Earnings Call Transcript - BSY Q3 2021

Carey Mann, VP of Investor Relations

Good morning, everyone and thank you for joining us for Bentley Systems’ Q3 2021 Operating Results Webcast. I’m Carey Mann, Bentley’s VP of Investor Relations. On the webcast today, we have Bentley Systems’ Chief Executive Officer, Greg Bentley; and Chief Financial Officer, David Hollister. Before we begin, allow me to provide a disclaimer regarding forward-looking statements. This webcast, including the question-and-answer portion of the webcast, may include forward-looking statements related to the expected future results for our company and are, therefore, forward-looking statements. Our actual results may differ materially from our projections due to a number of risks and uncertainties. The risks and uncertainties that forward-looking statements are subject to are described in our operating results release and other SEC filings. Today’s remarks will also include references to non-GAAP financial measures. Additional information, including reconciliation between non-GAAP financial information to the GAAP financial information, is provided in the press release and supplemental slide presentation. This webcast will be available for replay on Bentley Systems Investor Relations website at investors.bentley.com. Greg will begin today by reviewing business developments and our progress over the last quarter. And then David will take you through a review of the financial results. We will then conclude with Q&A. With that, let me introduce the CEO of Bentley Systems, Greg Bentley.

Greg Bentley, CEO

Good morning, and thank you all for your interest in Bentley Systems' quarterly operating results. Today, I will discuss the business climate and some corporate developments before handing it over to David Hollister for a review of our financial performance. We issued our operating results press release along with another release today. Regarding the business climate, we believe the third quarter of 2021 was quite satisfactory and is in line with our previously stated expectations for the full year 2021, especially in terms of new business growth and Annual Recurring Revenue (ARR) growth, which, due to our subscription model, tend to be closely linked. Given that U.S. federal infrastructure spending legislation has only recently progressed since our last quarterly announcement, it is too late for our full year 2021 expectations or those of infrastructure engineering organizations to be significantly altered. However, our user organizations seem more open to digital solutions to increase their workloads more rapidly than they can increase their workforce. As has been evident in our history as a public company, business conditions vary significantly among different infrastructure sectors. We monitor application usage, which typically aligns with new business growth and ARR growth. For the third quarter of 2021, the trends continued to reflect what I reported for the second quarter of 2021, including a comparison of performance since pre-pandemic. The consistency with last quarter allows me to be concise and focus on what's notably different or newly understood. Starting with the industrial/resources sector, which has traditionally underperformed. This sector comprises a portion of our revenue. However, we showed a new breakdown of ARR by sector in the last quarter, now including Seequent. We have not yet completely integrated Seequent into our metrics for sector revenue breakdown, but we plan to separate industrial and resources into two distinct sectors next year. Industrial will mainly consist of process plants for power generation and discrete manufacturing facilities, while resources will encompass our strong presence in offshore structures, increasingly for renewable energy rather than just oil and gas, and for geothermal and other environmental opportunities. Seequent is seeing significant growth, particularly in mining with a 7% increase in ARR from the second quarter to the third quarter of 2021. This does not include our geotechnical offerings, like PLAXIS, which continues its robust new business growth, nor does it factor in the acquisition of Minalytix, which occurred in September. Overall, I believe our evolving mix within the resources sector positions us favorably for the global energy transition. In the combined industrial/resources sector, the decline in fossil fuel capital expenditures seems to be ongoing according to our application usage readings. Many affected EPC contractors have reportedly reduced their workforce by around 20% since last year, and their usage of our applications has decreased by low double digits. Without this decline among EPCs, our third quarter recurring revenue retention rate would have been 108.5% rather than the reported 106%. Additionally, our project-wise collaboration service has been crucial for work sharing among EPC global resource centers, and their reduced workforce impacts this area substantially. Although new project-wise usage drove growth during the early pandemic, this initial surge of virtual talent has since slowed down. Within industrial resources, infrastructure engineers in owner-operators are responsible for nearly all the OpEx usage while also working on CapEx projects. We believe that owner-operators' project-wise usage can help us gauge their project delivery efforts. Aligning with our findings about EPCs, this usage is also down in low double-digit percentages since the pre-pandemic period. The cumulative impact of curtailments in industrial resources CapEx project delivery, along with significant declines in commercial facilities CapEx inferred from reduced project-wise usage, is nearly offsetting new business growth in ProjectWise. Similarly, our E365 program, where industrial resources represent a larger portion of overall ARR due to EPCs favoring E365 to share their cyclical volatility, faces declines in CapEx usage that outweigh gains in other areas amid the pandemic. Overall, new business growth in industrial/resources, excluding Seequent, has halved since pre-pandemic. However, these headwinds are somewhat offset by notable new business growth in our asset-wise management year-to-date, particularly in lifecycle information management. For assessing the business climate across world regions, we focus on new business growth rather than application usage. This aligns with how we manage our regional accounts and direct sales force. I should note that the relationship between trends in application usage and new business growth is stronger for us compared to competitors with enterprise subscription programs that rely on use-it-or-lose-it commitments. Our E365 program has become more diverse, which moderates the correlation somewhat. By region, there is encouraging news compared to the industrial resources sector. We have observed returning new business growth in the Middle East during the third quarter of 2021, likely due to a rebound in energy prices that we hope will continue. Latin America has also shown significant improvement, and Russia, particularly in industrial/resources, has demonstrated strong new business growth, leveraging its energy export opportunities. Turning to the tone of business by region, India has rebounded in new business growth for the third quarter, though not yet to pre-pandemic levels. India announced a four-year, $1 trillion build-back-better program for transportation and telecom planned to start next year. Australia and New Zealand have lagged in new business growth this year, impacted by unrelated institutional factors, though we believe that positive fundamentals could help turn the region around soon. In Greater China, where we observed geopolitical issues in the last quarter, it's encouraging that attrition during the third quarter matched global norms, resulting in seasonal new business growth comparable to prior years. This region typically relies on a strong fourth quarter, but we believe the foundational demand remains strong. Returning to infrastructure sectors, the decline in ProjectWise usage I mentioned indicates an even steeper decrease in CapEx projects compared to industrial/resources. However, in commercial/facilities, growth in OpEx usage fully compensates, recovering to pre-pandemic levels. To highlight a significant trend, in our mainstay public works/utility sector, indicators globally confirm progress towards pre-pandemic new business growth levels. For notable growth during the third quarter and year-to-date, credit is due to all our products that enhance asset performance for utility grids, water and sewer networks, energy networks, and telecom networks. This new business growth stems from the opportunities I highlighted in earlier operating results. During the third quarter of 2021, we secured new contracts for open towers worth millions in ARR. Together, the quantitative and qualitative data indicates we are achieving faster growth than our previous trajectory. I believe the main drivers of this growth stem from fundamental investments rather than new products or the Seequent acquisition. While these investments coincide with our public trading status, I think the key factor is our commitment to maximizing our potential. These fundamental investments align with the savings generated during the pandemic, which we reinvested to not compromise our target of improving margins in a sustainable way by 100 basis points annually. To summarize our fundamental investments, we have about 600 colleagues in our User Success Organization, which was established at the beginning of 2020. Not all of these roles are new, but they now include our consolidated technical support and professional services resources. Their presence has greatly enhanced our ability to support user advancements and increase the use of our products and cloud services. Our User Success Organization has positively impacted ongoing and new accounts, improving sentiment and facilitating their digital transitions through the new workflows introduced by our success blueprints. Additionally, our ARR now directly correlates with consumption based on term licenses, particularly in our E365 program, where we bill per application per day. The increase in term licenses primarily results from a full quarter inclusion of Seequent, and the third quarter has seen considerable growth in ARR under E365, mainly as accounts upgrade from our traditional ELS program to leverage the support from our User Success Force. We are now extending E365 invitations to larger accounts, creating a significant pipeline for future upgrades. Most of our ARR growth potential hinges on existing accounts moving to E365, and the results from our Success program investments have boosted my confidence in this upward trend. In recent quarters, I have shared insights regarding our ongoing fundamental investments since early 2020. A brief update emphasizes that Virtuosity primarily targets SMB prospects with subscriptions blending software access with assistance from our engineers. Virtuosity evolved from a captive reseller into a direct seller, with over 200 colleagues now managing direct sales, digital engagement, and e-commerce efforts. Through new User Success initiatives, our new business growth in SMB accounts has doubled since 2020, reaching 43% of our overall growth by the third quarter of 2021. For both our User Success and Virtuosity SMB investments, even greater returns could be achieved by enhancing our digital support for users. Unfortunately, our internal IT resources have been constrained due to Sarbanes-Oxley 404 compliance activities as we transition out of emerging growth company status, but we expect to catch up next year. In closing, I want to highlight our SYNCHRO 4D construction modeling offerings, which lead in new business growth year-to-date. The growth is balanced between SMBs and larger accounts, which speaks to the contributions of both Virtuosity and our User Success organizations. Our construction strategy aims for SYNCHRO to be the go-to solution for projects, recognizing that construction involves the dimension of time and space, where going digital is not merely about reducing designs from 3D to 2D paper, but about advancing in 4D. In this year's going digital awards, 28% of projects selected for recognition credited SYNCHRO, and concerning our iTwin platform, 26% of the finalists acknowledged its capabilities. Next, I will discuss corporate developments that relate to our external activities, starting with the going digital award finalists. Expert juries, many of whom are leading infrastructure journalists, evaluated hundreds of project entries submitted by our users. The nominees will be featured in our upcoming infrastructure yearbook and online gallery. The finalists have also presented their projects virtually to jury categories. You can view these presentations on our infrastructure website over the next few weeks. Our year-end infrastructure virtual event will feature keynotes discussing advancements in infrastructure projects and asset management, concluding with the announcement of the award winners. I would like to include you in a virtual event tailored for analysts and investors on November 29, led by Carrie Mann and Shannon Clemens. Invitations will be sent out shortly. Earlier today, Nvidia's CEO presented their GTC '21 keynote, which I understand garnered immense viewership. The presentation included our new offerings compatible with Nvidia's hardware and Omniverse services. As we know, 4D visualization enhances our design processes, relying on iTwin's capabilities to manage evolving infrastructure realities. Jacobs, one of our largest customers, has adopted our technology for digital twins. We collaborated with AEC Advisors to conduct a going digital survey, gathering insights from over 150 CEOs of leading engineering and consulting firms. They anticipate a shift towards delivering 3D models over 2D drawings and expect digital twin deliverables to gain prominence in the next few years. While infrastructure firms primarily engage in CapEx project delivery, many foresee opportunities to create subscription models for analytics, data improvement, and benchmarking services through digital twins. This shift will require a long-term commitment to digital initiatives. With the climate summit in Glasgow leading discussions on infrastructure's potential impact, Goldman Sachs estimates a requirement of $6 trillion in annual green CapEx spending. These expenditures align with our leadership in key sectors, including public works, utilities, energy, and transportation. The faster adoption of green CapEx reflects a pressing global need for infrastructure advancements. Regarding legislative developments, the recent infrastructure spending bill consists of $550 billion in incremental funding that will become committed shortly, covering several vital sectors aligned with our market leadership. Lastly, I have reorganized our executive team into two groups: one focused on operational success and the other on corporate development. Nicholas Cumins will be promoted to Chief Operating Officer, simplifying our operations and enabling a sharper focus on critical initiatives such as marketing automation and integration. I am confident in our Chief Accounting Officer, Werner Andre, who has been preparing for this role. He will oversee compliance tasks, allowing David Hollister to concentrate on corporate development. Before I conclude, the changes in our deferred compensation plan during the quarter were designed to enhance executive talent retention. We offered executives a one-time option for limited reallocations, which resulted in them diversifying about a quarter of their phantom shares, a move made to encourage continued loyalty while respecting investment prudence. I will now hand it over to David Hollister for a review of our third quarter financial performance. Thank you.

David Hollister, CFO

Thank you, Greg. I will begin by discussing our revenue performance. In the third quarter, we achieved GAAP revenues of $248.5 million, an increase of 22% compared to the same quarter last year. Due to purchase accounting for acquired deferred revenue associated with Seequent, we experienced a reduction that impacted our normal results. Therefore, we also report adjusted revenues of $251.4 million, which is a 24% increase from the same quarter last year. There's new accounting guidance that will eventually align GAAP accounting with a more current understanding of acquisition adjustments. However, we won’t be able to adopt this guidance until the fourth quarter, which we plan to apply to our full-year 2021 results, making the adjusted revenue concept unnecessary for future reporting, except for the current quarter. Most of our growth came from subscriptions, which rose 23% from the previous year, representing 85% of our total revenues. Consequently, much of my commentary will focus on subscriptions. We attribute the Seequent acquisition to approximately 10 of the 23 percentage points of growth over the last year. Foreign currency effects contributed slightly under two points, leaving just over 11% attributed to our actual business performance. As we have seen throughout the year, our Public Works and Utilities markets have thrived despite the general downturn in our industrial and resources sectors, which have been negatively impacted by delays and cancellations of capital projects. We are also experiencing effects of these delays in our commercial and facilities sectors. In terms of products and solutions, we continue to perform strongly in our utilities offerings, including electric and communications grades, as well as water and wastewater utilities. Our 4D SYNCHRO construction solution is also performing admirably, despite the aforementioned project delays. Positive contributions were also seen from our asset information management and inspection solutions during the quarter. However, the challenges in the oil and gas sector are slowing growth in our ProjectWise platform, which supports major capital projects. Geographically, our trends have remained consistent with no significant outliers in our revenue results. Greg has highlighted some business commentary regarding geographies with notable new business growth trends, primarily driven by increased annual recurring revenue, which is a good indicator for our future subscription growth. We observed improving trends in new business growth particularly in regions experiencing optimistic sentiments from rising oil prices, such as Russia, South America, and the Middle East. China showed some stability and a modest return to growth, but we need to see more progress as we head into Q4. Unfortunately, ANZ had a disappointing third quarter without an evident macro reason behind it. Our perpetual license revenues saw a decline of $1 million compared to last year, now making up less than 5% of total revenues. We are seeing a continued transition from perpetual licenses to term licenses and subscriptions, which is a positive trend. Our professional services revenues constitute 10% of total revenues, growing by $7.4 million over the same quarter last year, amounting to a 43% increase, mainly due to cohesive acquisitions. Year-to-date, GAAP revenues stand at about $693 million, which is a 19% improvement over last year. Adjusted revenues reached $697 million, up 20%. Our adjusted subscription revenues, accounting for acquisition adjustments, have increased by 18% year-over-year, with approximately 3% from currency effects, 5% from Seequent, and the remainder from overall business performance. Perpetual licenses have increased by $2.6 million year-to-date, reflecting the ongoing shift towards subscriptions as discussed previously, while professional services have grown by 65% year-to-date, largely due to cohesive company dynamics. Our last twelve months recurring revenues, primarily from subscriptions but also including some service revenues under contractual plans, have risen by 15.1% compared to the same period last year, with the Seequent acquisition contributing about three percentage points to this increase. Our subscription revenue, recurring revenue, and annual recurring revenue performance have all been affected by the industrial capital expenditure headwinds discussed throughout the year. These double-digit growth rates were achieved despite acquisition and currency impacts due to our diversified portfolio and increased momentum from our focused small-and-medium business initiative. This initiative has significantly contributed to new account growth, which is not reflected in our net retention rate, which stands at 106%, a figure we find disappointing. Given that this metric is based on a trailing twelve-month period, it changes slowly, but we are actively working on improving it through our investments in user success. Finally, our annual recurring revenue is up 26% compared to the same time last year, with Seequent contributing 13% of this growth. The remaining 13% comes from our business performance. This represents an acceleration in growth compared to our Q1 and Q2 results; however, it's important to remember that Q4 is traditionally our strongest quarter for ARR growth. Our GAAP operating income and net income reflected a loss for the quarter, driven by an $89 million one-time accounting charge due to changing a portion of our non-qualified deferred compensation plan from an equity-based to a cash-based arrangement. This reclassification was influenced by executive retention dynamics that led to this decision. We experienced an accounting charge of $89 million for shares converted from equity to cash obligations within this plan, effectively acting as a share buyback that will unfold financially over time. As a result of this change, our outstanding share count was reduced by 1.5 million shares. Moving forward, this converted portion will be linked to actual market performance, requiring periodic adjustments and potentially causing fluctuations in our operating expenses. For the third quarter, our adjusted EBITDA stands at $85 million, with an EBITDA margin of 33.6%. This brings our year-to-date adjusted EBITDA to $237 million, achieving a margin of 34%. This year-to-date figure represents a 25% increase over the same period last year. It's important to note that our operating expenses are typically higher in Q4, and we will continue to invest for growth, aiming to maintain our margin expansion targets. We remain committed to the financial performance expectations we previously shared, which are not being modified at this time. Regarding liquidity, our third quarter GAAP operating cash flows have improved by 47% compared to the same period last year and show an 18% year-to-date increase. Our cash flows are generally subject to short-term fluctuations, and we discussed some cash flow trends and unusual acquisition-related outlays during our last quarterly results call. We continue to anticipate that our business will generate cash from operations in the range of 85% to 90% of adjusted EBITDA. As of September, our net debt was $1.18 billion, with a net total debt leverage for Seequent at 3.4 times. Our net senior debt leverage is effectively zero, given we have $156 million in cash and $68 million drawn from our $850 million senior secured revolving credit facility, leaving $782 million available for borrowing. I had initially projected a leverage ratio below four times after the Seequent acquisition, and we are currently ahead of that target and moving towards further deleveraging, aiming for a leverage ratio below three times. Our capital structure remains robust, fully capable of supporting our business strategies, including programmatic acquisitions that we plan to pursue when opportunities arise. In closing, I want to mention our annual outlook, which remains unchanged at this moment. We are working diligently towards achieving our upper-end targets, but a considerable part of our financial performance depends on the fourth quarter. There's still much to accomplish, and expenses typically seasonally rise during Q4. We are focused on reinvesting in our business for growth, prioritizing long-term returns over short-term margin gains. Lastly, I want to emphasize our guidance regarding outstanding shares, which has adjusted due to our share repurchase related to the deferred compensation plan we discussed. With that, Gary, we are ready for questions.

**Operator, **

All right, we'll start with Matthew Broome from Mizuho.

Matthew Broome, Analyst

Thanks very much for taking my questions. So it's great to hear about improving new business growth in the Middle East and Latin America. But to what extent do you anticipate this will translate into a broader rebound for resources customers? And given that many of those customers are on consumption contracts, is it possible that a rebound could happen quite quickly? If and when EPCs start rehiring.

Greg Bentley, CEO

I believe this aligns with EPCs beginning to rehire. My guess is that this depends on their evolving business mix related to energy transitions and the recovery of energy prices. It's clear that even fossil fuel operational expenses remain important and are not at risk, which presents a great opportunity for us. For example, the asset lifecycle information management we mentioned is trending positively. However, regarding the nature of capital projects in fossil fuels, I'm not sufficiently informed to feel optimistic about that. Nonetheless, if EPCs start hiring for any projects, our ProjectWise and applications will quickly be utilized again. We have excellent new applications for wind power tunnels and other areas that EPCs are looking to pursue. However, they need to adjust their strategies and build up new backlogs in those areas, and I don't feel equipped to assess how quickly that might happen. In certain countries, rising energy prices are enabling them to invest in public works and utilities, which is the immediate effect we are already observing.

Matthew Broome, Analyst

I see. Okay. And then it sounds like virtuosity had another strong quarter. Do you anticipate further increasing the size of your inside sales force and other ways you can sort of further accelerate virtual season momentum?

Greg Bentley, CEO

Yes, I think one of the spending directions David Hollister mentioned at the end of his remarks is that we are committed to meeting our margin target for the year. We would look to add headcount in virtuosity more quickly while maintaining that goal. We are not yet experiencing diminishing returns in new application usage prospects in SMB, so we aim to increase our efforts over the coming year.

David Hollister, CFO

Indeed, it's at the front of the line for resource allocation. And it's not just headcount, it's also continued investments in technology and marketing, marketing tools, and Google AdWords, and we're seeing success. So we're going to keep feeding the leader there.

Matthew Broome, Analyst

That makes sense. And then maybe just one last one for me. Just in terms of M&A, does your current focus remain the geotechnical and environmental opportunity? Or are you looking at other opportunities as well?

Greg Bentley, CEO

I think the opportunity set presented by the infrastructure spending, though, and energy transitions are very significant and should have everyone's attention in terms of potential return on new investments.

David Hollister, CFO

Thank you. Next, we'll go to Jason Celino from KeyBanc.

Jason Celino, Analyst

Perfect. Good morning. Thanks for taking the time today. Maybe just a couple for David. The slight acceleration in ARR, constant currency errata 13%. Nice to see. It sounds like the business is doing well maybe help us unpack, that acceleration over the last quarter.

Greg Bentley, CEO

Yes, it's very much along the dimensions of the tone of business sentiment that Greg described in all of those areas. Again, it's an acceleration from, I think we showed 10% year over year growth in ARR constant currency. Net of onboarding Seequent in each of the first and second quarters. So this 13% is pretty impressive it includes some fairly nice wins related to communication towers solution, which contributed close to 3 million of that ARR growth during the quarter, which wouldn't have been included in prior quarters. So, yes, it's across the board. It's really impressive. But I'll again, caution, it's the third quarter. We need to do that again in the fourth quarter because so much of our ARR growth opportunity happens in the fourth quarters, just the business cycle we have and seasonality we have. So I'm cautiously optimistic about the acceleration. But I am also cautious, in particular, that the fourth quarter is much more important for us than the third quarter.

Jason Celino, Analyst

Got you. And that's probably the main reason as to why you're keeping the guidance unchanged but giving us some of those hands-on direction.

Greg Bentley, CEO

Yes.

Matt Swanson, Analyst

All right. I'm having a little trouble getting my video going, but that's okay. Greg, ESG certainly been a big topic which you guys came out, especially timely, like you mentioned with the infrastructure bill, the climate summit. Could you just talk to us a little bit about how this theme is tangibly driving your business today as well as maybe like any qualitative changes you've seen in customer conversations, that might give us some idea of the impact we could see in 2022.

Greg Bentley, CEO

Well, even with what can be spent under new government programs, not only in the U.S., but elsewhere. It's a fraction of a percent of our infrastructure capacity that can be new. So extending the lifetime of existing infrastructure assets is necessary, but they now need to be resilient for environmental adaptation and energy transition. And digital twins are the way to do that. I think when these AEC CEOs, we referred to their going digital survey when they recognize that digital twins are going to help them participate in the OpEx, lifecycle of the assets they engineer, and everyone's doing that for sake of safety and resilience, and energy transition, it sort of puts the digital twin opportunity front end center, digital twin opportunity and the ESG imperative, are closely linked, because we can't engineer enough new infrastructure to make a difference. It's improving and increasing the fitness for purpose of the infrastructure we already have. That is not only our focus now, but I think opportunity as the engineering firms see it on behalf of the owner operators. So remember, we want to help the owner-operators get to digital twins for better asset resilience and throughput with the engineering firms being developing for our AI twin platform, their cloud services that will be a new business opportunity for them in helping cover the owner-operators. So it's not limited to our sales, but sales via the engineering firm. So having surveyed the CEOs of the engineering firms for the first time, we're glad to see some alignment in the recognition of that opportunity, because we need all that help to get to the owner-operators.

Matt Swanson, Analyst

Yes, that's fantastic. And I guess, kind of building on that same theme, we've talked about the pandemic going digital faster. So as we see recovery kind of progress at different states for different regions. Are you starting to get a better sense of the durable trends that are emerging from the pandemic, especially in terms of the long-term pace of going digital. I guess, as people go through the recovery, are you seeing any sort of hesitancy to continue the progress? Or is it kind of a newfound emphasis that will continue on?

Greg Bentley, CEO

I think it's a newfound emphasis that will continue on, but particularly for infrastructure engineers, a portion of their work had been on job sites, not limited to company offices, and when they had to virtualize everything, they realize they can virtualize that too, with digital twins of the job sites, and for remote inspection of the assets and so forth. It was a necessity during the pandemic but it's an opportunity hereafter for them to work on more projects anywhere and have a greater set of opportunities. They also can grow their workforce by adding people anywhere. And that is already a huge focus. For instance, for these AEC CEOs, they realize that competition for talent is never going to end. It's all the more intense and being virtualized through our collaboration methodologies, and lessened to add the talent wherever they can find it. So those are things I think are never going to go back.

David Hollister, CFO

Yes, fantastic. Thank you guys for the time.

**Operator, **

We will next go to Gal Munda from Berenberg.

Gal Munda, Analyst

Perfect. Can you hear me now?

Greg Bentley, CEO

Yes.

Gal Munda, Analyst

That's great. Hi, everyone. I appreciate the opportunity to ask my questions. My first question is to elaborate a bit on Matt Broome's earlier inquiry regarding the trends in the underlying business, particularly in the energy sector. David, you pointed out that without the impact from E365 usage, you would likely see about a 2.5 percentage point improvement in your net retention rate based on current observations. My question is, when do you anticipate that this headwind will no longer be an issue year-on-year? If current trends persist, when do you believe you will have a clear path for a more typical run rate?

Greg Bentley, CEO

If you examine the progression of the net retention rate quarter by quarter, we've had two quarters at 106%, which we acknowledge is disappointing for us. However, this is a trailing 12-month metric, so we won't see a quick bounce back to 110% next quarter. Instead, it will gradually increase. We will see improvement as we anniversary the usage reductions from the affected EPC accounts, which went from strong performance to lower performance. Additionally, we will start to factor in the impact of new accounts. Our annual recurring revenue appears to be moving in the opposite direction of the net retention rate because new accounts are not included in the net retention rate. As these new accounts begin to come in and we fully anniversary the good performance from the EPCs from 12 months ago, we will start to see that rate increase.

David Hollister, CFO

It's a modest caveat to that as we don't have experience with the SMB subscription annual renewals yet, and we will 6 months from now.

Carey Mann, VP of Investor Relations

I would also add to just probably more fundamentally and thinking about this long-term. Our investments in user success, 600 people focused on retention and adoption, and expanded adoption. We will continue to build and grow momentum going forward.

Gal Munda, Analyst

Right.

David Hollister, CFO

Now we're doing the E365, we see the difference in greater accretion. I mean, the accounts that are in E365, then the universe of other accounts for that reason, but it's obscured by the EPCs all being on E365 still.

Gal Munda, Analyst

As a follow-up, we have previously discussed the opportunities presented by the infrastructure bill. However, with the upcoming climate incentives, it feels like we might be entering a new era of investment in green capital expenditures. Greg, could you share your thoughts on the current green capital expenditure opportunities? I'm interested in how you perceive this regarding the overall business exposure and its growth contribution. Additionally, how do you foresee this shifting over the next five years? Is it reasonable to believe that traditional operating expenditures primarily generate subscription revenue for you, while future growth, particularly in utilities, will largely stem from green initiatives given the prevailing trends?

Greg Bentley, CEO

I think it is most that's why I wanted to show the mapping between the green CapEx priorities and the Public Works and Utility sector plus resources which for us is going to be environmental, mainly in the future. So I think that there is a strong correspondence between what civil and structural and geotechnical engineers work on and green CapEx, and it doesn't have to take long, for everything that's done industrially for renewables, you need to connect up the grid. And that needs to be considerably expanded and fortified. And there isn't yet enough funding allocated for it. But it won't happen that we add renewables and not capacity to use the power where it's needed for electrification. So, I think our accounts feel very good about their backlog for years to come. Not only is it good business, but it's good for getting green and getting safer.

Gal Munda, Analyst

Do you think there could be a super cycle in terms of CapEx investment that drives a very long-term opportunity.

Greg Bentley, CEO

So, this gets into for a super investment cycle, we would need to have private investment in infrastructure as well. But there's more than enough private investment that would like to invest in infrastructure and how that gets enabled then, and facilitated is a question for policymakers. But the enthusiasm in ESG investing easily translates to an enthusiasm for infrastructure in green CapEx investing, I guess, you hear some of that coming out of Glasgow, with banks supporting green CapEx investment and so forth. Together if we get private investment added to the government investment, instead of either or that that could lead toward a super cycle, I suppose. I believe it's necessary. Also, I just don't know how quickly that can come about.

Joe Vruwink, Analyst

Okay, great. How is Greg and David. Other than 4Q being an important quarter in terms of magnitude and wanting to appreciate that appropriately in the forecast. Is there anything you're seeing from either a pipeline standpoint, or hearing in customer conversations, that's giving you pause as it relates to execution here at year-end, and do business growth targets?

Greg Bentley, CEO

Joe, I heard something that gave me some concern at the AEC Advisors CEO Summit. The CEOs present, who work in infrastructure engineering, expressed some apprehension that the infrastructure bill in the U.S. might be delayed for a year, based on past experiences with roadway bills. If that delay were to happen, it would significantly impact expectations for order volumes. So, it’s a relief to know we don’t need to worry about that anymore since the infrastructure release is now law. While this mainly concerns next year and the following years, there was some concern based on past experiences that a delay could lead to indefinite postponements. Thankfully, we don't have to think about that now.

Joe Vruwink, Analyst

And maybe the infrastructure bill will just be my follow-up without quantifying anything because I know that's still tough to do. What would be your expectation for timeline? If funding gets allocated, 1Q of next year, when might be the earliest Bentley's starts to see activity as it relates to just your customers planning, they're going to have to spend or hire to support increases in their backlog. When does Bentley see that in your own new business growth?

Greg Bentley, CEO

Well, I don't think it needs to take many quarters or a couple quarters after that, but the most precious thing I think I heard at that AEC Advisors CEO conference, and we're going to have the head of AEC Advisors be with us in our keynote on December 1, as I mentioned, but the head of the largest firms said, look as an industry in AEC, we're only going to be able to add to our workforce 1% per year. That's based on all the available engineers in school and coming into the pipeline or back out of retirement or whatever. And obviously, the ambitions just to continue the growth rate, let alone increase the growth rate, require much greater productivity therefore, and going digital is everyone's best idea for that there's just no impediment to it as once there was. Will some represent some of the findings of this survey, but generally, the CEO said that the impediments to going digital in general, are people in their own firm who haven't adapted yet to that not constraints on funding or demand or needing to meet client deliverables last week, as we talked about.

Kash Rangan, Analyst

Okay. I just unmuted myself. Congrats on the results. Greg, curious to get your perspective on the economic headlines that have been invoked lately, which is labor demand, being very high relative to supply and also inflation. How is that impacting your customers? or maybe it's not impacting your customer? What is your overall view on those forces, as it pertains to your end markets, willingness to invest in technology? And also secondly, I’m curious to see what are the milestones that we should be looking at, as this infrastructure build really takes hold and leads to actual tangible business? What are the things that you're looking for that we should be looking for there to see how that could start impacting Bentley more positively?

Greg Bentley, CEO

Well, regarding the first question, labor supply constraints are already impacting infrastructure engineers. Engineering firms are hiring from one another, but there isn't a new supply to handle the increased demand for structural, civil, and geotechnical engineers. That's why transitioning to digital solutions is important. In relation to inflation, materials, and supply chain constraints, these factors do not significantly impact the parts of the project cycles we are involved in, which are closer to the beginning stages. With the infrastructure bill, while half focuses on roads and bridges, there is also significant expenditure in other areas. The legislation directs the government to establish new programs for the grid, transit, and other sectors. Some programs specifically encourage digital investment, not in large tangible forms, but in how they are organized and who leads them, which will be crucial. These are new initiatives, and there isn’t historical data to predict how they will unfold.

Kash Rangan, Analyst

Got it. Just one last thing. This metaverse has the potential to engage more consumers. What is Bentley's perspective on the metaverse? Is it essentially about digital twins, or does it hold broader implications for your business if the metaverse gains traction?

Greg Bentley, CEO

Recently, we are starting to see immersive 3D environments for consumer applications. The advancements in technology for greater immersion and performance will enhance the experience of digital twins. Our iTwin platform aims to support various visualization environments, extending well beyond just the HoloLens. There is significant investment in this area, but for the industrial and infrastructure sectors, it's essential to immerse oneself not just through static images, but by leveraging computing power to explore the history of construction, the design options that were previously considered, the construction timeline, and the potential impact of not maintaining assets. This is what we refer to as the time slider or digital chronology. This understanding goes beyond traditional immersive environments and is derived from a ledger of changes in our iTwin platform, integrating ET, IT, and OT. We have never focused specifically on the last mile of the immersion experience, but it is encouraging to see substantial investments aimed at improving this aspect. Such advancements will enhance the value of content in an infrastructure digital twin, making it more effectively experienced. This was demonstrated today with Nvidia, showcasing the potential of their own technology.

Kash Rangan, Analyst

Good to see you, Greg. Thank you.

Greg Bentley, CEO

All right, everybody. We're going to wrap it up there. Thank you for attending the call and we'll see you next quarter.