Aspen Technology, Inc.

Good afternoon. My name is Rex, and I will be your conference operator today. At this time, I would like to welcome everyone to the fourth quarter 2022 Aspen Tech earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by number one on your telephone keypad. If you would like to withdraw your question, again, press star one. Thank you. At this time, I would like to introduce Brian Digno of ICR.

Thank you. Good afternoon, everyone, and thank you for joining us to discuss our financial results for the fourth quarter of fiscal 2022, ending June 30th, 2022. With me on the call today are Antonio Pietri, Aspen Tech's president and CEO, and Chantel Brightup, Aspen Tech's CFO. 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 results include, but are not limited to, those discussed in today's call, as well as those contained in our most recently-solved Form 10-Q and in Amendment Number 4 to the Registration Statement on Form S-4, which was filed on April 14th, 2022 by Emersub CX Incorporated with the SEC. Also, please note that the following information relates to our current business conditions and our outlook as of today, August 8th, 2022. Consistent with our prior practice, we expressly disclaim any obligation to update this information. Please note that we have posted a fourth quarter earnings presentation, as well as a presentation that provides more detail on the introduction of ACB as our primary growth metric on the investor relations portions of our website. The structure of today's call will be as follows. Antonio will discuss business highlights from the fourth quarter and fiscal year, including the completion of our transaction with Emerson and our pending acquisition of Micromine. And then Chantel will review our financial results and discuss our guidance for fiscal year 2023. With that, let me turn the call over to Antonio. Antonio?

Thanks, Brian. And thanks to all of you for joining us today. I'm excited to welcome you to our first earnings call as the new Aspen Tech. We're thrilled to have successfully completed our transaction with Emerson during the fourth quarter and to have welcomed the talented teams of OSI and their digital grid management portfolio of products, or DGM, and the subsurface science and engineering team and their portfolio of products, or SSE into Aspen Tech. This transformative transaction generated significant value for our shareholders and created a leading industrial software company with multiple paths to future long-term value creation for our customers and shareholders. I would like to start by providing an overview of the breadth and scale of our business today before reviewing our fourth quarter and fiscal year 2022 performance and our outlook for fiscal year 2023. Today, the new Aspen Tech is one of the world's leading industrial software companies and well-positioned to generate double-digit top and bottom line growth at scale. We now generate more than $1 billion in annual revenue and nearly $800 million in annual contract value, or ACV. The new business growth metric we're introducing this quarter and for which Chantel will provide more details later in the call. The two businesses contributed by Emerson have leading software solutions that significantly diversify Aspen Tech's operations and increase our opportunities for growth in new industries and from sustainability investment trends. The DGM portfolio of software solutions and services for the power transmission and distribution, or T&D, market provides Aspen Tech a market leading position in a fourth vertical. DGM will benefit from three micro drivers in the T&D market. First, the ongoing upgrading and expansion of the grid as part of global electrification to achieve net zero carbon emissions. Second, the growing complexity of the grid resulting from the introduction of renewable power. And third, the need for improved cybersecurity as the grid is critical infrastructure. These three drivers are catalysts for greater digitalization of the grid to manage larger systems of greater complexity. SSE. Formerly known as GSS, it's a leading portfolio of software solutions that are highly complementary to our existing upstream business. Aspen Tech can now provide a set of solutions that add value to the entire lifecycle of an upstream customer's operation by integrating subsurface and above-surface modeling and simulation capabilities to unlock additional value in operations. SSE also expands our reach into sustainability areas of the market, like carbon capture and sequestration, or CCS, and geothermal energy. The employees from each company are a strong cultural fit with our heritage business, with the same passion for innovation and desire to solve the most complex operational challenges facing our customers. The executive leadership team and I have spent significant time with many of the employees of both businesses in recent months and have become even more impressed that we have gotten to know them better. From an integration and transformation perspective, we're tracking well against our plan. We have detailed integration plans for each functional area and for each of the synergy streams, including the cross-selling initiatives between each of the businesses and and those associated with the Emerson commercial agreement. We're also making progress tokenizing the DGM and SSE product portfolios and converting the DGM portfolio to a term license structure. As we know from our own experience, the token term licensing model will unlock value for our customers and lead to broader and faster adoption of the products in the suite over time. We are pleased with the progress to date and feel very good that we will deliver on our target of $110 million of adjusted EBITDA synergies by fiscal year 2026, driven through a combination of ACV growth and cost synergies over time. The benefits of the Emerson transaction extend beyond the DGM and SSE product portfolios. We also formalized our new commercial agreement with Emerson that will make Aspen Tech solutions available to sell into markets where we have limited presence today, such as pharmaceuticals and pulp and paper. Emerson has created a dedicated sales team focused on accelerating adoption of Aspen Tech products and solutions across a range of these targeted industries, and we have established a corresponding team within Aspen Tech to support and enable Emerson to ensure we capitalize on this significant opportunity. Over time, we will realize additional benefits as more of our products and solutions are integrated into Emerson's industrial systems and as the two organizations identify opportunities for joint innovation that will begin to transform how our solutions are delivered to and adopted by customers. In addition, Our increased scale and the support of Emerson have expanded our capacity and ability to pursue M&A opportunities. The recent announcement of our definitive agreement to acquire Micromine is a great example. Micromine has developed a great set of software solutions that help metal and mining companies improve the safety, sustainability, reliability, and efficiency of their operations. The metals and mining industry will play a critical role in the energy transition, and it's at the very early stages of investing in the digitalization initiative that will enable them to meet that need. We look forward to completing this transaction in our fiscal second quarter, subject to regulatory approval. The scale of the new Aspen Tech and its critical role in the capital-intensive industries is attracting talent of quality, expertise, and diversity to the company, as proven by the members of our new board of directors. This injection of new talent will materially benefit the trajectory of this company over many years to come. In addition, as the company scales, we're enhancing specific organizational capabilities and systems. For example, In our go-to-market area, we have created an organization focused on the newly expanded set of key industries to sharpen our strategy, messaging, and go-to-market execution in each of these industries. We have also expanded our partners' organization with the intent to increase our market relationships as a leverage point for market penetration and adoption of our products and solutions. I could not be more excited at what we have built at Aspen Tech and the opportunity ahead of us. We have assembled one of the most comprehensive set of solutions in the industrial software market and are well positioned to help our customers address the dual challenge of meeting the increasing global demand for resources in a sustainable manner. The dual challenge is central to the continuation of global prosperity And that is why we have made it our mission. As the global population grows by another 2 billion people by 2050, as more and more people expect a better standard of living, and as society expects companies in capital-intensive industries to sustainably produce the resources to meet the future needs of the global population, an investment Over the next 20 to 30 years of a magnitude that hasn't been seen before in the history of humanity, we'll be required to achieve the complete transformation of the global economy to meet the dual challenge. This investment will focus not only on climate change, but also on circularity, eliminating plastic waste in the environment. and will drive the innovation and deployment of technologies and digital capabilities to achieve these environmental imperatives. We believe the new Aspen Tech is uniquely positioned to help companies in capital-intensive industries meet the dual challenge. With that backdrop, I would like to turn to our fourth quarter and fiscal year results. Since the Emerson transaction closed in mid-May and June 30th is our fiscal year end, I will focus my commentary primarily on the Heritage Aspen Tech business. Annual spend for the full year for the Heritage Aspen Tech business was $674 million, up 2.8% in the quarter and 8.5% year over year, which was above the high end of our guidance range. And free cash flow for the full year for the Heritage Aspen Tech business was approximately $286 million. Please note that this excludes a discrete tax payment associated with the Emerson transaction that Chantel will discuss in more detail later. We are pleased with our performance in the fourth quarter, which was strong across each of our key verticals and regions. Importantly, we did not see any impact from the worsening economic environment in Q4. The spending environment in our core markets continued to improve as the business and financial performance of our customers has strengthened. After a couple of years of muted investment in their operational excellence and sustainability initiatives, it is clear from transactions closed in the fourth quarter and fiscal year that customers are pursuing more strategic engagements with us and continue the process of standardizing across their operations on our products and solutions to drive greater efficiencies and sustainability gains. Overall, fiscal year 2022 played out much as we hoped it would, which provides us confidence as we enter fiscal year 2023. An important trend that saw acceleration across our business in fiscal year 2022 is how the sustainability imperative is influencing sales activity. Customers across All of our end markets are recognizing the need to step up their focus on sustainability and are putting in place initiatives around emissions reduction, decarbonization, and circularity that will fundamentally change the design, operation, and reliability of their assets in order to meet their sustainability ambitions. Our newly expanded set of solutions will support our customers' drive to meet these targets or those set by government agencies as a result of the growing regulatory push towards greater environmental disclosure and compliance. As a point of note, a recent webinar held by Aspen Tech on carbon capture and sequestration garnered a record amount of interest with over 1,900 registrants, a clear indication of the growing focus of our customers on decarbonization and sustainability. Looking at our performance by vertical in the year, refining had another strong quarter that was the best of the fiscal year. Crack spreads during the fourth quarter were at all-time highs, and while they have cooled off in recent weeks, they remain in the upper quartile of their historical range. We're optimistic about the profitability and demand environment for the refining industry and the growth that it will support for us. Energy security is also leading to a rethink of the medium to long-term need for refining capacity in certain parts of the world. Chemicals continues to be a source of strength for our business. Chemical customers recognize that driving greater efficiencies in their operations and mitigating their environmental impact through digitalization is critical to their future business performance. We're also confident about the long-term growth of the industry as global chemical demand is expected to increase 300% by 2050, according to the World Energy Forum, placing the industry at the center of meeting the dual challenge, as I have previously discussed. The ENC vertical continues on its transformation path as more customers focus on sustainability investments such as renewable power, hydrogen, carbon capture and sequestration, and other technologies. This, along with improved medium-term outlook for oil cap expense and an expected increase in LNG facilities investments, should drive backlog growth for the ENC industry. We're optimistic this vertical will show improvement going forward as it reopens, as it repositions itself towards sustainability and the associated CAPEX trends. I would now like to say a few words about the industries in which OSI and SSE operate. Digitalizing the transmission and distribution industry is critical to transforming how this industry operates to support global sustainability. with the DGM portfolio of products perfectly positioned in this regard. It is estimated that energy demand will grow by 50% by 2050 as the global population increases and achieves a better standard of living, which means that to reach net zero carbon emissions in that timeframe, 75% of the increase in energy demand will need to be supplied by electricity and 90% of it will need to come from renewable sources. This means the electrical grids will need to expand significantly and will become more complex, which will require greater and more sophisticated digital capabilities to manage and optimize their operations. This is where OSI and DGM products play a central role. The DGM product portfolio was developed to meet the increasing complexity of the grid including advanced capabilities such as advanced distribution management systems, ADMS, or electricity distribution, and distributed energy resource management systems, DERMs, which address the complexity introduced by intermittent sources of electricity into the grid from renewable sources. OSI has also developed capabilities to manage microgrids found in industrial facilities, commercial buildings, and other assets or systems that cannot afford the loss of power from public utilities. We also see this application as an important cross-sell opportunity into the Heritage Aspen Tech industrial customer base, and furthermore, into Micromine's customer base once the transaction closes. Looking ahead, we expect that significant cap expense will be dedicated to upgrading and expanding the grid. increasing the demand for DGM solutions for many years to come through all phases of the business cycle. It is important to note that OSI's business is levered to CAPEX budgets in the highly regulated utility industry and not tied to the traditional CAPEX investment drivers in oil and gas and chemicals, behaving more like OPEX investments. We're also very excited about the SSE product portfolio in the oil and gas exploration and production area. The integration of the SSE subsurface capabilities with our engineering suite above surface capabilities will create a unique offering in the market. We're already seeing a strong customer interest in this combined offering and its ability to drive innovation in the space. We believe that CAPEX budgets in the upstream sector will grow over the next three to five years in order to maintain and increase supply of oil and gas. This is a trend that we already see. Over time, we will create a new path for growth for this portfolio of products focused on decarbonization capabilities and renewable sources of energy, such as CCS and geothermal energy, respectively. In addition, existing SSE product capabilities will complement the micromine suite of products to further differentiate the performance of that future product suite. Finally, we're now the only company able to provide a comprehensive solution to model the entire petroleum value chain from the rock in the reservoir to the distribution of fuel to the corner gas station and into the chemical supply chain. As we typically do on our year-end earnings call, I would now like to provide you with some additional details about our performance for the full year 2022, all of which are on an annual spend basis. I will start from a product perspective and focus specifically on the performance of the heritage Aspen Tech businesses. The engineering business grew annual spend 5.5% for the year, generating 38% of our overall annual spend growth. This was stronger than we initially expected and driven in large part by better performance by owner-operators, which resulted in lower attrition and higher gross growth. Our manufacturing and supply chain, or MSC business, delivered annual spend growth of 12.1%, representing 55% of our total annual spend growth. We saw a significant improvement in MSC performance throughout the year, as our owner-operator customers, particularly refiners, saw business conditions improve as COVID-related disruptions abated. The asset performance management, or APM, business generated total annual spend growth of 14% or 7% of our total annual spend growth for the year, contributing 0.6 points of annual spend growth. The performance of the APM suite was impacted by headwinds from attrition, mainly in two areas. We had several ENCs that purchased APM entitlements in the last couple of years as part of their business initiative to generate revenue growth from operations and maintenance activities in brownfield sites. The expected revenue growth from this activity did not materialize as a result of depressed demand due to COVID, so these agreements were not renewed. And two, select customers in Asia and other regions that lacked the on-site support during COVID lockdowns required for the successful deployment of the product. The APM gross growth in the fourth quarter was one of the strongest in the history of the suite. Total gross growth for the suite in fiscal year 2022 equated to 1.1 points of growth. The outlook for APM attrition in fiscal year 23 is much improved as a result of most EMC contract renewals having already occurred, a more mature customer success process including remote support, and the expectation of improved demand for this suite going forward. Customer interest remains very high, and we continue to have a sizable and growing pipeline of opportunities. Shifting to our verticals. The energy, chemicals, and engineering construction verticals contributed 54%, 32%, and 7% of our growth in annual spend during the year, respectively. Global economy industries, or GIs, contributed 7% of our annual spend growth for the year and grew 9% in the year. For the full year, the attrition rate for heritage as Pentec was 5%. The acceleration in annual spend growth this year was split between lower attrition and higher gross growth. We generated 13.4% gross growth in fiscal year 22, which was approximately a 200 basis point improvement from last year. We are pleased with the growth performance during the year and believe it sets the stage for further improvement in the years to come. As you can see, We had a strong fiscal year 2022 and entered fiscal year 2023 with a great deal of momentum. The trends in each of our end markets are positive, and the addition of the DGM and SSE product portfolios provide exposure to new markets that are also trend favored. At the same time, we're mindful of the evolving macro environment and its potential to weigh on economic activity in the coming quarters, while also remaining vigilant about future COVID developments and geopolitical considerations. So, while we're optimistic about our performance in fiscal year 23, we think it's prudent to assume a wider range of potential outcomes. Similar to recent years, we expect fiscal year 23 to be a tale of two halves. We currently have greater visibility and confidence into the first half of the year, given the ongoing strength in our end markets and as customers look to utilize their calendar 2022 budget commitments. Conversely, we see several potential scenarios for customers' calendar 2023 budgets, depending on how the macro environment evolves in the next two quarters. Putting all this together, Our current expectation is for ACV growth in fiscal year 23 to be 10.5 to 13.5% for new Aspen Tech. There are several assumptions underpinning our guidance. First, DGM and SSE are expected to contribute approximately four points of growth in total this year. The DGM product portfolio has had a good start in the fiscal year, especially considering the sale, acquire, divest processes involving the OSI business for the better part of the last two years. We're also seeing notable market strength from the SSE product portfolio, supported by improved cap expense, a better position business after the completion of its restructuring under Emerson ownership, and the potential value creation from the integration of their capabilities with their engineering suite of heritage Aspen Tech. were bullish about the outlook for these two product portfolios going forward. Second, we currently expect growth in the first half of fiscal 23 to build upon the momentum in recent quarters. The current operating outlook for our customers in calendar 22 is very healthy and supports the budget and current spend rates in place. Based on today's macro outlook for oil demand and supply and market dynamics, We expect calendar 23 budgets to support a continuation of the spend experience this year, but we prefer to take a prudent approach to our ACV growth range. To put a finer point in the range, the high end of our range assumes that the DGM and SSE product portfolios will perform as projected in our guidance given their respective market dynamics. And the Heritage Aspen Tech product suites will see a continuation of improvement in the spend experience so far in calendar 22 into calendar 23. This outcome assumes little or no impact from any economic deceleration. And the low end of the range assumes the macro outlook gets materially worse due to economic conditions, COVID developments, and or geopolitical considerations. resulting in reduced customer spend for the heritage Aspen Tech suites with owner-operators, supporting a growth outcome for those suites similar to fiscal year 22, while the DGM and SSE product portfolios deliver a performance as projected in our guidance. It's important to know that in any of these scenarios, we're confident that we will deliver a year of double-digit growth in ACB. Third, From a suite perspective, we expect the engineering and MSC suites will contribute six to eight points of growth. BGM will contribute three points, SSC one point, and APM is expected to contribute approximately 0.5 to 1.5 points of growth. Lastly, attrition is expected to be approximately 7% to 8% for the year. The heritage Aspen Tech attrition is expected to show continued improvement to 3% to 4% for the year. The SSE suite attrition is expected to be approximately 4% for the year, which we would expect to improve in the coming years. DGM is not expected to have any material attrition. While the economic outlook is unclear at the moment, what is clear is that Aspen Tech is performing at a high level and well-positioned for the future. We meaningfully accelerated growth over the course of fiscal year 22 and have laid the foundation for durable double-digit growth in the future. The OSI and SSE businesses and the pending acquisition of Micromine provide exciting new growth opportunities and meaningfully diversify our end market exposure. Fiscal year 22 was the most transformative year in the history of the company. We delivered excellent operational and financial results while signing and executing our transaction with Emerson. This is the most exciting time in the 40-plus year history of Aspen Tech, and we're well-positioned to deliver greater value than ever before for our customers and shareholders. I want to conclude by recognizing the extraordinary work done by the Heritage Aspen Tech team to deliver the exceptional operational and financial results achieved in fiscal year 2022. and also thank the new Aspen Tech team for their outstanding effort to continue to make our transformation possible. I strongly believe the best is yet to come and that your efforts will result in significant value creation for all stakeholders of the company. With that, let me turn the call over to Chantel. Chantel?