Aspen Technology, Inc.

Good day and thank you for standing by. Welcome to the Q3 fiscal 2024 Aspen Technology Earnings Conference Call. At this time, all 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'll need to press star 1 1 on your telephone and wait for your name to be announced. 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 speaker today, Brian Denue from ICR.

Thank you, Josh. Good afternoon, everyone, and thank you for joining us to discuss our financial results for the third quarter of fiscal 2024, ending March 31, 2024. 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. Actual results may 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 will 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. Before I get into our results, I would like to highlight our flagship Optimize User Conference, which we held last week in Houston, Texas, with the theme of Partnering for the Future. This was the first time that the new Aspen Tech organization has held an Optimize event, and we were pleased to see many new and familiar faces in attendance. More than ever, our customers are focused on addressing the dual challenge of meeting the increasing demand for resources from a growing population with an increasing standard of living, while also addressing the sustainability imperative. At its core, this requires leading the organizations through a transformation that will require a heavy investment in digitalization and new technologies to meet performance, resiliency, and sustainability objectives. We believe the strong customer attendance and discussions held at the conference are representative of the opportunity available to Aspen Tech in the future. Now, turning to slide three for our Q3 results, we remain incredibly excited about the market opportunity we're seeing as reflected in the ongoing and healthy growth of our pipeline. The volume of business closed in the quarter did not meet our expectations or reflect the opportunity available to us. Annual contract value, or ACV, was $936 million in Q3, increasing 2.4% quarter-over-quarter and 9.5% year-over-year, and included the closing of the delayed renewal agreement that I had referenced on our prior Q2 earnings call. Free cash flow was $137 million in Q3. The lower than expected ACV growth in the quarter was driven by what we believe was a slow start to budget deployments by customers in their new fiscal year. And secondarily, and to a much lesser degree, our maturing sales organization. On the customer side, while customers remained engaged throughout the quarter on exciting value creation opportunities and discussions, ultimately, their conviction to close business in the quarter waned in the last month. We saw closing timelines extend beyond the quarter as customers exercised more caution in final purchasing decisions. These dynamics were prevalent across most regions and end markets in the quarter. We believe this reflected customers' need for additional time to evaluate their own end markets and budgetary allocations in the context of the uncertainty created by a dynamic macro environment. That said, Customers continue to communicate that their budgets are generally consistent with those of calendar 2023, and we're also seeing that strength exhibited in our pipeline. We continue to monitor this dynamic closely and are doing everything within our control to drive faster decision-making to meet our sales goals. On the sales side, we saw some instances where our sales execution was below our expectations as we continued to onboard our expanded sales team and institutionalized best practices. Over the past 12 to 18 months, we have put in place new sales leadership, expanded our overall sales team, and adjusted sales coverage for a significant portion of our customer base. We believe the combination of a still maturing sales team and a more cautious spending environment created some missed opportunities in Q3. We remain confident the investments and changes made to our sales organization will best position us to fully capitalize on our long-term growth opportunity. While we cannot control spending caution among global customers, we can actively address those things we can control. To that end, in the near term, we're working to drive full alignment across our sales organization and return our sales execution and predictability to the level that we expect of ourselves as a high-performance organization. Considering our Q3 performance, we're lowering our ACV growth outlook to at least 9.9% in fiscal year 2024. We believe this target is prudent when considering the dynamic we saw in Q3. We're also updating our fiscal year 2024 free cash flow guide to at least $340 million, which is mainly a function of the softer net new ACV in Q3. Chris will provide more color on our financials in his remarks. With that said, I will now turn to slide four to provide an update on our suite's performances in Q3, as well as our updated expectations for fiscal year 2024. Starting with Digital Grid Management, or DGM, the suite saw continuous strength in demand and signed several term license wins in Q3. as we continue to expand wallet share with existing customers and win new loads. During the quarter, for example, we won a large distribution management and optimization deal in North America, beating the competition across nearly all evaluation categories, including compliance, technology security, and performance. Overall, we continue to be excited about the outlook and prospects for this week. Demand for our grid innovation remains strong, as the acceleration of global electrification and prioritization of energy security drives an unprecedented investment cycle to update and modernize the grid. The combination of these funding tailwinds and the strength of our grid technology is helping to drive a strong term pipeline growth for DGN, both in the United States and international markets. Separately, as we've mentioned in the past, Utility customers have a materially different and longer procurement process than our other customer segments. We continue to make progress in refining and strengthening our sales forecasting in this area, considering the purchasing process characteristics associated with these deals. Overall, we're pleased with DGM's year-to-date performance, and it remains on track to deliver approximately 2.5 points of growth for our fiscal year 2024. Subsurface Science and Engineering, or SSE, had a softer quarter. In Q3, SSE had its largest block of contracts up for renewal. This backdrop, combined with the two factors I laid out at the top of the call, resulted in deals that pushed out of the quarter and more muted growth. We now expect to close many of these deals this quarter. With that said, The backdrop for SSE customers remains strong with solid capex and operating budgets in place for the remainder of the calendar year. In Q3, for example, we further expanded our existing SSE business with a national oil company in Latin America. This customer value is a strength of our seismic technology and has shown significant interest in converting to tokenization down the road to access our entire portfolio of subsurface innovation more easily. Taking all this into consideration, we now expect approximately one point of growth from SSE in our fiscal year 2024. Turning to slide five and our heritage Aspen Tech Suites. This is the part of the business where the two drivers I laid out regarding our Q3 performance were most notable. Engineering saw a significant number of deals pushed out of the quarter across all regions, marking a slowdown from the suite's prior accelerated levels in the first half. This was more prevalent in our high-velocity sales, or HVS, organization, which is one of the areas where we have increased our sales headcount significantly over the past several quarters. HVS is focused on generating new business through the SMB segment of the market, as well as with larger enterprise accounts new to Aspen Tech. With that said, we continue to believe that our engineering suite will remain a prime beneficiary of the positive CAPES outlook for both traditional energy markets and sustainability over the long term. In Q3, for example, we continue to win deals with owner-operators and E&C companies, expanding our business with a longstanding customer who is one of the world's top EPC firms in response to their increasing backlog in the energy sector and sustainability projects. Turning to our manufacturer and supply chain suite, or MSC, in Q3, MSC benefited from the closing of the delayed Q2 transaction and a pickup in sales activity. However, we still saw some deals move out of the quarter. The prolonged downturn in the chemicals industry remains a headwind for MSC, while refining was also an area where we did see some more cautious buying activity in Q3. Nevertheless, We were encouraged by the early uptake of our recently released Aspen Unified Planning product with several customers committing to it in the quarter. Looking ahead, we remain cautious on when a chemicals recovery will return, while refiners continue to have a favorable outlook. Our pipeline of business in this area continues to grow with interest in our multi-level process control DMC3 product, multi-unit dynamic optimization GDOT product, and comprehensive supply chain optimization solution. Finally, asset performance management, or APM, performed below expectations in Q3 as several deals moved out of the quarter. The combination of these with higher expected attrition for the full fiscal year means that we do not expect APM to contribute to ACV growth in fiscal 2024. We're in the process of simplifying its go-to-market strategy since it is now clear to us that there are certain market segments where we're taking a leadership position and APM's return on investment is real, material, and quantifiable. We believe this should provide better, more targeted selling opportunities and minimize the risk of future attrition over time. Taking all these factors into account, we now expect our Heritage Aspen Tech Suite to contribute at least 5.5 points of ACV growth to our fiscal year 2024 results. On slide six, I would now like to provide an update on our product and R&D initiatives. R&D and product teams have remained laser focused on the launch of our V14.3 software update, which we plan to release this quarter. Version 14.3 will include updates to our recently launched Aspen Unified platform, deeper industrial AI integration across our portfolio, and more. As an example, this release will include Aspen Virtual Advisor, or AVA, for Aspen Unified Planning and Scheduling. We have previously released Aspen Virtual Advisor for our DMC3 multivariable process control technology. In version 14.3, we're introducing AVA to the planning and scheduling area. AVA leverages AI algorithms at its core to help guide users in analyzing and optimizing production plans. We also launched the beta version of our new Aspen workflow product in Q3. as a shared component for unified and other solutions. Aspen workflow allows users to orchestrate workflows and actions across Aspen Tech and third-party applications for more efficient operational outcomes. This is just one of the many ways we're working to enhance the ability of our users to achieve greater workflow automation in their highly complex operating environment. Finally, we're excited to announce the recent limited availability launch of our Strategic Planning for Sustainability Pathways product, a new and unique integrated modeling and optimization solution that aims to guide companies in carbon capture, use and sequestration decision making, and sustainability strategy investments. By leveraging generative AI capabilities, Strategic Planning for Sustainability Pathways helps sustainability planners to solve the blank page problem combining different inputs to generate initial plans for asset carbon reduction. Turning to slide seven, I would now like to provide some color on our key focus areas for the coming quarters. First, we have several initiatives underway to drive better alignment and complete the onboarding across our sales teams. We're already making progress in these areas to date. We're working to further drive efficiencies and productivity across the entire company to accelerate our path to best-in-class profitability and free cash flow going forward. We're focused on controlling what we can control and believe there are several opportunities to rationalize expenses and drive multi-year improvements in productivity. Third, we will continue to make targeted investments into strategically important areas of the business, This includes a special focus on our DGM business, given the multiple tailwinds in that space and our continued belief in its significant long-term growth opportunity. Finally, I want to be clear that we feel strongly that our performance in Q3 does not reflect the full potential of the opportunities we're seeing today, nor does it reflect any material changes in the long-term underlying strength of our end market. Our customers remain at the center of several important megatrends, including global decarbonization and electrification, as well as the transition to a new energy system. At the same time, they are dealing with demands to do more with less while working to address a growing skills gap across their labor forces. As leaders in industrial software, our portfolio remains perfectly situated to help customers navigate these challenges. providing a compelling outlook for future spend with Aspen Tech. In conclusion, we're taking the necessary steps to drive improvement in areas that are both within our control and able to better position us to achieve our objectives in Q4 and beyond. We're confident that increased focus we now have in place for our expanded sales force, combined with the multiple tailwinds we see across most end markets, will yield improved ACB growth over time. Before I turn the call over to Chris, I would like to welcome two new members to the Aspen Tech team. First is our new Chief Financial Officer, David Baker. With a long and successful tenure in senior financial roles at Emerson, Dave comes to the company armed with deep financial acumen and operational expertise in support of our long-term growth objectives. I'm looking forward to my partnership with Dave. I would also like to thank Chris for serving in the interim role over the last four months and for everything he has done to maintain our forward trajectory. Thank you, Chris. Secondly, I would like to welcome David Henschel to Aspen Tech's Board of Directors. Over a long and highly successful career in software, David has accumulated a wealth of knowledge and leadership experience that will prove invaluable to us as we advance the organization going forward. Welcome, David. With that, I will turn it over to Chris for a review of our financial results before we open it up for Q&A. Chris?