Q1 2021 Bentley Systems Inc Earnings Call
It happened to be many E. L S renewals during our first quarter.
The ear last renewal is a function of the trailing 12 months of usage, specifically the second highest such month for each product.
So the 'twenty 'twenty trough in usage would weigh down on renewal accretion throughout 2021.
To have more immediate revenue.
Upside from upward trends in enterprise utilization is one reason, we have been promoting steady upgrades from <unk> to the <unk> hundred 65 program and.
More on that in a moment.
Our select commercial program covers all perpetual licenses owned by subscribers to which they of course can add at any time, but.
But given our preference for subscription licensing we have consciously reduced the incentive for select subscribers to purchase incremental perpetual licenses.
Select coverage entitled subscribers to pool their licenses for full utilization.
But they are able unless they can figure otherwise to exceed their license pools as their needs grow in which case, we charge them.
For term licenses only to the extent and for the period of such overuse.
So that takes us back to <unk> hundred 65.
Where we charge per application per day administered quarterly in arrears and increasingly subject to collared ranges, which we mutually agreed with accounts to balance risks.
As we've made clear since mid 2020. This has generally worked against us and revenue and they are mainly because of the continuing lapses in the workloads of industrial Upcs.
New upgrades to <unk> hundred 65 from Eos <unk>.
Generally upon annual renewals can add to a R. R. Even before usage increases because we implicitly charge more than we otherwise would for application day to compensate us for the cost of our embedded success colleague resources.
Embedding those success plans are our primary motivation for preferring <unk> hundred 65.
Since our experiences that they accelerate usage growth and application mix accretion all else being equal and here is where we finally have a glimmer of momentum from anticipated growth in infrastructure engineering.
We think expectations for post COVID-19 recovery are increasing the interest of Eos accounts in <unk> hundred 65, because they want this expert assistance so that by going digital they can expand their productivity faster than increasing their staff as they resume their own business growth. So all considered <unk>.
65, as ultimately win win notwithstanding the lingering pandemic volatility.
And then are now familiar comparisons of application usage versus a year earlier.
The baseline 2021, excuse me 20, Q1 period was of course, a hybrid different in each region of pre pandemic normal and eventually locked down.
Overall usage of our applications was flat versus a year earlier.
But not surprisingly trending ahead by quarter end.
By infrastructure sector. The picture Hasnt changed from our March report with slight decline year over year in the commercial facility sector.
The greater decline in the industrial resources sector.
And continued slight increases in our public works and utilities mainstay.
But here's another cut on application usage, which is consistent with the overall hypothesis we've been expressing.
Project delivery accounts.
Engineering <unk> construction contractors now have slightly lower application usage van in 'twenty Q1, well.
While owner operator accounts have higher application usage now.
For another perspective.
We've acknowledged that among both contractors and owners are.
Our accounts, who spend under $100000 per year with us, let's call them SMB accounts aggregated together presently for way short of the base of the pyramid.
Focusing on the SMB opportunity is one of our growth initiatives for the 2000, Twenty's and where I'd like to report some headway today.
To start with in terms of their application usage trends for.
Larger accounts usage is slightly lower than a year ago I think that's because almost all of the industrial resources sectors work being inherently of large scale. This performed by these large accounts.
Conversely, the application usage of our SMB accounts has increased appreciably over the past year.
Even more notably even though SMB accounts represent only about a third of our revenues.
21, Q1 about two thirds of our new business growth occurred within SMB accounts.
As to our overall new business growth perpetual license sales were not particularly strong but term licenses tend to more than make up for this from our standpoint.
The revenue in the quarter suffered somewhat as a result.
Recall that the quota plan weightings that I showed last time institutionalize our preference for subscription.
Our virtuosity initiative has now scaled up to offer virtuoso subscriptions, which include expert assistance as well as software licensing via low touch E Commerce.
Our channel partners are each important even though they collectively contribute only 8% of our revenue.
But while our peers rely primarily on channel partners to reach SMB accounts more than three quarters of our new business growth in SMB accounts has generated directly to inside sales.
We consider that we have much more to improve and self service for.
Virtuosity has brought us over 1000, new SMB accounts since its inception less than a year ago.
For yet more competitive differentiation, we've recently determined to add to Virtualized cities offerings perpetual licenses combined with virtuoso expert assistance.
We just announced another initiative to also go broad and reaching students future infrastructure professionals.
Phasing and geographically throughout the world during 2021, our new learning licenses are now available at no charge, including for schools and faculties as well as students.
Many investors have pointed out that this strategy has worked successfully for our competitors.
We believe that over time, this broad promotion to attract and reach our future users who will help us to increase our brand recognition and reception, especially in F. N. B's will also help our accounts recruiting.
Our new higher profile and our investment in self service fulfillment now makes this democratization of Bentley education feasible and important for <unk> as.
As well as for infrastructure constituencies at large.
The Bentley Education program will cost us most of our revenue from universities, but we have factored that into our financial outlook for 2021, that's one of the investments such as for SMB generally that will pay off in higher growth over the longer term.
Byproduct line subscription growth from a year earlier was led in 'twenty, one Q1 by project wise.
Asset and network performance, which also had the strongest new business growth quarter.
Our civil design applications.
And our plexus geotechnical offerings boding, well for our forthcoming sequent consolidation.
By way of geographies and subscription growth over the past year.
Russia was a standout.
Europe, including the U K has rebounded notably.
By contrast to the middle East.
Which is still bottoming out.
Greater China is back to great growth year over year, although each new year starts slowly there.
In the U S has been growing solidly.
In short we regard 21 Q1 as quite satisfactory in the context of our expectations for the full year 2021 as is further emerging.
To put on our corporate developments and the broadest perspective, we believe that our initiatives to advance infrastructure digital twins can uniquely improve both global economies and environments.
Far beyond the usual connotation of ESG, and reaching substantively towards the UN sustainable development goals.
I refer to our potential for Es terrain D G.
So far beyond merely reducing our environmental footprint.
We can and should especially prioritize D. S Y E. S D G handspring.
As investors are appropriately requesting we're working on many ways to help track improvements and to give credit to infrastructure engineers' efforts innovations and results and going digital to accelerate E. S. D G progress.
Particularly in relation to those sustainable development goals.
To which we can best help our infrastructure engineering users to contribute.
This month fast company announced that our project with Microsoft for the city of doubling digital twin project.
To make a virtue of necessity and pandemic resilience was a finalist in its 2021 competition for world changing ideas and the spaces places and cities category.
This project combining our open cities applications with teams in Azure is one of our joint initiatives that Microsoft's CEO Satya Nadella spoke about at our year on infrastructure 2020 countries.
At Microsoft annual developer conference.
<unk> night.
During this past quarter. This keynote speaker showed our initiative together for increasingly autonomous bridge inspections, applying an advancing mixed reality.
Because a generational generational opportunity on the scale of digital twin takes an ecosystem.
The croissant was instrumental in formation last year of the broad digital twin consortium.
And continues to work with us directly in the particular case of infrastructure digital twins.
Nvidia is another ecosystem partner leveraging its omni versus visualization environment.
He is CEO Jensen Huang highlighted the collaboration with BS VI for integration of our <unk> platform and their GTC conference last month.
We're particularly.
<unk> enthused about our corporate developments year to date in 2021, and I would like to explain the rationale for and a significance to us of the acquisitions, we've announced since we were last together.
Our captive digital integrator cohesive companies added on tracks consulting and at 60, plus colleagues, primarily in Alberta, Canada for yet more comprehensive critical mass across capabilities and geographies.
Cohesive companies are increasingly profitable leaders and implementation services for Ibm's Maximo.
For our asset wise asset performance solutions, and ultimately for digital twins and these infrastructure enterprise environments.
Construction management differs in India and elsewhere elsewhere in southeast Asia, because of the region's distinctive labor economics, but going digital is nonetheless, a priority for meeting the burgeoning and backlog infrastructure demand there.
To take advantage of our acceleration initiatives group added the 30 experienced colleagues up Naughty information technologies to bootstrap new opportunities for our growing synchro construction modeling software and cloud offerings throughout southeast Asia, and ultimately to export construction digital twin integration services more globally.
Our vision and plan, which is on track, though obviously still in early days is for our <unk> platform to enable an underlying digital twins for all infrastructure asset types.
To break this ground with powerful examples our acceleration initiatives group selectively enters into internal incubation combined with external joint ventures, because it takes an ecosystem to put together complete I twin powered solutions, which prove and inform the platforms advancements in fitting.
As for purpose.
An important announcement during 'twenty. One Q1 was the release of open tower IQ a comprehensive solution, which is being stress tested in live adoption for infrastructure digital twins of the world communication towers.
The ownership and management of communication towers have rapidly been consolidated consolidated into global or regional specialized and often publicly traded tower codes and.
In addition to in effect being responsible for the pace of going digital in the world at large through fiber additions to existing towers.
Our coast have themselves declared and are acting upon their own priorities for going digital in their capital programs and operations.
What I believe is a harbinger for the widespread future.
They are urgently demanding digital twins, literally and Theyre proliferating RFID and Rfps for the purpose not for experimentation through limited pilot, but in production for their full fleet to assure safety quality and compliance as they competitively increased capacity in its utilization.
Including for the five <unk> fit out race.
I'd like to bring this development to your full attention because I think this current developing case study for communications power Digital Twins Presage is the adoption cycle for infrastructure Tweens and all infrastructure asset types in term, we intend to learn a lot from it.
As we had explained in our definition and in our experience to date infrastructure digital twins necessarily combined three essential characteristics and enabling technologies, let's consider how open tower IQ illustrates this.
As we just saw to be a twin of the physical asset to three D reality must be captured for intuitive immersive navigation for communication towers as for most infrastructure assets only drone Uavs surveys can do this safely and relatively contained with some dormant.
In the case of communication towers, which are often on roof as well as free standing the needed digital context includes the surrounding terrain to enable the engineering of sight lines and accessibility.
On the meter or even millimeter accuracy as possible.
Machine learning creates and subsequently improves the stored flight path for each tower.
But the first operations tower codes want performed on their tower digital twins is their inventory.
Lying machine learning upon the three D reality net reality mesh and two the imagery to recognize and classify the placement of equipment from their digital component libraries, including their serial numbers is applicable.
Among the purposes for this intelligent voracity. This debt enables the engineering modeling of structural integrity wind loading electromagnetic fields and hence the capacity for additional revenue generation. So the tower digital twins continually increase ROA.
And of course, the <unk> digital twin objectives include automated inspection through machine learning and AI for corrosion breakage in installation and vegetation problems.
Far beyond what's possible from nearly static imagery, the evergreen digital chronology maintained over the towers history through change synchronization synchronization of both repeated surveys and engineering updates provides the fidelity to confidently identify trending maintenance issues and to prescribe.
Recommended interventions.
So the compelling benefits of infrastructure digital twins as in the for runner case of communication towers depend on converging their reality veracity and fidelity as open tower IQ does.
Another way to describe this convergence to and live and digital twins is that the cloud services at the heart if he like needed to maintain the digital chronology of the synchronized changes and to provide intuitive mixed reality environments for immersive visualizations and semantically aligned analytics visibility on.
Our <unk>.
Technologies.
And this term appropriately connotes as well integration with enterprise transaction systems, typically SA P and Maximo for instance for maintenance Records.
But for communication towers, that's for all infrastructure digital twins, the greatest value comes from the engineering modeling, which captures and sustains the semantic understanding and relationships between their functioning digital components for.
For communication towers as for most of the infrastructure construction never ends has continued adaptation for resilience and fitness for purpose is vital.
By virtue of the digital twin the design validated engineering simulations and tradeoffs can be continuously applied to the ever changing as operated asset.
No matter, it's reality and fidelity and evergreen digital twin is only as useful as it is evergreen.
T.
Engineering technologies, which happened to be our competitive names day at the S. One.
To interject, a commercial message, we do not need to worry about even on a much larger ecosystem partners such as those I've named going it alone because as they learn about infrastructure digital twins. They realize that our <unk> provides the indispensable substantive frame of reference.
If I only had a brain.
However, let us consider the sources of digital context, having established that photogrammetry and scanning from Uavs are essential for our communications towers. Examples, but these surveying modalities are just a special case of operational technology, Ot and a tower digital twin also makes good use of what we would all.
No as Iot inputs such as sensors.
For real time conditions of radiation wind seismic activity <unk> water.
If I only had a nervous system.
This convergence of E T.
Okay.
And then through an infrastructure digital twin is what is required to realize the full potential of analytics leveraging machine learning and AI to advance infrastructure by going digital.
He was the potential contribution of an ecosystem comes to mind again.
As of awareness to investors I'm sure so much attention and investment has been cumulatively attracted to the industrial internet of things.
We believe Iot could add comparable value as that which has meredith such investment to infrastructure, but that it takes a digital twin with its intrinsic ETE and <unk>.
Making sense of what would otherwise be Iot data overload to make this breakthrough broadly worthwhile.
In fact, one could say that the combination makes an infrastructure digital twin indeed a living.
Digital twins.
That's the infrastructure Iot opportunity opened up by our acquisitions announced last month, a sensor metrics and Vista data vision.
Though these bring us only about 40, new colleagues. We consider then the leading experts furthest up the learning curves and closing the gap between infrastructure assets and the existing Iot ecosystem of sensor devices and edge connectivity solutions and data environments, such as Azure, Iot and Siemens mines fear rather than.
Duplicating existing ecosystem capabilities, our priority with infrastructure Iot is extending our <unk> platform. So that every infrastructure digital twin can add appropriate connections to censor instrumentation and data management.
With what I think of as Dragon dropped simplicity.
Since the metrics from his outset has been uniquely focused on cloud based platform standardization for the sensor categories and device providers pertinent to infrastructure environmental monitoring and Vista Datavision has literally pioneered the leading edge infrastructure Iot applications.
As a pure software and cloud services vendor, we at D. S. Why I do not have intentions to be in the businesses of proprietary infrastructure asset data, nor proprietary analytics or aggregate benchmarking acting upon such data. So we very much aspire to be the digital twin cloud platform providers supporting these activities are idle.
<unk> is for our engineering and project delivery accounts to become the digital integrators and analytics proprietors for the owner operator accounts.
The engineering firms future depends on introducing such recurring revenue business models, where they would be paid for the value of outcomes rather than for their hours of input.
For all creating and Curating infrastructure digital twins or to them a conceptually appealing opportunity.
Alright twin platform progress within engineering firms has been constrained by slow development of business cases.
With our eye twin platform now the entry point for infrastructure, Iot and vice versa. We can now offer every engineering firm and immediate opportunity without their incurring substantial software development risks to offer ongoing environmental monitoring services for every infrastructure asset they have delivered their <unk>.
Pretty sudden resourcefulness is needed to determine what and how to instrument and how to configure triggers and recommendations from real time inputs to high twin powered digital twins.
To make the most of our joint E T engineering models, and simulations, which they've created with our applications with the many others that are on twin platform support.
Case in point is Schnabel engineering, a leader in the geotechnical engineering of dams and tunnels ranked number 203, among the Eni top 500 design firms.
Their proprietary infrastructure monitoring service Ians cloud platform is enabled by central metrics.
Improving schnabel business at the same time as we together improve environmental sustainability.
And now well known case in point for the price lists importance of critical infrastructure monitoring is that the Oroville dam in California, which was endanger a breach in recent years and where HDR engineering was a finalist in our 2020 going digital awards for their three D seepage and stability analysis.
The Oroville dam owner, California Department of water resources has standardized on central metric solutions for its dams and across its supply chain of local and global engineering firms with the attendant opportunity for us to twin power. This broad new opportunity to increase infrastructure safety and environmental resilience.
For subsurface digital twins deepened by our pending acquisition of sequent happens that of course.
Uavs cameras in laser scanners don't function underground, where the serious environmental risks originate.
So sensors and infrastructure Iot will be instrumental in further accelerating subsurface digital twins through new <unk> powered by environmental applications such as these examples.
And then we anticipating potential questions. It's too soon to speak knowledgeably knowledgeably about the causes of last week's catastrophic collapse of an elevated transit section.
Effectively a bridge from Mexico city, but subsurface conditions may have been a factor in any case. This underscores that E. S. D G potential for imperative for infrastructure digital twins, and infrastructure, Iot and averting such failures.
A relevant demonstration of whats, becoming practical for this purpose of broadly propagating critical infrastructure. Iot is this special recognition awarded 2020 year on infrastructure project in Korea, you can find it on page 17 of your 2020 infrastructure year book It.
Met the challenge of a 10000 dollar budget amendment to instrument atypical highway bridge by combining video and affordable sensors for OTT with D. S Y applications for E T.
I think governments need to bear in mind, these vulnerabilities and existing infrastructure on allocating funding for new infrastructure investment programs as the U S is now debating.
Notwithstanding whatever can be afforded for incremental capacity projects. It is clearly essential to extend the lifetime of existing infrastructure assets.
While there while improving their adaptability, including energy transitions to sustained fitness for purpose and increasing their environmental Brazilians.
The most advantageous and farsighted investments would prioritize infrastructure digital twins, enabling infrastructure Iot for existing assets.
On immediate opportunity is for mobility digital twins, where we at <unk> are already a world leader in traffic stimulation, but which we can timely advance through our <unk> recent acquisition of inroad.
Rather than utilizing mobility modeling only for new capital project planning.
Mobility digital twins should work continuously and comprehensively to maximize throughput of existing transportation networks.
Our <unk> for mobility digital twins already includes Legion for leading pedestrian simulation and cube for Metropolitan planning now in road and it's 35 colleagues headquartered in Montreal, Canada bring us any simulation for a world, leading multi modal simulation of transit and roadways together.
And dynamic for dynamic simulations at the level of individual vehicles. An example of what can then be enabled with continuous Iot traffic inputs is better dynamic optimization of urban congestion pricing, whose time has come now even in the U S.
So now over to David to review our financials.
Thank you, Greg and good morning, everyone.
I'm going to jump right on it and 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 on a little over 4% of that subscription growth comes from the currency tailwind of a weaker U S. Dollar on average this year relative to the same period last year.
Greg mentioned several product lines led that subscription book.
With each a project wise asset network performance civil and geotechnical standouts.
Our perpetual licenses revenues, which are now less than 5% of our total revenues declined by about 700000.
Likely influence on the ongoing progression of our various subscription offerings, including term licenses and virtual hospital 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 US was stimulated by acquisition included throughout 2020 and fully informed our full year 2021 guidance previously share.
Our recent first quarter 2021 acquisition of on tracks did not contribute materially to 2021 Q1 results.
Where do we consider it material to our expected full year 2021 results.
Our acquired digital integrator businesses are growing even since we acquire as technically there is some organic growth here, which in effect by classifying as acquisition growth.
So I'll offer a further comment on our services revenues and recent acquisition. We obviously don't have an ambition to become a professional services business.
That said these digital integrator service business acquisition, a broad scale to our existing service offerings and are profitable as you will on a favorable trend and finally positive services margins on the face of our income statement.
Now for the benefit of scale capability and profitability from these acquisitions, while also addressing our underlying primary strategic objectives of digital twin software culture, and a learning curve for digital twins integrator ecosystem is a compelling combination.
On presenting here on the right a reminder of our full year 2021 revenue outlook as well as provided during our year end 2020 earnings call.
Youll 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.
Okay.
Our last 12 months' recurring revenues, which include primarily our subscription revenues, but on.
Also we will include certain services revenues delivered under contractually recurring success plan.
Increased by 10, 7%.
This is supported by a recurring revenue retention rate of 107 per cent.
Which is reflected here on a Rev. Rec fix was six basis in 2021 as we are now required to present.
The preceding data points on this chart for based on 600 fiber.
And we presented this metric on a 605 basis for Q1 2021 it.
It would be slightly better.
It's still around that 207%.
For further quantify the new account growth for Greg highlighted new accounts contributed three percentage 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 so as you can see by the consistent at 98% on account retention metrics.
But there is an observable modest decline in existing account growth clearly influenced by largely pre pandemic Q1, 2020 and dropping out of the metrics.
Which has tended to be offset by new accounts and some observer hormone that's up from our SMB initiatives.
Asset life.
A significant kpis for us is our annual recurring revenue or <unk>.
<unk>, which has grown by 10% over the same period in the prior year.
Of this gross nine percentage of organic and one percentage the results from our various programmatic acquisitions, we completed last year and wishes for a day.
Our.
Seasonal and has a high correlation for contract renewal dates throughout the year.
Sequentially, our gross metrics are consummated by the meaningful seasonality patterns in our <unk> growth and I'll speak more on seasonality.
Yeah.
Our GAAP operating income was $55 6 million for the first quarter of 2021 up 21% relative to the same quarter last year.
As you know there is a bunch of noise on the GAAP results, which we endeavor to filter.
On to provide more meaningful commentary and analysis, we had adjusted EBITDA, which grew 43% over the prior year to $82 8 million.
This yields on 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 on.
And again in March that it was unusually strong due to pandemic related cost savings that continue to accrue to our benefit.
Although compensation levels and incentive plan payouts on 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 resolving committed to reinvesting such savings going forward and to grow net.
People go to market investments or acquisitions.
Summary, our profitability and margin performance was strong in Q1, but we expect some level of reversion based on reinvestment plans ahead.
I am reminding you of our full year 2021 performance targets, which we are not yet prepared to adjust.
Yeah.
As you can see here our GAAP operating cash flows are up over 80% for both the first quarter of 2021 relative to 2020 and for the trailing 12 months on hand.
We have consistently presented our business model is highly cash flow efficient for the conversion ratio of adjusted EBITDA free cash flow in the 85% to 90% range.
However, recent and current cash flows are particularly strong on unusual.
As I've mentioned, we don't have appreciable multiyear contracts. So there are no upfront multiyear windfalls.
However, the conversion of certain contracts with quarterly payment cycles.
<unk> hundred 65 contracts.
Where we seek to collect as a deposit we estimated consumption for a full year at the outset of the contract.
It has accelerated our cash flow.
For 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 the CSS.
It has also generated strong cash flow.
As these programs grow their cash flows outpaced the historical usage and resulting revenue recognition. We are focused on efficient on cash flow, but I don't represent the current margin performance to be long term sustainable.
As a quick review of what we discussed on our last call. During our Q1 2021, we successfully executed some substantial financing transaction.
The results of those are newly secured $850 million senior secured revolving credit facility and our $690 million convertible notes issued loans.
And a related capped calls are now reflected in our financial results and position as of March 31 2021.
All of this was undertaken to available on the shuttle 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 Sigma.
As of the end of March our net debt was $103 million.
And net debt total leverage was quite low on that point for us.
Cash on hand, and for revolving credit availability position us well to conclude the secret acquisition and the cash cash purchase price of $900 million.
And to support our ongoing investments for growth and quarterly dividend.
This will leverage after sequence 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 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 is still the case for perpetual licenses are most prominent towards the end of our year.
You just heard Greg mentioned that China, although delivering a solid Q1 typically has a strong last half of the year for us.
It is also the case that relative to other geographies perpetual licenses in China remain even more prominent on commercial choice for users.
The new for US in 2019, 606 revenue recognition standards introduced some workings as Greg sometimes references.
Essentially any of our pls contracts that renew on a bill annually require upfront revenue recognition of approximately 80% on the contract value.
With the remaining 20% recognized ratably over the year.
This upfront revenue recognition skew is more impactful in each year's first and fourth quarters for us.
I highlight here for directional pattern of our quarterly revenues for the last several years, which reflect the strength.
Although it could be somewhat masked by the growth in services from acquisition, we should all expect the same general pattern. This year.
That's not backing off from our outlook, which I will address on a nominal just educating has to normal unexpected intra year volatility due to accounting rules.
Also on the issue of accounting works.
As we convert annually <unk> subscriptions into <unk> hundred 65 subscription.
We leave behind on that upfront revenue recognition and introduced a Rev. Rec pattern that follows the actual consumption on the software and more closely approximate our 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 in E. L F current renewed and booked upfront revenue of 85% in Q1 2020.
And then converted to an <unk> hundred 65 in Q1 2021, we will reflect on a single quarter of consumption measured revenue recognition and net additional Q1 2021 period.
Of course, then in subsequent quarters the year over year comparison reflects a full quarter on the current year compared to <unk> five per cent of the contract recognition.
During the same quarter of the priority on now.
Alex's from these dynamics is complicated given the ongoing migration from <unk> to <unk> hundred 65.
To date the effects have not been group much niches I.
I will comment on now however that in this particular Q1 2021 has a portfolio of our converted in <unk> hundred 65 contracts when normalized for the aforementioned skewing facts.
Our subscription revenues would have reflected 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 leave the lumpy Eos upfront recognition behind us as we continue our <unk> hundred 65 migration.
I teased before that are Ah graph volatile seasonal pattern.
Which is impacted by the timing of normal annual renewal cycles for our subscription contracts.
Historically, the approximate average pattern, we are our growth in a given year presents has 10% of the growth in our Q1.
And then 25% of our growth in each of the second and third quarters.
Then I hadn't fourth quarter renewals with field, 40% of our annual IRR growth.
This seasonality is likely to temper going forward as more annual contracts renewing in Q4 become <unk> hundred 65 contracts, which effectively to review each quarter and get reflected in <unk> throughout the year.
Last one just a few comments on operating expenses.
We tried to concentrate annual raises for our colleagues to occur as a vehicle for us 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 raters are non trivial and the effect on operating expense in Q2, Q3, and Q4 relative to Q1 is meaningful.
This was further compounded by variable incentive compensation, which is historically higher on the last half of our year.
There is also a seasonality to certain of our larger promotional and event related cost, which are historically highest from the last half of our year.
Lastly on generally we are growing.
Those cost savings that we had been almost apologizing for our being steadfast we reinvested into growth initiatives people costs go to market cost and acquisitions.
Yeah.
Okay.
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 and we shared our guidance but.
But not flow extraordinary that we feel compelled to modify the full year outlook at this time for any of these metrics.
Related to sequence as Greg mentioned, we continue to navigate the administrative process of gaining regulatory approvals, but at this point expected on a substantive issues.
We continue to anticipate a second quarter closing subject of course for regulatory pace.
I remind you here generally what we expect from sequel in terms of scale on contribution.
Once secret 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 re share here our views on what we are targeting and our long term financial performance.
What we consider a solid Q1 is generally consistent with our views on the ambitions for these targets and we will keep working to deliver that.
With that Gary I think we're now ready for any questions on it.
Okay.
Alright, everybody, we will start with the Gal Munda from Berber Gala.
Okay.
Yeah.
Yeah.
Okay.
Okay.
Yeah.
Hello.
With me for it yet.
Yeah. So thank you for taking my questions.
On the call.
Sure Greg.
Maybe the first question for you.
What we've seen when there's an adoption of day technology.
Especially the construction related space like when we talked about bim in the past, it's always been helped with some of the mandates that were happening, especially across the world.
And then when we think about all the use cases that we're getting now are we talking about Mexico City and most recently he was talking about Genoa, Minneapolis and all that.
Do you believe that there could be a mandate that helps the adoption of digital twins.
Infrastructure that could be supported by.
By the fact that.
All of these use cases now the accidents are helping.
And could that effectively help the adoption going forward.
Well our mandate to.
And digital plan for existing infrastructure would be supported by <unk>.
The ROI case.
Along with safety.
And resilient.
The U K of course, you referred to I think when you talk about Bim mandates.
The UK is coming far with with digital twins, but remember the government.
Have a particular opportunity and responsibility when it is government funded infrastructure day fielding.
Are obliged in fact.
Two two.
On.
Going digital to help that would be a better long term investment so on.
Governments wouldn't have to mandate.
Technology preference and private investment but for.
Public investment there.
There are there are and especially public investment too.
Hasten the adaptation energy adaptation and safety and resilience of existing assets, we're bringing on.
To attention.
Bringing to the attention on governments as we can.
The advantages of doing that which largely are sharing what has worked for.
For instance, here in the United States sharing what has worked in other countries, but it has to be said.
There's there's not a.
Track record on our part or anyone's part of influencing has a lot to do with in the end.
Contract thing in procurement rules and those don't change very quickly, but it's a great opportunity. When there is new public investment for it to be investment in.
On extending the safe and resilient lifecycle of the infrastructure existing already.
That's very helpful. Yeah, that's what I was thinking because most of the investment there is coming from.
From a public works so from that perspective, they could have a big implants on them.
Okay.
My second question is just kind of a follow up on the transition from CLS.
365 and <unk>.
Yes.
Question for a combination of yourself from David.
In terms of.
In the previous quarters, we're excited to kind of going to take its natural course.
If it is correct to think about Q1 seems to have accelerated a little bit more on your U.
You sound a little bit more open on.
As well on the transition going forward understand the benefits of that.
But maybe if we just for a bit that what would your life what would your ideal model looked like in the future because you're probably not trying to convert all day.
Licenses and effectively.
Based on like what would what would a normal outlook look like maybe in a couple of years the way you see it.
I think on a couple of years it'll all be converted but we were cautious to start with because any software company venturing into charging per application per day. When previously you are paid a fixed amount for the year would be <unk>.
Sorry about the risk we're taking on.
Volatility in end market activity and guess what that debt.
Came to roost in the industrial resources portion of our.
It's not a it's not a huge part of our business, but it's a large part of the.
<unk> hundred 65, not surprisingly those firms, which know about their volatility prefer to be on a program where they are costs likewise track with their with their workload.
But.
That's pretty much behind us now and we wish to participate in the upside to come.
And that is something we're seeing even now and in.
Quarters of <unk>.
Low.
On a renewal activity, we work hard on evangelizing and introducing the <unk> hundred 65.
Upgrade to accounts that can convert can upgrade later in the year.
But we think that will continue to be a natural progression on the other thing we've adapted over the past year.
As we have we tend to have colors on the on the contract now.
On the accounts don't mind that either because they expect fairly rapid growth in their own consumption as the economy recovers. So we're learning as we go on I'm glad we didn't do it all at once so that we could factor in this line.
So Carl I wouldn't I wouldn't characterize Q1 at all.
Accelerated in terms of conversion.
For the.
Uh huh.
The lower hanging fruit has been picked early.
We were smart enough from.
Some of that daily volatility.
We learned to introduce these collars.
Which by the way about 40%.
Approximately half of our outstanding bonds had some form of this call protection.
It's also the case that the pipelines.
Conversion, that's going to go for for multiple years here isn't just <unk> contracts, it's the larger.
Select complex too we would look to on the converts as well on.
At this point not even halfway through what could be the potential partner of conversion.
Bob.
That's very helpful. Thank you.
Next we'll go to Matt Hedberg from RBC.
Hey, guys.
Thanks for taking my question.
Greg, adding 1000 customers in the SMB market was was certainly impressive over the last year.
Given that I think I would assume a lot of them were pressured by COVID-19 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 22% of revenues today, how big of an opportunity is SMB relative to your typical large enterprise focus.
Well I think for for the potential of it.
One can look at our competitor Autodesk, because I think that's the mainstay of.
Their business I wish I had otherwise.
Knowledge about the distribution of infrastructure engineers and the size of the firms they work in.
But I'll say we're encouraged.
I would have thought it would take on as much longer to add 1000, new SMB accounts.
But of course.
The products. They need are the same products I don't by the way you think it had much to do with with COVID-19 because.
With COVID-19 you'd like you'd like collaboration and project by project Wise is not the offering for for SMB.
Accounts. These are individual applications, they're practitioners there, they're smaller firms or in some cases may be on sole practitioners and infrastructure engineering and we just haven't.
Tried to find them before or have them find us.
And we are certainly.
Encouraged that it's not only a large number of accounts per can be a substantial portion of the business, where we're sure that when we look across the fence at the at the greener grass.
In.
Our competitive.
Landscape and where our strategy is different because we are.
Focusing on.
Inside sales on.
Efficient ecommerce on self service on connecting up with these this expert assistance, which is virtually delivered and machine learns and so forth.
There's something great for us to work on.
But it's also I think on the quantitatively significant we can now for the first time segment.
Okay.
Yeah.
I'll keep it there for the sake of time on thanks for the answer Greg.
Alright, Thats will go to adjacent on so we know from Quebec.
Yeah.
Great. Thanks for taking my question maybe.
So digital claims.
Big opportunity on albeit in a relatively early on.
Aside from the straightforward financial metrics, how should investors measure the pace of progress here.
Yeah.
Well.
The reason I.
Promote our our year book.
Yeah.
This is ware.
Accounts nominate their own projects for going digital awards and increasingly.
It's more and more of a digital twin approach.
I grant that is qualitative in assessing that but that provides great case studies.
For others to look at and be encouraged from and.
And learn from.
But I think this ecosystem is is helping when you have.
The video.
And Microsoft recall there.
For Ignite conference showed the.
Bridge inspection case endpoint debt.
We'll be on all of our mines now with with actual bridge failures.
But but it's 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 rote 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 we're problems have multiple causes.
Can put them together in a digital twin you can add the sensor realtime inputs and avoid these these problems but to talk about extending the life usefully in safely. It's what most engineers will be we will be working on for.
Most of the future.
On promoting cases, you can say that I am working on that myself to get the word on.
Okay, Great and then maybe just one quick one we've seen a number of these smart tuck ins so far this year.
We're going to obviously take one.
But how should we think about the near term pace of your M&A strategy going forward.
David I'll ask you to take that one.
So it's been a busy.
On a big first quarter.
And.
We've still got a pipeline.
Wouldn't expect us to keep up.
The pace in the second and third and fourth quarters that we've had on mall.
Our first for months to date.
But theres still Apple Jason This is still part of our our normal.
Yes.
Development of our portfolio do we spend multiple years to develop it or can you fill that gap on that white space more efficiently with an acquisition.
And.
It's still part of our strategy is still part on how we're going to grow but in terms of pace, we can't keep up that per square meters.
Just just bandwidth.
We're pretty disciplined about about integration as you know and we've got some work with all.
All of them.
Taking on supply this year.
Okay excellent. Thank you.
We'll go to Joe <unk> from Baird.
Oh great.
One.
I thought it was interesting I think I heard this right that asset wise was actually the strongest area for new business growth on the corridor.
Any particular solutions within the broader kind of category that were better than others or maybe start on sub sectors that showed greater incremental demand for asset wise on the quarter.
Well on rail.
Is the subject of <unk>.
Investment programs across Europe and in Asia.
Yet, we have particularly strong offerings there.
Roadway, we're bringing together mobility digital twins and.
Asset.
Performance.
So I think most of that opportunity is.
Still ahead for us.
And in industrial you do have.
Owner operators.
On spending more to make their existing assets more efficient and adding on our solutions for their enterprise environments for asset reliability.
That.
I mentioned that third bucket, but it isn't it isn't its new capital projects that are curtailed in industrial and resources not better utilization.
And the Brazilians have existing investment.
Yeah.
Okay.
Great and then just.
Final one for me.
Constant currency gross picking up relative to what had been the case on <unk> just to make sure I understand that slight acceleration is that really the E. 365 upgrades that are doing it and then can you just may be relate the 10% growth in <unk>.
I think the guide for the year was eight to 10, so starting out at the high on that.
I would have maybe thought the comps get easier in the back half so youre starting at a good point, maybe you can just talk about kind of how you would expect that to progress relative to starting up at 10% constant currency growth.
Okay.
Joey is the case.
Uh huh.
Any uplift we get arm converting systems.
<unk> does accrue to <unk>.
This all new accounts we've taken.
<unk> taken on board.
The term license subscriptions.
So all of that helps us loans.
Usage as well as modest pricing et cetera, et cetera, and it always has.
In terms of.
A 10% year over year margin.
In the first quarter.
Even even compared to a largely prepaying debt and first quarter of 2020.
It's a good time.
But remember we're not when I described the pattern on Lora.
Most of the year, it's 10% on 25% blend of opportunities is a big fourth quarter, 40% do I wish I had that 10% in the fourth quarter yeah.
But.
That's still on clients.
But the 10% roadmap for the first quarter is low.
There is a good sign and we will take it.
Great. Thank you.
Next we'll go on to Matt Broome from Mizuho.
Oh, great. Thanks, very much hi, Greg and David So it looks like you recently raised pricing on but you also see accounts across most product lines from what we can tell all of you.
Similarly raise prices across your end price broke his plans.
Moving forward, how are you thinking about pricing, particularly in terms of contributing to your longer term revenue growth target of 10% per year.
Okay.
I would say for virtual city on a learning curve that follows its own.
Its own cycle.
<unk> virtuosity subscription includes these expert assistance keys, which are literally people, who are embedded and so forth and we negate maybe getting experience on 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 correct, that's correct and edit 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 a extraordinary program for us.
Okay and then.
Just curious how did your partnerships with the likes of Microsoft Siemens Zone that telecom volume during the quarter.
Okay.
With 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.
Top con, it's largely to do with our digital construction works joint.
Joint venture.
That has.
Considerable footprint in the industrial space, So that has slowed that down somewhat and we're diversifying in a bit.
With Microsoft there are a number of.
Different initiatives that have.
They have us and Microsoft pretty pretty excited unoccupied one of them is project wise $3 65, which is the instant on project wise, which couldnt 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.
With Microsoft to Microsoft store is going to be part of that and so forth.
We are both interested in this.
The potential and the integration of teams with project financing, especially is something we'll be talking about for quite a low.
Okay. Thanks very much.
And finally, we will go to Brian Essex from Goldman Sachs.
Yeah.
Okay. Thank you very much. Thank you for taking my question and nice set of results.
I was wondering firstly I can dig into I know I know, there's obviously subscription revenue growth contributed nicely in the quarter.
But services revenue growth also accounted for a couple of hundred basis points suite, maybe unpack that a little bit.
Maybe understand a little bit better.
What the implications are for that for the rest of the year on growth for the business and what's going on there, particularly as it also nicely had.
Positive gross margin for the business.
Yeah, Thanks, Bryan so.
Yeah, the growth in services year over year for the quarter.
It was like 74%.
And almost all of it look for.
Transparent about it because it's non material and services almost all of it is from the 2020 acquisitions that we've made.
Back in.
Yes.
Middle of the second quarter last year, we acquired cohesive than in the fourth quarter, we acquired <unk> all of those of these digital integrator services businesses.
And Ah.
Those fully informed.
On the guidance outlook that we gave we obviously when we have those on board.
They are part of that guidance outlook net net.
Given.
And yes, absolutely we are really really pleased with their contribution to margin.
They brought us robotics.
Some scale.
And they turn on our services business.
Profitable.
They are well run professional services businesses.
Whereas historically that has not been on our business. So there are some some larger we brought on board, but are also help in helping the margin performance of course, it's a bit on a mix shift overall right because they are never going to have software.
But that's that's not the goal the goal is the strategic element of it which is to create that pull through of digital twin software and then stimulate this.
Ecosystem.
Digital integrators out there and led the way from that.
That's helpful, maybe maybe to follow up Gregg.
I think last year, we saw a bit of an impact from oil and gas industry and I was wondering if maybe you could pull on your experience.
Net of gas prices with Tommy.
The other way and spiking up.
Any inference that we might have on the performance of oil and gas industry.
And on the macro environment, there and how that might drive incremental usage of your platform now, particularly going through this year.
Well as I say, there's not been a slowdown in performance at existing asset performance and reliability initiatives. In fact, those are moving towards digital twins and digital twin is the terminology used by the majors there in there in their strategy for <unk>.
Improving their efficiency of their existing assets, but on the capital project side, it's more to do with energy transition opportunities and I mentioned, an example last time of our offshore structure of software.
Primarily used for fossil based platforms, but now it's used for wind power platforms, which is a big enough opportunity that it actually is.
<unk> has resumed.
Boeing well.
So <unk>.
Infrastructure engineers are always going to be busy when there is a need for transitions and so forth. However, sometimes it takes time for projects to start up and.
And make up for the lapses and workloads.
Have you seen historically have you seen when gas prices are highlight an increase in conversations with regard to alternative asset projects.
Okay.
I think that debt.
Conversation is <unk>.
Committed and it's going to go on forever.
Hi.
And I don't think Theres any.
Sure.
Cyclical hedges to enter.
Energy.
Transition it has everyone's full attention and prioritization and.
It's fun to work on.
So apologies.
Well go to Brad.
So unless you have a follow on.
No carry on I'm, just going to make sure you're back with <unk>.
Oh, Great Hey, guys. Thanks, so much for taking my question here on squeezing me in.
I wanted to.
Double click a little bit on your comments on strength in China.
Wondering if you could drill into that a little bit is that business representative.
The sub sectors that you see in the rest of the business in other words is there more weighting towards public works versus industrial over there.
Are there any segments that you are seeing greater strength in China.
Or is it pretty representative of the broader business.
It may not be quite representative, but I think it's more <unk>.
<unk> and institutional than it is.
Some larger pattern, we do well in.
Stayed on enterprises and their design institutes for rail and road and cities.
We have.
Some penetration.
In.
Metal industries.
We do well in electric grid and Substations.
<unk> are starting to do better in water.
I don't think it is a.
Public versus private.
Private.
It just has to do with.
Probably good salespeople, good reference accounts and and so forth.
But but.
Maybe concluding thing to say about getting better back to better business in China is they resumed in person work sooner.
And I want to reiterate my belief that all of our businesses are going to improve with in person work and then we had that ahead in the rest of the world now based on the based on the empirical observation about the pace of business in China.
Great. Thanks, so much Greg and then one more if I may please.
Earlier on the call you had cited some uptick in it.
Decreased six five 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 regards to that so.
I'm glad you asked about that it's not the consumption is yet.
Yet.
And that I was referring to it is that interest and converting to E. 365 from Elas is up because accounts that will pass.
Otherwise face their Eos renewal are saying wed like the success plan aspect of <unk> hundred $65 for did you can embed people, helping us and going digital so that we can do more work faster without taking on people faster.
Net debt that but that's not the same thing as consumption and the existing.
<unk> hundred 65 book, which continues to follow the pattern of Green for public works on utilities yellow almost screen and commercial facilities.
And and Red still for.
Industrial and resources. There is just nothing those folks can do to bring back projects.
Free much sooner that will be entering into energy transition projects, but they have to sell that work to get everyone busy in general the big EPC.
Youre talking about.
Expecting bringing back their furloughed employees and so forth I think that's looking better as well, but they are already on <unk> hundred 65.
Got it okay. Thanks, so much Greg.
Got it.
Thank you very much for your attention share.
Thanks, everybody.