Q2 2024 Bentley Systems Inc Earnings Call
Eric Boyer: Good morning, and thank you for joining Bentley Systems Q2 2024 results webcast. I'm Eric Boyer, Bentley's Investor Relations Officer. On the webcast today, we have Bentley Systems Executive Chair, Greg Bentley, Chief Executive Officer, Nicholas Cummins, and Chief Financial Officer, Werner Andre. This webcast includes four looking statements made as of August 6th, 2024, regarding the future results of operations and financial position, business strategy and plans, and objectives for future operations of Bentley Systems Incorporated.
Eric Boyer: Good morning, and thank you for joining Bentley Systems Q2 2024 results webcast. I'm Eric Boyer, Bentley's Investor Relations Officer. On the webcast today, we have Bentley Systems Executive Chair, Greg Bentley.
Speaker Change: Chief Executive Officer, Nicholas Cummins, and Chief Financial Officer, Werner Andre.
Speaker Change: This webcast includes forward-looking statements made as of August 6, 2024, regarding the future results of operations and financial position, business strategy and plans, and objectives for future operations of Bentley Systems Incorporated. All such statements made in or contained during this webcast, other than statements of historical fact, are forward-looking statements.
Eric Boyer: All such statements made in or contained during this webcast, other than statements of historical fact are forward looking statements. This webcast will be available for replay on Bentley Systems Investor Relations website at investors.bentley.com on August 6th, 2024. After our presentation, we'll conclude with Q&A. And with that, let me introduce the Executive Chair of Bentley Systems, Greg Bentley. Good morning and
Speaker Change: This webcast will be available for replay on Bentley Systems Investor Relations website at investors.bentley.com on August 6, 2024. After our presentation, we will conclude with Q&A. And with that, let me introduce the Executive Chair of Bentley Systems, Greg Bentley.
Gregory Bentley: Good morning, and thanks to each of you, as always, for your interest in BSY and this first operating results reporting in my new role. Our distinction is that we have virtually no multi-year recognition or billing as is elsewhere booked at the expense of the future. A stalwart constant, ever since our founding 40 years ago, has been our unusual executive bonus plan for top managers. At the outset of the plan, of course, our operating income magnitude was insignificant compared to today's, but knowing that the parameters of this plan would prevail indefinitely, as CEO, I could, and did all along the way, make intentionally long-sighted resource allocation decisions to benefit the magnitude per share of future profitability, sowing the seeds for incentives, more resources. It incorporates the distinctive and proven philosophy of our historical executive bonus plan, but refactore Thank you, Gregory.
Greg Bentley: Good morning, and thanks to each of you, as always, for your interest in BSY.
Speaker Change: and this first operating results reporting in new roles.
Nicholas Cummins: Our lineup will remain the same, but the format is updated to correspond to new responsibilities. In particular, I bequeath to Nicholas, as CEO , the charts to review our operating performance numbers.
Nicholas Cummins: Especially ARR growth as our key indicator, along with his expanded commentary on the underlying tone of business across all notable dimensions.
Speaker Change: As now Executive Chair, my perspective on directions and developments will here and henceforth be qualitative and comparatively succinct.
Speaker Change: While I think our 24 Q2 operating results should be recognized as commendably robust on their face, my qualitative characterization of the quarter is even more favorable.
Speaker Change: In all-around pace and balance, it seems to me, with now perhaps the benefit of a broader perspective in my new role, that everything has come together more so than ever.
Speaker Change: Hence some observations on our busyness directions in keeping with my new qualitative focus.
Speaker Change: For me, BSY busyness describes the unprecedented stride now being hit both in our infrastructure engineering end markets and in our own efficient execution, which of course will be further detailed in turn by Nicholas and Werner.
Speaker Change: And speaking of quality, rarely if ever in my experience has our ARR growth shown as much balance, visibility, and linearity as it has of late.
Speaker Change: In fact, I consider the fundamentals of our business to have further improved year over year.
Speaker Change: As would be reflected in ARR growth, net of subsiding inflation-based escalation, intentional commercial model changes in China, and onboarding from programmatic acquisitions.
Speaker Change: Likewise, I think 2024 revenues have significantly grown in quality, with recurring subscription revenues surpassing 90% of the total by virtue of mid-double-digit year-to-date growth in subscription revenue that is virtually all organic.
Speaker Change: And my new focus on qualitative observations leads me to also emphasize the transparency and accounting quality of our revenues.
Speaker Change: rare or unique among even software peers with likewise subscription preponderance.
Speaker Change: Our distinction is that we have virtually no multi-year recognition or billing, as is elsewhere booked at the expense of the future.
Speaker Change: Moreover, by virtue of our ever-growing E365 plurality,
Speaker Change: Over three quarters of our subscription revenues are recognized strictly ratably throughout the year, for which we collect in advance.
Speaker Change: with only the shrinking remainder of less than 25% still subject to any 606 obscurity, even just across quarters.
Speaker Change: Our what-you-see-is-what-we-get revenue quality, in turn, makes our profitability margins meaningful and consistent.
Speaker Change: And as you know, for further financial transparency and usefulness, our key profitability metric
Speaker Change: Adjusted Operating Income Inclusive of Stock-Based Compensation tracks reliably with cash flows after stock repurchases to offset the dilution which would otherwise result.
Speaker Change: Incidentally, for the first half of 2024, all of these measures thus follow suit with subscription revenues in significant favorable variances.
Speaker Change: Lastly, among qualitative observations of our unprecedented busyness,
Speaker Change: Recall my high hopes for our asset analytics initiatives to make a mark in 2024.
Speaker Change: In this incremental opportunity, beyond our existing commercial model where ARR is charged per user, our asset analytics subscriptions are charged per asset for insights derived through AI from digital twin cloud services.
Speaker Change: While still not quite moving our overall ARR growth needle,
Speaker Change: I'm pleased to say that in 24Q2, Asset Analytics did reach the pace of ARR growth, a rate of eight digits for the year, which I posited last quarter as a reasonable aspiration.
Speaker Change: Turning now to such long-term prospects, the Asset Analytics Initiative is characteristic of the auspicious expectations I have for our new generational leaders to explore and develop incremental opportunities.
Speaker Change: While I am confident that we have the right leadership, I regard it as my responsibility as Executive Chair to make sure that our board structures the appropriate incentives and rewards for success in succession.
Speaker Change: given what we've organizationally learned.
Speaker Change: And it happens that in a month, we will officially celebrate the 40th anniversary of Bentley Systems.
Speaker Change: Coinciding, as this does, with our CEO transition,
Speaker Change: It has been natural and important for me to reflect on the factors that I think have contributed to BSY remaining, in my humble assessment, sufficiently entrepreneurial for so long.
Speaker Change: and what we can do to perpetuate that growth mindset culture and its sustained compounding performance.
Speaker Change: Significantly, I think...
Speaker Change: A stalwart constant, ever since our founding 40 years ago, has been our unusual Executive Bonus Plan for Top Management.
Speaker Change: Having been a primary beneficiary of that plan for the last 33 years.
Speaker Change: And still remaining so, as per this recent disclosure filing, I feel entitled to say with some authority that the design and operation of this plan, on the one hand,
Speaker Change: and BSY's continually compounded growth in profitability and hence share valuation, on the other hand, have not been just coincidental. The plan has incentivized just that.
Speaker Change: by paying me an established fixed percentage of operating income each quarter for the very long term.
Speaker Change: At the outset of the plan, of course, our operating income magnitude was insignificant compared to today's.
Speaker Change: As CEO , I could, and did all along the way, make intentionally long-sighted resource allocation decisions to benefit the magnitude per share of future profitability, sowing the seeds for incentives reaped more recently.
Speaker Change: These days, the same underlying premise tends to be enshrined in the market as a Rule of Forty.
Speaker Change: at B.S.Y. where this plan set our compass to ingrain a growth mindset.
Speaker Change: As we reach our 40th anniversary...
Speaker Change: And even in our conservative way of calculating operating income after stock-based compensation, we have reached the rules 40 and counting, as this chart shows. So on this occasion of our first CEO transition,
Speaker Change: Our shared priority to further perpetuate this compounding likewise needs to underlie our new CEO's incentives.
Speaker Change: by way of long-term visibility into his compensation opportunities comparable to what worked for me and for BSY to date.
Speaker Change: During 24Q2, our Board's Sustainability Committee finalized this new CEO compensation plan anchored by what is indeed meant to be a career stock program for Nicholas.
Speaker Change: It incorporates the distinctive and proven philosophy of our historical Executive Bonus Plan, but refactored and modernized to begin now with our current profitable public company point of departure.
Speaker Change: Career Stock Awards and Appreciation are designed to provide the increasing majority of cumulative CEO earnings over what we expect to be another tenure of double-digit years.
Speaker Change: As in our original plan...
Speaker Change: The Career Stock Program pays out, in this case as an annual restricted stock award, an established fixed percentage of operating income, but now only to the extent of growth above an also fixed threshold annual growth rate.
Speaker Change: Each such annual grant does not vest until after five years of continued service to assure a sufficient rolling horizon for everyone to plan for.
Speaker Change: But importantly, during those rolling five years, the percentage parameters of the career stock program can't be changed.
Speaker Change: probably won't be changed even thereafter.
Speaker Change: This is of the essence.
Speaker Change: The CEO needs and deserves visibility to know how their resource allocation investment returns will be duly rewarded.
Speaker Change: It immunizes the CEO from the perverse disincentive otherwise of their goal posts being raised to the very extent they succeed.
Speaker Change: By continuing and compounding BSY's dependable growth, the CEO's career stock will accumulate and compound.
Speaker Change: to result in a competitively benchmarked and deserved reward over the course of a desired decade plus at the helm.
Speaker Change: But as importantly, the Career Stock Program appropriately contemplates our next CEO retirement.
Speaker Change: Though we believe in the value of continuity.
Speaker Change: Recent events, and I'm not talking about my retirement mainly, reinforce the virtue of a top leader not being incented to outstay their effectiveness.
Speaker Change: The vesting of all earned career stock accelerates upon an expected tenure as CEO that we have mutually agreed, facilitating the decision then to retire.
Speaker Change: Through CareerStock, our first generation of VSY leadership, now as board members,
Speaker Change: has in mind to program our new generational leadership to benefit much and most from the long-term thinking which we believe has served us optimally.
Speaker Change: and as much in the capacity of owners as executives for our 40 years so far.
Speaker Change: And speaking of our confidence in such succession.
Nicholas Cumins: May I introduce, for the first time as CEO , Nicholas Cummins to cover Operating Perspectives and Operating Performance.
Nicholas Cummins: Having completed my first month as CEO, I want to start my prepared remarks today by reiterating my enthusiasm for Bentley's role in the world of infrastructure and for the many opportunities that lie ahead of us. As Greg referenced in previous quarters, we're seeing increased adoption of our AI-based solution for roadway maintenance. The foundation laid over the last four decades has uniquely positioned Bentley for success and it ensures we will be there to help the world's engineering firms and owner-operators answer the call for more resilient infrastructure for decades to come.
Nicholas Cumins: Thank you Greg. Having completed my first month as CEO , I want to start my prepared remarks today by reiterating my enthusiasm for Bentley's role in the world of infrastructure and for the many opportunities that lie ahead of us.
Nicholas Cumins: Infrastructure sectors have benefited greatly from the massive capital investments in projects and jobs post-pandemic. But much more remains to be done to make infrastructure more resilient.
Nicholas Cumins: From retrofitting aging infrastructure and mitigating the effects of climate change to closing the gap in enduring resources.
Nicholas Cumins: Our collective ability to overcome those challenges will determine the quality of life for generations to come.
Speaker Change: Fortunately, a paradigm shift in software is reshaping the landscape. AI is going to be a major driver of our business moving forward, helping engineering services firms to increase their productivity and own operators to better understand the condition and improve the performance of their assets.
Speaker Change: The traction we are generating in the market with our AI-based solutions for asset analytics is worth noting. The vast majority of costs are incurred during the operations phase of the infrastructure lifecycle, which represents a significant growth opportunity for us.
Speaker Change: With Asset Analytics, we can transform the way organizations monitor the coordination of roads, bridges, dams, water networks, and telecommunications towers.
Speaker Change: As Greg referenced in previous quarters, we're seeing increased adoption of our AI-based solution for roadway maintenance, and our AI-based offering for cell towers is also ramping up globally.
Greg Bentley: Of course, this all builds on our broader strategy of bringing data to life, federating it, enriching it, reusing it, through Digital Twins.
Greg Bentley: Our first 40 years as a company were successful because we saw opportunity in part-time shifts to the personal computer, to the cloud, to digital twins, and now to AI.
Greg Bentley: The foundation laid over the last four decades has uniquely positioned Bentley for success and it ensures we will be there to help the world's engineering firms and owner-operators answer the call for more resilient infrastructure for decades to come.
Nicholas Cummins: Now to our business performance for the quarter. Q2 was another strong quarter with very positive end market and operational momentum. Throughout the first half of 2024, we delivered very strong profitability and cash flow. Moving to AR growth, our key metric of business performance year over year. In Q2, this remained at 11%, including contributions from programmatic acquisitions, which have become negligible. Our virtual VT subscriptions, targeted primarily at SMBs through our online store, continue to add a strong number of new logos in Q2, the 10th straight quarter of more than 600 new logos.
Speaker Change: Now to our business performance for the quarter. Q2 was another strong quarter with very positive end market and operational momentum.
Speaker Change: ARR performance was broad-based, across industries and geographies.
Speaker Change: Our e365 and virtuosity growth initiatives continue to be strong contributors as well.
Speaker Change: The two headwinds to our overall performance continue to be China, in particular for ARR, and Cohesive, our digital integrator business, with respect to professional services revenues.
Speaker Change: Cohesive continues to be impacted by the slow uptake of the next generation of IBM Maximo for enterprise asset management.
Speaker Change: Throughout the first half of 2024, we delivered very strong profitability and cash flow.
Speaker Change: Moving to AR growth, our key metric of business performance year over year.
Speaker Change: In Q2, this remained at 11%, including contributions from programmatic acquisitions, which have become negligible.
Speaker Change: We expect AR growth to benefit from significant E365 renewals towards the end of the year based on the impact of floors and ceilings as explained last quarter.
Speaker Change: Excluding the impact of China, AR growth was 11.5%. China now represents only 2.5% of our total AR.
Speaker Change: Moving to our growth by commercial models, our E3C5 program remains a major growth driver, with continued conversions of accounts from the Select Subscription Program, and application mixed acquisition, upsell or cross-sell, within existing E3C5 accounts.
Speaker Change: In terms of our SMB accounts, which we classify as accounts less than $100,000 of AR per year, we continue to add new logos at a strong pace.
Speaker Change: In Q2, new logos contributed 4 percentage points to AR growth for the second consecutive quarter, and at least 3 percentage points for the sixth quarter in a row.
Speaker Change: Our virtuosity subscriptions, targeted primarily at SMBs, through our online store, continue to add a strong number of new logos in Q2, the 10th straight quarter of more than 600 new logos.
Speaker Change: Moving to industry dynamics, which continue to be robust. In the most recent ACC quarterly survey, the main themes continue. U.S. engineering firms across sectors expect higher backlogs 12 months from now.
Speaker Change: They also continue to express optimism regarding the outlook for the U.S. economy, the design and engineering sector, and their own firm's overall finances.
Nicholas Cummins: Looking at our performance by infrastructure sector in Q2, public works utilities, our largest sector, was once again the main course driver for the company as we continue to benefit from strong global infrastructure spending across transportation, water utilities, and electric grids. We are also benefiting from increased spending for highways and bridges by the state themselves, estimated by trade groups at 13% this year. Asia-Pacific continues to be a growth driver with strong performance across sectors, with Australia and New Zealand standing out. Before I turn it over to Werner, I want to thank our colleagues around the world for their continued hard work and dedication in achieving a very successful quarter.
Speaker Change: Looking at our performance by infrastructure sector in Q2, Public Works Utilities, our largest sector, was once again the main core driver for the company as we continue to benefit from strong global infrastructure spending across transportation, water utilities and electric grids.
Speaker Change: Seville is also the largest gross driver for Sequin.
Speaker Change: Growth in resources remained solid with sequence strengthening its position in mining despite new mining investments remaining subdued. The industrial and commercial facilities sectors had modest growth.
Speaker Change: Moving on to regions, the Americas was the fastest-growing region, again led by North America. We continue to see tailwinds from the IHA with only 38% of the overall funding having been announced to date, and primarily for transportation.
Speaker Change: We are also benefiting from increased spending for highways and bridges by the state themselves, estimated by trade groups at 13% this year.
Speaker Change: As another positive development in the U.S., the Senate Energy and Natural Resources Committee just proposed a bipartisan reform bill representing the biggest change to federal permitting in years.
Speaker Change: The President recently signed into law the ADVANCE Act, a bipartisan nuclear energy bill to ease permitting restrictions.
Speaker Change: Moving to EMEA, Q2 performance was steady, driven by public works utilities and resources. The Middle East had a particularly strong quarter, driven by municipalities and mining.
Speaker Change: We are monitoring the recent political developments in Europe , but at this point, we do not believe there will be major implications for infrastructure priorities.
Speaker Change: President Modi's third-term government published its budget, which remains unchanged from an earlier version, and still foresees a record $133 billion in infrastructure spending in the financial year ending March 2025.
Speaker Change: Earlier this year, we hosted PennDOT's top executive team, the Commonwealth legislative leaders, and engineering firm CEOs at our campus to discuss digital product delivery.
Speaker Change: This exemplifies the outreach we look to do within the ecosystem or state DOT partners.
Speaker Change: Before I turn it over to Werner, I want to thank our colleagues around the world for their continued hard work and dedication in achieving a very successful quarter.
Werner Andre: Over to you, Werner.
Werner Andre: We are pleased with another consistent and strong quarter. Year-to-date total revenues grew 9% on a reported and constant currency basis.
Werner Andre: We are pleased with another consistent and strong quarter.
Werner Andre: Year-to-date total revenues grew 9% on a reported and constant currency basis.
Werner Andre: Q2 has historically been our lowest subscription revenue quarter when compared to other quarters and particularly Q1, due to a lower proportion of contract renewals with any degree of upfront revenue recognition. Our last 12 months' constant currency account retention rate was 99%, and our constant currency recurring revenues net retention rate was 108%, led by continued accretion within our E365 consumption-based commercial model, xChina, where our ARR is subject to erosion from commercial model changes. Our NRR was 109%. China now represents 2.5% of our revenue, down from 3% a year ago.
Werner Andre: Q2 has historically been our lowest subscription revenues quarter when compared to other quarters, and particularly Q1, due to a lower proportion of contract renewals with any degree of upfront revenue recognition.
Werner Andre: But the continued expansion of our consumption-based E365 program yields more readable revenue recognition throughout the year, benefiting Q2.
Werner Andre: For the first half, more normalized for mix and timing, subscription revenues grew 13% on a reported and constant currency basis.
Werner Andre: Perpetual license revenues for the quarter were $11 million, down $1 million year-over-year. Perpetual license sales make up only 3% of total revenues and will remain small relative to our recurring revenues.
Werner Andre: [inaudible]
Werner Andre: Our professional services revenues for the quarter declined by $4 million, down 15% year-over-year, or 40% in constant currency, driven primarily by the expected delays in IBM Maximal-related implementation and upgrade work within our digital integrator, Cohesiv.
Werner Andre: Such delays are now likely to continue through the third quarter before the pace of upgrade projects is expected to increase during the fourth quarter of 2024.
Werner Andre: On a positive note, our professional services related to Bentley software continue to grow modestly as expected.
Werner Andre: Moving on to our recurring revenue performance. Our last 12 months recurring revenues increased by 12% year-over-year in reported and 11% in constant currency and represent 90% of our total last 12 months revenues.
Werner Andre: Our last 12 months constant currency account retention rate was 99%, and our constant currency recurring revenues net retention rate was 108%, led by continued accretion within our E365 consumption-based commercial model.
Werner Andre: XChina, where our ARR is subject to erosion from commercial model changes. Our NRR was 109%.
Werner Andre: We ended Q2 with ARR of $1,260,000,000 at water and spot rates, with our E365 and S&P growth initiatives remaining the key growth drivers.
Werner Andre: Our constant-currency ARR growth rate was 11% year-over-year, or 11.5% excluding China, where we continue to experience ARR headwinds.
Werner Andre: China now represents 2.5% of our AR, down from 3% a year ago.
Werner Andre: The contribution from programmatic acquisition to our year-over-year ARR growth rate is currently negligible, while in the year-ago period, onboarded ARR from programmatic acquisitions contributed in the range of 1%.
Werner Andre: On a sequential quarterly basis, our constant currency AR growth rate was 2.9% and was fully in line with our expectations.
Werner Andre: As we discussed in more detail during last quarter's call, we have an increased percentage of our E365 accounts on consumption floors and ceilings.
Werner Andre: which impacts our ARR growth seasonality and tends to align an increasing portion of our ARR accretion related to our E365 consumption with the contract renewal timing.
Werner Andre: which is heavily weighted towards Q4.
Werner Andre: Based on our ARR performance for the first half of the year, we are in a solid position within the 10.5 to 13% range of our ARR growth outlook for 2024.
Werner Andre: Now moving to profitability performance. Our GAAP operating income was $80 million for the second quarter and $172 million year-to-date.
Werner Andre: We have previously discussed the impact on our GAAP operating results from amortization of purchased intangibles, deferred compensation plan liability revaluations, and acquisition expenses.
Werner Andre: Moving on to Adjusted Operating Income with Stock-Based Compensation Expense, our primary profitability and margin performance measure.
Werner Andre: Year-to-date adjusted operating income with stock-based compensation expense was $208 million, up 27 percent, with a margin of 31.1 percent, up 430 basis points. Our profitability continues to reflect run rate savings associated with the strategic realignment program, which we initiated during the fourth quarter of 2023. While most of the reliable action were completed at the beginning of 2024, we continue to ramp towards fully reinvesting these run rate savings into priority investment areas such as AI and product development and marketing.
Werner Andre: The year-to-date adjusted operating income with stock-based compensation expense was $208 million, up 27%, with a margin of 31.1%, up 430 basis points.
Werner Andre: While most of the realignment action we have completed at the beginning of 2024, we continue to ramp towards fully reinvesting these run rate savings into priority investment areas, such as AI and product development and marketing.
Werner Andre: Our operating margin also benefited from the mixed shift from lower margin professional services revenues to the higher margin subscription revenues, which represented 90% of total revenues in the quarter, up 3% year-over-year.
Werner Andre: Based on these developments. As of the end of Q2, our net senior debt leverage was 0.1 times. Our 24Q2 financial performance puts us in a solid position to deliver within the range of our annual outlook for AR growth, profitability, and cash flow from operations. However, while recurring subscription revenues exceed expectations year-to-date. Total revenues are trending below the midpoint of our outlook range due to weakness within our non-recurring professional service revenues caused by delays in Maximo-related implementation and upgrade work. For the first half of 2024, the U.S. dollar has only slightly weakened relative to the exchange rates assumed in our 2024 annual financial outlook, resulting in less than one million of incremental revenues from currency.
Werner Andre: Based on these developments.
Werner Andre: Our margin is trending higher than planned, and while this puts us in a strong position to deliver on our 100 basis points intended annual margin improvement, we do not undertake to maximize short-term profitability, and over the full year, we instead will prioritize investing in longer-term initiatives.
Werner Andre: With respect to liquidity, our operating cash flow was $63 million for the quarter and $268 million for the first half of 2024 and benefited from our strong profitability.
Werner Andre: With regards to capital allocation, during the first half of the year, along with providing sufficiently for our growth initiatives,
Werner Andre: We deployed $197 million towards bank debt reduction, which includes repayments of $103 million of our term loan during the second quarter, reducing our outstanding senior debt to $85 million at the end of the quarter.
Werner Andre: We further paid $36 million in dividends and applied $47 million to share repurchases to fully offset dilution from stock-based compensation.
unknown: All right. Hey, good to see you guys.
unknown: Nicholas, you were talking about second half E365 renewals, more so 4Q weighted. I guess, you know, could you talk to us about the confidence around some of those deals? You know, obviously, you guys are delivering good results, but it feels like
Speaker Change: Companies talk about elongated deal cycles extra signatures, just kind of walk us through sort of the confidence level in that second half <unk>, five renewal base, and which obviously predicate sort of the full year guidance.
Speaker Change: Yes, I'm going to I'm going to let Nick talk about the observations on the ground, but just struck structurally.
Speaker Change: Of course.
Nick: Sentiment matters, but the sentiment among infrastructure engineering organizations. Their concern is capacity not demand and their backlogs are strong and their visibility is as long. It at this point, but it should be remembered that most of our growth comes.
Nick: Comically from consumption and consumption is not a matter of.
Nick: Enterprise decisions, it's a matter, it's our our software as a factor of production in the throughput of.
Nick: Infrastructure engineering organizations and the consumption occurs as a as a matter of course now we do have some competitive procurements or project lives that once new project one of them wants implementations do occur in a matter of Rfps are subject the decisions as we talk.
unknown: Now, we do have some competitive procurements for project wise and asset wise, new project wise and asset wise implementations do occur and are a matter of RFPs are subject to decisions as you're talking about. But that's a very dilute portion of our ARR growth. And in any case, going digital is a priority for our users. So I'm saying structurally, we do not rely much on enterprise decisions. And even there, the sentiment in our market is concerned about capacity, not demand. But Nicholas, you're very much able to speak about the observations on the front.
Nick: But thats a very value portion of our.
unknown: Great, thanks. Congrats, guys. And congrats to both Greg and Nicholas on your new roles.
unknown: Yeah, great. Thanks for taking my question this morning.
unknown: Staying on the infrastructure and IIJA funding topic. So still very early, as you noted earlier, I think it's also well appreciated that project starts have been a bit uneven to date. Does this extended timeline, maybe this is in an ironic way, provide better opportunities for Bentley to grow at enterprise accounts since you get a bit of a flavor of the opportunity ahead, but you still have time to engage with a key software vendor like yourselves and you can strategize around future improvement. And I'm wondering if maybe that explains PennDOT and some of the decisions they're making, which, as you said, is leading to a good step up in spend there.
unknown: Yeah, it does mean, indeed, that the momentum we've seen from IHA is just going to last, you know, it's just going to last longer. So this is positive in that sense. It's sustained momentum from IHA.
unknown: It is true that most of the funding that has been announced has been for transportation. So this is with the DOTs. The DOTs are typically better equipped, they have more experience to apply for grants and then to execute on those grants. And we have a solid position with those DOTs. But I think whether it's the DOTs themselves, or the supply chain, which are struggling with enduring capacity, the fact that the funding is being announced over time is actually, I guess, good news for the whole supply chain to be able to deliver on that funding over time. Thank you. Great, thanks for...
unknown: So the next question comes from Jason Celino from Key Bank.
unknown: It's in the US and globally. There was one account that used our solution OpenTAR-IQ to create digital twins for tens of thousands of TARs just in the US. Perfect. Thank you very much.
Speaker Change: And we also see traction with our solution for road maintenance Cobbling seed acquisition, we did a year ago, we see that in with doses across the U S and we're getting a lot of interest from transportation authorities around the world to the extent that we're exploring in our rolling it out to two to two other geographies right.
Speaker Change: Now the business model around asset and then it takes is completely.
Nick: Incremental to the core business because the pricing is based on assets, which can even number of towers. We can indeed is the length of our roadway network. So it's all on top and by the way.
Nick: All of that revenue that we are realizing right now and the growth of <unk> going forward is on top of the total addressable market. We have been discussing for years, which was all around the number of engineers and how much more engineering software.
Nick: The value we can we can we can create with them.
Nick: Now there is another area of AI, which is quite interesting and it's around design. This is more in government right now and we're getting great traction from representative accounts.
Nick: Who we see a huge potential and leveraging AI again to get more from less to get more from the existing resources that they have automating mundane task if needs be for example, drawing production.
unknown: Thanks. Next question comes from Kristen Owen from Oppenheimer. Hey, good morning.
unknown: Hey, good morning. Good to see you all.
unknown: So, you know, quick question on the ARR growth guidance for the year. Good to see that you're coming within the range that you guided to. And I heard the comments about some of the seasonality in the second half of the year. But you know, maybe just to focus on what you had baked into the high end of the range, maybe some of the more optimistic scenarios you had baked in that might be driving you below the high end for 2024.
unknown: Asset Analytics, the incremental opportunity is we're on we're on the track to the eight digits of ARR group, from Asset Analytics alone, but the tiger is by the tail and that could inflect up
unknown: And if it's a timing difficulty, is that more geopolitical or is that more macro-based, do you think, Greg or Nicholas, and I'll know who has the best view on that.
Greg Bentley: It is the timing difficulties that more of a geopolitical or is that more macro base do you think Greg or for Nicollette should all know who has the best view on that.
Greg Bentley: So what do you think I think geopolitical exists only in China.
Nick: Alright.
Nick: Yeah.
Greg Bentley: In the countries.
Speaker Change: Oh of electoral.
Speaker Change: A regime change we think <unk>.
Nick: Infrastructure investments.
Nick: In the UK continues to be.
Nick: Priority in India.
Nick: That wasn't the regime change but continues to be.
Nick: A priority so the world that word geopolitical for us we only use.
Nick: China.
Nick: Sure.
Nick:
Gregory Bentley: anti-American concerns, and those continue, however, are not the only problem in China. The general softness there, and I should say that China ARR is down to two and a half percent. It was two, a little bit more than two years ago, it was five percent. So that's been a drag on overall ARR growth, and it hasn't, it's likely to continue. There's two and a half percent more to worry about. Nicholas, over to you.
Nick: Anti American concerns and.
Nick: Those continue.
Nick: However are not the only problem in China with general.
Nick: Fair enough to say China.
Nick: It's down to two 5% it was to a little bit more than two years ago was 5%. So thats been a drag on overall.
Nick: Our growth and Hasnt.
Nick: And it's likely to continue this two 5% more.
Nick: The OLED fab.
Speaker Change: Over to you.
Nick: Indeed.
Speaker Change: No no geopolitical concerns I did mention that there was.
Nick: And expected slowdown in India, which remain.
Speaker Change: Solid nevertheless, because of the elections in Q2, but the government's Modi President and <unk> is quite clear that they want to immediately reduce the investments in infrastructure. So that's all very good. They will also have elections in Europe at the European Union level, We expect continue to see the president Bruce will have on their lives has been.
Speaker Change: Ah reconfirmed reelected as the president of the EU Commission changes.
Speaker Change: Governments in the UK changes upcoming in France that we don't expect any major implications in terms of investment priorities.
Speaker Change: So indeed, the only area the only country where for geopolitical reasons one in political.
Speaker Change: There are some some changes that Sam.
unknown: We emphasize that if the U.S. legislation has been, if the only place the word bipartisan appears in the U.S. is attached to infrastructure legislation. I'm exaggerating perhaps a little bit, but we think that's not up for electoral change.
Brian: Brian we emphasize in the U S legislation.
Speaker Change: And that's the only place the word bipartisan appears in the U S is attached to the infrastructure.
Speaker Change: Thanks, not exaggerating that available, but we think that's not.
Speaker Change: For <unk>.
Speaker Change: Electrical change.
Speaker Change: Very clear thank you for your time.
Speaker Change: Thank you next question comes from Bill <unk> Becker from William Blair.
unknown: Thank you. The next question comes from Dylan Becker from William Blair.
unknown: Thank you. Next question comes from Dylan Becker from William Blair. Hey, guys, great to see everyone and nice job here. Maybe maybe Nicholas sticking with the the energy reform theme to a certain extent, I think right people think of
Bill: Hey, guys, it's great to see everyone and a nice job here, maybe maybe Nicolas sticking with the.
Speaker Change: The energy reform theme to a certain extent I think bright people think of infrastructure is public investments.
Speaker Change: If that gets pulled forward in some capacity how are you guys thinking about the opportunity for private capital to start flowing into the ecosystem and maybe what that can mean.
Speaker Change: Our ranking like broader investment opportunities.
Speaker Change: And the.
Speaker Change: I think <unk> all boats will rise.
Speaker Change: <unk> public and private for the whole supply chain, including us as a software providers.
Speaker Change: As more investment going into the electric grid.
Speaker Change: Beyond maintaining the existing grid.
Speaker Change: <unk> expanded and we know that this is we all know it is needed we must be able to expand it it would be great to support the right.
Speaker Change: Demand an actress city, but also to be able to go and tap into these renewable sources of energy, which are typically far far away from from where the energy is actually needed. If you think of.
Speaker Change: Also water for example are you thinking of a solar obviously think of geothermal et cetera.
Speaker Change: So so the expansion of the grid is needed and we know that this is indeed going to be benefiting everyone into in the supply chain I wouldn't be surprised if there's.
Speaker Change: Some private investments going along the way to support.
unknown: Dylan, the next question comes from Matt Martino.
unknown: Dylan, the next question comes from Matt Martino from Golden Sex. Matt, are you on mute? All right, we'll move on to... Oh, there you are. Hey, guys.
Speaker Change: The next question comes from Matt Martino from Goldman Sachs.
Speaker Change: Matt are you on mute.
Speaker Change: All right we'll move on.
Speaker Change: Very good.
Matt Martino: Hey, guys say apologies there.
Speaker Change: Nicholas just wanted to get an update as well from the owner on just kind of the prospects of your growth algorithm as the year progresses for AOR growth, especially as we get in the back half of the year, just trying to understand the dynamics between kind of the extent to which renewals application mix accretion and pricing escalators will factor into the remainder of our growth as we think through the back half beer. Thank you.
Speaker Change: Sure.
Vernon: Is there a question you want to tackle Vernon.
Vernon: Yeah, Yeah happy to do so.
unknown: Uh, so pricing is a key component, and application mix is, I think, also, as we mentioned before, it is a key growth driver for us. It is within the range that we expect. We don't expect any significant changes between H1 and H2 in the application mix.
unknown: It develops as expected. And then new logos also continues to be very strong. We have year-to-date new logos at 4% and that is at an historical high for us. It has been high over the last six quarters with 3 to 4% and so we will continue to expect that new logos will be strong contributors as we go throughout the year.
unknown: Last quarter, I believe. And that's on the order of a percent or more lower than it was in the previous year.
unknown: The next question comes from Siti Panigrahi from Mizzou. Well, hi. Thanks for taking my question. And Greg and Nicholas, congratulations on your new roles.
unknown: Go ahead; I'm sorry.
Speaker Change: Okay, I'm, sorry, Jamie with respect to <unk> and only 38% has been announced remember that announced also it doesn't mean that it's a water. That's the next step and it can take six months 12 months, depending on the projects. Once it is awarded then the money starts to starts to flow to the extent that the risk.
Speaker Change: Leaving entity is able to starting to work and at that point then it becomes additional usage of our software and it becomes a growth opportunity for us.
Speaker Change: But it means we still from that standpoint early on and the IHA funding as a tailwind.
Speaker Change: Many many of them.
Speaker Change: Summarizing the tone for us from that perspective.
Vernon: For years now that we've been public.
unknown: Really, the resilience of road and rail and water and grid in the world, all the resilience of all those networks has just become recognized as a long-term necessity. It's not a discretionary uh aspect of public policy; it's the most important thing that governments are responsible for. And we don't think it's subject to sentiment or even politics very much. At the moment, it's a consensus priority that's keeping civil and structural and geotechnical engineers busier than ever they have been with a big backlog of more of the same. Thanks for the call, everyone. Well, congratulations on the quarter, and I echo my congratulations, Nicholas and Greg. This question is for
Vernon: Really the resilience.
Vernon: Road, and rail and water and grid in the world all the resilience of all of those networks has just become recognized as a long term necessity. It is not a discretionary.
Vernon: Aspect of public policy, it's the most important.
Speaker Change: Saying that governments are responsible for and.
Speaker Change: We don't.
Vernon: Subject to sentiment or even powerful very much at the moment, it's a consensus priority keeping civil and structural geotechnical engineer visit.
Speaker Change: Busier than ever they have been with a big backlog of more of the same.
Speaker Change: Thanks for the color.
Vernon: Thank you next question comes from Joshua Tilton from <unk> Securities are what research sorry.
Speaker Change: Hey, guys can you hear me.
Speaker Change: Good afternoon.
Vernon: Congrats on the quarter and I Echo my congratulations Nicholas.
Vernon: Greg.
Joshua Tilton: This question is for either of you guys qualitative and quantitative so I guess just how how do you guys think about the durability of double digit growth in the context of the <unk> kind of tracking in that single digit range and as you mentioned a lot of the new growth is coming from smaller customers.
Speaker Change: How do we as investors get confidence and conviction and the ability to see that.
Vernon: Durable double digit growth rate that we love so much continue from Europe.
Speaker Change: Well <unk> has been one to say for a while.
Speaker Change: Wanted to ask about future growth.
Speaker Change: Please tell me what assumptions you make about inflation, because the escalation, which is one of the layers of it as quickly.
Joshua Tilton: We acted too.
unknown: market inflation, and that will tend to normalize. What we think is that the demand environment, in unit terms or real terms, the demand environment is not very subject to macro cycles. He used to say, of course, that arguably, public spending is even counter-cyclical. I think that may be dampened down a bit now because it's as high as it already is. And public finances are a concern. The question earlier about public-private partnerships and private funding; I think even a new government like the Labour government in the UK is open to greater private financing of infrastructure.
Speaker Change: The market inflation.
Joshua Tilton: And that will trend to normalize.
Speaker Change: What we think is that the demand environment.
Speaker Change: In unit terms, our real time, the demand environment is not very subject to.
Joshua Tilton: Macro cycles.
Joshua Tilton: We used to say of course.
Joshua Tilton: Yes.
Joshua Tilton: <unk>.
Joshua Tilton: Arguably public spending has really been a counter cyclical I think back moving dampen down a bit now because it's.
Joshua Tilton: As high as it already is.
Joshua Tilton: And public finances.
Joshua Tilton: I'm concerned that the question earlier about public private partnerships and private funding I think even a new government like the labor government viewpoint is open to <unk>.
Joshua Tilton: Greater private financing of infrastructure I definitely think that lives in the future. So concerned wouldn't be demand as far as the durability of our.
unknown: I definitely think that lies in the future. So concern wouldn't be demand as far as the durability of our, SMB growth and the 4% now of ARR growth that comes there. It's proven to be rather sustained already, as we emphasize, for multiple years. And the engineering firm sentiment, for instance, that Nicholas
Joshua Tilton: SMB growth and four percentage now of AOR growth that comes there.
Joshua Tilton: It has proven to be rather sustained already as we emphasize for multiple years.
Joshua Tilton: And the engineering firm sentiment for instance that Nicolas.
Nicolas: Reports on is includes the sentiments of the smaller firms.
Joshua Tilton: Well all of whom are increasingly being invited to participate in more of that.
Nicolas: Network for instance.
Joshua Tilton: And roadway and highway projects as I mentioned with <unk>.
Joshua Tilton: So those are reasons to be.
Speaker Change: I do agree that for double digit so we need to have.
Joshua Tilton: Both of those things going on.
Joshua Tilton: Seems to be.
Jeff: Jeff too.
Joshua Tilton: The inflation component the escalation component it.
Joshua Tilton: Seems to be rather.
Joshua Tilton: Higher for longer.
Joshua Tilton: Yes.
Joshua Tilton: And our last question comes from Blair Abernethy from Rosenblatt Securities.
Blair Abernethy: Thank you.
Blair Abernethy: Gentlemen, just.
Blair Abernethy: A follow up on the roadway maintenance business can you now that you've had a.
Blair Abernethy: A couple of quarters under your belt with this what's sort of the selling cycle looking like now.
Speaker Change: Timing, how long does it take you to introduce pilot and sort of get this thing.
Blair Abernethy: Get the revenue ramp coming up for Bentley.
Speaker Change: Well, we the whole state that has most recently come up started.
Speaker Change: With the with our pilot went for three months so.
Blair Abernethy: And it was a paid pilot so so I think it's.
Gregory Bentley: It's like that, it's a matter of quarters, but the great thing about selling to departments of transportation, for instance, and highway maintenance is not applicable only to states, but also at the county and municipal level and so forth, is they're not competitive with one another. They eagerly share their innovations and birds of a feather, and they're closely looking at the successes that they're all now also subject to a federal requirement, which hasn't yet become binding to report on and maintain the retroactivity of brain swiping, which is a particularly good application for antibiotics, I think the antibiotics.
Blair Abernethy: It's like that it's a matter of.
Blair Abernethy: Quarters, but we the great thing about selling to.
Blair Abernethy: Departments of transportation planning consent and highway maintenance is not applicable along with the state, but also at the county and municipal level and so forth.
Blair Abernethy: Not competitive with one another.
Blair Abernethy: These are really share there.
Blair Abernethy: Nation sand.
Blair Abernethy: And burgers are better than they are closely looking at.
Blair Abernethy: The.
Blair Abernethy: With the successes that they are all now also are subject to.
Blair Abernethy: And a federal requirement, which hasn't yet become binding too.
Speaker Change: Report on and maintain the repo activity as loans, Saipem, which is a particularly good applications.
Blair Abernethy: So then a comprehensive analytics so.
Gregory Bentley: So that doesn't need to take long, and that is part of the enthusiasm we have for exiting this year with a very steep slope in asset analytics. And the question we had earlier with AI, are we folding that into existing products? That had been our direction with i20 platform, but asset analytics, as Nicholas said, is entirely incremental, charging per asset. And generally, Nicholas's insight in his new executive group way of looking at things is that asset operations is this biggest next generational opportunity for us, and asset analytics kicks that off.
Speaker Change: Yes, it doesn't need to take on that as part of the enthusiasm we have for.
Blair Abernethy: Now exiting this year with a very steep slope.
Speaker Change: <unk> a question we had earlier with AI.
Speaker Change: Folding that into existing products that had been our direction with <unk> platform asset analytics is a network that is entirely incremental charging a per asset and generally nicholas's insight is new.
Speaker Change: Executive group way of looking at this.
Speaker Change: Asset operations is the biggest next generational opportunity for us and asset analytics kicked that off and.
Speaker Change: Doesn't it doesn't need to take long for it too.
Blair Abernethy: Become literally significantly I think it can be significant in Atlanta Nai.
Gregory Bentley: And it doesn't need to take long for it to become literally significant. And I think it can be significant in AI, excuse me, in ARR growth rate by the end of the year. Nicholas, last word for you.
Nicholas: NII excuse me our growth rate by the end of the year Nicholas last quarter.
Nicholas Cummins: It's a very easy sell, because it's a very easy solution to deploy, it's very easy to show the impact of it, because it generates insight so quickly from dash cam data, etc. Overall, as Greg said, Athena Ethics is usually exciting because it does tie to the much bigger growth opportunity we have with asset operations. Which, by the way, is also a massive growth opportunity for the engineering services firms that we serve, because many of them, as busy as they are right now on the projects, many of them are expanding their business or want to expand their business, nevertheless, beyond the handover points of the infrastructure assets. They want to have a more recurring business, if you want, with owner-operators to help them with maintenance. And we happen to have software to help them do exactly that.
Blair Abernethy: Okay.
Speaker Change: It's a very easy sale, because it's a very easy solution to deploy its very easy to show the impact of it because it generates insights so quickly from from from desktop data et cetera.
Blair Abernethy: Overall as Greg said SMA is usually exciting because it does tie to the much bigger growth opportunity, we have with asset operations.
Speaker Change: Which by the way is also a massive growth opportunity for the engineering services firms that we serve that many of them as busy as they are right now on the projects. Many of them are expanding their business I want to expand their business. Nevertheless, beyond the Hanover points.
Blair Abernethy: The infrastructure assets that will drive a more recurring business. If you want with owner operators, who held them for maintenance and we happen to have software to help them do exactly that.
Blair Abernethy: Usually exciting growth opportunity for us with many levels.
Speaker Change: Maybe I can just say that that's what I referred to in my quote where I would say that.
Blair Abernethy: Now, even though we work hard and do well in this particular quarter is one that.
Blair Abernethy: Really impressed me in terms of the balance visibility linearity and so forth.
Blair Abernethy: The focus on the long term and especially the Panther operations opportunity is really what we are.
Speaker Change: Interestingly on next incremental Tam.
Speaker Change: And when growth to get back to your question about that I think it's been great plan with them.
Blair Abernethy: With ecosystem focusing there you can see we have.
Blair Abernethy: We're way ahead on profitability this year so.
Blair Abernethy: So far but that's not that's not what we want we want to have a predictable 100 basis points increments.
Blair Abernethy: Efficiency and margins every year and otherwise invest everything we plan into.
Blair Abernethy: Long term futures and Netflix.
Blair Abernethy: Asset analytics and operations, we will have some.
Blair Abernethy: Returning to.
Blair Abernethy: Programmatic acquisitions in these areas.
Blair Abernethy: It's very exciting.
Speaker Change: Great. Thank you very much.
unknown: Yeah, thanks, Greg. So that concludes our call today.
Speaker Change: Yes, thanks, Greg So that concludes our call today, we thank you for your interest and time and Bentley systems. Please reach out to Investor relations with further questions follow up when we look forward to updating you on our performance in coming quarters.
unknown: We thank you for your interest and time in Bentley Systems. Please reach out to Investor Relations with further questions and follow-up. We look forward to updating you on our performance in coming quarters.
Blair Abernethy: Okay.
Blair Abernethy: Steve.