Bentley Systems Inc Q3 FY2023 Earnings Call

Good morning and thank you for joining Bentley Systems' Q3 2023 Operating Results. I'm Eric Boyer, Bentley's Investor Relations Officer. On the webcast today, we have Bentley Systems' Chief Executive Officer, Greg Bentley; Chief Operating Officer, Nicholas Cummins; and Chief Financial Officer, Werner Andre. This webcast includes forward-looking statements made as of November 7, 2023, regarding the future results of operations and financial position, business strategy and plans and objectives for the future operations of Bentley Systems, Incorporated. All such statements made in or contained during this webcast other than statements of historical fact are forward-looking statements. This webcast will be available for replay on Bentley Systems Investor Relations website at investors.bentley.com on November 8, 2023. After our presentation, we'll conclude with Q&A. And with that, let me introduce the CEO of Bentley Systems, Greg Bentley.

Good morning, and of course, thanks to each of you for your interest and investment in BSY. In our agenda, I start by interpreting directions within our quarterly operating results. Each quarter, a natural KPI headline is our ARR growth year-over-year business performance. While in '23 Q3, that nominally ticked down to the 12.5% midpoint of our financial outlook for the year, this nonetheless, represents continuity in our strong growth momentum given puts and takes specific to this quarter, which I will explain, and we are likewise steadily tracking to our planned annual gains in operating margins and cash flows. Leading the way, even among more broadly strong market conditions this quarter is the public works/utilities infrastructure sector in the U.S. With almost half of our ARR here, this mainstay in effect serves as the governor on our underlying flywheel. U.S. public works/utilities continues to benefit from the fundamental expansion emerging finally beyond transportation both infrastructure investment and Jobs Act funding. This quarter's ACEC survey of U.S. engineering firms across all sectors reports a medium current backlog of 11 months, reflecting an engineering resource capacity gap. Even more permanent for digital workflow investments, expectations for a year from now, across economic sentiment anticipate an even stronger market for engineering firms throughout next year that will result in yet higher backlog. When ACEC asked this time about the lack of qualified workers, you see there was strong agreement that an engineering resource capacity gap is already constraining engineering firms from growing to meet this backlog of work. Another indicator of this engineering resource capacity gap is that the average duration that our applications are used in a workday has continually increased now by 23 minutes per day since before the pandemic. We will shortly come back to count these workdays. As Nicolas will report firsthand, the capacity gap is motivating infrastructure engineering organizations everywhere to more than ever prioritize going digital. And with the resulting demand broadly pervasive across infrastructure sectors and global regions, our net revenue retention, the trailing indicator for growth in existing accounts remains at its sustained high level. So then what's up or rather down with year-over-year ARR growth as of this most recent quarter end? Well, a plurality of ARR is now under our E365 program for our largest accounts. And in Q3 '23, this E365 proportion, of course, continued to grow, both through accretion within existing E365 accounts and by accounts spending over $100,000 per year in ARR, hence, we consider to be E365 prospects rather than SMB, upgrading to E365 from our select subscription program. Under E365, we charge accounts for our ProjectWise and AssetWise enterprise collaboration systems based on the total number of users or assets, respectively, in the quarter. But the majority of our E365 charges are for daily consumption of our applications, which consumption occurs substantially on the weekday workdays during a quarter. A year ago, '22 Q3 had a calendar with 66 weekdays, but '23 Q3's calendar ended with a weekend day and began with two weekend days that were followed by effectively two holidays in the U.S. rather than one holiday last year. Now even though half of our business is in the U.S., holidays aren't universal. So even setting aside the comparative effect of that four-day weekend, if we just count all weekdays as workdays, '23 Q3's E365 consumption year-over-year comparison suffers as a result of having had one less weekday workday than 2022 Q3. Moreover, because we annualize E365 ARR by multiplying the trailing quarters' consumption by 4, '23 Q3's year-over-year ARR growth was negatively impacted by four weekday workdays of E365 consumption. But as you can also see, this phenomenon will normalize here during '23 Q4 as both years' fourth quarters and the full year have the same weekday count. Now our overall ARR growth, of course, comes not only from net retention and accretion for our existing accounts, increasingly through E365 as we have been discussing, but also from new logos, which for '23 Q3, again accounted for 3% of our ARR growth. New logos, of course, tend to start as SMB. We have become confident in being able to grow our SMB business, at least as fast as we grow E365 for our enterprise accounts. And in Q3, SMB growth was faster. By virtue of our own investments in going digital, our inside sales group focused on SMB is continually getting better at digital engagement. The net quarterly ARR additions from our Virtuoso subscriptions continue to compound. In '23 Q3, Virtuoso subscriptions again attracted over 700 further new logos. But in addition to subscriptions, our SMB sales group also offers perpetual licenses, largely for differentiation and appealing to prospects who don't have that choice from our principal competitor, this strategy is succeeding. During Q3, we added almost 300 incremental new logos through perpetual license sales. And as you see, overall, we saw in '23 Q3 an unprecedented year-over-year upsurge in purchasers who chose perpetual licenses rather than subscriptions. We have generally expected this in China, here broken out as we pivot there intentionally towards localization. As a result, while our overall new business and revenue in China did increase sequentially and year-over-year, ARR there continued its expected decline. In fact, the 97% of our business, excluding China, did maintain its highest level of year-over-year ARR growth. To summarize the business directions of '23 Q3, in light of these puts and takes, I was pleased with our strong year-over-year ARR growth rate notwithstanding its slight decline compared to last quarter in light of the combination of the E365 consumption workday anomaly and the observed transition to license purchases. For significant corporate development, I start with our annual Year in Infrastructure conference where I titled my keynote presentation, 'Going Digital Towards Infrastructure Intelligence'. We gathered physically in Singapore last month with our Going Digital Awards competition finalists chosen by juries of independent professionals, and we had there over 120 members of the world's infrastructure media, and we live streamed from there. I think Year in Infrastructure is the best available means to understand the fundamentals of our business on the ground. But the time zone made even virtual attendance difficult. So, Investor Relations Officer, Eric Boyer, attended and has compiled a video of the two edited keynotes and other conference highlights which is now available for you on our Investor Relations website. The global nature of the Year in Infrastructure was signified by the provenance of the 36 finalists chosen from over 300 nominees in 51 countries. Once again, this year, the region with the most finalists was Asia ex-China, with a prolific concentration of digital advancements. I've referenced many examples from our host country, Singapore, leading the way to Infrastructure Intelligence. In a world with a widening infrastructure engineering resource capacity gap, to me, the most significant headline comes from our having asked each nominee this year for the first time to quantify their project engineering savings from going digital. For those finalists where this could be calculated as a percentage, the median was 18%. This underscores the importance and potential of our BSY work and the Year in Infrastructure conference to help promulgate these digital workflow advancements, which can make a difference of such magnitude, as an indication of good traction from such efforts toward making all projects as good as the best projects. While in the past, we have reported on Digital Twin progress among the finalists only, I find it encouraging that this year, among all the 300-plus nominated projects, fully 28% credit reality modeling, our iTwin capture software for creating engineering-grade 3D models generally from drone surveying as the context for Digital Twins. And likewise, our SYNCHRO for construction modeling is now credited by fully 17% of all 300-plus nominated projects. Given that virtually all design, modeling, and simulation is already performed in 3D, we believe that seamlessly incorporating 4D simulation inevitably underlies the future of construction while also delivering the Digital Twin building blocks for infrastructure intelligence during the lifecycle of resilient asset operations. And while it is encouraging that this year, 64% of finalists credit our iTwin platform for any or all of such Digital Twin advancements, I think it's even more significant for iTwin now to be credited by fully 35% of all 300-plus nominated projects. Indeed, the iTwin platform and schema commonality across our Bentley Infrastructure Cloud enable infrastructure engineering data to compound in value throughout project and asset life cycles. As to the extent of this potential value, we estimate that our ProjectWise users are currently accumulating over 100 million new unique digital components per month for their future benefit. While Nicholas will next talk about how generative AI will yet further compound the value for an account of their data in ProjectWise, for instance, through copilot training and reuse of their data across their new projects. At Year in Infrastructure, I highlighted several infrastructure intelligence strategies already being showcased by finalists there. In the forefront of compounding value from accumulating data is BP, subject of this press release last week. To our knowledge, BP's deployment of AssetWise lifecycle information management, now underway globally after its 2019 implementation in the North Sea, becomes the industrial infrastructure sector's only initiative to leverage the same cloud-based central information store across all projects and operations, where otherwise, the unfortunate norm is for separate enterprise systems to remain disconnected. BP's infrastructure engineering data can compound in value from projects through operations, with AssetWise reliability working to optimize inspections, minimize maintenance costs, increase availability, and to improve safety and risk management. At $106 billion of net infrastructure value, BP is number 33 among the just released 2023 Bentley Infrastructure 500 top owners rankings available at the link here. As I believe our greatest ongoing growth opportunities are in Digital Twin advancements for operations and maintenance, it is gratifying to report that our current revenue run rate from serving 359 of these 500 top owners increased by over 20% from the comparable revenue run rate for 2022. And while fully half of our revenue run rate is now from infrastructure owner-operators in general, our revenue run rate from just these 500 top owners, who like BP have the most, again, from compounding the value of their engineering data through infrastructure Digital Twins, now exceeds 20% of our overall total. Speaking of rankings, the annual ARC big tables for engineering design tools this year acknowledged BSY's number one leadership not only in these infrastructure subsectors which they track individually, but now also for owner-operators in total. To me, that means we are on the right track towards ROI from infrastructure intelligence. Finally, I am glad to report since last quarter, two programmatic acquisitions, while even more immaterial financially than most others, each of these is significant strategically. Our iTwin Ventures approach has adapted to view the changed venture capital valuation environment opportunistically. Rather than a typical VC multitude of small stakes, we are now open to outright acquisitions of earlier-stage companies that can become significant within our Digital Twin ecosystem. Blyncsy, our first acquisition in what I call asset analytics applies AI to crowdsource data to detect for roadway operators immediate maintenance conditions such as obstructions, quality of lane divider paint, and/or actual versus planned construction zones. We will have more to say next year about consolidating asset analytics opportunities to go beyond our primary current business model, which charges primarily per user, to incrementally monetize Digital Twin subscriptions per asset and for instance, per mile as does Blyncsy. Last quarter, I discussed this year's capital market-induced slowdown in exploration for new mines and its impact on Seequent. While this pause in new mines continued during '23 Q3, Seequent, which depends more on continuous operation and expansion of existing mines, is still growing faster than BSY as a whole, though less fast now than our other platform acquisition, Power Line Systems. A source of greater balance and resilience for Seequent is our comprehensive agenda to expand the role of subsurface modeling for civil and environmental infrastructure, which for Seequent is now growing as fast as their mining mainstay. To further this, we announced that Year in Infrastructure the pending acquisition of Flow State Solutions extending Seequent's market-leading geothermal comprehensiveness to the simulation of geothermal reservoirs, wellbores, and surface networks. Like Seequent itself, Flow State Solutions is based in New Zealand, where geothermal already accounts for almost 20% of power production. And now from these quarterly directions and developments, over to Nicholas, for a more complete operational perspective on '23 Q3.

Thank you, Greg. The engineer resource capacity gap is indeed top of mind. Two weeks ago, I attended a CEO Summit for top engineering firms organized by AEC advisers. There were two takeaways relevant for this conversation. First, firms recognize their role in solving the world's biggest problems. Infrastructure is key to support economic growth, ensure energy security, and address climate change. Second, firms cannot find enough engineers to do this important work, and they are looking for solutions. Software is how they will drive efficiency as one engineering firm CEO said during a panel conversation. This is a great summary of our current market conditions. Let's start with Infrastructure sectors. The trends remained broadly in line with Q2. ARR growth was once again led by public works and utilities. The sector continues to benefit from large infrastructure investments around the world, and we expect this to be the case for years to come. ARR growth and resources remain above company average. Seequent, with its core business in mining, performed as expected. As discussed last quarter, we see less funding available to finance new exploration projects. However, Seequent is used through the mining value chain and is well positioned to help mining companies be more efficient when under margin pressure. ARR growth in industrial softened somewhat, in particular with EPCs in India and Southeast Asia focused on energy projects after many quarters of rapid expansion. The commercial and facilities sector remained flat. Moving on to regions. Americas performed well once again led by North America with more federal money from IIJA being spent on a greater variety of infrastructure in the U.S. and given our strong momentum with the State Departments of Transportation. Our growth rate with DOTs has increased by 50% year-over-year. All the more impressive given that these departments increasingly outsource work to their ecosystem of engineering services firms. EMEA's growth continued to benefit from public funding for projects across transportation, water, and energy. Some of these projects were finalized at the Year in Infrastructure. We are also growing with engineering firms who are expanding their reach outside their home country due to the strong demand environment in the broader region. In Asia Pacific, the main growth drivers were Australia and India. In the region, transportation water continued to be strong in performance. China continued to weigh down broader ARR growth given the preference there for perpetual licenses. Returning to the Departments of Transportation in the U.S., we are partnering with the DOTs in new ways, both to help them secure funding and help them in going digital across their respective ecosystems. We are squarely in year two of the IIJA's implementation and new and increased funding streams are available for DOTs to take advantage of. For example, we helped 13 departments apply for federal advanced digital construction management systems grants, which can fund software purchases. We believe these efforts will help strengthen our momentum next year as these grants get awarded. Despite the new funding, the DOTs are also impacted by engineering resource capacity constraints, which create an exciting opportunity for us to help them drive efficiency. For example, we partnered with AASHTO, a nonprofit organization of all U.S. state DOTs to support digital delivery across their value chain, including streamlined design to construction processes. Overall, we are excited about the expanding opportunities with the DOTs and our increasing role as a trusted partner. Regarding products, the main growth drivers are also in line with the previous quarter. We had noticeable growth with our civil engineering applications, OpenRoads and OpenBridge. Our structural engineering application STAAD and SACS as well as PLS for electrical transmission structures, we've also seen continued success with our open flows water modeling application, which is becoming a go-to product for water infrastructure around the world. As Greg mentioned, 2023 was a groundbreaking year for Infrastructure Intelligence. We have been impressed by the progress made by infrastructure organizations in leveraging data to improve project delivery and asset performance, exemplified by the Going Digital Awards finalist. If data is the obvious foundation of infrastructure intelligence, digital wins the building blocks. Digital Twins are used to unlock engineering data from FARs so that it can be analyzed, reused across projects enriched with operational and enterprise data, and mobilized across the infrastructure lifecycle. Because of the power of Digital Twins, we are evolving our entire product portfolio to leverage iTwin or Digital Twin platform to accelerate infrastructure intelligence. At Year in Infrastructure last year, we launched Bentley Infrastructure Cloud, including ProjectWise, powered by iTwin. This year, we announced that we're bringing iTwin to Bentley open applications, starting with the next release of MicroStation, for systematic use of Digital Twins in the design phase of the infrastructure lifecycle. This will enable users to collaborate in real time, evaluate the impact of changes more seamlessly and significantly reduce rework in errors, resulting in better designs faster. When we talk about infrastructure intelligence, we, of course, think about the significant role that artificial intelligence can play in improving project delivery and asset performance. AI was an important topic at the infrastructure and it was top of mind for the jury firm CEOs I met two weeks ago. They seek opportunities to use AI to increase exponentially the efficiency and effectiveness of the engineers. As I mentioned last quarter, Bentley is not new to AI. We already use AI in our software for asset monitoring, and we see huge potential for generative AI during the design phase of the infrastructure lifecycle. We believe generative AI will empower, not replace, infrastructure engineers. Consider our own software engineers use GitHub Copilot, a generative AI tool to assist with development by generating routine or basic code, documentation, automated test cases, and more. We envision a comparable copilot for infrastructure engineers that can take on mundane and time-consuming tasks during the design process so that engineers can focus on higher-value activities. At Year in Infrastructure, we presented our approach to generative AI for infrastructure engineering beginning with an AI agent that assists engineers in further optimizing site layout by leveraging designs and data from their previous projects. We also showed how generative AI can be applied to minimize time spent on product documentation by automating drawing production with fit-for-purpose notations. Capabilities like this can improve engineers' productivity and their overall work experience, both being essential in light of the engineering resource capacity gap. Of course, to train generative AI models, you need data. And we have a responsibility to our users to be very explicit about our approach to their data. We presented our commitment to data stewardship at Year in Infrastructure. While we are committed to help our users derive even more value from the engineering data they secure in Bentley Infrastructure Cloud, including maximizing its potential for generative AI, we are also clear that they retain all access and control over it. Our users’ data is their data, always. They get to decide how to use it to train AI for their benefit. One last stop, for infrastructure engineering, proven by our software enduring experience, the results will be better, not weaker from accounts for use of their own product data rather than the least common denominator of unknown engineering data that will be aggregated. With that said, I will now hand over to Werner for details of our financial results.

Thank you, Nicholas. We are pleased with another strong quarter. Total revenues for the third quarter were $307 million, up 14% year-over-year or 11% in constant currency. Year-to-date, total revenues grew 13% on a reported and constant currency basis. Subscription revenues for the quarter grew 15% year-over-year or 12% in constant currency and represented 88% of our total revenues. Year-to-date, subscription revenues grew 14% on a reported and constant currency basis. The onboarding of Power Line Systems at the end of January 2022 accounts for approximately 0.5 percentage points of this year-to-date improvement. Our E365 and SMB initiatives continue to be solid contributors to our subscription revenue growth. Perpetual license revenues for the third quarter grew 26% or 23% in constant currency. Year-to-date, perpetual license revenues grew 6% on a reported and constant currency basis. Even though perpetual license sales make up only 4% of total revenues, and will certainly remain small relative to our recurring revenues, they are likely to become more significant to us as they did in '23 Q3. This is particularly true for SMB and that it served as a competitive differentiator, helping us to attract new logos and in China due to local preferences. Our professional services revenues remained essentially flat for the quarter. Year-to-date, services revenues grew 6% or 8% in constant currency and benefited from the acquisition of Vetasi, which we acquired within our Cohesive Digital Integrator Group in '22 Q4. Moving on to our recurring revenue performance. Our last 12 months recurring revenues increased by 13% year-over-year or by 14% in constant currency. The acquisition of Power Line Systems contributed about 1 percentage point. Our last 12 months constant currency account retention rate rounded down to 97% from 98% as a result of exiting Russia mid-2022. Our constant currency recurring revenues, net retention rate remained at 110%, led by continued accretion and within our E365 consumption-based commercial model. We ended Q3 with ARR of $1.125 million at quarter end spot rates. As discussed by Nicolas, our ARR growth trends by infrastructure sectors remained broadly in line with the previous quarter, led by public works and utilities, resources performed just above the company overall. Industrial growth softened somewhat, and commercial and facilities remain flat. Our E365 and SMB growth initiatives remain the key growth contributors. On a constant currency basis, our trailing 12-month ARPU rate was 12.5% year-over-year and 2.6% on a sequential quarterly basis. When compared to the third quarter last year, and when compared to historic seasonality, '23 Q3 was impacted by one less weekday. This negatively impacted the annualization of our consumption-based E365 revenues, which is based on the current quarter's consumption times four. As the fourth quarter and the full year 2022 and 2023 have the same number of weekdays, there will be no impact from this on our full year ARR growth. But this calendar anomaly has caused ‘23 Q3 ARR growth to be slightly lower in proportion to the full year when compared to our historic seasonality. The quarter was also impacted by continued headwinds in China and a greater preference there, but also in SMB elsewhere for perpetual licenses. As a reminder, Q4 remains for us the biggest contract renewal quarter of the year and thereby represents the quarter with our biggest ARR growth opportunity. Our GAAP operating income was $74 million for the third quarter and $193 million year-to-date. We have previously explained the impact on our GAAP operating results from amortization of purchased intangibles, deferred compensation plan liability revaluations, and acquisition expenses. Moving on to adjusted operating income with stock-based compensation expense, our primary profitability and margin performance measures starting this year. Adjusted operating income with stock-based compensation expense was $86 million for Q3, up $19 million or 29% year-over-year with a margin of 28.2%, up 330 basis points. Year-to-date, our adjusted operating income with stock-based compensation expense was $250 million, up $41 million or 19%, with a margin of 27.2%, up 140 basis points. Q3 was a strong margin quarter for us. In Q4, we expect to see relatively higher operating expenses compared to Q3, mainly caused by incremental promotional activities and IT system implementation costs associated with our ERP system. We remain on track to deliver on our full year margin outlook of approximately 26%. With respect to liquidity, our operating cash flow was $73 million for the quarter, and $330 million year-to-date, up $92 million or 38%. The year-to-date operating cash flows benefited from an increased focus on working capital management, as well as timing. Due to these factors, we expect this year's cash flow from operations to convert from adjusted EBITDA at the rate of 85% to 90%, up from our previous estimate of approximately 80%. As previously discussed, our business model produces reliable and efficient cash flows over a trailing 12-month period, but with some variability between quarters due to timing. Prospectively, we estimated our conversion rate of adjusted EBITDA to cash flow from operations will be approximately 80% over future trailing 12-month periods. Year-to-date through Q3, along with providing sufficiently for our growth initiatives, we paid $44 million in dividends. We spent about $58 million on share repurchases to offset dilution from stock-based compensation, and we repaid $196 million of bank debt. As of the end of Q3, our net senior debt leverage was 0.7x, and including our 2026 and 2027 convertible notes' full year step, our net debt leverage was 3.7x. We are very comfortable with our capital structure as it stands today. We continued our strong deleveraging trajectory this quarter, delevering 1.0x adjusted EBITDA since the beginning of the year. With no debt maturing over the next two years and our strong free cash flow generation profile, we expect to organically delever and to increase our balance sheet strength over this period all while maintaining our programmatic M&A cadence, our dividend, and share repurchases to offset dilution from stock-based compensation. And from a rates exposure perspective, approximately 90% of our debt is protected from rising interest rates for either very low fixed coupon interest on our convertible notes or our $200 million interest rate swap expiring in 2030. So, the key message is, we are very comfortable with our current leverage, maturity profile, and interest rate exposure. But of course, we continually evaluate ways to optimize as conditions change. Given our strong year-to-date and considerations for Q4, we are not changing our financial outlook, except we are increasing the range for this year's cash flow from operations, as mentioned before. With regards to foreign exchange rates, on a year-to-date basis, the U.S. dollar has weakened relative to the exchange rates assumed in our 2023 annual financial outlook, resulting in approximately $6 million of incremental revenues from currency. Based on the most recent USD strength, if end of October exchange rates would prevail throughout the remainder of the year, our Q4 GAAP revenues will be negatively impacted by approximately $1 million relative to the exchange rates assumed in our 2023 financial outlook. And with that, I think we are ready for Q&A. Over to Eric. Thank you.

Thanks, Werner. In order to get to everyone's questions today, we ask that you limit yourself to just one. Our first question comes from Matthew Hedberg from RBC.

Thanks for all the commentary on the call. I was just kind of curious, it sounds like a consistent outlook this year. I know there's a lot of investors that are kind of wondering about some of the major trends including IIJA. It's probably too early to kind of think about next year, but if you were kind of helping us with some of the major building blocks for growth next year. Is it consistent with kind of '23? Are there things that you're kind of particularly excited about maybe China joint venture is ramping? Just sort of any help you can kind of think about next year would be certainly helpful.

The fourth quarter will influence our outlook for next year, and we will provide our annual guidance after the fourth quarter. A significant portion of our annual recurring revenue renews during this quarter, and there are ongoing negotiations related to E365 that are consuming our current time. Overall, our business is relatively stable, and we have good visibility into our operations. The only exception might be new mining exploration, which is experiencing a downturn this year, though it constitutes a small part of our business. Looking ahead, we are excited about the ongoing expansion of the Infrastructure Investment and Jobs Act, which now includes water and grid funding. However, the need for permanent funding for grid improvements remains unmet, but we believe it will be addressed in the coming year. On the more complicated side, much of our new business in China occurs in the fourth quarter, and our joint ventures are slowly progressing. We are still seeing growth in recurring revenue in China, but there is a shift towards perpetual licenses. As we look to next year, we need to consider that not all new business will come from new subscriptions. Generally, the core aspects of our business do not change rapidly and are currently experiencing favorable momentum.

Next question comes from Joe Vruwink from Robert Baird.

Great. Can you hear me?

Yes.

Two related questions on ARR performance in the quarter. Do you have a sense of where ARR growth and net retention would be if you just applied this quarter's application usage rates across a normal amount of working days? And then part B of the question, I want to make sure I heard this right. So ARR growth outside of China remained at year-to-date highs. It sounds like industrial markets maybe softened relative to the trend. So is the correct interpretation that public works and the Americas actually improved a bit sequentially?

I believe that is the right interpretation. Regarding industrial, these are very large EPCs involved in major projects that are focused on production and are perhaps particularly affected by this calendar issue. To clarify, there isn't a straightforward calculation to address your questions. For the E365 project lines, which is our largest dollar program, usage days are not counted. Any usage in the quarter incurs a charge for the project's entire life; that's always been the case. Asset-wise, it's determined by asset count. Additionally, for the applications, there are numerous floors and caps in effect at any given time, and the calendar fluctuations can cause these caps and floors to be triggered dynamically. We also have contracts where the pricing is usage-based, which we implement for government contracts, among others. For all these reasons, the calculations are not as simple as one might think. However, we can say that if we hadn't had one fewer day than last year, if there hadn't been the usual mix with no spike in perpetual licenses, and if there hadn’t been any attrition in China, there wouldn't have been a reduction in our indicated ARR growth for the quarter.

Thanks, Greg. Next question comes from Kristen Owen from Oppenheimer.

I wanted to ask specifically about the BP announcement, the AssetWise project. How we should think about that as a blueprint for this migration or increased penetration with asset owners and the owner-operators versus sort of the CapEx cycle? Just help us unpack the remote asset moderate opportunity, recurring revenue sources, and the development of that type of agreement.

I think you had that exactly right. Imagine how important it is for BP in its history to get right, the access, the engineering information over the operations life cycle of assets. So very smart people and very smart data scientists made very good long-term decisions about their approach to this over time, and it really is unique that they have agreed on a system and a data model and a schema that they can use both during their CapEx, and they have a huge CapEx program and their operations. It really is unique to share that data model for engineering information and has enabled AssetWise to be extended to AssetWise reliability for, I would say, inspection and corrosion management and so forth. I think it's more important than anyone to BP. And they have, as you know, in industrial, we do not have the footprint we have elsewhere. So I think it's really important that BP is leading the way in what we call infrastructure intelligence using the engineering information for not only safety, but reliability, uptime, and so forth. It's a down-to-earth application of that that is now propounded throughout BP and really is a model. Generally, industrials that are ahead of public works and utilities, and I think this is a respective that you're seeing with the BP enhancement.

The next question comes from Jason Celino from KeyBanc.

Guys, can you hear me or same

Yes.

Yes. Perfect. One of your competitors has been pretty vocal about the studies and partnerships they've been doing with different DOTs. Greg or Nicholas, can you tell us about this partnership with AASHTO? I think as they say it, is there any revenue opportunity? Or is it more about influence?

AASHTO is a nonprofit organization working with all the DOTs in the U.S. The partnership we're doing with them goes beyond a study. It is about integrating our software with a software that they all actually call AASHTOWare, which is managed by Infotech. And in order to enable true digital delivery, meaning data flowing freely from one system to another, from AASHTOWare, from OpenRoads, from ProjectWise, from SYNCHRO, and from one phase of the infrastructure lifecycle to the next. From design to construction, which is usually exciting because we see that as a big growth opportunity for Bentley going forward. We are very strong when it comes to design, we're going into construction with the DOTs in particular, as they are embracing digital delivery across design and construction.

This will have a bearing on most projects.

Next question comes from Michael Funk from Bank of America.

I apologize for the earlier issue. Greg, you mentioned the IIJA and some of the funding starting to come through. Specifically, you talked about water grid funding, although permitting is still pending in that area. Can you help us quantify this in terms of the funds allocated for different projects and where you believe you have a strong position, particularly in those two areas? Also, could you elaborate on the potential uplift to ARR from these projects expected to come online in 2024 and 2025? Additionally, you discussed iTwins during the call. How much potential uplift to ARR do you think iTwins could generate in the next 12 months?

First, regarding the IIJA, the transportation funding has been slowing and will continue to flow for the next three to four years without an increase. Other programs are being established, although that process is still ongoing. For water infrastructure, progress has been mixed, with some efforts now underway, but they are dependent on receiving the necessary permits for new transmission capacity. This process has yet to unfold. In terms of estimating the grid opportunity, the International Energy Association published a report last quarter indicating that global spending on transmission and distribution must double over time to meet the electrification demands. While I don't want to imply that spending will necessarily double, it is expected to increase significantly, which highlights our potential in the grid sector, even though there are capacity constraints to consider. I believe we will continue to see growth in the right direction, as evidenced this quarter and year to date in North America. Now, let me turn it over to Nicholas for iTwin.

Yes, iTwin is our platform for Digital Twins, Infrastructure Digital Twins. And as a platform, it is leveraged more and more across our product portfolio. This relates to a more fundamental evolution going on, where we as an industry overall, if you want, we're going from file-based to data-centric workflows. The technology we're using to do this is Digital Twin. What it means is all of our products over time will adopt iTwin as a platform. Last year, we announced Bentley Infrastructure Cloud, which is a combination of ProjectWise, SYNCHRO, AssetWise to be powered by iTwin. And this year at YiI, we announced that our open applications, the first one being MicroStation. We're going to also leverage iTwin going forward. What I mean by this is iTwin is not a discrete part category. If you're trying to put an ARR number to it, it's actually our overall growth as a company, which will be based on iTwin as our entire product portfolio is more and more powered by iTwin.

Our next question comes from Matthew Broome from Mizuho.

All right, everyone. So Greg, you mentioned positive survey results. Could you maybe talk about how you found customer sentiment in recent months based on your conversations? What are their concerns on their main pain points?

Well, Nicholas has just been with the CEOs at the conference you described, I might ask him. He's had those first-hand meetings. In general, they are very excited and enticed by the possibilities of generative AI in helping to enable their work to get more efficient, but they're very aware that they have valuable data at stake there and they never failed to bring that up and it's appropriately so, I think. What we're saying is their data should benefit only then, but that will be sufficient and is what they really want. But Nicolas, over to you, perhaps it will help.

It very top of mind is on their side, how much demand there is for infrastructure? And how important is the role, by the way, in designing, building, delivering that infrastructure and to address so many of the world's problems but at the same time, how much constrained they are in terms of engineering resource capacity. By the way, we heard it from the CEO of the top engineering firms we met a couple of weeks ago in Arizona. But we hear it across the regions the engineering resource capacity gap is just getting deeper. I heard that, for example, in India now, we're starting to be constrained in terms of engineering capacity when it comes to very advanced engineering for offshore platform, for example, or high-speed rail. So this is a global problem. And they all understand that the way for them to be able to bridge the capacity gap is by going digital. So of course, software plays a big role. And in that context, indeed, they are very interested in AI. I was surprised that in every conversation we had with infrastructure engineering firms, CEOs two weeks ago, AI came up as a topic every conversation. So, it is very much top of mind. They're looking at it as an opportunity to increase the productivity, the efficiency, and the effectiveness of their engineers as a step function.

The next question comes from Joshua Tilton from Wolfe Research.

You guys, can you hear me?

Yes.

I want to ask a two-part question regarding the infrastructure build bundling. First, building on an earlier question, you mentioned the funding for a wider variety of projects that are becoming available, like transportation and now water and other areas. Is it reasonable to expect that the growth boost from the infrastructure bill will be greater next year than this year since there will be more projects? Secondly, do you think the current interest rate environment is diminishing some of the enthusiasm for the infrastructure bill compared to when it was initially passed?

I believe there is an expansion of the IIJA into areas beyond just transportation, broadband, and water. Additionally, there are various grant programs, as mentioned by Nicholas, that can provide funding. However, the main focus on transportation will continue, and the other areas will gradually develop. Regarding interest rates, most of our work isn't privately financed. Yet, new mine exploration, which is sensitive to capital market constraints tied to interest rates, has slowed down this year unexpectedly. It's important to note that existing mines need to operate at full capacity due to ongoing demand. Since the costs of new infrastructure are already incurred, it makes sense to maximize production, and we have substantial resources to assist with that. In terms of private funding in the industrial sector, we have seen some softness. However, we can't yet label this a trend as it may relate to the number of days in the quarter and consumption patterns, particularly in India, which had more holidays in Q3. Thus, we are not ready to define this as a trend. Additionally, purchasing behavior is evolving, particularly with a preference for perpetual licenses, raising questions about the rationale for investing upfront amid high interest rates. Some small and medium businesses seem to be opting for perpetual licenses while they are financially comfortable, despite concerns about future economic conditions. In China, the situation is different; geopolitical anxiety appears to be driving some larger deals towards perpetual licenses due to fears of potential sanctions affecting subscription services. Consequently, while interest rates have some marginal impact, they do not significantly affect public works, utilities, and our other sectors.

Next question comes from Warren Meyers from Griffin Securities.

Can you hear me now? Thank you, guys, for having me. I'm obviously in for Jay. Just a quick one with respect to the multiple industry solutions you announced at your recent infrastructure conference. How would you rank those in terms of potential materiality to product and/or services, revenues or margins in 2024 and beyond kind of a multi-part question here?

I'm sorry, please continue, you had another part to your question. Go ahead.

No, no. That's basically it.

I'm willing to ask Nicholas to help quantify, but the idea that most of our opportunity lies in operations and maintenance is crucial. Infrastructure intelligence enhances the value, and that's where the economic potential exists, along with opportunities for analytics and AI in general. One of the earlier questions touched on this regarding what BP is doing. So, go ahead, Nicholas.

Yes. As you know, our business is roughly half-half between engineering firms, owner operators. But when we look at what owner operators are using for the most part, it is also software related to the design phase of the infrastructure lifecycle. So, we think one of the big growth opportunities for the Company is the software for the operations phase of the infrastructure lifecycle. And this is why the industry solutions are all about. Now there are a bit of a dimension that cuts across because what we're doing with these industry solutions is combining different products that we already have and then adding some additional capabilities when it's be. For the most part, these industry solutions are focused on giving more intelligence around infrastructure assets themselves. So being able to inspect remotely, and being able to sense through IoT devices, if anything is wrong with that infrastructure asset, and triggering some preemptive actions if necessary. Obviously, this is also a good use case for AI. This is why we're already using quite a bit of AI capabilities for asset analytics. So this is not a discrete product opportunity, if you want, it's more of a long-term growth opportunity for Bentley.

Our next question comes from Blair Abernethy from Rosenblatt Securities.

Thank you. Good morning. I wanted to follow up on some of Nicholas' comments regarding the concept of copilots to enhance the productivity of design engineers in infrastructure. Where do you anticipate implementing this first? What monetization strategies are you exploring? Additionally, what is the timeframe for this? Are you currently in preproduction or private previews, or is this something planned for a year or two down the road? Please provide some insight on when you expect to see this in the market.

We are already with AI when it comes to asset operations, as I just explained. We've had capabilities there for a couple of years now, which also made the acquisition of Blyncsy, which is also leveraging AI in order to detect what's going on around the transportation network. We are absolutely excited about the potential of AI when it comes to helping engineers in the design phase. This is very early stage as an industry overall. We are in the exploration phase and we previewed what we're working on, which is when relevant for some of the engineering firms, leveraging AI as a copilot when it comes to evaluating different site layout options, leveraging AI in order to automate some production of drawings that is really just a sync of time for them right now. The overall vision we have is AI to empower the engineers, not replace them. And we use our own experience actually as an analogy. Our own engineers are leveraging GitHub Copilot to be much more productive. GitHub Copilot, as I explained in the prepared remarks, is taking over all the mundane tasks so they can really focus on high-value tasks. So, we see exactly the same for infrastructure engineers. And the potential is huge, as I mentioned two weeks ago, in every conversation with infrastructure engineering firm CEOs, AI came up. So the potential is huge for sure. We all see the same. Our approach is going to be leveraging our own engineering applications to train the AI agents not the data of our users, which is different from an approach that other companies may take, right? So, we will train the AI agents with our own engineering applications so that they can learn from entering applications, whether the engineer rolls, right. And based on this, we'll be able then to suggest site layouts or components of designs of infrastructure, et cetera, going forward. And what we envision is our users will then leverage their data to fine-tune those models, those AI agents, this copilot will give to them. So, it's a quite distinct approach from what you may see in other industries, actually very adapted to our industry infrastructure and very much resonating. The idea of AI is a copilot, the idea that we train with our own engine applications that we let the users decide when and if they want to use their own data to fine-tune. This is what's really resonating.

Blair, on monetization, I will point out indirectly when engineering firms and owners recognize the value of the data for ways in which they didn't even anticipate it could compound in value in the future, for instance, with generative AI training their own tools. ProjectWise has become our single largest product just now. And the advantage of ProjectWise is a common schema where this state can be understood and comprehended more comprehensively in value. So, there are ways for us to implicitly monetize on the value of entering data without yet working out how whether there would be new products or enhanced products as far as monetization.

Our next question comes from Clarke Jeffries from Piper Sandler.

So, I wanted to follow up on a prior question and maybe reflect I think there are some memories of some of the civil construction projects being positive at the shovel-ready stage. And I think that there has been discussion of that before. So, I wanted to pose a question like that. How much of the engineering design work will be done entirely pre-shovel-ready on the construction? And how much continued engineering design work could be available after it moved to that final stage when construction on-site starts to happen? And then as a follow-up, when can the sale to the owner-operator occur when it's entirely at the sort of specialty contractor or engineering consultant stage or somewhere during the project?

Well, what an interesting question. And yes, it could be that in staging of projects, even those funded under IIJA. Some might wait for material costs and labor costs and so forth to balance out rather than bulge. But that won't have, in general, the impact on the design getting the project to being with shovel-ready. However, we're just back from Year in Infrastructure last month, and we are reminded that in Asia, which leads in so much in the world, in Singapore, a case in point of that, if you get a chance to watch some of the keynotes. Things have moved very far toward design build. And very often, major projects in Asia, the owner from the SAR has a Digital Twin in mind, and it isn't something that comes along after the fact that it really is interesting. And it is leading the way. We say they're leapfrogging ahead not being constrained by traditional contracting structures and so forth. So I think you'll see some examples of that in Going Digital Awards finalists and winning projects in Asia. And that's why we remarked that to me, it's a pleasant surprise to see that 17% of all of these 300-plus nominated projects this year use SYNCHRO. So, they're incorporating 4D modeling of the construction process during the design, and it's just an indication of the progress of design build and constructability ultimately to improve civil project execution and take out risk and variability.

That concludes our call today. We thank each of you for your interest and time in Bentley Systems and look forward to updating you on our progress in coming quarters.

Thank you.