Aspen Technology, Inc.

Ladies and gentlemen, thank you for standing by. And welcome to the second quarter fiscal 2021 Aspen Technology earnings conference call. At this time, all participant lines are in a 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 then 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star then 0. I would now like to hand the conference over to your host today, Carl Johnson, Chief Financial Officer. Please go ahead.

Thank you. Good afternoon, everyone, and thank you for joining us to discuss our financial results for the second quarter of fiscal 2021, ending December 31st, 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 condition and our outlook as of today, January 27, 2021. 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 business highlights from the second quarter, and then I will review our financial results and discuss our updated guidance for fiscal year 2021. 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. Let's start by looking quickly at our financial results for the second quarter. Revenue was $233.7 million. supported by the largest dollar amount of quarterly renewals in the fiscal year. GAAP EPS was $1.89, and non-GAAP EPS was $2.04. Annual spend was $604 million, up 1.3% in the quarter and 7% year over year. And free cash flow was $38 million. Aspen Tech's performance in the second quarter was solid given the current economic environment, and we remain on track to deliver a good year of growth in fiscal 2021. We continue to be confident in our ability to return to double-digit annual spend growth once economic conditions normalize. In the second quarter, we are particularly pleased with our renewals performance in what was the largest renewals quarter in our history. our customers continue to make substantial long-term commitments to Aspen Tech in a clear demonstration of our technology's strategic importance to their operations. One of the highlights of the quarter was signing one of our biggest ever licensed bookings transaction, a renewal for more than $75 million with one of the largest global oil companies. From a growth perspective, our engineering and MSC suites delivered growth in line with our expectations and the APM suite came in below plan. While our conversations with customers throughout the quarter were positive, we saw certain customers take a more conservative outlook on spending in late December that we believe was due in part to the recent wave of COVID-related restrictions in many parts of the world. Overall, demand activity across our portfolio remains strong. We're engaged in strategic conversations with customers in all our target markets to expand their investments in Aspen Tech solutions to achieve critical business needs and enable their assets to run safer, greener, longer, and faster. In fact, our demand generation and top of sales funnel business activity are performing at levels similar to what we experienced prior to the onset of COVID. We believe this is a positive indication about the opportunity for strong growth in the second half of fiscal 21 and beyond. Based on our first-half performance and current outlook for the second half of the year, we're tightening the range for annual spend growth to 6 to 8 percent, compared to our previous range of 6 to 9 percent. As we laid out at the beginning of the fiscal year, we faced a higher degree of uncertainty in fiscal 21 and a wider than normal range of potential outcomes. The underlying assumptions in our updated guidance include APM will contribute 1.25 points of growth down from two points, attrition in the upper half of the 5 to 6 percent range we provided at the beginning of the year. It's important to note that we have already incurred a significant portion of our expected annual attrition in the first half of the year given the timing of renewals, so we expect attrition will have less impact on annual spend growth in the second half of the year. We expect similar growth expectations for our engineering and MSC suites. From a profitability perspective, we're increasing our free cash flow guidance to $265 to $275 million, supported by strong collections and lower expenses. I would like to spend a few minutes providing an update on trends in each of our core markets. Chemicals continued to show good resilience and was the best performance vertical for Aspen Tech in the quarter. Overall, we have seen a slow and steady improvement in the chemicals market, with the segments benefiting from the current economic environment more than offsetting the parts of the industry that are facing challenges. As we have discussed in the past, Digitalization is a top strategic priority and consistent area of investment for chemical companies. Increasingly, this industry recognizes that it must operate in a more efficient and environmentally sustainable manner in order to remain competitive and viable in the long term. As Pentex Solutions, our mission critical in achieving these objectives, which gives us confidence we will continue to generate consistent growth in this market. To that end, We recently joined the Alliance to End Plastic Waste as an enabler company contributing capital, technology, and expert resources. The AEPW organization is a global nonprofit focused on building a more sustainable plastic value chain to achieve its mission of ending plastic waste in the environment. An example of the continued focus by chemical customers on digitalization and sustainability is a transaction signed with a North American chemical customer looking to maximize production and efficiency through optimal asset performance. After working with their digitalization group to evaluate our technologies, they selected Aspen ProMV to deliver more consistent quality, less waste, longer uptime, and maintenance spend reduction. generating millions of dollars in annual benefits. The refining business for oil and gas companies and independent refiners continues to face a challenging business environment related to changes in travel patterns due to COVID. The reduced demand for gasoline and jet fuel has had a pronounced impact on demand, resulting in operating rates below their historical levels. Refining margins have improved recently from the lows experienced in the middle of calendar 2020, but are still below their historical trend. We continue to have positive conversations with our refining customers, which remain committed to investing in digitalization technologies from Aspen Tech that will enable more efficient, agile, and flexible asset operations in the future. We signed a number of transactions in the quarter with refinery operators that expand usage of our products and solutions across the different regions of the world for both our engineering and MSC suites. We're also encouraged by a growing trend we're seeing where MSC products and best practices continue to migrate from refining to the midstream and upstream businesses of our customers. For example, A South American customer that is an important user of our Aspen PIMS AO solution for refinery planning optimization identified significant benefits from deploying an enterprise-wide planning optimization solution that extends from the refining assets to their upstream and midstream businesses to optimize the production and supply of crude oil in their operations. This enterprise planning optimization solution represents millions of dollars in incremental value capture in their logistics operations. A second example is a Europe-based integrated oil company that is extending the use of Aspen DMC3 and Aspen GDOT solutions to their upstream facilities. This customer has a decarbonization strategy to reduce CO2 emissions in line with the United Nations 2030 objectives. We worked with the customer in its main European upstream and midstream facilities to demonstrate how advanced process control could help decrease production costs as well as CO2 emissions. The pilot demonstrated a 15% reduction in CO2 emissions. As a result, the customer decided to roll out Aspen DMC3 and Aspen GDOT across the full site. A unique aspect of this pilot project was the remote deployment of our advanced control technology due to COVID restrictions. Turning to the E&C market, our performance was as expected in the second quarter and first half of the year. Attrition levels have been in line with the range of expectations as these customers right-sized their agreements to reflect the current CapEx reality. We have a multi-decade history in the ENC market. I have a very good understanding of its industry dynamics and how demand trends typically play out through economic cycles. We're confident in our ability to manage through the current environment while also being focused on emerging areas like third-party operations and maintenance services for brownfield assets. In the APM area, The suite contributed 0.3 points of growth to annual spend through the first half of the year, which is behind where we expected to be at this point in the year. The Aspen ProMV product in the suite continues to increase its contribution to growth. As mentioned earlier, the challenging market backdrop for our customers and their focus on cash conservation has impacted our ability to close Aspen MTEL transactions and outweighed growing customer interest. We remain confident this is a near-term dynamic based on our customer conversations and pilot completions and the significant value and success existing customers are having with their APM deployments. We continue to have a strong APM pipeline that includes a record number of in-flight or completed Aspen Intel pilots. These pilots have successfully demonstrated the value of the product to prospective customers and gives us confidence growth will improve as the macro environment normalizes. We have also seen cataloging, we have also been cataloging successes from the Aspen installed base that demonstrate the tremendous value it can deliver to customers across a range of reliability improvement use cases. We refer to these as catches, potential failures avoided by alerting from Aspen EMTO. For example, Aspen Entel alerted with 30 days' notice the potential rupture of a pipe in a recovery boiler of a pulp and paper mill that could have led to the complete shutdown of it, avoiding upwards of $10 million in losses. Similarly, Aspen Entel identified a failure in the cooling oil pipes of the compressor section of a hypercompressor in a polypropylene plant, avoiding $150,000 in costs in that one instance. Two months after the deployment of EMTL, the customers have increased plant availability by 35% and reduced downtime periods by 45%, representing avoidance of a significant number of failures. We now have an extensive library of examples where Aspen EMTL is improving reliability and capturing huge value. For some customers, Like an LNG producer in South America, the potential value creation from deploying Aspen Emtel was so compelling it skipped the pilot altogether and put the technology directly in production. The customer understood the differentiating factors and technical advantages of our solution and how we could meet its needs to improve asset reliability, reduce maintenance costs, and increase natural gas production. This customer is targeting a 2% improvement in asset availability. which represent millions of dollars annually in additional production. As we look to the second half of the year and beyond, we're as confident as ever in our ability to generate consistent double-digit annual spend growth over time. This confidence is driven not only by the expected benefits of better future economic conditions, but also the multiple significant product announcements we have made in recent months. As we have discussed on our business update call in November, Aspen Tech's strategy is to be the industrial AI company by leveraging the strengths of our core capabilities in engineering first principles with artificial intelligence capabilities to dramatically increase the value we can deliver to customers and use the AIoT Hub as the environment to deliver that value. The recently launched AIoT Hub is generating great feedback from customers and is quickly building pipeline. During the quarter, we signed our first wins with this solution in the energy and chemicals verticals. As a reminder, the AIoT Hub 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 important new visualization capabilities and provides an environment for data scientists to leverage machine learning to build their own AI applications within the AIoT hub. We're also very pleased with the early feedback we have received on our recent Aspen 1v12 release. In particular, we're seeing great customer interest in hybrid models, which combine data collection from across the enterprise with artificial intelligence And Aspen takes 40 years of domain expertise and strength in engineering first principles modeling to create the first and most accurate set of hybrid models for the process industries. With V12 and Aspen hybrid models, we're able to solve very complex problems faster and more accurately than ever before. One example of customer enthusiasm for V12 was a renewal with increased annual spent commitments by one of our largest ENC customers based in Europe. This customer quickly realized the potential value from using the hybrid modeling and multi-case capabilities now available in the B12 engineering suite. Another important part of our growth strategy is building upon our success in the global economy industries to further diversify our business in this vertical. We had a solid first half of the year in mining and pharmaceuticals and see significant opportunities for future growth in these markets. We recently hired David Lytton to a new role in the company as Senior Vice President and General Manager of our pharmaceuticals business. David is a 25-year pharma industry veteran, including most recently 18 years at Thermo Fisher Scientific, where he led a team that generated consistent double-digit software revenue growth. In this new role, David will be responsible for shaping Aspen Tech's product and solution strategy for the pharma market and leading our go-to-market efforts. We believe the pharma industry is undergoing structural changes that make it an increasingly attractive market for current and future Aspen Tech solutions. During the quarter, we made a small but strategically important acquisition targeted at the pharma market. KMO Analytics has developed highly sophisticated technology that applies analytical science to address process and product quality challenges that enable customers to meet compliance requirements while reducing waste. The addition of KMO will strengthen our analytics capabilities and better enable users to analyze large and complex datasets quickly, easily, and accurately. At our upcoming investor day on Friday, February 12th, we will provide an in-depth update on our B12 release. New product innovation and long-term growth strategy, including our point of view on the tailwind that sustainability and digitalization will play in our future. As companies in our core and GI industries manage their transition to lower emission operations and less plastic waste, we believe we will be uniquely positioned to support them. We're very proud of the investments we have made to increase the value Aspen Tech can deliver for our customers, and we look forward to explaining them in more detail to the investment community in a few weeks. As we have made meaningful investments in our product portfolio and go-to-market efforts, we also continue to generate high levels of profitability and free cash flow. In the second quarter, we generated $38 million of free cash flow, driven by better-than-expected collections, disciplined expense management, and COVID-related savings. From a capital allocation perspective, we did not repurchase any shares during the first half of the fiscal year. It is our intention to meet our original goal for the year and repurchase up to $200 million of stock in the second half of fiscal 2020, given business and market conditions. As a reminder, we allocate our capital based on driving shareholder value. Our strong balance sheet and cash generation are competitive advantages for Aspen Tech that allows us to invest in the business during periods of uncertainty when many of our competitors cannot. We have demonstrated this through prior economic downturns, and we intend to do so again with investments in the AIoT Hub, Aspen 1v12, and expanding our capabilities in pharma that I referenced earlier. Our disciplined capital allocation strategy has a demonstrated track record of producing attractive returns for shareholders in multiple ways. Before I turn the call over to Carl, I would like to end by emphasizing the enduring strength of our business in the midst of the most significant economic contraction in our lifetimes, Aspen Tech remains on pace to deliver mid-to-high single-digit annual spend and double-digit free cash flow per share growth in fiscal 2021. We believe this reinforces the unique qualities of Aspen Tech that we have highlighted to investors for years, the combination of mission-critical products, deep and long-term customer relationships, and a continued focus on operational excellence. We remain focused on supporting our customers and executing in our strategic priorities. We're incredibly excited about the opportunities ahead for Aspen Tech and are confident in our ability to deliver sustainable double-digit growth once economic conditions normalize. Now, let me turn the call over to Carl.