Bentley Systems, Incorporated (BSY)

Executive Summary / Key Takeaways

• Bentley Systems has completed a decade-long transformation from cyclical project-based software to a 92% recurring revenue model, achieving parity between owner-operator and supply chain ARR that fundamentally derisks the business from construction cycle volatility while delivering consistent 10.5% ARR growth.

• The company's AI-enabled asset analytics initiative represents a potential nine-figure incremental revenue opportunity that could redefine its growth trajectory, leveraging the iTwin platform and Cesium acquisition to capture the infrastructure productivity imperative as engineering firms accelerate AI spending from 19 basis points to 71 basis points of revenue over the next three years, representing nearly a four-fold rise.

• Strategic geographic derisking—halving China exposure to 2.5% of revenues and zeroing out Russia—has created near-term headwinds but materially improved long-term earnings stability, with management explicitly planning for further China attrition while the business elsewhere accelerates.

• Consistent delivery of 100 basis points annual margin expansion demonstrates operational discipline and pricing power, with adjusted operating margins reaching 27.7% in Q3 2025, supported by the shift to higher-margin subscriptions and E365's negotiated 10% annual escalators.

• Bentley's infrastructure-specific focus and iTwin platform create durable competitive moats against larger but less focused rivals, with Power Line Systems and Seequent delivering standout performance in grid resilience and mining exploration respectively, positioning the company to benefit from U.S. permitting reform and global infrastructure investment tailwinds.

Setting the Scene: From Engineering Tools to Infrastructure Intelligence

Bentley Systems, founded in 1984 and headquartered in Exton, Pennsylvania, spent its first 25 years building the definitive software toolkit for infrastructure engineering. The company made its name enabling engineers to design roads, bridges, utilities, and industrial facilities through applications like MicroStation and specialized vertical tools. This heritage matters because it forged deep domain expertise in the complex, regulated world of horizontal infrastructure—the linear networks of public works that form civilization's backbone.

The business model, however, was traditionally cyclical. Revenue tied to design and construction phases meant boom-bust exposure to infrastructure spending cycles. That began changing in 2009 when management made a deliberate, long-term pivot toward operations and maintenance software. This strategic shift wasn't opportunistic; it was structural. By building capabilities for infrastructure owner-operators—the utilities, transportation agencies, and resource companies that run assets for decades—Bentley created a recurring revenue stream that would eventually match its project-based business. Today, that vision is realized: ARR from owner-operators has reached parity with revenue from their engineering and construction supply chain, fundamentally altering the company's risk profile.

The industry context amplifies why this transformation matters now. Global infrastructure faces a $9 trillion funding gap to reach a state of good repair, yet the engineering workforce grows at just 1% annually. Technology spending by AEC firms has compounded at 13% annually, with AI implementation spending poised to increase nearly four-fold from 19 to 71 basis points of revenue. Bentley sits at the intersection of these imperatives: a chronic need for infrastructure productivity and an accelerating willingness to pay for software that delivers it. The company's purpose—to advance infrastructure through intelligent digital twin solutions—isn't marketing; it's a direct response to market forces that make its offering increasingly indispensable.

Technology, Products, and Strategic Differentiation: The iTwin Moat

Bentley's competitive advantage centers on the Bentley Infrastructure Cloud, powered by its iTwin platform and fortified by the 2024 acquisition of Cesium. iTwin federates data from disparate engineering applications into a single, queryable digital twin that spans the entire asset lifecycle. Why does this matter? Because infrastructure projects generate massive data fragmentation—different formats, disciplines, and stakeholders—and iTwin solves this by mapping everything to a common schema. This creates powerful switching costs: once an owner-operator builds its digital twin on iTwin, migrating to another platform means rebuilding years of integrated data relationships.

The Cesium acquisition broadens this moat by adding market-leading 3D geospatial visualization and an active developer community. Management's strategic objective was to leverage Cesium's ecosystem to accelerate iTwin adoption, and early evidence validates this. HNTB, an engineering firm, uses Cesium with Google (GOOGL)'s 3D photorealistic tiles to reduce modeling effort for contextual detail by up to 80% on long linear projects. This isn't incremental improvement; it's step-change productivity that competitors can't easily replicate without similar platform investments.

AI represents the next evolution of this moat. Bentley Copilot, integrated into next-generation applications like OpenSite+, Substation+, and SYNCHRO+, moves beyond passive design tools to active engineering assistants. While management cautions that OpenSite+ revenue will be "very marginal" in 2025, the engagement level is "truly impressive," signaling future pricing power. More immediately, asset analytics—using AI to monitor infrastructure conditions through digital twins—generates "traction" today. Management describes this as the "ground floor of a huge opportunity, AI enabled," with potential for "on top term of 9 digits." This transformation expands Bentley from a software vendor into an infrastructure intelligence provider, expanding its addressable market from design hours to asset performance outcomes.

The Connect platform, launching in December 2025, adds another layer by delivering a connected data environment for project and asset information. This foundational layer improves collaboration across the infrastructure lifecycle, directly addressing the industry's productivity crisis. When combined with AI-powered search capabilities and the Infrastructure AI co-innovation initiative, Bentley is positioning itself not just as a tool provider but as the essential platform for infrastructure AI implementation.

Financial Performance & Segment Dynamics: Evidence of Strategic Success

Bentley's Q3 2025 results validate the transformation thesis. Total revenues grew 12% to $375.5 million, but the composition reveals the real story. Subscriptions—now 92% of revenue, up two percentage points year-over-year—grew 13.5% to $344.3 million. This mix shift is significant because subscription revenue carries higher visibility, better margins, and greater customer stickiness than legacy perpetual licenses or services. The company has essentially completed its transition to a SaaS model while maintaining double-digit growth, a rare achievement for a mature software company.

Annual Recurring Revenue of $1.405 billion grew 10.5% in constant currency, with management noting Q3 was the "seasonal low quarter" and Q4 should accelerate due to renewal timing and potential asset analytics deals. The quality of this growth is superior: it's purely organic, with no M&A benefit, and excluding China, ARR growth was 11%. This demonstrates that the core business is healthy despite geopolitical headwinds.

The E365 commercial program exemplifies pricing power. Representing 45% of total ARR, E365 involves consumption-based charging with negotiated annual floors and ceilings that escalate approximately 10% for multi-year renewals. Accounts willingly commit to higher floors, signaling confidence in their own demand and Bentley's value proposition. This isn't typical SaaS pricing; it's a partnership model where customers share upside, creating alignment that drives 15 consecutive quarters of adding at least 600 new SMB logos with high retention.

Segment performance reveals strategic positioning. Resources was the fastest-growing sector in Q3, with Seequent delivering "particularly strong performance" as mining outpaced civil for the first time in six quarters. This is significant because resources grew from single-digit pre-IPO proportion to nearly 25% of ARR, diversifying away from cyclical commercial facilities and industrial sectors that now represent less than one-sixth of ARR. Power Line Systems remained a "standout performer," benefiting from global grid resilience demand and positioning for U.S. permitting reform. These specialized acquisitions aren't just revenue contributors; they're strategic moats in critical infrastructure verticals where deep domain knowledge creates barriers to entry.

Margin expansion demonstrates operational leverage. Adjusted operating income less stock-based compensation grew 16% to $104 million in Q3, with margins up 100 basis points to 27.7%. Year-to-date margins of 30.2% are up 60 basis points, putting the company on track for its 100 basis point annual commitment. This demonstrates that the subscription transition is delivering not just revenue quality but profit leverage, validating the decade-long investment in platform capabilities.

Cash flow generation remains robust. Year-to-date free cash flow of $384 million funded $135 million in senior debt paydown, $93 million in share repurchases, $10 million in convertible note repurchases, and $64 million in dividends. Net debt leverage fell to 2.2x adjusted EBITDA from 2.9x at year-end, providing flexibility for the $1.3 billion undrawn revolving credit facility.

This capital discipline shows management allocating cash to de-risk the balance sheet while maintaining growth investments, a balance that supports long-term compounding.

Outlook, Guidance, and Execution Risk

Management's 2025 outlook frames a clear trajectory: low double-digit ARR growth, approximately 100 basis points of margin expansion, and robust free cash flow. The Q3 commentary that ARR growth was "exactly what we were expecting" and that Q3 represents the "seasonal low quarter" reinforces confidence in Q4 acceleration. This guidance indicates management has visibility into renewal patterns and asset analytics deal timing, reducing quarterly volatility concerns.

The asset analytics opportunity carries execution risk. Management admits they're "learning this business" and that deals are "large and lumpy," often concentrated in Q4. While this creates quarterly variability, it also signals potential for step-function growth. The partnership with Google to integrate Street View imagery and Vertex AI into Blyncsy for roadway intelligence demonstrates real-world traction, with Los Angeles County using it for Eaton fire recovery efforts. If Bentley can standardize these solutions, the "nine-digit" opportunity becomes tangible rather than aspirational.

Geographic headwinds are explicitly managed. Management's stark assessment of China—"we can't hang on" as state-owned CEOs must personally vouch for American software use—signals realistic expectations. Planning to "continue to lose business in China" while the rest of the world shows "robust" demand creates a clean narrative: China is a known, contained drag that will diminish as a percentage of revenue. This clarity removes uncertainty and allows investors to focus on the 97.5% of the business growing healthily.

Permitting reform represents a potential catalyst. Both Seequent and Power Line Systems are "very well positioned" to benefit from U.S. energy infrastructure and critical minerals permitting acceleration. With grid resilience driving PLS demand and mining exploration showing early improvement, any legislative progress could provide upside to 2026 growth. This creates an asymmetric risk/reward where downside is limited by the current run rate but upside could be substantial.

Risks and Asymmetries

The most material risk is execution on the AI transformation. While asset analytics shows "traction," revenue remains lumpy and the business model is still being learned. If competitors like Autodesk (ADSK) or Trimble (TRMB) accelerate their own AI offerings, Bentley could lose first-mover advantage in infrastructure AI. The company's data stewardship principles—users control their data always—provide differentiation, but the market may not reward this until AI revenue becomes more predictable.

Customer concentration in infrastructure creates cyclical exposure despite the subscription model. While owner-operator ARR provides stability, a severe infrastructure spending downturn would pressure consumption-based E365 renewals. The 10% annual escalators assume continued usage; if projects are canceled, customers may renegotiate floors. This ties Bentley's growth to macro infrastructure investment, even if the recurring model smooths quarterly volatility.

Competitive pressure from larger players remains a threat. Autodesk's resourcefulness and scale advantage could enable aggressive pricing to gain infrastructure share. Management's observation that competitors are "dropping their price quite a lot" while Bentley's accounts "are sticking with us" is reassuring but requires monitoring. If Autodesk bundles infrastructure tools with its dominant AEC suite at discount, Bentley's growth could decelerate despite superior specialization.

The Cesium integration, while strategically sound, carries integration risk. The developer conference success and HNTB case study are early indicators, but realizing the full ecosystem benefit requires sustained investment and community building. If adoption lags, the $XXX million acquisition may not generate expected returns.

Valuation Context

At $41.96 per share, Bentley trades at 51.17 times trailing earnings and 33.65 times EV/EBITDA, with a price-to-free-cash-flow ratio of 27.69. These multiples reflect premium pricing for a high-quality recurring revenue business with 10.5% ARR growth and expanding margins. The valuation prices in consistent execution on the AI and asset analytics thesis.

Compared to peers, Bentley's multiples are reasonable for its niche leadership. Autodesk trades at 58.79 times earnings with 18% revenue growth but less infrastructure focus. Trimble trades at 55.77 times earnings with slower organic growth and hardware exposure. Bentley's 27.69 P/FCF multiple is attractive relative to its 12% revenue growth and 92% recurring mix, suggesting the market hasn't fully priced the margin expansion potential.

The balance sheet supports valuation. With net debt leverage at 2.2x EBITDA and $1.3 billion in undrawn credit facilities, Bentley has ample capacity for acquisitions, particularly in asset analytics where management is "prioritizing capital allocation." The 0.67% dividend yield and active share repurchase program ($98 million remaining authorization) signal capital return discipline. This shows management views the stock as attractively valued while maintaining growth optionality.

Free cash flow generation of $421 million TTM provides a 3.3% FCF yield, supporting the valuation through cash returns. The company's commitment to 100 basis points annual margin improvement, if sustained through 2027, would drive EBITDA to approximately $500 million, making the current EV/EBITDA multiple compress to approximately 25x—more reasonable for a double-digit growth software business with durable moats.

Conclusion

Bentley Systems has engineered a remarkable transformation from cyclical engineering software provider to a resilient, AI-powered infrastructure intelligence platform. The parity between owner-operator and supply chain ARR, combined with 92% subscription revenue, has fundamentally derisked the business model while maintaining double-digit growth. The strategic pivot toward resources and public works, away from cyclical commercial facilities, positions the company to capture secular infrastructure investment tailwinds.

The AI opportunity through asset analytics and iTwin represents the critical variable that will determine whether Bentley compounds at 10-12% or reaccelerates to mid-teens growth. Management's "nine-digit" confidence, backed by Google partnership traction and real-world deployment in disaster recovery, suggests this is more than hype. However, execution risk remains as the business model matures and competition intensifies.

Trading at 27.69 times free cash flow with a pristine balance sheet and consistent margin expansion, Bentley offers a reasonable entry point for investors seeking exposure to infrastructure digitization. The stock's performance will likely be driven by two factors: the pace of asset analytics revenue scaling and the company's ability to maintain pricing power amid competitive pressure. If Bentley can convert its AI investments into predictable recurring revenue, the current valuation will prove conservative. If not, the underlying business remains resilient enough to deliver solid returns through continued market leadership and capital discipline.