stimulate entrepreneurialism in developing digital twin applications, including those leveraging our iTwin platform capabilities. In addition to investing in more traditional early and growth stage businesses, an element of our charter is to find and fund very early-stage ventures, even seed and pre-seed businesses where we can closely influence technology platform decisions and comprehensively introduce iTwin technologies. Building on the success of our initial ecosystem sponsorship program, we are now introducing our iTwin activate program. With the iTwin activate program, we recruit and sponsor a group of early-stage businesses into a cohort and infuse intensive Bentley expertise and resources, along with funding through safe notes upon reaching development milestones towards solutions addressing significant infrastructure engineering challenges. Our first cohort consists of transformative startup organizations focused on addressing utility grid issues, including remote capture and modeling of physical grid assets and analytics for planning and interconnection of distributed energy resources and electric vehicle charging stations. The expected outcome is a more integrated, timely, and relevant solution to engineering challenges, endorsed by Bentley Systems, leveraging Bentley Solutions and iTwin platform technologies, as well as go-to-market synergies. We will discuss the iTwin activated program further next week at our Year-in-Infrastructure conference. We're excited about this program and foresee numerous opportunities to run cohorts in areas like infrastructure IoT, transportation, mobility, and mining. Since I last presented our iTwin Ventures portfolio, we've added additional portfolio investments including Teralytics, resulting from our Streetlytics traffic simulation data business, as well as a new portfolio investee, Overstory, which enhances infrastructure operations through AI and machine learning applied to satellite imagery for real-time vegetation encroachment management. Our BSY investments team remains focused on acquisitions, with an emphasis on incubation of new opportunities, exemplified by our joint venture strategies in China. Our first JV will launch the iLink collaboration solution at the end of this year, and its revenues and our economics will begin accumulating starting in early 2023. Additionally, we expect to formalize our next China joint venture focused on engineering applications by the end of this year, which I plan to discuss at our next meeting. Lastly, I want to comment on the performance and opportunities in our grid integration group, which notably includes our recent acquisitions of Power Line Systems and SPIDA. Performance continues to exceed our expectations, and I reaffirm that to be the case thus far. Short of specific guidance, which we provide only once a year, I offer an anecdotal outlook indicating no change to our grid solutions trajectory and performance, largely supported by current strength, momentum, consensus mandates for grid hardening, expansion, energy security and transition, and the associated public funding, even with delays in permitting reform. Regarding acquisitions, while the Power Line Systems acquisition is complete, the closure rate on programmatic acquisitions this year has been slower than usual. The pipeline is there, and we are actively pursuing various opportunities. Our programmatic acquisition appetite and strategy remain unchanged, but our discipline amidst the current macroeconomic climate has tempered velocity, even though we've worked diligently on comprehensive integrations of a large number of programmatic acquisitions over the last two years. We have delivered everything we expected and more from our Seequent and Power Line Systems platform acquisitions. This brief respite in closed programmatic acquisitions allows us to strategically approach our leverage, which isn’t necessarily a disadvantage. I know Werner will elaborate on liquidity and leverage when he discusses our financial performance, so I will now hand it over to him.

Thank you, David. We are pleased to report that our operating performance continues to reliably progress toward our full-year financial outlook, subject to foreign currency impacts from the strengthening U.S. dollar, which we discussed and quantified last quarter. Total revenues for Q3 were $268 million, growing 7% year-over-year or 15% on a constant currency basis. On a constant currency basis, Q3 revenues grew 12% in the Americas, 14% in EMEA, and 23% in APAC. Year-to-date total revenues grew 17% or 23% on a constant currency basis. Almost all of our revenue growth comes from subscriptions, representing 88% of total revenues during Q3 and growing approximately 18% year-over-year on a constant currency basis. This growth is supported by our business performance, which Greg and Nicholas described as balanced across sectors and regions, as well as our platform acquisition of Power Line Systems in January 2022. Our year-to-date constant currency subscription revenue growth of approximately 27% reflects the incremental impact from our platform acquisition of Seequent in June 2021, and the growth of our E365 program, especially consumption growth within our E365 accounts remains a solid contributor to our business performance. Regarding perpetual licenses and services revenues, there has been no material change in absolute amounts for previously discussed trends, which are reflective of our focus on recurring subscription revenues. I'll next cover our other constant currency metrics. Our account retention rate is rounding up to 99%, while our constant currency recurring revenues net retention rate, a key measure of our success in growing recurring revenues within existing accounts, increased to 110%, led by continued accretion within our E365 consumption-based commercial model. Our constant currency ARR growth rate remained at 14% year-over-year, combining 11.5% from business performance and 2.5% from the onboarding of PLS in Q1. Considering the factors related to our exit from Russia and associated contract cancellations in China, the stable year-over-year constant currency ARR growth from business performance at 11.5% reflects an uptick in tone of business fundamentals, giving us sufficient confidence above Q4 to maintain our full-year constant currency ARR growth outlook. In constant currency, our business remains robust, even net of exiting Russia. Moving on to actual currencies, our last 12 months recurring revenues at actual currencies increased by 20% year-over-year, representing 88% of total revenues. Our platform acquisitions of Seequent and Power Line Systems contributed about 14 percentage points of this improvement. The continuing strengthening of the U.S. dollar resulted in a significant year-over-year currency headwind, reducing GAAP revenues at actual currencies. FX had reduced our GAAP revenues for the quarter by approximately $15 million relative to the foreign exchange rates assumed in our 2022 annual financial outlook, indicating that if current rates persist, our full-year GAAP revenues will be negatively affected by around $40 million. GAAP operating income was $55.5 million for Q3 and $167.9 million for year-to-date 2022. The comparative periods reflect an approximately $91 million one-time accounting charge relating to the restructuring of a portion of our nonqualified deferred compensation plan. Our GAAP operating results reflect charges for acquisition-related costs, notably for PLS in the first half of 2022 and for Seequent in the first half of 2021. Incremental amortization from purchase intangibles from these acquisitions and stock-based compensation impacted the numbers. Our adjusted EBITDA grew approximately 6% over Q3 of 2021, and our year-to-date adjusted EBITDA of $273.9 million is an improvement of approximately 16%. Our year-to-date adjusted EBITDA margin is 33.7%, and we remain on track towards our 33% adjusted EBITDA margin target for 2022. While adjusted EBITDA in absolute terms is impacted by currency movements, the FX impact on our margin target remains significantly mitigated given our natural hedge. This has become more effective with the inclusion of revenues mostly denominated in U.S. dollars. As for liquidity, our third quarter GAAP operating cash flow improved 19% year-over-year with a year-to-date improvement of 14.8% compared to 2021. Our year-to-date operating cash flow of $238 million represents a cash conversion ratio from adjusted EBITDA of 87%, even after the payment of acquisition-related expenses totaling $13 million. Our last 12 months operating cash flow of $319 million results in a cash conversion ratio of 88% after accounting for the acquisition-related expenses of $14 million. We spent approximately $42 million on share repurchases associated with stock-based compensation through the first three quarters of 2022, offsetting dilution from compensation. We significantly reduced such repurchases beginning in Q2, and announced a stock repurchase program which permits flexible reallocation of cash generation between programmatic acquisitions, deleveraging, and stock repurchases. We repurchased $28 million of our stock under this program, with $15 million in Q3. As of the end of September, our net debt senior leverage was 1.3x, down from 1.6x at the end of December last year. This represents excellent performance on a pro forma basis to reflect the financing of the acquisition of PLS. Approximately 80% of our debt is protected from rising interest rates with a low fixed coupon interest on our convertible notes, and our $200 million interest rate swap extends to expire in 2030. I now want to remind you of upcoming investor conferences where members of the management team will present: the JPMorgan Digital Twin and industrial design software, the Nasdaq International Investor Conference, and the Berenberg European Conference, and then we will return to your questions.

We'll start with Matthew Broome from Mizuho. Matthew?

So you provided the year-over-year constant currency growth rate for ARR. But what was the incremental FX headwind to ARR during the quarter? In other words, it would be useful to know how much ARR increased versus the second quarter on a net basis when excluding the incremental impact from FX changes over the last 3 months?

Werner, I’m going to let you take that one. However, I believe that it’s too complex to do a new comparison of actual versus constant currency for ARR every quarter. So what we have calculated is the year-to-date figures in constant currencies. Can you take it from here, Werner?

I think you're right. So the actual currency ARR can be followed in the presentation and the queue, but the FX headwind versus our constant currency ARR, we actually did not calculate that way.

Okay. Yes. Given the current extreme foreign exchange movements, it would be helpful for investors if you could calculate that. My follow-up question is about linearity during the quarter, regarding your observations on pipeline growth, fundamental demand, and what you're seeing in October in terms of ongoing momentum.

Well, I will say that our quota carriers are enthusiastic about the fourth quarter and the year as a whole. They say that conditions are as good as anyone has seen. It's hard to imagine that changing during the balance of the year. You might then ask why don’t you narrow your range of outcomes, and I must remind you that China is the exception to that. We are enthusiastic about China; there are many reasons to be so, including our quota carriers there. The year so far has been spotty in China, beginning with the geopolitical problems in Q1. Since then, it’s more to do, we think, with pandemic lockdowns, and we just don’t know whether the fourth quarter will bring a return to the usual strong performance in China that has characterized every other year. Perhaps it will be even better, due to government commitments to infrastructure that can now start to flow quickly. However, geopolitical headaches that haven’t gotten better fundamentally still loom, even though we haven’t felt their effects this past couple of quarters as we did in Q1. So, that’s on our minds as we approach the fourth quarter.

Next, we'll go to Joe Vruwink from Baird.

Great. Hi, everyone. I wanted to go back, Greg, to your comment about new business accelerating noticeably in the states. When you think about your business over time, does this tend to serve as a leading indicator for how renewals end up going? And just on the renewal topic, since, as you said, Q4 is the important period, what do you think here regarding renewals is when a lot of your customers end up making upsized commitments with you. If you're seeing it in new business generation already, does that suggest positive implications for how renewals are going to go?

The business of infrastructure engineering underlies all of those indicators that you mentioned. I think we're just at the beginning of that; you saw that's the belief of the engineering firms in the U.S. I would point out that the renewal propensity in Q4 is not as relatively important for us as once it was. It still is, by far, the most significant quarter for renewals, but E365, as you see, has now grown to nearly one-third of our subscription book. In effect, there is volatility each quarter in the usage within E365, but that's been trending in the right direction as well.

Next, we'll go to Matt Hedberg from RBC.

Greg, I wanted to ask you, it's great to hear the continued success of Virtuosity; the 600 new logos were impressive. Can you provide a bit more detail thinking longer term about this new growth engine into really an untapped market? How material can this be for that long-term ARR growth algorithm?

I don't think we’re at our share yet. Based on an analysis with Cambashi, more than 40% of infrastructure engineers work in these smaller firms. We are on a path to make that our share of new business and ARR over the years to come; it's certainly worth the major investment we’re making now in what we call our digital experience platform, which represents our primary discretionary investment. But it may take us years ahead; it will be comparable to how long it takes for us to reach everyone with E365 among the enterprise accounts before we achieve substantial growth in the SMB market.

Got it. And then I don't know if Nicholas is on. I think he mentioned he was talking about the global demand environment, but I wanted to double-click a little bit more on Europe. I think your results were impressive sort of globally, but could you provide a little more color on how various regions of Europe are doing? How they're holding up and just how you feel going into the last three months of the year?

Yes, I’m stepping in for Nicholas as he’s occupied with our Year-in-Infrastructure preparations for next week. We’ve closely monitored Europe. In Q1, it was primarily Central Europe lagging; in Q2, it was Northern Europe, particularly in the U.K., which recovered well. In Q3, Southern Europe lagged; they are growing, but not as much as last year, which was strong. Thus, it’s clear we need to pay more attention to Europe. However, North America has performed better, with especially strong performance from India; we rarely see such growth in new business there. This can be attributed to a robust domestic infrastructure investment program in India. More work is also shifting to global design centers in India. North America has a slight edge overall, and Europe is a bit behind, but still showing signs of improvement.

Next, we'll go to Kristen Owen from Oppenheimer. Kristen?

You talked about this divergence between what we’re seeing in the overall macro indicators and what your customers are seeing in terms of their backlog. In the context of your E365 onboarding process, given that backlog and that disconnect, is there an opportunity for you to accelerate invitations to E365? What would need to be in place to move faster in that area?

Kristen, we're onboarding more accounts into E365 each quarter. It doesn't reflect increased ARR dollars because we started with our largest accounts and are currently moving to accounts in the middle of the field among the enterprise accounts. However, there is a natural constraint related to the quantity and quality of people, Kat discussed, who are handling the onboarding and quarterly business reviews. We have 500 blueprints that we manage, and we don’t want to dilute the quality of service for the accounts that are anticipating ongoing success and growth. Despite this, our original ELS program is nearly finalized, and invitations are being well received by the accounts as we continue working down our list for E365.

I wanted to further explore trends in resources and request some additional color there. Are you seeing growth in resources particularly in one area? What’s driving the strength in that business?

Mining constitutes a significant chunk of that, and mining is trending solidly upward. While this could turn cyclical, we have a plethora of electrification and mineral requirements before any downturn. Additionally, upstream oil and gas is seeing new pressures, along with renewables which often includes both floating and fixed wind platforms, where we play a critical role. The resources sector is setting a new standard, and we expect it to remain strong.

Next, we'll go to Gal Munda from Wolfe.

I want to follow up on E365. Greg, what is the potential when you look at our split today between our U.S. business and other regions? Specifically, could you elaborate on how you are introducing more of a consumption model into DOT structures? It’s not limited to just commercial entities.

We do appreciate sharing this consumption risk with our accounts. For government accounts, we’ve recently created a variation of E365, which we internally call EPS 365 for public services. The challenge is that government accounts have difficulty adjusting their purchase orders during the year, but they accept that we all have the right incentives to increase usage since they want to utilize more and compensate accordingly. So, this creates a situation where we’ve established a framework for tiered growth based on account activity. Furthermore, this quarter also marks our introduction of E365 in China, where we also apply similar adaptations to our commercial models. This supports a flexible approach ensuring consumption-based business practices for each type of account.

That’s perfect. I want to focus on the resources business as well. Knowing you had a headwind from EPCs when the company went public, how are you balancing new versus old business, especially with anticipated tailwinds from oil prices and the CapEx expected in the next couple of years?

In this mix, do not neglect PLS and its vital role in energy transmission and distribution, the bottleneck for many other improvements. Investments in renewable sources do not benefit much without reliable energy capacity, which is why David Hollister emphasized that. But we note that the tailwinds in the sectors we've been in are complemented by our strategic platform acquisitions in these fast-growing sectors. David, would you like to add anything regarding PLS?

No, nothing more to add on that.

We'll go to Andrew from Berenberg. Andrew?

First, Greg, I wanted to talk about your earlier comments about being positively surprised by the strength in the commercial facilities segment as well as the SMB aspect of the business. Were you surprised due to the negative macro environment in those segments, or was it more that you executed better than originally planned internally?

I was surprised for two reasons: Firstly, the commercial facilities sector continues to grow in new business, despite my beliefs that there was an oversupply of commercial spaces concerning utilization. Each quarter, I believe this, and find myself proven wrong. While it’s not rapid growth, there continues to be new business in this segment. In terms of SMB, I remain astonished by the 600 new logos we sourced in this quarter because I would have assumed there wouldn't be as many left to expand into at this stage. This suggests we do not fully understand the SMB space as well as we could, so we will maintain our focus there.

Thanks, and with that, apologies, we're now at time. So we'll end the call here. Thanks for your time, everybody, and we'll see you next quarter.