Earnings Call Transcript
Bentley Systems Inc (BSY)
Earnings Call Transcript - BSY Q1 2021
Carey Mann, VP of Investor Relations
Good morning everyone, and thank you for joining us for Bentley Systems' Q1 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 of 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 earnings 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 by reviewing business developments and our progress over the last quarter. David will then 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. As in previous discussions of our quarterly operating results, I will begin by discussing the overall business outlook along with our acquisitions and corporate developments. Our CFO, David Hollister, will then explain the financial figures, including aspects where accounting rules might obscure our business progress, after which we will welcome your questions. In the past two quarterly reports, we shared annual outlooks for 2020 and 2021 and outlined our ongoing initiatives. For Q1 of 2021, we are maintaining our previously communicated financial outlook for this year. Since we anticipate the Seequent acquisition will close this quarter, we will update our 2021 outlook during our Q2 report when the acquisition impacts become financially significant. There have been no changes in the overall business trends since our last update, which remains consistent. The first two quarters as a public company experienced unique challenges in 2020, though Q1 was relatively stable. Generally, the first quarter tends to be less dramatic concerning business volume, primarily due to the scheduled annual contract renewals. This year, there were noteworthy upgrades to E365, resulting in unusually high operating cash flows due to annual billing in advance rather than quarterly. Most of our staff and users continue to work remotely, contributing to significant cost savings and our high profitability this quarter, instilling confidence in meeting our full-year operating margin goals. While we are optimistic about economic recovery and public policy driving infrastructure activity, I believe that a return to in-person work will also boost business growth, particularly for ProjectWise, AssetWise, and iTwin cloud services. This first quarter has reflected our usual seasonal patterns as confidence grows within our sector. It’s essential to note that anticipated increases in post-pandemic usage have not yet translated into revenues or annual recurring revenue for Q1 of 2021. Under our ELS commercial program, revenue is fixed for the upcoming year, so only renewals can contribute to growth, and there are few ELS renewals in Q1. The renewals depend on usage over the previous twelve months, particularly the second-highest monthly usage for each product. Therefore, the low usage in 2020 will dampen renewal growth throughout 2021. To benefit from immediate revenue changes, we have been encouraging transitions from ELS to the E365 program, which allows subscribers to add perpetual licenses as needed while maintaining full utilization rights. Given our emphasis on subscription licensing, we aim to reduce incentives for purchasing additional perpetual licenses. As we charge per application per day for E365, our pricing compensates for the resources necessary for client success. Since mid-2020, this has worked against our revenue and ARR, primarily due to reduced workloads in the industrial sector. However, upgrades from ELS to E365 can enhance ARR even before usage increases, considering we charge a premium for application days to cover our costs. Transitioning to E365 is a win-win scenario, especially as we see increasing interest in going digital. In terms of application usage, while overall usage remained flat compared to last year, we observed some sector variances: a slight decline in commercial facilities, a more significant decline in industrial resources, and slight increases in public works and utilities. Project delivery accounts tend to show slightly lower application usage compared to a year earlier, while owner-operator accounts have higher usage. We recognize that SMB accounts, which contribute less than $100,000 annually, collectively fall short of the overall potential, and targeting SMBs is a growth initiative for the upcoming decade. We've seen SMB account usage increase significantly over the past year, despite larger accounts experiencing slight declines. Notably, although SMB accounts represent a small portion of our revenues in Q1, they accounted for a significant amount of our new business growth. While perpetual license sales were not strong, term licenses compensated for this. The introduction of Virtuoso subscriptions through our Virtuosity initiative has attracted over 1,000 new SMB accounts. Additionally, we're expanding Virtuosity's offerings to include perpetual licenses along with expert assistance. A new initiative aims to reach students and future professionals by providing no-charge learning licenses in colleges and schools. This approach has worked well for competitors, and we anticipate it will enhance our brand awareness, especially among SMBs. Although the Bentley Education program may reduce revenue from universities, we view it as a long-term investment for growth. Subscription growth in Q1 was strongest from ProjectWise and asset performance applications, promising for our upcoming Seequent integration. Geographically, Russia stands out, and Europe is rebounding while the Middle East is still recovering. Overall, we view Q1 2021 positively, aligned with our full-year expectations. Our initiatives in advancing digital twins for infrastructure aim to enhance global economies and environmental sustainability, transcending traditional ESG definitions and focusing on our role in achieving UN sustainable development goals. This month, Fast Company recognized our partnership with Microsoft for Dublin’s digital twin project as a finalist for innovative urban ideas. The collaboration showcases how our technology can lead to greater infrastructure resilience, with Microsoft emphasizing the potential for more autonomous inspections through advanced technologies. We are excited about the corporate developments in 2021, particularly the acquisitions we discussed previously. We added Ontracks Consulting to strengthen our capabilities in implementation services for asset performance solutions. In Southeast Asia, we've integrated Nadhi Information Technologies to expand our construction modeling software opportunities, aiming for global integration services. Our vision for the iTwin platform is to facilitate digital twins across all types of infrastructure assets. OpenTower iQ is one significant example, being tested for communication towers. As communication towers consolidate, they seek digital solutions for operations, increasing the demand for real-time digital twins to improve reliability and capacity. This case exemplifies the broader potential for digital twins across various infrastructure sectors. The infrastructure digital twin concept relies on integrating essential technologies, demonstrated through OpenTower iQ. This includes capturing real-world data for immersive navigation and engineering models for ongoing asset management. Infrastructure digital twins also depend on sensor technologies and real-time data for accurate insights and operational decisions. Our recent acquisitions aim to enhance our IoT capabilities, bridging the gap between infrastructure assets and existing IoT solutions. Our focus is on making our infrastructure digital twins user-friendly and integrating them seamlessly with sensor data. With these advancements, our platform enables engineering firms to offer value-added monitoring services, crucial for sustainability. We see promising applications in critical infrastructure monitoring, such as at the Oroville Dam, where our solutions improve safety and resilience. Although it's premature to assess other infrastructure failures, the need for digital twins in risk mitigation is evident. Investment in infrastructure must prioritize enhancing existing assets and extending their lifecycle, particularly through digital twins and IoT applications. With our recent acquisition of INRO, we aim to optimize traffic management and improve efficiencies across existing infrastructure networks with ongoing monitoring. Now, I will turn it over to David to discuss our financial results.
David Hollister, CFO
Thank you, Greg, and good morning, everyone. I'm going to jump right in starting with revenues. Our first quarter revenues of $222 million grew 14% over the same quarter last year. Of course, most of that growth comes from subscriptions, which represent 85% of our revenues and grew 10.5% over the prior year. Very little of that subscription growth comes from acquisitions and a little over 4% of that subscription growth comes from the currency tailwinds of a weaker US dollar on average this year, relative to the same period last year. As Greg mentioned, several product lines led that subscription growth with each of ProjectWise, asset and network performance, civil and geotechnical noting as standouts. Our perpetual licenses revenues which are now less than 5% of our total revenues declined by about $700,000 likely influenced by the ongoing progression of our various subscription offerings including term licenses and Virtuosity Subscriptions. Our Professional Services revenues now about 10% of our total revenues increased by $10.1 million or 74% over the same quarter last year. Effectively all of this was stimulated by acquisitions concluded throughout 2020 and fully informed our full year 2021 guidance previously shared. Our recent first quarter 2021 acquisition of Ontracks did not contribute materially to 2021 Q1 results, nor do we consider it material to our expected full year 2021 results. Our acquired digital integrator businesses are growing even since we acquired them. Hence, technically there is some organic growth here which in effect I'm classifying as acquisition growth. So I'll offer a further comment on our services revenues and recent acquisitions. We obviously don't have an ambition to become a Professional Services business. That said, these digital integrator service business acquisitions have brought scale to our existing service offerings and are profitable as you will note a favorable trend and finally positive services margins on the face of our income statement. To have the benefits of scale, capability, and profitability from these acquisitions, while also addressing our underlying primary strategic objectives of digital twin software pull-through and a learning curve for digital twin integrator ecosystem is a compelling combination we think. I'm presenting here on the right, a reminder of our full year 2021 revenue outlook, as was provided during our year-end 2020 earnings call. You'll recall we provided a range of $895 million to $920 million for revenues, representing growth of 11.7% to 14.8%. We believe our Q1 performance firmly supports our full year outlook. Our last 12-month recurring revenues, which include primarily our subscription revenues, but also will include certain services revenues delivered under contractually recurring success plans, increased by 10.7%. This is supported by our recurring revenue retention rate of 107%, which is reflected here on a rev rec 606 basis in 2021 as we are now required to present. The preceding data points on this chart are based on 605 rev rec. Had we presented this metric on a 605 basis for Q1 2021, it would be slightly better, but we'd still run down to 107%. To further quantify the new account growth that Greg highlighted, new accounts contributed 3% of our year-over-year quarterly revenue growth, which is growth occurring in addition to these recurring revenue retention metrics. Obviously, we're not excessively losing accounts as you can see by the consistent 98% account retention metric. But there is an observable modest decline in existing account growth, clearly influenced by largely pre-pandemic Q1 2020 dropping out the metric, which is turning to be offset by new account growth and some observable momentum from our SMB initiatives that we've discussed at length. A significant KPI for us is our annual recurring revenue or ARR, which has grown by 10% over the same period in the prior year. Of this growth, 9% is organic and 1% is the result of the various programmatic acquisitions we've concluded in the last year and this year-to-date. Our ARR growth is seasonal and has a high correlation to contract renewal dates throughout the year. Sequential ARR growth metrics are consummated by the meaningful seasonality patterns in our ARR growth. And I'll speak more on seasonality in a moment. Our GAAP operating income was $55.6 million for the first quarter 2021, up 21% relative to the same quarter last year. As you know, there is a bunch of noise in the GAAP results between endeavor and filter, and to provide more meaningful commentary and analysis of the adjusted EBITDA, which grew 43% over the prior year to $82.8 million. This yields an adjusted EBITDA margin slightly better than 37%. I went to some lengths to explain our recent history and full year 2021 EBITDA margin outlook during our call last quarter, and I encourage you to revisit that. Our margin performance for Q1 2021 is strong. And I again admonish that it is unusually strong due to pandemic-related cost savings that continue to accrue to our benefit. Although, compensation levels and incentive plan payouts are returning to normal for 2021, there are seasonal patterns for this expense recognition, which I will discuss. Further, our travel savings continue to be significant. We are resolved and committed to reinvesting such savings going forward into growth, that being people, go-to-market investments, and acquisitions. In summary, our profitability and margin performance was strong in Q1, but we expect some level of reversion based on reinvestment plans ahead. Thus, I am reminding you of our full year 2021 performance targets which we are not yet prepared to adjust. As you can see here, our GAAP operating cash flows are up over 80%, for both the first quarter 2021 relative to 2020 and for the trailing 12 months that ended. We've consistently presented our business model as highly cash flow efficient, with a conversion ratio of adjusted EBITDA to cash flow in the 85% to 90% range. However, recent and current cash flows are particularly strong and unusual. As I've mentioned, we don't have appreciable multiyear contracts. So there are no upfront multiyear windfalls. However, the conversion of certain ELS contracts with quarterly payment cycles into E365 contracts, where we seek to collect as a deposit the estimated consumption for a full year at the outset of the contract, has accelerated our cash flows. Further, continued expansion of our term license program, where we also seek to collect and maintain a year of consumption on deposits in the form of a CSS, has also generated stronger cash flows. As these programs grow, their cash flows outpace the historical usage and resulting revenue recognition. We are focused and efficient on cash flow, but I don't represent the current bulge in performance to be long-term sustainable. As a quick review of what we discussed in our last call, during our Q1 2021, we successfully executed some substantial financing transactions. The results of both our newly secured $850 million senior secured revolving credit facility and our $690 million convertible notes issuance and the related capped calls, are now reflected in our financial results and position as of March 31, 2021. All of this was undertaken to avail of a receptive market and to enhance our capital structure for continued growth and notably to position us to potentially pursue acquisitions on a larger scale as we subsequently deal with Seequent. As of the end of March, our net debt was $103 million and net debt total leverage was quite low at 0.4 times. Cash on hand and full revolving credit availability position us well to conclude the Seequent acquisition and the cash purchase price of $900 million and to support our ongoing investment for growth and quarterly dividends. Initial leverage after Seequent is still estimated to be well below four times. And our long-term total net debt leverage target continues to be ideally in the two times to three times range. In lieu of quarterly guidance, I thought it would be helpful to offer some commentary on our seasonality. It is historically and still the case, that perpetual licenses are most prominent toward the end of our year. You just heard Greg mention that China, although delivering a solid Q1, typically has a stronger last half of the year for us. It is also the case that relative to other geographies, perpetual licenses in China remain a more prominent commercial choice for users. The new products in 2019, 606 revenue recognition standards introduced some quirkiness as Greg sometimes references. Essentially, any of our ELS contracts that renew and bill annually require upfront revenue recognition of approximately 80% of the contract value, with the remaining 20% recognized ratably over the year. This upfront revenue recognition SKU is more impactful in each year's first and fourth quarters for us. I highlight here the directional pattern of our quarterly revenues for the last several years, which reflect this trend. Although, it could be somewhat masked, by the growth in services from acquisitions, we should all expect the same general pattern this year. That's not backing off of our outlook, which I'll address in a moment, just educating as to normal and expected intra-year volatility, due to accounting rules. Also on the issue of accounting quirks, as we convert annually built ELS subscriptions into E365 subscriptions, we leave behind that upfront revenue recognition and introduce a rev rec pattern that follows the actual consumption of the software and more closely approximates a ratable pattern throughout the year. But when we do that, we compare apples to oranges when looking back to compare year-over-year revenue. For example, an ELS that renewed and booked upfront revenue of 85% in Q1 2020, and then converted to an E365 in say Q1 2021 will reflect only a single quarter of consumption measured revenue recognition in that initial Q1 2021 period. Of course, then in subsequent quarters, the year-over-year comparison reflects a full quarter in the current year, compared to only 5% of the contract recognition during the same quarter of the prior year. Analysis of these dynamics is complicated, given the ongoing migration from ELS to E365. To date, the effects have not been worth much to mention. I will comment now, however, that in this particular Q1 2021 had the portfolio of our converted E365 contracts been normalized for the aforementioned skewing effect, our subscription revenues would have reflected a 2% greater year-over-year growth. We don't get overly excited about it. It will all normalize. And we're just as happy to lead the lumpy ELS upfront recognition behind us, as we continue our E365 migration. I teased before that our ARR growth follows a seasonal pattern which is impacted by the timing of normal annual renewal cycles for our subscription contracts. Historically, the approximate average pattern of ARR growth in a given year presents us 10% of the growth in our Q1. And then, 25% of our growth in each of the second and third quarters, then ahead fourth quarter renewals, which yield 40% of our annual ARR growth. This seasonality is likely to temper going forward, as more annual ELS contracts renewing in Q4 become E365 contracts, which effectively renew each quarter and get reflected in ARR throughout the year. Lastly, just a few comments on operating expenses, we try to concentrate annual raises for our colleagues to occur as of April one of each year. Although significantly abated for 2020, full normalcy will return in 2021. Since approximately 80% of our cost structure is people and related support costs, annual raises are nontrivial and the effect on operating expenses in Q2, Q3, and Q4 relative to Q1 is meaningful. This is further compounded by variable incentive compensation, which is historically higher in the last half of our year. There is also seasonality to certain of our larger promotional and event-related costs, which are historically highest in the last half of our year. And lastly and generally, we are growing. Those cost savings that we have been almost apologizing for are being steadfastly reinvested in the growth initiatives, people costs, go-to-market costs, and acquisitions. That's a good segue, into re-sharing here exactly what we shared last quarter related to our financial outlook for 2021. Our Q1 2021 was at least as good as we expected when we shared our guidance, but not so extraordinary that we feel compelled to modify the full year outlook, at this time, for any of these metrics. Related to Seequent, as Greg mentioned, we continue to navigate the administrative process of gaining regulatory approvals, but at this point, expect no substantive issues. We continue to anticipate a second quarter closing, subject of course to regulatory pace. I remind you here, generally what we expect from Seequent in terms of scale and contribution. Once Seequent closes, then we will update our 2021 outlook, hopefully when we report our second-quarter earnings. And before I wrap up and we open up for questions, I am also resharing here our views on what we are targeting in our long-term financial performance. While we consider a solid Q1 is generally consistent with our views and ambitions for these targets and we'll keep working to deliver them. With that Carey, I think we're now ready for any questions there may be.
Carey Mann, VP of Investor Relations
All right everybody. We'll start with Gal Munda from Berenberg. Gal?
Gal Munda, Analyst
Hello. I was muted. Thank you for taking my questions, and congratulations on the first quarter. Greg, my first question is for you. We've noticed that the adoption of new technology, particularly in the construction sector like BIM, has often been driven by various mandates around the world. Now that we're seeing numerous use cases, including Mexico City, Genoa, and Minneapolis, do you think there could be a mandate that supports the adoption of digital twins in infrastructure, especially since these use cases are demonstrating their benefits? Could this potentially enhance adoption in the future?
Greg Bentley, CEO
The requirement to incorporate digital twins for existing infrastructure would be backed by the return on investment along with safety and resilience. The UK is advancing with digital twins, particularly in relation to Building Information Modeling mandates. Governments have a unique opportunity and responsibility for government-funded infrastructure, feeling compelled to adopt digital technologies to enhance long-term investments. While governments may not need to dictate technology choices in private sectors, public investments, especially those aimed at accelerating energy adaptation and improving the safety and resilience of current assets, present a significant chance. We are highlighting the benefits of this to governments, emphasizing successful examples from both the United States and other countries. However, it should be noted that there is limited influence to show results, primarily due to contracting and procurement regulations that change slowly. Nevertheless, new public investments can serve as an opportunity to extend the safe and resilient life cycle of existing infrastructure.
Gal Munda, Analyst
That's very helpful. I was thinking that most of the investment there is coming from public works, which could have a significant influence on it. My second question is a follow-up regarding the transition from ELS to E365. In previous quarters, we mentioned that this would take its natural course. However, it seems that Q1 may have accelerated this process a bit. You also seem more open to discussing the transition going forward. While I understand the benefits, could we revisit what your ideal model would look like in the future? You're likely not aiming to convert all ELS licenses into E365. What does your outlook appear to be in a couple of years?
Greg Bentley, CEO
I believe that in a few years, we will have completely transitioned, but we were initially cautious because any software company that shifts from a fixed annual payment model to charging per application per day faces risks from fluctuations in market activity. We observed this particularly in the industrial resources sector, which, while not a major part of our business, is significant for E365. It’s understandable that companies familiar with volatility prefer a pricing model that aligns with their workload. However, I think we are past that challenge now, and we are eager to benefit from future growth. We are currently experiencing this, even during periods of slow renewal activity, by actively promoting the E365 upgrade to clients who can transition later in the year. We anticipate this will be a natural progression. Additionally, we have adjusted our contracts to include collars, which our clients appreciate as they expect substantial growth in their own usage as the economy recovers.
David Hollister, CFO
I wouldn't describe Q1 as a period of accelerated conversions. We've already tapped into the easier opportunities. We have gained insights from some daily fluctuations and introduced collars, which currently cover about 40% of our outstanding E365s. Additionally, the pipeline for conversions extending over multiple years is not limited to ELS contracts; it includes larger select contracts that we also aim to convert. At this stage, we have not yet reached the midpoint of the potential conversions into E365.
Gal Munda, Analyst
That’s very helpful. Thank you.
Carey Mann, VP of Investor Relations
Next we'll go to Matt Hedberg from RBC.
Matt Hedberg, Analyst
Hey, guys. Thanks for taking my question. Greg, adding 1,000 customers in the SMB market was certainly impressive over the last year. Given that I think I would assume a lot of them were pressured by COVID. Can you talk about the durability in sort of SMB strength? And remind us how big of an opportunity longer term? I think David said it's about 23% of revenue today. How big of an opportunity is SMB relative to your typical large enterprise focus?
Greg Bentley, CEO
I think we can look at our competitor Autodesk as a benchmark since it’s central to their business. I have knowledge about the distribution of infrastructure engineers and the sizes of the firms they work for. We're feeling encouraged. I initially believed that adding 1,000 new SMB accounts would take us much longer. The products these accounts need are the same ones we offer. I don't think COVID played a significant role here; while collaboration and ProjectWise are important during COVID, ProjectWise isn't targeted at SMB accounts. These are individual applications used by practitioners, smaller firms, or sometimes sole practitioners in infrastructure engineering. We just haven't engaged with them before or made it easy for them to find us. It's encouraging not only because of the number of accounts but also because this could represent a substantial portion of our business. We’re confident about this as we observe the competitive landscape and note how our strategy differs by focusing on inside sales, efficient e-commerce, self-service, and providing expert assistance through virtual delivery and machine learning. This presents great opportunities for us to develop, and I believe it will have significant quantitative impact, which we can affirm for the first time.
Matt Hedberg, Analyst
Thanks. I'll keep it there for the sake of time. Thanks for the answer, guys.
Carey Mann, VP of Investor Relations
All right. Next we'll go to Jason Celino from KeyBanc.
Jason Celino, Analyst
Thanks for taking my question. Digital twins are a significant opportunity, although it's still early in the process. Besides the basic financial metrics, how should investors evaluate the pace of progress in this area?
Greg Bentley, CEO
Well, it's a reason I promote our yearbook. This is where accounts nominate their own projects for Going Digital Awards. And increasingly, it's more and more of a digital twin approach. I grant that's qualitative in assessing that, but it provides great case studies for others to look at and be encouraged from and learn from. But I think this ecosystem is helping when you have NVIDIA and Microsoft recall their Ignite conference showed the bridge inspection case in point that will be on all of our minds now with actual bridge failures. But it's creating mind share among owners that they would expect to have a digital twin, and that's an opportunity they can't fulfill for themselves. They need an ecosystem to do that. It's the future of infrastructure engineers to not be working on road things that can be automated, but to be working on analytics that is enabled by the data that comes out of silos and goes together. So where problems have multiple causes, you can put them together in a digital twin. You can add the sensor real-time inputs and avoid these problems. But to talk about extending the life usefully and safely, it's what most engineers will be working on for most of the future and promoting cases you can see that I am working on that myself to get the word out.
Jason Celino, Analyst
Okay. Great. And then maybe just one quick one. We've seen a number of these smart tuck-ins so far this year in addition to obviously Seequent. But how should we think about the near-term pace of your M&A strategy going forward?
Greg Bentley, CEO
David, I'll ask you to take that one.
David Hollister, CFO
Yeah. So it's been a busy first quarter, and we've still got a pipeline. I wouldn't expect us to keep up the pace in the second and third and fourth quarters that we've had in the first four months to date. But they're still out there, Jason, where this is still part of our normal development of our portfolio. Do we spend multiple years to develop it or can we fill that gap and that wide space more efficiently with an acquisition? And it's still part of our strategy. It's still part of how we're going to grow, but in terms of pace we can't keep up that first-quarter pace. Just bearing through, we're pretty disciplined about integration as you know and we've got some work to do with all that we've taken on so far this year.
Jason Celino, Analyst
Okay. Excellent. Thank you.
Carey Mann, VP of Investor Relations
Next we'll go to Joe Vruwink from Baird.
Joe Vruwink, Analyst
Great. Hi, everyone. I thought it was interesting. I think I heard this right that AssetWise was actually the strongest area for new business growth in the quarter. Any particular solutions within the broader kind of category that were better than others or maybe certain subsectors that showed greater incremental demand for AssetWise in the quarter?
Greg Bentley, CEO
Rail is a focus of investment initiatives in Europe and Asia, where we have particularly strong offerings. In terms of roadway, we are integrating mobility digital twins with asset performance, and I believe the bulk of that opportunity lies ahead for us. In the industrial sector, owner-operators are increasing their spending to enhance the efficiency of their existing assets while integrating our solutions into their enterprise systems for improved asset reliability. It’s important to note that the new capital projects in industrial and resources are being limited, and the focus is shifting towards better utilization and resilience of current investments.
Joe Vruwink, Analyst
Okay. That's great. And then just final one for me. The constant currency ARR growth picking up relative to what have been the case in 3Q and 4Q, just to make sure I understand that slight acceleration. Is that really the E365 upgrades that are doing it? And then can you just maybe relate the 10% growth in 1Q? I think the guide for the year was $8 million to $10 million. So starting out at the high end, I would have maybe thought the comps get easier in the back half. So you're starting at a good point. Maybe you can just talk about kind of how you would expect the year to progress relative to starting at 10% constant currency growth?
David Hollister, CFO
Okay. So Joe, it is the case that any uplift we get upon conversion into E365 does accrue to ARR as does the 1,000 new accounts we've taken on board, which are largely subscriptions accrued ARR. So, all that helps as does usage, as does modest pricing, et cetera, et cetera, and it always has. In terms of 10% year-over-year growth in the first quarter even compared to a largely pre-pandemic first quarter of 2020, it's a good sign. But remember when I described the pattern of our ARR growth in the year, it's 10%, 25%, 25% and it's a big fourth quarter of 40%. Do I wish I'd had that 10% in the fourth quarter? Yes, but that's still in front of us, but the 10% growth as of the first quarter is a good sign and we'll take it.
Joe Vruwink, Analyst
Great. Thank you.
Carey Mann, VP of Investor Relations
Next we'll go to Matt Broome from Mizuho.
Matt Broome, Analyst
Great. Thanks very much. Hi, Greg and David. So it looks like you've recently raised pricing on Virtuosity across most product lines from what we can tell. Have you similarly raised prices across your enterprise-focused plans? And going forward how are you thinking about pricing particularly in terms of contributing to your longer-term revenue growth target of 10% per year?
Greg Bentley, CEO
I would say for Virtuosity on the learning curve that follows its own cycle. The Virtuosity subscription includes these expert assistance keys, which are literally people who are embedded and so forth. And we may be getting experience in how they're utilized and so forth. Otherwise, we do adjust for escalation once per year, and David I think that takes effect with renewals that start in the second quarter. Is that right calendar-wise?
David Hollister, CFO
Correct. That's correct.
Greg Bentley, CEO
And it is a usual escalation, which is related to cost of living maybe it's a little higher than that, but it's not an extraordinary program for us.
Matt Broome, Analyst
Okay. And then, just curious how did your partnerships with the likes of Microsoft, Siemens and Topcon perform during the quarter?
Greg Bentley, CEO
Well, with Siemens, where we created a lot of new cloud services over the past couple of years and now the focus is on go-to-market for them. In the case of Topcon, it's largely to do with our digital construction works joint venture that has a considerable footprint in the industrial space. So that has slowed that down somewhat and we're diversifying it a bit. With Microsoft, there are a number of different initiatives that have us and Microsoft pretty excited and occupied. One of them is ProjectWise 365, which is the instant-on ProjectWise, which could be an entry point for SMB. I don't think it has been quite yet. That's why I answered the earlier question that, that's mainly applications. But with Microsoft, the Microsoft Store is going to be part of that and so forth. We're both interested in this SMB potential and the integration of teams with ProjectWise, especially it's something we'll be talking about for quite a while.
Matt Broome, Analyst
Okay, excellent. Thanks very much.
Carey Mann, VP of Investor Relations
And finally, we'll go to Brian Essex from Goldman Sachs.
Brian Essex, Analyst
Thank you very much for the results. I wanted to explore the contribution of subscription revenue growth this quarter. Additionally, services revenue growth also played a significant role. Could we discuss this in more detail to understand its implications for the growth of the business for the rest of the year, especially considering its positive impact on gross margins?
David Hollister, CFO
Yes, thank you, Brian. The year-over-year growth in services for the quarter was about 74%. Most of this growth is attributed to the acquisitions we made in 2020. In the second quarter of last year, we acquired Cohesive, and in the fourth quarter, we acquired PCSG and SRO, all of which are businesses in digital integration services. These acquisitions significantly influenced our guidance outlook, and we are pleased with their contribution to our margins. They have provided us with scale and turned our services business profitable. These are well-rounded professional services businesses, which has not been the case historically for us. We've also learned from them, which is aiding our margin performance. However, it's important to note that they will not achieve software margins, but that's not our aim. Our strategic goal is to drive the pull-through of digital twin software and enhance the ecosystem of digital integrators.
Brian Essex, Analyst
All right, that's helpful. Maybe to follow-up, Greg. I think last year we saw a bit of an impact from the oil and gas industry. And I was wondering if maybe you could pull on your experience, now that gas prices are coming back the other way and are spiking up. Any inference that we might have on the performance of the oil and gas industry in kind of the macro environment there and how that might drive incremental usage of your platform, particularly going through this year?
Greg Bentley, CEO
There has not been a slowdown in the performance of our existing asset performance and reliability initiatives. In fact, we are progressing toward digital twins, which is a term used by major companies in their strategies to enhance the efficiency of their current assets. On the capital project side, the focus is more on energy transition opportunities. For instance, our offshore structural software, initially designed for fossil-based platforms, is now being utilized for wind power platforms, presenting a significant growth opportunity. Infrastructure engineers will remain busy when transitions are needed, though it sometimes takes time for projects to kick off and compensate for previous lapses in workloads.
Brian Essex, Analyst
Have you historically noticed an increase in discussions about alternative asset projects when gas prices are high?
Greg Bentley, CEO
I think that that conversation is committed and it's going to go on forever. I don't think there's any cyclical hitches to energy transition that has everyone's full attention and prioritization and its fun to work on.
Carey Mann, VP of Investor Relations
So apologies to Brad. We'll go to Brad unless you have a follow-on?
Unidentified Analyst, Analyst
Great. Hi, everyone. Thank you for taking my question and including me. I wanted to delve deeper into your comments about the strength in China. Can we explore whether that business reflects the subsectors you observe in the rest of your operations? Specifically, is there a greater focus on public works versus industrial projects there, or are you seeing any segments in China that are stronger than what you see elsewhere in the business?
Greg Bentley, CEO
It may not fully represent the situation, but I believe it's more about accidental occurrences and institutional factors rather than a larger trend. We perform well in state-owned enterprises and their design institutes for rail, road, and cities. We also have some presence in the metal industries and are improving in the electric grid and substations, as well as in water. I don’t think it’s a matter of public versus private; it likely relates to effective salespeople and strong reference accounts. One key point to note regarding improved business in China is that in-person work resumed sooner there. I want to emphasize my belief that all of our businesses will see improvements with in-person work, and we are now ahead in other parts of the world based on our observations of the pace of business in China.
Unidentified Analyst, Analyst
Great. Thanks so much, Greg. And then one more if I may please. Earlier in the call you had cited some uptick in E365 consumption on some renewals I believe. And I think your explanation was anticipation of a broader infrastructure spend coming with perhaps a bill. What are you hearing from customers with regard to that?
Greg Bentley, CEO
I'm glad you asked about that. It's not that consumption is up yet. The interest in switching to E365 from ELS is increasing because accounts facing their ELS renewal are expressing a preference for the success plan aspect of E365. This allows for the integration of support in going digital, enabling them to work more efficiently without needing to hire additional staff. However, this does not equate to an increase in consumption within the existing E365 base, which is still showing a trend of growth in public works and utilities, moderate improvement in commercial and facilities, and ongoing challenges in industrial and resources segments. Those sectors are struggling to expedite project timelines significantly. They will start engaging in energy transition projects but need to secure contracts to mobilize their teams. Generally, major EPCs are indicating plans to bring back furloughed employees, which is a positive sign, but they are already using E365.
Unidentified Analyst, Analyst
Got it. Okay. Thanks so much, Greg.
Greg Bentley, CEO
Thank you.
Carey Mann, VP of Investor Relations
Thank you very much for your attention. Cheers.
Greg Bentley, CEO
Thanks everybody.