Aspen Technology, Inc.

Good day, and thank you for standing by. Welcome to the Aspen Technologies Second Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the presentation, there will be a question and answer session. To ask a question during that session, you will need to press star 1 on your telephone, and please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to Brian Dinu from ICR. 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 2022, ending December 31st, 2021. With me on the call today are Antonio Pietri, Aspen Tech's president and CEO, and Chantelle 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 forelooking 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, January 26, 2022. 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 our pending transaction 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 deliver strong second quarter results that reflect continued improvement in the spending environment and good execution by our team. Our second quarter performance reinforces our belief in the strategic importance to customers of enhancing the operational efficiency and sustainability of their assets. We're now seeing this customer trend materialize in better growth as market conditions have normalized. While not all the way back to pre-COVID levels, market conditions are moving concretely in the right direction for us, Pentec. We're confident this will continue to support improved annual spend growth across our business over time. We've also made significant progress towards completing the proposed transaction with Emerson, which remains on track to close during our fourth fiscal quarter. As we've gotten to know the Emerson businesses better, we are continually impressed by the team and their culture. Since the announcement, we've also received more and more positive feedback from customers in a number of industries about their enthusiasm for the transaction. Given all of this, we're even more excited about the transformational opportunity the new Aspen Tech has in current and new verticals, as well as in sustainability. allowing for increased value creation opportunities for both our customers and shareholders. Looking quickly at our financial results in the second quarter, revenue was $171.4 million, GAAP EPS was $0.92, and non-GAAP EPS was $1.20. Annual spend was $640 million, up 1.7% in the quarter and 6% year over year. And free cash flow was $51.9 million. Looking at the second quarter in more detail, one of the key areas of improvement was the normalization of transaction closing cycles, which are now back to pre-pandemic cycle times. I'm pleased at how our sales organization has navigated these changes in recent quarters. In terms of vertical performance, Spending by refining customers saw notable improvement for the second consecutive quarter. As we have discussed in the past, refining has been a consistent source of strength for Aspen Tech as our solutions are critical to delivering on the short-term and long-term operational and sustainability priorities of our customers. During the second half of calendar 2021, refining margins improved meaningfully and trended back to their historical range, ending up on a strong note in December. We're also encouraged by the fact that the Omicron variant has not reduced fuel demand for transportation, despite causing record numbers of COVID cases, with low inventories for diesel and jet fuel now being reported. The performance of our refining customers in the first half of the fiscal year gives us confidence that this vertical will support the MSC business returning to consistent double-digit annual spend growth, assuming stronger budgets and spending in calendar 2022. Chemicals, once again, had a solid quarter and has been the most consistent vertical over the past two years. Within chemicals, there continue to be some areas that face supply chain constraints. But overall, we've had consistently good conversations with customers on their future investment priorities. We believe there are exciting opportunities for growth in this market and that Aspen Tech will continue to be an important partner to our customers as they drive operational excellence and transition to a more sustainable future, which for them means lower emissions as well as plastics circularity. The positive results from our refining and chemicals customers drove better than expected performance for our engineering and MSC suites, which are ahead of plan for the first half of the fiscal year. The ENC industry performed better than expected, delivering a slightly positive growth quarter. The market dynamics affecting this industry have largely stabilized, and backlog trends have shown modest positive improvements in the first half of the year. Importantly, Attrition amongst these customers has been tracking marginally better than expectations, and we're optimistic about our ability to forecast this metric. This is a critical first step towards improved demand and a return to stronger positive annual spend growth. While we do not expect the EMC sector to be a primary growth driver for our business short term, we're encouraged by the acceleration in final investment decisions, FIDs, for LNG projects and in the oil and gas sector in the Middle East region, as well as the expected increase in global oil and gas CAPEX in calendar 2022. In addition, the shift in their focus towards sustainability investments will help accelerate their recovery, as increasingly, CAPEX spend will be driven by hydrogen projects, carbon capture and sequestration, biofuels, wind, solar, and other projects. We believe this will drive E&C customers to be greater contributors to our long-term growth targets than they are today. Finally, I would like to provide an update on our APM suite. We're beginning to see some improvement in demand conversion in this area of the business as customers increase OPEX spend on maintenance and reliability in facilities where a lot of this work was postponed throughout the pandemic. As we have discussed during this same period of the pandemic, Interest and demand for our APM solutions have been strong with consistent growth in customer engagement pipeline and pilots. Through the first half of the year, APM contributed 0.28 points of annual spend growth just under our first half year plan. We believe the suite is well positioned to benefit from increased spending and contribute approximately one point of annual spend growth in fiscal 2022. We're also confident that a pandemic-tested APM business will be better positioned for growth longer term. Following are references to a few of the customer transactions closed in the quarter. First, a U.S. headquartered engineering firm, a customer for close to 15 years, increased its spend with Aspen Tech now that its business outlook is improving after having reduced its software license entitlement at renewal at the beginning of the pandemic. After conducting a thorough analysis of the market, including competitive offerings, the customer increased its commitment to the suite. The availability in the suite of Aspen Tech's ACCE product for capital cost estimation was fundamental in the decision to because the customer is in the process of reconstituting its capital cost estimation team that had been dismantled at the beginning of the pandemic, and its functionality is not available in the market from other competitors. Second, a European energy and petrochemical company and long-term user of our multivariable control technology in refining and chemicals decided to standardize all operating assets on our Aspen DMC3 multivariable control technology. through an enterprise license agreement. Two main reasons supported their decision, the operational improvements and value created by the technology and the customer's focus on energy efficiency and emissions reduction as part of a commitment to net zero carbon emissions by 2050. Third, a refining customer in Asia conducted an extensive evaluation of asset predictive maintenance solutions including Aspen Emtel. The customer selected Aspen Emtel on the basis of its technical capabilities and ease of implementation. The acquisition of an APM solution supports the planned digitalization of the customer's maintenance functional area. It is expected that Aspen Emtel will be rolled out to multiple units and equipment in the refinery and in time expanded to other refineries. Fourth and final, A Northern Europe independent refiner, recently formed from the acquisition of assets divested by one of the major oil companies, sought to upgrade the optimization technologies in the refinery to increase profitability and reduce emissions as part of the customers' and host countries' commitment to net zero carbon emissions. After a detailed analysis of the value capture opportunity, which was determined to be greater than $75 million per year, and the estimation of the expected reduction in emissions, the customer committed to a site license for the Aspen DMC3 multivariable control technology and the Aspen GDOT multi-unit optimization technology in the MSC suite. This agreement was signed in a three-month sales cycle. I point out that in two of the highlighted transactions, the customers requested enterprise license agreements to deploy certain solutions across the entire asset base. We're encouraged by these examples of customers preferring comprehensive agreements to deploy solutions that are critical to their sustainability initiatives. It's important to note that these agreements are still structured as part of our token-based licensing model. As we look to the second half of the fiscal year and calendar 2022, we're encouraged by the recent trends in key macro indicators for our business. Oil demand, while not yet at pre-pandemic levels, has exceeded growth expectations. Oil prices in the range of $75 to $85 per barrel and an equally strong or stronger outlook for calendar 2022. refining margins back in their historical range with industry expectations for acceleration in fuels consumption and strengthening margins in 2022. Chemical demand and margins expected to remain strong in calendar 2022. Cap expanding in oil and gas and chemicals expected to increase by double digits with cap expanding hydrogen carbon capture and sequestration and biofuels projects experiencing significant increases as sustainability investments accelerate, and software spend in our customer base projected to increase 10% to 15% based on customer surveys we conducted late last year. All of this leads to our expectation of solid increases in customer budgets and spending in calendar 2022. while we also remain vigilant about the evolution of the COVID pandemic and geopolitical events. Together with our year-to-date performance, we're adjusting our annual spend guidance for the fiscal year to 7% to 8%, up from 5% to 7% previously. In addition, in support of our growth guidance, we're adjusting our fiscal year guidance for attrition to 5% to 5.5%, compared to approximately 6% previously. While we're pleased with our performance in the first half of the year and the market trends we're seeing, we remind you of the potential uncertainties that still exist in the market that could change the outlook for our business. Our other primary focus in the second half of the fiscal year is completing our transaction with Emerson. Detailed information concerning the transaction can be found in the registration statement on Form S-4, recently filed with the SEC and available on the investor relation page of our website. Based on current information, we continue to expect we will close the transaction during our fourth fiscal quarter. As I previewed earlier, We have been incredibly impressed with the OSI and geological simulation software businesses and their employees. Like Aspen Tech, the teams at these two businesses are passionate about their customers and creating value for them. They're also passionate about the industries they serve. It is clear that both businesses have very talented workforces, lead with product innovation in modeling, simulation, and optimization, and have developed impressive product portfolios that are truly best in class. The more we learn, the more excited we are for the long-term opportunities we will have at the new Aspen Tech and our unique position to drive profitability and sustainability for customers. We continue to be confident in the new Aspen Tech's ability to be a consistent mid-teens grower with high recurring revenue, best-in-class margins, and substantial free cash flow. Underpinning our confidence in the growth opportunity for new Aspen Tech is the increasing importance of sustainability among operators in capital-intensive industries. While sustainability has long been part of the value proposition of Aspen Tech, in recent years we have seen it become a critical lens through which many customers make purchasing decisions. With this goal in mind, we focused our November software release on introducing over 50 new sustainability models that accelerate digitalization efforts for customers in support of their initiatives. Our customers are taking a truly comprehensive view of how their businesses need to adapt both in the near and the long term to meet the sustainability targets they have set for themselves. The combined product portfolio of the new Aspen Tech, which will include new electrification and carbon capture capabilities, as well as increasingly leverage AI to enhance the sustainability benefits of many existing Aspen Tech solutions, will make us a key strategic partner for all asset incentive businesses. who are confident sustainability will support significant investment cycles in these industries over the coming decades. Before I turn the call over to Chantelle, I would like to reiterate the key takeaways from the second quarter. Demand trends and growth continue to improve throughout the first half of fiscal 2022, which coupled with greater confidence that calendar 2022 budget will lead to increased spending, supports our decision to raise the guidance for the full year. While spending is not all the way back to pre-COVID levels, we're increasingly confident that it will continue to trend positively and support our long-term growth targets. The improvement amongst owner-operators, particularly refiners, is an important trend that is now firmly in place. These customers have been the primary growth drivers for the business for a number of years, and we feel good that they will once again deliver consistent double-digit growth for our MSC suite. Our strong year-to-date free cash flow performance demonstrates the scalability and efficiency of our business and our ability to generate high margins while investing in our growth initiatives. Finally, we're on track to close with Emerson and create the new Aspen Tech in the coming months. Taken together, we have made great progress on each of our key priorities for fiscal 2022. We believe that the combination of the transaction with Emerson and the factors discussed on this call will provide increased confidence in our ability to generate meetings growth and exceed $1.5 billion in annual spend in fiscal year 2026. We believe that the steps we have taken this year to create compelling opportunities to generate significant value for our customers and shareholders over the long term. Now, let me turn the call over to Chantel. Chantel?