Q4 2023 Bentley Systems Incorporated Earnings Call
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Cause they preserve our incentives and upside well, improving and extending the visibility of our revenue and cash conversion.
Back to the outlook for each accretion later, our annual price escalation.
It can vary by country and product mindful of competitive conditions is on average more or less calibrated to stay ahead of inflation in our own costs, which are primarily for colleague compensation.
For each of 2022 and 2023, we realized an weighted average escalation in mid single digits.
For 2024, it must be acknowledged that peak inflation in the world seems behind us so escalation will contribute less <unk> growth going forward.
As to consumption volume.
We face another putative headwind with the demographics of retirement tending to reduce the infrastructure engineering workforce.
And in theory.
Increasing productivity through going digital can even be at the expense of usage volume.
The only offsetting gains and application usage volume could come from competitive displacement opportunities on the margin.
On balance.
We cannot now expect nor rely upon net increases in the use of volume.
However, the widening engineering resource capacity gap between a static number at best of infrastructure engineering professionals and the burgeoning demand for world resilience and adaptation is in fact, the greatest and most durable driver of <unk> growth because going digital.
Is the compelling key.
Recall that the 2023 year in infrastructure going Digital award finalist documented an average of 18% savings in engineering time through the digital advances we enabled for them.
Quite noticeably our enterprise accounts are now explicitly prioritizing <unk> hundred 65, blueprint, which most deliver savings and man hours and usage days to our ultimate mutual benefit.
And accordingly application mix accretion, which measures the pace of our users upgrading to a more specialized and relatively more costly applications to increase their productivity.
Continues to more than offset demographically constrained usage volume and.
And accelerating application mix accretion.
Which is our average revenue per application usage day, holding pricing constant for the calculation our user success functions, especially by way of <unk> hundred 65 digital workflow blueprints are literally leading the way.
So I am pleased to report accelerating annual progress.
Annual application mix accretion, having grown from about four 5% for 2022 to about 6% for 2023.
This also captures the usage of project wise attached to these application user days. So this measure closely correspond to what we have shown that the anr top engineering funds, a representative quarter of our business spend with us.
Since that spending only averages about 1% of the amount that they built to their clients for that usage time I believe there is lots of headroom for application mix accretion to continue to expand indefinitely.
And looking to what's new.
Although we're confident in this long runway ahead for our strong and consistent consumption per user base business.
I believe that here in 2024, we're finally at the point, where our third aspiring growth initiative.
After a $3 65 for the enterprise market and virtual Osophy for Smbs have become firmly established.
Finally take off after having been promised in our interim deck as you see here for years.
Third growth initiative, Leverages digital twin opportunities to be incrementally monetized through cloud subscriptions charged per asset.
Well I think that by Reits this can grow to become larger than the provision of software per user.
The challenge has been that scaling digital twins takes a surrounding ecosystem of digital integrations.
To provide the related services around data quality and engineering, Proficiencies, which complete the use cases.
To that end, we along with others have been determined late evangelizing the infrastructure digital twin potential spanning delivery and performance to thus both the infrastructure project delivery supply chain and of course to owner operators directly.
Frankly institutionalized conservatism has made this a slow sales cycle with success by the ones and primarily in Asia Pacific.
The gain experience in the meantime, we have assembled our own cohesive digital integrator to show the way.
It's now nearly $100 million services business is opportunistically anchored by being the leading global implemented and emerging cloud hosting provider of Ibm's maxima the primary incumbent choice.
Infrastructure owner operators for enterprise asset management.
Thus over time.
He says can open doors for our <unk> platform to integrate engineering technology.
And operational technology Ot with Maximus for.
For digital twins to optimize operations and maintenance.
This represents the extreme of an enterprise approach to digital twins from the top down.
But because that takes so long we are trying also to widely catalyzed digital twin opportunities from the bottom up.
Hence our priority to infuse and connect all of our existing offerings with our <unk> platform, starting with our bently infrastructure cloud project wise and Syncrude for delivery and asset wise for performance and this year with natively hybrid capabilities in our modeling and simulation applications.
However, even this is at best then evolution toward digital twin workflows.
I am very pleased to say that we have now validated a breakthrough bottoms up entry point for digital twin monetization that is by contrast instant on both technically and commercially.
Accordingly, our main departure for 2024 will be a focus on this asset analytics opportunity. It leverages AI with our <unk> platform to generate discrete and actionable insights from enlivened reality modeling of infrastructure assets with the digital twin Ot.
Uniquely enhanced by E T and <unk>.
Our learning curve and asset analytics was initiated with hoping talent, which we developed around a small acquisition of cell tower specific AI for our structural modeling and our twin platform.
Since I showed this with operating results almost three years ago to AI value to communications operators for Capex provisioning and Opex inspection and maintenance has grown exponentially what is new or the global household names in the broadband infrastructure ecosystem looking to join forces.
Institutionalized cell tower digital twins.
Our other four rate to date in asset analytics is black Sea acquired and described late last year, where the monetize asset is a mile of roadway and what we charge depends on how frequently the AI is run on fresh crowd sourced imagery to detect actionable maintenance.
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Because it's crowdsourcing is ubiquitous.
Flexi asset analytics can be literally instant on and a blank.
And each asset analytics case, our role can be behind the scenes, providing the <unk> experience cloud services, our AI as a service and all of the automated processing at scale and at standard volume based pricing.
Ecosystem partners can variously bundle and provide the survey imagery their own proprietary asset specific engineering analytics and enterprise integration with the owner operators environments.
The financial opportunity is here and now.
Our <unk> for asset analytics cloud service is in three digits per cell tower.
In 23, Q4 open tower, one procurement, including for new business <unk> in seven digits and in 2024, we are competing for eight digit subscriptions.
And with our go to market coverage of transportation owner operators. Flexi is now also pursuing procurements that can exceed seven figures so they got wrong and.
In each of the cell tower and roadway verticals. It is thus already clear that there is an asset analytics Tan and nine figures and then our existing global footprint gives us the pole position with both the owner operators and required ecosystem partners.
So for 2024, our investment focus will be to organizationally consolidate open tower and black sea with further potential such acquisitions.
Our growth and operational synergies and to leverage and expand our asset analytics headstart.
This will have a higher priority than continuing either our <unk> venture program, a fractional investments or even our traditional programmatic acquisitions of known mature companies to fill white space in modeling or simulation.
Is there does tend to be potential asset analytics acquisitions beyond early stage companies the capital.
Requirement should fit well within what would have otherwise been the magnitude of our historical programmatic acquisitions.
And while open tower and blinks see themselves Merit rapid investment to add capacity within their ripening markets. This is already sufficiently accommodated in our 2020 for outlook for operating margin, including stock based compensation, which continues our consistent annual improvement target of 100 basis points.
Moreover to the extent, we succeed in making further outbreaks.
Acquisitions and asset analytics, and thus, presumably end up actually for accounting consolidating early stage losses, which would have been below the line had we been nearly VC investing to fund them, we will commit to corresponding increases in our <unk> growth rate so that D. S y <unk>.
<unk> rule of 40, if you do the math for 2024 is not significantly in jeopardy. This year.
So while I have been generally emphasizing maintaining into our 2020 for outlook are favorable overall operational and market consistency and momentum from 2023. This significant change to our acquisition priorities will make a difference.
As you see here the contribution to our business performance. So they are acquired with programmatic acquisitions had already been declining to a new loan and 23 Q4.
<unk> and 'twenty 'twenty, four we will be targeting asset analytics acquisitions, which will necessarily be in early stages. This layer will probably end up more <unk> than ever before.
This is reflected in our 2020 for outlook for IRR growth business performance.
Which is in the range of 10, 5% to 13%.
Nominally that appears below what was our outlook for 2023, a year ago and at the midrange below our 2023 actual outcome, but in fact, we plan for a quite consistent underlining robust <unk> growth, especially ex China.
But subject as measured though to these effects of the accelerating China subscription transition of somewhat moderated escalation and.
Kind of lowered expectations for <unk> from programmatic acquisitions.
Finally, the wider range than 2023 reflects the greater variability in the emerging asset analytics business model.
Speaker Change: To summarize.
Speaker Change: We are responding to very healthy end markets with appropriate and by now proven initiatives to sustain 2020, three's performance with incremental upside now including asset analytics and.
Speaker Change: In any case.
Speaker Change: I think you can take away confidence and our principal demonstrated investment premise consistently delivering profitability after stock based compensation, which has grown at a compounded rate remaining on the order of 16% per year since 2018 with distinctively transparent.
Speaker Change: Cash conversion.
And now over to Nicolas for operational perspectives behind these directions and development. Thank you.
Nicolas: Thank you Greg.
Nicolas: First I also want to congratulate our teams around the world, who work tirelessly to deliver another great quarter and year, we accomplished a tremendous amount that positions us even better to take advantage of the favorable dynamic for infrastructure and we see continuing into the foreseeable future.
Nicolas: In fact in Q4, we saw no major changes to the macro trends we have discussed throughout the year.
Nicolas: And we expect these trends to continue in 2024.
Nicolas: The engineering resources capacity gap to fulfill the demand for infrastructure is widening.
Nicolas: In the most recent ACC quarterly survey.
Nicolas: U S engine firms across all sectors continue to expect a higher backlog of projects 12 months from now.
Nicolas: This fits what we are hearing from users around the world there are struggling to find the people and skills necessary to fulfill the demand.
Nicolas: All of this is shooting the need for infrastructure organizations large and small to go digital and leverage software to be able to do more with less in better ways.
Nicolas: Moving to our performance in Q4.
Nicolas: It was also very consistent with previous quarters.
Nicolas: Starting with our infrastructure sectors.
Nicolas: Our largest sector public works and utilities continues to be the main growth driver for the company.
Nicolas: Benefiting from infrastructure investments around the world.
Nicolas: Within transportation water utilities are directory grid.
Nicolas: In this context, <unk> systems or applications for analysis and simulation of overhead transmission infrastructure.
Nicolas: To perform very well.
Nicolas: In terms of resources, we are seeing consistent trends with last quarter.
Nicolas: <unk> performed as expected given the slowdown of new mine investments continuing to wait on its growth rate.
Nicolas: Industrial remains mixed as growth with Epc's continue to slowdown, especially in Asia Pacific.
Nicolas: The commercial and facility sector remained relatively flat.
Nicolas: Moving onto regions North America continued its strong performance.
Nicolas: The infrastructure investment and jobs Act remains a tailwind to.
Nicolas: To date about 35% of the $1 two trillion dollars five year total has been announced for project selected to receive funding.
Nicolas: The majority of funding has been for transportation.
Nicolas: Last call we discussed how we help state departments of transportation in their efforts to win federal advanced digital construction management system grants I'm.
Nicolas: I'm happy to report that many of those duties were successful in winning grants.
Nicolas: We also supported the ots in their federal Smart grid applications, which will fund technology projects to improve transportation efficiency and safety.
Nicolas: Beyond transportation <unk> investments have started in water infrastructure and for the electric grid as well.
Nicolas: Most of the activities had been around improving the current grid, but we expect more growth to come from the much needed expansion of the electric grid to transmit electricity from renewable sources of energy whether U S permitting process as the main limiting factor.
Nicolas: EMEA had another strong quarter led by public works and utilities across the region. We continue to see investments in transportation in particular rail as well as water and energy.
Nicolas: In Asia Pacific, We had solid growth in southeast Asia, driven by outsourcing to local engineering talent.
Nicolas: Australia, and New Zealand continue to our strengths and resources.
Nicolas: With in India, the growth continue to normalize after many quarters of rapid growth.
Speaker Change: Regarding China I was able to visit the country in December.
Speaker Change: On one hand, they are making huge investments in the energy transition and the government is now mandating the use of <unk> modeling for new road projects, both of which create opportunities for us.
Speaker Change: On the other hand, the preference for local software is real and growing as well as a preference for perpetual licenses in case, the geopolitical situation worsens.
Speaker Change: The overall takeaway being that we expect China to continue to weight on broader AOR growth in the foreseeable future.
Speaker Change: But we continue to believe in the substantial longer term opportunity.
Speaker Change: I would like to take a couple of minutes to talk specifically about our subsurface software company sequence.
Speaker Change: Their core business is mining, but we are seeing increased momentum with our software in civil engineering, which was obviously one of the main strategic objectives for the acquisition of the company back in 2021.
Speaker Change: Understanding the subsurface is critical for infrastructure, the largest element of technical and financial risk lies in the ground I. According to the institution of Civil Engineers.
Speaker Change: More than one third of product overruns are related to unexpected ground conditions.
Speaker Change: Using technology to help reveal what lies beneath.
Help reduce risk cost and environmental impact of infrastructure projects.
Speaker Change: A great example is <unk> to the high speed rail line that will connect loan into Birmingham, and which requires a massive amount of earthworks.
Approximately 21 million cubic meters of material was earmarked for excavation along the 19 kilometer rail routes.
Speaker Change: The productivity needed to identify efficiencies that could minimize waste and help <unk> to meet its environmental commitments.
Speaker Change: By combining many faster to cloud and sequence Youll professional applications.
Speaker Change: Mcdonald was able to optimize mass coal movements during construction, which provided critical insight into mature we use across the project.
Speaker Change: It helped the team cut 400000 tons of carbon emissions and save the use of quarter of a billion liters of water.
Speaker Change: The three D models also provided foundation for the detriment of a digital twin to support future earthworks projects.
Speaker Change: We are seeing more of the subsurface civil projects. For example, so again housing food a rail line in Germany.
Speaker Change: Two thirds of the rut options run through tunnels.
Speaker Change: The firm Officer quick <unk> was hired to perform the subsurface investigation to determine an optimal route option using sequence Youll professional applications.
Speaker Change: Projects like these which bring together engineering and subsurface data to support the full lifecycle of infrastructure assets demonstrate both the value of integrated digital twins and the opportunity for Bentley.
Speaker Change: I will now hand over to <unk> for details of our financial results.
Speaker Change: Thank you Nicholas.
Speaker Change: We are pleased with another strong quarter to finish out a great year.
Speaker Change: Total revenues for the fourth quarter of about $311 million up 8% year over year or 7% in constant currency.
Speaker Change: Our fourth quarter revenues were impacted by timing from the continued upgrades of our accounts from traditional annual subscriptions with upfront revenue recognition to our <unk> hundred 65 commercial model that revenues are recognized on a ratable basis.
Speaker Change: Such <unk> hundred 65 upgrades and the associated timing impact on revenue recognition.
Speaker Change: Slightly higher than what the model out.
Speaker Change: Otherwise the quarter was in line with our expectations for.
Speaker Change: For the full year total revenues were $1 billion $228 million and towards 12% on a reported and constant currency basis.
Speaker Change: Subscription revenues for the quarter grew 8% year over year, plus 7% in constant currency and represented 88% of our total revenues.
As just mentioned subscription revenues were impacted by the timing aspect from our continued <unk> hundred 65 upgrades.
Speaker Change: <unk> hundred 65, now reflects 38% of our 2023 subscription revenues up from 32% in 2022.
Speaker Change: For the year subscription revenues grew 13% on a reported and constant currency basis.
Speaker Change: Our <unk> hundred 65 SMB initiatives.
Speaker Change: <unk> to be solid contributors to our subscription revenue growth.
Speaker Change: Perpetual license revenues for the fourth quarter grew 6% year over year in reported and constant currency.
Speaker Change: For the full year perpetual licenses revenues was 6% in reported and 7% in constant currency.
Speaker Change: Even though a perpetual license H make up only 4% of total revenues and build certainly remains small relative to our recurring revenues. They have grown in significance to us and we expect their relative importance to our commercial offerings to continue.
Speaker Change: Particularly for SMB.
Speaker Change: And in China due to local preferences.
Speaker Change: Our professional services revenues for the quarter grew 9% year over year in reported and 7% in constant currency.
Speaker Change: For the year services revenues grew 7% on a reported and constant currency basis and benefited from the acquisition of Hitachi, which required within our cohesive digital integrated pool in 'twenty to Q4.
Speaker Change: Now before moving to a recurring revenue performance I want to highlight our change in methodology for calculating constant currency growth rates.
Speaker Change: Starting this quarter, we transitioned to the transactional methodology from the previous functional methodology and reporting constant currency growth rates.
Speaker Change: The transactional methodology aligns with how we manage our business and how we have historically provided guidance.
Speaker Change: For us historically, both approaches typically deliver similar results.
Speaker Change: However, the increased significance of sequence U S dollar based international billings out of bank of Ireland.
Speaker Change: Combined with increased FX volatility period over period.
Speaker Change: The bigger differences between the two methodologies.
Speaker Change: We provided our constant currency results under both methodologies in our Q4 results release.
Speaker Change: And you will see further comparisons and reconciliations within the MD&A of our 2023 Form 10-K filing.
Speaker Change: On a prospective basis, starting with Q1 'twenty four we will report constant currency results on a transactional basis only.
Speaker Change: Our GAAP results as reported of course not impacted by this change.
Speaker Change: Moving onto our recurring revenue performance.
Speaker Change: Our last 12 months recurring revenues increased by 12% year over year reported and constant currency and represent 89% of our total revenues.
Speaker Change: Our last 12 months constant currency comps retention rate expected, 98% and our constant currency recurring revenues net retention rate was 109% led.
Speaker Change: Led by continued accretion within our <unk> hundred 65 consumption based commercial model.
Speaker Change: All of our recurring revenue measures on a trailing 12 months' basis with 2022 as the comparable period.
Speaker Change: As a result, they are all impacted by our exit from Russia, mid 2022, and Russia represented approximately 1% of our subscription revenues run rate.
Speaker Change: We ended Q4 with <unk> of $1 billion 175 million at quarter end spot rates.
Speaker Change: Our <unk> hundred 65, and SMB growth initiatives remain the key growth drivers.
Speaker Change: On a constant currency basis, our trailing 12 months a growth rate was 12, 5% year over year and three 2% on a sequential quarterly basis.
Speaker Change: Q4 continued to be impacted by headwinds in China, and a greater preference there for perpetual licenses.
Speaker Change: Overall as Q4 is our biggest contracts renewal quarter and thereby it represents to go out there with our biggest growth opportunity.
Speaker Change: We are pleased with the finish of the year.
Speaker Change: Now moving to profitability performance.
Speaker Change: Our GAAP operating income was $38 million for the fourth quarter and $231 million for the year.
Speaker Change: We have previously explained the impact on our GAAP operating results from amortization of purchased intangibles disrupt compensation plan liability revaluations and acquisition expenses.
Speaker Change: There are two other items I would like to highlight this quarter.
During the fourth quarter, we initiated a strategic realignment program.
Speaker Change: Our first since 2022.
Speaker Change: To better align our resources with our strategy.
Speaker Change: Address market opportunities and to support our pool.
Speaker Change: The increase of the realignment charge of $12 million, mainly for severance, which we expect to be fully accounted for.
Speaker Change: In our operating cash flows during the first half of 2024.
Speaker Change: We expect to fully reinvest run rate savings into priority areas, such as AI in product development and marketing.
Speaker Change: Secondly, during the fourth quarter, we recognized a net discrete income tax benefit of 171 million relating to an internal legal entity restructuring and continued alignment of our sequence IP ownership.
Speaker Change: Our operating model.
Speaker Change: The associated disrupt tax assets.
Speaker Change: Presenter anticipated discounted future cash tax benefits, which we expect to realize for tax amortization over the next 13 years.
Speaker Change: Moving.
Speaker Change: On to adjusted operating income with stock based compensation expense, our primary profitability and margin performance measure.
Speaker Change: Adjusted operating income with stock based compensation expense was 75 million for the quarter up $11 million or 16% year over year.
Speaker Change: With a margin of 24% up 150 basis points.
Speaker Change: In line with our plan and as discussed on our last call. Our Q4 margin was impacted by relatively high opex compared to Q3, mainly caused by incremental promotional activities.
Speaker Change: And it system implementation cost associated with our new financial systems.
Speaker Change: For the full year, our adjusted operating income and stock based compensation expense was $325 million up $51 million or 19% with a margin of 26, 4% also up 150 basis points year over year.
Speaker Change: With respect to liquidity.
Speaker Change: Our operating cash flow was $87 million for the quarter.
Speaker Change: And $417 million for the year up $143 million or 52%.
Speaker Change: Our conversion from adjusted EBITDA was 100% for the full year.
Speaker Change: And benefited from timing of collections at the beginning and at the end of the year.
Speaker Change: And our increased focus on broken capital management.
Speaker Change: As previously discussed our business model produces reliable and efficient cash flows over trailing 12 months period.
Speaker Change: But with some variability between quarters due to timing.
Speaker Change: For 2024, we estimate that our conversion rate of adjusted EBITDA to cash flow from operations will be approximately 80%.
Speaker Change: Based on the expected seasonality of collections and expenditures, we expect that approximately 55% to 60% of our cash flow from operations will be generated during the first half of 2024.
Speaker Change: For 2024, our cash flow expectations include a number of puts and takes including approximately $12 million of severance payments relating to our strategic realignment program.
Speaker Change: Around $15 million to $20 million of cash expenditures associated with our it systems upgrades, which we expect to be amortized into opex starting in 2025.
Speaker Change: And incremental estimated cash taxes of approximately $8 million, which does reflect the cash tax benefits from the legal entity restructuring that I mentioned before.
Speaker Change: These increases are partially offset by a reduction in cash interest net of the benefits from our $200 million interest rate swap.
Speaker Change: This is achieved by us having already fully paid down our revolving line of credit.
Speaker Change: Our only expensive debt by the end of January 2024.
Speaker Change: Okay.
Speaker Change: With regards to capital allocation in 2023, along with providing sufficiently for our growth initiatives, we deployed $259 million paying down bank debt.
Speaker Change: <unk> 9 million in dividends.
Speaker Change: $59 million of effective share repurchases to offset dilution from stock based compensation and $38 million on acquisitions and investments.
Speaker Change: As of the end of Q4, our net senior debt leverage was <unk> five times and including our 2026 and 2027 convertible notes fully expect our net debt leverage was three five times.
Speaker Change: We continued our strong deleveraging trajectory delevering, one two times adjusted EBITDA since the beginning of 2023.
Speaker Change: With our strong free cash flow generation profile, we expect to organically delever and to increase our balance sheet strength, while maintaining our programmatic M&A readiness, our dividend and share repurchases.
Speaker Change: From a rates exposure perspective, now that we have fully repaid our revolving line of credit substantially all of our debt is protected from high or rising interest rates.
Speaker Change: We had a very low fixed coupon interest on our convertible notes or our 200 million of interest rate swaps expiring in 2013.
Speaker Change: We remain very comfortable with our capital structure.
Speaker Change: Our leverage.
Speaker Change: Maturity profile and interest rate exposure, and we will continue to evaluate ways to optimize as conditions change.
Speaker Change: Yeah.
Speaker Change: Moving to our 2024 outlook, which reflects our confidence in continued favorable market conditions and in the momentum of our growth initiatives.
Speaker Change: It also assumes a slightly larger than normal range of possible <unk>.
Speaker Change: <unk> to account for a commercial model shift in China from <unk>.
Lower acquisition expectations.
Speaker Change: With used Escalations now that peak inflation, it's behind us.
Speaker Change: And the incremental upside from asset analytics as Greg discussed.
Speaker Change: Our outlook also reflects our continued margin improvement commitment of approximately 100 basis points.
Speaker Change: Accordingly, we expect total GAAP revenues based on current exchange rates in the range of $1 billion and $350 million to $1.375 billion with constant currency growth between 10 and 12%.
Speaker Change: This is reflective of our mix with services revenues expected to grow about half of company average.
Speaker Change: And license revenues growing more slowly.
Speaker Change: We are projecting constant currency April between 10, five and 13%.
Speaker Change: We expect an adjusted operating income with stock based compensation margin, reflecting approximately 100 basis points annual margin improvement.
Speaker Change: Any FX impact on our margin is expected to be significantly mitigated by our natural hedge.
Speaker Change: We expect our effective tax rate to be approximately 20%.
Speaker Change: We expect cash flow from operations to convert from our adjusted EBITDA at a rate of approximately 80%.
Speaker Change: We expect capital expenditures of approximately $22 million.
Speaker Change: So help you with your models I also include here on this slide additional expectations on interest expense and cash interest cash taxes stock based compensation operating depreciation and amortization outstanding shares and our dividend.
Speaker Change: We have raised by fourth quarter 2024.
Speaker Change: And with that I think we are ready for Q&A.
Speaker Change: Over to aric to moderate thank.
Aric: Thank you.
Aric: Thanks Brennan in order for everyone to ask a question today, we ask that you limit yourself to just one.
Aric: Our first question comes from Matt Hedberg from RBC.
Aric: Okay.
Aric: Okay.
Matthew George Hedberg: Right. Thanks, guys. Thanks for taking my question.
Matt Hedberg: I guess I had a question from Iga funding a lot of a lot of good content.
Matthew George Hedberg: In the prepared remarks, and I think he noted 35% of the $1. Two trillion funding has been announced I guess it would be on.
Matthew George Hedberg: And transportation in our water and electric grid, how should we think about the release of those dollars to.
Matthew George Hedberg: Two additional verticals and how should we think about just kind of the potential tailwind that can be for you guys over the next several years.
Speaker Change: Nicolas could you feel badly.
Nicolas: That's absolutely right so 35% of.
Nicolas: Uh huh.
Nicolas: The project funding has been announced and mind you there is a bit of a time gap between when it's announced and when it's awarded.
Nicolas: Which can range from one project to the other in general It does take time to percolate down from.
Nicolas: The federal agencies to the state authorities and or owner operators, who to the contractors.
Nicolas: Most of it has been for transportation as you noted and we explained in the prepared remarks, we see it coming now for water, we see coming for electric grid.
Biggest issue, we see for electric grid. Unfortunately is the permitting process in the U S.
Nicolas: We can take many many years for a product to get started once you have all the approvals older permitting done right. So this is this stays remains the main limiting factor right now in order to try to have.
Nicolas: <unk> in the electric grid as even stronger tailwind right. Most of the activity we've seen for a great actually all of them are about resilience of the existing transmission lines.
Nicolas: Analysis of their current state, but it has not yet about expansion and when when it comes to expansion. This is when you need permitting this will be a significance.
Nicolas: Additional growth opportunity.
Speaker Change: Thanks, Matt Thanks, guys. Congrats on another good year.
Speaker Change: Our next question comes from Christopher <unk> from Oppenheimer.
Christopher: Hi, Good morning, Thank you for taking the question.
Christopher: I wanted to ask about your AI priorities, just given the shift this year in capital allocation and can you help us put some parameters around what you see how badly needs to itself.
Christopher: Versus partner versus maybe acquiring some of the priorities that you've outlined and just as a related follow up remind us with the success of the cell tower business over the last three years, just what does the economics look like at the ongoing AI business model. Thank you.
Speaker Change: Greg we kind of hear you yeah, Greg you're on mute.
Greg: I'm, sorry, I realize I'm also invisible, which we're working on here.
Greg: But Nicholas maybe you can speak to the first part of the question and then I'll talk about capital allocation and asset analytics.
Nicholas: It would be I will be happy to we see two main use cases for AI in the infrastructure sector.
Nicholas: The first use case is actually a set of analytics.
Nicholas: Where we use AI to understand exact physical condition of an infrastructure asset and its context.
Nicholas: Can detect any corrosion and you're correct, we can detect visitation and we can trigger engineering workflows based on this we can also triggered by the way commercial workflows to under the <unk>.
Nicholas: Stan.
Nicholas: Full utilization of a cell tower and if there is space for more equipment.
Nicholas: If if necessary.
Nicholas: But these are the this is the first use case for AI and infrastructure sector and is quite advanced and then Greg can talk about the kind of financials, we see there, but the second use case, which is also quite promising as the use of AI.
Nicholas: When it comes to design and using AI as a copilot floor engineers to be able to do more I mean that engineering resource capacity gap that we've talked about is indeed widening we simply not.
Nicholas: As a as a full ecosystem not creating enough engineers fast enough to cope with the demand. So it's all about making them more productive and we think AI is a tremendous potential to make them more productive.
Nicholas: And here our investments or.
Nicholas: Around site engineering, using AI to automate.
Nicholas: Proposal of slightly ounce to automate joined production.
Nicholas: It's still very early stage, we are very much at the cutting edge here, but we're working together with a lot of representative users lot of representative accounts.
Fully endorsing the direction given its potential.
Nicholas: Now across both.
Nicholas: AI.
Nicholas: Sure.
Nicholas: The analytics and AI for design and there is a true platform opportunity at the most fundamental level, it's the digital twin platform.
Nicholas: When we do AI and analytics, we actually create a digital twin of infrastructure assets.
Nicholas: Win.
Nicholas: When we power.
Nicholas: In fact, six engineers to do better designed through corporate capabilities. We also leveraged digital twin technology so across.
Nicholas: Both we have the <unk> platform and then when it comes to asset analytics specifically.
Speaker Change: Through our investments with ICU ventures, our corporate venture arm, we have looked at so many companies in that space and we realize there is definitely a lot of redundancy they'll build a sim capabilities over and over again, so we see a clear platform opportunity for us on top of digital twin technology in order to do asset analytics.
Speaker Change: Well I'll only add that Chris.
Speaker Change: Chris and I realize it's been three years since I talked about the cell tower opportunity as a forerunner for what should become digital twins and every infrastructure asset tank and the AI has gotten better and better and the value has gotten more and more over that period of time, but the business has had the fits and starts of the power.
Speaker Change: <unk>.
Speaker Change: One thing digital trends, but their own acres ecosystem of providers and their own internal.
Speaker Change:
Speaker Change: Enterprise systems, not being ready.
Speaker Change: So that has come and gone to where whats going on now however is.
Speaker Change: In Prime time with the pace of household name providers of broadband infrastructure onboard with this potential as they remake.
Speaker Change: <unk> networks and our role is behind the scenes provider of the AI and the AI processing in reality modeling.
Speaker Change: And we're generating three digits per tower and participating in procurements that will help institutionalize. This financing so it will have taken.
Speaker Change: And the rest of this year on top of the three years for.
Speaker Change: For these four runners to become.
Speaker Change: To establish the potential of asset analytics, along with very much a believer.
Speaker Change: Alright that we're at this turning point here.
Speaker Change: Our next question comes with Clarke Jeffries from Piper Sandler.
Speaker Change: Yes.
Clarke Jeffries: Hello, Hello, Thank you for taking the question.
Clarke Jeffries: Greg I'm, reflecting on your comments.
Clarke Jeffries: <unk> no longer being able to rely on user volume growth and maybe an expectation for longer term application accretion expansion.
Clarke Jeffries: Are we at the point, where you expect that to be a pretty linear cadence each year or is this a comment about the longer term that you would expect continued expansion I'm trying to understand if we're at the point where.
Clarke Jeffries: User growth is not growing net per year or if we're trying to do.
Clarke Jeffries: Increase the monetization up level, the individual employee with application to the next.
Clarke Jeffries: As soon as 2024.
Clarke Jeffries: Well first I might say that our observation about user volume is.
Clarke Jeffries: Particular.
Clarke Jeffries: We see it most in the <unk> hundred 65 universe, where we literally charge per application.
Clarke Jeffries: And it's those accounts the large ones that have the.
Clarke Jeffries: The latest data we saw one out of every 10 positions is open and they may face retirement faster than they can add new.
Clarke Jeffries: New colleague so there.
Clarke Jeffries: Literally emphasizing workflows that save user days, and we're delivering those through blueprint and more specialized applications.
Clarke Jeffries: I think that can inflect, even faster because the.
Clarke Jeffries: These firms are the same DNR top firms, who spend 1% of what they bill on software and realized into smarter for them to have more productive hours and thats, the only way for them to grow their business and meet their backlog.
Speaker Change: I don't think it has to be only a linear progression.
Speaker Change: From what has spent now per infrastructure engineered to what could be spent and he has already spent on by other types of engineers on selco, we've been talking about that comprising our Tam if you like for a long time and it's the pressures are causing it to accelerate now I think.
Thanks, Mark our next question comes from Jason's point out with Keybanc.
Mark: There we go.
Jason: Thank you.
Jason: Sure Tom.
Jason: Maybe one for Werner.
Jason: And then have the 13% <unk>.
Jason: Guidance for the year.
Werner: I know you mentioned that the wider than normal range, but any way to unpack.
Werner: Like what the headwind is in China.
Werner: Or maybe M&A contribution.
Werner: And then the third.
Werner: That would be no press release.
Speaker Change: Hey, guys.
Speaker Change: On the acquisitions from me.
Speaker Change: 100 basis points.
Speaker Change: The outlook.
Speaker Change: <unk>.
Speaker Change: Thanks, Mike This is coming down from that level actually would have been 23. The contributions we are less than the 107.
Speaker Change: 70 basis points in 'twenty, three and 'twenty two.
Speaker Change: So we've taken our expectations down also.
Speaker Change: The ramp up Greg Greg mentioned.
Speaker Change: Uh huh.
Speaker Change: Between China.
Speaker Change: Low escalations, we don't really want to.
Speaker Change: Right click and banks.
Speaker Change: It's a wide range of.
Speaker Change: Perpetual outcomes.
Speaker Change: Yes.
Speaker Change: And so unlike momentum powered for.
Speaker Change: Our key growth drivers. This is Mary comes to Smith micro trends are pretty consistent.
Speaker Change: Incremental upside from comprehensive analytics business, let me talk I'll try to provide a range of outcomes.
Speaker Change: Okay great.
Speaker Change: That's helpful. Thank you.
Speaker Change: Thanks, Jason next question comes from Michael Funk from Bank of America.
Speaker Change: Yes.
Michael J. Funk: Hey, good morning, how are you doing.
Michael J. Funk: Yeah.
Michael J. Funk: Yes.
Michael J. Funk: Yes, so Greg. Thank you again, if product metal color on on digital twins really helpful and good to hear the updated commentary on the tower business.
If we're thinking about how that business scales it'd be helpful. Though to get maybe some some more metrics. There. So greg there might be a proxy about a 160000 towers in the U S. For example, can you give us a sense of how many towers you actually servicing today and how thats ramped for last couple of years.
Michael J. Funk: A related question are the.
Michael J. Funk: For the tower construction companies like Mastec are they also a gating factor is the tower codes might have contracts with them for maintenance. So let's talk about how quickly that business can ramp based on those factors.
Speaker Change: I think it's mainly a business for the existing towers.
Speaker Change: And.
Speaker Change: Our.
Speaker Change: Subscriptions have gone up and down over time.
Speaker Change: Based on the preparedness of the ecosystem to.
Speaker Change: Uh huh.
Speaker Change: To manage the digital trend.
The business is.
Speaker Change: Starts the year in seven figures as IRR I'm very confident we will end the year in eight figures of IRR, but there are very sensitive procurements going on at the moment that preclude me, saying.
Speaker Change: More than that.
Speaker Change: Aye.
Speaker Change: We believe there is equal opportunity in lengthy.
Speaker Change: Which which is April which is proposing.
The crowd source based.
Speaker Change: For a maintenance condition detection, which can run every day or multiple times per day.
Speaker Change: To multiple of our <unk> and we can make that.
Speaker Change: Pat.
Speaker Change: Those AI insight, even more valuable by relating the entity ETT.
Speaker Change: And the regarding maintenance, it's very exciting to put them together, we will we will hand.
Speaker Change: Michael I think a quarter from now a full announcement with a new name and so forth for that for that business.
Speaker Change: Right now where we're busy.
Winning it will get to communicating more about it over the course of 2020.
Speaker Change: That's great and just for clarification, Greg from Tower business you are charging.
Speaker Change: Per asset and then for the <unk> business you are charging per mile can you give us a sense of the economics. There I mean, what you charge per tower monthly quarterly annually and the same for the.
Speaker Change: Our breakfast business.
Rob: Tyler it's Rob.
Tyler: Three digits per year per ton.
Tyler: And we have standard pricing for per roadway mile with links to it also is a standard pricing, but it depends on which AI insights you want and how frequently you you want them, but we're trying to make all of this standard price book we want.
Tyler: They have many partner is selling for us the engineering firms to be offering this to their owner operator accounts, where they can add their proprietary analytics on top of.
Tyler: On top of ours.
Tyler: And were they won't have to worry about doing the back office processing, because we're going to be very proficient and doing that at scale and economically and high quality.
Tyler: Thank you. It's all very helpful. Thanks, Michael next question comes from Jay Bruce our from algorithm Securities.
Jay Bruce: Good morning, Thank you Greg in your comments.
Jay Bruce: About the 2024 developments you noted the asset analytics. The question there is.
Jay Bruce: Would you put that in the context of the industry solutions concept you've spoken of previously for example at Yi.
Jay Bruce: If so could you speak more broadly about some other critical product deliverables that you foresee for 2024.
Jay Bruce: And is there any reason to believe that customers might be more inclined to adopt new technology.
Jay Bruce: These days more quickly than they might have in the past.
Jay Bruce: Well I think everyone is conditioned to say what can I do for me now and Thats the difference with asset analytics as we want an instant on entry point. So that you don't have to say well you start with the whole concept of digital twins and Thats from the beginning.
Jay Bruce: Lifecycle and so forth.
Jay Bruce: If you take the example of lengthy with Crowdsource imagery you can head of the next day, there's not even a special survey that needs to be done for that I would say the principal difference from industry solutions is here with asset analytics, we really have an ecosystem in mind, we're trying to beat the platform to be ecosystem friendly so that the.
Jay Bruce: Ecosystem can moving into this AI opportunity without having to start from scratch with bringing together the <unk> and her team and then we want to come to market, primarily through ecosystem partners, who either are maintenance organizations or engineering firms.
Jay Bruce: Or the types of a partner that <unk>.
Jay Bruce: <unk> mentioned.
Jay Bruce: So the whole thing is how can you get into this opportunity now because owners are aware and interested now.
Jay Bruce: Term AI has around them to say Theyre, probably is something that can do for me to start with right.
Jay Bruce: Right now to start with and that's the difference.
Speaker Change: Thank you. Thanks, Joe next question comes from Matt <unk> from Goldman Sachs.
Matthew George Hedberg: Good morning, Thanks for taking the question so Greg you called out a potential displacement win.
Matthew George Hedberg: And SMB from perpetual license, which I believe has been kind of a multi quarter trend here and also can you perhaps talk about what's kind of driving this proclivity towards licenses in SMB and the extent to which this is benefiting broader SMB momentum in competitive takeouts. Thank you will.
Matthew George Hedberg: Matt It's really interesting our license sales went down year after year after year determinedly because of course, we prefer subscription it's clear why in China.
Matthew George Hedberg: If they are worried about Americans being able to continue to do business with them. They prefer to buy a perpetual license manner and Nicholas saw that for himself firsthand in December but over an SMB, we all scratch our heads a bit why why would you prefer a perpetual license and as you know our competitor doesn't offer a perpetual license so thats the <unk>.
Matthew George Hedberg: Recent Dakota competitive differentiator and anecdotally, what we hear from those who then it's 400 of them new logo license purchases in SMB and this quarter I may say the Sun is shining our business is good we'd rather buy our software in a M.
Matthew George Hedberg: And be able to continue to use it for multiple years and we say that's a different way of looking at the way you would trade off discounted cash flow and so forth. If you are a sophisticated large business, but let's not dictate to them how they should look at their choice of acquiring technology, let's get on with it. So it's a good opportunity for us it's not.
A large in the scale of our overall.
Matthew George Hedberg: But.
Matthew George Hedberg: We hope to continue to grow these new logos forever into our conventional enterprise programs.
Matthew George Hedberg: Thanks, Matt next question comes from Joshua Tilton from Wolfe Research.
Joshua Tilton: Hey, guys can you hear me yes.
Joshua Tilton: I, just kind of have a bit of a high level one.
Joshua Tilton: But I guess, if I step back it sounds like you guys are focusing more on new logos.
Joshua Tilton: You expect less contribution from M&A than you have previously you called out a strategic realignment then there is a bigger focus on perpetual so what I'm just trying to understand is there like bigger changes in strategy going on under the hood or I might just reading too deeply into the commentary that you guys gave us.
Speaker Change: No I think it's stay the course on what is working very well we concluded the year with our IRR growth that which we particularly chase and measure.
Speaker Change: At our all time high water, Mark except for China, where.
We're purposely changing the business for the reasons. We just mentioned it is just that we'd be glad to grow faster with these AI opportunities in the digital twin opportunity has been hanging around narrow AI gives us this <unk>.
Speaker Change: Entry point.
Speaker Change: And back on SMB, we just become more convinced every year that we have been.
Speaker Change: We've neglected that potential.
Speaker Change: In the market and we're very excited about that now.
Speaker Change: Just.
Speaker Change: Our overall strategy, Josh was what we commit to improving our operating margins, including stock based compensation by 100 basis points per year, but subject to that we want to grow as fast as we can and the ideas. You've just mentioned are all timely and once we can act upon during this coming year in.
Speaker Change: In M&A.
Speaker Change: You'll see that we only spent $38 million last year, including.
Speaker Change: DC investments.
Speaker Change: We are.
Speaker Change: Going to focus in particular this year on opportunities in asset analytics, we may not find them. We hope we do if.
Speaker Change: If we do we want to do outright acquisitions like Linksys <unk> was an opportunity that came to us as a potential VC investment and we want to incorporate and consolidate those and have this platform advantage and will be the back office provider of the AI in reality modeling processing at scale, because we think it's difficult otherwise.
Speaker Change: So organizations that have good proprietary analytic capabilities, but don't have the.
Speaker Change: Resources to provide an experienced bank office and we're going to get very good at that.
Speaker Change: I know on Bubbling over with whats, new and exciting and.
Speaker Change: And interesting, but but it's not a substitute for what's growing better than ever.
Speaker Change: The mainstream business.
Speaker Change: Super helpful. Thanks, guys.
Speaker Change: Thanks.
Speaker Change: Question comes from Blair Abernethy from Rosenblatt.
Speaker Change: Thanks.
Speaker Change: <unk>.
Speaker Change: Just generally.
Blair Abernethy: We can hear you blur update great sorry, trying to get the video on.
Blair Abernethy: Thanks for doing this.
Blair Abernethy: Just back on the.
Speaker Change: J a for a second if we could.
Speaker Change: Now that we're sort of 35% of the prop.
Speaker Change: Projects sort of announced is there any sort of trends are you seeing in terms of what the dot's are doing are they.
Speaker Change: Are they standardizing on their software or are they going project by project and making the decisions that way just kind of want to get a sense of what the what the competitive aspects have been looking like now that this has been a year and a half or so into into the into the process.
Speaker Change: Well, they're most are are standardized in terms of what they use on bentley's software on the other hand there.
Speaker Change: Their supply chains are at full capacity and they're beating the bushes as something to say that the deal thesis theyre spending more state money as well along with the incremental federal money I think the state money is up 11% year on year.
Speaker Change: And that Texas.
Speaker Change: Everyone.
Speaker Change: And.
Speaker Change: Some of the new logo opportunities for us are civil engineering firms have primarily have done slate engineering in the past and they're now gravitating toward.
Speaker Change: Toward roadway.
Speaker Change: All hands are needed on this for the reasons, we talked about the demographics and the shortage of users and user days in the U S.
Speaker Change: Especially but the.
Speaker Change: I think the main picture is.
Speaker Change: Higher for longer rather than higher.
Speaker Change:
Speaker Change: It can't be I can't be in transportation any faster than it is at the moment.
Speaker Change: Nicolas do you want to add something to that.
Nicolas: I will say dot's, leveraging IAG to accelerate when they were already embarking on in particular digital delivery. So using a model based approach from design through construction.
Nicolas: All the way to two operations.
Nicolas: Now as you know there are multiple.
Nicolas: Grant programs.
Nicolas: One of them is called Smart and smart is to encourage her to help the dot's Pilar.
Nicolas: New technology, and what we've seen with the smart grants are some dot's leveraging.
Nicolas: That fund in order to to drone led inspection of infrastructure assets, so going back to your assets on ethics, and the duty themselves and leveraging technology to automate inspections.
Nicolas: No just overall, when we talk about accelerating and relatively faster.
Nicolas: It isn't necessarily faster than the rest of the world that isn't necessarily faster than you know these are organizations that are that have a long legacy and lots of.
Nicolas: Enterprise constraints.
Nicolas: And their own challenges for talent and so forth, but the appetite is greater than ever before the construction is one of the this year's big priorities for us and them so lots going on.
Nicolas: But it's.
Nicolas: Needed.
Speaker Change: Great. Thank you.
Speaker Change: This will conclude the Q&A portion, Brian do you want to ask about <unk>.
Brian: Sure one more comment on seasonality. So we had our last programmatic acquisition meaningful.
Brian: Ocean was easy power.
Brian: 23, Q1, which at the end of Q1 will drop into that trailing 12 months.
Brian: Baseline I think we had a large portion of our <unk> hundred 65, the cost of the truss floor resets in Q4.
Brian: David.
Brian: Brooklyn based product flowing to the usage area.
Brian: Throughout the year. So we expect Q1 to be at the seasonal low for us in terms of the Aqua America, albeit may up as we go through the year so trusting our.
Brian: Our seasonality.
Speaker Change: Alright, so that concludes our call today, we thank each of you for your interest and time and Bentley systems and look forward to updating you on our progress in coming quarters.
Speaker Change: Thank you. Thank you sure.
Speaker Change: Yeah.