Bentley Systems, Incorporated (BSY) Q3 2025 Earnings Call Transcript
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Overview
The company's earnings call reveals a positive outlook with strong ARR growth expectations, margin expansion, and increased free cash flow projections. The strategic partnership with Google and AI integration enhance their asset analytics capabilities, while regional and sector performance indicates robust demand. Although there are some uncertainties in M&A and asset analytics, the overall sentiment is positive, supported by optimistic guidance and strategic initiatives.
Key Financial Performance
ARR (Annual Recurring Revenue) ARR increased 10.5% year-over-year or 11% when excluding the impact of China. Growth was underpinned by a net revenue retention rate of 109%. Reasons for growth include solid E365 performance and 300 basis points of ARR growth from new logos, primarily within the SMB segment.
Total Revenues Total revenues for the third quarter were $376 million, up 12% year-over-year on a reported basis and 11% on a constant currency basis. Reasons for growth include strong subscription revenue growth and favorable foreign exchange rates.
Subscription Revenues Subscription revenues grew 14% year-over-year for the quarter in reported terms and 12% in constant currency. Subscription revenues now represent 92% of total revenues, up 2 percentage points from the same quarter last year. Growth was driven by E365 and SMB initiatives.
Perpetual License Revenues Perpetual license revenues for the quarter were $11 million, essentially flat compared to the prior year. No significant year-over-year change was noted.
Professional Services Revenues Professional services revenues declined 2% for the quarter in reported terms and 3% in constant currency. Reasons for the decline include a reduction in IBM Maximo implementation and upgrade work.
Adjusted Operating Income less Stock-Based Compensation Expense Adjusted operating income less SBC expense was $104 million for the quarter, up 16% year-over-year, with a margin of 27.7%, up 100 basis points. Reasons for growth include strong revenue performance and operational efficiency.
Free Cash Flow Free cash flow was $111 million for the quarter and $384 million year-to-date. Growth was consistent with expectations based on seasonality of collections and expenditures as well as timing of cash tax payments.
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Operating Highlights
AI-driven applications: Bentley introduced next-generation applications powered by AI, including OpenSite+, Substation+, and SYNCHRO+, which feature Bentley Copilot, an AI assistant for infrastructure engineering.
Bentley Infrastructure Cloud: Announced 'Connect,' a new foundational layer to improve collaboration across the infrastructure lifecycle, available in December.
AI-enhanced existing applications: Bentley is enhancing existing applications like OpenRoads and OpenRail with AI capabilities, including AI-powered drawing production.
Geographic performance: Strong performance in Asia Pacific, particularly India and Southeast Asia. Americas and EMEA also showed solid growth, with the Middle East leading in EMEA.
Sector performance: Resources sector was the fastest-growing, driven by mining exploration and global demand for grid resilience. Public works and utilities also performed well.
ARR growth: Annual Recurring Revenue (ARR) grew 10.5% year-over-year, with strong contributions from new logos and SMB growth.
Subscription revenue: Subscription revenues grew 14% year-over-year, now representing 92% of total revenues.
Margin improvement: Adjusted operating income margin improved by 100 basis points to 27.7%.
AI investment and adoption: Engineering firms are increasing AI spending, with a projected 4x growth in AI implementation spending over the next three years.
Strategic acquisitions: Bentley is prioritizing capital allocation for strategic acquisitions to lead in asset analytics and digital twin technologies.
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Risk or Challenges
Engineering Resource Constraints: Chronic engineering resource constraints are limiting the ability to meet increasing demand for infrastructure projects. This could hinder the company's growth and ability to scale its solutions effectively.
AI-Driven Business Model Disruption: The adoption of AI is expected to disrupt traditional engineering business models, shifting from billable hours to value-based pricing. This could impact the consumption of Bentley's software and cloud services, potentially affecting revenue streams.
Data Privacy and Security Concerns: Engineering firms have expressed concerns about data privacy and security in AI implementations. This could slow down AI adoption and impact Bentley's ability to scale its AI-driven solutions.
Economic and Geopolitical Headwinds in China: China's economic and geopolitical challenges have negatively impacted growth, with the region contributing only 2% of total ARR. This poses a risk to revenue diversification.
Professional Services Revenue Decline: Professional services revenues have declined and are expected to remain at current levels, which could impact overall revenue growth.
Supply Chain and Policy Uncertainties: Uncertainties related to tariffs, policy shifts, and federal shutdowns in the U.S. could disrupt operations and impact revenue.
Slowdown in Australian Infrastructure Spending: A slowdown in transportation spending in Australia has softened growth in the ANZ region, posing a risk to regional revenue performance.
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Guidance & Outlook
AI Implementation Spending: Firms anticipate increasing their annual AI implementation spending over the next 3 years to a median ranging from $35 million to $164 million, a multiple of almost 4 from today. This projected AI increment would cause total technology spending as a percentage of revenue to grow about 50% faster than at present.
AI-Driven Business Model Changes: AI is expected to catalyze a shift in engineering business models from hours-related revenue towards value-priced data-enabled services and performance/outcome contracting. This transformation is anticipated to impact the consumption of software and cloud services.
AI-Enabled Subscription Revenue Growth: Bentley Systems expects asset consumption, driven by AI-enabled digital twins, to become a mainstay of subscription revenue growth, particularly within owner operators and engineering firms.
E365 Renewals and ARR Growth: E365 renewals are expected to sustain a healthy gradient with negotiated annual floor and ceiling escalations averaging about 10%. ARR growth is projected to remain robust, with Q4 2025 expected to have higher year-over-year ARR growth compared to Q3 2025.
New AI-Powered Applications: Bentley introduced new AI-powered applications, including OpenSite+, Substation+, and SYNCHRO+, which are expected to drive productivity gains and enhance engineering workflows.
Geographic Growth Projections: Robust investment in India is expected to continue, supporting long-term growth. In the U.S., permitting reform for energy infrastructure and critical minerals could drive growth in the coming quarters. Europe is also expected to benefit from permitting reforms and investments in renewable energy and grid infrastructure.
Free Cash Flow and Financial Outlook: The company is on target to meet its full-year free cash flow outlook of $430 million to $470 million. Adjusted operating income margin is expected to improve by more than 100 basis points in Q4 2025 compared to Q4 2024.
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Shareholder Return Plan
Dividend Payments: Year-to-date, Bentley Systems has deployed $64 million on dividends.
Share Repurchase Program: Year-to-date, Bentley Systems has deployed $93 million in effective share repurchases to offset dilution from stock-based compensation.
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Key Q&A
Q:Can you elaborate on the opportunity for better ARR growth in Q4, particularly regarding renewals and asset analytics?
A:Gregory Bentley explained that ARR growth in Q4 is expected to be stronger than Q3 due to a strong renewal period and potential contributions from M&A and asset analytics opportunities. Renewals with enterprise accounts often involve a 10% annual escalation in spending, reflecting increasing value, especially from AI. Nicholas Cumins added that Q3 ARR growth met expectations, and Q4 is expected to surpass it due to these factors.
Q:What impact has the government shutdown had on your business?
A:Nicholas Cumins stated that the impact has been minimal, as direct revenue from the U.S. federal government is less than 1%. Projects with IIJA funding continued during the shutdown. However, prolonged shutdowns could marginally affect renewals and consumption expectations. Gregory Bentley noted that other government functions, like permitting reform, are also delayed.
Q:Are you seeing early benefits from permitting reform and the demand for more power?
A:Nicholas Cumins highlighted that PLS and Seequent are strong growth engines benefiting from mining projects accelerated by processes like FAST-41 in the U.S. and similar initiatives in Canada. While electric grid expansion is still in early stages, there are encouraging signs of progress, driven by higher electricity demand from data centers.
Q:Can you provide an update on your AI innovation roadmap and its integration with customer workflows?
A:Nicholas Cumins discussed how Bentley is co-innovating with users to evolve engineering applications and commercial models for AI integration. The company involves users throughout the development process, from identifying use cases to scaling products. Bentley is also investing in its own AI capabilities to enhance productivity and support user workflows.
Q:How are labor availability challenges in construction and infrastructure affecting your customers?
A:Gregory Bentley noted that engineering resource constraints are accelerating the adoption of AI and changes in commercial models. Bentley aims to support engineering firms by providing asset analytics cloud services, enabling them to bundle these with their own analytics and AI models.
Q:What is the status of your partnership with Google and its impact on asset analytics?
A:Nicholas Cumins explained that Bentley is integrating Google geo data across its portfolio, including 3D photorealistic tasks in engineering applications and Bentley Infrastructure Cloud. The partnership also involves processing Google Street View imagery for asset inventory and analytics, enhancing Bentley's asset analytics capabilities.
Q:Are you seeing proactive RFPs for AI capabilities from customers?
A:Nicholas Cumins stated that it is still too early for customers to request specific AI capabilities. However, customers are focused on ensuring easy access to their data for AI purposes and are cautious about data usage by software providers. Bentley emphasizes data stewardship and integrates AI capabilities into existing applications without a separate go-to-market approach.
Q:How is Bentley evolving its product development process to meet portfolio demands?
A:Nicholas Cumins emphasized iterative development with user involvement at every stage. Bentley does not impose strict timelines for product releases, focusing instead on user feedback to refine software. AI tools are being used to enhance developer productivity, aligning with Bentley's vision of AI as a productivity enhancer for infrastructure engineers.
Q:What are the financial drivers behind ARR growth and expectations for Q4?
A:Gregory Bentley and Werner Andre explained that Q3 ARR growth was in line with expectations, driven by organic factors. Q4 is expected to see a significant step-up due to renewals, asset analytics deals, and potential M&A. Asset analytics deals, though volatile, are seen as a critical growth area.
Q:What is the macroeconomic outlook for Bentley's markets heading into 2026?
A:Nicholas Cumins and Gregory Bentley described a robust demand environment for infrastructure, driven by resilience and adaptation needs. While China remains a weak spot, other regions show strong demand. Political factors and the need for self-sufficiency in resources are also driving infrastructure investments.
Q:What are the implications of consolidation among large E&C customers for Bentley?
A:Gregory Bentley stated that consolidation has not negatively impacted Bentley, as larger firms continue to require software for production. Consolidation may enhance technical and commercial collaboration, benefiting Bentley's platform approach and API expansion for AI.
Q:How is Bentley internally using AI to drive productivity and margin expansion?
A:Nicholas Cumins mentioned that AI is being used across business functions, including lead nurturing, user support, and product development. These applications are expected to enhance productivity and contribute to both top-line and bottom-line growth.
Q:Was Q3 ARR growth in line with expectations, and what are the key takeaways for Q4?
A:Gregory Bentley and Werner Andre confirmed that Q3 ARR growth met expectations. Q4 is expected to be stronger due to a significant renewal period, asset analytics opportunities, and potential M&A. The company remains confident in its outlook.
Q:What was the most significant announcement from the Year in Infrastructure conference?
A:Nicholas Cumins highlighted Bentley Infrastructure Cloud Connect as a key announcement, emphasizing its role in federating data for AI purposes and enhancing user experience. Gregory Bentley added that Bentley's integrated approach to data and AI sets it apart from competitors.
Q:Review of Unclear Management Responses
A:Management avoided providing specific details on the size of M&A deals or the exact financial impact of asset analytics opportunities, citing the early stage and volatility of these areas. Additionally, they did not quantify the potential margin expansion from internal AI use, offering only general expectations of productivity gains.
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Earnings Word Cloud
The most frequently occurring keywords in this quarter's earning call
AEC Advisors
AEC firm
AI AEC
AI agent
AI capability
AI implementation
AI model
AI survey
API
APIs
Advisors survey
Awards submission
Bentley AI
Bentley Copilot
Connect
Copilot AI
Digital Awards
Gap application
Infrastructure AI
ProjectWise
Users
YII Digital
application AI
asset consumption
concern
design automation
energy supply
engineering context
feedback
firm AI
firm infrastructure
generation application
labor productivity
stage
survey engineering
technology spending
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The earnings call highlights strong financial performance with a 16% increase in adjusted operating income and a 110 basis point margin improvement. AI-driven initiatives and digital twins are positively impacting growth, with strategic investments in these areas. The Q&A session reveals optimism about AI's role in future revenue, despite some uncertainties in monetization timelines. The company's focus on expanding M&A and leveraging AI for strategic growth is well-received. Overall, the sentiment is positive, driven by strong financial metrics and strategic growth initiatives.
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