Bentley Systems

Bentley Systems' second-quarter revenue grew 12% in constant currency, supported by stable annual recurring revenue expansion. Net retention rate of 109% was stable over the past five quarters. Operating margin declined 160 basis points year over year, but still within management's expectations.

Why it matters: Bentley Systems continues to deliver strong, consistent results thanks to its stable customer base of infrastructure and mining companies. The company enjoys over 80% market share across global top 500 infrastructure owners outside of China and Russia. Bentley also introduced multiple MCP servers to connect its open applications with large language models. These add-ons are nice to have and unlock more value for clients, which should reinforce Bentley's dominant position in infrastructure engineering and mining. We think premium AI offerings that can lift the average account size require a more integrated experience within the Bentley application interface. Meanwhile, AI agents should be able to automate parts of the design workflow, something we are yet to see.

The bottom line: We maintain our fair value estimate for wide-moat Bentley Systems at $43. Shares currently look undervalued. All parts of Bentley's business show no signs of weakness in the AI era, and the company remains on track to deliver double-digit annual ARR growth over the next five years. We think Bentley is likely to overshoot its goal of 100 basis points of annual margin expansion, as the integration of Power Line Systems and Seequent realizes cost synergies. GAAP operating margin should reach 32% by 2030, 800 basis points higher than in 2025. Besides healthy free cash flow supporting accelerated share repurchases, we think Bentley can also be opportunistic to pursue more acquisitions. Muted software valuation should allow Bentley to enter new verticals, similar to its Seequent acquisition that opened up opportunities in mining.

Our fair value estimate for Bentley Systems is $43 per share, which implies an adjusted price/earnings ratio of 30 times and an enterprise value/adjusted EBITDA ratio of 22 times. We model an 11% cumulative growth rate for Bentley Systems over the next five years, mainly driven by the secular growth of infrastructure projects and the continuous digitalization efforts of infrastructure operation and maintenance.

Subscriptions should remain a predominant driver of Bentley Systems’ future growth. We forecast low-double-digit annual revenue growth for Bentley’s software subscriptions over the next five years. Existing customers should continue to expand their business relationships with Bentley as the company further enhances its geospatial and digital twin offerings, with these offerings contributing the majority of incremental revenue in the future. We do not foresee revenue from new logos having a significant impact on Bentley Systems because the company has a very broad customer base of over 40,000 across nearly 200 countries. Even if Bentley adds a few hundred new accounts each year, the contribution to total revenue growth from new customers should be relatively low. Revenue from perpetual licenses should remain stable in the long term as Bentley keeps this offering for a small group of customers with specific needs.

We believe Bentley Systems’ margins are poised to grow as the company continues to benefit from operating leverage and realize more cost savings from recent acquisitions. Gross margin should expand by around 150 basis points between 2025 and 2030, while operating margins should expand by around 800 basis points over the same period. We model around 200 basis points of drop in the research and development expense ratio for the next five years as Bentley Systems increasingly turns to M&A to expand its library of intellectual property.

We assign Bentley Systems a Morningstar Economic Moat Rating of wide, based on the switching costs associated with its dominant market position in infrastructure design. Similar to other established design software vendors, Bentley Systems has accumulated a sizable customer base with very stable retention metrics that support high switching costs. Recent acquisitions of Seequent and Power Line Systems further expanded Bentley’s capabilities in geoscience and electric grid design, solidifying the company’s leadership in the public works space. We believe Bentley’s continuous expansion in infrastructure design should help retain its return on invested capital above its cost of capital over the next 20 years.

Founded in the 1980s, Bentley Systems is one of the earliest software companies to provide computer-aided design, or CAD, software in civil engineering. Its flagship MicroStation product has become the gold standard for civil infrastructure design, and the civil engineering community today still considers MicroStation as an indispensable part of its toolbox. On top of MicroStation’s success, Bentley has significantly expanded its portfolio from design to delivery, operation, and maintenance, covering the entire lifecycle of a public works project. Its asset analytics and digital twin products, namely AssetWise and iTwin, utilize project data from the design and construction stage to provide ongoing support for the real asset, giving users real-time insight into the bridge or road’s health and maintenance schedule. In short, Bentley Systems provides unparalleled breadth and width when it comes to software products targeting public works and utilities projects.

When evaluating a software company’s economic moat, the criticality of its function and the number of customer touch points are positively correlated with the strength of its switching costs. We believe Bentley Systems delivers top-of-the-class performance in both categories, warranting the company a wide moat. Without Bentley’s software, many infrastructure design and construction companies need to fall back on alternatives that often lack key functionalities, potentially leading to project delays as engineers try to come up with workarounds. In addition, Bentley Systems is the only company in the infrastructure engineering field that provides a comprehensive solution covering the entire lifecycle of infrastructure projects. The number of Bentley’s touch points surpasses that of competitors, who mainly provide point solutions with a strong focus on a certain stage of the workflow, such as design or construction.

We think Bentley Systems’ best-in-class client retention is another piece of evidence of very strong switching costs. The company’s annual revenue retention of above 98% and net revenue retention of around 110% are on par, or better than, many other wide-moat software companies. In addition, Bentley Systems’ client concentration is very low, with no single customer contributing more than 2% of the company’s total revenue. The low client concentration means that retention rates are unlikely to change materially due to the loss of a single customer, which matters for Bentley since the company’s addressable end market is smaller than its peers. Considering MicroStation’s long operating history and high reputation, we are confident that the average lifespan of Bentley Systems’ customers should reach 20 years, if not longer.

Additionally, a deeper dive into Bentley’s customer base shows that the company has a relatively high exposure to government customers, especially with each state’s Department of Transportation, since they are the main designers and constructors of infrastructure in the US. We think that local governments are inherently different than typical enterprise software users in that they are not trying to attract new customers or drive profitability. In that regard, if there are no major operational glitches, the systems are largely assumed to be adequate to remain in use, which explains Bentley’s outstanding client retention. As governments gradually adopt Bentley’s cloud-based, Software-as-a-Service solutions, they should provide stable, sticky revenue streams to Bentley over the long term, which reinforces Bentley’s switching costs.

Besides client retention, there are some additional traits of switching cost that Bentley Systems shares with other wide-moat design software companies. Switching between different platforms often involves a high risk of data and productivity losses because the data formats are usually not compatible, requiring an additional step of data conversion that is prone to file corruption. Meanwhile, designers and engineers also need time to get up to speed with the new platform, a process that usually takes between three and six months just to reach basic proficiency.

Autodesk and Bentley Systems share a network of designers and engineers because the two companies exchanged their software libraries in 2008, creating complete interoperability. However, we do not think Bentley Systems has the same network effect as Autodesk in our moat analysis. There is an apparent gap in user size between Autodesk and Bentley, and Bentley’s DGN file format is less standard than Autodesk’s DWG file format. For some large-scale projects that require top-tier architecture and utilities design capabilities simultaneously, sharing the same network as Autodesk can benefit Bentley Systems’ business. That said, we do not see such benefits supporting Bentley Systems’ economic moat from a network effect perspective.

Bentley Systems can expand its leadership in public works and utilities to other sectors, such as resources and industrials, dramatically increasing the number of customers it can serve.

The prevalence of data infrastructure and AI tools can accelerate the adoption of digital twins among infrastructure engineering companies, fueling Bentley’s growth.

Cross-advantages from recent acquisitions, including Seequent, Power Line Systems, and Cesium, should benefit Bentley Systems through cost savings and cross-selling opportunities, contributing to the company’s outperformance.

Competitors such as Autodesk are developing more advanced infrastructure engineering software, gradually narrowing Bentley Systems’ competitive advantage.

Designers and engineers are often comfortable with their existing workflows, which poses a challenge to the penetration of Bentley’s data and digital twin offerings.

The infrastructure engineering software market is inherently smaller than other verticals like architecture and manufacturing. Bentley Systems has to find new growth points in the long term, and this process can be more challenging than we expected.