Aspen Technology, Inc.

Today's conference is scheduled to begin shortly. Please continue to stand by. Thank you for your patience. Thank you. Thank you. Thank you. Good day, and thank you for standing by. Welcome to the Aspen Technology Fiscal Quarter 2022 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. Please be advised that today's conference is being recorded. To ask a question during the session, you will need to press star, then one on your telephone. If you require any assistance, please press star zero. I would now like to hand the conference over to your speaker today, Mr. Brian Dunew. You may begin.

Thank you. Good afternoon, everyone, and thank you for joining us to discuss our financial results for the third quarter of fiscal 2022, ending March 31, 2022. With me on the call today are Antonio Pietri, Aspen Tech's president and CEO, and Chantel Brightup, the 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, April 27th, 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 third 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?

Okay, thanks, Brian. and thanks to all of you for joining us today. Aspen Tech's strong third quarter results were driven by further improvement in our key end markets and continued strong execution by our sales team with the support of the rest of the organization. As we have mentioned previously, we expected the new budget year for our customers to lead to a better spending environment for Aspen Tech considering the positive macro indicators coming into the year. I'm pleased to say that this is what occurred during the third quarter. We also remain optimistic about our ability to drive further improvement in annual spend growth over time, considering the continued positive macro environment and the growing strategic importance of operational efficiency and sustainability to our customers. We're also excited to be approaching the completion of our proposed transaction with Emerson. The registration statement on form S4 has been declared effective by the SEC, and we have filed our proxy statement and set a May 16th date for the special meeting of stockholders to approve the transaction. We believe the combination of our current solutions with the innovation and expertise of OSI and geological simulation software will position the new Aspen Tech to create greater value for our customers as we help them solve the dual challenge of meeting the increasing global demand for resources in a sustainable manner. We believe our customers can operate sustainably and profitably at the same time. There doesn't need to be a tradeoff when you use the right technology. Looking quickly at our financial results in the third quarter, revenue was $187.8 million, GAAP EPS was $1.12, and non-GAAP EPS was $1.38. Annual spend was $655 million, up 2.4% in the quarter and 7.4% year over year. And free cash flow was $89.2 million. Looking at our third quarter results in more detail, we experienced a strength across each of our key verticals and regions. As I mentioned, the biggest change in the quarter was the notable improvement in customer spending. Our customers' calendar 2022 budgets are much improved, reflecting our expectations after the uncertainty and challenging conditions of the prior two years. We have already seen a positive impact to our sales cycles as a consequence of the ability of customers to engage in more strategic conversations with us and execute on them. We're optimistic this will have a positive impact across all areas of our business, as the year progresses. Looking at our performance by vertical, refining had a particularly strong quarter and its best performance since the pandemic began. Refinery's margins improved throughout the quarter and were at the high end of their historical range. As expected, a normalization of the transportation market drove up the demand for fuels and pushed refinery operating rates to historical high levels. The performance in refining over the last two quarters has returned us to the double-digit annual spent growth in the Aspen I MSC suite that we generated consistently for many years pre-COVID. Chemicals continue to generate solid growth, and it's an exciting market for us. The industry is increasingly embracing sustainability as an impetus to improve its operational performance while also substantially reducing its environmental footprint. In our conversations with customers, it has become clear that forward-thinking companies that recognize greater investment in digitalization can increase their competitive advantage, drive better financial performance, and move closer to their sustainability goals. The strong performance of chemicals during the pandemic and the multiple tailwinds benefiting this market gives us confidence in the durability of growth from these customers. The EMC vertical continued to show improvement and delivered positive growth for the second consecutive quarter. The tight supply-demand balance for oil resulting in high oil prices along with increased commitment to emissions reductions in the last few years, has started to have a positive impact on global energy and sustainability CAPEX budgets, respectively. The improved macro outlook for this industry is benefiting Aspen Tech through improvement in attrition rates, which we now expect to come in modestly better than our previously revised range of 5% to 5.5%. Longer term, there are three factors that we believe can have a positive impact on our E&C business. The first is the expected upcycle in upstream CAPEX budgets over the next three to five years necessary to increase oil supply to address future expected growth in demand. The second is the expected acceleration of sustainability CapEx investments and the pivot that many ENC firms are making towards executing projects in low-carbon energy areas like hydrogen, carbon capture and sequestration, or CCS, biofuels, wind, solar, and other areas. We're beginning to see more activity in these areas amongst ENCs and believe it will become an increasingly significant part of their overall businesses in the coming years. And the third is the growing importance of energy security rooted in oil and gas, specifically in the short to medium term. Recent events have caused a broader reexamination of where energy is being sourced from and the need for diversification of suppliers. We expect this to be a significant catalyst for the global LNG industry in the coming years and a key source of incremental cap expense. The improved budgets in refining and chemicals and positive trajectory for ENCs is resulting in a performance above expectations for the year for our Aspen I engineering suite. We also remain optimistic about the outlook for our APM business because of the quality and quantity of our pipeline, especially as we focus on closing the year. Following our references to a few of the customer transactions closed in the quarter. First, a global chemical company and long-term customer of Aspen Tech renewed its agreement for all three suites of our products and solutions. This new agreement increased their annual spend by 15% for a total booking value in excess of $70 million, making it one of our largest customers. The customer further standardized on additional products such as Aspen Capital Cost Estimation for the design of new facilities. This company uses Aspen Tech solutions to run their operations safer, greener, longer, and faster, including for the required reporting on emissions to regulatory authorities. Second, a leading independent player in the European energy and refining industry signed a new agreement to expand its use of our MSC and APM applications. This customer, which operates one of the largest refineries in Europe, and the most advanced in terms of plant complexity, decided to increase its usage after a study by Aspen Tech personnel identified tens of millions of dollars in incremental profitability through operational performance improvements and energy savings and the related reduction in emissions. The deployment of the Aspen Tech control and optimization solutions in the refinery, including a CO2 emissions dashboard coupled with expansion of Aspen Enfield to a second, recently acquired wind farm, will be key solutions to help this customer meet its sustainability and profitability objectives. And third and final, a North American electrical vehicles company that manufactures fleet commercial vehicles and SUVs increased its use of the Aspen One engineering suite to drive collaboration and standardization across production lines in the modeling and manufacture of electrical cell batteries by the chemical engineers in these teams. The collaboration capabilities of the suite will drive alignment and knowledge sharing across the teams in the multiple production lines as they ramp up vehicle output. In addition to the examples I've reviewed for this quarter, Our latest ESG report, released in Q3 and available on our website, covers several more longer-term examples of how customers are implementing our solutions for sustainability, highlighting the role that digitalization plays in helping companies across diverse industries reduce waste and energy use and meet their emission targets. Stepping back and looking at our business more broadly, Our recent results reflect the positive impact from an increased customer focus on operational efficiency and sustainability. As we have discussed in the past, the drive towards the automation and digitalization of assets to run them more efficiently and sustainably is still in the relatively early stages and is a top investment priority for our customers. In a world of growing demand, rising inflationary pressures, and greater scrutiny of the environmental impact of their operations, our customers recognize that being able to do more with less is a strategic imperative. This was evident in the customer and industry conversations I've had while attending CERA Week recently. CERA Week, which is run by IHS Market and now part of S&P Global, is the world's premier energy conference. I've been attending this conference for years, and this year the focus on the need to increase the use of technology to drive efficiency and sustainability was greater than I've ever seen. This is particularly true as it relates to sustainability. Conversations with customers about sustainability are hitting an inflection point, and it is now part of nearly every meeting we have. The increased activity by regulatory agencies, most notably in Europe, but more recently by the SEC here in the United States, about sustainability reporting requirements is driving customers to take a comprehensive view at their strategy in this area. Aspen Tech is in a great position to benefit from this trend in two ways, driving material amounts of emissions out of customers' operations while also making it possible to track their progress in a holistic way. While we're pleased about our performance years today and see the conviction from customers globally about transacting in the current quarter, we also recognize that a degree of uncertainty exists in certain markets for Aspen Tech, such as Russia and related sanctions and China and the spread of COVID-related lockdowns, which could dampen the growth in the quarter. the main concern being this customer's ability to get existing business done before the end of the quarter. This leads us to maintain our current annual spend guidance for fiscal 2022 at 7% to 8%. In addition, we're adjusting our fiscal year guidance for attrition to 4.5% to 5% compared to 5% to 5.5% previously. We're also adjusting the guidance for our APM business to 0.75 to one point of growth compared to approximately one point of growth previously. And finally, we expect to deliver the best-in-class profitability outcome that we guided to for the year and that investors have come to expect from Aspen Tech. The growing market focus on sustainability is especially exciting, and we look ahead to the opportunities for the new Aspen Tech and the capabilities that the OSI and geological simulation software businesses that are being contributed by Emerson will bring. These industry-leading solutions are incredibly well-positioned to benefit from the expected increase in capital investments in electrification and CCS around the world. We believe our expanded product portfolio will give new Aspen Tech a unique ability to benefit from the common decarbonization transition by enabling existing energy and chemical suppliers to operate with higher levels of efficiency and lower emissions than they ever have before to meet current energy and chemical demand, while also capturing the emissions they produce in CCS systems to further decarbonize their production. In addition, we will enable the design of hydrogen production facilities and will optimize their operation once built as countries around the world ramp up on the utilization of hydrogen as a clean energy source over the coming years and decades. And finally, we will enable the transition to global electrification from clean energy sources by supporting the dramatic increase in power, transmission, and distribution capacity that is required to meet many of the ambitious sustainability targets that countries and companies have committed themselves to over the next 10 to 30 years. It is important to note that the sustainability imperative is kicking off a massive capex investment cycle that will need to continue and increase for the next 30 to 40 years. For example, According to S&P Global, the total capex spending in the global energy sector supply side in 2021 was $1.5 trillion. About 30% or $450 billion is spent on low-carbon power, which includes hydrogen, CCS, wind, solar, and other forms of renewables. Twenty-three percent of that figure, or $104 billion, is in transmission and distribution infrastructure. Twenty-two percent, or $99 billion, is spent in each of the upstream and non-hydro renewable sectors, and 33 percent, or approximately $150 billion, on solar or photovoltaic power systems. Furthermore, Carbon capture and sequestration is estimated to be a $4 trillion market by 2050 according to ExxonMobil as compared to the $6.5 trillion market for oil and gas today that they estimate. What all this says is, That going forward, Aspen Tech will benefit from a major CapEx investment cycle where the products of the new Aspen Tech will be uniquely positioned to enable our customers to design, operate, and maintain these new facilities. We're excited about the future for Aspen Tech. The plans to integrate the OSI and geological simulation software into the new Aspen Tech and the commercial agreement that will deepen our partnership with Emerson have grown our conviction for an exciting future. We remain confident in new Aspen Tech's ability to be a consistent mid-teens grower with high recurrent revenue, best-in-class margin, and substantial free cash flow. who are looking forward to completing the transaction as soon as possible and getting to work executing on our strategic plan. Before turning it over to Chantel, I would like to formally welcome Manish Chawla, who recently joined Aspen Tech in the newly created position of Chief Revenue Officer, where he will lead all revenue generating functions of the company. Manish joins Aspen Tech after spending the past 14 years at IBM, where he was most recently the global general manager of the industrial sector. He's led IBM's efforts around energy transition, sustainability, and Industry 4.0, and has extensive experience scaling large global organizations. I'm thrilled to welcome Manish to Aspen Tech's senior leadership team and look forward to his contributions to our success. Manish will be assuming the leadership of our operations team from John Haig, who has decided to retire after 27 years with Aspen Tech. John will remain in Aspen Tech until October 1st, supporting the integration efforts of OSI and GSS, and leading the commercial team that will support the Emerson sales team taking Aspen Tech solutions into a number of their key markets. John has been an important and valued leader at Aspen Tech in a number of roles over the years, most recently as EVP of operations. On behalf of everybody at Aspen Tech, I want to thank John for all he's done for the company and wish him all the best in his future retirement. I would like to finish by just reiterating how pleased we are with our performance so far in fiscal 2022. We're delivering better than expected growth, high profitability, and free cash flow, and have made significant progress preparing for the completion of our transaction with Emerson. We believe market trends are clearly in our favor and provide a favorable setup for us to deliver on our long-term financial targets and generate significant value for our shareholders. Now, let me turn the call over to Chantel. Chantel?