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?

Thank you, Antonio. I will now review our financials for the fourth quarter and for the full year of our fiscal 2023 on slide 10. Before I begin, I'd like to highlight that our earnings presentation includes explanations regarding the impact of ASC topic 606 on our financial results. We have also included definitions of annual contract value, or ACV, and bookings in our earnings presentation now available on our IR website. We ask that investors refer to these definitions together with today's call. As Antonio discussed, annual contract value was $884.9 million at the end of fiscal 23, up 11.8% year-over-year and 3.5% quarter-over-quarter. This was at the high end of our outlook for fiscal 23, reflecting our portfolio expansion, solid growth across our product suite, and resilient demand in most end markets. Customer attrition was 5.9% in fiscal 23, beating our guide of 7 to 8%, mainly due to benefits from transformation efforts in SSD, and secondarily, focused customer success efforts on EPC customers to mitigate reduction in spend. Annual spend for Heritage Aspen Tech was approximately $730.9 million at the end of fiscal 23, increasing 8.5% year-over-year and 2.7% quarter-over-quarter. Please note that we will not be disclosing annual spend for Heritage Aspen Tech going forward now that we have finished the fiscal year. Total bookings was $380 million in the fourth quarter and $1.08 billion in fiscal 2023, above the high end of our guide. As a reminder, bookings are impacted by the timing of renewals. Total revenue was $320.6 million for the fourth quarter and $1.04 billion for fiscal 2023 within our guidance range. As a reminder, revenue in our model is heavily impacted by contract renewal timing and variability under ASC Topic 606. Now, turning to profitability. On a GAAP basis, operating income was $6 million, while net income was $27.3 million, or 42 cents per share, in Q4. For fiscal 23, operating loss was $183.1 million, and net loss was $107.8 million, or $1.67 per share. On a non-GAAP basis, operating income was $148.9 million in Q4, representing a 46.4% non-GAAP operating margin. For fiscal 23, non-GAAP operating income was $394.8 million, representing a non-GAAP operating margin of 37.8%. Related to my comment on revenue in topic 606, the timing of customer renewals and the resolving impact on license revenue recognition in a given quarter also drive fluctuation in margins between periods. Expenses came in slightly higher than our guide due to an increase in bad debt expense driven by one customer. Non-GAAP net income was $138.2 million in the quarter, or $2.13 per share. For fiscal 23, non-GAAP net income was $372.1 million, or $5.72 per share. Turning to the balance sheet. We ended fiscal 23 with approximately $241.2 million of cash and cash equivalents and no debt. In addition, we had $193.1 million available on our revolving credit facility. On cash flow, we generated $113.6 million of cash from operations and $111.5 million of free cash flow in Q4. For fiscal 23, we generated $299.2 million in operating cash flow and $292.3 million in free cash flow. This was below our expectations due to lower collections. As we have discussed in the past, Heritage Aspen Tech has a disproportionate amount of its receivables due on June 30th. This year, we saw a greater portion of these invoices push out of the quarter as certain customers took longer to pay than they have historically. We received a significant portion of these payments in July. We believe this reflects certain customers being more cautious as they manage through a tighter working capital and cost of capital environment. Tightening our collection processes and improving the rigor of our collections forecast across the entire business is a primary area of focus for us in fiscal 2024. Before turning to guidance, I would like to take a moment to discuss our capital allocation strategy. which we have outlined on slide 11. I'll begin by providing an update on Micromine. In collaboration with Potentia, Micromine's majority owner, we have terminated our agreement to acquire Micromine. As stated previously, we have been waiting to secure final regulatory approval. The outstanding approval needed was from the Russian government. As its review process continued, the timing and requirements necessary to secure the approval became increasingly unclear. This lack of clarity on the potential for and timing of a successful regulatory review led us to this course of action. We remain committed to acquisitions, including smaller technology tuck-ins or larger, more strategic targets as our primary use of capital. We have built one of the world's leading industrial software businesses, and we believe we are in a great position to deepen our product portfolios for our core verticals through M&A. In addition, we will opportunistically pursue acquisitions that provide us with leadership positions within new markets that could further benefit from our deep technical capabilities and first principles approach. Importantly, we have strengthened our internal M&A capabilities to execute on additional M&A as part of our strategic roadmap. I would note as well that despite the decision to terminate the micromine transaction, the metals and mining industry remains an attractive market particularly for our DGM, MSD, and APM suites. And we remain committed to expanding our footprint in this industry through organic and inorganic investments. If we do not identify attractive and actionable M&A opportunities, we will pursue share repurchase authorizations if market and business conditions warrant. For example, in Q4, we announced a $100 million accelerated share repurchase program that we anticipate completing this quarter. And today, we are announcing that our board of directors has approved a $300 million share repurchase authorization for fiscal year 24. Once the ASR is complete, our intention is to begin executing on this new authorization. We maintain a robust financial profile with a strong balance sheet and healthy cash flows. We consider these to be strategic assets, and they allow us to deploy capital in ways that generate value for our customers, employees, the communities we serve, and our shareholders. Turning to slide 12, I would like to now close with guidance. Consistent with prior fiscal years, we will continue to provide guidance on an annual basis. As Antonio mentioned, we are targeting total ACV growth of at least 11.5% year-over-year in fiscal 24. This includes our expectations for attrition of approximately 5%, with a higher concentration of attrition occurring in Q2 and Q3. We expect total bookings of at least $1.04 billion with $580 million up for renewal in fiscal 24 and $80 million up for renewal in Q1. We expect total revenue of at least $1.12 billion, GAAP net loss at or better than $7 million, and non-GAAP net income of at least $424 million. In addition, we expect GAAP net loss per share at or better than 11 cents and non-GAAP net income per share of at least $6.51. This includes the impact of our fiscal 23 share repurchase program. From a cash flow perspective, we expect operating cash flow of at least $378 million and free cash flow of at least $360 million. Please refer to our earnings release and presentation for a complete overview of our fiscal 24 guidance. Our earnings presentation presents other important considerations for investors to think about in terms of modeling our business. I'd now like to provide some additional color on these points. In general, our business is typically weighted more towards the second half of the fiscal year. For ACV, we expect fiscal 24 growth to have a similar cadence to what we delivered in fiscal 24 to 23 in terms of our net new ACV added during the year. Q1 is expected to be the lowest and Q4 the highest in terms of net new ACV added. On free cash flow, the large majority of our free cash flow typically occurs in the second half of the year. In fiscal 24, we expect at least 80% of free cash flow to occur in the second half of the year, which is largely consistent with last year's linearity. We anticipate free cash flow in the second half to be fairly evenly split between Q3 and Q4. Please note that Q1 is typically our lowest free cash flow quarter, and we expect that to be true again this year. Our guidance assumes cash tax payments of approximately $125 million. With respect to revenue, as noted earlier, timing is more variable due to the impact of 606. However, renewals, which heavily impact license revenue, are generally more weighted to the second half of the year, with Q1 renewals at the lowest and Q4 renewals at the highest. Based on current expectations, we anticipate that our revenue linearity will be broadly similar to fiscal 2023. We will continue to disclose the amount of bookings up for renewal each quarter. Let me wrap up by saying that we are proud of what we have accomplished in fiscal 2023. I am confident in our team and our ability to capitalize on both existing and emerging growth opportunities going forward. With that, I will turn it back to Antonio for his closing remarks. Antonio?

Great. Thanks, Chantel. We'll be opening up the call for Q&A momentarily, but before we do that, I want to reiterate the key takeaways from this call and Fiscal 23 more broadly. First, we delivered a solid year in Fiscal 23, delivering double-digit ACV growth and laying the foundation for the expansion of ACV growth and free cash flow margins in the coming years. We made great progress integrating OSI and SSE with Heritage Aspen Tech and made a strong progress on our ambitious transformation roadmaps for both the OSI and SSE businesses. I'm confident our efforts this year position us for success in fiscal 24 and beyond. Third, sustainability is a sizable and growing tailwind across every area of our business. We are in a great position to capitalize on increased investment from customers in areas like energy transition and electrification for years to come. As we look ahead, we expect to build on our leadership in sustainability as a key driver of our strategic priorities. And finally, we enter fiscal 24 with solid momentum, a cutting-edge technology stack, and long-term vision for a solution that is very compelling to our customers. A big component of my confidence in our ability to deliver on these outcomes is also the incredibly talented team we have at the helm of new Aspen Tech today. We enter the year with the right people, processes, and products in place to take full advantage of the opportunity in front of us. With that, operator, we would now like to begin the Q&A, please.

And thank you. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. We ask that you limit yourself to one question and one follow-up. Again, we ask that you limit yourself to one question and one follow-up.

And one moment for our first question. And our first question comes from Rob Oliver from Bayard.

Your line is now open. Hey, Rob.

Hey, Antonio. Hi, Chantel. Thank you guys for taking my question. I appreciate it. I had two. One, just to start, since it's probably the last time we're going to be able to ask about it, which is the Heritage Aspen tech component of the guide, which I'm going to miss. Antonio, I appreciated your color around some of the moving parts within that, and it looks like it's relatively flattish with this year. Can you just give us a sense of what linearity was in Q4 with your chemicals customers? And I know things dropped off pretty dramatically there. So when you say, hey, you know, we're not expecting any change in the market, is that off of sort of that low base you guys saw last quarter? Help us understand that and maybe some of the other moving parts within that. I just had a quick follow-up.

Yeah. Well, I mean, look, the fourth quarter was a solid quarter for hot growth. that supported the eventual outcome that we got. Nonetheless, as you said, the growth we had in fiscal 23 was similar to fiscal 22, around 8.5%. And that is a result of a combination of factors, certainly chemicals, and not that chemicals completely disappeared, but probably from a growth standpoint, it contributed less than half of what it normally does. uh you know there was a little bit of uh back and forth throughout the year in in in our russian business and and you know we had a quarter where china and china was fully closed down as well and look ultimately fiscal 23 was an incredible year a huge amount of work was accomplished in integration and transformation they they had a leadership team had to take on the integration and transformation of the OSI and SSC businesses. And I have no doubt that a lot of their brain cycles were dedicated to that effort, as opposed to the normal execution cadence that we have in the company. Now that we're past that, I am convinced that we're going to get back to that execution cadence going forward, which is what encourages me about our guidance for fiscal 24. in line with what we accomplished in fiscal 23, at least what we did in fiscal 23.

Okay, very helpful. Thank you, Antonio. I appreciate it. And then, Chantal, just to quickly touch on some of the issues around the acquired assets, SSE and DGM, that surfaced last quarter. It sounds like you guys are on the path to fixing those, and I guess particularly on SSE around contract durations and DGM around labor-related issues. Can you just help us understand where we are relative to those as we enter FY24? Thank you guys very much.

Yeah, happy to, Rob. I would say we're exiting FY23 with confidence that we fully understand the learnings and have incorporated those. So we've taken the exit out of 23, incorporated that into our 24 guide, learning from SSC, learning from DGM and OSI. So Rob, we've fully taken those learnings and incorporated them, and we're confident that we have our hands around those in our 24 guide.

And what I would also add to Chantel's answer, Rob, is Look, we're now entering 24 with the leadership team, the organization, the systems, and the processes in place. That's what we worked in 23. 24 is about execution now, and that's what gives us a lot of confidence. Thanks, guys.

And thank you. And one moment for our next question. And our next question.

comes from Andrew Obin from Bank of America. Your line is now open. Hi, Andrew. Yes, good afternoon.

Can you hear me? Yep. Hey, just historically, you guys sort of provided your guidance within three percentage points. So this 11.5%, am I correct to assume that that's sort of the low end of the guy? I just want to make sure, right? versus the midpoint of the guide, the way you would historically guide, right? Does that make sense what I'm asking?

Yeah, you should assume that the 11.5% is the floor for our performance in fiscal 23, fiscal 24.

Gotcha. That sounds good to me. And then on DGEM, just, you know, we've heard from some of your competitors that Utilities just generally, as you transition the license structure, they have to figure out how to incorporate it into their base rate. Can you just talk about it? You know, and it seems it's not, right, it's not just an Aspen issue. It's like other competitors have sort of highlighted that as well. Can you just talk to us where we are in terms of sort of industry acceptance as you go, you know, as you go away from perpetual license? model with utilities, regulated utilities customers. Just give us a little bit more color, how much work has been done, what's the understanding level in the industry. Sounds like you guys have done some, but just maybe a little bit more color. Thank you.

Yeah. Well, Andrew, I believe one of the comments that we have on our preferred remarks is also how pleasantly surprised we are about the early receptivity to our term licensing model by utility customers. Frankly, we had that same belief that you just communicated at the beginning of the fiscal year and listening to the OSI team. But as we approach these customers with term licensing, the benefits of it, and even some preliminary conversations around the token suite, we've seen them to be... very accommodating. No doubt that they have to find ways to build that cost into their cost rate. They do go through those motions. A lot of them do. It has allowed us to do some term business for new pipeline that has closed early on, but also we've been able to convert some pipeline that has been on a perpetual license basis to term license business at the very end of those deal negotiations. So, yes, we understood that to be the case, but the fact is that our self-motion is proven to be otherwise in most cases. No doubt there's some customers that prefer perpetual, but this is a transition, and the progress we've made, we're very pleased with.

Oh, thanks for clarifying. Thanks a lot. And thank you.

And one moment for our next question. And our next question comes from Matthew Fowle from William & Blair.

Your line is now open. Matthew?

Hey, Antonio. Hey, Shantel. Thanks for taking my questions. First, I wanted to ask on acquisitions, and thanks for an update on the capital allocation strategy. But specifically on acquisitions, What does the pipeline look like there for larger transactions like the MicroMine one? Are there attractive ones that are out there? And how soon would you be willing or feel that you're ready to pursue another transaction similar size to MicroMine?

Yeah, I think that I can start, Matthew. I think from the perspective, we definitely have a pipeline. We have an active pipeline that we're always looking at as being part of our capital allocation strategy. There are targets out there that are of interest. Unfortunately, you can't always time when you would like to do it versus when they're available. As I mentioned in my prepared remarks, we're ready to do that activity when it presents itself. We've developed the internal M&A activities. We have the valid sheet to support it. So, I think we're ready when we find it, but we remain disciplined, as we've always discussed, in the sense that we want to make sure it is accretive or supports double-digit ACV growth and our best-in-class profitability. So, you know, we'll time it when it's available, but we're ready to still engage in it.

Okay, great. And then just wanted to follow up on comments around the Russia business. Is there any of that left that's included in the fiscal 24 guidance? And is there any risk around that part of the business?

Yeah, look, our guidance of 11.5 certainly accounts for chemicals, accounts for other potential eventualities. But on Russia, due to the different challenges that we'll be facing in that market, we decided to go to a renewals-only mode. So that means that we're not going to be selling anything new into Russia going forward. We will be focusing on renewing the existing business, and that's going to be our focus. So our guidance already implies that we will not see any growth from Russia. And we've also taken a little bit of a conservative approach with respect to potential attrition in Russia. Although we expect to renew the business that's coming to us in fiscal 24, we've been cautious and assume some level of attrition in Russia as we try to renew some of that business. So going forward, Aspen Tech will only be renewing business. We will not be selling new entitlement to Russian customers.

Got it. Thanks a lot. Appreciate it.

Thank you.

And thank you. And one moment for our next question.

And our next question comes from Jason Salino from KeyBank Capital Markets. Your line is now open.

Hey, Jason.

Great. Thanks. Hey, Antonio. Hey, Chantel. Thanks for fitting me in. No, really, really strong guide here with a double-digit ACV guidance. I think you mentioned on Andrew's prior question that this was kind of a floor. I guess how conservative do you think investors should view this type of ACV outlook?

Well, look, if we give you that guidance of 11.5 being the floor is because we're confident about that number. If you look at the ACV growth in fiscal 23 and the attrition, 11.8 plus 5.9, that's about 17.7% of gross growth, new growth in fiscal 23. That's a very strong outcome from a new growth, new business generated in fiscal 23. In fiscal 24, if you look at the guidance of at least 11.5 and the attrition at 5, approximately 5, that's 16.5. So what you see in our guidance is the expectation of chemicals for the full year not contributing. We had half a year of strong contribution from chemicals in fiscal 22. We're assuming that chemicals will be subdued in the full year in fiscal 24 in their less Russia growth or no Russia growth. And so that's how we come up to the 11.5. If you look at our guidance as well on the suite, on a per suite basis, you look at, you know, had delivered about 8.5% growth in fiscal 23. We're talking approximately close to double-digit growth in fiscal 24. OSI grew at 30% in fiscal 23. We're guiding to almost 40% growth for the DGM suite. Sorry, I should have said DGM in fiscal 23, 30%, 40% in fiscal 24. And SSE grew by 33% in fiscal 23 and we're guiding to about 15, 14, 15% growth in fiscal 24. And this is solid growth across all suites that we're assuming. We saw in Q4 a solid contribution to growth from DGM. We were conservative in our Q3 outlook for DGM, considering that we were still learning around the dynamics of customers' motions to sign deals, but we were pleasantly surprised in Q4 with that outcome. So, overall, look, we feel good about the trajectory for HAT in fiscal 24, the trajectory for DGM, the trajectory for SSC. We're going to have a greater focus on our execution, and now it's about really injecting more momentum into the business as we go forward.

Perfect. No, I really appreciate that really in-depth answer, Antonio. And then maybe just a quick follow-up for Chantel on the pre-cash flow for the year and for next year or for the quarter. You mentioned some timing differences just on invoicing. That makes sense. Any way to quantify what moved from Q4 to Q1?

Yes. No, I understand the question for sure, Jason. I would put it at basically the difference between the actual and the guide would be the range that I would carry in and And in our guidance, we assume that some of that continues through the year, so it's not with an alternative to Q1 and Q4 has none. But you can say the range to the actual would be what I would assume.

Okay. Perfect. Thank you.

Thank you, Jason.

And thank you. And one moment for our next question. And our next question comes from Clark Jeffries from Piper Sandler. Your line is now open.

Hello. Thank you for taking the question. You know, I really appreciate the disclosure on the ACV growth contributions, especially by industry. Antonio, maybe I would clarify something that you briefly mentioned in a prior question, but when we think about Heritage Aspen Tech, you know, getting back to double digits, you know, where would be the delta there? Was it chemicals was half the contribution that you'd normally expect? Any other call-outs when we think about industry contribution, overall heritage, returning to that double-digit level?

Yeah, no, look, I think fundamentally our energy industry refining has been a strong contributor, certainly. That will be the case. accelerated to almost 8.6% growth in fiscal 23. By the way, that's the fastest growth rate of our engineering business since fiscal 14 when it grew just over 10%. So we're really excited about the tailwinds for the engineering business from sustainability investments. I think that will continue in fiscal 24. We believe that MSC will continue to perform strongly. There are some products in MSC that didn't perform as we expected as a result of execution focus in fiscal 23. That focus will come back. I think that will give us a lift in the same markets, refining, even upstream that is taking up more of those technologies. And APNs are a similar contribution. But look, I think MSC will be able to focus on execution in fiscal 24.

Perfect. And then a follow-up for Chantel. One thing that stands out to me is the bookings number for next year. Just wondering if there were any early renewals, anything that contributed to bookings this year being above the high end of the guide that you had for last quarter for full-year bookings. Any other mechanics that would lead to the bookings number being down year over year for fiscal 24?

Yeah, I think that, you know, in the sense of some of the prepared marks you've heard and driving the bookings for this year would be, you know, the achievement of the term length for HUD. I think that we look at, you know, what we've achieved in DGM. So I don't think there's anything mechanical. I think it's just a mix of business and timing of the renewals is the key factor. So I would put it on more the timing of the renewals than anything more specific than that.

All right. Perfect. Thank you very much.

Thank you.

Yeah.

And, Clive, just one more thing, and for everyone, if you look at the presentation, the slide deck that we posted, if you look at slide 16, that has all the ACV dollars by suite over the last three years, which will allow you to calculate the growth rate for fiscal 23 instead of having to remember what I said.

And thank you. And one moment for our next question. And our next question comes from Josh Tilton from Wolf Research. Your line is now open.

Hey, Josh.

Hey, guys. Thanks for taking my question. Can you hear me? Yes. The first question that I wanted to ask is kind of revisiting a question that I think was sort of asked about a few questions ago. But given this is the last time we're you're going to, I guess, talk to or disclose the heritage business. You know, you're guiding to kind of like a mid-single-digit growth for next year. When you guys step back and you just, you know, really look at that business, like how should investors view the growth profile of what is core heritage asset over the next three years? Like does this remain a mid-single-digit grower? Is this going to accelerate, decelerate? Like how do you guys think about the growth profile of this business over the next few years?

Well, I mean, look, first of all, we're 90 to 7.5%, and I guess that would be at the high end of mid-single digits. But look, for us to get to our growth rate that we believe this business can operate at, the HAT business will be a double-digit growth business. That's our expectation. We are revisiting our expectations around the engineering business from being sort of a high-mid single-digit business to high-single to double-digit. I think our MSC business hit a soft spot, if you will, this year. That will recover. and we continue to have expectations about the APM suite. This is why we made that tuck-in acquisition that we just announced. So overall, our expectation is or had to be a double-digit grower. Now, what I would tell you is this is on an ACB basis. In the past, it's been an annual spend, so there's a little bit of a step down because of the higher base in ACB. But overall, our expectations have been changed for that suite, okay?

Makes sense. And then maybe just a quick follow-up for me is I think you guys during the Q&A said that you look to the current guidance as sort of a floor. If we were to look at the heritage business or some of these newer assets from Emerson, like 12 months from now, you guys beat the guide, where would we expect Where are you most confident to see the upside come from? Is it from the heritage business or some of these newer assets?

I mean, look, I think chemicals plays a big role in the outcome for HAAT. We listened to the commentary from chemicals company CEOs. They expect chemicals to be subdued through the end of this calendar year. They're not saying anything about next year, but we assume it's more of the same. to be conservative on our guide. If things change, I could provide some upside. I'm a big believer in our MSC business. We were fully focused on executing on that business. Our engineering business has shown a strong resilience. But look, I think DGM, we're gaining momentum on that business as well. Look at sustainability. could be the big surprise as well here, and the big benefit on sustainability is coming through the HAT suite. Electrification is what drives DGM, and we're building the pipeline there. So I know I'm sort of giving you an answer for everything, but I just think that there's just a lot of opportunity out there, and it'll be just a matter of execution. So we'll see what outperforms, but the 11.5 is the floor.

Thank you guys so much.

Thank you.

And thank you. And if you have a question, or if you'd like to ask a question, that is star 11. Again, if you'd like to ask a question, that is star 11.

And bear with me for our next question. And our next question comes from Mark Sheppel from Loop Capital Markets.

Your line is now open.

Hi, Mark.

Hi. Thanks for taking my question. Antonio, this quarter's remarks around the DGM business were much more positive than last quarter when you ran into some project milestone issues and had some longer sales cycles that you spoke of. I was wondering if you'd just review once again some of the changes in that business over the last quarter that you've seen.

Look, I think we need to talk about the cadence of the full fiscal year. There was an incredible amount of work going on in Q1 and Q2 to lay the foundation, put in place the teams, the processes, the systems, our push into the markets of SSC and BGM with term software or term licensing for the software. You know, as we got into the services business, there's some things that we found there. And in a way, you know, a lot of things came to a head in Q3. We learned a lot out of the Q3 quarter. And I would also argue that those learnings were quickly applied early in Q4, and it was produced what I think was much cleaner execution in Q4, there was very little learning that happened in Q4. It was more about applying what we learned from the previous three quarters. And then I feel that we generated momentum, which is what's propelling us into fiscal 2024. So I think it's just how the year flowed and the activities that were happening and the assumptions we made. It sort of all came together in the Q3 quarter, but we quickly pivoted. And I'm very proud about the job that the team did coming out of that quarter to really refocus our execution. And therefore, you have what I think is a tremendous Q4 outcome.

Great. Thank you. And then as a follow-up, with respect to MicroMine and the termination of that deal, To be relevant in the metals and mining industry, do you believe that you need to do another transaction in that sector?

Well, look, I've always said that if we want to sort of grow and be relevant in a new industry, we need to have an anchor asset, meaning buy something that gives us a very critical mass. And therefore, the answer is yes. I still believe that In any industry that we decide to go into, the goal has to be to buy an anchor tenant, if you will.

Great. Thank you. That's all for me.

Thank you. And thank you. And I am showing no further questions. I would now like to turn the call back over to Antonio Pietri, CEO, for closing remarks.

Yeah, look, I want to thank everyone for joining us on the call today. Again, just to reiterate the takeaways, look, we built the foundation for the next stage of growth for the company, and I hope that's clear. We're entering fiscal 24 with momentum, and we believe that the guidance that we provided supports that. We continue to see strong demand around our mission-critical solutions, HAT, DGM, and SSE. And we see emerging opportunities in sustainability, especially for our engineering business. So all of this, we believe, is creating a very exciting outlook and environment for the new Aspen Tech. And, well, our job is now to execute in fiscal 24. Thank you, everyone. Thank you.

This concludes today's conference call. Thank you for participating and you may now disconnect.