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.

Carl? Thanks, Antonio. I will now review our financial results for the second quarter fiscal 2021. As a reminder, these results are being reported under topic 606, which has a material impact on both the timing and method of our revenue recognition for our term license contracts. Our license revenue is heavily impacted by the timing of bookings, and more specifically, renewal bookings. A decrease or increase in bookings between fiscal periods resulting from a change in the amount of term license contracts up for renewal is not an indicator of the health or growth of our business. The timing of renewals is not linear between quarters or fiscal years, and this non-linearity will have a significant impact on the timing of our revenue. As a result, we believe our income statement will provide an inconsistent view into our financial performance, especially when comparing between fiscal periods. In our view, annual spend will continue to be the most important metric in assessing the growth of our business and annual free cash flow the most important metric for assessing the overall value our business generates. Annual spend, which represents the accumulated value of all the current invoices for our term license agreements at the end of each period, was approximately $604 million at the end of the second quarter. This represented an increase of approximately 7% on a year-over-year basis and 1.3% sequentially. Total bookings, which we define as the total value of customer term license contracts signed in the current period, plus the value of term license contracts signed in the current period, but where the initial licenses are not yet deemed delivered under Topic 606, plus term license contracts signed in a previous period for which the initial licenses are deemed delivered in the current period, was $274.4 million, a 144% increase year over year. The growth in bookings was heavily influenced by the timing of renewals, including the large renewal with an energy customer that Antonio referenced earlier. Total revenue was $233.7 million for the second quarter. an 85 percent increase from the prior year period. The year-over-year increase in revenue was the result of the increase in total bookings discussed above. Turning to profitability beginning on a GAAP basis, operating expenses for the quarter were $70 million compared to $67.5 million in the year-ago period. Total expenses, including cost of revenue, were $84.3 million, which was up from $83.1 million in the year-ago period. Operating income was $149.5 million, and net income for the quarter was $129.2 million, or $1.89 per share. Turning to non-GAAP results, excluding the impact of stock-based compensation expense, amortization of intangibles associated with acquisitions and acquisition-related fees, we reported non-GAAP operating income for the second quarter of $162.2 million, representing a 69.4 percent non-GAAP operating margin, compared to non-GAAP operating income and margin of $52.1 million and 41.4 percent, respectively, in the year-ago period. As a reminder, margins will fluctuate period to period due to the timing of customer renewals and therefore license revenue recognized during the quarter. Non-GAAP net income was $139.3 million, or $2.04 per share, based on 68.4 million shares outstanding. Turning to the balance sheet and cash flow, we ended the quarter with $217.5 million of cash and cash equivalents and $304 million outstanding under our term loan and revolving credit facility. During the quarter, we paid down approximately $119.2 million on the outstanding balance on our revolving credit facility. In the second quarter, we generated $37.8 million of cash from operations and $38 million of free cash flow after taking into consideration the net impact of capital expenditures, capitalized software, and acquisition-related payments. We are pleased with our cash flow performance in the second quarter and the first half of the year, which has benefited from better than expected cash collections and reduced expense levels. A reconciliation of GAAP to non-GAAP results is provided in the tables within our press release, which is also available on our website. I would now like to close with guidance. We now expect bookings in the range of $805 million to $850 million which includes $519 million of contracts that are up for renewal in fiscal 2021. This includes $122 million of contracts up for renewal in the third quarter. With respect to annual spend growth, as Antonio mentioned, we are now forecasting 6 to 8 percent annual spend growth. In terms of timing, we would expect the linearity of the sequential growth to be similar to recent years and that the fourth quarter will have more growth than the third quarter. We now expect revenue in the range of $731 to $760 million. We expect license revenue in the range of $513 to $542 million, and maintenance revenue and service and other revenue of approximately $191 and $27 million, respectively. From an expense perspective, we expect total gap expenses of $356 to $361 million. Taken together, we expect GAAP operating income in a range of $375 to $399 million for fiscal 2021, with GAAP net income of approximately $328 to $347 million. We expect GAAP net income per share to be in the range of $4.80 to $5.08. From a non-GAAP perspective, we expect non-GAAP operating income of $418 to $442 million in non-GAAP income per share in the range of $5.29 to $5.58. From a free cash flow perspective, as Antonio mentioned, we are taking up our free cash flow guidance to $265 to $275 million compared to $260 to $270 million previously. Our fiscal 2021 free cash flow guidance assumes cash tax payments in the range of $60 to $70 million. To wrap up, our second quarter performance in the context of a challenging environment demonstrates the resilience and scalability of our business. We remain focused on executing on the things we can control and ensuring we are best positioned to benefit from any improvement in economic conditions. With that, operator, let's begin the Q&A.

Thank you. As a reminder to ask a question, you will need to press star then 1 on your telephone. To withdraw your question, please press the pound key. Our first question comes from the line of Rob Oliver with Baird. Your line is now open.

Hi, Rob. Hi, Antonio. Hi, Carl. Hi, guys. Thank you very much for taking my question, and Happy New Year. Just one, and then a follow-up. On the APM side, I just want to understand if there are particular verticals where you guys are seeing more of that, I think, Antonio, as you put it, seeking to preserve cash rather than proceed with these projects. Because looking broadly at some of your end markets, they appear to be recovering a bit, certainly chemicals and some of the commodity prices. So just wondering about what the delta is and the change relative to your guidance on APM and where we shake out right now. And then I had one quick follow-up.

Okay. Well, I mean, look, certainly the refining industry is very focused on managing their cash flows, considering the macro that they've been facing. Certainly upstream is another area. Chemicals, while we had a solid quarter, we've also had a little bit of a pullback in chemicals. But at the same time, look, we signed deals outside of our core industries in mining, and a couple of other industries as well, pharmaceuticals actually as well. So we think this is temporary. In the quarter, while it wasn't a record quarter for number of pilots, it was the second largest quarter of pilots we've done just behind the Q1 quarter. And we're projecting that Q3 will probably be a record quarter again for number of pilots. So we remain confident. It's just that we're seeing a conservative approach from some customers with regards to spending.

Okay, great. That's helpful. Thank you. And then just one follow-up. I know you mentioned you had that, I think, one of your largest renewals ever, over $75 million with that large company. oil company. And this is obviously a very big renewal year for you guys. And just wondering if we can get some more color on that particular renewal. And it sounds like your comments also relative to the rest of the year in turn seem positive. But I just wanted to get a sense for how customers are looking at these renewals and if you have an opportunity to to talk APM with your customers at renewal time to show them that product. Thanks, guys.

Yeah, no, look, first of all, you know, 12, 18 months, 24 months before any renewal, we're already engaged with that customer, making sure that not only are they using the entitlement that they have, but that we can also drive up entitlement. This is one of the largest oil companies in the world. It's our largest licensed bookings transaction ever. A lot goes into doing a renewal like that. But we highlighted, just to give you all a sense for the magnitude of the business that we have with our customers, the volume of business that we were renewing in Q2, and certainly how relevant our technologies continue to be to these companies that are managing through a very difficult microenvironment, but also are focusing on energy transition, sustainability, and how they can leverage our solutions going forward. So we're very happy with with the outcome of that renewal and actually in the out years of that contract, it gets even more interesting. So just signaling that despite the macro environment, there's significant business happening for us as well.

Thank you, guys. Thank you.

Thank you. Our next question comes from the line of Jackson Ader with J.P. Morgan. Your line is now open.

Thanks for taking my questions, guys. How you doing? The first question, just sticking with APM, you know, I understand APM below plan and kind of lowering the expectations for this year, but even if I you know, compare it to also a pretty tough calendar first half of 2020, that the expectations for APM are actually slightly worse than what you guys added last year. So I mean, is the conservative spending really that much worse? Or is it also that maybe, you know, the pipeline just isn't filling up as you expected?

Well, I mean, look, our pipeline remains – our pipeline of business has remained flat basically through Q1 and Q2. It hasn't gone up. It hasn't gone down. But the volume of that pipeline that is related to in-flight pilots or completed pilots has increased. And the only thing that I would say about Q1 and Q2 FY21 is that – It is a couple of quarters that are impacted by the pandemic as opposed to Q1 and Q2 2020. Our Q3 and Q4 quarters in 2020 were impacted by the pandemic, but not Q1 and Q2. So I think the comp is a little bit different, and now we've seen the impact of basically the macro in 2020. So that's what I can say about that. Okay.

All right. That's helpful. And then, Carl, just a metric question. What were the bookings for renewal in the second quarter, in the December quarter?

Yeah, it was about $170 million.

All right. Perfect. Thanks, guys. Thank you.

Thank you. Our next question comes from the line of Jason Salino with KeyBank Capital Markets. Your line is now open.

Great. Thanks, guys. You know, one question on the quarter. You know, with the backdrop of this, you know, very big renewal quarter, second quarter annual spend increased sequentially by that 1.3 points that you mentioned. You know, that's lower on a sequential basis compared to previous two key over the last couple of years. Was this mainly just driven by the APM business, or how should we think about it, given it was such a big renewal year quarter?

Yeah. Well, I mean, look, I think what we said, attrition is tracking to our expectation for the first half of the year. Now, we have perfect visibility into the amount of renewals in the first half of the year and the size of the Q2 quarter renewals on a dollar basis. So, our assumptions for attrition in the first half correlated to that volume of business. Now, we've also said that our engineering and MSC business perform according to expectations and APM is down. And then the last thing I'll say, Jason, is that, again, our overall performance in Q1 and Q2 of 21 has the impact of the pandemic and oil prices and all of that, while Q1 and Q2 2020 were not impacted by the pandemic. So the comp is very different.

Gotcha. Okay. And then? One more question. I think last quarter you talked about one customer renewing with a shorter duration. Have you seen any of that in the most recent quarter or has that activity not come up much?

Yeah, no, look, we had a, let me make sure I use the right word, a solid quarter of duration in renewal. So we saw no impact whatsoever. Okay, great. I appreciate the call. Thank you. Yeah, no, great. Thanks.

Thank you. Our next question comes from the line of Matt Fault with William Blair. Your line is now open.

Hi, Matt. Hey, guys. Thanks for taking my questions. First, I wanted to ask on the cautious spending environment and maybe some detail on why you know, that has a larger impact on the APM business versus engineering and MSC?

Yeah, I mean, look, again, I think it has to do with the fact that it's new technology, Matt, and it's probably seen as discretionary spending. The fact is that you know, these organizations have maintenance processes in place and they continue to, you know, execute to those. You know, our engineering and MSC solutions have a long history of creating value, and we continue to see the spend in that area. In APM, you know, we've had... we've come to the end of quarters and customers have pulled back. I do think we were somewhat unlucky in that towards December, we all started to hear a lot about increasing cases of COVID and lockdowns and perhaps a deteriorating economic environment and perhaps it's what happened in the last two in the last two weeks of the quarter for us with some of the transactions that did not close. But look, on the other hand, the fact that throughout the quarter we continue to execute a high level of pilots, we expect to have a record number of pilots completed in the Q3 quarter, also signals to us that there's a lot of interest in the technology and what it can do. And so, you know, certainly we have this sort of dichotomy between a number of pilots being executed and business that is closing. And this, in a way, encourages us in that this is probably a temporary issue. And once the macro environment gets back to a more normal environment, we'll start to see some of this pent-up demand that we see in our pipeline.

Got it. And then wanted to ask on the pharma business, any other significant investments that you need to make there, whether from a sales perspective or potentially acquiring some more industry-specific functionality? And then I guess what would be next on your list? Are there any other verticals that make sense to target more directly like what you're doing with the pharma? Yeah.

Yeah. Yeah, we're standing up. We've been standing up a sales organization in pharma now for a couple of quarters. That's one of the investments that we targeted at the beginning of the fiscal year. We've also made some decisions around additional investments to incorporate additional pharma-specific capabilities in some of the products that are relevant for the pharma industry. Those are investments that will start to happen this quarter under the guidance and oversight of David. KMO Analytics is certainly an acquisition that we brings an installed base and we're excited about. But ultimately, we've always said that in any industry that we operate in, we want to be number one and number two in the product segments or solution segments that we're in. And in the case of pharma, if we find the right acquisition and and I won't go into what we mean by that. I've explained that to investors all the time. We would be open to that, but we have our criteria around best-in-class profitability and double-digit growth, and that's the lens that we look at anything through, including in pharma. Look, metals and mining is another industry that we believe is interesting. As well, I think there's an opportunity to create value. We are creating a significant value in already metals and mining for some customers with our APM solution. I think the AIoT hub and our data historian could play a big role in that industry as well. But there's also a whole software ecosystem in metals and mining that's also attractive. And beyond that, Luke, you have food and beverage and other industries.

Great. Thanks, guys. Appreciate it. Thank you, Matt.

Thank you. As a reminder to ask a question, you will need to press start and 1 on your telephone. Our next question comes from the line of Galmunda with Barenburg Capital. Your line is now open.

Yeah, hi, thanks for taking my questions. The first one is just a little bit around one of the largest deals you've signed today. You're talking about a 75 million total contract value. I wanted to kind of just think about when you think about the last time that deal kind of renewed, can you give us any sort of comparator in what that would be in terms of the ACV? Are you seeing a significant uplift? maybe in terms of what the ACV uplift would have been compared to the previous contract, and where is it coming from? Is it mainly from new modules that you've introduced in the past, or is it just higher consumption of tokens in the customer?

Yeah, well, look, what I can say about the historical origins, if you will, of that contract and and our relationship with that customer. First of all, it's a relationship that goes back a very long time. This is a customer that this contract has the standard duration that we talk about, five to six years. And over that period, when we first signed that renewal, There's been a continuous uptake of technology by that customer and a standardization on our solutions across their entire operational ecosystem in refining, in some cases in upstream, in some cases in chemicals as well. So the contract has increased significantly. since the last renewal, and our expectation is that that relationship will also continue to grow in the future as they take up some of our new solutions and incorporate hybrid modeling capabilities the Aspen GDOT product and the new generation of solutions that we're introducing into the market. But very encouraged by that transaction in the midst of everything that's been going on last year.

Absolutely. That makes a lot of sense. And then just as a follow-up, you were referring to... to your ambition to return to the double-digit annual spend growth, which is very, very nice to hear. But if I'm thinking about in the context of, you know, this year guiding for 6% to 8% increase, thinking what makes you return to that double-digit growth, is it on one side higher contribution, better contribution from APM, maybe a couple of percentage points, or is it also lower attrition or a combination of that in order to get you there?

Well, I mean, I think, Gal, so this is a, first of all, I invite you all to attend our investor day because we'll talk about our growth drivers going forward and how we see some of these major trends around sustainability and digitalization supporting our business going forward. So I'll say that first. But look, in a way, you just have to look at the last five years and the trough in 2017 around sort of low to mid single-digit growth, the level of attrition, how attrition and the glide path of attrition over the following three, four years. You could see that between 2018 and 2019 fiscal, our growth rate jumped from 6.4 to 10.6. So I do believe, and recent history tells us that these periods of micro disruption do hold back spending by our customers. And once the macro normalizes, budgets normalize, and there's pent-up demand that gets released into better spending on our technologies, you know, so going from 6.4 growth to 10.6. I mean, that's a big jump in one year. So, and I'll tell you, Aspen Technology today is not the same company that was five years ago, and I will guarantee you that Aspen Technology will not be the same company in three years and five years than it is today. We've put towards significant investments and including introducing a new generation of capabilities that did not exist up until early October when we released them, and we're going to be releasing a lot more of those capabilities. The AIoT hub was introduced late at the beginning of Q2 fiscal. Our investments in pharma are new as well. So my expectation and the expectation of everyone in the company is that Over the next three to five years, the organization will be transformed again. Furthermore, our technologies in general will be very relevant during this energy transition and transition in the chemical industry into a circular economy and plastic waste elimination. And we'll talk about all of these during Investor Day, but we're very encouraged by what we're seeing from our customers, the involvement that they expect from Aspen Tech in this transition that they're planning and are experiencing, and also the role that we've played over 35, 39 years now in reducing emissions through better efficiencies, reducing waste through better optimization, and in general, contributing to what over the last 35 years has been considered efficiency to drive profitability, and today is considered efficiencies to drive reductions in emissions, which also equates to better profitability. So I'm very encouraged by our future, and we just have to We just have to manage through this rough patch in the macro environment and then come out on the other side with all guns blazing, figurative speech.

That is very, very clear. Yeah, so I guess it's both. So double digit does not mean 10% necessarily. I got it. Thank you so much. I appreciate it, Tyler. Thank you. Great.

Thank you. Our next question comes from the line of Mark Sheppell with Benchmark. Your line is now open.

Hi, guys. Thank you for taking my question. Hi, thanks for taking my question. Antonio, with sustainability becoming an increasing focus with process manufacturers, what are some of the internal initiatives you're doing or what are some of the internal initiatives that are taking place in the company to kind of align with your customers' sustainability goals?

Well, first of all, a lot of what we do today is our technologies can be leveraged to model, well, starting with research, new types of compounds and products that are more sustainable, more degradable, better recyclable. And with that, then you have to design, research and design the The process technologies that go into a design and then are built to produce these new compounds at scale. When you think about carbon capture use and sequestration, our technologies are already being used to model those processes. When you think about mechanical recycling and chemical recycling, our technologies are being used in those cases as well. When you think about a hydrogen economy, we're being asked by one of our customers that is thinking about building an entire hydrogen supply chain to work with them in what that would mean. Some of these old companies that have announced net zero carbon emission targets are asking us to participate in advisory panels, external advisory panels, to help them understand what are those technologies that will contribute to not only continue to produce the amount of energy that will be required to sustain and improve the standard of living of the world population over the next 20, 30 years, but do that in a sustainable manner, producing less emissions and so on. So what are we doing internally? Look, we have a lot already in flight and based on our history, we actually think that hybrid models will play an increasing role in sustainability because we'll be able to model reactions that are hard to model using first principles and a lot of that has to do with sustainability. So look, we're building, so having said all that, just like we did with our capabilities around data science and chemometricians and so on over the last five years, we're now starting to put together teams that will be exclusively focused on sustainability technologies because there's certainly a lot more than we can do. And you'll hear You'll hear more from us during Investor Day about this. Look, we're very encouraged by what we're hearing from our customers in this whole area of sustainability and how it's been accelerated and the role that they expect us to play as well.

Great. Thank you. That's all for me.

Yep. Thank you.

Thank you. Our last question comes from the line of Blake Gingin with Wolf Research. Your line is now open.

Hey, yeah, thanks for the time this evening. I wanted to circle back on APM and not to pile on here, but trying to get an understanding of the customers that are in trial with APM right now. How many are existing MSC customers and some of the larger customers in your core end markets versus potentially new customers and in new markets for you? I guess I'm just trying to understand that. How much of the cash conservatism are users of MSC that just don't want to maybe spend on APM at this time versus, you know, I would imagine some logistical hurdles getting into the facilities with COVID? Or is there something, you know, competitively that we should be aware of? Are you waiting for opportunities to maybe displace a competitor in some of these APM opportunities?

Yeah, well, let me look at it. Historically, we say that about 10, 15, really about 15% of our total pipeline is outside of our core industries, the process industries, into mining, into pharma, into other industries. That's probably gone up a little bit over the last four quarters as we focus more on pharmaceuticals and mining. but still call it in that 15% range. And that's, look, we had a solid quarter and a solid first half of the year in pharmaceuticals and mining. And really, it's a reflection of our performance with APM in those areas. So we see the difference in decision-making between the industries. And look, it's what leads us to believe that this is something temporary. But we're also aware, look, that this is now two quarters in a row with this story. We were hoping for a better quarter in December. We thought we were going to have it, didn't materialize at the end. You know, customers continue to ask to do pilots and prove their value. So I think we're building up a significant pent-up demand that should materialize.

No doubt. Yeah, it's a challenging environment for sure. You know, in terms of the free cash flow guide encouraging on the profitability front, it sounds like in this, you know, subdued annual spend growth environment that you're able to streamline costs a little bit and take some costs out. I'm just wondering how we should think about cost add-back as sales efforts normalize and you're able to do business travel. Should we think about it as cash conversion versus annual spend or as a percentage of annual spend growth with respect to cost add-back?

Well, let me look. Certainly some of the expense benefits that we've seen are, of course, travel. travel and entertainment, sort of in-person marketing events. And those are the two main areas. Now, you know, fiscal, look, everyone has a point of view about what's going to happen here over the next 11 months now and when people will start traveling and so on. Considering the fact that our fiscal year our fiscal year's crossover calendar years. We think that even if we start traveling and we start doing in-person events, that'll probably be impact, only start impacting is fiscal year 22 and possibly only half of fiscal year 22. So that add back on expenses will not be as pronounced as perhaps for other companies that operate on a calendar fiscal year. But look, Let's just say that our discipline in this company around expenses and delivering profitability will continue to come through even as we transition back to a normal economy. Let me just say that.

That makes sense. Appreciate the time. Thank you. Thank you.

Thank you. There are no further questions at this time. I would now like to turn the call back to Antonio Pietri for closing remarks.

I want to thank everyone for joining this evening's call. I look forward to talking to some of you, all of you, as the quarter progresses here and hopefully get to start having some in-person meetings in the future. Thank you, everyone. Have a good evening.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.