Bentley Systems Inc

NASDAQ:BSY

Earnings Call Transcript 2022-Q1

[Carey Mann, Vice President Investor Relations]

Good morning, everyone and thank you for joining us for Bentley Systems Q1, 2022 operating Results Webcast. I'm Carey Mann, Bentley's VP of Investor Relations. On the webcast today, we have Bentley Systems Chief Executive Officer, Greg Bentley, Chief Financial Officer, Werner Andre, Chief Operating Officer, Nicholas Cumins, and Chief Investment Officer, David Hollister. Before we begin, allow me to provide a disclaimer regarding forward-looking statements.

This webcast, including the question-and-answer portion of the webcast, may include forward-looking statements related to the expected future results for our company and are therefore forward-looking statements. Our actual results may differ materially from our projections due to a number of risks and uncertainties. The risks and uncertainties that forward-looking statements are subject to are described in our operating release and other SEC filings. Today's remarks will also include references to non - GAAP financial measures.

Additional information, including reconciliation between non - GAAP financial information to the GAAP financial information, is provided in the press release and supplemental slide presentation. This webcast will be available for replay on Bentley Systems Investor Relations website at investors. bentley.com. After the presentation, we will then conclude with Q & A. And with that, let me introduce the CEO of Bentley Systems, Greg Bentley.

Good morning, as the case may be and thanks to each of you for your interest. Our operating results presentation will follow our now standard sequence. I will now briefly cover tone of business and will be back after Nicolas for commentary about corporate developments. When we last met it was already March, but much has happened in the world since then. Our '22 Q1, operating results signify BSY's overall resilience, but with significant developments to remark upon which we will do briskly today. This includes not only the war between Russia and Ukraine, but also related effects that I term counter globalism impacting our business as a U.S. company in China.

These developments and our responses to date will be covered today, as to Russia by our Chief Operating Officer, Nicholas Cumins, based in Europe, and as to China, by our Chief Investment Officer David Hollister and colleague, Chris Lou. Chris was until this year our Territory Executive for North Asia, within which he helped grow greater China to reach 5% of our business. And he's now heading Glocalization Initiatives for BSY investments.

Net of these 22 Q1 ARR impacts in Russia and China, an incremental to year-over-year constant currency ARR, growth of 15% from platform acquisitions, Sequent and Power Line Systems. We will also here shortly from Head of TLS at Lynch, our business performance year-over-year, constant currency, ARR growth was 12%, and net recurring revenue retention also in constant currency for the trailing year was a 108%. I consider these operating results to thus reflect some degree of over-performance globally with respect to post-pandemic seasonal expectations, when excluding China and Russia. In light of this resilience, which will be the subject of my review of corporate developments in a few minutes, we haven't changed our general expectations since in March, we provided our financial outlook for the full-year 2022. This slide which has become a fixture since the second half of 2020, is a reminder of the recurrent drag on our business from the industrial portion of the industrial resources infrastructure sector. So it's great to report now that industrial usage has finally turned around in the right direction. Although still far from the pandemic levels against which our directional colors are benchmarked.

You will likely have heard plausible arguments that industrial CapEx is now being kick-started even in western countries by new imperatives for energy security. We are now positioned resiliently for immediate accretion in ARR and revenue from these upticks in usage and application mix. And in 2022 Q1, we continued our measured pace of account upgrades to E365 and specially to foster ARR growth through E365 's embedded success services.

After so long during which EPCs bogged down with industrial CapEx stagnation have significantly stifled overall E365 ARR growth during '22 Q1, they finally resumed some new business, although still at a slower rate than the mainstream of E365 accounts. Such continued EPC invigoration throughout 2022, would contribute an upward inflection from 2021's, growth serving to offset the detrimental aspects of this year's geopolitical upheavals, which are actually creating opportunities for EPCs. Turning from enterprise to SMB, which as we showed last quarter was more significant than ever in 2021's new business.

Virtuosity continued its rapid growth seasonally adjusted. During 2022 Q1, about 60% of Virtuosity 's new business was in 600 plus new names for BSY. In 2022 Q1, new names, that is not by acquisition, represented three percentage points within our 12% core ARR growth, a high-watermark for us. Our internal term new business measures primarily ARR growth, subject to some mildly ranging weightings across different commercial offerings as I have reviewed in the past. All of our quota carriers and their territorial executives share new business incentives and new business is now the basis for our management teams annual and long-term equity incentives. So each quarter, Nicolas will focus his operational perspectives on new business developments by region and product brands. Over to Nicholas.

[Nicholas Cumins, Chief Operating Officer]

Thank you, Greg. From a regional standpoint, our new business continued to accelerate in the Middle East, as well as in Australia and New Zealand as indicated in Q4. Our new business also accelerated in India, benefiting from renewed investment infrastructure, including industrial and bounced back in Southeast Asia, in particular with firms. Our new business down, notably in Europe from a year-to-year, mainly due to lower consumption growth in our E365 accounts. Reflecting the general economic conditions in the region impacting infrastructure investments, with a shortage of labor, raw construction material, and increased energy costs. We mentioned in March that Russia represented about 1% of our globally ARR. We decided to pause marketing ourselves in Russia in light of the war in Ukraine, effectively hurting our new business. We also continued to strictly apply expert controls and restrictions impacting our existing ARR. For instance, oil and gas accounts are already under the sanction representing 10% of our ARR in Russia. We are expecting more sanctions and other restrictions to impact the remainder of our ARR.

Now we've therefore decided to reduce our theme recurring ARR substantially to reflect this, as Werner will quantify. David will cover China in his section. From a product standpoint, our new business accelerated electric utilities, especially with a recent acquisition of PLS and SPIDA for transmission and distribution, as well as in water utilities with open flows or product line for water infrastructure. Our new business also accelerated with open roads or design and modeling application for roads, as well as STAAD, our main simulation application for structural analysis. A key pillar of our product strategy is to drive engineering excellence.

The acquisition of ADINA exemplifies this. ADINA was founded in 1986 by Dr. Klaus-Jürgen Bathe, a world-renowned professor at MIT, who literally wrote the book on Finite Element Analysis. We are delighted to welcome to Bentley Dr. Bathe and his dream team of PhDs with deep scientific and technical expertise. Historically, ADINA has been primarily commercialized in a process and industrial analysis context. However, it is highly regarded by infrastructure engineers as the industry standard to study the response of infrastructure in detail.

We see opportunity to leverage ADINA in the analysis workflows of infrastructure engineers by offering the possibility to extend almost every application in our engineering formulation portfolio with non-linear analysis and advanced simulation capabilities. ADINA will have engineers analyze with greater precision the impact of events that it used non-linear or otherwise extreme response in build infrastructure, such as hurricane force winds, storm serves, earthquakes, blast and extreme temperatures. Back to you, Greg.

[Greg Bentley, Chief Executive Officer]

Thank you, Nicolas. Moving now from new business, I will focus this quarter review of corporate developments on the makeup of our ARR the growth of which depends on in business. While in 2022 Q1 there turned out to the unanticipated developments which setback certain territories significantly BSY as a whole demonstrated resilient, which to me was fully satisfactory. As other potential macro uncertainties seem to Lou now, I think it is timely to consider the extent to which our corporate developments over the past two-plus years have improved.

Not only our top-line growth rates, but also our predictability and resilience. During the last two years, corresponding not only to our debut as a public company, but also to the pandemic, our initiatives to reinvest pandemic savings have, and I think enduringly, increased our growth rates of new business ARR and revenue, while adhering to our steadfast commitment to steady annual improvements in our normalized operating margins. To start with enterprise new business compared to the pre -pandemic early days of our 365 programs for our largest accounts, today, much more of our ARR resets are based on daily consumption rather than lagging annually. However, during this period, we have also institutionalized collars on E365 contracts to reasonably constrained ARR volatility. But most significantly through E365 expansion, we can consistently and constantly benefit from the usage growth, and application mix accretion, which our enterprise success blueprints for new workflows and going digital are advancing. As I reviewed last quarter, we can now quantify the improved new business and ARR growth rates which result under E365.

And as I showed earlier, we are steadily upgrading more mid-sized enterprise accounts to E365 as we had success force capacity with headroom for years of further momentum. But next, our other new focus since 2019, on the SMB segment also provides ongoing upside opportunities that don't depend on market growth. In March, we reported on independent market research indicating then that in at least these large economies, the number of infrastructure engineers in SMB firms actually exceeds those in engineering firms of enterprise scale, despite SMB being a much smaller portion of our own business. As we have also reinvested pandemic era of savings into SMB targeted Virtuosity quota carriers, and now towards their digital experience, I believe, we're now gaining market share in SMB and thus overall.

But beyond these initiatives since 2019, for a faster growth in enterprise and SMB, there are other respects in which our cumulative corporate developments have at the same time reinforced our resilience to macro level fluctuations. Over the period since 2019, our business growth by geography has served to somewhat reduce our proportion of ARR in Europe the subject of more pronounced economic concerns at present. But in general, across all geographies hence behind the scene within the macro geographies and this breakdown, Seequent mining and resource footprint has contributed diversification by being concentrated in relatively undeveloped, mineral intensive areas. Latin America, Western Canada, Africa, Australia, New Zealand, balancing infrastructure intensity in cities. Most significantly as to diversification, recall that we took to heart the lessons of the financial crisis, which sharply curtailed CapEx projects.

And since 2009, our major priority in R&D and Portfolio Development, has been to complete our comprehensiveness across the full Infrastructure asset life cycle by integrating support of Maintenance and Operations, thus setting the stage for evergreen infrastructure Digital Twins, uniquely spanning CapEx and OpEx through reality modeling and our iTwin platform, Cloud services. Consider that our ARR balance between CapEx contractors, and OpEx -minded Owner Operators looked like this prior to the pandemic.

And the resulting industrial downturn, even in this industrial infrastructure sector, OpEx actually increased as a priority with Owner Operators needing to increase productivity of their existing assets, including through digital trends. We are well-positioned to take advantage by virtue of our increasingly strong leadership positions, according to Arc Advisory Group 's research and software and Cloud services for infrastructure asset reliability. And this contributed to our reporting in March, that from 2019 to 2021, our run rate for the largest OpEx Owner Operators, the Bentley Infrastructure 500, grew by 19% compared to the 12% run rate growth for the largest in CapEx, the ENR Top Design firms.

This advertent emphasis on owner operators and OpEx has helped improve our balance in favor of owner operators, where all the value of infrastructure is generated, and accordingly, has increased the cyclical resilience of our business now. OpEx is arguably counter-cyclical. But in corporate developments led by acquisitions, we have also, since 2019, very significantly fortified our cyclical resilience with respect to infrastructure sectors. The relative cyclical vulnerability of these sectors was confirmed during these last two years, during which industrial / resources have shown relatively the largest exposure to CapEx disruptions followed by commercial / facilities, while public work / utilities, as we have seen, tends to verge on being counter-cyclical, given government fiscal policy commitments in the form of multi-year infrastructure investment programs. Fast-forwarding to the present, these diverging growth rates, and especially our platform acquisitions of Seequent and PLS have considerably improved our own cyclical resilience.

With somewhat less ARR proportion in the CapEx -sensitive commercial / facilities sector, significantly greater ARR proportion in the more Evergreen Public Works/Utilities sector, and with now a substantial ARR proportion accelerated by the Seequent acquisition in a newly delineated Resources sector, comprising; Mining, Renewable Energy, and the Subsurface Environment. As a result, the underlying core disciplines including structural and oppressional, have lower volatility corresponding to this overall mix.

This leaves a much smaller ARR proportion exposed to industrial CapEx volatility. However, about half of our ARR in the industrial sector is for the more resilient OPEX, and at now seems plausible that the CapEx rebound for energy security is likely to increase and endure foreseeably. Finally, along with our ARR mix, having become much more resilient than ever, these two years of corporate development have positioned us much better than ever to take fuller advantage of the fastest-growing opportunities for going digital in infrastructure engineering, which I described in March as corresponding to the world's ESDG priorities.

And that starts with mobility Digital Twins, consolidating our long-standing leading competitive comprehensiveness in civil engineering and horizontal infrastructure, and environmental Digital Twins, anchored by our Seequent platform acquisition, supplementing our leading water and wastewater infrastructure momentum, and with the Power Line Systems ' platform acquisition, increasing our leading comprehensiveness for integrated networks across energy transmission, substations, distribution, and communications for grid Digital Twins.

My premise is that we are performing better now because we have, since 2019, improved through corporate developments not only our important scale economics and competitive mode as the infrastructure engineering software company, but also and especially, we've improved the quality and hence resilience of our ARR and new business, not only as to ARR by infrastructure sector in discipline, but also to review as to ARR by consumption model and as to ARR by geography and as to ARR by account type. Our 2022 Q1 operating results support my conclusion that these cumulative corporate developments since 2019 have increased our underlying intrinsic growth rate through enterprise user success and SMB penetration, have improved our resilience to macro volatility, and have accelerated our upside participation in the world consensus priorities for infrastructure engineering, the limitless, mobility, environment, and grid digital twin opportunities.

I think these corporate developments are already paying off as in '22 Q1, for which we're reporting strong operating results after having absorbed and provided for unanticipated consequences of war, resulting counter-globalism, and more pervasive economic concerns. Despite our enthusiasm for this demonstrated resilience, we are not going so far under the current circumstances of more obscured visibility as to now increase our announced financial outlook for the year 2022. And despite this year's inevitable gyrations in rates of inflation and FX, I regard that our standing annual outlook should primarily be interpreted in relatively constant real or unit terms, as economists would say, abstracting from these noisy nominal fluctuations. So now for an update as to our BSY investments, over to Chief Investment Officer, David Hollister and colleagues, who will in turn hand over to Chief Financial Officer, Werner Andre, and then your questions. Thanks.

[David Hollister, Chief Investment Officer]

Thank you, Greg. I will quickly review some topical highlights related to our BSY investments activities. On the topic of acquisitions, our year-to-date progress notably includes PLS as a platform acquisition, which we'll discuss in some depth, as well as the ADINA of programmatic acquisition we completed last month. Nicholas has just shared wire, "We're excited to add ADINA to our portfolio.

It's a textbook example of our programmatic acquisition strategy. It brings us relatively little historical revenue but the tech and talent that we onboard, call that accelerated R&D, if you will, brings us future commercial opportunity, strengthens our product portfolio and deepens our account relationships. I'd like to take a minute to talk about China. Growth in Asia, including and in particular China has been a priority growth strategy for us for many years.

While greater China is still representing less than 5% of our revenues, until recently, our growth rate in China has been a positive outlier for us. As you've heard on this call, that star has lost a bit of shine, and in fact, our revenue in China actually declined in the first quarter of 2022 relative to the same quarter last year. That said, we remain considerably invested and interested in infrastructure opportunities in China. We've always been forthright about the challenges to succeeding in China, which can require customizing solutions, or creating new solutions first and specifically for the Chinese market, as well as the preclusion from provision and cloud solutions and challenges to navigating data residency restrictions, and even a preference for accommodating commercial model and licensing uniqueness.

It is the case that we've enjoyed the most success in China, where we've adapted our solutions specifically for China, tailored our commercial model, and accommodated more flexible licensing and provisioning. Recently, China's domestic policies are becoming increasingly challenging. And you'll hear more about that momentarily. All of these considerations together have led us to incrementally approach some of our growth in China through joint ventures. We've just announced the first of those, where we are 1/3 partner in the JV with three trusted channel partners. We call Beijing TGGX, which will go-to-market with a China specific streamline version of our ProjectWise design integration solution. The economics for Bentley Systems include technology royalties, profit share in the JV, and expected pull-through synergies for other Bentley solutions. I'd now like us to hear from Chris Lou, who recently transitioned from his role as our top commercial executive in China to now being our SVP leading our acceleration initiatives in China.

[Chris Lou]

Thank you David. As David alluded, our growth in China has been hampered by a few headwinds, namely of preference by State owned enterprises, design institutes, and the ecosystem. To use software developed by local companies and commercial models, including licensing and On Premise versus Cloud that don't necessarily follow traditional practices. I have had the privilege of running Bentley China for over a decade and have seen the widespread adoption of our desktop applications and project collaboration products namely ProjectWise.

Through the use of trusted partners, working alongside our own sales team, we were able to see the market resulting in some of the largest projects in the world using Bentley software, like the auto SF Express A cargo terminal, which is the FedEx equivalent, building Tibet High-Speed Rail Design and Construction, digital selling development of Shanghai Economic Zone in Southern China, many of which won our WYI awards, a pinnacle achievement in our industry. However, the current state of the market pretends the usage of locally produced software, where the core is domestically developed, controllable and autonomous.

In many cases, special budgets are being apportioned to create domestic solutions on named infrastructure projects with reliance of foreign software, projected the decrease by 20% in the coming years. Thus we have created a, retreat of our most trusted channel partners, to build a local solution for project collaboration. ProjectWise, which is our design integration and work in progress solution, is the glue which binds all of Bentley applications along with third-party vendor apps, by creating a local version of ProjectWise for China, called, we not only assure the concerns of being a foreign software company, but we can expand the reach of our user base to include non-engineers, like owners, estimators and financial persons who need access the project information. Since a lot of these non-engineers use other local products in their workflow, such as which is a Zoom all team's equivalent, Baidu cloud storage like Dropbox, the JV will create integrations, with these tools and services as part of their offering. All pricing and licensing would also be controlled by the JV to allow for local flexibility.

This localization of ProjectWise and soon other of our technologies for the Chinese market through joint ventures will create new opportunities while simultaneously abating attrition from customers looking for a local solution.

Thank you.

Thanks, Chris. And now on to PLS, which has hit the ground running for us, contributing quite favorably to our February and March results since the acquisition on January 31st. And in fact, is exceeding our expectations. Since onboarding of the initial PLS ARR it has grown impressively over just the two months through March 31st, including into new names, into developing geographies, and with our new PLS grid solution. We ended March with ARR growth over the prior year of 25%. Certainly that's a pace likely to at least deliver our previously provided guidance for PLS has contribution of 30 million in first year subscription revenue of which 27 million we expect to occur in this calendar year 2022, given the closing on January 31st. Of course, it's only two months, but momentum is strong. PLS continues to generate a very high margin contribution, which we're reinvesting into Bentley Systems growth initiatives, including into our Grid Integration Group strategies.

Before I turn this over to Varner for more on our results overall, I'd like to share how PLS is leveraging receptive macro-environment, integrating with SPIDA for distribution and accelerating growth, including internationally and who better to comment on this than auto Lynch, the longtime CEO of PLS, and who now leads PLS for Bentley Systems.

[David Hollister, Chief Investment Officer]

The electric grid infrastructure is in the middle of a perfect storm. Like most infrastructure, our electric grids are dated. Far too many structures in our grids are more than 50 years old and are well past their life expectancies as evidenced by many and costly failures. At the same time, much of our grids were designed using archaic engineering practices that are no longer valid today.

We have a much better understanding now of how to properly design wood, tubular steel, concrete, fiberglass, and wider steel structures that are used in our grids. Additionally, climate change is punishing our grids with temperatures, wind, ice and other modern meteorological events, and those loadings were not anticipated in their original designs.

This is leading to failures in our grids and even relatively mild weather events. Concurrently, we're seeing a shift in generation sources from fossil fuels to renewable energies such as wind and solar. These are incremental demand on our grids. We can't mothball a coal plant in Pennsylvania and build a wind farm or solar farm in its exact place. Finally, the general public's expectation of reliable always on electricity has increased. All of these issues combined mean that we are in the midst of rewiring America. We're required to rebuild older infrastructure to today's engineering practices and weather events, often known as storm hardening.

We have to add additional infrastructure to ship the generation from its new source to where the electricity is needed. We need to provide more reliable electricity and assured Internet services. Over 93% of the electric outages in America were on the distribution side of our grids. We have worked hard with the American Society of Civil Engineers over the past few decades in developing standards and practices that are being successfully deployed in the transmission industry.

We now need to apply the same standards and practices on the distribution side of our grids. Bentley's gig solutions, notably PLS for transmission and SPIDA for distribution, are the perfect solution to this perfect storm for our electric grids. Our recently released PLS grid brings all of this together with grid-wide analytics and digital twin solutions. And this problem is not unique to just the U.S., it's a worldwide situation. The combination of PLS and SPIDA, together with Bentley's global footprint and investment commitment, make global expansion a particularly attractive opportunity. One final event providing yet further opportunity. The Federal Energy Regulatory Commission has just issued Order 881, requiring transmission facility owners to consider seasonal and time of day changes on their line ratings.

PLS is uniquely positioned to assist utilities in providing these mandated answers to FERC. I believe we are now going to hear from Werner about Bentley's numbers for the quarter.

[Werner Andre, Chief Financial Officer]

Thank you, David, and good morning, everyone. We're off to a strong start in 2022, and we are very pleased with our resilient results on the first-quarter. I'll start with our revenue performance. Our total revenues for the first quarter $275.5 million and grew 24% over the prior year. Most of that growth comes from subscriptions, which now comprised approximately 88% of our revenues and grew 28% over '21 Q1.

The acquisition of Seequent Power Line Systems onboarded 18% of growth. Foreign currency headwinds offset 4%, and therefore, our business performance, inclusive of the organic performance of our platform acquisitions, comprises 14% of subscription growth on a constant currency basis. Our Perpetual License revenues, which now represent approximately 4% of our total revenues, are relatively flat in absolute terms, and continue to reflect the preferences for subscription offerings. Our Professional Services revenues at approximately 9% of total revenues, and increased by 3% over '21 Q1, on a constant currency basis.

Within our Services Business we see continued growth from our investment into the Cohesive Digital Integrator businesses, partly offset by the shift and redeployment of our Traditional and more episodic service business to support recurring success services embedded in our E365 subscription offerings.

Presenting here on the right the reminder of our full-year 2022 revenue outlook, as was provided during our year-end 2021 operating Results Call in the range of one billion, one hundred and ten million to one billion, one hundred and forty million representing GAAP revenue growth of 15% to 18%.

Overall, our Q1 revenue performance was consistent with our expectations and our financial outlook. Most notable are our platform acquisition Seequent and PLS for the first two months since acquisition are showing very strong business momentum and growth rates with solid contributions in new business and our business performance. In March, in response to the Russia, Ukraine war, we announced the suspension of new business in Russia and Belarus. While the impact including sanctions on overall revenue performance during Q1 was minimal, we reduced our rated ARR by 5 million representing an approximately 50% decrease in estimated recurrence of business in those countries.

As we do expect, the corresponding impact on revenues in the remainder of 2022. On the FX front, our 2022 outlook is based on current exchange rates, when issued in March. So while our Q1 revenue performance was negatively impacted by currency headwinds of about 4%. Such headwinds were already affected into our 2022 outlook. Moving onto recurring revenue performance. Our last 12 months recurring revenues increased by 25% and now comprise 87% of our total revenues. The mid-year 2021, on-boarding of Seequent, and the on-boarding of PLS during Q1 contributed about 13 percentage points to this improvement. Our deep and long-standing relationships with our accounts are again proven with our 98% account retention rate, and on our constant currency, recurring revenue net retention rate of 108%. New accounts contributed three percentage points of our quarterly year-over-year recurring revenue growth, which is growth in addition to the recurring revenue retention metrics. On a constant currency basis, our ARR is up 27% over the same prompt in time last year, with business performance accounting for 12% of growth and 15% coming from the on-boarding of our platform acquisitions.

The unexpected ARR attrition Russia, which I mentioned before, impacted our ARR growth rate by approximately half a percentage point. As we illustrated during our '21 Q4 Operating Results Call, our ARR growth rate in comparison to their rate of the previous years, is impacted by the pandemic in during 2020. Our GAAP operating income was $56.6 million for 22 ' Q1, up 2% from 21 ' Q1. The 22 ' Q1 GAAP results reflect rather substantial incremental charges, like decision expenses related to PLS, incremental amortization from purchase intangibles, primarily relating to our Seequent and PLS acquisition, an incremental non-cash stock-based compensation, partially offset by a mark-to-market gain, from the revaluation of our different compensation plan liabilities. On the right, our adjusted EBITDA metric normalizes for such accounting. We view a new growth in our adjusted EBITDA of 18%.

This reflected an adjusted EBITDA margin of 35%, and now with travel and promotional activities returning to new normal levels, our Q1 EBITDA margin's put in line with our expectations for the first quarter, which is typically a higher-margin growth for us due to OpEx seasonality. With regards to OpEx, it will add and it will take a Q1 charge of approximately $1 million to the risk of our working capital essence associated with our business in Russia, another one to remind you, with our seasonal pattern of expense allocation. We concentrate our annual raise's local leaks, took care as of the April 1 of each year. And since approximately 80% of our cost structure is people and related support costs, annual raise has a significant impact on our operating expenses in Q2, 3, and 4 relatives to Q1.

This is product compounded, a very good incentive compensation, as well as our larger promotional inventory data costs, which are historically highest in the second half of the year. That said, we are on track to deliver our 33% adjusted EBITDA margin target for 2020, which reflects our commitment to an annual expansion of our adjusted operating margins of about 100 basis points.

Normalized foreign expected pandemic savings that occurred in 2020, and to a lesser extent in 2021. I'd also like to comment on our income tax rate, which is 5% for Q1, and benefited from significant discrete full tax benefits primarily associated with distributions from our deferred compensation plan, net of the impact from officer compensation limitation provisions.

These discrete tax benefits correlate with the timing of distributions, and are also impacted by our share price at the time of distributions. For the full-year, we continue to expect an income tax rate of closer to 15%. Moving onto liquidity. Our Q1 GAAP operating cash flows of $101.7 million are strong, representing the cash conversion ratio from adjusted EBITDA, of 104% and includes payments of acquisition-related expenses of $10 million. When we compare our cash flows with the prior periods, I want to remark that our cash flows in '21 Q1, where atypically strong. As we remark throughout last year, the unusually strong cash flows where aided by a significant increase in customer deposits and our E365 subscription program, and associated program conversions.

And '21 Q1, is therefore an unusual basis for comparison. Similarly, our last 12 months operating cash flows of $257 million are facing strong comparative basis compounded by the fact that accelerated collections in '21 Q1 resulted in relatively lower collections in '21 Q2. These cash flows are also by payments of acquisition-related expenses for our platform acquisitions of $27 million and an increase in income tax payments, inclusive of prepayments of $60 million. Our business remains highly cash flow efficient. And while the short-term volatility due to timing, we continue to expect the conversion ratio of adjusted EBITDA to operating cash flow on average in the 85% to 90% range, primarily due to the predominantly annual nature of our contractual relationships.

As we presented before, we completed the acquisition on Power Line Systems at the end of January 2022, while cash consideration of approximately $696 million net of cash acquired and inclusive of future tax benefits from a tax-deductible step up in basis, which we present value at $90 million.

We used available cash and borrowings under our bank credit facility to fund the transaction. In 2022 Q1, we spent approximately $35 million or defects the share repurchases associated with stock-based compensation and to offset the dilution from such compensation. However, for the remainder of 2022, we have planned to significantly reduce our share repurchases and embark our free cash flow after funding programmatic acquisitions to deliver. With regards to capital allocation, our net debt senior leverage was 1.4 times as of March 31st, 2022, down from the 1.6 times as of December 31, 2021, which I presented during our year-end 2021 operating results call on the pro forma basis and on the consideration of pro forma adjustments to reflect the financing of the acquisition of PLS.

When including as intactness, our 2026 and 2027 convertible notes, which proceeds to have dedicated to fund our accretive platform acquisitions, our net debt leverage was 4.9 times as of the end of March. Lastly, I want to point out that while interest rates are rising, approximately 75% of our debt is protected from changes to interest rates through either highly favorable coupon interest on our convertible debt, or our $200 million interest rate swap, which contributed a 12 million mark-to-market valuation gain, so other income during 22 ' Q1. And with that I'm handing it over to Carey for questions.

[Carey Mann, Vice President Investor Relations]

We'll start with Joe Vruwink from Baird.

[Joe Vruwink, Baird]

Great. Hi everyone. Is the right way to think about performance in the quarter 12% was the Organic Business performance? And then was the combination of Russia and China, about 200 basis points? I guess my question is, compared to your guidance, did you start the year maybe closer to 14%? And if that's true, can we just walk through maybe some of the upside drivers relative to the 11.5 to 13.5 forecast you presented?

[Greg Bentley, Chief Executive Officer]

Well, I'm going to ask Werner to go through the quarter-by-quarter way that the full-year outlook came about. I don't think that Russia and China together are 200 basis points, but they're at least half that. Over to you Werner.

[Werner Andre, Chief Financial Officer]

Yeah, that's why for Russia, for Q1 the impact was actually pretty minimal. It doesn't impact on ARR, which we took down by $5 million. And similarly, the same reduction we have for China ARR, which was like a total of 101% drag on our ARR growth rate. But the impact on revenues for Q1 was diminished also for Russia, there was a slight reduction to Q1 last year. But it's more prospective basis because there's no recurrence assumed for certainly agreements, and in China it's predominantly related to project rates where you highlighted, David. Talk to like what we do, we're trying to venture to counter that. And in Russia we also -- we'll see that there's -- to be assumed that based on the recurrence probability that there will be some impact on revenues for the remainder of the year, but the impact on the growth was not that significant.

[Greg Bentley, Chief Executive Officer]

In revenue it was an ARR that the impact occurred because we in effect wrote-down the ARR because we don't regard that it can incur unfortunately.

[Werner Andre, Chief Financial Officer]

on the margin, we took only $1 million dollar expense to de -risk the working capital in in Russia.

[Joe Vruwink, Baird]

Okay. The second question when you start to appreciate the strength out of PLS on the quarter growing by 25%. I think that's quite a bit faster than maybe the original assumption. Does that, in any way, just exposure to utilities and thinking about how infrastructure investment is likely to unfold across your other sub-sectors. Does the strength there, in any way, inform a view about how the rest of the year might play out. I know open roads was good. Hot-water was also good. Is it a leading indicator of any sort of how the rest of the year might go?

[Greg Bentley, Chief Executive Officer]

Well, do keep in mind the 25% that David referenced is a year-over-year growth and is just a small sample from which we don't feel we know the business well enough to extrapolate, if you see what I mean, from two months. But the phenomena talked about, which are the reasons that attracted us to this integrated grid opportunity and to PLS, we think are very real. I mean, it's a sure bet that the -- that growth rate will inflect, especially as we can globalize what has been Power Line Systems ' historical focus on the U.S. but proving suitability for other geographies as well.

How long that will take we can't say, but I certainly think there is outside opportunity in this grid Digital Twin opportunity this year for sure. I would just add just in terms of a directional indicator, also our spade of business which we -- we've owned for a few months longer than PLS, is performing percentage wise much smaller than PLS but percentage wise, even better than PLS. So the distribution and transmission grid opportunity together seem to have some momentum.

[Joe Vruwink, Baird]

Great. Thank you very much.

[Carey Mann, Vice President Investor Relations]

We'll next go to Matt Hedberg from RBC.

[Matthew Hedberg, RBC Capital Markets]

Morning guys, can you hear me okay?

[Greg Bentley, Chief Executive Officer]

Yes, Matt.

[Matthew Hedberg, RBC Capital Markets]

Hey, thanks for the time and the prepared remarks. Greg, I think, I really appreciated your comments on the prepared remarks adjusting the businesses far more resilient even than around the IPO given some of your vertical distribution and new businesses. I'm wondering though as a point of reference, can you talk about how Bentley performed during maybe prior downturns, obviously, recognizing that this were occurring and durable this time? But just some frame of reference on prior economic downturns?

[Greg Bentley, Chief Executive Officer]

Well, there are two that come to mind and David Hollister last year, would show these when we were introducing ourselves as a company. In the great financial crisis in 2009, our revenues went down by 10%. I happen to recall that being mostly FX, but our recurring revenue managed to stay the same at that time. But it was -- it took the -- all the air out of new license sales for which were greater proportion, still not a lot of -- still not a very large portion, but of our revenue then than now. And that's when, as we say, we decided we have to be in the operations and maintenance. The OpEx life cycle, which we are much more so these days as I showed quantitatively.

[David Hollister, Chief Investment Officer]

the next downturn that comes to mind it comes to mind because it was when we filed to go public in 2014 and it mainly had to do with volatility in oil prices and the industrial sector, which has all of these gyrations. And I, that the point is the other sectors don't. Commercial and facilities is also economically volatile, but it's industrial that is especially and that set us back considerably. So the point is, we haven't shrunk in that business, but we've grown everything else. rather determinedly. And if there was a downturn in 2020, it was only for us in this industrial 10% or so, which I think gives us confidence to say that the other sectors are more resilient. Commercial and facilities is another 10%, went down, but not as much. I don't think it's going to go up as much either as public works and utilities going forward.

[Greg Bentley, Chief Executive Officer]

The only other thing I would add that we learned during these -- and demonstrated during those prior downturns was, again just a visibility and control over our cost structure. We continued to deliver the EBITDA and improved EBITDA margins, even in those downturns. Yes. Our head cost alignment model is calibrated twice per month against our current ARR book and including the ARR from consumption of our E365. So we tend not to be able to be surprised very much when it comes to sustaining our margins. Who's next?

[Carey Mann, Vice President Investor Relations]

We'll go to Matthew Broome from Mizuho.

[Matthew Broome, Mizuho Securities]

Can you hear me?

[Greg Bentley, Chief Executive Officer]

Now, yes please.

[Matthew Broome, Mizuho Securities]

Okay. Hi, guys. I guess, mostly just curious, how is linearity during the quarter in terms of the underlying fundamental demand and pipeline growth? Was March relatively stronger than January or how did that go?

[Greg Bentley, Chief Executive Officer]

Let me ask Nicholas. If you have an impression about that and as it might compare to other quarters and other first-quarter. I don't.

[Nicholas Cumins, Chief Operating Officer]

I will say quite similar to what we've seen before. It is not the linear that I would like to see. I think there's still a lot that is back-loaded. We would like to start see that as cred -- better throughout the quarter.

[Greg Bentley, Chief Executive Officer]

And of course, we were talking to you in mid-March or March 11th or so. Of course, we weren't talking about the first-quarter at the time, but a lot of the disruptions occurred after that, but did impact the first quarter when it comes to the counter globalism aspect especially.

[Matthew Hedberg, RBC Capital Markets]

Right. And actually, I guess on that, and specifically in China, do you expect the environment to continue to deteriorate than what's your outlook there? And to what extent and in what timeline do you expect you're new JV to counter those geopolitical headwinds?

[David Hollister, Chief Investment Officer]

I'm afraid it can deteriorate further. And when we talk about counter-globalism, I'm not describing something endemic in the world, it's between the U.S. and China. And it's not only on the Chinese side, of course, it's on the U.S. side that we're discouraging bilateral trade, I'm afraid. So I have talked in the past, over the past year or about, getting ready for this -- I've heard the word, I like it, glocalization that we're doing in China. We aren't just starting; we're just announcing these joint ventures that we've been incubating for a while. But unfortunately, they will take considerable time to come to market because they're just being formed.

The parties are contributing people as well as capital, but I'm afraid that the deterioration can come faster than the remedy. But the remedy to have indigenous Chinese solutions that generate revenue and ARR for us is a rather permanent solution, I hope. It's incremental. We're not going to discontinue anything we're doing as Bentley, the American entity in China. Bentley in China, the Chinese part of -- but it's regardless American. I believe such as the opportunity in China, we can still grow Bentley in China, but to realize the opportunity, we need to do these incremental glocalization things. Do you want to add anything to that, Nicholas?

[Nicholas Cumins, Chief Operating Officer]

I would say that yes. I mean, it’s -- clearly the JV is going to help us level the playing field with respect to the local providers, but we're not slowing down our efforts to re-energize the core business we have in there, computing this product-wise with state oil enterprises and design institutes. I think the -- this issue we've had over there for a couple of years is the fact that those companies are not amicable to cloud services. They really want software to our own premises. And because of that, many of our innovation or new capabilities were not available to them. So we are going to deliver this on an on-premise basis in China through a core team to reenergize that.

[Greg Bentley, Chief Executive Officer]

Of course, this is only the first joint venture. There are others in the works that we'll be announcing during the balance of the year.

[Matthew Hedberg, RBC Capital Markets]

Okay. Perfect. Thanks, guys.

[Carey Mann, Vice President Investor Relations]

The next caller, Jason Celino.

[Jason Celino, KeyBanc Capital Markets]

Can you hear me?

[Greg Bentley, Chief Executive Officer]

Yes.

[Jason Celino, KeyBanc Capital Markets]

Perfect. Okay. So I understand the conscious on macro and the changing political backdrop. But when we think about your core infrastructure end market seems to be doing okay, your SMB seems to be up performing and your PLS acquisition seems to be doing well. How would you describe your confidence in the business pipeline today versus maybe 90 days ago?

[David Hollister, Chief Investment Officer]

Well, I think everything you just said, that is true. Our business depends on how busy are the world's civil and structural engineers and oppressional s, and what is their capacity and appetite for going digital. And the answer is they're so busy their capacity is low, so their appetite for going digital is high. And there's nothing in the world that can create new capacity for civil, and structural, and oppressional engineering as they're busy as they are. So these disruptions in the world are our concerns, and as in this quarter, they can hit us an integer proportion of ARR growth. But we think the backdrop we're observing to be -- to have some continued momentum. When we consider our financial outlook for the year, recall that there are three aspects of our financial outlook. We talk about constant currency, ARR growth. The question I'm getting to is what about FX and the disruptions there? Constant currency ARR growth obviously abstracts from FX concerns.

[Greg Bentley, Chief Executive Officer]

And then there, we talked about adjusted EBITDA. And there as you know, we manage our margins. You could say, well we manage our margins in constant currency, they will be somewhat subject to FX. But our hedge is very good. Our natural hedge is very good. And then there is revenue of course, and our revenue, financial outlooks should be regarded as subject to foreign exchange.

But when we considered this one day the dollar index, went down by a percent. In the next two days, it went up by a percent-and-a-half, so we just have to say, please understand that our financial outlook is in real economic terms and you will have to do your own adjustment for the gyrations of foreign exchange. But overall, in fundamentals, we're observing things are pretty strong. Europe is a bit notably down in the first quarter, which doesn't seem surprising to us given what's going on there. And we hope that we'll be short lived as there is even new work to be done for energy security in Europe.

[Jason Celino, KeyBanc Capital Markets]

Okay. And then when we think about PLS, the out performance, you can attribute that to maybe before where they've got acquired, right? So, or what do you say is from revenue synergies, from being part of Bentley for two months?

[Greg Bentley, Chief Executive Officer]

Tough to those apart, I will ask David if he has an opinion, but the fact that PLS was a great and strong development and transmission engineering organization, but hadn't focused on sales and marketing compared to our extent to focus on that. Occurs at the same time as these secular tailwinds for transmission engineering especially. And we don't report to have had enough experience to tease those out yet. But --

[David Hollister, Chief Investment Officer]

the quarter.

[Greg Bentley, Chief Executive Officer]

-- well we had twice the experience. One quarter for now. Go ahead Dave.

[David Hollister, Chief Investment Officer]

Yeah. I guess, I'd add to take exception to say it all happen before our acquisition, Jason, because what's new is the PLS grid product, yes, developed by talented PLS team, but really taken the market for the first time for in the main, this first quarter has contributed significantly. This is the Digital Twin for grid design. And we're really excited about it we think it's going to contribute to more growth this year than even the international expansion opportunities that we can also bring to PLS.

[Greg Bentley, Chief Executive Officer]

Jason, to clarify there, the transmission engineering products are one tower at a time, if you like. PLS grid looks across the network of transmission and can help answer questions like FERC 's questions about overall capacity under varying conditions and it's very well-timed to come to market now.

[Jason Celino, KeyBanc Capital Markets]

Okay. Perfect. Thanks.

[Carey Mann, Vice President Investor Relations]

We'll next go to Kash Rangan from Goldman.

[Kash Rangan, Goldman Sachs]

Hey, congratulations on the quarter despite all the turmoil. Despite the world going digital, David Hollister 's background has a nice analog clock on the screen pendulum, which is a timeless reminder. Greg, as you look at the structural forces in the industry, you've certainly positioned yourself through acquisitions to be more enduring as a business model through PLS, Seequent acquisitions, etc.

On the cyclical front, you have lived through many a downturn before. What is it that you see on the leading edge with respect to project financing, affordability, etc., given inflation, higher rates? And on the company-specific front, as a results, are you looking to maybe pause hiring a little bit or bringing operating expenses just because we don't know certain things today that we thought we knew about three to four months back or so? Just on the flexibility side of the financial side. Thank you so much.

[David Hollister, Chief Investment Officer]

Let me take the second question first. No company can pause hiring today because talent is so scarce, so we have more recruiters doing more recruiting than ever. Our attrition rate is higher, but not substantially high, and we have better engagement and retention than most do. But you can't pause recruitment and hiring. Also, we have, as I mentioned, our head cost alignment model is with respect to our ARR, but we do not put a directional lens on that.

We would like to invest as much as we can in growth, including enterprise success headcount that allows us to grow E365, because the growth rate is faster for the portion of the ARR that E365 covers. We would like to add SNB direct sales headcount as fast as we can and we will not hold that back because we're -- because we have the concern in the outlook. We will meet our margin targets because of the way we manage, but we're not looking down the road and concerned about something. Let me go to your question about finance interest rates and financing. That was certainly, you might even say at no interest rate. In 19 -- In 2009, no project could be financed at any interest rate.

[Greg Bentley, Chief Executive Officer]

And that caused us to change our relative balance between CapEx which was everything then to OpEx now or is a significant portion of our business. But also in favor of publicly financed projects, which have this counter cyclical as effect. And then on the privately financed projects, interest rates, you would say are relatively high compared to where they were in the past couple of years. But there's still relatively low compared to where they've been then and hurdle rates for projects and especially for energy security. The projects don't seem to be speculative at this point, but necessary, so we just say visibility is a little obscured when things can come along and change what you think about a year as a whole in terms of predictability, I can hardly imagine a business that's more predictable than ours, the way we manage it and what we're sensitive to.

[Kash Rangan, Goldman Sachs]

A quick thought on competition each change with respect to Autodesk to so and I will wind up thank you so much.

[Greg Bentley, Chief Executive Officer]

No, I don't think so. Autodesk focuses on construction, which has to do with infrastructure. Infrastructure has to do with construction, but construction is intrinsically more cyclically vulnerable to supply chain and labor issues and so forth, than is our evergreen lifecycle focusing on design and operations and maintenance by contrast to Autodesk with construction. And that so continues not to be a factor in much of what we do see -- that's not to denigrate that, so they have a terrific business and discrete manufacturing and so forth. But they -- we're just on our past, did for a while in China, but not any longer. Do you want to anything -- add anything to that, Nicholas?

[Nicholas Cumins, Chief Operating Officer]

I have nothing to add.

[Greg Bentley, Chief Executive Officer]

Thank you.

[Carey Mann, Vice President Investor Relations]

We'll next go to from Griffin.

Thank you. Good morning. For Greg and Nicholas, first as the scope of your business has evolved, broaden, that is, and your end markets. Could you comment on how your software engineering infrastructure or processes have evolved or might yet have to evolve? Your DevOps, if you will. And as the output to product development, how are you thinking about future changes to your product release cadence, and or product packaging and configuration model? Then a follow-up. Thank you.

[Greg Bentley, Chief Executive Officer]

So I'm going to ask Nicholas mainly to comment on. I'll just say that that was the point he made in China rather quickly, that much of our development now is in the Cloud capabilities. Every desktop software user has access to our Cloud capabilities, and especially now through the iTwin platform that we're working hard to embed and incorporate across our product range. Except in China, it's rather because they don't have access to, and they don't -- they're not inclined to take advantage of Cloud capabilities. Over to you, Nicholas.

[Nicholas Cumins, Chief Operating Officer]

The main change in the way we are working is exactly what Greg explained. It's the fact that an increasing percentage of our revenue is coming from Cloud services, and even with our desktop products, we provide Cloud qualities to these products by complementing them with Cloud services, or being able to release new capabilities on a more frequent basis. So that's the main reason why we're changing. We have been changing the way we've been working within our product organization for the past few years. More than the companies, are the fact that we have extended our portfolio and we've acquired more companies. Now the companies we acquire are either on the desktop side of the house like Arduino, or there will be a combination of desktop and Cloud. And when they fall in, when they are joined and we harmonize the way we work together with the Cloud services, and then with those desktop products.

[Kash Rangan, Goldman Sachs]

Okay. Thank you for that. You mentioned earlier that PLS could be thought of as a kind of Digital Twin for the grid. Could you comment more broadly on your Digital Twin business in the quarter in terms of pilots or production? Deployments that you saw or what you're anticipating for the rest of the year? And Nicholas, if you recall back in December, when you spoke about Digital Twins, you referenced a variety of use cases. Here, half a year later, what do you see in terms of perhaps the two or three use cases for Digital Twins, that are becoming most common?

[Greg Bentley, Chief Executive Officer]

Obviously, remark first that the Digital Twin, in addition to being comprehensive across the lifecycle and bringing together ET and IT and OT, that from any part of the lifecycle to maintain fitness for purpose for an infrastructure asset, the Digital Twin stuff we do is also the same iTwin platform for our whole portfolio itself, so it helps for coherence across products as well.

And an example, when you mention PLS, PLS have been desktop applications, but PLS grid should be part of the Digital Twin cloud solution that includes the reality modeling and the infrastructure IOT. So PLS doesn't bring us an integrated grid, it brings the transmission aspect and the PLS grid product to look across transmission assets to a transmission grid to an integrated grid, which integrated grid should include substations and distribution as well of our existing products. So when we say PLS as a platform acquisition, doesn't bring us a platform, but it completes what our platform can now make comprehensive across the grid. Over to you Nicholas.

[Nicholas Cumins, Chief Operating Officer]

When we think of our Digital Twin business, we think primarily of the iTwin platform, and then the different products we have, the social we have that leverage the iTwin platform capabilities. But our platform is also used more and more by third-party organizations, whether they are software vendors, or they're engineering firms who create their own products and solution.

So from a business standpoint, Q1 in terms of cause, when we look at how much revenue came from the platform itself, from the products that are powered by the iTwin platform, it is very much in line with what I've commented on for the previous quarter, and the previous year actually, which is a healthy growth. The trajectory remains strong -- strong growth. Now from a product standpoint, Digital Twins is still at the heart of our products or product investments.

When we think of our desktop products, as I was explaining right before, and I talked about Cloud qualities, many of these complementary services that act as extensions of these desktop products are increasingly powered by the iTwin platform. For example, one thing we're going to release in a couple of months for Open Roads, which is one of the products that grew quite nicely in Q1, will be a modal validation service, which is powered by the iTwin platform itself.

Now, you were asking about use-cases and where we see we're getting traction. Well we are covering more and more use cases ourselves and our ecosystem, is covering more and more use cases. We launched in Q1, a new digital twin solution for the storm and waste water networks. So we had one for the portable water networks and now we launched new ones for the storm and wastewater network, and we see a lot of traction in water utilities for digital twin solutions. Very much, like we were explaining for electric utilities where there's quite a bit of traction. We see utility companies’ interest in digital twin solutions that help them integrate also so they are coming from different systems and etc. And then be able to run operation analytics and simulations analysis on it.

[Greg Bentley, Chief Executive Officer]

Thank you. And Carey, I know you want to us to wrap up.

[Carey Mann, Vice President Investor Relations]

With that, we'll end the call. Thank you, everybody, and we'll see you next quarter.

[Greg Bentley, Chief Executive Officer]

Cheers. Thank you.

[Werner Andre, Chief Financial Officer]

Thank you.