Q1 2023 Bentley Systems Incorporated Earnings Call
Significantly, including operating margins measured now by adjusted operating income, which stock based compensation.
Our operating cash flows were even higher than expected, but as Darin will explain we expect consistency here on a trailing 12 months basis.
As Nicholas will elaborate all operating trends remain directionally strong.
And Ashley will explain even though this year has started appreciably better in China than in other recent years.
That probably will serve to accelerate our intentional localization pivot there had some increasing cost to existing AOR.
All considered are across the board strength in 'twenty, three Q1 duly increases our confidence in our annual financial outlook for 2023.
And as to what I consider our key metric.
Our growth.
Indeed, this expanded sequentially to a first quarter high of 13% year over year constant currency business performance.
With net revenue retention over trailing 12 months.
Remaining consistently high at 110%.
This new business strength is consistent with external benchmarks has the Dodge survey of U S. Civil engineering firms continues to show that their current backlogs have kept increasing continuously.
Broadening to AC <unk> survey of U S engineering firms generally not limited to civil.
Such firms are confident about backlogs continuing to increase over the coming 12 months.
And as to that 12 month horizon for their expectations about macro conditions at large versus their own environment.
U S engineering firms sentiment has generally improved over the last quarter, but again more so for overall engineering and design services and especially for their own firms favorable prospects.
And this latest ACC survey of U S engineering firms current sentiment by industry.
Here Matt.
Slides infrastructure sectors correlates with our own new business resilience.
With quite favorable sentiment for water wastewater within our resources sector.
Broadly leading sentiment for industries within the public works slash utility sector.
Satisfactory sentiment for industrial.
And industries within the commercial facilities sector that is critical infrastructure generally lagging.
For U S. AUC firms. The most significant annual survey was just published by Engineering News record earlier. This month ranking the U S. Headquartered top 500 by design buildings.
They report their design billings to <unk> in accordance with this breakdown so their aggregate design billings here can likewise be generally grouped within <unk> infrastructure sectors and these proportions.
For our resources, including at least water networks.
The main stay for us and for these top design firms overall public works slash utilities.
For industrial and.
And for the commercial facility sector, which leaves some reported design billings not applicable to infrastructure sectors.
Of course, each year, the top 500 or a somewhat different set of firms. So the year to year growth in the total of their design billings does not per se correspond to an organic growth rate, but note. The conspicuous inflection now underway in the top 500 firms design buildings as well.
Along with somewhat greater inflation design intention of infrastructure projects to our resilience adaptation and energy security are being increasingly prioritized.
Eni does not annually report the top design rankings for those largest headquartered outside the U S until early summer.
So the latest analytics for the global top design terms are still using the combined 2022 rankings when the consolidated top 637 firms reported aggregate design billings of $216 billion.
I have been reasonably asked why when China represents only a few percent of <unk> revenues, we are allocating so much attention and emphasis on our determined <unk>, new China specific go to market strategy, particularly as everywhere else in the world, we relatively uniformly apply our proven.
Direct sales formula.
The Eni top firm rankings show the answer in terms of magnitude just the top 29 firms in China performed 27% of the design billings of all of the world's top firms.
The proportion is not an abstract future projection noise. It derives from Mercury economic statistics, rather this reflects the here and now proportion that China already represents among our top accounts and prospects if and when we can earn the same share of design billings in China and elsewhere.
Our overall scale of usage and revenues could grow at comparatively little incremental cost by almost 25%.
To quantify <unk> current penetration rate outside China.
Consider that our project wise enterprise collaboration system is particularly well established in these top firms.
To distribute their engineering workflows across their globally, Virtualized talent and resources. So.
Such work sharing has become increasingly essential for these firms.
The pandemic and since then in light of their staffing challenges to meet the backlog really just looking at it.
We know from our consumption log analytics the number of users of project wise within these firms as we charged them each calendar quarter per unique user.
Based on the middle of the road assumption that these top firms design billings are performed by full time employees ftes each estimated to generate an average of 200 K of design billings annually. It turns out that about 14%.
Of these ftes and a calendar quarter our project Qantas uses.
While I am sure. This makes us by far the leader in enterprise collaboration for these top firms the remaining opportunity for firms and projects to further standardize on project wise is a compelling priority for our product sales and successful organizations.
<unk> Global Eni top design firms alone account for about one fourth of <unk> and of course with initially laws each hour each firm's users PSY application consumption and most of these firms are <unk> hundred 65 accounts that we charge per day of such us.
So how does our revenue compare to the design firms revenue for each such design hour.
As to which an educated assumption is that these ex China firms bill at about $150 on average.
For each such power using <unk> applications. The average expenditure by these top design firms is $1 41 or.
Or less than 1% of that hours later billing.
And a portion of these firms project wise expenditures over the air BS VI application usage hours hedge on average about 39 change and cost puts us design our.
While there are other additional cost of going digital among others hardware, Microsoft Communications internal support.
I think that would be general agreement that <unk> application software and project wise. If you use most largely determine the actual value of that design our yet.
Yet presently account for only a few percent of the total cost to design firm.
At this juncture when such firms faced record backlogs, but our constrained from adding hours by the limitations of skill shortages.
I think this makes the case that there is a long upside runway ahead for us to provide and be paid commensurately for more valuable more specialized applications, enabling a continuously increasing rate of application mix accretion.
Now by way of reporting corporate portfolio of developments in the last two months.
We announced during 'twenty three Q1, our investment in broke sensing.
Up and coming global independent leader in integrated infrastructure Iot hardware connectivity solutions.
In exchange for the thread connectivity hardware, which we acquired with <unk> metrics in 2021, and a financial investment in World change things series D capital round, we have acquired a low double digit equity stake.
But even more importantly.
Our central metric software within <unk>, and Iot will be closely though not exclusively integrated with world sensing sensors and network connectivity hardware.
And our freemium trial license subscription will be included in all new world sanctioning installations.
For this quarter's observations about capital allocation I will next show, how I think about measuring and optimizing that leverage within our capital structure, that's dominated by convertible securities.
I think this is significant because you can look at a bloomberg screen that shows <unk> is a highly leveraged outlier as a result of notwithstanding we're seeing between convertibles and straight there.
Now I recognize that accounting rules do treat convertible securities 100% as debt.
But for leverage assessment I believe it's appropriate to look more through a financial lens.
As with the holders of the convertibles.
They are intrinsically and intentionally a dynamic mixed between that on the one hand and equity on the other.
Obviously, our bank debt, which was incurred early last year to finance, our highly accretive platform acquisition of <unk> systems.
In which net of cash was down to $340 million at the end of 2000, <unk> Q1 <unk>.
Anchors our debt leverage.
But how should we think about our unquestionably attractive convertible debt.
With coupon rates of one H and creates percent covenant tree, which financed our highly accretive platform acquisition of sequent in 2020.
It consists of an issue maturing in 2026.
Which one can view on this Bloomberg page, including here a computed delta statistic.
For the embedded equity option.
Delta changes constantly based on the <unk> stock price volatility interest rates and the remaining time to maturity snapshot reflected the market on a recent day.
The other issue maturing in 2027.
It's a different delta statistic corresponding to each different parameters.
And any prevailing market condition. These delta statistics.
Here I admit to being a recovering financial engineer as the first company I founded 35 years ago was in the business of software for derivatives modeling the Delta can help us to conceptually a portion each convertible issue between debt and equity.
Delta is the hedge ratio the degree to which the value of the convertible issue moves in relation to the value of the underlying shares as the stock price changes.
The Delta would range from zero.
At the maturity date of the stock price would be lower than the strike price.
Security then behaves as if all that.
Two one if that maturity of the stock price would be higher than the strike price such that conversion to equity would be certain.
Accordingly at the Delta of four three for the first issue, we can ascribe 43% of its face value to be acting as is approximately $4 5 million shares of equity and the remainder to be acting approximately as if $400 million of debt.
And at each Delta of three nine doing the same for the 2027 issue results as if.
$350 million of debt.
Now, we reckon our leverage ratio on the basis of our adjusted EBITDA.
That's what our bank syndicate does for pricing and covenants and for the last 12 months through 'twenty three Q1, our adjusted EBITDA was $383 million.
Which implies a net bank debt leverage ratio of <unk> nine times.
And for the Delta adjusted debt portion of both convertible issues additional leverage of one nine times.
For a total current effective debt leverage ratio of two eight times adjusted EBITDA.
Tolerably approaching the range, which I think we would consider optimal.
Now I'd welcome feedback on this apparently novel Delta adjusted approach to monitoring leverage that includes conversions.
But now.
Over to Nicolas for Hughes and formed operational perspectives on 2000, <unk> Q1 Nicola.
Nicholas.
Thank you Greg we.
We had a strong start to 2023, and we see momentum continuing into Q2 with healthy pipelines and many of grade and expansion opportunities.
The demand environment continues to be very positive and the pace of business is brisk.
Incrementally, we see more evidence of funds from infrastructure investment program flowing through to our accounts around the world and this will continue to be a tailwind for the foreseeable future.
Let me now provide some color commentary starting with infrastructure sectors.
Trends in Q1 were consistent quarter over quarter.
We saw very strong growth in resources strong growth in public works and utilities solid growth in the industrial sector with commercial facility somewhat flat.
We continue to hear from some accounts concerns about interest rates and inflation, but in Q1, there were no surprises.
So the infrastructure remains very resilient.
Turning to commercial models are each received 500 shows the key growth initiatives continued their upward inflection.
In Q1, we upgraded 355 almost twice the number of accounts that we did in Q1 of 2022.
Bear in mind, however that the accounts remaining to be upgraded tend to be those with lower <unk> to start with.
Over the last three years, we have grown each received five primarily with global enterprise accounts and we increasingly view the regional mid market as a significant opportunity for <unk> hundred 65.
We were excited to upgrade to <unk>, a number of regional Midmarket accounts in Q1, and we are on pace to hit our target for the year.
As you know each reached 65 is a consumption based commercial model and Pos upgrade our user success teams pay particular attention to the adoption of our software through six that blueprint.
Designed to achieve business outcomes through more efficient and effective use of digital delivery workflows.
Q1 was a very strong quarter in terms of consumption growth by each received provide accounts.
In SMB the tone of business was very positive and we saw a continuation of our growth trajectory across the board in fact viewed shows the key achieved its highest number of new logos in a single quarter.
We see our SMB pipelines growing day in day out and the good news is that a lot of video CPE business is closing within 30 days.
Nick looking across regions, India was a bright spot.
The national infrastructure pipeline, a funny large transportation and water projects.
These projects are ecosystems of their own and we've been very effective in driving adoption of our software by owner operators and their value chain of project. They are re firms large and small.
Global product delivery firms also continued to tap into India engineering talent to support projects around the world and to help close air capacity yet.
We also saw continued solid growth in Europe with more evidence of EU funding flowing through for example in transportation and water projects in Italy.
Growth was solid in the Americas, II with abundant project backlogs across multiple business lines, including projects from owner operators extending to project delivery firms primarily for design.
And we saw more IHG funding flowing through to <unk>, which is very positive news for us.
As we have mentioned on previous calls infrastructure engineering and North America is characterized by a very tight labor market with an aging workforce and project delivery firm simply cannot attract tenants fast enough.
Interest rates and inflation also making infrastructure projects more expensive and as a result owners are very focused on managing costs.
Both of these factors productivity and efficiency.
Very well with our value propositions.
Middle East and North Africa showed some softness but this was due to very specific account situations and onetime effects and we do not believe these constitute a trend.
In China the impact of Covid is now in the rearview mirror and the Chinese government is very focused on bringing the economy back.
We had a better start to the year as revenue retention stabilized in the quarter.
Although we continue to be cautious for the remainder of the year due to the geopolitical and business environments.
Last week, we officially form each wise, our joint venture with par China HTC.
Our focus is on engineering applications for the hydropower and water conservancy industry that leverage our platform, but our develop and distribute it domestically.
As with our ortho joint venture <unk> X and their product <unk>, our net revenue proportion will decline with the account that transition to the new localized offerings.
However, we expect that the depth of the market for autonomous Chinese solutions will eventually more than make up for this.
In the meantime, especially because the joint ventures will cater to the preference of Chinese state owned enterprises for perpetual licenses the faster the jv's takeoff.
Later, the erosion of our existing AOR in China.
With respect to products. The performance of open roads opened bridge Microstation asset wise was notable in Q1.
Of particular interest insurance quotation in North America, we saw strong growth in Bently open applications, especially open rules in Openreach as well as micro station a reflection of our strength in the ecosystems.
<unk> are resource constrained, but the usage of our software accelerated with entering services firms that are part of their ecosystem.
This was a result of the training and over the shoulder mentoring our user success teams have been giving to engineering services firms to put them in a better position to deliver in the beauty market.
The instances of beauty is requiring models in deliverables should extensive growth in Q1, and we did not see that slowing down in Q2.
Dot's are looking to do more with less through going digital digital delivery tools and techniques can streamline processes across infrastructure engineering lifecycle and enables seamless collaboration across the Iot ecosystems.
Digital delivery advances designing two construction using digital twin for collaboration among projects decoders.
Digital twins created and updated through the digital delivery process, and then deleveraging I said accretions on maintenance to take advantage of engineering data.
In this context, we announced in Q1, a new collaboration with design and consulting firm WSB aimed at leading civil infrastructure owners and contractors to adopt digital delivery and model based digital workflows.
<unk> launched a new digital construction management solution and advisory service based on Bentley Syncrude, leveraging the power of construction digital twins.
Does WSB joined the Bentley digital Invigorate program, which provides programmatic good market support and knowledge transfer to eligible productivity with firms that are creating and curating digital twins for their clients infrastructure assets.
Before I hand over I want to thank all bank liquidity for a great start to the year and for your commitment to consistent execution.
More infrastructure into works now that at any previous time in history and the infrastructure sector is relying on bentley's software to help us deliver a more sustainable and resilient future.
And with those operational perspective, I will now hand, the call Savannah to go over our financials in more detail.
Thank you Nicholas.
We are pleased that we started the year strong which puts us in a good position to achieve our established full year outlook.
I'm, starting with a reminder of our full year 2023 revenue outlook <unk> provided during our year end 2022 operating results call.
Range of $1.205 billion to $1 billion $235 million, representing net revenue growth of nine 5% to 12, 5% or 10, 5% to 35% on a constant currency basis.
Total revenues for the first quarter of $314 million up 14% year over year by 17% on a constant currency basis.
For the quarter subscription revenues grew 15% year on year or 18% in constant currency and represented 88% of our total revenues.
The on boarding of powerline systems at the end of January 2022 accounts for about two percentage points of this improvement.
And the continued upgrades of our enterprise comps to a consumption based <unk> hundred 65 program is moving us towards a more ratable allocation of GAAP revenues between calendar quarters, which benefited the first quarter on a year over year comparative basis.
Regarding our perpetual licenses recent trends continue which are reflective of our focus on recurring subscription revenues.
Our professional services revenues benefited from the acquisition of the Kashi, which.
Rick via with in our cohesive digital integrated group in 2012 Q4.
With regards to foreign exchange rates.
The U S. Dollar has weakened relative to the exchange rates assumed in our 2023 annual financial outlook.
While the impact during 'twenty three Q1 was not significant.
End of April exchange rates prevail for the remainder of the year, our full year GAAP revenues will be positively impacted by approximately $10 million.
Relative to their revenues based on the exchange rates assumed in our full year 2023 outlook.
Moving onto our recurring revenue performance.
Our last 12 months recurring revenues increased by 14% year over year Opex, 20% on a constant currency basis.
On a constant currency basis, the on boarding of our platform acquisition sequent in Poland systems contributed about six percentage points to this improvement.
Our constant currency account retention rate was at 98% and our constant currency recurring revenues metro retention rate remained at 110%.
Led by continued accretion within our <unk> hundred 65 consumption based commercial model.
We ended Q1 with annualized recurring revenues of 1.071 billion at quarter end spot rates.
Our constant currency growth rate was 13% year over year.
And three 1% on a sequential quarterly basis.
You can see in the dotted line the <unk>, which is attributable to the initial on boarding of our platform acquisitions.
As the Pls acquisition of <unk> at the end of January 2022.
The Onboarding is no longer a factor in the year over year comparison.
Our strong and sustained Q1 revenue and <unk> performance was supported by consistently strong market growth trends led power resources and public works utilities infrastructure sectors.
Our balanced business performance across regions other than China.
And our <unk> hundred 65, and virtuosity growth initiatives.
With regards to China, our first quarter was slightly better than in recent years.
But we are still taking a cautious stance for 2023 due to the continued geopolitical uncertainties and as Nicolas mentioned, our intentional pivot to license sales within that market, which will be a headwind to our growth as our joint ventures gained traction.
Our GAAP operating income was $6 6 million for the first quarter up $9 million or 16% over 20 until Q1.
We have previously explained the impact on our GAAP operating results from amortization of purchased intangibles.
Our compensation plan liability revaluations and acquisition expenses.
Moving on to adjusted operating income inclusive of stock based compensation expense.
Which as discussed in our Swan until Q4 earnings call is now our primary profitability and margin performance measure.
While adjusted operating income with stock based compensation normalizes for the GAAP charges I. Just mentioned this measure intentional include stock based compensation expense, which we believe appropriately captures the economic cost to our business.
Adjusted operating income with stock based compensation expense was $90 million for the first quarter up $12 million or 15% over 'twenty to Q1 with a margin of 28, 8% up 40 basis points year over year.
In 2023, and prospectively, we will now measure our long term annual margin improvement commitment of 100 basis points.
Breast in terms of adjusted operating income with stock based compensation.
If our margin targets for 2023 of approximately 26%.
In that regard our Q1 margin of 28, 8% was fully in line with our expectations for the first quarter, which is typically a higher margin quarter for us due to opex seasonality.
And I do want to remind you of our seasonal pattern up expenses, we concentrate our annual ratios for colleagues to occur as of April one of each year.
And James approximately 80% of our cost structure, which headcount and related support cost annual ratios have a significant impact on our operating expenses in Q2. Since we ended Q4 relative to Q1.
This was further compounded by our large promotional event related costs, which are historically highest in the second half of the year.
We expect that our annual stock based compensation expense will be decreasing as a percentage of revenues to a range of 6% from approximately 7% in 2022.
They will continue to be some stock based compensation expense volatility between quarters.
Corresponding to the timing of our ongoing annual Roundup broad based equity clients, which are predominantly crowded into for us and fourth calendar quarters.
With respect to liquidity, our Q1 operating cash flow of $176 million increased by 73% year over year.
I discussed during our 2000 till Q4 operating results call developed swung until Q4 cash flows from operations were eight typically low due to a shift in timing of Q4 billings and therefore collections of swap with <unk> hundred 65 renewals and newly converted <unk> hundred 65 contracts over.
Representing helping your business.
These 2000 till Q4 timing shortfalls were fully offset in early 2023, resulting in 23 Q1 being a strong cash flow quarter.
As previously discussed our business model produces reliable and efficient cash flows over trailing 12 months period.
Subject to some variability between quarters due to timing.
For 2023 and prospectively.
We estimate that our conversion rate of adjusted EBITDA to cash flow from operations will be approximately 80% over trailing 12 months period.
Along with providing sufficiently for our growth initiatives and.
Our 2023 increased to a modest dividend.
In 2000, <unk> Q1, we spend about $21 million on the effect of share repurchases associated mainly with deferred compensation plan distributions to offset dilution from stock based compensation.
As of the end of Q1, our net debt leverage was <unk> nine times.
And when including our 2026 and 2027 convertible notes as debt our net debt leverage was four two times.
This is down from the end of 2022, which was one three times and four seven times respectively.
As a reminder, approximately 85% of our debt is protected from rising interest rates for either very low fixed coupon interest of our convertible notes.
Our $200 million interest rate swap expiring in 2013.
Okay.
With regards to our 2023 financial outlook.
Started the year with strong operational execution.
And momentum in our end markets.
This allows us to express great confidence in our 2023 outlook, which we believe is appropriately balanced between our business momentum.
And a cautious approach towards China, and our commercial loan facility sector due to geopolitical and macro uncertainties.
And with that I think we are ready for Q&A.
Over to Eric to moderate.
We will now move to the Q&A portion of our call. We ask each analyst to please limit themselves to one question only so we can get to everybody today. Our first question will come from Christopher <unk> from Oppenheimer.
Chris Yes.
Yes, I can hear you now thank you.
So wanted to ask first about sequence because that just continues to be a business that outperformed our expectations and.
As an outside observer, you might look at that business and thank Paul mining geothermal all of these are capital intensive businesses. So why are they holding up so well and if I could ask you to talk a little bit about what sustaining growth in that segment and maybe where we are in terms of unhappy with some of the revenue synergies between the legacy customer bases. There. Thank you.
I might start the the reasons are secular reasons the world's priority on.
Energy transition and electrification require.
Mining activities.
And that's got a long runway ahead.
I believe.
Much of our.
Purpose in bringing the subsurface digital twin into our.
Brown is the synergies with civil engineering projects and subsurface infrastructure conditions, and that's proceeding as well as just not nearly so visible.
And the number of sizes the momentum.
And mining Nicholas would you like that.
Yes third sequence.
He is aimed at maintaining a high level of growth.
And it is fair to say that it's a rent the diversified business.
A majority of their growth is still in mining and the market conditions remain.
Favorable in mining.
So despite some short term volatility on some some prices the mining companies are looking and using long term price assumptions to decide whether they're going to open up new mines or expanding existing mines.
And those assumptions are positive so they are still investing.
But in the sequence.
Involving more than <unk> one of the main reasons why they were so excited to be part of Bentley with strict centered their growth considered.
And I.
I will say for most of 2022 focus with still more on the back office integration with with Sequent and our focus has shifted to the trunk office synergies the biggest synergies in particular with Cvs. So now all the sequence and ramp is sequent products.
Core civil engineering or available to our <unk> accounts.
And in Q1, we've seen a nice uptick.
This product it's still early.
Of course.
It's looking very promising.
And finally, just a reminder that the consumption of the sequence software in mining is more to do with the opex throughput of mines and the capex necessarily of Newmont.
Thanks, Chris Our next question will come from Matt Hedberg from RBC.
Hey, guys. Good morning, Thanks for taking my question.
And I appreciate the format this quarter that was super helpful.
You spent some time talking about the importance of China, which I think we all appreciate it.
And maybe I missed it but could you talk maybe about some of the expected IRR headwinds. This year I know if you can quantify that and then perhaps even more so once the JV is are in place what sort of tailwind do you think that could provide.
At some point the future.
Well its toughest to know.
The unpredictability in China, the rest of our business is so predictable and the trends are so prevailing.
China is by far the contrast.
As far as <unk> in China.
Rest of our business is <unk> intensive business, but China increasingly is not an anr intensity country made.
Prefer perpetual licensing.
There is not.
The ability to have SaaS software there.
And we're going increasingly indirect all of those are factors that.
So we will literally reduce our AR.
And so as to the significance of China for our overall financial outlook for this year recall that over each of the past two years and each of those years, we have lost more than a 4% of our overall volume.
In China.
Partially that the rest of the world growing partially that.
Currency weakness in China, but it's mainly.
It's mainly state owned enterprises and geopolitical headwinds to do the right thing for the long term, which is always our focus is not the short term. We are pivoting to this localization strategy, but it's only going to mean that everything else benefits.
And you literally will lose existing AOR does better that goes in and it's Nicolas.
Now how fast will it turn around to where we have higher unit volume to make up for that and by the way we make up for it on other line items to hang on IRR for that is really hard to say.
Really helpful about it and the reason I wanted to share that China is 27% of the.
Engineering activity by the by even just the largest identifiable of firms is to reinforce the magnitude of their engineers are great users of our software here and now if we can get that.
To them over the overcoming of geopolitical offerings.
Okay, Alright, Matt Matt. Our next question will come from Joe Brewing from Robert W. Baird.
Great.
Hi, everyone.
<unk>.
Yes, I think this might be the first quarter, where you have explicitly commented on the connection between II JA dot's being funded.
And now Youre related products seeing a consumption benefit. So I guess my question is what is your expectation here in North America.
Is it just more projects are undertaken through 2023 on any then it should be the case in 2024, and then maybe not the lead you in any direction, but it seems like water and the electric utility is can maybe be the next big areas to see a step off road and bridge are seeing it right now.
Yes, I think especially the uptake we remain to not have seen yet NII is in the other half of the money.
Sides, the transportation money and that really is making progress, but it's not equivalent lead flowing in as.
That is the case with the.
With the road and bridge and transit funding.
Funding already.
Nicolas do you want to add to that.
We are indeed, seeing the budgets of the beauty.
Duane quite a bit and this is obviously related to <unk>.
And this allows us to fully fund projects, where software is being used.
<unk> example is the brand expense bridge between <unk> and NOI.
So this is where we're seeing now the first impact of HMA.
But we're just starting it's a growing tailwind and it's going to get stronger.
We are seeing a more direct link when it comes to transportation Indeed.
Executive you were saying, Joe we just have to look at IHA, aided where they're planning the funding and we know that it will come as well when it comes to the water infrastructure when it comes to to the electric grid.
Thank you adjusted to add there are permitting.
Legislation in Congress now in the U S, which would help to catalyze faster spending, especially for electric transmission and distribution among many energy projects, but the ones that are really teed up.
Two that would make a big difference for us.
Transmission and distribution of electricity.
Thanks, Jonathan.
The next question will come from Jason <unk> from Keybanc.
Great.
Good morning, gentlemen, thanks for fitting me in I think my yes.
My one question I think I'll just focus on our commercial facilities.
In the quarter did you see any headwind there and then I guess for the second half you do kind of embed maybe some extra conservatism to the IRR guidance. Thanks.
Well I think our word was flat which of course could be worse.
And we hope it won't get worse, but Nicolas do you want to add on that.
We remain very cautious because we attributes.
That growth to the market conditions and we.
We assume it is related to the let's say general Underutilization of critical infrastructure.
And the high interest rate environment, which is not favorable for forward for new projects.
Now remember that it's a very small percentage of our <unk>, one single digit percentage of our <unk>, but it's a worst flat next quarter with that flag and inside this quarter.
And we remain cautious.
Okay, Great I appreciate the color. Thank you.
Thanks, Jason Our next question will come from Joshua Tilton from Wolfe.
Hey, guys can you hear me okay.
Great. Thanks for taking my question.
Wanted to go back to the.
The Iga dollars with the Ots.
Maybe just how is the competitive landscape within the Dot's changed since the last time, we had an infrastructure bill or some type of funding to this level and do you feel like there are more hand, maybe trying to grab at the pie. This time around and how do you ensure that maybe you can take a similar share of the funding as you have done previously.
Well I think our our share of work time bye.
And every five or six year, bill more and more relatively of their work is done and there is supply chain engineering firms as they.
So as more and more of it and we think that's been to our general benefit as we focus more on this.
Something that he said is however is that in the current environment of constrained on engineering capacity.
And with the IHA a money in each state there is Chris.
Sure on the <unk> to be sure to spread that money around to include the smaller firms.
Disadvantaged firms in many cases, they have only done site civil engineering with other competitive software there is pressure on with E&ps to be sure to include those new smaller firms to get some of this.
Work, we think that's ultimately good for us because those firms will want to take.
Take a look at that and you saw and how they can increase their deal.
<unk> work with specialization on that new software as well and we have programs to help them contractually the introduced to our software, but it's all hands.
On deck.
To meet this capacity constraint for the E&ps.
Thanks Ara.
Our next question will come from Matthew Broome from Mizuho group.
Hi, everyone.
Thanks Scott.
Taking my question.
Could you maybe just talk about your current M&A priorities and sort of how you view the car.
I will ask it back.
While we still have white space to fill and I think our acquisition.
Easy power earlier this year is a great example.
Four.
Some.
Specialized electrical analysis that.
If you like is on the facility side of the meter in plants and a major infrastructure installations it had been.
That's something where where the electrical modeling was often done in other software that wasn't integrated and now it can all be done.
Increasingly in.
And let me software without.
Semantic translations and so forth will improve.
All of the in feed electrical modeling is never done in a planetary installation because.
Controls are constantly changing even when.
When the rest of the capital remains the same.
So that's just an example.
Appropriate programmatic acquisition.
The thing is you can't.
Even though we say programmatic it can't quite expected and scheduled out and as you know we've had fewer and smaller programmatic acquisitions over the last year and a half now for no particular reason to start with some of that I think had to do with valuation or business known as waiting for better Valley.
Valuation that we have.
A reasonable.
Pipeline.
<unk>.
And are approaching it no differently than.
And ever.
Results turned out to be a little.
Episodic.
That's the nature of the Beast in M&A.
Got it thanks very much.
Matthew next question comes from Andrew Gasperi from <unk> capital markets.
Thanks for taking my question I guess, if I were to look at the growth for the rest of the year.
In terms of that consumption based accounts versus virtuosity, we think we still see the same type of a typical pattern that we've seen.
In other words, where you see a seasonal slower Q2 with the ramp up for the rest of the year and then do you think a balance between the two will change in any way.
Well virtuosity.
The experience we had it's only over the last couple of years and it only gets bigger every.
Every quarter.
There is a bit of a higher seasonality in Q4, but.
Otherwise I think it stand back and watch that continue to to flow in.
And consumption of course, we've been we can measure consumption.
Historically.
As the.
But historically our revenues in IRR haven't dependent as much on consumption as they do now given <unk> hundred 65 has become our largest.
Commercial program. So we're learning more about that as we study it more and I mentioned after 'twenty to Q4.
Q4 has more holidays and if there are fewer days of work there are fewer days of consumption. Therefore, Q1 doesn't have that problem.
And then the other quarters.
Can make a science of where the holidays fall and so forth.
We haven't applied ourselves.
To that yet but.
Subject to the.
<unk>.
Holiday calendar effect, which can be a couple of percent. If you think of a day within a quarter that has 60 workdays.
So it can matter, but subject to that.
We certainly think everyone's as busy as they can be in our success teams, especially are there helping to introduce new more specialized applications and digital workflows, especially so hopefully look back at this year and seeing and continued increase in application mix.
Accretion and my recent to show that even in the top firms only a $1 41 per hour is what's spent on our applications not only to show how much more potential there is to help them be more productive for the reasons Nicolas talked about by using more specialized software we had that specialized software.
We just need to be introducing.
Through the success team.
Thanks, Andrew.
Question comes from Jay <unk> from Griffin Securities.
Thank you and good morning.
Nicholas in your prepared remarks regarding the pipeline could you talk about how thats being manifested in terms of demand for multi solution sales across the portfolio.
As well for the demand for your services and consulting support vehicle use of for example.
Are you having to invest incrementally in your services and implementation capacity. Thank you.
We are.
Strengthening the solution dimension in our go to market and by sooner should we need them.
How different products and accumulation of truck and so this is so specific issues of users' accounts.
Specific industries, so as we go into.
To this especially for the for our key growth growth Industries. Then, yes. Our conversations are multi products are cutting across product and services now the beauty of something.
Once you're on that program as it goes pretty quickly from a conversation about solution that cuts across products adopting and using those products because we remove all the friction in order to per se and the software in order to access the services that are needed in order to implement consider integrates there's software that you need.
And I guess, the what I would add is in the application or applications that can be added one at a time one day at a time one user at a time and end up being multi product on a project that way, but our enterprise.
<unk> project lies in asset lives are typically procurement cycles involving our ftes often involving cohesive to help with integration and so far their.
Sales motions at once are important Inc.
Incremental evolutionary increase in depth.
Applications, and adding new users of project life and asset life, and I sort of showed how.
Project Wise is used extensively.
The top firms, but not by all the top firms and we have many more opportunities there and.
Implementation and.
Digital integrator services are needed and we want to be.
Leading the way in.
Helping ultimately to recruit new digital integrators, among the engineering firms and sell it to help the owner operators and we're learning to do it better through.
Cohesive, which is now part of Nicholas's agreement issue as well.
Thanks, Jay. Thank you. Our next question will come from Blair Abernathy from Rosenblatt Securities.
Thanks. Good morning, just wanted to see if we could get a little more color.
On the virtual <unk> side of things it sounds like.
Record logos, new logos out of this quarter.
Where are you seeing these.
What's sort of verticals or geographic areas are you seeing strength are you seeing any weaknesses in any areas just a little more color on that would be helpful.
Okay.
Yes.
We had more than 700, new logos through a virtual succeeded so this quarter. It is a record breaking quarter in and the momentum is.
Is.
<unk> is very strong.
It correlates with where we are growing as a company overall accretive nicely actually with for example, the commentary I gave on the regions.
You will see you will see let's see.
Similar growth when it comes to Vishal.
And one thing that is interesting is we agreed not only with the accounts in isolation. We are also growing and winning accounts in the context of those very large projects.
Good example is in India for example.
Our software is being used by and large.
Engineering firm respondents are creators charter massive waterpark.
Funded by the National infrastructure pipeline.
This is actually pulling a lot of smaller engineering firms in their ecosystem to use of software.
<unk>.
So it's.
Getting smarter and smarter about how we play.
The dynamics of the full ecosystem in order to win not just in large organizations, where the smaller ones that are part of that and when we do that we do it through virtuosity.
And I'll add that.
In China, where we mentioned things having stabilized in the past quarter.
<unk> practitioner subscriptions are doing well in China now these.
Think are being acquired.
Say not by the Big state owned enterprises, but by the ecosystem in.
China. So we go where we can go.
Four.
And in a very large market.
And even though overall, China is characterized by preferring perpetual licenses by.
While orange.
Enterprise commercial programs in such a large market that we even can grow.
And virtuosity evening.
Okay, great. Thank you.
Our next question will come from Matt Martino from Goldman Sachs.
Hey, guys, Matt on for for Kasher, Gregg India continues to perform very well can you just further characterize the strength youre seeing in the region from an end market and application perspective. Thanks.
It tends to vary from quarter to quarter between.
Northern and central and southern Air that I'm going to ask <unk> to comment on that sitting in Europe and he is doing.
However.
One thing I will remark upon if you.
Look in our 10-Q, Youll see very high year over year revenue growth.
Europe , which doesn't correspond to our commentary on <unk> and that has to do with.
606 GAAP.
<unk> that that come and go so it's doing well, but it's not but there was a outsized revenue.
Revenue growth there that isn't nearly so fundamental but could you break it down for us Nichols in Europe .
I'd say if you look at.
Q1, the main growth drivers, where we saw the strongest growth were in transportation.
With rail projects in particular, and then in industrial.
With EPC and automotive.
That's for Q1, but in general what we're seeing is a really positive impact.
Infrastructure plans.
First one that came into force is the next generation EU and we estimate that about 20% of the funding of <unk> and that goes straight to projects, where our software has been used in.
In the prepared remarks I mentioned for example, the water projects. The three there are real projects as well in Italy, where software is being used and they are funded by the EU.
And then there is a new plan that got fully adopted and alcohol to Repower EU plan.
It is about ensuring energy security, which is top of mind as you can imagine in Europe . Its also about accident, it's an energy transition.
It was discussed a while back but it was it was fully adopted Dana in February and we expect that to become tailwind as well because it plays to our strength.
Thanks, Matt our last question today will come from Michael Funk from Bank of America.
Hey, John sure.
Thank you for the question.
One if I could just on the leverage Greg.
Earlier your own calculation for a net debt to EBITDA adjusting for the convert.
How does that affect your view on funding acquisitions and debt capacity.
Well, our compass is set so that will continue to delever.
<unk> quantified that about a <unk> five times.
Delevering in the first quarter alone out of the first quarter is our strong cash flow quarter. So we're.
Ending here aware in and we will continue to Delever.
And I regard that thats not imperative as which is if we are in fact over levered, but it will help us to be opportunistic as you suggest for M&A opportunities if they if the programmatic opportunities come closer together.
Somewhat larger and of course, we can't anticipate.
A platform acquisition, but they have come along so they could come along again and we would likely to be we would like to be well positioned to that with.
Less leverage than we have at.
At the moment so.
It's not an urgent matter to delever, but its a sensible thing to do to be better prepared for M&A opportunities and in the meantime, we continue with.
The increased dividend this year and with commitment to more or less repurchase.
Equity and to our convertibles to offset.
Stock based compensation, which were on track with so far.
This year, but I, just generally feel comfortable with our leverage situation among things because.
Interest rates are.
Either low or offset by our swap to the extensive 85% of the debt we have now.
And it did.
Did want to bring attention to the way, we think about it for that.
A balanced view of the thing about convertibles is.
They're either going to get converted over there or they are not and we have to be ready for future situations, but such as the magnitude that they bear in relation to our cash flow I think we can be comfortable with that.
And Greg previously I think you mentioned private market valuations are relatively elevated are you seeing those come down at all as you evaluate targets.
I think somewhat.
Yes, but nicholas.
The.
Portfolio development.
<unk> acquisition to now are within Europe .
Yet have you.
Do you have a sounding on the market for that.
Okay.
I don't have I don't have.
Anything special to try to save you.
We.
No.
Nicola <unk> ventures.
That's a startup market.
Of course.
We're all on the investment committee for that and my goodness, the private valuations have certainly been affected.
<unk>.
And that early stage in the mature firms.
That were acquiring in a programmatic program.
Yes, I think there is some.
Improvement in.
And the balance of power to the to the purchaser.
And.
And I don't think valuations are.
Quite an issue now.
Availability in fitness.
It is determining.
Programmatic acquisition pace.
Great. Thank you all for time, Thanks, Michael that concludes our call today and we thank each of you for your interest and time and battery systems and look forward to updating you on our progress in coming quarters.
Thank you.
Okay.