Aspen Technology, Inc.

Good day, and thank you for standing by, and welcome to Q4 2023 Aspen Technology Earnings Call. At this time, our participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to introduce your host for today's call, Brian Denue from ICR. Your line is now open.

Thank you, Operator. Good afternoon, everyone, and thank you for joining us to discuss our financial results for the fourth quarter and full year of fiscal 2023, ending June 30, 2023. With me on the call today are Antonio Pietri, Aspen Tech's President and CEO, and Chantelle Brightup, Aspen Tech's CFO. Please note, we have developed an expanded earnings presentation for the fourth quarter and our fiscal year 2023. This presentation is now posted on our IR website, and we ask that investors refer to this presentation in conjunction with today's call. Starting on slide two, before we begin, I would like to take this opportunity to remind you that our remarks today will include forward-looking statements. Actual results may differ materially from those contemplated by these forward-looking statements. Factors that cause these results to differ materially are set forth in today's press release and in our annual report on Form 10-KT and other subsequent funds made with the SEC. Any forward-looking statements that we make on this call are based on assumptions as of today, and we undertake no obligation to update these statements as a result of new information or future events. During this presentation, we present both GAAP and certain non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in today's earnings press release and investor presentation, both of which are available on our website. With that, let me turn the call over to Antonio. Antonio?

Thanks, Brian, and thanks to all of you for joining us today. Let me open by thanking our investors for their thoughtful feedback and suggestions regarding our earnings materials, which are reflected in the structure of today's prepared remarks and as well as our updated earnings presentation. Beginning on slide three, we achieved several important milestones in the quarter and fiscal year to help lay the foundation for Aspen Tech to enter our next growth stage as a leading global industrial software player. First, we delivered a solid fourth quarter to close out a successful year, marked by resilient demand and ACV growth above the midpoint of our guidance range. We believe these results have successfully laid the groundwork for a promising fiscal 24 and positioned Aspen Tech well for future HV growth and free cash flow margin expansion over time. Second, we made substantial progress integrating and transforming OSI and SSE, and we're pleased with how well these businesses fit into our broader portfolio given how early we are in our journey with these assets. We're excited about the enhanced value proposition. Our solutions can now provide customers across energy, chemicals, EPCs, and utilities, among other industries. Third, we build the teams, processes, and systems to capture growth synergies between Emerson and Aspen Tech and establish a cadence between organizations to execute on these opportunities going forward. And finally, We remain focused on R&D and co-innovation with the strategic partners and customers. Our efforts to advance use cases in support of our customer sustainability strategies show incredible promise and have been well received by customers. Q4 was a strong finish to an important year and shows the benefits of our transformation efforts and learning. Fiscal 23 annual contract value was $884.9 million, representing double-digit growth of 11.8% year-over-year, while fiscal 23 free cash flow was $292.3 million. Chantel will address our free cash flow performance in her remarks. Turning to slide four, I'll walk through our SWIFT performance. In the quarter and throughout the year, Demand in most of our end markets and geographies was strong. Our performance this year against the backdrop of an unpredictable macro environment is an important reminder of the mission criticality of Aspen Tech solutions to our customers' operations and strategic priorities. I'll touch now on the key high-level themes we're seeing across our suites. First, Heritage Aspen Tech performed well, contributing 7.2 points of growth on an ACV basis. Our engineering suite outperformed this year, driven by an improving business environment for EPC customers after years of restructuring in the industry and a strong energy market. We also saw material growth contribution from new customers that are benefiting from or investing in sustainability-related projects. We believe these new customers represent a classic land and expand opportunity for our other suites in the future. MSC performance was in line with our commentary from the third quarter, benefiting from refining market strength. Chemical demand remains subdued in the fourth quarter, particularly for bulk chemical producers, as companies continue working through this token and the impact from an uncertain economic outlook. This dynamic is having a more pronounced impact on OPEX spend for chemicals customers, which drives most of our chemicals business. Our expectation is this trend will now last at least through the end of the calendar year based on recent market commentary from customers. APM's performance came in at the lower end of our guidance range for fiscal 23 and reflected a continuation of the trend we have experienced in recent years. While APM represents a relatively small portion of our overall business, We continue to believe in its growth potential and remain committed to building out its capabilities to better capitalize on opportunities in certain markets. On that note, I'm pleased to announce that we recently closed a token IP acquisition that will provide additional failure mode and effect analysis and new root cause analysis capabilities, in short, FMEA and RCA capabilities to our EMTEL product. This will strengthen EMTEL's existing use cases and help to further expand its reach into other industries, such as power and transmission and distribution. The SSE and DGM suite of products were both successful in their first year as part of new Aspen Tech, exceeding our anticipated points of ACV growth contribution by 60 basis points in total. SSE had an exceptional fiscal 23 and was the largest area of outperformance for the year. The upside was driven in large part by the positive impact of initial transformation synergies, including the establishment of minimum contract lengths and Heritage Aspen Tech-like contract terms and conditions, as well as better than expected demand. SSE's performance this year reinforces the attractiveness of our full lifecycle solution that supports both traditional oil and gas EMP efforts for upstream customers, as well as an increasing number of sustainability use cases. DGM sales delivered a solid Q4 performance, and we're pleased with its sales activity outside of North America. Historically, DGM has been focused on the U.S., and its ability to leverage Aspen Tech's global expertise and capabilities is an important driver of our growth strategy in fiscal 24 and beyond. Furthermore, the imperative to expand the grid to achieve global electrification and the funds committed globally by governments to this effort will accelerate the demand environment for the DGM suite. Turning now to slide five. In fiscal 23, we built a foundation of new Aspen Tech while delivering solid financial results. In the span of 13 months, we made significant progress bringing OSI, SSC, and Heritage Aspen Tech together. We successfully integrated these businesses' sales, marketing, finance, and product development teams, among other areas, to create a fully unified organization. We also completed our acquisition of Emation, which, combined with our industrial AIoT offerings, forms what we now refer to as data works. On the synergies front, our results reflect early success in realizing our objectives as part of the Emerson transaction. We're on track to achieve the $110 million of EBITDA synergies, which includes $40 million in cost synergies. In particular, We have made significant progress in laying the foundation for our joint go-to-market strategies with Emerson. We're excited about the increasing opportunities we see to jointly expand business in either Aspen Tech or Emerson accounts, as well as co-innovation and OEM collaboration. Emerson brings a unique and complementary skill set to our industrial software focus, and we're aligned on execution and priorities going forward. Importantly, We also executed the plan transformation work for fiscal 23 related to OSI and SSE. Having done all of this, and because of it, we remain confident in our execution plan and the timeline to achieve the anticipated outcomes from these businesses' transformations. As an example, in the case of OSI, we're building out OSI's third-party implementation services provider's network to support the secular increase in demand and as part of the business model evolution towards a software-centric business like Heritage Aspen Tech. We're also receiving encouraging early receptivity to our DGM term license model from utility customers as we introduced an alternative to perpetual software licensing. And we have completed the work to make the DGM suite token ready to introduce to the market soon. As we discussed on slide six, We continue to see the megatrends of the energy transition and global electrification as important drivers of our business, particularly related to sustainability projects. That said, I'd like to take a moment now to discuss how we're positioned to capitalize on these sustainability pathway opportunities, many of which have been expanded through our transaction with Emerson. First, Heritage Aspen Tech's capabilities across all three suites are uniquely positioned to drive energy efficiencies and profitability in our customers' existing asset operations, while also addressing a growing number of energy transition use cases around biofuels production, carbon capture and sequestration, the hydrogen supply chain, electrical batteries engineering design and recycling process design, direct air carbon capture systems, and more. we already started to see material benefits from sustainability efforts in our engineering suite. In DGM, many customers are using our Monarch SCADA platform to help manage oil and gas distribution systems, supply and demand management for solar, wind, and hydropower electricity, and a broad array of key resources, supply and demand management networks, such as for water. Chemicals and refining customers are also showing heightened interest in microgrid management capabilities, presenting us with the opportunity to cross-sell our DGM suite into these markets. Meanwhile, in SSE, we're seeing interest in geothermal energy production, carbon capture and sequestration, subsurface hydrogen storage, and other sustainability use cases that are happening faster than we originally anticipated in certain parts of the world. Now, more than ever, Aspen Tech is well-positioned to drive existing customer growth, win new logos, and gain market share through these sustainability-related opportunities. As you can see on slide seven, we're investing in R&D and co-innovation partnerships to build out additional sustainability capabilities in our products to enhance our first mover advantage in this space for the benefit of our customers. As an example, This year we partnered with Emerson and Microsoft to develop a joint hydrogen value chain solution demo that helps optimize CapEx operating costs and other infrastructure to expedite speed to market. On that note, and turning to slide eight, we've outlined several customer wins in Q4 that demonstrate the value we're creating for our customers through this work as well as the current and future growth opportunities. On this slide, we've highlighted a few examples that are relevant to our discussion here today and would encourage you to read those in more detail. Wrapping up my discussion of our fiscal 23 results, I can tell you that the team here at Aspen Tech is energized and excited about the opportunity and growth potential of Aspen Tech today. At our recent annual sales meeting, I was encouraged to meet with my colleagues from around the world and discuss our next chapter. It was a materially different conversation now that the Heritage Aspen Tech OSI and SSC teams have all been a part of a unified organization for 13 months. Their excitement about what's possible going forward was palpable. As we kick off fiscal 24, we enter the year with a strong foundation from which we can build and grow new Aspen Tech. The success we had in fiscal 23 put in the teams systems and processes in place necessary to scale this business means we're now able to increase our focus on execution and achieving our go-to-market priorities. Now turning to slide nine. I want to shift to fiscal 24 and our ACB guidance. We start this year with a solid operational foundation and growing momentum. Customers are reacting well to our expanded value proposition and ability to positively impact their bottom line and sustainability efforts. Moreover, customers across all industries are grappling with their strategies to achieve a successful energy transition and believe we're positioned extremely well to help them achieve their goals. The technology stack and long-term vision for our solutions are very compelling to customers. Our outlook is for ACV growth of at least 11.5% in fiscal 24. This includes at least 7.5 points of growth from Heritage Aspen Tech, 2.5 points of growth from DGM, and 1.5 points of growth from SSE. We believe this outlook effectively balances the positive demand trends we see in most of our end markets and the benefit of improved execution focus with the ongoing uncertainty of the macro environment. Some of the key assumptions underpinning our guidance include industry demand trends that are consistent with fiscal 23, which were positive in all markets except for chemicals. In the chemicals market, while we remain excited about its long-term prospects due to its focus on digitalization, efficiency improvement, and sustainability initiatives, Our guidance assumes the market conditions we experienced in the second half of fiscal 23 will persist throughout all fiscal 24. Within Heritage Aspen Tech, we expect the ongoing strength in the refining market will support another solid year of MSC growth. The engineering suite is expected to continue benefiting from encouraging CapEx trends across the upstream energy market as well as the positive impact from sustainability initiatives. Finally, for APM, we anticipate its ACV growth contribution to be similar to fiscal 23. While we continue to think APM is an attractive growth opportunity, our guidance does not anticipate selling conditions to improve this year. For DGM, we're confident DGM ACV growth will improve in fiscal 24 due to, one, Our ongoing investment in DGM sales capacity, including our international sales team. Two, increasing demand in the market as funding to upgrade and expand electrical grids continues to grow. And three, the benefit of a full year of DGM customers adopting our term license offering. Turning to SSE, we're pleased with its underlying performance in fiscal 23 and the future growth opportunity for this week. SSE is benefiting from increased investment in traditional upstream CAPEX, a growing number of opportunities to support our customer sustainability efforts in areas such as carbon capture and sequestration and geothermal energy, among others, as well as the benefits of Aspen Tech's tokenization model. Having said that, it is important to note that a significant portion of SSE's outperformance in fiscal 23 was due to the positive impact of a transformation synergy that was at one time in nature, as customers renewed or signed new agreements that aligned with Heritage Assessment Texas standard contractual terms and conditions. SSE contract duration at the time of the Emerson transaction was approximately one year, which means we have renewed almost all of its existing contracts and largely captured the impact of this transformation initiative. There remains an important transformation synergy in the SSC business, which is a conversion of a large base of legacy perpetual SMS ACV to term software ACV, which will begin to convert in fiscal 24 by leveraging the SSC token suite. We expect this to materialize over a multi-year period. Overall, SSE's 1.5 points of expected ACV growth contribution equates to a mid-teens SSE ACV growth rate, which compares favorably for expectations for this business when we announce the Emerson transaction. With that, I would now like to turn the call over to Chantel before I return for closing remarks. Chantel?