Aspen Technology, Inc.

Ladies and gentlemen, thank you for standing by and welcome to Aspen Technology first quarter fiscal 2021 business update call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to our speaker today, Aspen Technology Chief Officer, Mr. Carl Johnson. Thank you. Please go ahead, sir.

Thank you. Good afternoon, everyone, and thank you for joining us to discuss our selected financial results for the first quarter of fiscal 2021, ending September 30, 2020. I'm Carl Johnson, CFO of Aspen Tech, and with me on the call is Antonio Pietri, President and CEO. Before we begin, I will make the safe harbor statement that during the course of this call, we may make projections or other forward-looking statements about the financial performance of the company that involve risks and uncertainties. The company's actual results may differ materially from such projections or statements. Factors that might cause such differences include, but are not limited to, those discussed in today's call and contained in our most recently filed Form 10-Q. Also, please note that the following information relates to our current business conditions and our outlook as of today, November 5th, 2020. Consistent with our prior practice, we expressly disclaim any obligation to update this information. The structure of today's call will be as follows. Antonio will discuss current business trends, and I will provide an update on completing the filing of our Form 10-K for fiscal year 2020, and our 10-Q for the first quarter of fiscal year 2021, as well as certain balance sheet items. With that, let me turn the call over to Antonio. Antonio?

Thank you, Carl, and thank you all for joining us today. We hope all of you and your families continue to be safe and healthy. Given the ongoing process to complete our 10-K filing for fiscal 2020, we will also be delayed in completing our quarterly closed process for the first quarter. For that reason, today I will only discuss our annual spend performance in the first quarter and provide an overview of current business trends and our expectations for the remainder of the fiscal year. Annual spend at the end of the first quarter is expected to be within a range of $596 million to $597 million, which would represent 8.8% year-over-year growth and 0.6% growth sequentially. This was solid in the context of the macroenvironment in what is normally our seasonally lowest growth quarter. Even in this difficult macro environment, our customers continue to invest in Aspen Tech solutions to enhance the operations of their assets and enable them to run safer, greener, longer, and faster. We know from previous economic downturns that the mission criticality of our products has been made even more evident to customers, and we believe that is true today as well. Our annual spend performance in the quarter reflected the anticipated attrition amount for the quarter and in line with the higher level of attrition we expect in fiscal 21. And gross growth that was largely in line with our performance in the first quarter of fiscal 2019 and 2020. Customer interest in investing in technology to realize the benefits of digitalization remains high. and we had encouraging wins across all three of our core verticals. Not surprisingly, we did see a number of customers pause over the summer to regroup and recharge after what had been several extraordinarily stressful months in their operations. Customer engagement and the quality of our conversations around transactions has picked up since Labor Day and especially into October. reminiscent of what we saw in the fourth quarter of fiscal year 20. Amongst our owner-operator customers, we had a solid quarter in chemicals, where we're seeing a slow and steady improvement. As we mentioned last quarter, the recovery in the chemicals market is uneven, with the various changes in demand patterns due to the current economic environment being a positive catalyst for parts of the industry and a challenge to others. These customers continue to demonstrate a commitment to their digitalization initiative and a focus on making high ROI investments with Aspen Tech. We have generated consistent growth for many years amongst these customers and expect that trend to continue. In the energy vertical, we saw good customer activity and interest. The pause I referenced earlier was more pronounced among these customers. But we're optimistic for the balance of the fiscal year based on improving conversations around deals, as just mentioned, and a growing pipeline of opportunities. Similar to what we hear in chemicals, energy customers have made clear that the disruption from the pandemic has reinforced a need to operate their assets with greater agility and flexibility in the future. As Pentec has long been a core enabling technology to meet these goals, And as I will explain in a moment, we're poised to take our value creation to the next level. In the EMC market, as you would expect, these customers are adjusting their operations to the new levels of capex spending in their end markets. Positively, we went through a number of renewals in this market during Q1, and they were in line with our expectations. In one case, we had a larger renewal that was signed for a shorter than typical duration, even as this customer's annual commitment with Aspen Tech went up. It's too early to tell if this will become more common with these customers, but this particular renewal will have an impact on the relationship between annual spend with bookings and revenue when we report our final first quarter results. We continue to see and capture emerging opportunities for growth with these customers as they look to diversify their book of business towards operations and maintenance activities in brownfield assets. In the quarter, we signed a new agreement with an important North American engineering firm that committed to our Aspen Fidelis and Aspen Intel products in the APM suite as part of its efforts to grow business in this area. One thing that has become clear in the last eight months is that important global trends, including the focus of our customers on their sustainability efforts, have accelerated. This means that for the industries we serve, there's this additional impetus to accelerate deployment of digital technologies to achieve their sustainability targets. The move to net zero carbon emissions and reduction in plastic waste is being driven by treaties such as the Paris Climate Accord and society's demand for a cleaner environment. Traditionally, the return on investment from our digital technologies has been measured in efficiency and operational gains that translate into profitability. Now, we're seeing more customers adopt our solutions to also address sustainability goals and justify the investment on this basis. Digitalization has been in progress for decades in the process and other capital-intensive industries, and now next-generation industrial AI capabilities will become critical to addressing climate change and plastic waste in the environment. In fact, in a recent survey we conducted with ARC of global chemical and energy companies, 90% of respondents had sustainability initiatives in place, and 75% of respondents rated DDoS transformation as highly important for achieving sustainability goals. In APM, we continue to be pleased with the level of business activity and our number of active pilots, which once again set a record in the first quarter. As we discussed on our last call, we're seeing a number of delayed purchasing decisions with this suite as customers look to hold the line on expenses in the near term. We're confident this is a near-term dynamic and that the positive activity we see in multiple verticals with pipeline creation and active pilots will translate to faster growth as the economy normalizes. To highlight a couple of APM wins from the quarter, a new North American mining customer committed to deploy Aspen Intel after a successful offline pilot. with the objective to improve the reliability of equipment in their mining operations. Similarly, we saw one of the largest Russian oil companies expand the use of EMTEL to one of their largest refineries in the country after the successful rollout at their first refinery. This is part of their digitalization strategy to improve reliability across their operations. Looking forward, We remain confident in our outlook for the rest of the fiscal year while cognizant of the difficult macro environment that our customers are facing. We had a solid first quarter, and as mentioned, the quality of conversations with our customers around quarter transactions is positive, and our pipeline of business continues to grow. We are reiterating our full-year annual spend growth target of 6% to 9%. which we have known will be weighted to the back half of the year. We continue to expect attrition to be in line with our guidance of 5% to 6%. And we're also confirming our full year free cash flow target of $260 to $270 million. From a product perspective, we have recently introduced some of the most important product releases in our history as we deliver on our industrial AI product capabilities and our vision of the self-optimizing plant. We released Aspen One version 12, which embeds AI across our product portfolio and uses the capabilities in the Aspen AIoT hub to deliver enterprise-wide analytics and insights. A key advancement in version 12 is the introduction of Aspen Hybrid Models, the first hybrid modeling solution ever introduced in the market. Aspen Hybrid Models captures data from assets across the enterprise and applies artificial intelligence, our historically strong capabilities in engineering first principles modeling, and our 40 years of domain expertise to build the first and most comprehensive and accurate hybrid models in the market. With Aspen hybrid models, customers are now able to address problems that cannot be solved with engineering first principles models alone, build better models faster than ever before, and sustain these more accurate models in production longer than before. Aspen Hybrid Models is a significant achievement that has been incredibly well received by customers. In fact, Hybrid Models set a record with the most customers participating in our innovation club and beta testing phases. Other exciting innovations in Aspen One version 12 include Aspen MultiCase, which allows customers to run thousands of concurrent simulations either on-prem or in the cloud to allow faster and more accurate decisions to optimize operational complexity. Aspen Maestro, an exciting new capability of DMC3 and EMTL that automates model development by guiding newer users on how to build a model or agent. Aspen MES Collaborative, which connects data from across all assets, including small sites where data has historically been stranded and aggregates it with our enterprise level historian, and Aspen Cloud Connect, which provides flexible and high performance connectivity and security to transfer data from the edge to the cloud. We also announced the Aspen AIoT Hub, which has received terrific industry and customer feedback since its release in August. We now have the ability to enable seamless and flexible data mobility and integration from sensors to the edge and the cloud while providing important new visualization capabilities. The AIoT Hub is a core element of our strategy as the industrial AI company. It is our cloud-ready architecture that supports the ability to collect vastly more data than ever before to support our new generation of high-value hybrid applications. It also provides an environment for data scientists to develop AI applications, leveraging the machine learning algorithms in the data science studio environment of the hub. This is increasingly important as customers' data science groups look to contribute to the digitalization efforts of their organizations. Aspen One version 12 and the AIoT Hub are only the first step in building out our complete strategy for Aspen Tech as an industrial AI company. Our future releases will more deeply embed AI into our solutions that further improves the speed, accuracy, and quality of models built for assets that run on Aspen Tech products. Aspen Tech is democratizing the application of AI to where it can deliver the most value. We believe the self-optimizing plan is key to achieving a digital enterprise, and with version 12 and the AIoT Hub, we're creating the foundation for that reality for our customers. In short, we're on a journey to reinvent how the process and other capital intensive industries manage their assets and create significantly greater value. To summarize, we got off to a solid start in fiscal 21. More importantly, we have delivered a tremendous amount of new groundbreaking innovation to the market in recent months. For 40 years, Aspen Tech has enabled the process industries to operate in ways not previously thought possible. We are confident the new innovations in the AIoT Hub, Aspen One version 12, and our broader innovation on hybrid modeling and hybrid products represent the biggest advancement in the process industries in a generation. In the near term, Our focus is on supporting our customers and executing through the current economic challenges while continuing to deliver on our innovation vision. We're confident we're laying the foundation for sustainable double-digit growth as the economy normalizes. Now, let me turn the call over to Carl. Carl?