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?

Thank you, Antonio. I will now review our financial results for the fourth 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 licenses 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 $621 million at the end of the fourth quarter. This represented an increase of approximately 4.8% on a year-over-year basis and 1.9% sequentially. Total bookings, which we define as the total value of customer term license contracts signed in the current period, less the value of our term license contracts signed in the current period, but where the initial licenses were 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 $225.6 million, a 4.5% decrease year-over-year. Total revenue was $198 million for the fourth quarter, a 2% decrease from the prior year period. Turning to profitability, beginning on a gap basis, Operating expenses for the quarter were $77.8 million compared to $70.5 million in the year-ago period. Total expenses, including cost of revenue, were $92.1 million, which was up from $85.6 million in the year-ago period. Operating income was $105.9 million, and net income for the quarter was $95.4 million, or $1.39 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 fourth quarter of $118.4 million, representing a 59.8% non-GAAP operating margin compared to non-GAAP operating income and margin of $125.5 million and 62.2% 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 $105.3 million, or $1.53 per share based on 68.6 million shares outstanding. Turning to the balance sheet and cash flow, we ended the quarter with approximately $380 million of cash and cash equivalents, and $293 million outstanding under our credit facility. In the fourth quarter, we generated $103.2 million of cash from operations and $103.7 million of free cash flow after taking into consideration the net impact of capital expenditures, capitalized software, and acquisition-related payments. In the full year 2021, We generated $276.1 million of cash from operations and $277.5 million of free cash flow. A reconciliation of GAAP to non-GAAP results is provided in the tables within our press release, which is also available on our website. From a capital allocation perspective, we resumed our share repurchase activity in the fourth quarter, buying 361,000 shares for $50 million. In addition, we recently announced a new share repurchase program for fiscal year 2022 to repurchase up to $300 million of stock. As part of the program, we entered into an accelerated share repurchase agreement for $150 million that we expect to complete later this quarter. The remaining $150 million are expected to occur over the balance of the year. Utilizing our balance sheet, whether through share repurchases or M&A, to generate shareholder value is an important part of our strategy. I would now like to close with guidance. Consistent with fiscal years 2021 and 2020, we will continue to provide guidance on an annual basis. With respect to annual spend growth, as Antonia mentioned, we are forecasting 5% to 7% annual spend growth. We expect bookings in the range of $766 million to $819 million, which includes $486 million of contracts that are up for renewal in fiscal 2022. This includes approximately $58 million of contracts up for renewal in the first quarter. We expect revenue in the range of $702 to $737 million. We expect license revenue in the range of $481 to $515 million, and maintenance revenue and service and other revenue of approximately $192 and $30 million, respectively. From an expense perspective, we expect total gap expenses of $386 to $391 million. Taken together, we expect gap operating income in a range of $316 to $346 million for fiscal 2022, with gap in income of approximately $288 to $314 million. We expect gap in income per share to be in the range of $4.27 to $4.65. From a non-GAAP perspective, we expect non-GAAP operating income of $361 to $391 million and non-GAAP income per share in the range of $4.80 to $5.17. From a free cash flow perspective, we expect free cash flow of $275 to $285 million. Our fiscal 2022 free cash flow guidance assumes cash tax payments in the range of $60 to $66 million. To summarize, we continue to produce growth and significant cash generation in a challenging environment. We are investing in our solutions to increase the value we deliver for our customers and ensure we are in the best position to accelerate growth as our customers' ability to spend with us improves. We have been through these cycles before and are confident we will return to double-digit annual spend growth over time. With that, operator, let's begin the Q&A, please.

As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound or hash key. Please stand by while we compile the Q&A roster. Your first question comes from the line of David Robinson from William Bear. Your line is now open.

Hi, David. Hi. Thanks for taking my questions. The first question I had was about kind of the budget improvements that you're expecting for the next upcoming fiscal year. Can you quantify kind of how much you expect the budgets to improve relative to 2021 in your end customers markets?

Let me frame it in the following manner. Of course, it will be up to customers to decide how much they're going to increase their budgets. If you look at the key metrics that we track for the performance of our customers, certainly oil prices have been in a healthy range for the last few months. If you look at chemicals, demand is back to pre-COVID or above pre-COVID levels. If you look both at now at refining margins, they're back to pre-COVID levels. Chemicals margins have exceeded pre-COVID levels and in a way are in some cases setting records there's an expectation that CapEx investment will begin to grow, perhaps in the low single digits, but nonetheless as well. So if you take all those metrics as a group, you think that we will have a better budget and spending environment next year. Now, at the same time, look, the COVID pandemic pandemic and the Delta variant certainly introduced a question mark around where the outlook will be in the fall season. And that's something that, you know, may or may not have an impact on budgets. But overall, we feel that our customers will be increasing their budgets for calendar 2022.

That's helpful. And then one other question I had around the attrition. So you said you kind of came within your expectations for the year. Was that kind of the last customer that you referenced that disposed or disinvested in some assets? Was that kind of built into your original attrition expectations? I'm just trying to get a sense of kind of how that affected the overall rate for the rest of the year.

Yeah, so I just want to clarify, we came in somewhat above the range that we had given investors at the beginning of the year, 6.7 versus a range of 526. What we saw in the last 12 months was an increase in M&A activity by customers, especially in the oil sector, where they were actually divesting assets, refining assets. and that certainly led to greater attrition as a result of these divestitures. This is not something that we had expected or planned for, but it's a result of the sort of reassessment of our oil customers of their businesses going forward. The sale of all the standalone refineries as they reposition their portfolios. for the refining portfolio to be more integrated petrochemical sites. But to answer your question specifically, no, no, it was not something that we had expected.

Okay. I appreciate the additional detail. And that's all the questions that I had. Thanks for taking my question.

Yeah. Thank you, David.

Your next question comes from the line of Jackson Ader from J.B. Morgan. Your line is now open.

Hi, Jack. Thanks for taking my question today, Antony. So, Antony, we've heard for a long time that when customers are under pressure, that a lot of times that will drive some efficiency purchases or efficiency demand. I'm just curious why you think that didn't materialize this year for your chemicals or refinery customers that were particularly under pressure?

Sorry, Andrew, question is why it will or didn't materialize?

Yeah, why didn't it materialize this past year in fiscal 21?

Okay, yeah. Well, look, we've now been engaged with customers both virtually and in the last few months. I finally had some in-person meetings with customers, which was great. Look, as we said in the prepared remarks, The disruption that took place in the last 12 months was like nothing before, especially operating rates dropping into the low 60s for refineries and the impact that had in operational stability and their margins overall. When you're operating at those rates, your ability to create value from driving greater efficiencies in your operations isn't there because you are just not processing as much crude oil or feedstock for your NAFTA crackers to produce ethylene. So the need for technology to drive operational efficiencies just isn't there anymore in such an environment. And frankly, in my entire career, and I'm now getting towards the end of it, I had not experienced a moment like this where you have refiners operating at such low rates that their decision is whether to keep these assets operating at the edge of operational stability or shutting them down, which some of them had to do. So that incentive to drive more technology implementation just wasn't there, equally with chemical companies. And our expectation going forward, though, is that as operating rates are now coming back to that 85%, 90% range, if you listen to Marathon Petroleum's earnings call, the CEO talked about their operating rates being at 94%. So that's all very healthy for them to start thinking about how to squeeze more efficiencies out of their operations, including chemicals, including in the chemical sector. So I do think that we're now back to a range of operations where the incentive for technology adoption is back in play. And we'll see what happens going forward.

Okay. And then another kind of maybe strategic follow-up as well for you, Antonio. I mean, is it fair to wonder whether the planned investments in pharma or the other GEI industries are you know, are warranted or worth it. I mean, if they're not necessarily growing that much faster, if at all, than the core on a much smaller base, you know, I mean, I guess I just would have expected that pharma, the pharma revenue would have grown a little bit faster than 8%. And so if it's not growing that much faster at the moment, do you think it's worth creating all this kind of sales and go-to-market investments around it?

Look, Jackson, that's a fair question from you, but let me say the following. Fiscal 21 certainly was a very difficult year from some point of our end markets, but at the same time, there was a lot happening inside the company as we put our foot to the pedal on investments. While fiscal 22 will be the largest investment year in 20 years, fiscal 21 was the second largest. We launched our AIoT business unit on October 1st of last year. We launched our pharmaceuticals business unit on April 1st. We hired a metals and mining executive that is now formulating a strategy and we're beginning to execute put the pieces in place for that strategy. We've been growing our GI sales organization that is actually the one that's going to market in metals and mining. We've been standing up our pharmaceutical sales organization as well. So in the context of from an operational standpoint, everything that we were working on was really to set up for faster growth in fiscal 22 and going forward. I'm not disappointed in our results in pharma or metals and mining. As a matter of fact, I'm glad we had it. But we do expect better results in fiscal 22 and going forward. And absolutely, those investments will be merited. Okay. All right. Great. Thank you, Antonio.

Yeah. Your next question comes from the line of Andrew Olin from Bank of America. Your line is now open.

Hi, guys. Good afternoon. Can you hear me? Yeah, yeah. Hi. How are you? Hey, guys. How are you? So, I completely appreciate having to guide on oil and gas budgets as your customers have not even really started the planning process for calendar 22. Having said that, I think a couple of your competitors are definitely talking about the fact that, you know, they're having good visibility into 22. and even 23, and I think our channel checks indicate some of that as well. Can you just talk about this longer-term visibility and what kind of conversations you are having with your customers that are giving you confidence into 22 and 23?

Okay, well, I mean, look, in Aspen Tech, it's been our philosophy to only guide one year at a time, so I will not talk about 23. Yeah, no, sure. Okay. Look, I think you're also implying that we're claiming not full visibility into our customers' budgets for 2022, but some of our competitors are. I won't talk about our competitors, but what I can tell you is that where we sit today and what we have experienced in the first half of this calendar year, gives us a certain sense for what the second half of the calendar year, the first half of our fiscal year will be. We believe the budgets will be the same. These customers will maintain their fiscal discipline and continue to spend to the budgets that they set last fall. And then come 22, look, we do think that budgets will improve, and we're having good conversations with customers, but we'd rather be more cautious with our guidance at this point in the fiscal year and the calendar year and, you know, then wait until what customers tell us they plan to do for calendar 22. Oh, no, no.

What I meant to imply is that I think it's easier for your competitors to make more vague statements about 22 without having to formally guide. I was not implying that they have more visibility. No, no, no. Another question. Yeah, it's tough to guide in the middle of the year, that's all I'm saying. Look, another thing I just want to understand, as we think about annual spend and where we are for fiscal 21 and where you're guiding for fiscal 22, As you think about longer-term plan, do you think that the curve has permanently shifted down, or do you think there's going to be a catch-up down the line to sort of to get back you on this track of, I think, 12% CAGR that you were talking about at your February analyst day? Thank you.

Yeah, well, I mean, look, first of all, we are very optimistic about our end markets going forward. If anything, an expectation that CapEx investment in upstream will increase over the next two, three to five years. Certainly, the refining industry will probably be going through sort of a slow readjustment in that integrated refining and chemical sites will be more profitable going forward, and you'll see some refinery rationalization At the same time, refining capacity in Asia and the Middle East will continue to grow, and on a net-net basis, refining capacity will continue to increase around the world. Now, what happens in 15, 20 years from now? We can have that debate in a separate call. But no, we're very optimistic about the next five to 10 years. Look, our job in Aspen Technology is to help our customers be the best stewards of those resources in order to drive more sustainable businesses by reducing CO2 emissions and plastic waste in the environment. That's what we've always done in Aspen Tech. It wasn't how we position ourselves, but it is absolutely what our customers are now looking to do with this company, and therefore we see a lot of positive going forward. Thank you very much.

Yeah.

Your next question comes from the line of Jason Salino from KeyBank. Your line is now open.

Hi, Jason. Hi, Antonio. Hello. Thanks for taking my questions here. It sounds like the approval processes of your customers are still elongated, but it was interesting that you said that as the quarter kind of went on, it started to improve a little bit, but help us understand the magnitude of that improvement, the end of the quarter versus maybe the beginning. Okay.

Yeah, I think it's a tale of two sides. Jason, one, the larger the deal, certainly scrutiny is still there. Look, we worked on some seven-figure deals in the quarter, and certainly there was still a lot of scrutiny on that level of spend. But as you got to smaller deals, we saw a lot less friction in getting those deals approved. So I think there's a greater... degree of comfort on the environment. You know, all these oil and chemical companies have reported an incredible cash flow generation in the last quarter, and I think that's also then leading to a loosening of some of the approval processes for smaller spend. A larger spend, yeah, it's still there, the approval processes. But I think that's that will continue to evolve over the next few months.

Okay. And then, you know, when I look at the free cash flow guidance, you know, it's basically flat year over year, and, you know, it's lower growth than, you know, the annual spend that we saw that you're forecasting. Maybe why is that?

I'll let Chantel step in here. Go ahead, Chantel.

Yeah, hi. I think that there are two things, and this is, you know, We always have a prudent pre-cash flow guidance I would say. But the two things I would take into your consideration are the investments that we're making. We're making quite a big – the largest investments as Tony referred to in 20 years into those diverse kind of industries and our core. And two, we have a position on cash taxes that we're still working through to see. So I would say cash tax assumptions and the investments are the two main factors we're working through in that guide.

Okay, excellent. That is quite helpful. And then maybe one quick follow-up on the big investments here. How much is it headcount related versus other development or product type investments?

Yeah, I would say there's three main categories. We have talent, which you call headcount. I'd call it talent investment. We have R&D investment. And then the third one would be our go-to-market, especially in some of the geographies that Antonio mentioned. So there's three main areas that we're focusing on.

Okay. Excellent. Thank you. Yeah, Jason, and in that, look, as we go into this new industry, I mean, new industries, we've been in pharmaceuticals for a while, but certainly we need to raise the visibility of Aspen Tech in pharmaceuticals, our visibility in pharma, and our brand recognition. So So some of those investments are one-time investments, but there's a lot of talent investment in there as well. Okay. Thanks.

Your next question comes from the line of Mark Shafal from Benchmark. Your line is now open. Hi, Mark.

Hi.

How are you doing, guys? Thanks for taking my question. Antonio, last quarter you called out a competitor that was giving away a software for free, I think for like a three-year period. Did you continue to see that type of intense pricing discount from competitors this quarter?

Look, now that I'm aware, it wasn't raised or I heard about something like that in our forecast culture in the quarter. So maybe that competitor heard me talk about it in the last earnings call and was a little embarrassed and stopped the practice.

Okay. And then with respect to your ESG products, right, that you expect to launch in the coming year or so, you did mention in detail the work you're doing in the area of hydrogen production. I was wondering if you could give another example or two of some of the other ESG areas that you're developing.

No, great. And thank you for that question, Mark, because the fact of the matter is that there's so much functionality in our products today that is ESG or sustainability-related that, in a way, a lot of our customers are not familiar with it because they've really never had a need for it. But now, of course, this is front and center. But look, carbon capture and sequestration modeling. Some of the early pilot sites for carbon capture and sequestration were modeled using our Aspen Plus technology. biomass processing modeling. You can talk about hydrogen production, but also advanced chemicals or chemicals recycling. So there's a lot in our products. Look, you can optimize a refinery from the standpoint of reducing the amount of CO2 emissions. And we have customers that are now inquiring about that functionality in a product that they've been using for 25 years. But at the same time, we're going to enhance the capabilities of our products around all of this. Just so you know, when I was in Asia, based in Asia, one of the biggest users of our Aspen custom modeling technology, which is a layer product on Aspen Plus, were Japanese automobile makers because they were modeling electrical batteries. for some of their hybrid automobiles back in the mid-2000s. So we've had pockets of usage of these capabilities and now it's all at the forefront and probably will drive certainly some of our growth over the next five, 10 years and beyond, for sure.

Great, thank you.

Yeah.

There are no further questions at this time. I will turn the call over to your CAO, Ansonia Pietri.

All right. Well, thank you, everyone, for participating in today's call. Look forward to hopefully have some in-person meetings here in the future. But nonetheless, thank you all.

This concludes today's conference call. Thank you for participating. You may now disconnect.