Good morning and thank you for joining Bentley Systems' Q2 2024 Results Webcast. I'm Eric Boyer, Bentley's Investor Relations Officer. On the webcast today, we have Bentley Systems' Executive Chair, Greg Bentley; Chief Executive Officer, Nicholas Cumins; and Chief Financial Officer, Werner Andre. This webcast includes forward-looking statements made as of August 6, 2024, regarding the future results of operations and financial position, business strategy and plans, and objectives for future operations of Bentley Systems Incorporated. All such statements made in or contained during this webcast, other than statements of historical fact, are forward-looking statements. This webcast will be available for replay on Bentley Systems' Investor Relations website at investors.bentley.com on August 6, 2024. After our presentation, we will conclude with Q&A. And with that, let me introduce the executive chair of Bentley Systems, Greg Bentley.

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

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

Thank you, Nicholas. We are pleased with another consistent and strong quarter. Total revenues for the second quarter were $330 million up 11% year-over-year and 12% in constant currency. Year-to-date, total revenues grew 9% on a reported and constant currency basis. Subscription revenues for the quarter grew 15% year-over-year in reported and constant currency, representing 90% of our total revenues, up from 87% in 23 Q2. Q2 has historically been our lowest subscription revenues quarter when compared to other quarters and particularly Q1 due to a lower proportion of contract renewals with any degree of upfront revenue recognition. But the continued expansion of our consumption-based E365 program yields more ratable revenue recognition throughout the year, benefiting Q2. For the first half, more normalized for mix and timing, subscription revenues grew 13% on a reported and constant currency basis. Our E365 and SMB initiatives continue to be solid contributors to our subscription revenue growth. Perpetual license revenues for the quarter were $11 million down $1 million, year-over-year. 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 $4 million down 15% year-over-year or 40% in constant currency, driven primarily by the expected delays in IBM Maximo-related implementation and upgrade work within our digital integrator, Cohesive. Such delays are now likely to continue through the third quarter before the pace of upgrade projects is expected to increase during the fourth quarter of 2024. On a positive note, our professional services related to Bentley software continue to grow modestly as expected. Moving on to our recurring revenue performance. Our last 12 months recurring revenues increased by 12% year-over-year in reported and 11% in constant currency and represent 90% of our total last 12 months revenues. Our last 12 months constant currency account retention rate was 99%, and our constant currency recurring revenues net retention rate was 108%, led by continued accretion within our E365 consumption-based commercial model. Ex-China, where our ARR is subject to erosion from commercial model changes, our NRR was 109%. We ended Q2 with ARR of $1.26 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 where we continue to experience ARR headwinds. China now represents 2.5% of our ARR, down from 3% a year ago. The contribution from programmatic acquisition to our year-over-year ARR growth rate is currently negligible, while in the year-ago period, onboarded ARR from programmatic acquisitions contributed in the range of 1%. On a sequential quarterly basis, our constant currency ARR growth rate was 2.9% and was fully in line with our expectations. As we discussed in more detail during last quarter's call, we have an increased percentage of our E365 accounts on consumption floors and ceilings, which impacts our ARR growth seasonality and tends to align an increasing portion of our ARR accretion related to our E365 consumption with the contract renewal timing, which is heavily weighted towards Q4. Based on our ARR performance for the first half of the year, we are in a solid position within the 10.5% to 13% range of our ARR growth outlook for 2024. Now, moving to profitability performance. Our GAAP operating income was $80 million for the second quarter and $172 million year-to-date. We have previously discussed 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 $95 million for the quarter, up 30% year over year with a margin of 28.8%, up 410 basis points. Year-to-date, adjusted operating income with stock-based compensation expense was $208 million up 27% with a margin of 31.1%, up 430 basis points. Our profitability continues to reflect run rate savings associated with the strategic realignment program, which we initiated during the fourth quarter of 2023. While most of the realignment actions were completed at the beginning of 2024, we continue to ramp towards fully reinvesting this run rate saving into priority investment areas such as AI and product development and marketing. Our operating margin also benefited from the mix shift from lower-margin professional services revenues to the higher-margin subscription revenues, which represented 90% of total revenues in the quarter, up 3% year-over-year. While our services revenues declined for the reasons we discussed, we pay close attention to our services delivery cost structure to adjust for volatility in episodic services work. This nets to higher gross margin to the benefit of profitability for the quarter and year-to-date. Based on these developments, our margin is trending higher than planned. And while this puts us in a strong position to deliver on our 100 basis points intended annual margin improvement, we do not undertake to maximize short-term profitability. And over the full year, we instead will prioritize investing in longer-term initiatives. I also want to remind you of our OpEx seasonality, which is more heavily weighted towards the second half with our annual raises occurring as of April 1 each year, further compounded by larger promotional and event-related costs concentrated during the second half of the year. With respect to liquidity, our operating cash flow was $63 million for the quarter and $268 million for the first half of 2024 and benefited from our strong profitability. For the remainder of 2024, we continue to expect that our conversion rate of adjusted EBITDA to cash flow from operations will gravitate towards the 80% range. With regards to capital allocation, during the first half of the year, along with providing sufficiently for our growth initiatives, we deployed $197 million towards bank debt reduction, which includes repayments of $103 million of our term loan during the second quarter, reducing our outstanding senior debt to $85 million at the end of the quarter. We further paid $36 million dividends and applied $47 million to share repurchases to fully offset dilution from stock-based compensation. As of the end of Q2, our net senior debt leverage was 0.1 times. And including our 2026 and 2027 convertible notes fully as debt, our net debt leverage was 2.8 times. With our strong free cash flow generation profile, we have year-to-date deleveraged by 0.7 times adjusted EBITDA to increase our balance sheet strength and M&A flexibility. From a rates exposure perspective, all of our remaining debt is protected from high or 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 comfortable with our capital structure in terms of leverage, maturities and especially interest rate exposure and believe we have sufficient flexibility for the upcoming renewal of our credit facility. And finally, with regards to our outlook for the year, our ‘24 Q2 financial performance puts us in a solid position to deliver within the range of our annual outlook for ARR growth, profitability, and cash flow from operations. However, while recurring subscription revenues exceed expectations year-to-date, total revenues are trending below the midpoint of our outlook range due to weakness within our non-recurring professional service revenues caused by delays in Maximo-related implementation and upgrade work. For modeling seasonality, we expect year-over-year ARR growth to accelerate in the second half and particularly in Q4 due to E365 renewal timing and consumption dynamics around floors and ceilings. With regards to foreign exchange rates. For the first half of 2024, the U.S. dollar has only slightly weakened relative to the exchange rates assumed in our 2024 annual financial outlook, resulting in less than $1 million of incremental revenues from currency. If end of July exchange rates would prevail throughout the remainder of the year, then we would not expect a significant FX impact on GAAP revenues relative to the exchange rates assumed in our 2024 financial outlook. And with that, we are ready for Q&A. Over to Eric. Thank you.

Thanks, Werner. Before we begin, I just want to remind you that please limit your questions to one so that we can get to everybody. First question comes from Matt Hedberg of RBC.

Great. Matt here. Good morning, everyone. It’s nice to see you all. I have a question regarding the second half. It’s encouraging to know that all your ARR is on track. Nicholas, you mentioned that the second half E365 renewals are primarily focused on the fourth quarter. Can you share your confidence regarding these deals? While you’re showing solid results, the overall macro environment seems a bit uncertain. Other companies have mentioned longer deal cycles and requiring additional signatures. Can you elaborate on your confidence levels for the E365 renewal base in the second half, which is crucial for your full-year guidance?

I'm going to let Nicholas discuss the observations on the ground, but structurally, sentiment is important. However, the sentiment among infrastructure engineering organizations focuses on capacity rather than demand. Their backlogs are strong, and their visibility is long at this point. It's essential to note that most of our annual recurring revenue growth is primarily driven by consumption, which is not a result of enterprise decisions. Our software serves as a factor of production in the throughput of infrastructure engineering organizations, and consumption happens naturally. We do encounter some competitive procurements for new projects and assets, which are influenced by decisions around requests for proposals, but these constitute a small part of our revenue growth. For many users, Golden Digital is the priority. Therefore, structurally, we do not heavily depend on enterprise decisions. Even in that context, the sentiment in our markets is focused on capacity rather than demand. Nicholas, you can provide better insights into the observations on the ground.

The sentiment in the end markets is quite positive. Our Public Works Utilities accounts are busier than ever, and this situation hasn't changed. Demand remains very high. The main challenge is a lack of resources, which presents a great opportunity for us. We're positioned to help them increase productivity with the engineering resources they already have. Therefore, market sentiment is strong. Additionally, with the momentum we have from our own programs, E365 and SMB, we are confident in what Werner has indicated, which is that we will be well within our ARR range.

Great. Thanks. Congrats, guys, and congrats to both, Greg and Nicholas to new roles.

Thanks, Matt. Next question comes from Joe Vruwink from Robert Baird.

Yeah. Great. Thanks for taking my question this morning. Staying on the infrastructure and IGA funding topic, so still very early as you noted earlier. I think it's also well appreciated that project starts have been a bit uneven to date. Does this extended timeline, maybe this is in an ironic way, provide better opportunities for Bentley to grow at enterprise accounts since you get a bit of a flavor of the opportunity ahead, but you still have time to engage with a key software vendor like yourselves, and you can strategize around future improvement. And I'm wondering if maybe that explains Ben DOT and some of the decisions they're making, which, as you said, is leading to a good step up in spend there.

Yeah. Well, I definitely think higher for longer is the consensus, in the U.S., but it's interesting that states are stepping up their spending also. And Nicholas maybe had more commentary on it.

The momentum we've observed from the Infrastructure Investment and Jobs Act is expected to continue for a longer period, which is a positive development. Most of the announced funding has been focused on transportation projects handled by Departments of Transportation, which are generally better prepared and have more experience in applying for and executing grants. We have a strong relationship with these Departments of Transportation. However, both the Departments themselves and their supply chains are facing challenges related to capacity. The staggered announcements of funding can be beneficial for the entire supply chain by allowing it to more effectively manage the delivery of funds over time.

Thank you.

So, the next question comes from Jason Celino from KeyBanc.

Great. Thanks for taking our question. The performance in SMB continues to be quite strong. Wanted to get an update on how retention is in that segment. I know you've talked about 80% retention previously, and I'm just curious how it's been trending.

Well, we don't quantify it each quarter, but we're happy with how it's tracking. We're working on automating it more and more so and allocating resources between the digital experience upgrades to do that. That's what we spend capital on now and, the mix of people working on that versus new subscriptions and so forth, we're experimenting with. But we'll have a quantitative update of that within the year as well, I think. Nicolas, anything more to add?

The SMB segment serves as a cross buyer for the company globally, engaging both new accounts and existing ones. I highlighted this in my prepared remarks. We've observed a high retention rate, even in a market where firms typically utilize the software for a project duration within their subscription period. What we're noticing is that clients extend their use of the software beyond this term, sometimes because projects last over a year or they start using the software across multiple projects. Generally, I mentioned in the last call that the retention we are witnessing in the SMB sector is indeed higher than our initial expectations when we launched the initiative years ago.

Next question comes from Clarke Jeffries from Piper Sandler.

Thank you for taking my question. Nicholas, one thing that caught my attention was the emphasis on the growing significance of AI in the company's operations. Can you discuss what the immediate impact on the traditional portfolio will be as a result of this increased focus? Are you revisiting monetization opportunities? Are there aspects of asset analytics that you believe could be integrated into the traditional portfolio in the near future?

There are two, let's say, two areas of investments for AI right now. The one which is ready and in the market is around asset analytics. That's what I was commenting on, saying we're generating quite a bit of traction with this AI-based asset analytics solutions. It's in the U.S. and globally, there was one account that uses our solution OpenTower IQ to create digital twins for tens of thousands of towers just in the U.S. And we believe that usage of Digital Twin technology and AI at that scale, it's quite unprecedented. And we also see traction with our solution for roadway maintenance called Blyncsy, the acquisition we did a year ago. We see that with DOTs across the U.S., and we're getting a lot of interest from transportation authorities around the world to the extent that we're exploring in our rolling it out to other geographies. Right? Now the business model around asset analytics is completely incremental to the core business because the pricing is based on assets which can be a number of towers or it can be the length of the roadway network. So, it's all on top. And by the way, all of that revenue that we're realizing right now and the growth opening going forward is on top of the total addressable market we've been discussing for years, which was all around the number of engineers and how much more engineering software value we can create with them. Now there's another area of AI, which is quite interesting, and it's around design. This is more in development right now, and we're getting great traction from representative accounts, who we see a huge potential in leveraging AI, again, to get more from less to get more from the existing resources that they have, automating mundane tasks if need be, for example, drawing production, are simply allowing the engineers to be more effective by acting truly as a Co-Pilot. The monetization there will have to be potentially different from some of those capabilities. If we're talking about automation, then a user base pricing, obviously, is not totally adequate, right? You can be sure that whatever efficiency gains we generate, we will capture a fair share of that value.

The next question comes from Warren Myers from indiscernible Securities.

Good morning, everybody. Thank you. Just, I guess, one question. What is the status of what, I guess, Bentley is called Phase 2 of your products and platform development? And when do you foresee a meaningful commercial impact in terms of deliverables?

So, what you're referring to is the adoption of our digital twin technology across the portfolio. Phase 1 was the development of iTwin as a platform. Phase 2 involves leveraging iTwin capabilities to enhance existing applications. Phase 3 will consist of fully native digital twin applications that we're currently developing. We just released a new version of MicroStation that includes capabilities powered by iTwin for ad hoc, or unstructured, collaboration. This is currently in tech preview, and we will continue to refine it with our users to ensure it meets their needs. It's important to note that the phasing might be a bit misleading because it may seem like we're moving from Phase 2 to Phase 3, but we are actually working on applications that belong to Phase 3. The application I mentioned involves investments in an AI-based solution specifically for site engineering, which will be a next-generation engineering application leveraging AI capabilities. We expect to launch it at our annual conference this year.

Next question comes from Kristen Owen from Oppenheimer.

Good morning. Thank you for taking my question. Nicholas, I wanted to come back to the permitting reform legislation that you discussed in the prepared remarks. You've previously talked about power line systems really sort of sitting on a launch pad, I think is how you described it, waiting for that permitting bottle next to clear. I'm just wondering, can you speak to the PLS fundamentals today and how you would assess that opportunity unlock? I understand there's a little bit of lag from when the legislation is signed to when we see those bottlenecks clear.

The growth of PLS is already very strong even before the permitting reform has taken full effect. We see significant growth in the U.S., Canada, and EMEA. This is occurring prior to the impact of permitting reform, as we anticipate long-term expansion projects. The existing infrastructure must support the demand for electricity, which is increasing without delay. The U.S. is experiencing a reshoring of companies and incentives to transition from fossil fuels to cleaner energy sources. Additionally, the rise of AI is driving the creation of data centers that are highly electricity-intensive. The focus is on optimizing the existing electric grid, which is where we currently observe PLS growth. As permitting reform starts to take effect—though it will take time for the federal rule to facilitate environmental reviews within the projected two-year timeframe—we expect to see a future impact on projects and the use of our software. From a PLS perspective, this means very strong growth is achievable by enhancing support for the existing electric grid to meet rising electricity demand.

The next question comes from Michael Funk from Bank of America.

I have a quick question regarding the ARR growth guidance for the year. It's good to see that you're falling within the range you set. I also noted your comments about some seasonality in the latter half of the year. However, could you clarify what you have considered at the high end of the range? Are there more optimistic scenarios that could explain why you might be falling short of that high end for 2024?

We expanded our guidance range this year from our usual 2 percentage points to 2.5 percentage points because the potential from asset analytics is significant. I mentioned that we're on track for substantial ARR growth from asset analytics alone. However, the competition for major procurements is fierce, and this will play a crucial role in achieving the higher end of our ARR growth forecasts. So far this year, we've been successful, and we remain optimistic about this aspect.

And is the timing difficulty, is that more geopolitical or is that more macro-based, do you think, Greg or Nicholas, I don't know who has the best view on that?

I believe geopolitical issues primarily affect us in China. In countries experiencing electoral regime changes, we see infrastructure investments, such as in the U.K., remain a priority in India. While that may not have been a regime change, it still holds importance. We reserve the term geopolitical for China, particularly regarding anti-American sentiments. These issues persist but are not the only challenges in China, which is also facing general softness. As we mentioned, the annual recurring revenue (ARR) in China has decreased to 2.5%, down from a little over 2% more than two years ago when it was at 5%. This decline has negatively impacted our overall ARR growth and is expected to continue.

Indeed, there are no geopolitical concerns. I did mention that there was an expected slowdown in India, which remains solid, nevertheless, due to the elections in Q2, but the government of President Modi is quite clear that they want to immediately resume investments in infrastructure. So that's all very good. There were many elections in Europe at the European Union level, and we expect continuity. President Ursula von der Leyen has been reconfirmed as the President of the EU Commission. There are changes in governments in the U.K. and France, but we don't expect any major implications in terms of investment priorities. So indeed, the only country where there are geopolitical changes, rather than political ones, is China.

And we emphasized that the U.S. legislation has been the only place the word bipartisan appears in the U.S. is attached to infrastructure legislation, I am exaggerating a little bit, but we think that's not up for change.

Next question comes from Dylan Becker from William Blair.

A nice job here. Maybe, Nicholas, sticking with the energy reform theme to a certain extent. I think, right, people think of infrastructure as public investments. If that gets pulled forward in some capacity, how are you guys thinking about the opportunity for private capital to start flowing into the ecosystem? And maybe what that can mean around kind of like broader investment opportunities?

I believe that all players in both public and private sectors will benefit across the entire supply chain, including software providers like us. There is increased investment in the electric grid not just for maintenance but also for expansion. We all understand the necessity to expand the electric grid to meet rising electricity demand and to incorporate renewable energy sources, which are often located far from where the energy is actually needed, such as water, solar, or geothermal energy. Therefore, the expansion of the grid is essential, and it will ultimately benefit everyone in the supply chain. I would not be surprised to see private investments emerging to support this initiative.

So, the next question comes from Matt Martino from Goldman Sachs.

Nicholas, just wanted to get an update as well from Werner on just kind of the prospects of your growth algorithm as the year progresses for ARR growth, especially as we get in the back half of the year? Just trying to understand the dynamics between kind of the extent to which renewals, application mix accretion and pricing escalators will factor into the remainder of your growth as we think through the back half of the year. Thank you.

Is that a question you want to tackle, Werner?

Yes, I'm happy to provide an update. We expect our annual recurring revenue to increase in the second half of the year due to the renewal timing of E365 and the factors related to floors and ceilings that we discussed last quarter. Additionally, the ramp-up of asset analytics deals is gaining traction, and we have a positive deal pipeline for the second half. Currently, our year-over-year ARR growth is minimally impacted by programmatic acquisitions as we move into the second half, and we anticipate a bit more demand. Regarding underlying growth factors, earlier annual escalations may present a slight challenge this year, with expected escalations coming in a bit below last year, but still within the mid-single-digit range. We believe these adjustments are reasonable and necessary to address our inflation related to colleague compensation, cloud costs, and internal software use. Pricing remains a critical element, and the application mix, which has developed as expected, is also a key growth driver for us. We do not foresee significant changes between the first and second halves of the year in terms of application mix. Furthermore, new logo growth continues to be robust, with a 4% year-to-date growth rate, which is a historical high for us, and has remained strong over the last six quarters with growth rates of 3% to 4%. We expect new logos to remain strong contributors going forward. Regarding escalation, I want to remind you that we set it annually. It is not subject to change between the annual settings, and it was established at the beginning of last quarter, I believe, and it is about a percent or lower than last year.

Next question comes from Siti Panigrahi from Mizuho.

Thanks for taking my question. Greg and Nicholas, congratulations on your new roles. I want to ask about the current macro environment and potential lower interest rate and U.S. election, how does that impact your business? And could you talk about the trend and IIJA spending heading into 2025?

Yes, I'm happy to. Would you like to start, Greg?

I'm happy to address that, but would you like to start, Greg?

Okay. From a political perspective, regarding the U.S. elections, I believe this is what you're referring to. Infrastructure is a widely supported issue. As I mentioned in my prepared remarks, the President signed the Advance Act, a bipartisan nuclear energy bill, and the Senate has proposed a new bipartisan bill. This is a topic that unites everyone; there is a consensus that we need to invest in infrastructure. Therefore, we do not anticipate any slowdown regardless of the election outcomes in the U.S. As we noted earlier in this Q&A session, market sentiment is very favorable for infrastructure investments in our operational areas. It is important to remember that most of our business involves public works utilities. While some segments of our business with private firms, such as mining companies needing to secure funding for new projects, have been affected by high interest rates and the challenge of raising capital, this has resulted in that part of our business being less robust than it was about three years ago. However, the majority of our business is focused on public works utilities and is driven by public investments, and we do not foresee any slowdown in this area. Regarding the IIJA, only 38% of the funds have been announced so far. It's crucial to remember that an announcement does not guarantee an award; that's the next step, which can take anywhere from six months to a year depending on the projects. Once the awards are made, the funds will start to flow, provided that the receiving entities can begin the work. At that point, this will lead to increased utilization of our software and present a growth opportunity for us. Overall, we are still in the early stages of IIJA funding as a supportive factor.

If I could just summarize the tone for us from the perspective of the four years now that we've been public. Really the resilience of road and rail and water and grid in the world, the resilience of all those networks has just become recognized as a long-term necessity. It's not a discretionary aspect of public policy. It's the most important thing that governments are responsible for. And we don't think it's subject to sentiment or even politics very much at the moment, it's a consensus priority that's keeping civil-led structural and geopolitical engineers busier than ever they have been with a big backlog of more of the same.

Next question comes from Josh Tilton from Wolfe Securities.

Can you hear me?

Yes.

Congratulations on the quarter. I want to extend my congratulations to Nicholas and Greg. My question is directed at either of you, regarding both qualitative and quantitative aspects. How do you view the sustainability of double-digit annual recurring revenue growth, especially considering that net revenue retention is tracking in the single-digit range? As you've noted, much of the new growth is coming from smaller customers. How can we, as investors, gain confidence in the ability to maintain the durable double-digit growth rate that we value moving forward?

I have mentioned before that if you want to discuss future ARR growth rates, please provide the assumptions regarding inflation, as escalation is directly tied to market inflation and will likely stabilize. We believe the demand environment, both in unit and real terms, is not heavily influenced by macroeconomic cycles. While public spending has historically been seen as countercyclical, that may have tempered recently due to its current high levels. Regarding public finances and inquiries about public-private partnerships, I believe that even a new labor government in the U.K. will be more open to private financing for infrastructure, which I see as a positive direction for the future. Therefore, I don't believe demand will be a concern for the sustainability of our SMB growth. The current 4% ARR growth from this segment has shown durability over several years. For instance, the engineering firm sentiment reported by Nicholas Cumins reflects the views of smaller firms, which are increasingly participating in networks like the roadway and highway projects we mentioned with PennDOT. These factors give us reason to be optimistic. However, to achieve double-digit growth, we need both components to be in place, and it appears that the inflation aspect and escalation factors will remain elevated for an extended period.

And our last question comes from Blair Abernethy from Rosenblatt Securities.

Just to follow up on the roadway maintenance business, can you share what the selling cycle looks like now in terms of timing? How long does it take to introduce a pilot and start increasing revenue for Bentley?

The recent state that has emerged followed a three-month period. It's mainly a matter of quarters. Selling to departments of transportation and highway maintenance is applicable not just at the state level but also at county and municipal levels. They are not in competition with each other; rather, they share innovations and closely monitor each other's successes. They all now face a federal requirement to report and maintain infrastructure, which aligns well with our asset analytics offerings. This process doesn't have to take long, and that contributes to our positive outlook for ending this year with significant growth in asset analytics. Regarding AI, we are integrating it into our existing products, which has been our plan for the platform, but asset analytics, as Nicholas noted, is a completely additional revenue stream, charging per asset. Nicholas also mentioned that the new executive group's perspective sees asset operations as the next big opportunity for us in asset analytics. This could quickly become significant and potentially drive notable ARR growth by year-end. Nicholas, would you like to add anything?

It's a very easy so, because it's a very easy solution to deploy. It's very easy to show the impact of it because it generates insights so quickly from dashcam data, etc. Overall, as Greg said, asset analytics is usually exciting because it does tie to the much bigger growth opportunity we have with asset operations, which, by the way, is also a massive growth opportunity for the engineering services firms that we serve that many of them as busy as they are right now, on the projects, many of them are expanding their business or want to expand their business, nevertheless, beyond the points of the infrastructure assets, they want to have a more recurring business, if you want, with owner operators to help them for maintenance, and we happen to have software to help them do exactly that. So, it's a hugely exciting growth opportunity for us at many levels.

I would like to highlight that, despite our hard work and success in this quarter, I was particularly impressed with our balance, visibility, and linearity. Our primary focus remains on the long-term, especially in regards to the opportunities in asset operations, which we see as crucial for increasing our total addressable market and driving growth. I believe we are in a strong position as we concentrate on this area. We've significantly outpaced our profitability targets this year, but our goal is to achieve a consistent 100 basis points improvement in efficiency and margins annually while investing as much as possible into long-term initiatives. This encompasses asset analytics and asset operations, where we also plan to return to programmatic acquisitions.

Thanks. So, that concludes our call today. We thank you for your interest in time in Bentley Systems. Please reach out to Investor Relations with further questions and follow-up, and we look forward to updating you on our performance in coming quarters.