Q3 2021 Bentley Systems Inc Earnings Call
This webcast, including the question and answer portion of the webcast may include forward looking statements related to the expected future results for our company and are therefore forward looking statements. Our actual results may differ materially from our projections due to a number of risks and uncertainties. The risks and uncertainties that forward looking statements are subject to our.
Ascribed in our operating results release and other SEC filings.
Today's remarks will also include references to non-GAAP financial measures additional information, including reconciliation between non-GAAP financial information to the GAAP financial information is provided in the press release and supplemental slide presentation.
This webcast will be available for replay on Bentley systems Investor Relations website at Investor <unk>.
<unk> Dot com.
Greg will begin today by reviewing business developments and our progress over the last quarter and then David will take you through a review of the financial results. We will then conclude with Q&A with that let me introduce the CEO of Bentley systems, Greg Bentley.
Good morning, as the case may be and thanks to each of you for your interest in Bentley systems quarterly operating results.
Prepared remarks today will follow our usual format as I will discuss the tone of business and certain corporate developments and over to David Hollister to review our quarterly financial performance.
Our operating results press release is one of two we issued today.
By way of tone of business.
We consider that 'twenty, one Q3 was a quite satisfactory quarter and tracking towards our previously expressed expectations for the full year 2021.
Particularly in terms of new business growth and <unk> growth, which.
Which by virtue of our subscription preponderance tend to be closely correlated.
With U S federal infrastructure spending legislation, having only just finally moved forward from its status when we last announced quarterly results.
It is too late for our full year 2021 expectations or those of infrastructure engineering organizations to be materially impacted or adjusted but our user organizations seen already more receptive to going digital in order to be able to increase their workload more rapidly than they expect to be able to increase their work.
For us.
As happens to have been the case throughout our now year plus history as a public company.
<unk> business differs considerably by infrastructure sector.
In each case, we monitor application usage, which for most of our business tracks tolerably closely with new business growth and <unk> growth.
For the third quarter of 2021.
Pattern continued to correspond with what I reported for 'twenty, one Q2 and.
In accordance with the stoplight relative color coding here.
This refers to the trend direction since pre pandemic.
In terms of unit volume abstracting from almost two years of some commercial changes.
The consistency with last quarter's report enables me to be brief today and touching on only what's the sirna be different or newly discern.
As before I will start with the seemingly chronic infrastructure sector laggard.
Industrial Slash resources traditionally this represents only the portion shown here of our revenue by sector.
But recall that last quarter, we showed the new breakdown of our IRR by sector now, including Sequent, we have not sufficiently integrated sequent into our systems and metrics such that we can regularly breakout revenues by sector.
But when we can do that next year. It is our intention to separate industrial and resources into two sectors industrial will primarily consist of process plants, including for power generation, along with discrete manufacturing facilities.
Resources will then become the larger sector shown here by virtue of sequence concentration in mining and will include our substantial footprint or should I say es DG handprint for offshore structures increasingly for renewables, rather than only oil and gas production.
And for a geothermal and other environmental opportunities.
<unk> is thriving primarily with mining growth, including for the electrification quest.
And it added 7% to <unk> from 'twenty, one Q2 to 21 in Q3.
This does not include either our geo technical offerings, such as practices, which we have reverse integrated into sequent, and which continues by the way, it's notably strong new business growth nor the acquisition of <unk>. Our other acquisitions by Sequent analytics was in September to fully incorporate the.
Nx deposit drill hole data management cloud platform.
On the whole I consider that our new mix within the resources sector positions us rather favorably for the worlds energy transition imperatives.
But back in our traditional combined industrial slash resources sector. The drop off in fossil fuel Capex appears to have continued.
Based on our application usage readings in keeping with the fact that typical affected EPC contractors based on their own public company filings have reduced their workforce by on the order of 20% since the middle of last year.
Their usage of our applications is down by a percentage in low double digits.
But we are realizing other knock on impacts.
Our last 12 months subscription revenue from Epc's is now down year over year by a high single digit percentage if not for this EPC decline our 'twenty. One Q3 recurring revenue retention rate would have been 108, 5%.
Then on a reported 106%.
Moreover, our project Wise collaboration service has been the workhorse for work sharing across Epc's global resource centers and their reduced workforce has made a substantial dent here as well.
While new project Wise usage was a growth driver during the first year of the pandemic is going digital need working from home more productive by now this first time versus virtualization of talent has of course slowed down in.
In industrial resources infrastructure engineers within owner operators, Besides accounting for almost all the Opex usage also work on Capex projects. It has occurred to us that owner operators use of project wise provides us a proxy to measure this project delivery.
<unk> of their work.
Corroborating our observations for EPC. This usage is also down in low double digit percentages since pre pandemic.
Overall, this accumulated drag from industrial resources Capex.
Jack delivery curtailment.
Plus an even larger proportional curtailment and commercial facilities Capex.
Also inferred from lower usage of project wise is tending to almost offset new business growth for project wise.
Similarly within our consumption based <unk> hundred 65 program, where industrial resources accounts.
Represent a greater proportion.
<unk> of our overall IRR because of Epc's preference for <unk> hundred 65 to share with us their intrinsic cyclical volatility in.
Industrial resources Capex usage declined somewhat more than offset all other usage gains during the pandemic to date.
Overall, our new business growth in industrial Slash resources again, excluding sequined has declined by half.
Pre pandemic.
However, these capex headwinds are somewhat mitigated by notable new business growth in asset lines year to date led by industrial Slash resources lifecycle information management.
For assessment of the tone of business across world regions, we use the measure of new business growth rather than application usage. This corresponds to a regional management of our accounts advancement direct salesforce.
As a footnote for us the connection between application usage trends and new business growth is stronger than four competitors, whose enterprise subscription programs are based on use it or lose it commitments. However.
However, our <unk> hundred 65 program does increasingly include some symmetric colors, which serve to somewhat attenuate the correlation.
And by region. There is better related news then within the traditional industrial resources sector per se.
Last quarter, we had continued to observe that while whole regions such as the middle East.
Our economy's substantially depend upon industrial resources fossil fuel revenues had a bit more new business growth across all infrastructure for the past year.
So it is gratifying now to observe that for 'twenty, one Q3, new business growth has significantly returned in the middle East.
Presumably this is a result of the rebound in energy prices, which hopefully will be sustained.
Latin America also significantly turned around with notable new business growth.
And Russia in this case uniquely led by industrial Slash resources was relatively the best region and new business growth performance for 'twenty, one Q3, presumably capitalizing on rush's energy export opportunities.
Rounding out the tone of business by region based on other drivers of regional performance than the industrial Slash resources sector, India rebounded to new business growth for 'twenty, one Q3, though not yet back to pre pandemic levels in August India announced the four year one trillion.
<unk> build back better program for transportation and telecom to start next year.
Australia, and New Zealand have brought up the rear and new business growth this year.
But from an unfortunate combination of unrelated institutional factors. We think in spite of relatively positive fundamentals, which we think should turn this region around foreseeably.
In greater China, where we called out geopolitical issues that seem to come to a head last quarter. It's good news that attrition during 'twenty. One Q3 was down to globally normal levels with the resulting new business growth seasonally comparable to prior years.
This region's year still depends characteristically on a strong fourth quarter, but we do think demand fundamentals remained strong.
Back to infrastructure sectors, and commercial slash facilities. The decline in project wise usage that I mention indicates an even greater proportionate decline in capex projects.
There was an industrial slash resources, however, and commercial slash facilities growth in Opex usage fully makes up for this recovering overall to pre pandemic usage levels.
And to get to the most sustained and significant trend of all <unk>.
Concluding with our mainstay public works slash utility sector.
All indications by region and globally continue to confirm advancement from pre pandemic usage and new business growth levels.
By way of example for notable growth during 2001 in Q3 and year to date credit in particular goes to all of our products for provisioning and asset performance of utility grids open.
Open flows for water wastewater and sewer networks opened utilities for energy networks.
<unk> com's for telecom networks and.
And open tower for communication tailored digital twins.
This new business growth results from the extraordinary opportunity I described at length, along with our 'twenty. One Q1 operating results in May.
And indeed during 'twenty one Q3, we won new open tower contracts for a multiple millions of.
Dollars.
Together.
Think these quantitative and qualitative data points make the case that we are succeeding and becoming capable of faster growth than our traditional trajectory.
I don't think the principal drivers for this are so much on new products or initiatives on the margin, nor even the sequent acquisition, but rather some fundamental investments.
Well they happen to coincide with our having become publicly traded.
I think the only relationship to that is indirect holding ourselves more accountable to reach our potential.
And while these fundamental investments happen to coincide with the course of the pandemic, which has made our markets more receptive to going digital faster I think the more direct relationship. In this case is that we could reinvest pandemic induced travel and event savings so.
So as not to compromise our committed target to annually improve my margins by a measured and sustainable 100 basis points.
So to reprise these fundamental investments.
First we now have about 600 colleagues within our user success organization, which didn't exist at the beginning of 2020 not.
Not all of these colleagues are incremental as this now includes all of our now consolidated technical support and traditional professional services resources.
Everyday reinforces how much more effective we become as a company and supporting our users advancements in adopting and expanding the usage of our products and cloud services now that we have a dedicated success force who work on nothing else.
Then when we previously assumed this could be done as a small and amorphous and a measurable part of every colleague John.
I think our user success organization. So still so young has already made an impact on nearly every existing and new account improving their sentiment capacity and progress and going digital by using more of our offerings better.
Especially through the new digital workflows that our success blueprints introduce in accordance with the priorities of our <unk> hundred 65 accounts.
So to underscore the importance of our user success investment consider the extent to which our <unk>.
Now varies directly and immediately with consumption through term licenses and especially our <unk> hundred 65 program, where we charge per application per day.
This slide from last quarter shows our point of departure for the proportions of revenue by commercial model.
And here are those proportions at the end of 'twenty one Q3.
The major increase in term licenses reflects the first time inclusion of sequence for a full quarter.
More significantly 21, Q3 was another quarter of substantial growth in <unk> under <unk> hundred 65.
Mainly attributable to accounts opting to upgrade from our traditional Eos program in order to secure the virtually embedded assistance of our success for us.
Including through success blueprints and going digital.
We are now offering <unk> hundred 65 by invitation to the larger accounts and more currently select subscribers with more than ample pipeline for years of further upgrades.
The majority.
<unk> of our AOR growth upside potential depends on accretion within our existing accounts. After they upgrade to <unk> hundred 65, and the palpable results of our success program investments to date have steadily increased my confidence in this upward inflection.
In recent quarters I had described at length, our other fundamental investments since the start of 2020.
So a brief update should suffice.
<unk> City offers primarily to SMB prospects, our virtuoso subscriptions, which uniquely combines software access with success key assistance from our substances Engineers Pritchard.
<unk> began as a captive reseller, which we quickly determined to mainstream and now more than 200 colleagues work for example, here in Dublin and its direct sales digital engagement and e-commerce activities competing primarily with our competitors indirect channels.
Largely as a result.
And aided by new specifically targeted user success initiatives, our new business growth in SMB accounts has more than doubled from its level in 2020 or 2019 to reach in 'twenty, one Q3 fully 43% of our overall new business growth.
In the case of each of our user success and virtuosity SMB investment even greater ROI can be achieved through further investment in our ongoing digital to support each of these colleagues through greater and better automation and self service for our users and prospects than our competitors.
Unfortunately.
<unk>, our internal and.
And supporting resources for whom this otherwise would be their highest and best use are constrained this year by the extravagance compliance ritual of our first time Sarbanes Oxley 404 deadlines as we exit the emerging growth company exemption at year end, but we plan to more than catch up.
Starting in the new year.
To conclude the tone of business I would like to highlight our brand which leads in new business growth year to date are synced grow <unk> construction modeling offerings in particular I note that it's new business growth is equally balanced between SMB accounts and larger accounts with <unk>.
<unk> indicates that both virtuosity and our user success organizations deserve considerable credit.
Our construction strategy is not to try to be all things to all participants rather we want <unk> to become the solution on projects, which realize that construction is intrinsically about the occupancy of space and time, so going digital is not about dumbing down <unk> designs to <unk> digital.
Paper, but rather construction hearing in 40 as a measure of where this awareness and potential penetration stands in the marketplace.
I think it is significant that among this year's going digital awards finalist and more about them in a few minutes at this point, 28% of the project's credit synchrony.
I am also frequently asked about the pace of take up of our <unk> platform, which adds digital twin cloud services to any of our user environments.
I think it's also notable that this year fully 26% of our going Digital award finalist credited.
<unk> platform enablement.
So now on to corporate developments to relate to what's occurring externally.
And indeed, starting with our going Digital award finalist.
Recall, the independent expert jewelry, and many jewelry, which are the world's infrastructure journalists spent the summer assessing the hundreds of project entries submitted by our users for going Digital award consideration.
You will see all of these nominees and our forthcoming 2021 infrastructure yearbook, and our online gallery searchable across all past years as well.
The three finalists in each category has been announced and have recently been presenting their projects virtually to their categories jewelry and a recorded format.
You are invited to watch these finals through our year and infrastructure website.
For the mobility categories. This has been available since November one.
And for the project delivery categories since November eight.
The city categories finals will be available in November 15th.
The energy categories finals will be available on November 22nd and the water categories. Finally also on November 27. This all builds up to our year on infrastructure virtual event keynotes, including on December 2nd Nicholas' comments currently our chief product Officer.
And Chief success Officer lowered 11, we'll talk about going digital for infrastructure project Advancement and will finally announced the winners selected by the jewelry.
On the previous day December one.
Our Chief Technology Officer, Keith Stanley.
Es DG director Rodrigo Fernandez, and I will speak of that going digital for the advancement of infrastructure assets and infrastructure engineering organizations.
I guess <unk> will be the Ts rebellious CEO of Siemens Smart infrastructure and member of the managing board of the Siemens parent company <unk>.
And Andre Abilene, President of AAC Advisors, which you will hear more about shortly.
We would like to include each of you and what I call a concierge virtual event for analysts and investors on November 29th.
Cary Man and Shannon Clemens will be your guides for most efficient participation throughout the year and infrastructure 2021.
Please expect an invitation to register.
But speaking of CEO keynotes.
And about 40 digital twins earlier.
Earlier today from Europe, and videos CEO Jensen Huang presented their GTC 21 keynote.
I have heard that 7 million people will watch this.
This included this slide here promoting our new offerings, which work with Nvidia is RPX hardware and omni versus services.
And we will all want these days I know to be fully reversed as to <unk> visualization of course.
Three D visualization is made better with mixed reality devices, which use their graphics computing power for real time photo realistic rendering quality and our <unk> platform supports all of these including popular game engines for immersive experiences.
The challenge for actual infrastructure engineering, However is that both designs and as operated physical reality are constantly changing and much of the value of infrastructure digital twins is in understanding perhaps extrapolating.
These changes and their implications.
<unk> Visualizations uses the computing power of Nvidia as omni averse to interactively move backward and forward not only in <unk>, but also by way of our twin platforms time Spider backward and forward in an asset digital chronology to immersive we review.
For instance, the design history <unk> here to fore deconstruction sequence. This killer application for omni versus only possible by virtue of Ni twins unique change ledger, which assures that the digital twin can be synchronized with the evolving reality.
An early adopter of this technology combination for digital Twins is global infrastructure engineering firm Jacobs, one of our largest accounts today.
To gauge such progress and aspirations.
<unk> and AUC advisors, a leading investment banking and corporate finance advisory firm for executives and boards of architecture engineering and consulting firms collaborated on a first going digital survey, which was completed by over 150 Ceos of most large such firms together.
<unk> performed more than half of the whole world contracted infrastructure engineering work.
Presented the survey results by way of these AAC advisor slides at their in person CEO Summit last month with my annotations and this slide answer their collective expectations about the pace of change in the deliverable requirements of their infrastructure owner, operator clients I reported that the CEO.
<unk> already considered <unk> models is more important deliverables to clients named <unk> drawings and within three years do not expect to de drawings to be significant in comparison to three D models.
But many think that even the combination of models and drawings, we will not be nearly sufficient within three years expecting infrastructure digital twin deliverables to be significantly prioritized by their owner operator clients by then.
And I think that the simulation results that many more significantly expect to deliver we will also be produced by digital twin environments, implying expectations for overall demand for digital twin deliverables to grow steadily if not immediately.
These AAC firms generally participate now only in Capex project delivery.
But those who most expected digital twins to be required within three years expect the greatest value to be for infrastructure operations offering the prospect of attractive new longitudinal and even new subscription business model opportunities for these firms whose roles would include <unk> platform enabled services.
For our proprietary analytics to have a quality improvement surveying and monitoring and benchmarking.
But as you can see and as we acknowledge going digital twins is a long term ramp.
And it is interesting to consider the AAC ceo's expectations about the contribution of such going digital initiatives to their own firms market valuation, respectively compared to today in three years 10 years and in a generation.
On the one hand, it's gratifying to see significant percentages that presumably motivate the continuation of investment and going digital that had accelerated with the pandemic NR demonstrably already providing good returns.
But on the other hand, I think we can all observe other economic domains retailer autos for instance, where it's understood that multiples of market valuation are at stake and going digital with greater urgency and seemingly in AUC.
In fact, turning to the news of the day with the biggest of all economic figures attach of course, the climate summit in Glasgow has the full attention of infrastructure engineers as their work is what can make a difference.
In terms of economic opportunity. This line from Goldman Sachs shows the distribution of their estimate of $6 trillion in annual Green Capex spending required to meet all of the global goals under discussion.
Whatever are the announced that can and will be over time incrementally allocated these green capex priorities correspond closely that the categories of PS.
<unk> wise public works and utilities sector market leadership, and going digital for infrastructure engineering, including the largest expenditures by sector for roadways corresponding to our roads and bridges leadership.
And the largest grouping of expenditures for renewables in the energy grid corresponding to our market leadership and energy grids and in mining and offshore resources needed for these renewables.
It has to needed expenditures in rail corresponding to our market leadership in rail and transit and has to water quality corresponding to our leadership position in water wastewater drainage and treatment plants.
And needed expenditures in telecom ports and airports tending to correspond with our municipal market category.
While green Capex dollars are.
Our measures of need so can by no means the put in the bank.
And the finally advancing U S infrastructure spending legislation $550 billion of the headline one two trillion.
Is actual incremental spending over and above historical baseline funding that is about to become actually committed.
The incremental spending can be a portion approximately along the same lines.
As to roadways, where this new funding is incremental to the existing gas tax funding program for roads and bridges.
And for energy, including renewables.
As to passenger and freight rail.
And as to water and.
<unk> needed expenditures and telecom ports and airports.
This final corporate development is significant but should not be regarded as a surprise.
This year I reorganized what had been a monolithic executive cabinet into two groups are operating council takes responsibility for our business as usual and works on improving our execution and coordinating from product to market to use our success, increasing our precision and making our numbers I.
So I had already asked Nicholas' comments to lead this activity of late and am now formalizing Nicholas's promotion to Chief operating officer effective for 2022.
With our revenue marketing success and operations slash information officers than reporting into Nicholas.
You had the chance to meet Nicholas last quarter as he introduced as a Bentley company Sequent, which has reported to him from the outset of the acquisition.
I think it's reasonable for us all to expect that this change will result in improvements to our business as usual.
The operating council has already been working cohesively together, but now we will have more degrees of freedom to double down on initiatives that for too long as a private company.
By that I mean, I failed to sufficiently take aboard to the obvious examples of the explicit success organization and SMB New business focus we will add a new priority for a step change advancement and marketing automation and integration.
And this is also a very welcome change for me personally as it will afford me more capacity to concentrate on external investor activities and communications.
The public software company CFO function, particularly upon graduating from emerging growth company status. As we're now doing is a full time job and I am very confident that our current chief accounting Officer, Werner Andre who has been meant towards with this promotion in mind by David Hollister over the last seven years.
We will serve me and all of US well in this capacity reporting to me.
<unk> is available today to help us answer questions. I know you will all warmly welcome him throughout this year. He has been very occupied needless to say and completing our sarbanes Oxley compliance well ahead of the year end deadlines.
And as I suspect David Hollister will tell you himself. He is very pleased to be able to assume focus fully on leading the increasingly significant activities of the second management group that I created this year for corporate development.
This include responsibilities among other potential initiatives for our acceleration activities in which we nurture new businesses and in some cases, we'll be creating new joint ventures for our twin ventures fund and for our cohesive captive digital integrator.
In respect of these investment activities since last quarter. In addition to the sequence acquisition already covered there have been announced the acquisition by the cohesive companies of <unk> plus <unk>.
Combining presence in central Europe, and in road and rail owner operators.
<unk> announcement of the investment by IRI Twin venture fund along with the most recent announcement by on Earth of another significant by twin venture Fund investment and we're very pleased that our first <unk> ventures investment company future on headquartered in Norway.
<unk> announced a significant growth investment by Katie on Kongsberg digital.
Now before handing over to David Hollister to cover our 2000, <unk> Q3 financial performance, maybe I explained how our deferred compensation plan change during the quarter relates to this overall subject of executive talent.
As you know the Bentley brothers believe that our long standing equity sharing program has been the secret sauce for our company's sustained progress.
For much of our history before 2015, our executives equity incentives were primarily earned through Phantom shares in DCP.
The mainstay of our executive management today are among this cohort of companies security.
And recall that our principal motivation before becoming a public company last year was to provide liquidity for our colleagues shareholders.
And most have accordingly become April indeed to choose or not to diversify the value of their <unk> investments.
However, the DCP executive cohort have lapsed flexibility as the Phantom shares representing the bulk of their holdings could only be diversified after being distributed.
Most of these executives distribution elections were made years ago and in most cases distribution is either not possible for many years or significantly is triggered upon or after separation from service.
Without a change in the plan for these executives to effectuate, even a modest near term diversification of their substantial and deserved wealth concentration in public <unk> shares. They are only recourse would've been to resign.
Rather than continuing to ask them in effect to choose between loyalty and reasonable investment Prudence. We offered these active executives a onetime only election or limited reallocation within the DCP and the result is that they have been able I think gratefully diversify about a quarter.
<unk> Hotel DCP Phantom shares.
And as representative of these executive talent qualities now over to David Hoster.
Okay.
Thanks, Craig I'll start with our revenue performance.
Our third quarter GAAP revenues of $248 5 million grew 22% over the same quarter last year.
Because of the purchase accounting for acquired deferred revenue primarily related to sleep. When we have a haircut, which serves to deflate mobile results and accordingly, we also present adjusted revenues, which were $251 4 million.
Up 24% in the same quarter last year.
There happens to be new accounting guidance, which formally bring GAAP accounting up to pace with this more enlightened view of the historical acquisition haircut.
Unfortunately, we can't adopt that guidance until our Q4, which we intend to do when applied to our full year 2021, which will render this adjusted revenue concept unnecessary other than for the current quarter.
Of course, most of that growth comes from subscriptions, which grew 23% over the prior year, representing 85% of our revenues gives.
Given this preponderance I offer much of my business commentary here as it relates to subscriptions.
We attribute the acquisition of sequence to represent 10 of those 23 percentage points of growth over the prior year.
Foreign currency effects account for just under two of those 23 points and thus our billed business performance comprises just over 11%.
As has been the case all year, our public works and utilities end market has led the way in overcoming the macro induced drag on our performance in the industrial and resources sector, where our footprint of EPC accounts continues to suffer declines induced by capital project delays in that.
Cancellations.
We also see the effects of capital project delays on our commercial facilities sector end markets.
On a product and solutions dimension, we continue to see strong performance with our utilities offerings for electric and Communications group.
As well as water and wastewater utilities.
Similarly, our <unk> broke construction offering continues to perform well even despite the capital project delays, we've mentioned and again asset wide information management and inspection solutions, all had notably positive contributions during the quarter on.
On the other hand, those oil and gas industrial capital projects headwinds are now decelerating growth in the portion of the project wise, which enables major capital projects.
On a geographic dimension there are really no outliers from our trends year to date, good or bad reflected in our GAAP.
In our GAAP revenue results.
Greg has shared his tone of business commentary.
Within that some geographies, where new business growth trends are noteworthy and new business growth, which is primarily growth. In IRR is is of course, a precursor for us to future subscription revenue performance.
They are in we saw improving new business growth trends and geographies, presumably benefiting from positive sentiment from rebounding oil prices, including Russia, South America, and the Middle East.
We also noted some stability and modest return to growth in China with still some work to do in Q4 for it to hit its targets.
He had a disappointing third quarter for no apparent underlying macro reason just slippage.
Our perpetual license revenues are again down $1 million for the quarter relative to the prior year and now represent less than 5% of total revenues.
We continue to observe ongoing cannibalization of perpetual licenses in the term license subscriptions and virtual <unk> subscriptions, which of course is a encourage trend for us.
Our professional services revenues or 10% of our total revenues and increased seven 4 million over the same quarter last year, representing 43% growth.
Of which can be attributed to cohesive related acquisition.
Again cohesive companies is our digital integrator business, we operate ultimately stimulate beverage system software product pull through and digital twin adoption.
Year to date, GAAP revenues are about $693 million and 19% improved over the prior year.
Adjusted revenues of $697 million are up 20%.
Similarly subscription revenues adjusted for acquisition Haircuts are improved 18% over the prior year with about 3% coming from currency challenge, 5% from sequence.
The balance of the business performance.
Perpetual licenses are off $2 6 million year to date, reflecting the trend towards subscription that I described for the third quarter.
And professional services are up 65% year to date also primarily reflective of the cohesive company's dynamics I described for the quarter.
Our last 12 months recurring revenues.
Which include primarily subscription revenues, but will also include certain services revenues, which we deliver under contractually recurring success plans.
Together increased 15, 1% relative to the same LTM period last year.
The Onboarding of Sequent contributed about three percentage points of this improvement are subscription.
<unk> revenue performance, our recurring revenue performance and our IRR performance are each net of the industrial Capex capital project headwinds, we've discussed all year and again this quarter.
And of course, our exacerbated by our <unk> hundred 65 consumption based commercial model.
These double digit growth rates, even net of acquisitions and currency effects were achieved by virtue of our comprehensive.
Portfolio, and our diversification as well as growing momentum with our focused SMB initiative.
This SMB initiatives disproportionately delivers new accountable and new accountable is excluded from our net retention rate.
Thus, our net retention rate again rounds down to 106% which is disappointing.
Because of the trailing 12 month nature of this metric it moves slowly.
It has our full attention and eventually will benefit from our ongoing investments in user success.
A final comment here on <unk>, which is up 26% over the same point in time last year.
As mentioned last quarter sequent onboard at 13% of this growth.
Since this is a constant currency metrics business performance accounts for the remaining 13% growth.
This is an acceleration in growth relative to our Q1 and Q2 performance, but I'll remind you that due to seasonal patterns. Our Q4 is our most prominent and important quarter in terms of AUR growth.
Okay.
Our GAAP operating income and GAAP and GAAP net income each unusually reflect a loss during the quarter.
This loss is directly the result of an $89 million, one time accounting charge related to the re characterization of a portion of our nonqualified deferred compensation plan from an equity settled arrangement to an eventual cash settled arrangement.
Greg has explained the executive retention dynamics, the directed our determination to undertake this week characterization.
Let me just go through some of the financial effects of the transaction.
First and most significant we have a total accounting charge during the quarter of $89 million.
This is for the most part in predominantly the fair market value of $1 5 million shares converted from equity settled to cash settled obligations of the plan.
Effectively this is a share buyback with the cash outlay for that buyback occurring far in the future.
Of course this portion has shifted from equity to liability within the plan, we reduced our outstanding share count by one 5 million shares.
Going forward from the point of conversion.
This portion of the plant converted into cash so the liability will be indexed to actual market performance for.
For various mutual funds that would be affected participants in the plan have chosen is tracking indices. The performance of those bonds will require a presumably nominal mark to market each quarter.
Will result in a corresponding noncash charge or credit to operating expenses.
During this third quarter for example that mark to market was $1 million.
Our reductions in our liability and a reduction to operating expenses.
Prospectively.
We will also be highlighting these nominal mark to mark to market charges and also excluding <unk> effects and our non-GAAP measures.
Particularly in this initial quarter of impact there.
The accounting required to establish the arrangement.
Skewering true underlying performance so we've adjusted to neutralize it with non-GAAP measures and.
And that is best reflected here in adjusted EBITDA.
Which for the third quarter was $85 million.
And an EBITDA margin of 33, 6%.
This brings year to date adjusted EBITDA to $237 million.
On a margin of 34% this year to date adjusted EBITDA is up 25% over the same period last year.
As a reminder of the seasonality profile of our operating expenses is heavier in Q4 than other quarters.
Further we continue to invest for growth to the extent, we can still achieve our measured margin expansion targets.
Accordingly, I refer you to our previously shared financial performance expectations for the year, which we don't endeavor to modify at this time.
With respect to liquidity.
Our third quarter GAAP operating cash flows are 47% improved over the same period last year.
It also reflects an improvement of 18% year to date compared to the year to date periods last year and 27% improved for the third quarter LTM period compared to the same LTM period last year.
Notwithstanding a great cash flow quarter for us that can be a fair bit of short term volatility and seasonality in our in our cash flows.
I also refer you to our operating results call last quarter, where we highlight some year to date cash flow trends and cash inflows as.
As well as some unusual acquisition related cash outlays.
We continue to expect that on average our business will efficiently generate cash cash flow from operations at a ratio of <unk>, 85% to 90% of adjusted EBITDA.
As of the end of September our net debt was $1 8 billion.
Net net total debt leverage pro forma for <unk> was three four times.
Our net senior debt leverage rounds to zero times, given $156 million in cash on hand.
And only $68 million drawn on our $850 million senior secured revolving credit facility.
$782 million remains fully available to borrow on our revolving credit facility.
I had previously projected less than four times total leverage after the <unk> acquisition, and we're actually slightly more favorable at present and trending towards further deleveraging.
As I've mentioned I think leverage under three times is optimal for us, but our business with its predictable and visible cash flows areas that very tolerable.
Our capital structure is in great shape.
And we're fully able to support our business strategies, including ongoing programmatic acquisitions, which we do intend even opportunistically.
A final comment or two on our annual outlook or guidance, if you prefer which were not changing at this point.
We continue to work hard to deliver on the upper end of ranges and maybe with excellent performance get ahead of some of the metrics, but a significant part of our annual ballgame as the fourth quarter.
We still have lots of work to do and lots of opportunity.
Also I'll remind folks that we have a fair bit of Q4 expense seasonality and.
We're reinvesting in our business for growth.
And our normal margin expansion targets, which we regard as a very high priority.
It's not our highest priority to eke out short term margin gains beyond this we'd rather see investment.
Growth in higher future returns.
And I suppose the last year I will give our annual guidance is to look towards the low side of the range. We gave for outstanding shares.
This is the result of the $1 $5 million share repurchase with the deferred compensation plan, which we've talked about headwinds here.
And with that Gary I think we're now ready for some questions.
Okay.
Alright, well ill start with Matthew Broome from Mizuho.
Thanks very much.
Taking my questions. So it's great to hear about improving new business growth in the middle East and Latin America.
But to what extent do you anticipate this translates into a broader rebound for us losses customers and given that many of those customers are on consumption contracts is it possible that a rebound.
It happened quite quickly if and when the EPC start rehiring.
Okay.
So Matthew I think it would correspond to EPC starting rehiring.
<unk>.
I think that.
My guess is that it depends on their changing business mix.
With energy transitions.
As far as.
Rebounding energy prices, it's certainly clear that.
Even.
Fossil fuel opex.
Is really important tenant is not in jeopardy, and thats a great opportunity for us for instance, with asset lifecycle information management that we mentioned this honor.
On a good upward direction, but the nature of capital projects.
For fossil fuels I do not think we can I don't think I know enough to be sanguine about that.
But yes, if apc's resume hiring for projects of any sort that will.
<unk> put our project why that applications.
Back to work.
We have terrific new applications for wind power.
Tunnels and so forth direction.
<unk> would like to move toward.
But they've got to.
No change in direction of their ship sand and build up new backlog in most directions and I don't feel qualified to.
Two.
Comment on how quickly that can be done in the countries. The energy prices are helping them spend money on public works and utilities.
The immediate impact we already see.
Hi.
Okay.
And then.
It sounds like.
<unk> had another strong quarter.
Do you anticipate further increasing the size of your inside sales force.
The other ways, you can sort of Fob accelerates.
<unk> momentum.
Yes, I think one of the.
Spending direction stable Hollister referred to towards the end of his remarks here, where if we are of course going to be sure to meet our margin target for the year, but when if we can add faster to head count.
In.
Virtuosity, while doing that.
Because it's.
Fairly.
And we're not at the point of diminishing returns.
And with new application usage prospects in F&B.
So, yes, we want to put that.
Accelerated closer to the floor.
Over the coming year indeed.
Front of aligned for resource allocation.
And it's it's.
Not just head count, which also continued investments in technology and <unk>.
Marketing marketing tools and Google Adwords.
Where we're seeing success with an active bidding and the euro.
That makes sense and then maybe just one last one for me.
Thomas.
Does your current focus remain yes, geotechnical and environmental opportunity or are you looking at other opportunities as well.
I think the.
The opportunity set presented by the.
Infrastructure spending bill and energy transitions are.
Very significant and should have everyones attention in terms of.
Potentially turn on new investments.
Hi, Brian.
Thanks, guys and David Best of luck in your new role.
Next we'll go to Jason So we know from Keybanc.
Yeah.
Perfect. Good morning, Thanks for taking the time today.
Just a couple for <unk>.
David.
The slight acceleration in constant currency and 13%.
Nice to see alright sounds like the business is doing well, maybe help us unpack that acceleration over last quarter.
Yes, it's very much.
Along the dimensions of that.
The.
The tone of business sentiment that that Greg described.
All of those areas.
Again, it's an acceleration.
I think we will.
So 10% year over year growth.
Constant currency.
Net of net of Onboarding sequence.
In each of the first and second quarters. So this 13%.
<unk> is putting pressure that includes it includes.
Some fairly nice wins.
Weighted too.
Communication towers solution.
Which contributed.
Close to $3 million of that.
During.
Better which would have been included in prior quarters.
So yes, it's across the board.
Really impressive.
<unk>.
But I'll I'll call again caution into the third quarter.
Need to do that again in the fourth quarter, because so much of our.
Our growth opportunity happens in the fourth quarter, it's just the.
The business like what we have in seasonality we have so.
I am cautiously optimistic about the acceleration that I'm a muscle cautious.
In particular that is fourth quarter is much more important for us in the third quarter.
Gotcha.
The main reason why you're keeping the guidance unchanged, but giving us some of the Samsung direction.
Yes.
Okay perfect.
I'll keep it there and get back in queue. Thank you.
Yes, well next go to Matt Swanson on for Matt Hedberg from RBC.
Alright.
I'm, having a little trouble getting my video going but that's about it.
Okay Greg.
ESG has certainly been a big topic since you guys came out.
Timely like you mentioned with the infrastructure build the climate summit could you just talk to us a little bit about how the steam it tangibly driving your business today as well as maybe like any qualitative changes just given customer conversations.
Give us some.
The impact we could see in 2022.
Well.
<unk>.
Even with what can be.
Spend under new government programs not only in the U S but elsewhere.
It's a fraction of a percent of our infrastructure capacity that we that can be new.
No.
Extending the lifetime of existing infrastructure assets is necessary, but they now need to be resilient for.
And environmental.
Adaptation.
And in energy transition and digital twins.
Sure.
Are the way to do that.
Think when these AAC CEO as we referred to they're going digital survey when they.
When they recognize that digital twins are going to help them.
Participate in the Opex.
Life cycle of the assets the engineer.
And everyone's doing that for St.
Safety and resilience.
And the energy transition, it's sort of.
Puts the digital twin opportunity.
Front and center and digital twin opportunity and the ESG imperative.
Are closely linked.
Cause.
We can engineer enough new infrastructure to make a difference it's improving.
And increasing the fitness for purpose of the infrastructure, we already have.
That is.
Not only our focus Nab I think opportunity is the engineering firms see it on behalf of the owner operators. So remember we want to help.
Healthy owner operators get to digital trends for better.
<unk> resilience and throughput with the engineering firms being developing for our <unk> platform their cloud services that won't be a new new business opportunity for them and.
And helping cover the owner operators. So it's not limited to our sales or sales by the engineering firm, so having surveyed the CEO.
Hum.
Okay.
Engineering.
For the first time.
Glad to see some payment.
Okay.
Needle health.
Liana.
That's been building.
Can you talk David pointed for faster.
Kind of different.
John.
Get a better sense of bearable trends better.
Merging the pandemic, especially near term.
The long term.
Hi, guys.
As people go through their recovery are you seeing any sort of Bob has been continued progress or is that kind of a new found emphasis.
The new found emphasis will continue on but particularly for infrastructure engineers.
<unk> of their work.
Ben.
On the job.