Aspen Technology, Inc.

Ladies and gentlemen, thank you for standing by, and welcome to the Aspen Technology First Quarter Fiscal 2022 Earnings Conference Call. At this time, all participants are on a listen-only mode. After this speaker's presentation, there will be a question-and-answer session. To ask a question during this session, you will need to press the star, then the one key on your touchtone telephone. Please be advised that today's conference is being recorded. If you require our assistance, please press star, then zero. I would now like to hand the conference over to your speaker host today, Brian Downey. Please go ahead.

Thank you. Good afternoon, everyone, and thank you for joining us to discuss our financial results for the first quarter of fiscal 2022, ending September 30th, 2021. With me on the call today are Antonio Pietri, Aspen Tech's president and CEO, and Chantel Brightup, CFO of Aspen Tech. 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, October 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 first quarter and our pending agreement with Emerson, and then Chantel will review our financial results and discuss our guidance for fiscal year 2022. With that, let me turn the call over to Antonio. Antonio?

Thanks, Brian, and thanks to all of you for joining us today. We had a strong start to the year with annual spend coming in above our expectations. We saw a notable improvement in the spending environment during the quarter as the continuing economic recovery has improved end market conditions for many of our customers. As we have discussed over the past 12 months, we have seen consistently strong demand indications from our customers about expanding adoption of Aspen Tech solutions to increase operational efficiency and sustainability. While the market is not yet back to pre-COVID levels, we believe the first quarter was an important indicator that spending by our customers is improving. More importantly, the recent announcement of our transaction with Emerson is a transformational moment for Aspen Tech. I will discuss it in more detail later, but we could not be more excited at the opportunity for the new Aspen Tech to deliver faster and greater value in sustainability innovation, and profitability to a broader set of customers. Looking quickly at our financial results in the first quarter, revenue was $136 million, GAAP EPS was 58 cents, and non-GAAP EPS was 77 cents. Annual spend was $630 million, up 1.4 percent in the quarter, and 5.6% year-over-year. And free cash flow was $33 million. Looking at our first quarter performance in more detail, we saw clear signs of normalization in spending across our owner-operator markets. In particular, while the extra steps and scrutiny around the transaction approval process have remained in place, customer executives are noticeably more comfortable giving the final approval to transactions. We believe customers remain mindful of the fluidity with which market conditions can change, but the improved environment is enabling them to focus on the future, including how to deliver on their long-term strategic objectives. We're optimistic this will be reflected in the CAPEX and OPEX budgets for calendar 2022 that customers are now developing. Looking at the business by vertical, we saw the most notable improvement amongst our owner-operator customers, but especially with refining customers. Spending by these customers grew our MSC business by 3.2% sequentially and 9% in the last 12 months, just shy of its historical double-digit growth rate which is a strong performance, especially when compared to the growth of the MSC business in fiscal year 2021 at 5.8%. As we mentioned on our last earnings call, we have seen a marked increase in the level of engagement with these customers in recent months about their future investment priorities. Our results in the quarter are an indication that improved conversations were signaling and improving sentiment from higher refining margins resulting in increased spending. Our chemicals business also performed better and continued to improve, sequentially contributing to the acceleration of the MSC business. While overall trends are encouraging, there are still sectors of the chemical supply chain that are recovering from the lingering economic effects of COVID. We're confident chemicals will continue to be an important growth contributor going forward. Aspen Tech solutions are essential to chemical customers' ability to achieve their operational and supply chain efficiencies and sustainability targets. Our E&C business performed as expected during the quarter. Conditions remain challenging, and we have seen only modest improvement in capex and backlog trends. We expect this will be the part of the business that takes the longest to return to normal, and we anticipate modest levels of growth from these customers for the foreseeable future. Attrition in the quarter was in line with our expectations, which, if you recall from our last earnings call, was expected to be higher in the first quarter given the timing of renewal this fiscal year. While we're optimistic about the improved spending environment and higher budgets in calendar 2022, We believe it is appropriate for now to maintain our guidance for growth in annual spend in the range of 5 to 7 percent. We're also maintaining our guidance for attrition in the year, which, as we've previously stated, is mainly a reflection of the reduction in capex in the ENC space and elevated levels of renewals in our fiscal year 2022. Following are some notable wins from the quarter. A global energy company in the Middle East and a long-time user of Aspen Tech's engineering and MSC suites signed an agreement to standardize on the use of Aspen Tech's PIMS-AO planning solution for refining. After a rigorous process to evaluate the capabilities and incremental value creation opportunities of PIMS-AO, the customer committed to standardize on the technology and executed on a global rollout of this technology. The deployment of PIMSAO is expected to generate tens of millions of dollars of benefits for this customer. Second, a U.S.-based multinational food processing and commodities trading company, user of our engineering and MSC suites, has committed to roll out our recently released batch APC capabilities across their bioproducts manufacturing business. Bioproducts manufacture amino acids from corn through fermentation. After a rigorous trial of the technology, the customer recognized sufficient value from improving production yields in their bioproducts manufacturing to commit to the technology. A new batch APC technology is expected to open up new use cases in batch production processes, as opposed to the continuous processes found in refining and bulk chemicals. We expect our batch APC technology to extend our reach further into specialty chemicals, bioprocesses, pharma, and other industries that use batch processing. Third and final customer reference, a U.S. energy company and a subsidiary of a global Middle East energy company expanded the use of the engineering and MSC suites to execute on a comprehensive deployment of production planning and production operations optimization programs solutions to realize benefits in excess of $50 million per year in their manufacturing complex. The products involved are planning, scheduling, dynamic optimization, or GDOT, multivariable process control, and the engineering suite. One of the key themes you've heard from Aspen Tech in recent years is our commitment to a sustainable future. To that end, in just a few days, Aspen Tech will join companies from around the world at COP26. to discuss and share solutions to address the global climate challenge. Next Thursday, November 4th, I will be speaking on a COP26 panel with executives from Microsoft and Wood discussing the digitization of the energy sector. This panel discussion will address how digital technologies are increasingly highlighted as key enablers to grow efficiencies across systems and to accelerate the technology development that is required to address demanding climate goals. Similarly, as we have mentioned before, Aspen Tech is an active member of the Alliance to End Plastic Waste, supporting innovation to build a more sustainable global plastic value chain to create circularity. I'm actively involved on the board of the Alliance, and several Aspen Tech delegates participate in Alliance work groups and committees that are focused on regional plastic waste issues and technology development. Our contributions to the alliance will continue by providing expertise in advanced recycling and modeling with our engineering suite, and we expect to play an even greater role here as the alliance advances towards achieving its mission of plastic circularity. I would now like to talk about the pending transaction with Emerson. We believe this agreement offers compelling value for our customers and shareholders and positions New Aspen Tech as the leading industrial software company. There are several compelling benefits of this combination. First, New Aspen Tech will have the most comprehensive portfolio of mission-critical software products that expand the entire capital asset lifecycle. Aspen Tech's rich heritage in asset optimization will be extended and strengthened with Emerson's grid energy management and advanced distribution management systems technology and the geological simulation software. These software portfolios are highly complementary and provide exciting upsell and cross-sell opportunities into our respective installed bases. Second, we will significantly diversify Aspen Tech's business and increase our total addressable market. New Aspen Tech will have an immediate leadership position in the power and utility transmission and distribution vertical and an enhanced portfolio to model the entire oil and gas supply chain and reservoir modeling capabilities for resource extraction and carbon capture and sequestration. Third, this combination will enhance our capabilities to support our customer sustainability initiatives. We have long had a critical role to play in our customers' efforts to operate assets safer, greener, faster, and longer. The combined company will now be able to more fully support a broader array of sustainability initiatives, including electrification and carbon capture, among others. Fourth, New Aspen Tech will have greater scale and a compelling financial profile with more than a billion dollars in revenue and more than 3,000 global customers. We believe new Aspen Tech can be a consistent double-D grower with high recurring revenue, best-in-class margins, and substantial free cash flow. This increased scale and broader footprint will also make new Aspen Tech a vehicle to pursue additional M&A in the future. Fifth, we will deepen our existing commercial relationship with Emerson, which will provide exciting new go-to-market opportunities for resale, co-sale, and OEM of the entire suite of Aspen Tech products and solutions into all the industries where Emerson is installed, including those that Aspen Tech is targeting today through organic investments. The commercial relationship will also lead to joint package solutions and the development of next-generation software capabilities. Finally, this transaction provides significant near and long-term value for our shareholders. Aspen Tech shareholders will receive $6 billion in cash and will own 45% of new Aspen Tech. This attractive structure will give our shareholders upfront liquidity and the opportunity to benefit from new Aspen Tech's increased scale, expanded growth opportunities, and future margin expansion. A key aspect of this transaction will be converting the OSI and geological simulation software businesses to our token-based term license model. For those of you that were around when AspenTech first introduced our new commercial model in fiscal year 2010, you recall the significant improvements in growth, sales productivity, and user adoption that we experienced. We're confident we can deliver similar results this time as well. During our executive advisory board meeting that we hosted in Houston following the announcement of the transaction with Emerson, we received a strong endorsement from those customer executives in attendance. They understood the synergies from the stronger relationship between the two companies, the possibilities for joint package solutions, and the even stronger ability new Aspen Tech will have to deliver sustainability solutions that can help transform their businesses. Let me finish by reinforcing how excited we are by the recent developments for Aspen Tech and the future potential for new Aspen Tech. Our core business is beginning to show signs of improvement and we're executing well on the growth investments we're making in product development and our go-to-market capabilities. When you put that together with the great software businesses that are being contributed to new Aspen Tech and the deeper partnership with Emerson, We believe we have all the pieces in place to generate meetings growth and reach $1.5 billion in annual spend in fiscal year 2026. My sentiment has only been reinforced. I'm the most excited I've ever been about the future of Aspen technology. Now, let me turn the call over to Chantel. Chantel?