Bentley Systems Inc Q1 FY2024 Earnings Call

Good morning. Thank you for joining Bentley Systems Q1 2024 Results Webcast. I'm Eric Boyer, Bentley's Investor Relations Officer. On the webcast today, we have Bentley Systems' Chief Executive Officer, Greg Bentley, Chief Operating Officer, Nicholas Cumins; and Chief Financial Officer, Werner Andre. This webcast includes forward-looking statements made as of May 7, 2024, regarding the future results of operations and financial position, business strategy and plans and objectives for the future operations of Bentley Systems, Inc. All such statements made in or contained during this webcast other than statements of historical fact are forward-looking statements. This webcast will be available for replay on Bentley Systems' Investor Relations website at investors.bentley.com on May 7, 2024. I would like to mention that the 2023 infrastructure yearbook, which explores the world's top infrastructure projects, is now available online at bentley.com/yii/yearbook. You can also order a printed version from the same link. Additionally, we have published our 2023 ESG report, which is available on our Investor Relations website. After our presentation, we will conclude with Q&A. And with that, let me introduce the CEO of Bentley Systems, Greg Bentley.

Good morning, and as always, thanks to each of you for your continued interest in BSY. Eric, thanks for setting the stage for our focus today. For all that we characterize and think of Bentley Systems as a no-drama company, we do realize that we've made news over the 2-plus months since we have last been together. And of course, I'm talking about our press release and announcement in London of our CEO transition plan. After this quarter, I will retire from CEO responsibilities to become Executive Chair. As I will continue to oversee Investor Relations, I expect our quarterly operating results presentations to continue foreseeably with the same format and lineup as today. Given that I will turn 69 years old next week, I believe that my retirement as CEO has been reasonably anticipated. The timing purposely follows the completion of transitions throughout our senior executive ranks since the IPO in 2020 in favor of a literally rejuvenating new, and I consider improved cohort of leaders. The generational improvement at my current position, handing the reins to a first-time CEO is derisked for everyone, I think, by virtue of an incoming Executive Chair. In that role, my priority will be to support Nicholas Cumins through and beyond the transition stage. And in addition to management of our Board activities and Investor Relations, I will continue to be responsible for capital allocation decisions, including platform M&A. By way of capital allocation, for now, I am overseeing the asset analytics initiative, which we introduced this year. A transition to Executive Chair is probably unsurprising upon retirement of a founding tech company CEO, and most of you have heard me looking forward over the past few years to this change at BSY, but I find it interesting to see that this seems to be becoming the norm more generally as reported by Board-level Authority, Spencer Stuart. Of all CEO transitions in the S&P 500 last year, the average age of incoming CEOs increased to over 56. So by contrast, we at BSY, with Nicholas at age 47, have purposely prioritized the capacity to perpetuate our long-term continuity. But our CEO transition is otherwise in common with the S&P 500 norm, as 78% of incoming CEOs like ours had never been CEO of a public company, and 74% were internal promotions like ours, and the former CEO became Executive Chair as will occur in our case and 41% of all S&P CEO transitions. Now I should say that for our CEO selection, the Sustainability Committee of our Board over the past year conducted a full assessment of candidates from first principles, including engaging top professional advisers. While they are not going to recount all of our criteria, of particular importance to me is the roundedness of our next CEO. You may have heard me admit to wanting to upgrade especially our marketing orientation for a better balance with our established engineering DNA. Suffice it to say about Nicholas that his education was in law; although he correctly recognized the highest and best use of his talent and capabilities in software, he left SAP for entrepreneurial opportunities in a couple of startups, including in programmatic advertising technology before returning to SAP to lead its marketing cloud, including integrating major acquisitions. But those of you in our audiences today have by now come to know Nicholas in the capacity of Chief Operating Officer to which he was promoted on my part, anticipating this subsequent transition at the beginning of 2022. And what you have come to know him for has been our consistent and continuing steady execution under Nicholas' leadership of our collaborative and effective operating counsel from which I have absented myself since entrusting our operations to Nicholas and his team. As Chief Operating Officer, our colleagues everywhere have already been reporting into Nicholas, except those in the corporate functions of finance and legal, who will do so beginning on July 1. Consistent with the planned nature of our transition, Nicholas has already announced internally his pending organization structure as CEO. Beyond execution, Nicholas has also brought structure and rigor to our planning functions. As we reprogram annually to optimize growth subject to our institutionalized annual margin improvement. Nicholas' remarkable capacities to learn and lead have been literally demonstrated to our coinciding track record as a public company. Reflecting our global footprint now extending to a European CEO designate. We chose to announce the transition during the opening of our new office in London, the U.K. being our second largest country in revenues. In keeping with our post-pandemic strategy to create magnetic offices to convene collaboration among colleagues and for visitors, in London, we now occupy a top floor in one of the most significant new buildings in the city. The project managers of builder Lendlease enthusiastically keynoted our opening event by explaining how our software made the construction of 8 Bishopsgate successful despite the ambitious design and the construction challenges they noted here. They showed here how our 4D construction modeling software, SYNCHRO within Bentley Infrastructure Cloud was uniquely instrumental to the project delivery of a Bishopsgate. Like construction itself, as you can see, 4D is about the interaction of space and time, with SYNCHRO, Bentley Systems strategy for going digital and construction and live infrastructure digital twins for their full potential from design through operations. Rather than regressing from 3D to 2D digital paper, we believe that adding intelligence from 3D to 4D, which we lead across infrastructure sectors globally, will steadily preempt and advance the future of digital construction, and Nicholas will have more to say about SYNCHRO's momentum. Turning back now to '24 Q1. The quarter was quite consistent with our overall expectations for 2024. As Werner will further detail, our profitability and cash flow are for now well ahead of that pace. With subscription revenues on track. When we were last together, I described our objectives for cohesive rather than growth per se of a professional services business as a means toward the end of validating the business model potential for an ecosystem of digital integrators to create and curate comprehensive infrastructure digital twins for owner operators. In fact, to the detriment of our overall revenue growth and owing to delays in accounts implementation of upgrades of IBM's Maximo, the encumbered enterprise asset management system for most infrastructure owner operators, the cohesive digital integrator business is off to a slower start than in 2023. Accordingly, within our prevailing 2024 revenue growth outlook, our revenue mix this year will be more subscription intensive starting at 91% in '24 Q1. Our key metric of year-over-year ARR growth merits a closer look in light of the factors we have planned to be different in 2024, lower contributions from programmatic acquisitions, intentional cannibalization in China and the glide path of pricing escalation with inflation subsiding. And indeed, in '24 Q1, year-over-year ARR growth, business performance, including acquisitions, ticked down to 11%. Because over the trailing year, ARR onboarded with programmatic acquisitions has now become insignificant, the downtick in organic terms is to a lesser extent. Further excluding China's impact on ARR growth likewise shows more sustained momentum in the other 97% of our ARR. And back to our reporting metric, business performance globally, our 2024 outlook of 10.5% to 13% ARR growth takes into account the evolution of parameters now generally governing our E365 consumption subscription contracts. First, to report, as usual, on the quarter's growth in the scope and proportion of the E365 plurality of our ARR. Here in green is the incremental magnitude of E365 accretion and expansion. Also, as usual, a relatively small portion of E365 growth was from select accounts upgrading, with the majority from accretion or NRR, net revenue retention, and E365 accounts. Last quarter, I observed that the '23 Q4 decline in our overall NRR from 110% to 109% would not have occurred, excluding China and Russia. In '24 Q1, China and Russia again factored into the same extent, but NRR declined to 108%. As with ARR, this is also influenced by the direction of inflation, which impacts not only our annual pricing escalation, but also the background expectations which mutually inform negotiations of the step-ups in E365 floors and ceilings that now often extend over multiple future years. Moreover, this year, a change in the seasonality of E365 consumption accretion particularly affected the first quarter. We alluded to this directionally last quarter, and I'd like to now illustrate more quantitatively this phenomenon. Apart from any change in consumption, what we charge and recognize as revenue and ARR growth is increasingly attenuated by the ever greater magnitude of E365 ARR that has recently become subject to an annual floor. First, see here that in 2024, a greater proportion of our overall ARR is consumption charged E365 than in 2023. And the proportion of E365 ARR with no annual floor is now even smaller. Incidentally, where there is a floor, there is almost always a ceiling as that's generally the incentive for the account to agree to a floor. And more or less institutionalizing floors and ceilings to reasonably share with accounts the risks of consumption extremes has been essentially neutral in its impact on our overall E365 revenues and ARR as at any given time, there has been relative symmetry between levels of usage below floors and levels of usage above ceilings. For the small portion of E365 ARR without floors or ceilings, any and all increases in consumption will immediately increase ARR, not subject to reset seasonality. And while aggregate consumption tends to grow throughout the year at an average trend rate consistent with our NRR, the floors and ceilings don't adjust quarterly, but rather only once per year in advance coinciding with annual renewal and resets, which tend to be clustered in certain quarters. So the skewing of ARR growth across the quarters of 2024 is affected by the increasing prevalence compared to 2023 and the reset timing of floors and ceilings. Here is the distribution of the floor bounded E365 ARR entering each of 2023 on top and 2024 on the bottom by quarter of annual reset. For the darkest portions, which we set longest ago, it is most likely that typically growing consumption will be might by now above the floor levels. And hence, will constitute ARR growth. But that magnitude and proportion, as you see, is lower than last year. More of the E365 ARR in 2024 in lightest blue on the right has just reset and will not reset again until Q4 of this year. So trending consumption growth under those contracts will likely result in a concentration of ARR growth from rising above the annual floors later during this year. Moving now within ARR growth from existing accounts NRR to new logos that would most naturally start within small medium business under our criteria, which classifies as SMB those with ARR of less than $100,000 per year. I'm pleased to report that the indicators, which I attribute to our success in competitive displacements are distinctly headed up in 2024. After five straight quarters of contributing 3% in '24 Q1, new logos for the first time contributed overall ARR growth of 4%. By the end of 2023, Virtuoso Subscriptions targeted primarily at SMB through direct digital experience had captured over 600 new logos for eight straight quarters, and that count was steeply increasing. In '24 Q1, the exponential growth of Virtuoso Subscriptions continued, thanks to a record number of new logos, with the cumulative number of accounts with Virtuoso Subscriptions almost all new over the last three years at now over 9,000. Finally, as to incremental growth, within our new asset analytics initiative that I previewed at length last time we were together, which is for instant-on Instant Digital Twins monetized per asset. It has been a quarter of study behind-the-scenes progress in technical portfolio and business development and towards a concerted marketing launch with significant announcements still to come. What you see here is a new Blyncsy offering to enable roadway owners to efficiently comply with new federal highway requirements effective in 2026 to continuously maintain sufficient lane striping retroreflectivity. For asset analytics, the largest new deal so far this year brings in seven-digit ARR. You should expect to hear throughout 2024 much more about growth and new investments in asset analytics. And now for operational perspectives and our congratulations over to Nicholas. Thank you.

Thank you, Greg. First, I want to thank again the Board of Directors for entrusting me with the responsibility to lead Bentley. I am deeply honored to follow in Greg's footsteps as CEO. Greg's leadership for more than 30 years has delivered remarkable success for Bentley Systems, positioning the company for continued growth as we help address the infrastructure sector's biggest challenges. I look forward to working with Greg as a transition to Executive Chair. Q1 was a continuation of the same strong and steady macro trends that we discussed throughout last year. The most notable being the ongoing engineering resources capacity gap, driven in part by high demand. In the most recent ACEC quarterly survey, U.S. engineering firms across all sectors once again highlighted lengthy project backlogs of 1 to 2 years, with expectations of higher backlogs 12 months from now. This optimism is supported by their increasingly positive views on the U.S. economy, the design and engineering sector, and their own firms' overall finances. Higher backlogs and engineering resource constraints continue to dominate conversations around the world as well. In April, I attended FIDIC global leadership forum in Geneva, Switzerland. FIDIC, the International Federation of Consulting Engineers, represents over 40,000 firms globally, and the forum brought together an exclusive group of senior leaders from among these organizations. The resource capacity gap remains an underlying theme which I see of one major firm commenting that the problem is getting worse, reinforcing the need and opportunity for digital solutions. Moving to our performance in Q1, it remained very consistent with last year starting with our infrastructure sectors. Once again, public works and utilities, our largest sector, was the main growth driver for the company. We continue to benefit from strong global infrastructure spending across transportation, water utilities, and the electric grid. In terms of resources, we are also seeing trends consistent with last quarter. Seequent performed as expected, given the slowdown of new mine investments, but long-term mining sentiment remains strong. We continue to invest in new products and capabilities, especially in mining operations. This will further differentiate us from our competition and help users become more efficient, which is critical given the modern pressures they face. As I highlighted last quarter, we are very excited about the growth opportunities for Seequent in civil as well, and we saw continued strength in Q1, including our first seven-digit deal for Leapfrog works with a major civil engineering firm. Industrial remained mixed, and the commercial and facility sectors remain relatively flat. Moving on to regions, North America continued its steady performance with market sentiment, nothing but positive. As Greg mentioned, consumption growth was impacted by resets in Q4, but we expect it to strengthen in Q2. Transportation continues to experience strong momentum from IIJA and also from state spending more. We have momentum with U.S. DOTs adopting our software for digital delivery across design, construction, and into operations. This includes SYNCHRO, which I will discuss in more detail shortly. Beyond transportation, there was movement in the U.S. with electrical transmission permitting reform. The Department of Energy will work to consolidate environmental reviews for energy transmission projects within a standard 2-year schedule. We are cautiously optimistic that this could help facilitate faster build-out of new electrical transmission infrastructure within the U.S. over the long term, which our Power Line System business is uniquely qualified to support. EMEA had a good start to the year, especially in Northern Europe and was led by a particularly strong quarter in resources, followed by public works. We see continued investments in infrastructure across Europe, and there are calls for even more in the face of climate change. In Asia Pacific, India was once again the main growth driver with continued momentum in water, now expanding from product delivery into operations with digital twins of the water networks. The rest of the region experienced steady growth. China's performance was consistent with Q4; the headwinds remain the same with difficult economic conditions and continued geopolitical tensions. However, we did see renewal rates improving, which is encouraging. Back to SYNCHRO, which is part of Bentley Infrastructure Cloud. As an open, collaborative, and data-centric environment, Bentley Infrastructure Cloud is the key to digital project delivery, unlocking digital workflows that help firms increase efficiency and productivity from design through construction and handoff. Our focus in construction is on digital delivery versus general construction management software. That is leveraging a digital twin to sequence and digitally rehearse every step of the construction process. This includes enriching the digital twin throughout that process so that it accurately reflects the as-built asset when handed over into operations. One reason for this focus is the clear ROI it can deliver for users. A recent standout project is EchoWater, a large wastewater treatment facility in California. Engineering firm product control skewed, leveraged SYNCHRO to develop a digital twin to manage 22 engineering projects across the facility. Various users from designers to contractors leverage the digital twin, working in real-time to prepare for and carry out all activities. The digital twin streamlined coordination and optimized construction sequencing, reducing overall program cost by an outstanding $400 million. As the planning director said, it was an overwhelming success and really proved to everyone the power of Bentley's digital construction platform. Results like this will further drive the uptake of Bentley Infrastructure Cloud, especially as the silos between design and construction breakdown and engineering and construction teams unite in a collaborative digital twin environment. As users add model-based workflows to their traditional file-based workflows, they will increasingly benefit from digital delivery and gain a competitive advantage in delivering higher quality, sustainable projects. Before I hand over to Werner, I want to thank Bentley colleagues for a strong start to the year. Thanks to their efforts, we are well positioned to take advantage of the many infrastructure opportunities before us in 2024. Over to you, Werner.

Thank you, Nicholas. We are pleased with the strong start to the year, which puts us in a good position to achieve our full-year outlook. Total revenues for the first quarter were $338 million, up 7% year-over-year in reported and constant currency. Subscription revenues for the quarter grew 11% year-over-year or 10% in constant currency, in line with our expectations, representing 91% of our total revenues, up from 89% in '23, Q1. Our E365 and SMB initiatives continue to be solid contributors to our subscription revenue growth. Perpetual license revenues for the quarter were flat year-over-year or up 1% in constant currency. Perpetual license sales make up only 3% of total revenues and will remain small relative to our recurring revenues. Our Professional Services revenues for the quarter declined by $6 million or 22% year-over-year in reported and constant currency, driven primarily by weakness in Maximo-related work within our digital integrator cohesive. First, '23 Q1 was a difficult comparison due to a particularly large Maximo implementation contract in the year-ago quarter. And second, during the first quarter of 2024, our Maximo-related implementation work was negatively impacted by delays in Maximo version upgrade work, with such delays now likely to continue through the second quarter before the pace of upgrade projects is expected to increase early in the second half of the year. An advantage of later upgrades is that we will be better positioned to offer at the same time the transition from on-premise to our hosting managed services for Maximo, facilitating eventual integration with our iTwin environment. On a positive note, we are pleased that our Bentley software-related services grew modestly as expected. Moving on to our recurring revenue performance. Our last 12 months recurring revenues increased by 11% year-over-year in reported and 10% in constant currency and represent 90% of our total last 12 months revenues. Our last 12 months constant currency account retention rate is up at 99%, and our constant currency recurring revenues, net retention rate was 108%. Our net revenue retention is led by continued accretion within our E365 consumption-based commercial model. Ex-China and Russia, our NRR was 109%. We ended Q1 with ARR of $1.186 billion at quarter-end spot rates. With our E365 and SMB growth initiatives remaining the key growth drivers. Our constant currency ARR growth rate was 11% year-over-year or 11.5%, excluding China. On a sequential quarterly basis, our constant currency ARR growth rate was 2.2% and was fully in line with our expectations. As I mentioned during last quarter's call, we expected our ARR growth rate for Q1 to be lower than last year's sequential 3.1% growth rate for two primary reasons. First, our last programmatic acquisition with appreciable ARR contribution, which was 50 basis points was EasyPower in '23 Q1. And second, as Greg's slide showed, we have an increasing percentage of our E365 accounts on consumption floors and ceilings, which impacts our quarterly ARR seasonality. With the fourth quarter being our biggest contract renewal quarter, many of these floors and ceilings have just reset at the end of Q4. These resets consider consumption growth expectations over the next year. As such, floor resets can be and often are above the consumption level at the beginning of the renewal period with accounts growing into and above the floors over the renewal term. While our practice is to recognize ARR from E365 consumption and associated growth based on the annualized quarterly consumption, if a consumption floor, which reflects the minimum contract value resets at a higher level than current consumption, we recognize ARR at the new floor level at the time of contract renewal. As such, the higher prevalence of floors and ceilings tends to align an increasing portion of our E365 consumption growth with the contract renewal timing, which is heavily weighted towards H2 and Q4. Lastly, we continue to be impacted by ARR headwinds in China and the greater preference there for perpetual licenses. China represents 3% of our ARR. Now moving to profitability performance. Our GAAP operating income was $92 million for the first quarter. 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 measure. Adjusted operating income with stock-based compensation expense was $112 million for the quarter, up $22 million, up 24% year-over-year with a margin of 33.3%, up 450 basis points. During the fourth quarter of 2023, we initiated a strategic realignment program to better align our resources with our strategy, address market opportunities, and to support our growth. Most of the realignment actions were completed at the beginning of 2024. Our first quarter profitability benefited from these run rate savings, which we expect to fully reinvest into priority areas throughout the rest of the year. As we previously discussed, our priority investment areas are AI in product development and marketing. As a reminder, we calibrate our business to achieve our annual operating margin improvement objective by investing in long-term initiatives rather than maximizing short-term profitability. I will now briefly comment on our services gross margin. While our services revenues declined year-over-year by 22% for the reasons we discussed, we pay close attention to our services delivery cost structure to adjust for volatility in episodic services work. The net year-over-year services gross profit impact, but it was a decline of only $1 million. Moving back to adjusted operating income with stock-based compensation. Our Q1 operating margin is typically a higher margin quarter for us due to OpEx seasonality, and I do want to remind you of our seasonal pattern of expenses. We concentrate our annual raises for colleagues to occur as of April 1 of each year. And since approximately 80% of our cost structure is headcount and related support costs, annual rates have a significant impact on our operating expenses in Q2, Q3, and Q4 relative to Q1. This is further compounded by our larger promotional and event-related costs, which are historically highest in the second half of the year. With respect to liquidity, our operating cash flow was $205 million for the quarter, up $29 million or 16% and benefited from the strong profitability of the quarter. For 2024, we continue to expect that our conversion rate of adjusted EBITDA to cash flow from operations will be in the range of 80%. Based on the expected seasonality of collections and expenditures, we expect that 65% to 70% of our cash flow from operations will be generated during the first half of 2024, up from our previous estimate of 55% to 60%. With regards to capital allocation, in the quarter, along with providing sufficiently for our growth initiatives, we deployed $95 million paying down bank debt, and we have now fully paid down our revolving credit facility, $18 million on dividends, and $23 million in share repurchases to offset dilution from stock-based compensation. As of the end of Q1, our net senior debt leverage was 0.1x. And including our 2026 and 2027 convertible notes full year's debt, our net debt leverage was 3x. We continued our deleveraging trajectory, delevering 0.5x adjusted EBITDA in the quarter and 1.7x adjusted EBITDA since the beginning of 2023. With our strong free cash flow generation profile, we have delevered and increased our balance sheet strength. And in April, we have not started to pay down our term loan, while increasing our dividend, continuing sufficient share repurchases to offset dilution from stock-based compensation, and maintaining our programmatic M&A readiness. From a rate exposure perspective, now that we have fully repaid our revolving line of credit, all of our remaining debt is protected from higher rising interest rates through either very low fixed coupon interest in our convertible notes or our $200 million interest rate swap expiring in 2030. We are very comfortable with our capital structure, in terms of leverage, maturities, and especially interest rate exposure, and we have flexibility to optimize as conditions change. And finally, we remain comfortable with the outlook we provided just over 2 months ago on our Q4 call with regards to foreign exchange rates. For the first quarter, the U.S. dollar has weakened slightly relative to the exchange rates assumed in our 2024 annual financial outlook, resulting in less than $1 million of incremental revenues from currency. Based on the most recent rates where the U.S. dollar has strengthened, if end of April exchange rates would prevail throughout the remainder of the year, our Q2 to Q4 GAAP revenues would be negatively impacted by approximately $6 million relative to the exchange rates assumed in our 2024 financial outlook. And with that, we are ready for Q&A.

Thanks, Werner. Before we begin with Q&A, I want to remind everyone that we issued a press release on April 19 regarding Bentley's policy of not publicly commenting on market rumors or speculation. Reportedly, we will not be commenting on any such matters. Please keep your questions focused on our Q1 results and strategic progress. We also ask that you limit yourselves to one question so we can get through the queue. And with that, our first question will be from Matt Hedberg from RBC.

Congrats on the results. And actually, also congrats, Greg, on your run as CEO, and Nicholas to this next phase of growth. I guess for you, Nicholas, we've known you for a while, and you're a big part of the Bentley fabric. As we enter this next phase of growth, do you see any change in sort of your philosophy, and in terms of where you might look for some additional growth, potential synergies that might be a little bit different than Greg and sort of the prior growth phase?

Well, as you said, I've been the CEO for a little bit more than 2 years now. And before that, I was the CPO. So you shouldn't expect any major change either from a strategic or an operational standpoint. And our priorities remain the same. When it comes to growth, E365, SMB, digital twins, from a product standpoint, operative remain the same as we move from far base to data-centric workflows using digital twin technology. Using there for data, leveraging data for AI purposes, et cetera. So no major change, either in strategy and operations. The key word here is continuation.

Our next question comes from Joseph Vruwink from Robert W. Baird.

Just on the new logo growth in the quarter. I was wondering how much of that is specifically in the U.S. and you would say is related to this expanding ecosystem or at state DOTs that's happening, just as more engineering firms want to participate in infrastructure work. And I guess, related to the question, I think in the past, when you talked about new logo contribution within your growth algorithm, you had typically hedged that a little bit just because smaller accounts might have a propensity to churn a bit more. But if the new logo growth is lining up to support infrastructure activity and the outlays for that are going to be higher each year for the next several years. Do you think new logos just become a more reliable contributor to the model?

I want to ask Nicholas if he has a sense of the quantitative makeup of logos including the geographic distribution then. I know that qualitatively that phenomenon and you mentioned smaller firms, especially getting into linear infrastructure work in the U.S., is significant, but I don't have a feel for the relative magnitude of it, Nicholas?

Our momentum in the small and medium-sized business (SMB) sector is truly global and not limited to North America. In fact, we experienced significant growth in Latin America, primarily driven by SMB. We continue to see strong momentum with SMB worldwide, which we believe is attributed to the flexible commercial terms we provide, whether through subscriptions with Virtuosity or perpetual licenses with SELECT. Feedback from our clients indicates they appreciate having an alternative to their previous solutions. This momentum has been consistent, as we've gained over 600 new logos for several quarters, with Q1 being our strongest yet in the SMB segment. We find this level of momentum predictable in this line of business. Additionally, we are focusing on retention, which has exceeded our initial expectations at the start of the SMB program. This high retention positively impacts productivity and consistency in our results.

Our next question comes from Jason Celino from KeyBanc.

Great. Greg, Nicholas, congrats. Nice to see the continuity here. So my question is actually for Werner. The explanation of the resets and the mix for the year was really helpful. But as we think about the sequential ARR guidance, what does that look like for 2Q and the rest of the year?

Yes, our growth ARR sequentially aligns a little bit more with the contract renewal timing. We previously gave guidance on what the contract renewal timing is for the year, so that reset now that the correlation of ARR growth is more like 20%, 25%, 20%, and 35% throughout the year, you would expect. So we would expect that for Q2, the sequential quarterly year ARPU is picking up again. And as I look into the ARR guidance for the remainder of the year, it is more that can be loaded as we discussed last time. Our expectations did not change. There is still growth opportunity from our asset analytics business that's working on bigger, bigger deal opportunities. There is still growth opportunities from acquisitions. We expect acquisitions to be somewhat lower than it was in the historic past. There's a little bit of a shift in the acquisition, more to earlier-stage companies, but throughout the rest of the year, there's still like that tailwind from asset analytics and acquisitions coming in and the expectation is that we move back to the mid-range of the guidance as we move for the year.

I was hoping that Werner would indeed mention our asset analytics initiatives. All of that business is ARR, and we are working on, as I've mentioned, significant opportunities; it will be lumpy when they occur during the year and don't have any relationship to our established renewals and seasonality as sort of the overlay on that, but I do expect to be moving the needle with that by the time the year is out.

Our next question comes from Sitikantha Panigrahi from Mizuho.

Congratulations, Nicholas and Greg. Great quarter. But can you comment on the trends in the international business, which is close to now 58%. So what segments are more robust than others? And also in terms of geography, how specifically like Western Europe doing? And how do you see this election in different countries going to impact your business? Like India is almost wrapping up elections. How should we expect post-election, and in the U.S., as you are heading into elections?

I'm going to ask Nicholas to take that, but I myself, I wonder the same thing. India had led the world in growth rates through most of last year and then declined for a while, and now is boring back, and I don't know if that has to do with the political situation there.

Yes. To the first question, Siti, I will simply refer back to the prepared remarks in terms of where we see growth by sector and then by region. Specifically to India, India did, and was again a major growth driver in Asia Pacific, even though it had normalized towards the end of 2023, we saw it taking momentum again. And to the earlier question, by the way, SMB played a big part there. A lot of investments still in the water infrastructure and as for the full ecosystem. Not just the local authorities. And there might be a pause, obviously, because of the elections on some new projects to be awarded, but it should be a mandatory pause. Yes. The good thing is our growth in India is really based on full ecosystems, all consistent, including the smaller firms. So we expect the growth to remain strong in India for the remainder of the year.

I guess something else to add about India is that India has benefited not only from its own indigenous investment program but also from the resource capacity constraints elsewhere. India continues to produce more qualified civil and structural engineers especially, and more of the work gravitates to India, thanks to our ProjectWise environment that tends to be, however, overflow would not be quite the right word, but that does fluctuate with workloads in the industrial sector, especially as we've observed it. So superimposed on a steady domestic demand in India is a more cyclical international sourcing to India, and it's good to see it benefiting from both apparently, again, overcoming.

Great. Congrats on the quarter. And very impressive margins and cash flow.

The next question comes from Clarke Jeffries from Piper Sandler.

Greg, I noticed that you mentioned you'll be overseeing the asset analytics opportunity, and the prior question you mentioned moving the needle with some of these opportunities and if they will be lumpy. I just wanted to ask, are there any other near-term 2024 opportunities? And I think, specifically, do you plan to accelerate the industrial or vertical coverage for asset analytics as a business model? Any preview of expansion beyond Blyncsy and cell towers that we've already talked about?

We have stated that this year our focus will be on programmatic acquisitions in the asset analytics field. We are working on consolidating our offerings to leverage and share platform capabilities, which include the processing advantages of AI and inception to generate insights. Our aim is to enhance the reliability, speed, and efficiency of our processing. We're looking to engage in AI workloads for computing and aim to establish multiple vertical offerings. Currently, we have towers and Blyncsy, but we're planning to target additional areas, such as transmission and distribution infrastructure. We are particularly interested in outright acquisitions, similar to our approach with Blyncsy, as we believe this will allow us to benefit from economies of scale. Additionally, we want to provide engineering firms, who are ahead in our industry, the chance to engage in asset analytics without the need to set up their own back offices for processing or to learn AI technology. This collaboration will allow them to integrate their expertise in asset management and services into the analytics process, leading to improvements in operations and maintenance. We want to facilitate their entry into this space by streamlining the technology aspect. Overall, we have ambitious plans for investments, including acquisitions in the asset analytics sector, which we see as a promising area. Our head start in this market has strengthened our commitment to investing in alignment with the annual recurring revenue growth we've achieved from our existing efforts.

So yes, shared infrastructure investments this year, but definitely ARR opportunity as well alongside it. Thank you.

Next question comes from Kristen Owen on Oppenheimer.

Congratulations both Greg and Nicholas. I wanted to ask about the resources growth and ask you to maybe double-click on that. Help us understand how much of that portfolio today is CapEx versus OpEx activity? And any updates that you could share on cross-selling synergies for Seequent across the broader portfolio?

Nicholas?

Yes, the majority of our business in resources is mining. The rest of the resources sector performed as in previous quarters. But in fact, mining also performed as in the previous quarter, which is there is still a slowdown in investments in new mines or major expansion of existing mines. Now, the interesting thing is even with that slowdown, Seequent in mining is still growing faster than the company average, right? So if it's still actually a growth driver for us, even in other environments. And as because Seequent is not just us for exploration of new mines or major expansions of existing mines, but throughout mine operations. And in fact, we are a bit taking advantage, so to speak, of the slowdown to strengthen our position with existing accounts. There's such a pressure to be more efficient. That's fantastic for an incumbent to strengthen the position. And we are overlaying this with more investments from a product standpoint, specifically for mining operations. Now within Seequent, the majority of the revenue of Seequent is also in mining. But the fastest growth part is actually civil, as I commented in the prepared remarks. And that's also a continuation of what we've seen in Q4. What's very interesting here is not only is the geotechnical product business growing and you could argue, well, that was the historical business that Bentley had for the subsurface that we transferred to Seequent. But what's more interesting, I think, is the geomodeling piece of civil is growing very fast. Leapfrog works, which I referred to. This is the adaptation of the core product of Seequent called Leapfrog or the civil industry. And here, we're literally creating a market, right? And the value proposition we have is just very unique and very strong. It's because of a better understanding of the subsurface. We can reduce the financial risk, we can reduce the technical risk of project delivery. We can also improve the carbon footprint. And then the other part of the Seequent business is in energy transition, in particular, most in almost 2 years ago, I commented on Seequent software being used for geothermal. And that's a strong part of the business, but Seequent software is used more and more for offshore wind platforms as well to have a better understanding of the subsea, subsurface conditions if you're going to do fixed foundations for these offshore platforms, yes. So tremendous growth opportunities beyond mining with civil and with energy, but mining itself, even in the context of a slowdown, we're great, we're going very well.

The next question comes from Jay Vleeschhouwer from Griffin Securities.

So I'd like to ask a question about portfolio management. Last fall, you spoke at the Infrastructure Conference about a number of new industry solutions. I believe the number was 8 at the time. More broadly, over the last year or so, we've spoken, Nicholas, you and I, of your intent to simplify the portfolio, particularly with respect to the number of open modules you have trying to improve the salability, for example, through the channel. The question therefore is, can you update us on how the progress of portfolio simplification or reconfiguration is progressing and as that occurs, do you think that could play into some effects on consumption? Or that is to say, might simplification improve consumption over time?

Absolutely, because as we simplify the portfolio, we simplify the way our accounts or users can discover new capabilities that I can benefit from. So we remove friction in that discovery process, we make it as easy as possible for them to understand how else Bentley can help. So that's one, indeed one of the main reasons for the simplification of the portfolio. And simplification of the portfolio, just to make it clear to the others, we're not part of that conversation that we had, Jay. It doesn't mean that we are reducing our coverage or comprehensiveness, not at all, right? Our portfolio comprehensiveness is what makes us very distinct. What we mean by portfolio simplification is just how can we make it easier to discover the breadth and depth of capabilities that Bentley has to offer. And it's true that the main mechanism that we use in order to simplify that portfolio is the industry lens. And it's both a lens that we're using from a go-to-market standpoint. So it's easier for you to discover for a given industry such as, I don't know, electric utilities or water utilities, what Bentley has to offer, but we also use it from a product standpoint to make sure that our products integrate great with non-Bentley software, but they integrate even better with Bentley software.

Just a little commercial for my asset analytics. I say mine because I'm going to be hanging on to that for a bit after the CEO transition that the idea there is where we had, had a broad set of offerings. For instance, we talk about the solutions for dam safety, let us say. For those asset types where we can package it up to a standard price per asset to generate the AI insights. And we've so far done that with communication towers, obviously, and now with miles of roadway, where, for instance, the new offering we were talking about here is crowd-sourced imagery to identify the reflectivity of the lines, how often do they need to be repainted where it can be boiled down to something which can be programmatically delivered on a standard menu at a standard price, we can package that up into asset analytics and have it be instant-on for any engineering firm that wants to add that offer that plus more to their own accounts. So we're trying to find that which can be most digestible, and there's a lot more in common with communication towers from one to the next and roadway miles from one to the next, than there is for dams. So we're imagining we can add more asset plates to the asset analytics menu, the instant-on menu to yet try more so to shorten the sales cycle and increase the pace of monetization. But that's in addition to what Nicholas has described on the industry solutions side.

Next question comes from Michael Funk from Bank of America.

Greg, thank you so much for attending us over the years, and congratulations to you. And you as well, Nicholas. So Greg, earlier you mentioned greater focus on marketing is one thing Nicholas has brought to Bentley. So to put it another way, I guess, where do you believe there have been deficiencies in marketing, and how can you improve?

Nicholas is a great addition to our company as our Chief Product Officer, bringing a strong enthusiasm for product management. We've started to explore avenues we had previously avoided, such as SMB and e-commerce, which we only ventured into after becoming a public company at the age of 36. Moving forward, it’s crucial for us to recognize the missed opportunities and ensure we position ourselves to excel in those areas. We are excited about the new marketing resources we recently announced, including our new Chief Storyteller from Amazon and GE. I encourage everyone to check out our recently published infrastructure yearbook, which highlights projects that demonstrate how infrastructure can enhance both our economy and environment. We aim to involve infrastructure engineers in sharing these impactful stories. Overall, we are very optimistic about the return on investment in SMB, and we look forward to achieving a balanced and rounded approach to our brand with your help, Nicholas. Thank you. So I'm still in my CEO seat for another two months.

Next question comes from Dylan Becker from William Blair.

Congrats, Greg, congrats Nicholas and maybe first for the happy early birthday, Greg. Nicholas, you called out some of the U.S. transmission reform that's potentially accelerating investment on the energy side. I wonder how you kind of pair that because I think that was kind of somewhat of a gatekeeper of incremental new spend with some of the sustainability initiatives and maybe how that can kind of pair with asset analytics from your perspective, Greg, around things like reliability, resiliency, intermittency and things of the like, given that always-on is maybe now more readily available or readily addressable. If that makes sense.

I can get started. Over the past few quarters, we've seen announcements regarding IIJA funding for the electric grid, which is crucial for its expansion. We need to develop the grid further, particularly to access renewable energy sources that are often located far from consumption points. The estimate suggests we must expand it by two-thirds by 2035 to achieve our clean energy targets in the U.S. The main challenge for this expansion is permitting. There was some positive news from the White House indicating that all environmental reviews for clean energy projects could occur within a standard two-year schedule, potentially reducing review time by 50%. We're cautiously optimistic about how this will materialize. Meanwhile, our users are actively utilizing Power Line System tools to manage the aging grid, which poses risks due to climate change and extreme weather events. We anticipate significant growth for PLS even before actual electric grid expansion begins.

Next question comes from Arsenije Matovic from Wolfe Research.

This is Arsenije Matovic on for Josh Tilton. Congratulations, Nicholas. And congratulations, Greg, for your successful tenure as CEO. Wanted to ask on digital twin revenue from iTwin. I think the last time you had a target was for 8 figures of ARR, which you meant exiting the fourth quarter of 2020. Where are we today? Like has that doubled and how accretive has it been to overall ARR growth? And then just a brief follow-up to make sure that we understand the comment on ARR regarding the floor and ceiling dynamic of E365 renewals. So in this scenario where in the fourth quarter, a renewal was made with the floor and ceiling reset. And in the following first quarter, the consumption of E365 was below the floor set in the fourth quarter; the ARR contribution in that first quarter is based on the floor for consumption set in the fourth quarter, and not based on the consumption in the first quarter.

Yes. I'll start with the last point since it's relevant. The annual recurring revenue growth for the first quarter was zero because consumption happened, but it didn't meet the established floor level. This floor level will hopefully be reached sometime this year, and ideally, the ceiling level will also be achieved, although we can't be certain about that. The ARR is currently equal to the floor, but there has been no growth in ARR. This situation aligns with what we discussed previously, where accounts are requesting multi-year contracts that include set floors and ceilings. They recognize the importance of going digital as a top priority, but they want to ensure there's a limit on their spending. They're open to agreeing to increases in the floors and ceilings, but these adjustments only occur once a year, as adjusting them quarterly is too complex. This trend is becoming increasingly significant, especially as more of the overall ARR falls under E365. I'll now hand it over to Nicholas to address the first question.

Yes. The reason we haven't given a number in terms of digital twin ARR for quite a while is because it's almost impossible now to separate it from the growth of our products because more and more of our products are leveraging digital twins and leveraging iTwin to support new capabilities, and so you can argue iTwin is a reason why we see momentum with an Infrastructure Cloud, including ProjectWise, powering new capabilities such as ceiling design validation, or advanced design review, or even the 4D modeling piece of SYNCHRO, which is also powered by iTwins. So we cannot really separate it, yes. And then asset analytics, by the way, we'll also then be considered as digital twin revenue because we actually create digital twins of the cell towers. We create a digital twin of the road network as we use OpenTower or Blyncsy.

We will break out the asset analytics ARR curves. When we're preparing a lot of marketing launch materials, it's going to have a proper name like Cohesive does and Seequent does and so forth, and we'll provide a lot of visibility into that. That's entirely owing to the iTwin platform, along with the other AI we incorporate in it, but we sort of envy the iTwin platform and everything now as a preference, not only financially, but to get it fully taken up, so that we don't have an evangelism barrier in each account is something explicit for digital twins. We'd like digital twins to be implicit to start with.

The next question comes from Blair Abernethy from Rosenblatt Securities.

Congrats to Greg and Nick as well from me. Just a quick one. Can you give us an update on the IIJA funding programs? How are you seeing where you're at there, particularly on the road side? And secondly, Greg, just like Blyncsy, what's the go-to-market program look like there over the next couple of years? Is it embedded with your core go-to-market or because it's more of a specialized solution? Is it something you're going to do separately?

It's not so specialized that it can't work. Our account managers are focused on transportation agencies. However, a lot of the opportunities lie with smaller municipalities, counties, and metropolitan planning organizations. These entities have an engineer of record, and we aim to collaborate with them to help bring Blyncsy offerings to all of their resources. That's what we're working on expanding. In the meantime, I mentioned a multi-million dollar annual recurring revenue deal with a state Department of Transportation, and there will be many more of that size. Our goal is to reach every roadway owner, which we plan to achieve through our engineering firms.

Yes. Currently, 37% of the funding from the Infrastructure Investment and Jobs Act has been announced. As we mentioned in the last quarter, there is a delay between the announcement and the award of these funds. Therefore, IIJA continues to serve as a significant tailwind for us in the U.S., helping to maintain our momentum. Notably, much of the funding is allocated to transportation, as we previously indicated. Additionally, states are increasing their own investments in infrastructure on top of this funding, with transportation budgets across various states rising by approximately 11% year-over-year. Voters in 15 states have also chosen to support increased investment in infrastructure through measures on ballots, demonstrating clear momentum at both federal and state levels.

And at the federal level, believe it or not in the U.S., I think you're there in Canada. The airports funding is controversial. Yet it just passed the houses of Congress, is about to become law. This bill is the best yet in explicitly allowing advanced digital construction management systems to qualify for federal funding and have an explicit funding for drone inspection programs that will really lead the way and rates of gain for infrastructure in the U.S.

Before we conclude, Werner, you want to touch upon the revenue seasonality point.

Yes. So as I mentioned in the prepared remarks, we expect that our maximum upgrade work in Q2 remains at Q1 levels before it's going to pick up again, but it's expected to pick up again really in the second half. So we expect that our services revenues in Q2 remain essentially at Q1 level. So that means that our revenues will be more concentrated on subscriptions in Q2.

Great. So that concludes our call today. We thank you for your interest and time in Bentley Systems. We look forward to updating you on our progress in the coming quarters.

Thank you.