Aspen Technology, Inc.

Good day and thank you for standing by. Welcome to the Q2 2023 Aspen Technology earnings conference call. At this time, all participants are on a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, to Brian Danu, ICR. Please go ahead.

Thank you. Good afternoon, everyone. Thank you for joining us to discuss our financial results for the second quarter of fiscal 2023 ending December 31st, 2022. With me on the call today are Antonio Pietri, Aspitex President and CEO, Chantelle Brightup, Aspitex CFO. Before we begin, I want to make the safe harbor statement that during the course of this call, We may make projections or other formative statements about the financial performance of the company that involve risks and uncertainty. The company's actual results may differ materially from past projections or statements. Factors that might cause such differences include, but are not limited to, those discussed in today's call, as well as those contained in our form 10-Q, most recently filed with the SEC. Also, please note that the following information relates to our current business conditions and our outlook as of today, January 20th, 2023. Assistant with our prior practice, we expressly disclaim any obligation to update this information. Please note that we have posted a financial update presentation on the investor relations portion of our website. The structure of today's call will be as follows. Antonio will discuss business highlights from the second quarter, and Chantel will review our financial results and discuss our guidance for the 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. Aspen Tech delivers solid second quarter results as we continue to benefit from a positive demand environment in many of our core end markets. We're also seeing clear benefits from the combination of heritage Aspen Tech with the OSI and SSE businesses that were part of the Emerson transaction in go-to-market activities, innovation, and customer access. As I mentioned last quarter, Our primary focus in the first half of the year was executing on the integration, transformation, and change management plans to create unified, consistent operating principles and a single business model across the entire organization. We have made substantial progress and believe our initial integration plans are largely complete, and the transformation phase of the OSI and SSE businesses is well underway. Our primary focus in the second quarter was instituting and standardizing on best practices across our go-to-market organization, including transaction terms and conditions and the change management required to support these best practices. While we had already onboarded the OSI and SSE sales teams in the first quarter and implemented a standardized sales methodology, We're now focused on driving the execution required to deliver high-quality and long-term duration license agreements that support the financial predictability that investors are accustomed to from Heritage as Pentec. This was a key area of reinforcement at our recent company-wide sales meeting in Boston, from which I came away very pleased with the progress we have made towards establishing a common set of transaction best practices across all businesses and the enthusiasm and buy-in demonstrated by the OSI and SSE sales teams. There's still more work to do in this area, but I'm encouraged by the progress to date. In terms of synergies, we're confident on our ability to meet or exceed the synergies expected in fiscal year 2023 based on the increase in pipeline across the different growth synergy categories. the actual cost synergies achieved today, the alignment and execution between the Emerson and Aspen Tech teams, and the completion of the key transformation requirements that capture growth in ACB in the OSI business. Overall, I'm pleased with our performance in the first half of the year and confident in our ability to execute to achieve our full-year financial targets. The success we expect this year in integrating and transforming the business setup and transforming the business sets up the new Aspen Tech well to deliver significant top and bottom line growth in the coming years. I'm highly optimistic about the opportunity ahead for Aspen Tech and our ability to generate significant value for our shareholders. Now, looking at our financial results for the second quarter, annual contract value for ACV was $833.7 million, up 8.7% year over year, Revenue was $242.8 million. Gap loss per share was $1.02. And non-gap EPS was 35 cents. And free cash flow was $53.1 million. I wish to provide further commentary on the quarter performance from OSI and SSE. The OSI business closed significant transactions in the quarter in line with our expectations. but because of the bundled nature of the commercial arrangements in the quarter, they did not contribute to ACV growth. In our last earnings call, we talked about the importance of achieving separability for the OSI services business as a key transformation milestone so that new agreements signed are able to be included in our ACV metric. We're excited to announce that, as expected, we recently achieved this key milestone which will allow us to begin including from OSI agreements the DGM product term license component and the SMS component of perpetual license agreements in our ACB metric beginning this quarter. This aligns OSI with how ACB is calculated for Heritage Aspen Tech. Chantelle will go into more detail in her prepared remarks. We also continue to be very encouraged by the prospects of the SSE business and its contribution to ACV growth as demonstrated through its contribution of the two largest ACV growth transactions in the quarter. We equally expect that as our execution in the OSI and SSE sales organizations evolves to be in line with Heritage Aspen Tech, we will experience greater and more predictable ACV growth. Looking at the quarter in more detail, The demand environment remained positive and was similar to trends we have seen in recent quarters. We signed notable contracts in each of our key verticals and global markets, and pipeline development continues to be robust. Our continuous strong performance in the midst of uncertain and changing economic conditions is a testament to the relevance and resiliency of our customers' businesses and the mission criticality of new Aspen Tech solutions. Aspen Tech has an essential role to play in helping our customers meet the demand for the products that support greater global prosperity while achieving their sustainability goals and ambitions. Historically, these two areas have been viewed as being in tension with one another, and delivering on both goals is the core of our dual challenge mission. Our customers have validated this value proposition and recognize our unique position to help them meet the dual challenges. Refiners and chemical producers will need to meet the increasing demand for their products and significantly reduce their environmental impact, while utilities will need to transform how electricity is generated and distributed to meet an unprecedented increase in demand. These are complicated challenges that will require elevated levels of investment for decades to come, and Aspen Tech is in a great position to benefit from these trends. I would now like to spend a moment providing details of what we're seeing in the market and our performance by verdict. Refining continues to perform well around the world. Refining margins are expected to remain solid through 2023, albeit down from historical highs. And overall, end market demand for refined products will continue to grow, especially for diesel and middle distillates products. The ongoing return of air travel, the upcoming import ban of refined products from Russia by the European Union, and increasing demand from the recent reopening in China are all expected to be ongoing catalysts for this market. We feel very good about the opportunity for Aspen Tech to drive consistently strong growth with refining customers. We had a very strong quarter and have great momentum in the power transmission and distribution or T&D market with the DGM solutions from our OSI business. We're very pleased with the sales performance of DGM in the first half of the year. The secular trends in this market are incredibly favorable given the expected vast increase in electricity demand and increasing number of energy sources that will power the grid in the future. The greater complexity from renewable power sources like wind and solar is creating more complex transmission and distribution networks, including commercial and industrial microgrids, which will require a wholesale rethinking of how to manage them. We expect this industry to have favorable investment trends for many years to come, considering the investment that will be required to transform the grid. CapExpan in 2023 for power generation, transmission, and distribution is expected to be about $1.2 trillion. One of our key growth synergy opportunities with DGM is to leverage Aspen Tech's global footprint starting in Europe. We have already had some exciting early wins with DGM in that market and continue to actively build out our sales capacity in that region. In December, we held the OSI User Forum in Las Vegas. The event was highly successful, with 500 customer attendees representing more than 150 utility companies from around the world. This was the first time since the pandemic started that OSI's customers gathered in person. We felt great enthusiasm from customers about the future plans for the OSI business under Aspen Tech, especially on the establishment of an ecosystem of third-party implementers for the DGM solutions. The oil and gas industry, upstream and midstream, had a banner year in 2022, supported by high oil prices and strong execution discipline. Forecasts indicate oil prices will remain elevated through 2023 at an average of $80 to $90 per barrel for Brent crude for the year, based on various current projections. The industry capex is expected to increase by 12% to $485 billion in calendar 2023 according to energy intelligence projections, with a significant portion of that increase coming from national oil companies. In our business, we had another strong quarter of the combination of Heritage Aspen Tech Solutions and SSE's products has created an unmatched technology portfolio that can deliver far greater value for customers. We signed a number of quality wins with the upstream customers in the quarter, including a significant contract with one of the largest oil producers in South America, and we're also engaged with customers on the use of SSE capabilities for carbon capture and sequestration in various locations around the world. The ENC vertical did well in the second quarter and has been an important source of strength in the first half of the year. Customers in this market are benefiting from two important trends. First, in their traditional business, investment in upstream oil and gas projects has increased notably in recent quarters. The combination of strong oil prices and tight supply after several years of below-average capex investment in the oil and gas market is supportive of ENC's backlog and headcount growth, which is positive for Aspen Tech. And second, ENCs are aggressively investing in establishing engineering capabilities for sustainability investments that represent a new growth opportunity that is likely to be less cyclical than their traditional business. The capacity investment required to meet sustainability targets in our core owner-operator markets will be substantial. and we present EMCs with sizable growth opportunities that haven't been present for several years. We're very optimistic on the outlook in this market in fiscal year 2023 and beyond. Finally, the chemicals industry had a good quarter, but does face some challenges globally and regionally in Europe. The ongoing situation in Europe and its impact on local energy supplies and consumer demand continue to weigh on chemical customers in the region. Globally, chemical customers are also experiencing a slowing demand and margin pressure as the global economy has slowed its growth. In conversations through the last quarter, many of our customers have told us they believe the current situation will recover in the second half of the calendar of 2023 as economic activity picks up. We remain optimistic on the opportunity in the chemicals market, but would flag it as one of the areas of our business that we are cautious on in the near term. I would now like to share some customer wins from the quarter that demonstrate our success. First, an existing SSE and Heritage Aspen Tech customer and one of the largest oil producers in South America is looking to shorten by 65% the time it takes to get a new oil field discovery to production. As part of this initiative, the customer evaluated multiple vendors on their knowledge automation and AI capabilities and elected to increase the spend of SSE products due to the combination of capabilities in the SSE suite. SSE has been and remains the largest incumbent in the exploration and production portfolio of software capabilities used by the customer. Second. an international utility company headquartered in the UK, owns and maintains the high-voltage electricity transmission network in England and Wales. This customer is investing heavily in its network of thousands of kilometers of overhead lines and underground cables and more than 300 substations to connect more and more low-carbon electricity sources, since that is a crucial factor to meeting net zero carbon ambitions in the region. After a careful study to upgrade transmission management system and an extensive evaluation of multiple competitors, the customer selected the OSI solution because of its more mature, modern architecture and out-of-the-box capabilities. This win opens up the opportunity to expand the use of OSI products into other operating areas and across other companies in the customer's group. And third and final, Emerson and Aspen Tech are having success in the market. Emerson recently announced its selection as the main automation contractor for the Rasq-Lafan Petrochemical Complex, or RLP, a joint venture between Qatar Energy and Chevron Phillips Chemicals. RLP will be the largest ethylene plant in the region and one of the largest in the world. The scope of work covers automation, software, and analytics capabilities, including various products from Aspen Tech's engineering and MSC suites. Emerson's seat at the table in the very early phases of the competitive process for this major construction project accelerated Aspen Tech's visibility into this opportunity, while Aspen Tech's products and solutions contributed to Emerson's overall bid quality to the customers. We expect this win will open many more opportunities for both companies in the future. This win is also a good demonstration that the commercial relationship between Emerson and Aspen Tech is already benefiting both companies, and the alignment between both commercial organizations will undoubtedly continue to grow the pipeline of business. We expect the focus on targeted growth initiatives will result in increased long-term growth and profitability for both companies through a strengthened go-to-market presence and offering. Now, turning to our innovation investments. In November, we launched our new software release, Aspen One version 14, which provides augmented intelligence, guiding users to improve decision-making abilities and increased operational excellence. Introducing over 100 sustainability models, this release will help customers accelerate progress in the areas of emissions management, hydrogen economy, carbon capture, material circularity, bio-based feedstocks, and renewable energy. V14 is a great example of how AspenTech will leverage our historical strength in modeling and simulation with new technologies like artificial intelligence to deliver greater value to customers through better profitability and improve sustainability. A great example of collaborative innovation in product development is a recently announced strategic partnership and licensing agreement with Saudi Aramco. As part of this agreement, we partnered with Aramco to provide to the market a unique, integrated modeling and optimization solution for the sourcing and utilization of CO2 Through this solution, we expect to provide customers the ability to rapidly evaluate sources of CO2 generation and potential opportunities for use or sequestration of the CO2, and hence design new innovative solutions that can reduce their carbon footprint while ensuring profitability. M&A is another important part of our innovative strategy, and we continue to maintain a positive posture in this area. We got off to a strong start with Ignation, which has received fantastic early feedback from customers. It greatly accelerates our AIoT industrial data and connectivity product roadmap and will enable greater visibility and understanding of an asset's operating environment. We're also proceeding on our integration planning with Micromine as we work towards the completion of the transactions. We expect this acquisition to close as soon as we obtain the last remaining regulatory approval, which we are actively working to secure. We have become even more impressed with the Macromine team and products as we have gotten to know them better as this process has played out and look forward to welcoming them to us, Pentec. Let me finish by providing our latest thoughts on fiscal year 2023 guidance and the second half of fiscal 2023. We remain confident in our ability to deliver on the full year ACV growth target and are maintaining the guidance range of 10.5 to 13.5%, while also maintaining our free cash flow guidance of $347 million to $362 million. Our confidence is based on our pipeline of business, the momentum building from the integration and transformation activities undertaken, the 2023 CAPEX spend projections and economic outlook in our core industries. Our success in achieving these outcomes will still depend in part on continuing to successfully execute on our integration and transformation initiatives across the company. As a reminder, We have always expected the second half of the year to be a stronger contributor to growth and free cash flow given the historical buying patterns of Heritage Aspen Tech customers and the expected timing of DGM and SSC contributions, including for the anticipated synergies. who are pleased with the performance of DGM and SSE so far and believe the operational progress we have made in the first half of the year and our growing sales pipeline puts us on track to deliver four points of ACV growth from those businesses. We also continue to be mindful of the macroeconomic environment, COVID developments in China, and the challenges facing the chemicals market, which we have flagged as the key variables in how we perform within our ACV growth range for the year. Before I turn it over to Chantel, I want to reiterate how much progress we have made in the first half of the year in bringing Heritage Aspen Tech, OSI, and SSE together as one company. We have created a world-class industrial software company that is poised to accelerate growth and generate significant profitability as we execute on our long-term strategies. The new Aspen Tech team has done an amazing job getting us to this point, and I want to recognize their effort and commitment to our success. So with that, let me turn the call over to Chantel. Chantel?