Aspen Technology, Inc.

Good day, and thank you for standing by. Fiscal Q2 2024 Aspen Technology Earnings Conference Call. At this time, our participants are on 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 hand the conference over to your speaker today, Brian Danu from ICR. Please go ahead.

Thank you, Justin. Good afternoon, everyone, and thank you for joining us to discuss our financial results for the second quarter of fiscal 2024 ending December 31, 2023. With me on the call today are Antonio Pietri, Aspen Tech's president and CEO, and Chris Stagno, Aspen Tech's interim CFO. Please note, we have posted an earnings presentation on our IR website, and we ask that investors refer to this presentation in conjunction with today's call. Starting on slide two, I would like to take this opportunity to remind you that our remarks today will include forward-looking statements. Factual results might differ materially from those contemplated by these forward-looking statements. Factors that could cause these results to differ materially are set forth in today's press release and in our annual report on Form 10-K and other subsequent filings 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 investor relations website. With that, let me turn the call over to Antonio.

Antonio? Thanks, Brian, and welcome to everyone joining us today. Let me start by reiterating that I've never been as excited about the future of Aspen Tech as I am today. The Aspen Tech team has done an excellent job working through a dynamic macro environment to deliver solid results in the second quarter. With an expanded portfolio and team, were uniquely positioned to capture and benefit from the numerous opportunities available in the energy transition from efficiencies and sustainability use cases. Now, starting on slide three with our quarterly results. In Q2, we saw solid demand for our products and solutions. Annual contract value, or ACV, was $914 million, increasing 9.6% year-over-year. while free cash flow was $29 million. These results reflect the delay in renewing a large customer agreement that was scheduled to be renewed in Q2 and reduced ACV growth by approximately 0.6 points. We now expect to close this customer agreement in Q3 with a correspondent benefit to Q3 ACV growth. In addition to this, I would like to highlight four key takeaways regarding our Q2 results. First, our overall term software pipeline has continued to increase. We're seeing growth in the number and size of opportunities across our businesses, which is in line with our sales channel investments over the past several quarters and the contribution from the DGM and SSE suites resulting from the transformation of those two businesses. We will start converting more of this pipeline to sales in the second half of fiscal year 24. Second, The macro environment and demand for our products and solutions has remained strong in most end markets, consistent with our commentary from the last couple of quarters. Third, we made significant advances in upgrading our product portfolio and advancing new sustainability-related use cases in Q2. With a successful launch of our V14 software update, we have introduced enhancements to our products that we believe will drive incremental growth in the second half of fiscal year 24 and longer term. Fourth and final, taking all these factors into consideration, we remain confident in our ability to deliver on our ACV growth target of at least 11.5% for the full fiscal year. We recognize that we need to have two strong quarters of growth in the second half to achieve this target, and we continue to believe that we're in a good position to deliver on this outcome. Turning to slide four, I will now provide an update on our end markets and suites, starting with digital grid management, our utility solutions business. BGM has enjoyed an excellent first half of the year as it continues to benefit from the mission-critical nature of its products and solutions alongside a robust demand environment. Importantly, Today's utilities are in the early stages of an unprecedented investment cycle to expand the electrical grid, introduce renewable energy, and enhance cybersecurity capabilities to meet the growth in electricity demand driven by the energy transition and the energy security requirements of countries around the world. Our transformation initiative to align the DGM business with the Heritage Aspen Tech model over the past 18 months are also producing their expected results. These initiatives have included launching and growing DGM's term software licensing model, expanding its sales channel and global footprint to capitalize on the growth opportunities we're seeing, and ramping up its ISP network. For example, in Q2, We won several large-term license deals, including one with a leading North American power utility, where we displaced the competition as part of their holding company's vendor standardization program. Our energy management solutions' proven track record of delivering value, as well as our longstanding relationships with other utilities in this holding company's portfolio, were key catalysts for us in this win. Both in the U.S. and internationally, BGM's product strength, hardware agnostic stance, and ability to form a strategic long-term partnership with customers are driving growth. We expect to see continued strength from this suite in the second half of fiscal 24 and believe this will be a high-growth business for Aspen Tech going forward. Now, turning to our subsurface science and engineering suite. SSE performed to expectations in the first half of the fiscal year, benefiting from a strong cap expanding environment and new use cases driven by sustainability, especially in carbon capture and sequestration. SSE has long been the upstream industry's most comprehensive offering, and the Aspen Tech go-to-market model is serving as a catalyst to help fully unleash its potential. In Q2, for example, SSE gained further momentum as we closed a large deal with a national oil company in Asia. While many vendors competed for this opportunity, the strength of our subsurface formation evaluation and geological modeling capabilities, combined with the strength of our relationships across organizations, allowed us to ultimately win this deal. We continue to work closely with this customer and seek clear pathways to expand this strategic relationship at additional sites with more solutions. SSE is also benefiting from synergies with our engineering suite and the positive momentum from its tokenization rollout. As with our other suites, we continue to see that the combination of a term license model and tokenized suite is a true win-win situation, allowing our customers to benefit from our latest innovation and supporting faster product uptake. Overall, We expect CAPEX budgets in calendar 24 to remain consistent with last year's, supporting the demand for SSE products in the second half of fiscal 24 in line with our expectations. Now, moving to slide five, let's review our heritage Aspen Tech business, starting with our engineering suite. Strong capex trends in traditional upstream markets and newer sustainability-related use cases are driving greater usage by EPCs and our owner-operators. On the back of this favorable spending environment, our engineering suite's modeling, simulation, and analysis capabilities have remained in high demand, supporting the strongest growth this suite has seen in many years in the first half of fiscal 24. In Q2, for example, We won a large-scale deal with a new EPC logo that is executing several projects for a large energy company in the Middle East. Prior to working with Aspen Tech, this customer was using a variety of tools from different vendors to manage its process engineering workflows. The customer was interested in standardizing their engineering software solutions tool set and conducted a competitive evaluation process resulting in the selection of Aspen Tech due to the breadth of capabilities. By engaging with Aspen Tech, they are now able to leverage our full portfolio of innovation and product synergies to execute on their project backlog. Separately, our engineering suite has continued to see solid traction with the small to medium business segment of the market through our high-velocity sales organization. During the quarter, this business continued to win engineering deals with customers in non-traditional industries for Aspen Tech that are looking to decarbonize their operations or see a business opportunity in sustainability, including such areas as aviation biofuels, hydrogen, ammonia, LNG, direct air carbon capture, or DAC, and more. Now, turning to our manufacturing and supply chain suite, The MSC results in the first half of 2024 reflected the ongoing weakness in the chemicals market, as well as the delayed renewal that I referenced earlier. Nevertheless, given this business's typical seasonality, strong pipeline, and expected closing of the delayed renewal agreement, as well as the continuation of solid refining demand and our ongoing innovation efforts, we expect a stronger performance in the second half of this year. As part of our recent V14 software update, we have made substantial improvement to our new Aspen Unified Platform environment for asset planning and scheduling in MSC. Specifically, we have introduced tighter and better model integration, improved data management capabilities, deeper AI capabilities, and a more scalable architecture. This represents the most significant update to our Unified Platform planning and scheduling solutions in over a decade. While we're still in the early phases of this rollout, customers are already responding positively to this improvement. For example, in Q2, we received a green light from one of the world's largest integrated energy companies to implement our updated Aspen Unified Planning and Scheduling solution across their asset base. This customer highly values the strength of our latest innovations and, ultimately, our ability to support better operational decision-making across their global teams. We're excited to work with them on this project over the next several months and see additional opportunities to support their digitalization initiatives going forward. Finally, our asset performance management suite continues to gain industry recognition and grow its customer base. For example, in Q2, our APM team closed an exciting win with a large global pharmaceutical company to implement our EMTEL product at one of its European manufacturing plants. This deal was supported by our commercial agreement with Emerson, who also has a strong relationship with the customer via their offerings, including the Delta V control system. While this deal was for one initial site, the customer has shown strong interest in rolling out the solution across its entire manufacturing base to drive further operational and sustainability excellence. Turning to slide six, we will discuss our sustainability initiatives. As I highlighted previously, sustainability-related topics contributed to accelerated engineering suite growth in Q2. We believe that the strong tailwind we're seeing in sustainability is being driven by the energy transition and the alignment of corporate strategies with government policy and funding. This was further validated to me at COP28, the United Nations Climate Change Conference. As part of this event, public and private organizations alike made pledges to reduce carbon emissions by increasing renewable energy production and usage and driving higher energy efficiency. To do this, companies must not only accelerate their digitalization journeys, but also leverage the potential of new and existing asset optimization technology. We remain focused on partnering and co-innovating with customers in these areas in Q2 to accelerate their use case development. For example, we advance our collaboration with a large global player in renewable wind energy that aims to also secure leadership in the production of green hydrogen and ammonia. While this customer currently leverages our modern and DMC-3 process capabilities to drive efficiency, We are now also partnering to improve their electrolyzer modeling capability. Additionally, we've built on our existing relationship with a refining company in Europe to implement our emissions management solution for better CO2 tracking, reporting, and modeling. This customer already relies on our solutions to run its assets more efficiently and sustainably and is excited about the potential to leverage our emissions management solution to better manage its carbon footprint going forward. As an organization, we also recognize that the challenges presented by the prevailing energy megatrends are considerable, and we remain committed to doing our part. To that end, I'm proud to announce that we made a formal commitment last week to achieve net zero emissions as an organization by 2045. As part of this commitment, we will build a decarbonization plan over the next 12 to 24 months to achieve net zero for scope one and two emissions by 2030, and across scope one to three by 2045, in line with the science-based targets initiative. Now, turning to slide seven. for our innovation initiatives. In November, we successfully launched enhancements to our version 14 and a new version 14.2 Aspen One software. This update included enhanced industrial AI, further OT data integration, and additional sustainability capabilities with more than 140 sustainability models now available to customers. As mentioned previously, this latest rollout is garnering positive customer response and helping us to win additional business. We look forward to showcasing the full range of our innovations at our optimized 2024 conference in Houston this May. I would also like to take a moment to speak about how our latest B14 update incorporates artificial intelligence. While we have been using industrial AI in our products for years, This latest update leverages the technology in ways that are new, innovative, and represent exciting growth drivers for us. For example, with this latest release, we have integrated additional AI capabilities, including neural networks, into Aspen Unified and Aspen Hi-C Dynamics hybrid models. These AI enhancements extend and build upon our ability to employ nonlinear hybrid modeling in both traditional and sustainability-related use cases to improve modeling accuracy. We have also incorporated generative AI-based assistance into our strategic planning capabilities for sustainability pathways. This innovation helps to solve the cold start problem for users by using their queries or prompts to automatically create a new superstructure workflow, saving them time and allowing them to focus on more creative and high-value tasks. These are just a few examples of the way Aspen Tech is leveraging AI across our portfolio today. As always, our ability to leverage these innovations alongside deep industry expertise and first principles know-how remains a competitive differentiator for us and highly valued by our customers. In closing, on slide eight, we remain confident in our ability to deliver ACP growth of at least 11.5% year-over-year in fiscal 2024. Our confidence in reaffirming this guidance is primarily based on the following factors. First, is the strength of our pipeline resulting from a positive microenvironment, resilient demand, and sales channel expansion. Second, the adoption of the DGM suite term licensing model is accelerating in the market and contributing to increasing growth. Third, the SSE suite and its tokenization continues to gain momentum in the market. Fourth, is the continued demand strength for our engineering suite driven by upstream and sustainability cappings. And fifth and final, an expanded sales channel will have a greater impact on pipeline conversion in the second half of the fiscal year. Specifically, on Q3, we now expect sequential ACV growth in the mid to high 3% range. This accounts for the closing of the delayed renewal agreement mentioned earlier, as well as the factors just referenced in support of our fiscal year guidance. A stronger Q3 and Q4 quarters are in line with our historical cadence, as Aspen Tech's results have traditionally been more weighted to the second half of our fiscal year. With that, I would now like to turn the call over to Chris for a discussion of our Q2 financial results. Chris?