Good morning everyone, and thank you for joining us for Financial Results Webcast and Conference Call for the 3rd quarter ending September 30, 2020. I'm Carrie Mann, Bentley's Office for Investor Relations. On the call today, we have Bentley Systems' chief executive officer, Greg Bentley, and Chief Financial Officer, David Hollister. Before we begin, allow me to provide a disclaimer regarding forward looking statements. This call, including the question and answer portion of the call 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 earnings release and other SEC filings. 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.
Greg will begin with an overview of Bentley Systems. David will then take you through a review of the financials, and then Greg will review business developments before we proceed to Q
I'm gonna briefly reprise our road show presentation from September in order to set the stage for our 1st quarterly update which will be next, but first, in introducing Bentley Systems, infrastructure, supports our economy and environment that's supported by the work of infrastructure Engineering They depend upon infrastructure engineering software, and we go so far as to think of B. S. Y as the infrastructure engineering software company, And that's because it's been our mission for these 36 years since our founding during which we've developed the most comprehensive portfolio for going digital and infrastructure engineering. We've invested everywhere in the world, become dependably growing and compounding, including through 2020, by virtue, in particular, that the majority of our revenues, 87% are Recurring, the majority of those revenues renewed annually paid in advance and the majority from accounts whom with whom we had enterprise relationships. They spend, at least $250,000 per year with us and our EBITDA margins are comfortably ahead of 30%.
But it's particularly important to understand our end market footprint, if you like. They are the sectors of infrastructure. I'm going to show the proportion of our revenues in each sector, each segment within a sector based on, accounts specific to those sectors or products specific to those sectors. So the first of those commercial and facilities. So that would be vertical infrastructure buildings, if you like, which is proportion shown here.
The next next sector, industrial, and resources. And then the remainder of our revenue, our segments within the sector we call public works and utilities, and you see that those include roads and bridges, utility transmission and distribution, municipal, and mapping rail in transit, water and wastewater. And then together, that's public works. And utilities. We have also accounts and products that are generalized that are not particular to one of these sectors, and that makes up the balance of our, revenue footprint the portion in public works and utilities, including ports and airports alone, is 3% of GDP, and we believe we're the market leader in roads and bridges and, like, utility transmission and distribution and rail and transit in water and waste and in the disciplines of structural and geotechnical Engineering and in this sector of public works and utilities, overall.
But how big a market can that be? It happens there are 22,500,000 infrastructure engineers in the world. They recently have spent $8,300,000,000 annually on software, which works out to $369 per such engineer, But while there are only half as many product engineers in the world, they spend more on software. In fact, $12.50 per year So our total addressable market, if and I think when each infrastructure engineer would spend as much as already due to product engineers, would be $29,000,000,000. Now we think of that product engineering market in investment terms as the PLM segment where the l is for life cycle.
And indeed, expanding Tori Artam can depend on that. In fact, in our company's history, We started in 1984 with the modeling of infrastructure. We had one product, MicroStation, but it was the platform for what are now all of our specialized products for modeling by sector and discipline. We began developing and acquiring the simulation engines that infrastructure engineers depend upon. And since, 1999, we've also been in the business of collaboration systems, for project delivery or project wise environment.
And then in 2009, it happened that we had a very comprehensive, so, portfolio for project delivery, then new capital projects stopped. As you can recall in the great financial crisis, And we realized we were missing an opportunity to add value during the operations and maintenance life cycle of those same projects as they became assets. So we have since then invested in our asset wise, portfolio, representing now the proportion shown here of our revenues. So the majority of our revenues, recently are still modeling and simulation applications, these generally are on premise seats that we connect together, with cloud services to keep them current. Our systems are faster growing.
Of course, they're strictly by subscription, an Azure managed services or still some on premise hybrid, but increasingly native SaaS. And we became in 2019, one of the top 25 users of Azure for the purpose. So that continues now. If you like the consecutive nature of these functions, if we introduce now what we call digital twins, a cloud service to connect together an evergreen environment for the full life cycle of infrastructure assets than the functions of modeling and simulation, especially can be repeated and add value to maintain adaptive fitness for purpose for infrastructure assets, whatever would come along, including resilience challenges like a pandemic. So this, these 36 years have made us the most comprehensive across sectors and disciplines That matters because most substantial infrastructure projects require all of the sectors and disciplines to work together interoperably.
And uniquely, we cover the whole infrastructure life cycle and geographically, the majority of our businesses outside, the United States The majority of our colleagues are in the world where the opportunities for infrastructure are greatest. By commercial model, we still sell perpetual licenses, our principal competitor Autodesk does not, is the reason we do. We have some episodic professional services, but more and more of our professional services are part of excess plans, we call it, that are part of our enterprise relationships and recurring we build. Our select subscriptions are for those with perpetual licenses, but more than just maintenance. Our enterprise subscriptions are either enterprise, ELS, enterprise license subscriptions, or 5, which we'll look at at greater length today, and we offer quarterly and monthly term licenses.
So that's the recurring majority of our revenues within our ARR, most, by far renews annually. As I say, we have term licenses that are monthly and quarterly, the e 365 program, enterprise program is based on daily consumption, and, of course, that would be subject to the greatest volatility, which we'll report on today. So our growth strategies, We primarily grow within our existing accounts because after 36 years, there are a few new names among infrastructure engineering organizations, We have a priority to multiply, force multiply our inside sales efforts to grow in smaller and medium accounts, in particular, We focus on Asia, and we're bringing to market new cloud services jointly developed and jointly sold in particular with Microsoft and Siemens, acquisitions are programmatic for us, and we're particularly investing annual report today on investments in digital integrators to help to create and curate infrastructure Digital Twins. And now David Hollister will report on our third quarter 2020 financial metrics.
Thank you, Greg, and good morning, everyone. I'm first going to discuss our third quarter 2020 results, and then we'll offer some views on our full year 2020 performance expectations. I'll start with 3rd quarter revenues, which grew 8.8% year over year to reach 203,000,000. This is fairly consistent with our year to date growth of 9%. Breaking that down further, subscription revenues, which are over 85% of our total revenues, grew 11.6%, while our perpetual licenses and services revenues, we declined by 7% 3.5%, respectively.
These more episodic perpetual license and services revenues are typically, for us, where we'll feel softness in the face of macro headwinds and cyclicality. To a lesser degree, we'll also see any macro induced softness manifest in certain of our shorter term subscriptions and in particular, our e three sixty five daily consumption based subscriptions. As Greg will further discuss, while we're resilient and growing, We're cautious about the lingering effects of the pandemic on the capital project starts, in particular, within the commercial and facilities sector and industrial and resources sector, or the combination of these end markets represent about 1 third of our revenues. The public works and utilities sector, our largest end market, representing about 2 thirds of our revenues, while not unaffected, remains relatively robust for us. You will have noted that our last 12 month recurring revenues, which include primarily our subscription revenues, but also will include certain services revenues delivered under contractually recurring success plans increased by 11%.
This is consistent with continued strong performance in our net recurring revenue retention rate of 110 percent. Our deep and long relationships with our accounts, again, are proven with our 98% account retention rate and growing and expanding with those accounts continues to be our most prevalent source of growth in an area where we continue to invest with our user success adoption initiatives. A significant KPI for us is our annual recurring revenue or ARR. As of September 30th, 2020, our ARR has grown by 9% on a constant currency basis. Since the same time last year.
Our GAAP operating income was 5,300,000 for the third quarter of 2020 compared to 41,400,000 for the same period last year, There's a significant distortion in these results, and I'll next highlight several of these items. Firstly, our GAAP results include a charge of $26,100,000 for directly associated with our IPO in September. Uniquely, our IPO did not include the issuance of any new shares for Bentley Systems. Normally, IPO costs are against the proceeds from primary share issuances and do not flow through the issuers operating results. With no primary shares being issued in our IPO, these same costs were charged to operating expense.
Next, during the third quarter 2020, but in advance of our IPO, we issued a one time stock bonus award essentially to all Bentley Systems colleagues. These awards vested upon completion of the IPO and resulted in 15,400,000 charge to operating expense. In addition, During the third quarter 2020, we initiated and approved a restructuring plan. You'll see this labeled as a realignment plan in our financial statement footnotes. As a result, we accrued and recorded a $10,000,000 charge to operating expenses in the third quarter 2020, almost exclusively related to severance benefits.
The plan impacts about 1100 of our 4000 colleagues and is not a cost savings motivated plan. We're investing and will continue to invest any savings to stimulate several of our growth initiatives, you'll hear Greg speak about momentarily. Our GAAP net income of $5,800,000 for the 3rd quarter was similarly distorted by these significant and unusual items. Accordingly, we also present our non GAAP adjusted EBITDA, which normalizes for these and other items to facilitate useful analysis in comparison. Our adjusted EBITDA for the third quarter was $73,600,000, up 39% year over year, and up 43% year to date 2020 versus last year.
Savings initiatives undertaken as a precaution against pandemic uncertainties continue to generate the expected savings, contributing to unusually strong levels of profitability even beyond what we would have expected in an ordinary year and even beyond a concerted reinvestment of certain of these savings into the growth initiatives we're highlighting today. Certain of these 2020 cost savings are temporary in nature, while we expect a portion of the savings to permanently benefit our cost structure. Our resulting year to date adjusted EBITDA margin of 32.5 percent is nearly 800 basis points of improvement over the same year to date period last year. Of course, due to the expected return of certain 2020 cost savings, this level of margin and the pace of margin expansion is not sustainable. However, we've historically delivered and expect to continue to deliver steady margin expansion from a normalized baseline of approximately 100 basis points per year for many years to come.
We also present adjusted net income aimed at similarly normalizing outlier items to facilitate analysis in comparison. Adjusted income, net income for the 3rd quarter was $51,400,000, up 31% year over year. Before I turn to our capital structure, I'll offer a quick diagnostic on our unusually high 62 percent effective tax rate for the third quarter. This anomaly results from the non deductibility of much of the $26,100,000 in IPO costs we expensed during the quarter. In addition, as a public company, certain of our executive compensation for all of 2020 becomes non deductible.
And upon our IPO in the third quarter, we trued up our provision accordingly. These permanent differences were partially offset by some windfall deductions for stock based compensation. However, the overall effect was an abnormally high third quarter 2020 tax rate. Turning to our balance sheet capital structure and liquidity, I highlight that we finished the quarter with approximately $138,000,000 in cash and cash equivalents and $590,000,000 of long term debt. Net leverage based on trailing 12 months adjusted EBITDA was less 1.8 times.
Our debt levels reflect borrowings incurred to support the payment of a dollar 50 per share special dividend declared and paid in the third quarter 2020. Adding this to our ordinary recurring quarterly dividend of 3¢, We paid $397,000,000 in dividends in the third quarter 2020. Obviously, in the 3rd quarter, we completed the initial public offering of our Class B common stock. Our secondary selling stockholders completed the sale of 12,400,000 shares, including 1,600,000 shares issued pursuant to the full exercise of the underwriters over allotment As mentioned, there were no new primary shares offered in our IPO. And accordingly, the company did not receive any proceeds from the issuance of shares in the IPO.
Regarding cash flow, our cash flow from operating activities year to date third quarter 2020 was 176,000,000 up about 49% compared to the same period last year. We don't present a non GAAP free cash flow metric, but it might be useful to know that our year to date Q3 2020 operating cash flows reflect the payment of approximately $4,000,000 of the $26,100,000 in IPO costs with the remaining 20 the payment only of about $400,000 of the $10,000,000 in restructuring charges. With again, the remaining $9,600,000 of these costs expected to be reflected in our Q4 operating cash flows. With some of this potentially deferring into the 2021 period.
Turning now to
our expectations
for full year 2020. We expect total revenue in the range of $790,000,000 to $800,000,000, and this represents growth of 7.2% to 8.6%. We also expect ARR growth of 7.5 percent to 9 percent on a constant currency basis. And given our strong profitability performance, we now expect adjusted EBITDA in the range of $250,000,000 to $265,000,000, representing growth of 33% to 41%. Here are some additional modeling details you might find useful.
We expect full year interest expense of approximately 7,500,000 which would decline in the event of any follow on offering to the extent debt is reduced by the proceeds from the issuance of primary shares. We expect our effective tax rate for 2020 to be 23% to 25%. Normalized for the unusual IPO re related activity I've mentioned, effective tax rate is expected to be approximately 20%, a rate we target, respectively. We expect 4th quarter diluted weighted shares outstanding of $304,700,000 and full year diluted weighted shares outstanding of approximately $299,100,000. And We expect full year outlays for capital expenditures, including minimal amounts for certain capitalized software development activities to remain less than 2.5% of sales.
As they've consistently been in the past. Overall, we're pleased with our performance. While we're cautious given our visibility into some marginal pandemic induced softness and usage of our applications relative to last year, and these are concentrated in certain sectors as Greg will further discuss. Overall, Our business and revenues have demonstrated relative resiliency and we continue to grow. We're prudently managing our costs and delivering improved profitability despite these macro headwinds and have steadfastly reinvested in future growth initiatives, including our normal acquisition cadence.
And we remain intent on continued investment as clearly demonstrated by our just announced $100,000,000 corporate venture capital initiative, Bentley ITwin Ventures. Greg, I think now you're going to comment on new business developments and provide some further commentary on tone of business.
Thank you, David, for covering the financial results and our range of financial performance expectations for 2020 as a whole. Obviously based on our assessment for this fourth quarter that we're now almost halfway through. Had we instead been a publicly traded company for the whole of the year We would have first provided such annual guidance along with the operating results for the previous full year in March. Then, though, as you know, we declined to ever provide financial guidance for individual quarters, In such a volatile year as this has been, I believe we would have been updating those annual expectations for you upon such occasions as this, after the end of at least the second quarter as well as now. I am momentarily going to cover at some length our current soundings regarding the tone of business.
This will also be more protracted than I expect to normally be the case because of the confluence of exogenous cross currents now unfolding around us. I want to share an abundance of the underlying observations to which we're managing so that under these volatile circumstances, you can be best prepared to draw your own interpretations. Then I will conclude with some plans and announcements for going forward. First, I'd like to cover our DSO corporate news since the IPO in September. There is more such news than will tend to be the case for most such quarters because we've just completed our annual year end infrastructure conference and we tend to bunch up announcements to coincide with that.
Of course, our conference format was all virtual for the first time. This enabled us to expand attendance by a multiple of the 1500 or so thought leaders that we could invite to our traditionally alternating Singapore and London venues, but it also will enable you through our bentley.com website to browse and at least sample the presentations, which I hardly recommend. The conference is annually anchored by our year in structure awards for advancements in going digital. You may recall that we featured all of the 2019 award winners in our S 1 document. This press release announces the 2020 winners, and the presentations for each of them are accessible now on demand.
For me, the keynote highlight was my interactive discussion with Microsoft CEO, Sachin Nadella, about infrastructure digital Twins and our expanded strategic alliance initiatives to accelerate not only technical, but also go to market collaboration. We discussed why and how the events of 2020 to date have created imperatives for going digital to improve infrastructure projects, operations, and especially their resilience. Joint initiatives with Microsoft include our project wise 365 with Microsoft teams, Citiescale Digital Twins for Smart Cities and our ITwin platform integration with Azure Digital Twins and Azure IoT. The resident theme of the year in infrastructure 2020 was that infrastructure digital twins are now practical and versatile. Thanks to our iTunes platform and to our applications, which are increasingly iTunes enabled.
Rather than for Bentley colleagues to evangelize the benefits, this year, the digital twin presentations were made by user organizations, covering a full range of use cases as you see here and as you can watch online. Our determined emphasis now is to get across that digital twins are an accessible technology and strategy, even for smaller projects, assets, and organizations, and that it's easy to get started. To summarize, the current point of departure in propagating digital twin aspirations across our user base, Within the about 400 projects nominated by our accounts for these going digital awards, it must be acknowledged that these are considered their exemplary project. By them rather than merely being representative. The following proportions credited these digital advancements in 2020, by comparison to prior years.
17% credited 4dconstruction modeling up from 4% in 2019. This is uniquely enabled by our iTunes enabled Syncro software. 35% credited reality modeling, up from 28% in 2019, This is enabled by our context capture software and cloud services, which produce 3 d reality measures from photographs and scans typically from drones. 23%, up from 20%, credited a connected data environment by which we mean combining project wise and asset wise. 27%, up from 23%, credit eye models used to semantically align deliverables.
Often, eye models are behind the scenes enablers, which users don't see for digital workflows. 13%, up from 7%, credit asset performance modeling, in which modeling and simulation applications are reused during the life cycle of asset operations. And finally, 33%, up from 24%, Credit Digital Twins. Although that can be interpreted as aspirational in many cases, if not, literally, I Twins platform cloud services yet. At the top of the scale, with greatest potential benefits from infrastructure Digital Twins.
We released at the conference our 2020 Bentley Infrastructure 500 the unique global ranking of the largest owner operators ranked by their balance sheet infrastructure asset value, net of depreciation. Shell is number 3. Shell QGC in Australia was the winner in the juried category of utilities and industrial asset performance. For their connected data environment, which over the last 5 plus years, has taken full advantage of project wise and asset wise, and now the ITwin platform for this world class mega project and resulting assets. But I find it particularly significant that this year, Shell showcased their groundbreaking ITwin platform adoption for deepwater project digital twins, all of which has occurred during 2020 to date.
This extends the plant site cloud service that we have co developed with Siemens to include conceptual stage engineering. Shell's commitment during this austere period for them reinforces that industrial and resources owner operators recognize that going digital is necessary to effectuate the step changes in economic effectiveness on which their future depends. But turning now from our corporate news to the tone of business, we do see a perceptible change from the second quarter of 2020. During the first half of the year, we saw progressively by month and in turn for regions across the world, a reduction compared to the same period in 2019, and the number of days that our applications were used and which generally returned to parity by the end of the quarter. This is the slide from our IPO roadshow presentation, which summarized that.
In this next slide from that roadshow presentation, we expressed our directional expectations in degrees reflected by a different color for each sector about the potential direction for the trend of application days. In a nutshell, during the third quarter of 2020, these directions have eventually Of particular significance for impingement on our overall revenue and ARR growth, in the industrialresources sector, where I have just noted that owner operators seem generally to be continuing their initiatives in going digital to improve the operations and maintenance performance. That's as we say the OpEx of their existing assets, there has been a detrimental impact for the workload of some of our users of the decline in capital projects activity. We say CapEx. And that has shown up for the first time presumably after working off backlogs in the third quarter.
Because these affected EPCs Engineering, procurement, construction contractors are individually very large enterprises. They have tended to be early adopters of our e365 daily consumption based enterprise licensing, which indeed helps them to manage just such cyclicality, and so provides us a competitive advantage in their software budget allocation. But commensurately, In Q3, under e365, this has reduced our revenues from these EPC accounts. And annualized has also reduced our related ARR. Relative to earlier in 2020, and even more so relative to 2019.
Since this relates to macroeconomic conditions that are expected to prevail for longer than the direct pandemic consequences, we want to particularly bring this to your attention. But on the other hand, we do not now see the same downturn in the majority of our business as in industrial resources CapEx. So to help you more fully weigh and understand our interpretation of these cross currents, which seem to have never been harder to predict, and the impact of which we think depends on our business mix, both with respect to macro conditions by infrastructure sector and with respect to our different commercial contract sensitivity to short term consumption, I will now provide many more observations about our software usage than we would normally find it useful to report. And thus, we do not undertake to update these measures in future. Before breaking out, each of the 3 infrastructure sectors that we measure.
Keep in mind that about a third of our revenue is from accounts who can't be reliably classified into any of these, generally because they're diversified engineering firms who variously work in all these sectors. But it is our belief and experience that the sector weightings within all of their businesses tend to correspond in aggregate to BNY's overall proportions and thus to reflect the same usage patterns that I will next share. To start with, with respect to the same period in 2019, our overall application days declined in 2020's third quarter by about 4%. After being a essentially level year over year in 2020's second quarter when late arriving usage logs were factored in. Application days for our accounts within the commercial slash facilities sector, that's about 8% of our total, were down most steeply from 2019 at about 9%.
For commercial slash facilities, CapEx accounts, engineering, architecture, and or construction contractors, application days were down about 14%. Accounts in this sector do not tend to be on e365 contracts. Application days for our accounts within the resources sector, which is about 19% of our total application days, were down from 2019 about 8% after being down from 2019 2020 second quarter by about 4%. For industrial resources, CapEx accounts, EPCs, the largest of whom tend to be on E365 contracts, Application days were down about 11%. Application days for our accounts within the public works slash utility sector were down from 2019 about 2%.
For public works slash utilities, CapEx accounts, Application days were up about 4% from 2019. For public works slash utilities, OpEx accounts, owner operators, Application days were down about 7%, representing more than half of our overall decline in application days from third quarter 2019. We believe this is because many of these organizations reduced their workforce schedules to effectuate partial furloughs and suspended fieldwork. Many German utilities, for instance, adopted halftime work in conjunction with pandemic lockdowns. In general, Although obviously no one seems able to authoritatively predict future pandemic severity, we do not believe these policies will be extended or repeated and we are considerably less concerned about an enduring overall downturn in public works slash utilities.
Application days for our products rather than for accounts that are specific to public works slash utilities, and this is about 24% of our total application days for these products. In the third quarter were up from 2019 by about 3%. While modeling and simulation applications still represent the majority of our revenues, our collaboration systems have consistently grown faster. In the public work slash utilities sector, users of our mainstay project wise design in the third quarter of 2020 were up from 2019 by about 4%. During 2020, accelerated by work from home virtualization, overall users of project wise through our Azure cloud services, including design integration managed services as well as our native SaaS project wise 365, have increased about 23%.
Overall, project wise, revenues for 2020 year to date through the 3rd quarter are up from 2019 by about 17%. New business for asset wise faces the challenge of completing enterprise scale procurements during travel lockdowns. Usage of asset wise in the third quarter of 2020 increased over the same period in 2019 by about 4%. Overall, asset wise, revenues for 2020 year to date through the third quarter are up from 2019 by about 6 Finally, as to our new Itwin platform, ARR has grown throughout 2020 consistent with a reasonable chance to reach significantly, I think, as to new business in general, through the third quarter of 20 money year to date, we have achieved 89 percent of our overall new business quota, which after the pandemic onset, we set and seasonalized to be the same as 2019. Within the new business quota, we double the weight for our cloud services, project wise, asset wise, and eye twins.
To sum this up for 2020. During the third quarter, because of the E365 application days downturn led by the EPC which decremented our ARR and to that same extent, therefore, new business, we fell behind the year to date 90 percent of 2019 new business pace. We hope to catch back up to that pace during the fourth quarter. And thus the full year, and there generally appears to be sufficient pipeline to chase. But, obviously, this can't be taken for granted.
What I can say is that we are quite confident in the relative resilience of infrastructure engineering and and about our anticipated future. To speak now about going forward, As we announced last month, our going public process has helped us in recruiting world class software executive talent. While I believe that we have self developed an excellent pipeline of executives internally during our 36 years as privately held company, we obviously were not able to internally develop public company experience. I am pleased to say that we welcomed over this summer. First, Nicholas Cummins, as our new chief product officer from SAP where he had charge of SAP's marketing cloud businesses, and over time, also success factors and concur all of which we fully utilize.
Nicholas also has entrepreneurial experience. He's based in Munich, Germany, The majority of our colleagues are in our product advancement group reporting up to Nicholas who reports to me. And we welcomed Catriona Lord Levin, our first chief success officer, who led user and enterprise success initiatives at Autodesk over multiple decades, with excellent results that we roofily observed firsthand. Kat, based in Samson Francisco, is inaugurating our user success and enterprise success functions reporting to me. And we welcomed Chris Bradshaw as our new chief marketing officer coming most recently from Blue Prism, but having been at Autodesk through 2017 in senior roles, including chief marketing officer.
Chris is based here on the East Coast and reports to Gus Bergzman, our chief revenue officer. Our restructuring charge in third quarter 2020 for colleague severance is not to cut our costs, but rather the opposite. We are enabling Nicholas, Cat, and Chris to reprioritize new talent needs as we resolutely reinvest a large portion of our 2020 cost savings into our public company era growth strategies. Faster accretion in existing accounts, force multiplying inside sales to better reach small and medium sized accounts, focusing on Asia, and joint cloud services with Microsoft and Siemens. And addressing our final 2 growth strategies, programmatic acquisitions and digital integrators, we announced at our year end infrastructure conference that cohesive companies a digital integrator, which we wholly own, but manage independently within our Bentley acceleration initiatives, acquired the UK based going digital advisory firm, PCSG.
We are increasingly thinking of our Bentley acceleration initiatives as a second segment afforded by our increased resources as a public company. And today, we are excited to announce a further initiative. We are committing to invest over a period of years $100,000,000 in corporate venture capital through the new Bentley ITwin Ventures fund, which in turn will invest in entrepreneurial and emerging companies participating in the infrastructure digital twin's ecosystem being catalyzed by our eye Twins platform. The first such ITwin Ventures investment, representative of many more anticipated, has been in future on AS. The Norwegian developer of Subsea Digital Twins, including For Shell.
And that closes the loop on our prepared remarks, and we look forward to your questions.
Thank you, Greg. We'll start by taking a question from Joe Brueink from Baird.
The commentary on industrial natural resources was really helpful. You've also seen some comments from some of your peers that maybe things started to improve a bit in the month of October, specifically with EPC customers in natural resources, I'm wondering if that was evident in your book of business at all.
Joe, thanks for the question. We we do have excellent telemetry. And in the 4th quarter so far, everything has tended for the better. You know, we talk about new business. New business for us is what we're selling.
It's the accretion in ARR. It's not our whole ARR. It's just on the margin, how much it grows. And if it doesn't grow. That's a detraction from our new business.
So that's that's looking better than the third quarter, looked at any point and and usage has turned in the right direction. I don't think that's true, however, for the EPCs, for the, industrial resources firms. They they use our software for really large projects. If you look at, these EPCs in their own, the ones that are public, companies and their own reporting, they're down 15% to 30% on the previous year. And anyone on the call would be as well able as me to predict when capital projects come back in the, process plant and energy sector, but we don't see it yet.
I'm afraid. Everything else, more than makes up for that. Thank goodness.
Okay. Great. That that's helpful. And then one other thing that I think is interesting, and it seems to be occurring maybe in this theme of kind of divergence or or, crosswinds, but the backlog work with civil engineers seems to be holding up comparatively much better than civil contractors. And so it would suggest that, you know, the planning is still a going on project work is out there, there's still a good pipeline if you're a civil engineer.
I, I suppose that speaks to your resilience, but how does that type of environment, maybe speak to the type of budget you're likely to see in 4Q with your civil public works customers, the degree of visibility that provides for your 2021 ARR performance?
Well, it it I think what you say is is is quite observable. It happens I was just on a panel during the past week with, AEC Advisors. They're they they 2 surveys of all of these firms, the world over, AECC for them is not construction, but rather consulting, as they say. So these are the infrastructure engineering firms, the world over, and they survey most of them. They believe they have most of the dollars.
And they're the result of the survey for 2020 as it defirms of late expect, to grow slightly in 2020. Now when AEC advisors weighted it then, not average or median, but by farm size, the growth came out to 0 for the year, But compared to what's going on with GDP and the economy, it is a relatively resilient, sector and, of course, is spending more ongoing digital, which the subject of the panel, that that I was on, you know, in in in this country, remember, the United States is is a little under, half or been under half of our, revenue, we we look like we'll be welcoming a new administration, and it's likely that we will join the rest of the world in focusing on infrastructure investment as a means of fiscal stimulus because it's thought to be that, which has the long the most enduring best return on investment. Much of the world has already determined to do that, and and is part of the, of the reasons we're, encouraged about 2021 in particular. But in the, in the US, we, we, we think, that will that factors in. And in fact, these firms that I'm talking about are expecting to grow in 2021 about in the, to the extent they have grown annually prior to 2020.
And as I said, 2020 is a flat year, which, which looks pretty good for the population you're talking about.
Great. Thank you very much.
The next year from Brian Essex from Goldman Sachs.
Brian, you you're muted, I think. There we are.
Hear me?
Hey, Brian. Yes.
Oh, great. Great. Thanks. And congrats on the results and emerging as a public company. I was wondering if maybe we could touch on, you know, you've you've you've spoken previously about, an initiative to penetrate some of the smaller customers on your platform.
Obviously, the larger customers are are are pretty substantial in terms of their contribution. Any any thoughts that you'd like to outline in terms of those plans for the other 33,000 or so smaller customers or mid mid market customers on your form and, the trajectory that you might expect from penetration of those accounts?
Well, it's very much our priority for 2021 has, everything to do with the reinvestments we're, we're making now of our, of our cost savings. We wanna to be going digital in the way that we develop e commerce capabilities. You know, we didn't have e commerce capability until a very our new chief marketing officer is very much dedicated to the head, and our remix of resources will help us with direct engagement, and and, increase in, marketing effort and effectiveness as a public company, and we have a very significant appetite to, improve our penetration there, some of our initiatives are underway, but more so, will be in, in 2021. The the engineers and the smaller firms need the same superior software as the engineers in the, in the larger firms, it's just late in the game that it's getting our full attention, but it has that net.
I I might just add, Brian, that, as a as a proof of concept for us and a head start, one of our acceleration initiatives, virtual city, where we're targeting individual practitioners, which tend to be, of course, the smaller and medium sized enterprises, through an ecommerce platform and embedding expert services with them. Is actually performing as expected, and something that's gonna, serve the light of the way for us as well. Going after these small and medium sized accounts.
Great. That that's helpful. Maybe just a follow-up. You know, in in terms of you know, expectations of, you know, potentially, you know, as we saw yesterday with, you know, news that the vaccine progressed, think about, the scenario where the economy might start to open up a little bit more, particularly from the re with the respect that we've seen you know, a little bit of, a pressure on utilization from some industries that have been pressured in this macro environment. Are there any kind of, you know, key economic or or macro indicators that you typically look at to kind of anticipate what the impact or the magnitude of, you know, reopening might have on utilization on your platform and and how meaningful that might be.
Well, I
do wanna emphasize that other than in, industrial and resources and perhaps commercial and facilities, all that, that's relatively small That's why we haven't dwelled on that. The in in public works and utilities, any, any decline in, in, application days, we think, is kinda institutional about scheduling changing, and I don't think application weeks or months would have would be down in some of these organizations that literally have responded to, lockdowns with changing their their work schedules. The the most significant aspect of reopening are the, infrastructure plans around the world. And if I look at Asia in particular, we say focus on Asia because it's it's been such a reliable source of new business growth for us. This year so far, it's it's not been, better than last year as it normally is.
But a lot of that depends on the 4th quarter. The 4th quarter is always the strong quarter for, Asia And countries like China has just done a new 5 year plan that emphasizes digital plant and digital cities and environmental initiatives and so forth, all of which are are great for us and and open up new opportunities or Australia, their new budget has a 10 year infrastructure plan for transport infrastructure where we're particularly strong And and the same is true in most countries in the world, anyone can handicap it, but likely to be also true in the United States, we think. And and focus on energy adaptation also is good for the for the work of infrastructure, engineers, and and and if I come down to another factor that that could be helpful, looking forward, it is that in our own country, to be less antagonistic about globalization, will serve us well. For instance, in, in China. So these factors are coming together to, to, as you say, make us a rather, rather optimistic about 2021.
Great. Very helpful color. Thank you.
Well, next here from Brad Sills from Bank of America.
Oh, great. Hey, guys. Thanks so much for taking my question here. And, maybe just to follow-up to the comments you just made, Greg, on on China. I think might might be helpful, to talk about how Bentley's positioned.
What's your presence in China? You mentioned this 5 year infrastructure investment plan. How is Bentley positioned to, to participate in some of these projects? Thank you.
We're really well positioned in in China, fully invested there. It's only about 5% of our revenues now, but a lot higher portion of our, potential, the the question in in China challenge for us, while there's an immediate challenge that there are not, Azure cloud services. So we're engineering around that and, and, Chinese accounts need to do their own, private cloud stack and so forth, which they can, and have accomplished with with their iTunes ambitions and so forth. But we really have to, scale up to that, opportunity in the the cities of China, for instance, have assigned industrial design institute to be responsible for their BAM and digital cities, strategies. And we often have experience with them already.
So there's there's just a lot of headroom in China over 2020 to date, It hasn't it hadn't gotten easier, but there are some export controls now that slow things down. And, and generally, trade tensions have not been helpful, but I, I think, all changes for the better as as far as that. And we really are very well, positioned, in in China in terms of talent and resources. And, there is a very good pipeline there, and we stand a a good chance, we think, of, reaching, last year's new business level, by the end of the fourth quarter, and we're applying ourselves, assiduously to do that.
Great. Thanks so much. And then and, David, one for you, please, if I may. Gross margin came in, quite a bit better than where we were involved. Can you talk a little bit about the puts and takes there?
What's what's driving, you know, maybe the the the side and the gross margin, at least to our model.
Sure. I I assume you're talking about adjusted for the, yes, the the the nonrecurring, items that I've highlighted. Yeah, it's, part of it part of it is cohesive. The acquisition, is, is a strong margin performing services business for us. So that's a that's a bit of a lift.
And, I've said, we can we can the the other piece of our cost of goods that goes into that gross margin is our cloud costs, our cloud delivery costs, and we continue to find efficiencies in delivering our cloud services. So, it's, that that's contributing to some some improvement there as well.
Great. Thanks so much, guys.
We'll next hear from Matt Hedberg from RBC.
Hey guys, good morning. Thanks for taking my questions. So I wanted to ask about E365. It's obviously, as you alluded Greg been a great competitive advantage for you guys over the years. When you think over the next several years, what's the right way to think about the pace of adoption of these three 65, in your base, what would that mix look like longer term?
And then when a customer moves to E365, what typically happens to their spend?
So, really, E365, you might say, oh, Greg, you you've taken on this risk. Are you so sure about that? Our our predecessor ELS program also had a mark to market based on consumption, but it was only once per year. So it was lagged. And and now we don't have that lag, but it's so much preferable to the account for us to share the risk in cyclicality and, and we're prepared to share that risk.
It isn't a large risk and proportion to our huge book of annual resets, if you like. The reason we prefer the E365 format, despite taking on a bit more immediate volatility is it includes the success plan component where We're really competitively distinguished by having more civil engineers and structural engineers and geotechnical engineers who can help in digital workflows that our accounts want and in taking full advantage of the software, we embed them, and and we charge for that in the application day charge. So, typically, the spend, does go up, somewhat, but from our standpoint, that's not the opportunity we're seeking. It the more it's the accelerated accretion from application usage growing faster when in effect we can virtually embed our experts to help the software get better used. We can with our with our cloud services for our applications, we can see what functions are being used and not used and be helpful, in in direct engagement, going digital ourselves to embed our success force and better enable them.
That that's what is for us, the the motivation. So we suppose it will take another several years, but we'll end up, migrating the ELS book to E365 and a year like this doesn't deter us because in the combination of forces that creates economic challenges and so forth, where we're pretty well able, as you see, to absorb this additional volatility, on the margin, and we have an appetite to do more of it.
So just a, just a frame, just to frame the scale of that for you, Matt. So about a third of our ARR is these, enterprise scale subscriptions. And wear, give or take, about halfway through, in terms of the ELS to E 365 migration.
Super helpful, David. And actually just one more quick one for you on the margin side. Services revenue, I believe, has been about 8% of your year to date revenue. You talk about the long term trend of services revenue in your overall mix? And and do you think you're going to be able to leverage the channel a bit more for some of the lower margin services work?
Well, if we do the the the better job we do with our project wise and asset wise offerings, the services would be required in the scheme of things. The the future of of services for us is the digital integrator opportunity to literally help with the data in the case of an infrastructure digital twin. When you open up what's been dark data. So you can bring the ET along with the IT and the OT for this evergreen digital twin opportunity. You see there needs to be and data quality.
It's a good job for engineering firms when you say channel. I encouraged in the panel that I described. I said the future for the engineering firms is to be the creator and the curator because it's all it's never done. You need to maintain the digital twin up to date. And to be in the business of the analytics and the benchmarking and so forth, which, which we we don't wish to be in those businesses.
The those are opportunities for digital integrators, and the best channel for us would be the engineering firms themselves to bring the digital twin opportunity to the owner operators. That's the, that, that would be the long term way in which that occurs. As you know, we need to incubate some digital integrator experience. And so we have that under our Bentley acceleration initiatives, but we sort of compartmentalize that. So we manage that differently than the, than the software business.
But yes, we do not wish to grow professional services within our core business. We wish that to be an opportunity for others, but especially for engineering firms, whom we need to improve on their business model of selling their hours and and wish very much to do so. And are as they virtualize this year, they have much more receptivity and motivation to do that than ever.
Thank you.
Alright. We'll next hear from Mad Broom from Mizuho.
Greg and David. So, during the quarter, you announced an expanded relationship with, Micro soft. I, I guess, more broadly, how did your strategic partnerships and ventures with the likes of Microsoft Siemens and, topcon, performed during the quarter?
Well, with with Microsoft and Siemens, both, we we sort of transformed our relationships in each case because we've, for the past years, focused on technical collaboration. And now that has blossomed into these, what I call digital Coventure, these cloud services that are ready for market, and we need to focus on joint go to market where either of us can can sell them. So that's not just one initiative, but a bunch of initiatives, which happen at the same time to be occurring with each of Microsoft and Siemens, transforming from merely technical collaboration to also go to market collaboration. With with Topcon, our joint ventures, digital construction works, and that's not the best place to be at the at the very moment, and needs probably to diversify itself. What we're we're we're working on focusing on heavy civil construction where there are particular opportunities where we call it constructioneering where design build approaches consider the the design and construction, at the same time and innovate in that respect.
Yeah. The the the BCW topcon joint venture is just right in the crosshairs of capital projects, delays and implications. I think, we picked up about a
half a $1,000,000 loss in the quarter relative to our, equity method investment in that joint venture. There. The the focus there has shifted from, revenue generation face of some pretty severe headwinds towards demonstrating some, referenceable successes and and building out, building out their capabilities.
Okay. That's that's definitely helpful. Thanks. And I'm just interested if you could maybe provide a little more color on the sort of regional trends, that that you saw playing out during the quarter, especially in in in in Europe?
Well, Europe has been a bunch of separate regions. It's tough to generalize. I will say for us, EMEA, we include Middle East And Middle East is is still depressed in terms of, application usage really hasn't come back as has most of the world after the after the lockdowns, which we think is now not regional, but a matter of of the sector, the industrial resources sector, affecting that. In we we've done alright, year to date in ARR, in, in Europe, new business, I think, is regaining momentum, but, And if I just turn my attention to Asia for a moment, Asia, are are in Asia, there are economies that depended most on face to face travel, and, and even for procurement processes, they weren't ready for being digital in India, and and other parts of South Asia, there were not the cultures of working from home and laptop and so forth. All that has been surmounted now.
In general, I think all of infrastructure engineering has virtualized successfully is better off for it. Can now everyone can work on projects anywhere with collaborators anywhere. And I think they're energized by it, and and will never, give up that level of utilization with the collaboration tools that they've learned and and honed. But but, you're a has, has, tough to generalize, but, but has still some improvement to return to. Is there more to say on yours?
Okay.
Perfect. Thanks very much.
Well, next here from Jason Salino from KeyBanc.
Guys. Can you hear me alright? Yes. We can, Jason.
Great. You know, I I really appreciate all the color on tone and that the businesses, but looks like renewal rates are still pretty strong. But how should we think about the relationship between some of these usage trends in revenues for the non E365 business?
Well, I'm gonna let David add more, but if they're unrelated, when when we count application days that has a direct bearing on E365 revenue, and therefore on ARR, and therefore on what we call new business. I realize new business is new business is our own quota. It's not something we we measure for you necessarily, but we're we're We're not far from last year's new business, and we can catch up even, we think, but all of that is impinged upon by application days that's on E365. Otherwise, it it makes no difference. For the great bulk of our renewals that that are not based on application days, there there isn't the direct impact and and renewals are occurring and account are not expecting to spend less, and I think are all expecting to spend more.
Yeah. I would throw into the category of application day usage that's already manifest in our ARR and our revenues, these, our, our term license business, the monthly and quarterly term licenses obviously would have been picked up in the results you see already. But, with with the majority of our business being annually, renewing you know, the implication is a matter of how prolonged is, is the, impacts of the pandemic. And, you know, if it if if if it carries on for another year, you'll start to see that in some of in some of the annually renewing contracts.
Okay. Great. And then maybe a quick follow-up on, some of the operating margins. So if I look at adjusted operating margins of 34%, you know, highest watermark in company history.
You
know, any particular thing sense management and then, you know, how sustainable are are these margin levels?
Yeah. So, a a good question. And, you know, I'm I'm not I'm not here to provide our 2021 margin guidance, but I, you know, I would like to at least comment directionally on on some of the trends you're seeing and and, where we're headed. So 20, as I said, 2020 is, fairly opaque, unusual year in terms of our, in terms of our profitability because of some pretty significant cost savings initiatives so so even backing up from there and looking at 2019, as a as a normalized baseline to start thinking about, margins, you would have expected us to see our normal 100 basis point or so, embedded improvement just from, efficiencies and scale. Then, you know, we, we, we have pretty significant cost savings in 2020, you know, in in the neighborhood, Jason, of 4 of $40,000,000.
And at least at least half of that is going to return to our cost structure in, 2021. The, the the other thing I will point out for 2021 relative to 2020 is that effective October 1st, we're taking $30,000,000 annually of, compensation to executives that previously was cash based, and will be stock based going forward. I'm not we're not seeking or expecting margin expansion credit for that, but I just want to make sure it's understood that, In in, in the 4th quarter, you'll see $7,500,000. And for the 4th quarter 2020, moving from cash base to stock base, And then in 2021, a full year of 30,000,000, which is give or take, 3a half margin points and, and, and, and we'll, we'll add that back when we're reporting adjusted EBITDA just to be benchmarked and aligned to our peers. And then, of course, in 2021, you can also expect, normal scale efficiencies of 100 points or so coming back to our, improve our margins.
And we're committed to do that, and we demonstrated ability to do that. Regularly and annually going forward.
Okay. Great. Appreciate the color.
And for our last question, we'll hear from Gal Munda from Berenberg.
Yeah. Hi. Good morning. Thanks for taking my questions. The first one is just, I really liked a short example you gave, Greg.
And I was wondering, if you could talk a little bit more about the usage, what happens between the more advanced owner operators like Shell versus an average customer you have on the owner operator side today, maybe specifically, you know, how much of the uplift than there is when they did adopt other part of the technology all the way to the digital twin versus just the modeling side?
Well, Michelle, of course, is a, private company, you know, is in the private sector and, wouldn't be so surprising if innovation happens faster in the private sector. As in the case of shell than in the case of publicly owned infrastructure, with departments of transportation and government, government management. So but but they the great thing about selling to owner operators in public works and utilities is they don't compete with one another. So they're glad to share advancements and so forth. So the single thing that I'm most pleased by this year is at the year end infrastructure conference.
Again, I hope you will all, watch at least some of the sessions there, but the the fact that you have of some of these owner operators wanting to present and share with the affinity group of other owner operators around the world, it's one of the reasons it's so important to watch the Chinese. We sometimes say that in public, in infrastructure who does R&D. In in China, they do. They, they wish to adopt everything as quickly as possible in terms of, digital twins, and it's great to see those examples. When we come back to the United States and and our our changes that we may expect here, we hope we may be able to influence, you know, an infrastructure spending bill so that it would encourage digital twin approaches to improve the economics for the whole life cycle.
And I, I think that's not out of the, not out of the question. But generally, what what what holds us back is levels of ambition and levels of ambition to go in going digital have discernibly improved. That's my take on our year end infrastructure this year and the and the owner operators themselves sharing these, success stories. I know we're at the end of our time, and we've used more time than usual because of this notion that we had to include our introduction to the company and then this tone of business. And in conclusion, I would like to thank our our Bentley colleagues, the 4000 whom are now all shareholders, but I want to thank all of them for their sacrifices to start with and then commitment and resourcefulness in this year, so far.
And we all look forward to 2021, as I've said, but first, let's, deliver, which is in our sights, a terrific end to the year, over resilience, 2020. Carrie, was I supposed to say that now, or are you gonna sign us off?
Thank you, everybody. Thanks, Greg. Thanks, David. And we'll see you next.