Aspen Technology, Inc.

Good day and thank you for standing by. And welcome to the Q4 2021 Aspen Technology Earnings Conference Call. At this time, all participants 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 1 on your telephone or touchtone key. 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 your first speaker today, your CFO, Chantal Brightup. Thank you. Please go ahead, madam.

Thank you. Good afternoon, everyone, and thank you for joining us to discuss our financial results for the fourth quarter of fiscal 2021, ending June 30, 2021. I'm Chantal Brightup, CFO of Aspen Tech, and with me on the call is Antonio Pietri, President and CEO of 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, August 11, 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 fourth quarter, and then I will review our financial results and discuss our guidance for fiscal year 2022. With that, let me turn the call over to Antonio. Antonio?

Great. Thanks, Chantel, and thanks to all of you for joining us today. Before turning to the quarter, I would like to acknowledge that tomorrow is the 40th anniversary of Aspen Tech's founding. Some of the original team from MIT are at Aspen Tech to this day, and I would like to congratulate them and all of our employees on this milestone. I would also like to thank our customers and investors for their continued support over the years. Now, turning to the fourth quarter, overall, our performance was in line with our expectations. While the macro environment has recovered considerably since our last earnings call, the spending environment by our customers remains constrained. However, we continue to have exciting and strategic conversations with customers. There is clear interest in expanding adoption of Aspen Tech solutions to meet the objectives of increasing operational efficiency and sustainability. This conversation gives us continued confidence that we will return to double-digit annual spend growth over time as the macro environment continues to improve and spending budgets normalize. Looking quickly at our financial results, starting with the fourth quarter, revenue was $198 million, GAAP EPS was $1.39, and non-GAAP EPS was $1.53. Annual spend was $621 million, up 1.9% in the quarter and 4.8% year-over-year. And free cash flow was $103.7 million. For the full year, total revenue was $709.4 million, an increase of 18%. GAAP EPS was $4.67, and non-GAAP EPS was $5.20, and free cash flow was $277.5 million. Looking at our fourth quarter results in more detail, we had a seasonally stronger performance as you would expect, but the spending environment remained constrained with consistent with recent quarters. There continues to be a great deal of spending restraint in our core markets from the impact the pandemic had on the operating environment of our customers. As we have seen throughout fiscal year 2021, overall demand activity remained healthy with pipeline growth across all areas of the business. Conversely, the more difficult dynamic around transaction approval processes that we discussed last quarter was still prevalent. but we did start to see signs of normalization as the quarter went on. Overall, Asia Pacific, North America, and our SMB business were strong in the fourth quarter from a new business standpoint. At a high level, the overall economic backdrop improved during the quarter as many markets began to reopen and end market demand for fuel and chemicals approached or exceeded pre-COVID levels. However, this was not uniform across the world, as the very recent shutdowns in Australia, India, Singapore, and Japan illustrate. A positive outlook for consistent and sustained recovery from the pandemic, coupled with overall improvement in economic conditions, should translate into greater confidence and readiness to deploy larger CAPEX and OPEX budgets, supporting faster growth for Aspen Tech. As a reminder, our customers are operating with budgets that were set late last year in a far more challenging and uncertain environment. We're cautiously optimistic that budgets for calendar year 2022 will reflect the improved conditions we see today, but as we all know, the evolution of the pandemic and COVID infections is highly fluid. From a vertical perspective, refining margins improved to pre-pandemic levels in the U.S. in the fourth quarter and moved higher in Europe, but remains under pressure in other parts of the world still dealing with COVID waves. Overall, end market demand and therefore utilization rates and refining margins have been trending in the right direction in recent months. Financial results for refining customers or the refining businesses of integrated oil companies in the most recent quarter have improved to varying degrees reflecting the asymmetrical recovery and evolving end market environment for these customers. We were encouraged in the fourth quarter by the increase in the number and quality of conversations we're having with customers focused on more strategic discussions about their future investment priorities. We believe this is a positive sign for future demand for Aspen Tech. Chemical customers saw record demand in some sectors in their most recent quarter, with strong margins, supporting solid financial results overall. Spending trends by customers in this sector are not back to pre-COVID levels, but remain healthy and were modestly better than the third quarter. Aspen Tech solutions are very well aligned to the chemicals customers need for greater operational efficiency and sustainability. We expect chemicals will continue to be a source of strength for us going forward. Looking at our E&C business, our performance was better than expected, even as the E&C industry continues through a process of adjustment as a result of the reduced CapEx spending by their customers. CapEx budgets remain tight, and this has led to reductions in backlog and projects on which to utilize our solutions over the last 12 months. But we did see a slight pickup in project awards going into the quarter, and expect a slight upward trend in project awards going forward. We do not anticipate an accelerated improvement in this part of the market, but continue to believe there's a longer-term opportunity in this industry, especially as these customers continue to shift their focus to operations and maintenance activities and sustainability-related cappings. Finally, in APM, we saw some improvement during the quarter in our core markets, but the trend is largely the same as we saw throughout fiscal 2021, high and growing customer interest. In the GEI markets, we continue to see more concrete purchasing decisions around ASP and MTEL. As we have discussed previously, APM has been an area where core customers have deferred buying decisions to preserve capital given lower asset utilization rates and less need for maintenance. We're confident this is a temporary phenomenon, and that as the operating conditions require it, customers will begin to budget for operations and maintenance spending that will support increased growth in the future. A good example of the opportunity in APM was a low seven-figure expansion transaction we signed with a global mining customer. An existing APM user, this customer continues to expand its deployment of APM to other sites around the world. Overall, this customer is now spending more than $3 million annually on APM, which we believe is great validation of the opportunity in this market. Some other notable wins from the fourth quarter include, first, a global chemical company based in Asia signed an expanded renewal for Aspen Entel that extended its initial one-year license for three more years. After signing an initial contract for two of its plants based on the ease of use and scalability of the solution, this customer will now be expanding its deployment to four sites due to EMTEL's AI capabilities that enhance the safety and sustainability of their operations. Second, a global chemical company based in Asia and one of Aspen Tech's first customers has embarked in a transition of its business from bulk to specialty chemical production. At the same time, this customer is also undertaking a digital transformation to leverage more technology in its operations. As part of the most recent renewal, the customer expanded its commitment to Aspen Tech with added usage of Aspen AI Model Builder for some of the nonlinear specialty chemical processes which are difficult to model using first principles. The customer is also increasing usage of Aspen DMC3 and will continue deploying Aspen EMTL. All of these resulted in a renewal with material growth with plans for expansion of usage in these and other technology areas. And lastly, a North American integrated oil company and long-term customer of Aspen Tech decided to embark on a digital transformation of its petroleum supply chain from production to retail to capture the full potential of their value chain. More than 15 vendors were invited to a rigorous evaluation of their technology and capabilities. Aspen Tech was ultimately selected as the leading technology partner for the comprehensive program that is expected to generate incremental free cash flow in the hundreds of millions of dollars for this customer. I would now like to provide you with some additional details about our performance for the full year 2021. all of which are quoted on an annual spend basis. From a product perspective, the engineering business grew annual spend 3.3% for the year, generating 40% of our overall annual spend growth. This performance exceeded our expectations, supported by stronger performance than expected in the ENC vertical. Our manufacturing and supply chain, or MSC business, delivered annual spend growth of 5.8%, representing 40% of our total annual spend growth. MSC was the area most heavily impacted by COVID-related disruptions and the related macro environment, as customers pulled back on their OPEX budgets due to the significant deterioration in their operating environment. This was the first time in many years the MSC business did not grow more than 10%. Traditionally, MSC has not been a cyclical business, and we don't expect it to be in the future, but the historic COVID-related downturn impacted our owner-operator customers in ways not experienced before. The asset performance management, or APM, business generated total annual spend growth of 16.2% or 13% of our total annual spend growth for the year, contributing 0.6 points of annual spend growth. As we discussed throughout the year, APM's performance reflected an increase in no decisions by customers looking to defer investment decisions until they had more visibility into their business outlook. At the end of the year, our installed base of business was split 57% engineering, 39% MSC, and 4% APM. Our three core verticals of energy, chemicals, and engineering construction contributed 46%, 24%, and 24% of our growth in annual spend during the year, respectively. Global economy industries, or GIs, contributed 6% of our annual spend growth for the year and grew 4.7% in the year. We are in the early days of our investment in pharmaceuticals. We grew our business 8.6% in the year, We expect this industry to be a more meaningful contributor to growth in this fiscal year and going forward. In addition to standing up an organization focused on this industry and increasing our R&D and marketing investments, we have been building our pharma sales channel in Europe and North America over the last six months with incremental investment planned in Asia this fiscal year. We believe pharmaceuticals represent an important opportunity for Aspen Tech as this industry tries the digitalization of their business operations and increases the use of technology in manufacturing and for their sustainability ambitions. We're also optimistic for the opportunity in the metals and mining industry, particularly with the APM suite. We grow our business in this industry 12.6% in the year. There's an increasing number of APM customers in this industry, and they have expanded the use of our technology because preventive failure alerts create significant value. We will plan for increasing our investments as the opportunity evolves and our strategy is executed. At the end of fiscal year 2021, the energy vertical represented 41% of our business, chemicals 28%, engineering and construction 25%, and GEIs, including pharma, 6%. For the full year, our attrition rate was 6.7%, This is above the high end of the 5% to 6% range that we provided at the beginning of the year and guidance given in our most recent earnings call. Most of the additional attrition was attributable to a divestiture of certain assets by a few customers. This impacts attrition since these assets rolled off those customers' contracts, but it is offset by a corresponding increase in spend by the customer acquiring the assets. Despite the challenges this year, it is important to note that we generated gross growth or growth prior to attrition of 11.4% in fiscal 2021. This is tremendous validation of how valuable our solutions are to customers. During the fourth quarter, we held our biannual Optimize conference, our first virtual customer conference. This year's Optimize was five times larger than our most recent in-person event, with more than 5,400 participants, representing over 2,000 companies and 84 countries. This year's Optimize was entitled The Future Starts with Industrial AI, and the recurring topic was how customers can generate new levels of operational excellence while simultaneously addressing their sustainability targets. This dual challenge broadly means meeting the increasing demand for resources and higher standards of living from a growing population, while also addressing sustainability goals, reductions in emissions, and reductions in plastic waste in the environment. Many of our existing customers shared their progress on meeting the dual challenge using our products and solutions. One notable example was a customer in Japan, which is a producer of packaging materials derived from propylene and other resins. This customer implemented our supply chain management solution in their distribution network and were able to achieve reductions in CO2 emissions of over 160,000 metric tons per year. Also, as part of its supply chain distribution optimization and logistics, the customer collected some of the waste being produced as a result of the use of their products and returned over 443,000 metric tons per year to warehouses for recycling. all simply through the use of supply chain management capabilities. This customer received the 2020 Green Supply Chain Award from the Demand and Supply Executive Publication in Japan. Taking this to a higher level, Aspen Tech has estimated that collectively, among our customers, the use of our products and solutions generates $59 billion in profits per year through greater efficiencies and productivity. At the same time, we have calculated that among our European refinery customers alone, they have in total realized CO2 emission reductions of 2.3 million metric tons per year, associated with $4.2 billion in efficiencies and productivity gains per year. Our unmatched domain expertise and growing data science capabilities have resulted in a methodology and capabilities that we now refer to as hybrid products or hybrid modeling. This approach, announced last year as part of ASPEN 1 version 12, enhances first principle driven models with artificial intelligence capabilities. Our latest product introduction in May, ASPEN 1 v12.1, builds on the hybrid model approach and represents the next step in fulfilling our vision of the self-optimizing plan. With our version 12.1 enhancements, we have extended industrial AI across our solutions to drive higher levels of profitability and sustainability in customers' operations. One of the most important features to come out of this new release is first principles-driven hybrid models embedded within our products, which brings AI directly into our simulators. With version 12.1, we now have a library of sustainability application examples that customers can leverage that range from carbon capture and sequestration modeling to optimizing the reduction of carbon emissions in production operations, also including biomass processing and hydrogen production modeling. Over the next few quarters and years, you will see us release more and more sustainability applications that will allow customers to not only model hydrogen production, but hydrogen transportation distribution and capture. We will also introduce more capabilities around chemicals or advanced recycling and other processes that are of keen interest to customers. As I have said many times, there is no trade-off between safety, sustainability, reliability, and profitability. It is all intertwined, and it is what we have been doing for our customers throughout our 40 years of existence. As we look ahead to fiscal 2022, we are optimistic we will deliver increased growth, but there continues to be heightened levels of uncertainty. We currently expect the year to be a tale of two halves. The first half we expect to look broadly similar to what we have experienced in the second half of fiscal year 2021 due to current customer budgets. And the second half to start showing an acceleration of growth as we expect customers' budgets for calendar 2022 to increase given their improved business outlook. It is important to know that there is caution in our expectations. As we have seen repeatedly in the last 18 months, the impact of COVID-19 is highly unpredictable and has led to an asymmetric recovery. The global recovery has been uneven, countries have come in and out of lockdown, and the emergence of the Delta variant has added more uncertainty. Our current expectation is for annual spend growth to be 5% to 7%. There are several assumptions underpinning our guidance. We expect the bulk of growth to come in the second half of the year. As mentioned earlier, our baseline assumption is that spending conditions improve in the second half of the fiscal year as customers set their calendar 2022 budgets in the context of greater certainty and a better operating and macro environment than they did last year. An environment with greater certainty due to COVID and the Delta variant could influence budgetary decisions and resulting in an outcome towards the low end of the range. From a suite perspective, we expect the engineering and MSC suites will contribute four to six points of growth, and APM is expected to contribute approximately one point of growth. And third, attrition is expected to be approximately 6% for the year. Specifically, we expect attrition in the first quarter to be elevated due to the concentration of renewals in more challenged verticals like engineering and construction and upstream, which will lead to higher than normal attrition. This will dampen annual spend growth in the first quarter and is factored into our outlook for the year. I would like to finish by reiterating our optimism for the business. In the midst of the most difficult environment we have seen in decades, We generated almost 5% annual spend growth and $277 million in free cash flow, while helping our customers solve the two primary long-term challenges facing their businesses, operating efficiency and sustainability. Fiscal year 2022 will represent the largest yearly increase in investment in 20 years in Aspen Tech, demonstrating our belief on the opportunity available in our core markets and our conviction on the opportunity ahead of us in pharmaceuticals, and in metals and mining. The investment plan accelerates our product roadmaps, adds new talent to the company, and continues to enhance our go-to-market capabilities as we position Aspen Tech for the next three to five years. We have demonstrated time and again the resiliency and cash flow generating capacity of this business during major downturns and our ability to generate double-digit annual spend growth during normal spending environments. We're confident the same will be true this time as budgets return to normal over time. We're excited for the future and the opportunities ahead for us, Pentec. Now, let me turn the call over to Chantel. Chantel?