Q4 2022 Bentley Systems Inc Earnings Call
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Speaker 1: Virtuosity for SMB and iTwin Investments.
Speaker 1: reinforce our confidence for, again, a strong operational and financial outlook for 2023.
Speaker 1: Today, we will also hear, as I always enjoy, from founder Keith Bentley, who will be transitioning his Chief Technology Officer role at the end of this quarter and retiring later this year.
Speaker 1: In the investment community, we'll hear for the last time from former CFO and current Chief Investment Officer David Hollister, who will be retiring at the end of this quarter.
Speaker 1: As always, I will start with what's new in our tone of business.
Speaker 1: Our key operating results headline is year-over-year constant currency ARR growth consistent with our original and sustained financial outlook of 12.5% in business performance, which excludes ARR acquired with powerline systems.
Speaker 1: For the quarter and for the year, this reflects robust and sustained momentum everywhere else in the world, making up for having lost Russia and for compounded headwinds in China. There, in addition to geopolitical concerns which are not abating, as evidenced by more recent developments.
Speaker 1: During the fourth quarter's major annual selling season, the pandemic first caused a shutdown of our offices and then widespread sickness after the reopening.
Speaker 1: And as well, the government's intended infrastructure spending seemed to have been delayed.
Speaker 1: For the year 2022, for instance, as reflected in our anticipation last quarter, we would have exceeded our range of ARR growth outlook if not for the regression caused by Russia and a knock-on counter-globalism in China.
Speaker 1: We are cautiously bearing in mind those risks in China in our outlook for 2023.
Speaker 1: With the respective to the relative tone, the color of business by infrastructure sector.
Speaker 1: The only change in Q4 was that the commercial facilities sector finally flatlined. We had been anticipating this earlier in 2022, and we do expect this to continue for 2023.
Speaker 1: So, only affecting a single-digit percentage of our ARR.
Speaker 1: And we have regularly reported on the Dodge ENR quarterly survey of civil engineering firms self-reported backlogs.
Speaker 1: I believe Q4's reported downward assessment as a percentage of their ideal backlog has more to do with the reporting firm's assessment of what's ideal for them.
Speaker 1: as the same firms report net increases in backlog from Q3.
Speaker 1: Moreover, the ACEC quarterly survey representing a much larger sample across all engineering firms actually quantifies the substantial current backlog as fully 12 months.
Speaker 1: And especially in this survey, there continued expectation of a further increase in backlog over the coming year.
Speaker 1: The related sentiment survey also shows continued improvement over the last quarter.
Speaker 1: For our accounts, in the face of workforce constraints and growing backlogs, going digital is the priority for increasing their infrastructure engineering capacity.
Speaker 1: And our consumption-based E365 commercial program, embedding our enterprise success expert teams to implement each E365 account's prioritized blueprints for new digital workflows every quarter, is the first of our own primary incremental growth initiatives.
Speaker 1: as E365 accounts achieve demonstrably faster ARR growth than our other enterprise accounts.
Speaker 1: In 22Q4, as expected with our seasonal bulge in renewals, we upgraded accounts to E365 at about twice the ARR rate as in each earlier quarter of 2022.
Speaker 1: E365 increasingly becoming our mainstay commercial program has contributed to our application mix accretion that measures the annual change at constant pricing and average user spending per consumption hour.
Speaker 1: This reflects their pace of upgrading to more specialized and thus more expensive applications.
Speaker 1: And it has been expanding steadily from approximately two and a half to four and a half percentage points of ARR growth over the last two years. And of course, that's in addition to growth from pricing escalation, volume, and cloud services adoption.
Speaker 1: Our second incremental growth initiative has been our virtuality go-to-market strategy for SMB accounts and prospects.
Speaker 1: Our second incremental growth initiative has been our virtuosity go-to-market strategy for SMB accounts and prospects. From the beginning, it has generated...
Speaker 1: exponential growth continuing to reach N22Q4, a milestone of over $33 million in virtuosity ARR.
Speaker 1: And for yet another consecutive quarter, Virtuosity's new business included more than 600 further new logos.
Speaker 1: enabling us to surpass the further milestone of over 40,000 unique accounts globally.
Speaker 1: And New Logos added almost 3 percentage points of ARR growth.
Speaker 1: And among our existing accounts, net revenue retention in Q4 remained at its high of 110%.
Speaker 1: concluding as to SMB and Q4 SMB represented fully 47% of our overall new business.
Speaker 1: And even in China, SMB new business grew year over year in 22Q4.
Speaker 1: In fact...
Speaker 1: New business overall was healthy in Hong Kong and Taiwan.
Speaker 1: So, I believe our applications are competitively well positioned throughout Greater China.
Speaker 1: But to reach our potential there, we must navigate the geopolitical issues that currently limit our prospects.
Speaker 1: the primarily state-owned mainland enterprises. Thus in December we announced in China our second Chinese joint venture, which doesn't yet have an English name. It's with HDEC, a large design institute that's part of Power China.
Speaker 1: We've worked closely with HDEC for decades as a major account and particularly to support their development of China specialized applications based on our platform, both for their internal use and to market to their peers.
Speaker 1: The joint venture with HDEC, whose business is primarily engineering for hydroelectric power generation, will soon become our exclusive channel partner for all hydropower accounts in China, representing almost 20% of our business there.
Speaker 1: We will transfer to the JV, along with some Bentley China colleagues, our existing direct relationships.
Speaker 1: and a capital contribution for our one-third ownership.
Speaker 1: HDEC will contribute two-thirds of the capital and its existing application business and products.
Speaker 1: The JV will initially resell our existing applications as well as HDECs, but over some years we'll work to increasingly shift the mix towards all indigenously developed Chinese products built on our platform.
Speaker 1: paying us royalties rather than net product revenues, and eventually leading to hope for investment returns as well.
Speaker 1: Moreover, the JV will cater to the preferences of this Chinese enterprise market.
Speaker 1: Those are preferences for perpetual licenses rather than subscriptions.
Speaker 1: rather than our cloud-based enterprise systems for on-premise systems.
Speaker 1: Like i-Link, the reworked derivative of ProjectWise, now coming to market from our first JV.
Speaker 1: So, during 2023, major portions of our ARR in China will tend to regress.
Speaker 1: During 2023, major portions of our ARR in China will tend to regress from gross to net.
Speaker 1: and then as subscriptions are cannibalized for perpetual licenses.
Speaker 1: But given the magnitude of the Chinese market, accounting for 30% of global infrastructure spending, we think that to manage through the geopolitical headwinds...
Speaker 1: These investments and risks are warranted for sake of the long term.
Speaker 1: Now it's too early to knowledgeably quantify this drag on 2023. However, you will notice that our annual outlook for 2023 in terms of ARR growth looks like 2022's annual outlook and actual outcome.
Speaker 1: Although the complete loss of Russia obviously can't occur again.
Speaker 1: the possibility of China somewhat following suit could be a significant 2023 factor.
Speaker 1: But for both years, let me emphasize that Russia and China are the asterisk exceptions to our backdrop of unprecedented sustained growth.
Speaker 1: and momentum for our business and for our colleagues.
Speaker 1: everywhere else in the world for 2023, as Nicholas will now elaborate.
Speaker 2: Thank you, Gray.
Speaker 3: I am pleased to report that we made a strong finish to 2022 and see momentum continuing into 2023 with healthy pipelines and a very brisk pace of business.
Speaker 3: market conditions remain positive.
Speaker 3: Q4 was a very busy quarter with more evidence of IAG investment and EU recovery funds flowing through, more so than in product quarters. And as Greg pointed out, accounts appear to be more concerned about their capacity to execute rather than their book of business.
Speaker 3: Talking about momentum, I would like to acknowledge the invaluable work of our new Chief Revenue Officer, Brock Bullard, who has been instrumental in the successful global rollout of our E-35 program.
Speaker 3: I'm delighted that he now brings this wealth of industry experience to our operating council.
Speaker 3: Of course, I would be remiss if I didn't also pay tribute to its predecessor, Gus Bergsema, whose relentless focus on execution elevated the company's self-performance to a new level of precision.
Speaker 3: Looking at the vision, I will draw your attention to Europe and India.
Speaker 3: Europe was a bright spot with improving market conditions and a strong pipeline. The main cross-drivers were public works and contractors in industrial sector, as well as an acceleration of E35 conversions and consumption.
Speaker 3: In India, momentum continued at both Enterprise and SMB, with public works and industrial driving year-on-year growth.
Speaker 3: Transportation continues to be a strong point for us, with firms flowing and lots of project awards.
Speaker 3: India is also focused for urban and rural drinking water programs and we made the single largest sale of our water product line in India in the last 10 years.
Speaker 3: Southeast Asia continues to impress with the scale of its ambition and it can point to mega projects in transportation, in rail in particular.
Speaker 3: At the Year in Infrastructure and Going Digital Awards, which were held in London in Q4, two real projects from South East Asia were financed.
Speaker 3: the Metro Manila subway project, and the eventual winner, the high-speed railway from Jakarta to Bandung.
Speaker 3: The project set a new benchmark for going digital. iTwin technology reduced the design review time by 10% and shortened the construction schedule by 6 months. Turning now to products, Microstation grew fast in SMB. This is a positive indicator that there is still an untapped segment of individual practitioners.
Speaker 3: and smaller infrastructure organizations for whom the station has a strong product market fit.
Speaker 3: Why this is significant is that these practitioners and organizations who may be using microstation on a product for the first time, represent an install base that we can in future upsell to a higher value, more powerful engineering application.
Speaker 3: what Greg called application makes a creation. And beyond that, help them get on the on-ramp to infrastructure digital twins. Other brands with notable performance in Q4 included Open Rail, Open Bridge, Open Flow, SACS, and LeapFull.
Speaker 3: Finally, a few words about our colleague engagement.
Speaker 3: As you will see in the 10K report, we had a remarkable 92 participation rates in our 2022 Annual Colleague Engagement Survey, with 85% of colleagues responding that they are proud to work for Bentley and 87 glad to recommend Bentley as a place to work.
Speaker 3: It is gratifying to see favorable comparisons with tech industry benchmarks.
Speaker 3: against the backdrop of take-leafs and so-called quite winning.
Speaker 3: This is due in no small part, we believe, to our intentional approach to work flexibility and colleagues' wellbeing.
Speaker 3: which facilitates a high level of engagement and productivity.
Speaker 3: What we call our Infrastructure and Part Workforce plan encourages our colleagues and their managers to make effective choices about the right balance of working from home or in the office.
Speaker 3: and truly make the best of both worlds. Our policy of not requiring colleagues to come to the office at any specific frequency has been instrumental in attracting and retaining talents and allowing our colleagues across the world to contribute to Band-Aid system success in a meaningful way. And with those operational perspectives, back to you Greg for corporate development.
Speaker 1: Thank you, Nicholas. And may I add my thanks to the whole of your operating teams for these best-ever operating results that we're reporting today and expecting for 2023. Following on from the Chief Revenue Officer Transition that Nicholas just reviewed, the corporate developments we will cover now are also related to executive succession.
Speaker 1: Recall that the primary motivation for our IPO after 35 years was to help provide a prosperous retirement for our colleagues who had collectively earned one-third of the company's ownership while making possible our success.
Speaker 1: As an expected consequence, we will this year substantially complete the retirement succession for, cumulatively, nearly half of our officers. I describe this wave of management promotions as generational.
Speaker 1: This year's retiree cohort has an average tenure of 26 years.
Speaker 1: A commitment we have ingrained over all that time.
Speaker 1: is that our operating management is annually charged with realizing scale efficiencies sufficient to expand our operating margins by about 1 percentage point.
Speaker 1: In our financial outlook for the year 2023, we are now aligning our external margin metric with what we believe most appropriately measures this aspect of operating performance.
Speaker 1: and improving on adjusted EBITDA for these purposes. Based on feedback to date, I think investors will also prefer our compass-setting metric going forward, which is adjusted operating income, including stock-based compensation.
Speaker 1: as encompassing real and substantial economic costs that are conspicuously overlooked and adjusted EBITDA. This includes capturing operating depreciation and amortization, which becomes more significant for us in 2023 as our digital experience investments include some IT expenditures that require capitalization.
Speaker 1: But most importantly, to us all as shareholders, stock-based compensation bears real costs of dilution, in our case corresponding to the free cash flow we use to fund off-setting repurchases. As I described in our own history, we think stock-based compensation is crucial for us off-setting.
Speaker 1: Then as a public company, our comparable grants in full value restricted stock entailed accounting costs at a much higher magnitude. Following the ensuing retirement wave, which I described our equity incentives as having enabled, we have prioritized intentionally rebuilding appreciable equity holdings.
Speaker 1: by our next generation of leaders. But, subject to cash versus stock elections by and for executives, including our CEO , I expect our SBC charges to level off in the 6% range of margin points.
Speaker 1: giving full weight to these economic costs. We have progressed quite well in following our internal compass towards increased adjusted operating income with stock-based compensation. From pre-IPO years through the pandemic years, which were subject to normalizing adjustments for the temporary...
Speaker 1: travel and event savings, and as reported today for 2022. Leading to our Confident 2023 Outlook.
Speaker 1: to achieve a compounded annual growth rate over the last five years of just under 16% in adjusted operating income with SBC. And most significantly over this period spanning the pandemic impact,
Speaker 1: We have substantially accomplished our objective of an annual percentage point improvement in operating margins by this most appropriate and fully encompassing measure.
Speaker 1: Two related final thoughts are about our leverage, consisting primarily of our convertible notes maturing in 2026 and 2027.
Speaker 1: First, if as is our track record and our plan, we continue to extend this compounded animal Roast Rate.
Speaker 1: Then at current valuation multiples of adjusted OI with SBC, I think you would see that this debt will in fact convert. And second, do they extend valuation multiples become lower and the debt doesn't convert. The compounding cash generation this poor ten.
Speaker 1: After fully offsetting SPC dilution, should easily underwrite our choice of refinancing.
Speaker 1: Now, back to our executive succession for the developments. Keith Bentley, up next, will then introduce David Hollister to review our significant recent Bentley investments. I can say with appreciation that we wouldn't be here without David Hollister. I will certainly miss his influential thinking and steering.
Speaker 1: And I am sure that as a continued substantial investor, he will expect ample returns from the long-sighted investments he has overseen.
Speaker 1: David will then introduce Werner, his successor as CFO to wrap up. Setting aside any admitted bias, I think the infectious spunk and constructive values and work ethic of founder Keith Bentley have defined our company just as much as his technical groundbreaking and future proofing. Keith will cover our third primary growth initiative.
Speaker 1: The infrastructure, digital twin, generational advancement, powered by I-Twin, that will be his enduring legacy.
Speaker 1: in generational advancement, powered by I-Twin, that will be his enduring legacy. Keith, you're up!
Speaker 1: Thank you Greg. When we began betting systems journey in 1984, I'm sure I wouldn't have been able to predict where we'd be at this point as a publicly traded company with a billion dollars in annual revenue.
Speaker 1: It's been an incredibly rewarding and exciting journey for me as the years have just flown by. But of course, I've been at this for so long and I've made so many multi-decade personal relationships with our wonderful user organization. And I feel a real personal obligation to them.
Speaker 1: Likewise, I'm deeply committed to my colleagues here at Bentley. Many of whom have dedicated their entire career to our company. So part of me wants to work forever. But alas, as they say, time waits for no man, and inevitably there must be a transition. Best if it can happen while I can help make it as smooth and successful as possible. So while I'm stepping down as CTO and I intend to start gradually ramping down my career, I'm deeply committed to my colleagues here at Bentley.
Speaker 1: There's a danger that I may lose interest in our long-term success.
Speaker 1: I've been working with my successor at CTO Julian Moot continuously over the past two years, and I've come to have a sincere trust in his instincts and a real admiration for his drive to get things done.
Speaker 1: Together, we'll make the transition as smooth as possible and we're both committed to continuity, both in terms of our long-term directions and our immediate priorities. So we expect no drama. Now, as you may know, in the infrastructure software market, we find ourselves at a very real inflection point around infrastructure digital twins, a concept that's vanquely nearly single-handedly invented.
Speaker 1: In my obviously biased but informed humble opinion, there's currently nothing remotely competitive to our eye-twin technology stack. So it's our priority to leverage our eye-twin advantage as quickly and as adroitly as we possibly can. Since we introduced eye-twin in 2017,
Speaker 1: We've seen significant uptake by some of the world's leading engineering firms on the world's most significant projects.
Speaker 1: A good indicator of that is the number of finalists in the year in infrastructure and going digital awards that credited I-Twin for their project. That fraction has increased from 20% in 2020 to more than 40% last year. But that's because infrastructure digital twins empower engineering firms.
Speaker 1: and over operators to accomplish extraordinary things to make gain changing improvements to their workflows and their business process and even transform the business models. So if you haven't already done so, I encourage you to review the recordings of the final's presentation from last year's year and infrastructure and see for yourselves how they describe it in their words.
Speaker 1: We want the benefits of using this technology to be experienced by all infrastructure projects and in all by all infrastructure professionals, no matter the size of their project, the size of their organization or whatever phase of the infrastructure life cycle they contribute. With all the investment going on in infrastructure throughout the world, wouldn't it be nice to think that together we're getting the maximum value for every dollar, every euro and every other currency being spent and that the projects are safer, greener and delivered on top of the
Speaker 1: for infrastructure digital twins and of course Bentley i-Twin. But that means that i-Twin should be pervasive.
Speaker 1: It already powers the Bentley Infrastructure Cloud. It already enables us to mobilize data across the infrastructure value chain across every stage of the infrastructure lifecycle. But our priority for this year are to bring the power of cloud native i-twin to our engineering, modeling, and simulation applications.
Speaker 1: but without requiring our users to fundamentally change their ways of working. They should be able to incrementally realize the benefits of infrastructure digital twins without having to start over. To accomplish that, we'll embed the I-Twin engine inside our existing applications. It's an exciting project and one where Julian and I have been actively involved and engaged with nearly every team here at Bentley.
Speaker 1: And I have to say, it's one of my most enjoyable projects ever. So I've had a tremendous career and I'm very thankful to all the talented people here at Bentley, now and over the years who've made it so rewarding.
Speaker 1: We began long ago in an era called computer aided design. But I now describe our scope as software aided infrastructure. And I think the possibility for that on your endless our world needs to improve the efficiency, the longevity and the resilience of our global infrastructure as a matter of urgent priority.
Speaker 1: But that can only happen with innovative new technology, new processes for all phases of its life cycle period. It's not a matter of its but how. And on that note.
Speaker 1: I'd like to hand it over to my good friend and our longtime CFO David Hollister, who will be speaking today on our operating results call for the last time, David. What new investments have you been working on for our futures as retirees? Thank you Keith, for your vision, your leadership, and your kind words.
Speaker 1: And indeed, I will talk about some new investments. Beyond our noted progress in developing formal joint ventures in China, the four-gen alternative needs of new business in that evolving landscape, I'd like to give updates on our eyes to our future venture activities and expand a bit more on two of our latest acquisitions, easy power and the TASI.
Speaker 1: So as you know, we formed ITW inventors to stimulate entrepreneurialism in developing digital twin applications, including those leveraging our ITW platform capabilities. In addition to our traditional venture portfolio investments and I'll highlight a new addition to that in a moment, we sponsor and support a development ecosystem. There in ITW and Activate is our accelerator program where we engage with early stage companies
Speaker 1: and fund approved development projects in exchange for equity, typically safe notes. We completed our first cohort of I-Twin Activate focused on the grid. And the success of this cohort has already led to certain products right for introduction. And joint marketing and co-selling motions between Bentley and the cohort participants are already underway. It's our expectation that many of these I-Twin Activate program participants graduate.
Speaker 4: sensor and connected car data to generate a synthetic data set approximating all road usage.
Speaker 4: This data supports a range of optimization and analytics use cases starting with traffic signal optimization and extending to traffic flow monitoring and optimization at city scale.
Speaker 4: We also see the potential for FlowLabs real-time data sets to contribute to Bentley's advanced traffic simulation solutions. Our easy power acquisition adds electrical design and analysis capabilities to our portfolio. We've historically found really good success. We also found really good success.
Speaker 4: and offering analysis and simulation applications specifically for infrastructure context, which are fit for purpose and easy to apply, iterate and incorporate for optimized design and operation of infrastructure assets.
Speaker 4: But, actually, these solutions tend to be mature, sticky, and high-margin contributors for us, and we expect the same from easy power. We estimate easy power can offer everything that 90% of infrastructure, electrical power engineers will ever need. And the solution is easy for them to learn and apply.
Speaker 4: but can also complement other advanced electrical and house solutions outside of our portfolio and not presently our focus. Within our comprehensive portfolio, easy power will initially complement our open buildings, open flows, open plant, and raceway and cable management design and modeling applications. In particular, in the context of industrial,
Speaker 4: mining and commercial building sectors. Easy Power will also serve as a platform to introduce electrical analysis to other of our sectors in due course. We're excited to welcome Easy Power CEO , Kevin Bates and his Portland Oregon based teams Bentley Systems.
Speaker 4: Since our last operating results call, our cohesive business has also completed its acquisition of VITASSI. You'll recall our cohesive digital integrator business was formed to provide digital strategy consulting, integration, deployment and system services support to help our client-stitute business outcomes and benefits from digital twins.
Speaker 4: Cohesive seeks to adopt approved commercial models that we believe in engineering firms in particular.
Speaker 4: We'll find to be an appealing business model and we'll also adopt accordingly. Matassia is a European-based, maximum-focused digital integrator, which very nicely feels geographic voids for us and compliments our existing sector focus with presence of utilities, mining, oil and gas and transportation.
Speaker 4: Matassi also brings a highly skilled team of nearly 200 digital integrator consultants, including in cost-efficient bases in Poland and Indonesia. We expect to realize GNA's, sales-notion synergies, project delivery utilization synergies, and cross-cell opportunities as Matassi integrates with Cohesive.
Speaker 4: While both the easy power and potassium acquisitions are of our programmatic scale, and not material to warrant disclosure of their specific financial information, I do consider we acquired each at what this former CFO considers to be very efficient valuations.
Speaker 4: They perfectly align to the historically successful programmatic acquisition strategy we previously articulated.
Speaker 4: And now to sign off, I'll have to say most of my reflections, sentiments, encouragement, and untold secrets for a proper retirement party in speech.
Speaker 4: But I would like to share that I am both humbled by the quality, character and talent of my colleagues over the years, and then so very proud of what we've accomplished together.
Speaker 4: I'll leave the body of work to speak for itself. And while I personally may be moving away from driving value each day, I'm lifted by the even greater potential that I see for Bentley systems, and I'm comforted that the depth of talent and quality of culture will continue to harvest that potential.
Speaker 4: and like Keith, but maybe with a zero removed. I too will be a better system shareholder for a very long time, and you can bet that I'll be frequently chirping in the year, one person or another, when I see things that need to be
Speaker 1: or opportunities to be exploited. And speaking of character and talent, I'd now like to hand over to our CFO , Bert N'Andre. Thank you, David. And thank you for your leadership, the profound impact you have had on Bentley, and mentoring and guidance you have given me over the years.
Speaker 3: We are pleased that we finished three years strong and we feel good about our outlook for 2023. I'll start with our Q4 revenue performance. Total revenues were 287 million, up 7% year by year, or 13% on a constant currency basis. On a constant currency basis, America's cool 9%, in May at 16%, and APAC 17%.
Speaker 3: For the quarter, subscription revenues co-13% year were year or 18% in constant currency and represented 88% of our total revenues. The growth is supported by our balanced business performance across sectors and regions, other than China, our E365 and SMB growth initiatives and our platform acquisition of power and systems in January 2022.
Speaker 3: Regarding our perpetual licenses and services revenues, recent trends continue, which are reflective of our focus on recurring subscription revenues. Now moving on to full-year revenue, which were 1.1 billion and up 14% year over year, or 20% in constant currency, which is at the high end of our constant currency outlook range.
Speaker 3: On a constant currency basis America scrolled 22%, a mayor 15% and APEC 21%. China was a 9% point heading to APEC's constant currency revenue growth. Subscription revenues grow 18%, or 24% in constant currency, which included 12% points from our secret and power line systems acquisition.
Speaker 3: and 12 percentage points from our business performance. I'm covering next our recurring revenue performance. Our constant currency account retention rate was at 98% and our constant currency recurring revenue net retention rate remained at 110%.
Speaker 3: led by continued aggression within our E365 consumption-based commercial model. The ND 2022 with ARR of 1 billion 37 million at year end spot rates, now for the first time above 1 billion, and our constant currency ARR growth rate was 15%. Powerline systems onboarded 2.5% of this growth.
Speaker 3: and our business performance accounts for the remaining 12.5%, which is the midpoint of our financial output range.
Speaker 3: The strong and sustained momentum of our business performance is driven by our E365 and SMB growth initiatives and the continued growth philosophy of our platform acquisitions of the current and power-land systems.
Speaker 3: making up the lost ARR in Russia and headlamps in China. Our last 12 months recurring revenues at actual currencies increased by 17% year by year.
Speaker 3: The acquisition of secret and powernet systems contributed about 11 percentage points of this improvement. Our gap operating income was 41 million for Q4, down 3 million and 209 million for the full year, up 140 million year over year.
Speaker 3: We have previously explained the impact on our gap operating results from acquisition costs, incremental amodization from purchase intangibles, increases in stock-based compensation, and the one-time accounting charge for the third compensation of approximately 91 million in 2021. Moving on to our trusted EBITDA.
Speaker 3: Our fourth quarter group by approximately 5% over 2124 and our full year trusted EBITDA of 366 million is an improvement of approximately 13%. With an adjusted EBITDA margin of 33.3%, we delivered on our 2022 E Trusted EBITDA margin commitment of about 100 basis points margin improvement over our normalized E Trusted EBITDA margin.
Speaker 3: of 32.3% in 2021. As you will remember in 2020 and 2021, we normalized our margin performance for temporary margin-bindfalls from reduced travel and events. In 2022, travel and events are now in line with what we believe to be a normalized post-puntamic run rate.
Speaker 3: Greg already described that starting in 2023, we will measure our operating margin performance and improvements the same way for our annual outlook as we will do for purposes of executive incentives, which will be based on a trusted operating income, inclusive of stock-based compensation.
Speaker 3: We believe that this measure appropriately captures the true economic cost of shareholder dilution from stock-based compensation.
Speaker 3: It also includes operating depreciation and amodization, which will increase as our cat-packs will include digital experience IT investments of approximately 10 million in 2023 and a comparable amount in 2024.
Speaker 3: With respect to liquidity, our Q4 operating cashflow of 36 million decreased 55% and our full-year operating cashflow of 274 million decreased by 5% over year.
Speaker 3: We have previously discussed that our business model produces reliable and efficient cash flows over a trailing 12 months period, but with some variability between quarters. We have no significant upfront multi-ecolection, which limits variability on a trailing 12 months basis. And our continued expansion of our E365 program, where we collected the deposit for the estimated annual consumption at the onset of the annual contract period.
Speaker 3: from the straightforward annual renewals of non-consumption based models to E365, right up to the end of the year. With consumption generally rising year over year for existing E365 contracts, we focus on renewal negotiations for higher annual deposits, floors and cats.
Speaker 3: which in many cases were not concluded until nearly year end. The resulting later building led to later collections. But the 202 Q4 shortfalls was fully offset by extraordinary collections in early 2023.
Speaker 3: Our 2022 cash flows were also impacted by higher cash interest and Q4 was also unfavorable due to some significant vendor payments which we accelerated to obtain better terms. For 2021-3 and prospectively, given higher interest rates and the higher cash tax burden from the requirements of the 2017 Tax Cards and TROP Act to now capitalise and analyse R&D expenses rather than straight-expensing them, we estimated our conversion rate of a trusted EBITDA to cash flow from operations will be approximately 80%.
Speaker 3: Along with providing sufficiently for our growth initiatives and our 2023 increase to our modest dividend, our capital allocation prioritizes equity and debt repurchases to offset dilution from stock-based compensation. Accordingly, against stock-based compensation of 75 million in 2022, we spend 44 million on de facto share repurchases as so stated mainly with the throughout compensation plan distributions and under our stock repurchase program, which we announced in the second quarter.
Speaker 3: We repurchased shares for 28 million on convertible senior notes for 2 million. As of the end of December , our net debt senior leverage was 1.3 times, and when including our 2026 and 2027 convertible notes as debt, our net debt leverage was 4.7 times. Approximately 80% of the debt is protected from rising interest rates through either very low fixed coupon interest of our convertible notes or our 200 million interest rates were expiring in 2030.
Speaker 3: And if I assume an approximately 100 million per year investment into programmatic acquisitions, which does succeed recent averages, we can expect to D-level at the rate of about 0.7 times at Chastadevida and Oli. Moving to our 2023 outlook. Our outlook reflects our continued margin improvement commitment of approximately 100 basis points and our continued focus to maximize our long-term EAR growth.
Speaker 3: While we continue to see unprecedented market demand for infrastructure engineering going digital, our outlook does factor in a cautious approach towards China due to continued uncertainties.
Speaker 3: Accordingly, we expect total revenues and as reported basis in the range of 1 billion 205 million to 1 billion 235 million, representing growth of 9.5 to 12.5 percent, or between 10.5 and 13.5 percent on a constant currency basis. We are projecting constant currency ARR growth between 11.5.
Speaker 5: OH!
Speaker 3: The expected effective tax rate will be approximately 20%.
Speaker 3: As I mentioned before, we expect cash flows from operations to convert from our trusted bidar at the rate of approximately 80 percent and we expect capital expenditures of approximately nearly 30 million.
Speaker 3: which includes approximately 10 million of incremental IT investments into our ERP system. To help you with your models, I also include here on this live additional expectations on interest expense and cash interest, cash taxes, stock-based compensation, operating depreciation and amortization, outstanding shares and dividends.
Speaker 3: And with that, I think we are ready for Q&A. Over to Eric to Mother Earth. Great. We'll now move to the Q&A portion of our presentation. We ask that each analyst limit themselves to one question, one follow-up. First, we'll go to Joe Bruink from there.
Speaker 6: maybe seems like a good analogy or anecdote. This is a market that is spending a lot on infrastructure, post-immulus, and you seem to be specifically seeing strengths in your associated products in India around transportation.
Speaker 6: I guess my question would be, can we extend this into the U.S.? So have you started to see in acceleration a new business aligned with the sectors farthest along in the I.I.J. deployment? And if this is so, is your kind of expectation for the upcoming year that new business growth likely broadens out across the portfolio as the scope of I.A.J.A. broadens out across different subsectors?
Speaker 4: Joe, I think that describes it pretty well. I don't think it could be of the scope of increase of India. Remember, India was pretty much affected by the pandemic. So, but it's come back way above three pandemic levels in India. We did see we are seeing the increase from the IIA. We began to see that of course during third quarter. The fourth quarter in North America was not so much yet. We had a further increase, but we are expecting.
Speaker 3: between additional investment in infrastructure engineering software and infrastructure plan. So it is the most advanced and we can point to a number of projects where our software is being used and it is directly funded by the National Infrastructure pipeline as it is called over there.
Speaker 3: India benefits from something else, which is there is a number of global accounts who are moving work to India. In order to solve for the capacity issue that they have in the rest of the world, they move work to India as a, let's say, work bench extension if you want. But the way they move work over there is not just because it is really to tap into.
Speaker 3: from the federal to the state level in infrastructure owners, contractors. So this is going to be a a tell-in for multiple years.
Speaker 6: Okay, that's great. And then just to spend a bit of time on the resources side of the portfolio, which I think you called out LeapRog was one of the areas of strength. And also, you know, at one point in time, kind of the E365 customers that were energy exposed your EPC customers.
Speaker 6: lost if I can call it that ARR and then what would kind of be your more specific outlook on resources and the the sequence side of the business. Yeah, let me start with the EPCs, the big global firms who primarily do engineer procure construct for industrial catfacts.
Speaker 4: Of course, their business went way down in the pandemic and they have worked at diversifying now into renewables and energy transition, which was a great choice for them to focus on. And I don't think their growth rate is distinguishable from the green color of tone of business in industrial and resources.
Speaker 4: generally now, but it's a good question and I'm not sure whether they're back. I would guess they're not quite back to where they were. Pre-pandemic, but that's that's not a informed quantitative view at the moment. We have stopped separating them because they look like everyone else is being fully occupied at the moment, although their companies did shrink. And then on mining and resources, Nicholas may be with the sequence. You could comment on the pace of growth in mining and resources.
Speaker 3: Yeah, on mining is still in a super, super cycle. The early stage drilling, which we look at the early indicator is up and it's at its highest level since the 2014. So there's a lot of activity going on. I think there's a clear realization that a lot of mining is needed in order to support the world at exfification. The AIQ. The AIQ.
Speaker 3: We see also a lot of activities with large mining companies who are full of cash because they benefit from sustained price increase. They also benefit from the strength of the US dollars, which is the currency that they use for their business. And we see them acquiring a lot of smaller mining companies. So in fact, in 2022, the first stop of 2022, we saw 50% more and many activities than in the previous year. So there's a lot of investments going on into mining. And of course, the coin is extremely well positioned to benefit from that.
Speaker 3: I just want to say that when it comes to EPCs, so contractors and industrial, those are actually among the two rules, drivers that we've seen in both Europe and India in Q4. So we've definitely seen a regain of strength there. Now, CQAT, when it comes to energy, is going to be used more for geothermal or even for for wind platforms rather than oil and gas traditionally. So it's focused more on renewable sorts of energy. Thank you. Thank you.
Speaker 1: Max, I'll move the Matt Hebberg from RBC. Oh, great. Thanks for taking my questions, guys. Nicholas, the European strength really stood out to me. Can you double click on maybe where you saw that strength and just, you know, how sustainable you think that is into 2023? Yeah, we, I mean, I mentioned already in the preparing max. We saw that school's driver's public works. The driver's public works.
Speaker 3: And contractors in industrial sector, so EPCs, as well as drivers, we've also seen a net acceleration of conversions to the E35 program and consumption with any 35. But there's something else that I didn't say in the pre-public market that is going on in Europe , which is a very large infrastructure investment plan.
Speaker 3: The first one which is really impacting us, it's called the next generation EU plan started to be active in 2021. About almost 20% of the funding for that plan is already being distributed across a different countries. And we can point to a number of projects that are being funded by that plan where also for us being used. Like multiple high speed well projects in Italy, we're just starting to for a very large electricity utility that we won as a we made a big deal because of a project that is funded by.
Speaker 3: the next generation EU plan. So there's more coming, only 20% has been distributed, there's more coming. There's another plan which is not yet in effect, but it's quite urgent because it is about reducing still our energy dependency with Russia. This is called the repower EU plan. It is still in legislative proposal state. It's not yet enforced. When it would be enforced, it is well aligned with what we see as our strength from a software standpoint. So we should benefit from that as well. So that is all additional tailwind that is coming to sustain our growth in Europe . Got it. And then Werner for you on the guidance. Is there any way to think about quantifying the inorganic contribution to ARR growth as well as maybe what you've included for China? I know you said, you know,
Speaker 4: things could deteriorate further there, but just trying to get a sense for how de-risk your guide is for China. Can I jump in on China in particular? Sure. We began, we began 2022 with China at about 5% of our ARR. This year we start the year, it's under 4%. And of course we had some net attrition, but also everything else grew, if you see. And finally the currency didn't do well during 2022. But so that actually turned out to be a bigger headwind for us than was the loss of Russia. And is the reason to be to be apprehensive.
Speaker 4: If China would be growing at the relatively favorable growth rate compared to the company as a whole that we experienced prior to the pandemic. Our outlook for 2023 would be at least a percent higher in ARR growth. And I'm going to send to you the question on the programmatic acquisition which we include in our business performance because it's not worth breaking them out.
Speaker 3: So I had to agree on everything on China and programmatic acquisitions. The in over the past they contribute an average of 1 to 1.5% to end all recurring revenue and to our top land revenues. Although more recently on AI was a little bit higher but approximately between 1.5% Well, it was lower in 22 because there were few.
Speaker 7: Great. Good morning. Thank you for taking the question. So I wanted to follow up on some of the commentary around the easy power acquisition. You know, we talked quite a bit about the overlay of your portfolio with electrification and energy transition, but I was hoping you could speak specifically to the grid digital twin ecosystem, you know, who becomes the steward of those digital assets? And are there areas of the portfolio that you feel are maybe missing similar to this easy power acquisition?
Speaker 4: distribution and that's where a lot of our integrated grid efforts have focused on the physical side. Easy power comes in on the modeling and analysis side but as to a grid, there's a portion if you like that belongs to the utility and then we say behind the meter is the portion that belongs to the
Speaker 4: major power user and easy power has focused to date mainly, not entirely, but mainly behind the meter. But what those on behind the meter is increasingly a mix of what we call distributed energy resources. So it's facilities that are starting to have some solar, starting even to have some wind and some battery storage. And therefore, for every industrial or commercial or mining facility, power engineering is never done. It constantly needs to be modeled and updated through a digital twin. And that's where easy power.
Speaker 4: comes in because it's much more approachable and accessible to make part of a digital twin. So it's an excellent acquisition for us. We will need ultimately to extend this to all aspects of the integrated grid, but we're about focused on this distributed energy resource opportunity behind the meter, most immediately, with easy power. Ah, there we go. Thank you. Apologies for that. So my follow-up question is, is really a follow-up to the prior, which is, you know, you have easy power now that you've talked in this year. Should we think about you returning to that historical point, point and a half of programmatic?
Speaker 8: from Andrew D. Guest Perry from Barrenburg.
Speaker 8: I'm going to be able to do that. Taking my questions. First congratulations to Keith and David as well as Julian on the promotion. Maybe Greg, could you could you elaborate a little bit on the digital score and in that getting embedded in some of the software more broadly. Is there like a timeline you have in mind whether that could happen? And then I have a follow up. Thanks. Thank you.
Speaker 4: Well, we announced in November at year and infrastructure 2022 Bentley Infrastructure Club, which brings the I twin platform and the I twin schema to project wise SyncRO and and asset wise. That leads the two thirds of our portfolio, the modeling and simulation applications.
Speaker 4: for the focus that Keith talked about. And maybe I'll just say this, that it's easier for Keith to stop getting paid than it is to stop working. And he made a commitment to our users, but I think it's very significant. You said before the year is out in 2023, we'll have a modeling and simulation users also benefiting in their applications from becoming data center, from in creating their deliverables that they do now. They'll also be creating a...
Speaker 4: an iModel that can be referenced in query for analytics, machine learning, and so forth without there needing a change what they do. And I think his change in focus here has been sort of because he wants, he knows that our chief technology officer role includes lots of other responsibilities, wants to lean the take all that up so he can focus on delivering on this promise to integrate the the iH Twin platform so that our users are creating iModel at the same time as their traditional deliverables. And his background for that was the coming year. And I think it's a wonderful ingenious plan he has.
Speaker 1: for that. And by the time the year is out, our modeling and simulation software will also include iModel generation for all of our users actually adopt their 2023 edition of our applications. That's helpful. And then maybe runner on the margin expansion. I just wanted to maybe touch a space in that if you could break out a little bit more, what are the components that are going to get you to that 100 basis point.
Speaker 8: I mean, how much of it is core relative to the stock base comp leverage? Because if also I look at Q4, Q4 based on the release, it looks like the core margin had slightly gone down a little bit, but just wondering, is that reversed essentially in 2023? And yeah, I think it'll elaborate a little more. Thanks. Maybe came to Q4, Q3 years ago was like a high level because it was only a machine base.
Speaker 3: And the goal was always to come in at the end of the year, approximately 33% of the trustee that are marching. So we knew that as we went into Q4, that we were more investing to the business and try to spend in areas that benefit that the following year and going into Q4. So we managed a margin on the our alignment model.
Speaker 3: very consistently, we calibrate the revenues with our, the government, the headquarters, so revenue-run rate.
Speaker 5: and coming into co-forbid are pretty much like balanced with that measure. And they are having incremental investments in the next year. Going into 2023, the scale, as they always will be.
Speaker 1: the role of revenue as indicated and the reduce or cost a little bit relative to the revenue growth and manage it through the alignment model. So of course we don't reduce our cost, we reduce our rate of increase of our cost in relation to revenue. Maybe I'll just comment quickly that I'm always confident that we'll need our...
Speaker 4: is not difficult. Well, it is difficult, a lot of work that goes into it, but we become confident in being able to do that. But as you see, we don't wish that to be based on a just-a-deep-it-dog, given its arbitrariness and excluding, for instance, operating depreciation and amrization, which is significant for us now, and especially excluding stock-based compensation, which can jump around for arbitrary reasons like elections by executives and...
Speaker 1: and so forth. So Nicholas is delivering these improvements and I'll give you the last word. Nicholas, what's the matter? I will just confirm that we're committed to keep improving our margin. Merit your derived way. Exactly. Thank you. Great. The next question is going to come from Matthew Brum from Zuhu. Hi. Thanks for taking my question. I just had my congratulations to Keith and David and you know, best wishes to both for the future. So I guess firstly just how did demand trend during the quarter in terms of linearity? And I suppose given that we're now sort of two months into the first quarter is that there's nothing you can say about how usage has been tracking year to date. Well, I may start on on linearity. You know, we had this phenomenon of reduced collections during the quarter, which we sort of didn't plan on or anticipate.
Speaker 4: business this year was of the nature that I described of renegotiated recess and new e365 upgrades. And I described the application mix accretion which never stops. Rather than outright consumption quite to the degree, although the question mentioned consumption increased in Europe in particular. Anything further in the question on that?
Speaker 3: I will say that the general trend is that we are improving the inarity. It is true that in Q4 we have many of these e-fix effect conversions that happen a little bit late in the quarter. But as we are converting accounts to e-fixified and as consumption growth then becomes an important portion of our AOR growth, that actually contributes to better linearity.
Speaker 3: Same with virtuality as we sell, two thousand quarter with virtuality, the more we sell with virtuality, the higher the percentage of our AR coming from virtuality, then the better it's gonna be on linearity. So the overall trend is in cooling. That is the enterprise negotiations that drag out to the end, the SMB and virtuality practitioner sales, and so forth are more reliable and steady. Okay.
Speaker 1: All right, thanks. And then just curious how you are pushing hiring in the year ahead to what extent are you still having a sort of success finding a sort of qualified civil engineers to build out. You know, your E365 program.
Speaker 3: Yes, so in hiring we see clearly more applicants now to our job openings than we've seen before. But we haven't seen an acceleration of the hiring process still. So we still have a lot of candidates who come in with pretty high expectations when it comes to compensation that we need to then align with what we are we are able to to afford. So we do hope and for CXB that.
Speaker 1: And most of the engineers were hiring of course math, math, you are software engineers and that's where the phenomena Nick was talking about. You did ask about civil engineers, those are important for our success things, but it isn't numerically the bulk of our hiring if you see. No, that makes sense. And then sorry, maybe I just squeezed on one last one. One of your competitors has been talking a lot about seeing a lot of demands and...
Speaker 3: and smart water infrastructure. Just curious what you're seeing in that market, both in terms of fundamentals, but also competition. Eglis? Yeah, well, open sources actually, which is our brand for our applications for the water infrastructure was a highlight in Q4. We did see notable growth around the world. We did sign our larger field in India in the last 10 years, which was actually directly related to the major infrastructure plan in India, which had some provision in order to upgrade the water infrastructure and make sure that tap water is available to everyone in the rural parts of India.
Speaker 3: We are benefiting from more investments in water infrastructure that we're seeing in India, but we also see as more and more infrastructure owners, water infrastructure owners who are looking into creating digital twins of their water infrastructure, add the way to get more efficiency, more effectiveness in their processes. I'll just mention finally that using power, for instance, is very important in greening water infrastructure and energy resilience and transition. Right, that makes sense.
Speaker 1: That's our last question from Cash Rang and Prangolinsus. Hey guys, this is Matt on for Cash. Makes for taking my question. Right, Bentley's performance down market has been very solid with Virtualosity another quarter of 600 new logos. I think you made a comment last quarter that you're really surprised if there are so many logos to go after in any given quarter. Perhaps if you could characterize how you view the opportunity for SMB heading into 2023. I really just any change to the competitive landscape. Thank you. I'm asking Nicholas because we just had the whole sales group together and.
Speaker 4: The Ferturosity Leadership and Team are, what I say, exponential growth. That's their plan for 2023 as well. They're not at diminishing returns in terms of competitive opportunities. A lot of our digital experience investment is self-service, e-commerce and automated renewals and so forth so that the same team can get even more done. But Nicholas, how would you summarize that? Yes, the Ferturosity is going to be a big growth priority for 2023 and
Speaker 3: And of course, with infrastructure owners operators. So there is also an sizable growth opportunity for us to win new logos in enterprise space, not your system. All right, I think the last question we'll take today is from Jason Solino from Quebec.
Speaker 3: Great. Thanks. Sorry. There we go. Great. Thanks for fitting me in. You know, maybe on the ARR guidance, you know, a lot of moving parts, but just for the benefit of everyone. Just want to clarify that, you know, PLS is not included in the 11 and a half with 13% guide. Is that correct? Now, PLS is included. What was never included for PLS was the...
Speaker 4: modeling that for 2023 because we provide only annual guidance. We're prepared to go back to 2022 and answer questions that you Jason and others asked about the constant currency sequential ARR growth. Maybe you could cover that. Yeah, so from Q1 to Q4, in 2020 tools, eventually on constant practices like ARR rule.
Speaker 1: 3.1% in Q2, 3.3% in Q3, and 3.3% in Q4. And that is business performance that doesn't all include the onboarding of power line systems as great as MNQ. And then you think about how to seasonalize that if you would like to do it for 2023. 3.3. Recall that the numbers business performance basis in Q1 of 2022 and Q2 of 2022 included Russia and China impacts that we've already quantified that you might want to further adjust.
Speaker 1: because those numbers are net of those impacts. But we have wanted to come back and answer the questions we got during the year last year to be organized about being able to do sequential constant currency ARR. Okay, perfect. We can take that offline. And then really quickly, I know we're moving to the OI guidance with SPC. But if you'll, let me ask about EBITDA one last time, would this have also translated into 100 basis points of EBITDA margin expansion?
Speaker 4: for what have been more than 100 and base points given the decrease in SBC. So for 2023, what we can say about SBC, it seems to me, is it's going to gravitate in the range of 6% plus or minus. The reason that SBC can jump around is, as I mentioned, elections on our executives part of whether to take cash or stock in their compensation. But that depends in turn on whether they're going to get their equity distributions gross or net and who has to pay the taxes.
Speaker 4: And that in turn depends on our repurchase program and consideration of the stock price and so forth. So it's just it's not nearly as visible how even the SPC might go up or might go down. So which is why we're saying it's going to gravitate out. We think to be 6% or so for the long term, but hard to say for 2023. And I wouldn't want our executives to be focused on or measured by something which has that bit of arbitraryness in it in the SPC. Arbitraneous meaning elections that executives could make based on things that are not inside and not within the company's control.
Speaker 1: So I know that gets a little bit complicated, but we think normally it'll be the case that there will be an approximate correlation between the justity of the top and adjusted operating income with SBC. But adjusted operating income with SBC is the one we can control. We think is economically and conceptually better and for everyone to converge around as many investors have asked us to focus on that. Okay. Perfect. I think that's it. Thanks, guys. Before concluding, we just wanted to announce that Bentley systems will be ranked.