Bentley Systems: Building Infrastructure for Long-Term Growth Amid Headwinds

Bentley Systems, a leader in infrastructure engineering software, has positioned itself as a beneficiary of secular trends in digital transformation and global infrastructure spending. Despite macroeconomic uncertainties, its first-quarter 2025 results underscore a resilient business model, driven by subscription-based revenue growth, margin expansion, and strategic investments in AI-driven solutions. For investors weighing a "Hold" rating against the company's valuation, the data suggests a closer look at its structural advantages.

ARR Growth: A Moat Against Economic Cycles

Bentley's Annualized Recurring Revenue (ARR) rose to $1.319 billion in Q1 2025, a 12% increase in constant currency year-over-year. This growth is underpinned by a 110% net revenue retention rate, indicating strong customer loyalty and upselling opportunities. Subscription revenue, which now accounts for 92% of total revenue, grew 11.5% to $342.3 million. The E365 Enterprise Subscription Program has been a key driver, adding 600 new enterprise accounts in the quarter—a 13th consecutive quarter of growth through digital SMB channels.

This recurring revenue model acts as a stabilizer. Even as global infrastructure spending faces headwinds—from China's property slowdown to geopolitical tensions—Bentley's diversified customer base (spanning transportation, utilities, and energy) and geographic spread (Americas, Asia-Pacific, and Europe) buffer against regional downturns. The company's focus on asset analytics and AI integration further insulates its value proposition, as engineers increasingly rely on software to reduce costs and improve project outcomes.

Margin Expansion: A Testament to Operational Discipline

Bentley's profitability is improving. Its operating margin rose to 31.1% in Q1, up from 27.2% in 2024, while the adjusted operating margin (excluding stock-based compensation) hit 34.1%, a 0.8 percentage point increase. This reflects cost discipline and the scalability of its cloud-based platform.

The company's free cash flow grew 7% year-over-year to $216.4 million, reinforcing its financial flexibility. Management has prioritized shareholder returns, with a $0.07 dividend declared for Q2 2025 and a commitment to maintaining a strong balance sheet.

Strategic Leverage: AI and Infrastructure Demand

Bentley's differentiation lies in its AI-driven solutions, such as the OpenSite+ platform, which automates civil site design tasks using generative AI. This reduces engineering bottlenecks and aligns with global infrastructure backlogs, where governments are prioritizing spending. For example, the U.S. Infrastructure Investment and Jobs Act (IIJA) is funding highway and bridge projects at $157.7 billion in 2025, an 8% increase. In Europe, Germany's digitization push and Asia-Pacific's urbanization (led by India and Southeast Asia) are additional tailwinds.

Partnerships like its collaboration with Google Cloud further enhance its asset analytics capabilities, enabling real-time digital twins for infrastructure management. These tools not only boost customer retention but also open avenues for cross-selling into adjacent markets like renewable energy and smart cities.

Risks: China, Valuation, and Geopolitics

The company is not without risks. China, once a key market, has slowed due to regulatory shifts and property sector declines. While management insists the company's exposure is now “diversified enough to mitigate single-market risks,” execution in new regions remains critical.

Investors must also weigh Bentley's valuation. With a trailing P/E of 59.0 and a forward P/E of 35.85–40.46, the stock trades at a premium to peers. If growth slows below its 10.5%–12.5% ARR guidance, the valuation could compress.

Why the "Hold" Rating Might Be Premature

While risks exist, Bentley's fundamentals argue for a re-evaluation. Its subscription flywheel—strong retention, recurring revenue, and margin leverage—creates a compounding effect. With $415–455 million in projected 2025 free cash flow, the company can invest in R&D (e.g., AI tools) and acquisitions without diluting returns.

The Hold rating may overlook the long-term structural shift toward digital twins and infrastructure efficiency. As governments globally allocate capital to modernize aging systems, Bentley's software is integral to solving complex engineering challenges.

Investment Thesis

Hold for the cautious, Buy for the opportunistic. Investors comfortable with high valuations and willing to bet on infrastructure resilience should consider a position. Key catalysts include:
- Execution of 2025 guidance (low double-digit ARR growth and 100 bps margin expansion).
- Market share gains in AI-driven asset analytics.
- Geopolitical stability in key regions like Asia-Pacific.

For now, Bentley's moat is intact. Its mix of recurring revenue, margin discipline, and AI innovation suggests it can navigate near-term headwinds while capitalizing on long-term trends. The question isn't whether to hold—but whether to buy before others catch up.

Disclosure: This analysis is for informational purposes only and not a recommendation to buy or sell securities.