Q2 2021 Aspen Technology Inc Earnings Call
Ladies and gentlemen, todays conference is scheduled to begin shortly please continue to standby. Thank you for your patience.
[music].
Ladies and gentlemen, thank you for standing by and welcome to the second quarter fiscal 'twenty 'twenty, One Aspen Technology earnings Conference call. At this time, all participant lines on a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question, though on the session.
You will need to press Star then one on your telephone please be advised that today's conference is being recorded if you acquired any further assistance. Please press Star then zero.
I would now like to hand, the conference over to your host today, Karl Johnsen Chief Financial Officer. Please go ahead.
Thank you.
Good afternoon, everyone and thank you for joining us to discuss our financial results for the second quarter of fiscal 2021, ending December 31 2020.
I'm Karl Johnsen CFO of Aspen Tech and with me on the call is Antonio Pietri, President and CEO.
Before we begin I will make the safe Harbor statement that during the course of this call we may make projections or other forward looking statements about the financial performance of the company that involve risks and uncertainties.
The company's actual results may differ materially from such projections or statements.
Factors that might cause such differences include but are not limited to those discussed in today's call and contained in our most recently filed form 10-Q.
Also please note that the following information relates to our current business conditions and our outlook as of today January 27 2021.
Consistent with our prior practice, we expressly disclaim any obligation to update this information.
The structure of today's call will be as follows Antonio will discuss business highlights from the second quarter, and then I will review, our financial results and discuss our updated guidance for fiscal year 'twenty 'twenty one.
With that let me turn the call over 10 Tonia Antonio.
Thank you Carl.
Thank you all for joining us today.
We hope all of you on your families continues to be safe and healthy.
Let's start by looking quickly at our financial results for the second quarter.
Revenue was $233 $7 million.
Supported by the largest dollar amount of quarterly renewals in the fiscal year.
GAAP EPS was $1 on 89 cents.
Non-GAAP EPS was $2.04.
Annual spend was $604 million up one 3% in the quarter on 7% year over year.
And free cash flow was $38 million.
I spent I've spent ex performance in the second quarter was solid given the current economic environment and we remain on track to deliver a good year of growth in fiscal 'twenty or 'twenty one.
We continue to be confident in our ability to return to double digit annual spend growth once economic conditions normalize.
In the second quarter, we were particularly pleased with our renewals performance and what was the largest renewals quarter in our history.
Our customers continue to make substantial long term commitments to Aspen Tech and a clear demonstration of our technology as a strategic importance to their operations.
One of the highlights for the quarter was signing one of our biggest ever licensed bookings transaction, our renewal for more than $75 million with one of the largest global oil companies.
From a growth perspective, our engineering and MSC suites delivered growth in line with our expectations and the APM suite came in below plan.
While our conversations with customers throughout the quarter were positive.
We saw certain customers take a more conservative outlook on spending in late December that we believe was due in part to the recent way for Covid related restrictions in many parts of the world.
Overall.
Demand activity across our portfolio remains strong.
We're engaged on a strategic conversations with customers in all our target markets to expand their investments in Aspen Tech solutions to achieve critical business needs and enable their assets to run safer greener longer and faster.
In fact, our demand generation on top of sales funnel business activity are performing at levels similar to what we experienced prior to the onset of Covid.
We believe this is a positive indication about the opportunity for strong growth in the second half of fiscal 'twenty, one and beyond.
Based on our first half performance and current outlook for the second half of the year, we're tightening the range of items for annual spend growth to six to eight per cent compared to our previous range of 6% to 9%.
We laid out at the beginning of the fiscal year, we faced a higher degree of uncertainty in fiscal 'twenty, one and a wider than normal range of potential outcomes.
Your line assumptions in our updated guidance include.
APM will contribute 125 point took growth down from two points attrition in the upper half of the 5% to 6% range. We provided at the beginning of the year.
It is important to note that we have already incurred a significant portion of our expected annual attrition in the first half of the year given the timing of renewals.
So we expect attrition will have less impact on annual spend growth in the second half of the year.
We expect similar growth expectations for our engineering and MSC suites.
From a profitability perspective, we're increasing our free cash flow guidance to $265 million to $275 million supported by strong collections and lower expenses.
I would like to spend a few minutes, providing an update on trends in each of our core markets.
Chemicals continues to show good resilience and was the best performance vertical for Aspen Tech in the quarter.
Overall, we have seen a slow and steady improvement in the chemicals market with our segments benefiting from the current economic environment more than offsetting the parts of the industries that are facing challenges.
As we have discussed in the past digitalization is a top strategic priority and consistent area of investment for chemical companies.
Increasingly this industry would recognize says that it must operate in a more efficient and environmentally sustainable manner in order to remain competitive and viable in the long term.
Aspen Tech solutions are mission critical in achieving these objectives, which gives us confidence we will continue to generate consistent growth in this market.
Does that end, we recently joined the alliance to end plastic waste as an enabler company contributing capital technology and expert resources. The H E. P. W. Organization is a global nonprofit focused on building a more sustainable plastic value chain.
Attributes mission abandon plastic waste in the environment.
An example of the continued focus by chemical customers on digitalization and sustainability is a transaction signed with a north American chemical customer looking to maximize production on efficiency through optimal asset performance after working with their digitalization group to evaluate our technologies.
Selected Aspen Prime b to deliver more consistent quality less waste longer uptime, and maintenance spend reduction generating millions of dollars in annual benefits.
The refining business for oil and gas companies and the independent refiners continues to face a challenging business environment related to changes in travel patterns due to COVID-19.
The reduced demand for gasoline and jet fuel has had a pronounced impact on demand, resulting in operating rates below below their historical levels.
Refining margins have improved recently from the lows experienced in the middle of calendar 2020.
But are still below their historical trend.
We continue to have positive conversations with our refining customers, which remained committed to investing in digitalization technologies from Aspen Tech that will enable more efficient agile and flexible asset operations in the future.
Yeah.
We signed a number of transactions for the quarter with refinery operators that expand usage of our products and solutions across the different regions of the world for both our engineering and MSC suites.
We're also encouraged by our growing trend, we're seeing where MSC products and best practices continue to migrate from refining to the midstream and upstream businesses of our customers. For example on South American customer that is an important user of our Aspen <unk> Seo solution for refinery.
Planning optimization.
Identified significant benefits from deploying an enterprise wide planning optimization solution that extends from the refining assets to their upstream and midstream businesses.
To optimize the production and supply of crude oil in their operations. This enterprise planning optimization solution represent millions of dollars in incremental value capture and their logistics operations.
A second example is a Europe based integrated oil company that is expanding the use of Aspen D&C, three and Aspen Ddos solutions to their upstream facilities.
Customer has had de carbonization strategy to reduce cotwo emissions in line with the United Nations 2030 objectives.
We worked with the customer and its main European upstream and midstream facilities to demonstrate how advanced process control could help could help decrease production cost as well as seal to emissions.
Pilot demonstrated a 50% reduction in Seo to emissions as.
As a result, the customer decided to rollout Aspen DMC three in Aspen G thought across our food site.
A unique aspect of this pilot project was a remote deployment of our advanced control technology due to COVID-19 restrictions.
Turning to the Enc market our per.
Performance was as expected in the second quarter on first half of the year attrition levels have been in line with a range of expectations as these customers right size their agreements to reflect the current capex reality.
Have a multi decade history in the ANZ market I have a very good understanding of its industry dynamics and how demand trends typically play out through economic cycles.
We're confident in our ability to manage through the current environment. While also being focused on emerging areas like third party operations and maintenance services for brownfield assets.
In the APM area. The suite contributed three points of growth too I know spend through the first half of the year, which is behind where we expect it to be at this point in the year.
The Aspen pro on the product in the suite continues to increase its contribution to growth.
I mentioned earlier, the challenging market backdrop for our customers on their focus on cash conversion conservation.
That impacted our ability to close aspen until transactions and outweighed growing customer interest.
We remain confident this is a near term dynamic based on our customer conversations on power.
Net completions and a significant value and success existing customers are having with their APM deployments.
We continue to have a strong APM pipeline that includes a record number of in flight or completed Aspen dental pilots.
These pilots have successfully demonstrated the value of the products to prospective customers and gives us confidence growth will improve at the <unk>.
Vikram environment normalizes.
We have also seen catalog Inc. We have also been cataloging successes.
From the Aspen installed base.
That demonstrate the tremendous value, we can deliver to customers across a range of reliability improvement use cases.
We'll refer to these as catches potential failures avoided by alerting from Aspen Enfield for example.
That's been ample alerted with 30 day notice the potential rupture of a pipe in a recovery boiler of a pulse on pay per meal that could have led to the complete shutdown of at avoiding upwards of $10 million in losses.
Similarly, Aspen dental identified a failure in the cooling oil pipes on the compressor section of our hyper compressed or in a polypropylene plant.
In $150000 in costs in that one instance.
Two months after the deployment of until the customer sales increased plant availability by 35% and reduced downtime periods by 45% representing avoidance of a significant number of failures.
Now have an extensive library of examples for Aspen dental is improving reliability and capturing huge volume.
For some customers like on LNG producer in South America, the potential value creation from deploying Aspen <unk> was so compelling is keep the pilot altogether and put the technology directly in production.
Customer understood the differentiating factors on technical advantages of our solution and how we could meet its needs to improve asset reliability reduce maintenance cost and increase natural gas production.
Customers targeting a 2% improvement in asset availability.
Which represent millions of dollars annually in additional production.
As we look to the second half of the year on beyond we're as confident as ever in our ability to generate consistent double digit annual spend growth overtime.
This confidence is driven not only by the expected benefits of better future economic conditions, but also the multiple significant product announcements we have made in recent months.
As we have discussed on our business update call in November.
Spent ex strategy is to be the industrial AI company by leveraging the strength of our core capabilities and engineering first principles with artificial intelligence capabilities to dramatically increase the value, we can deliver to customers and use AI Iot hub as the environment.
To deliver that value.
The recently launched <unk> Iot hub is generating great feedback from customers and is quickly building pipeline.
During the quarter, we signed our first wins with this solution in the energy and chemicals verticals. As a reminder day out T hub is a cloud ready architecture that supports the ability to collect bass vastly more data than ever before to support our new generation of high value hybrid applications.
It also provides important on new visualization capabilities and provides an environment for data scientists to leverage machine learning to build their own AI applications within the Iot hub.
We're also very pleased with the early feedback we have received on our recent Aspen <unk> 12 release in particular, we're seeing great customer interest in hybrid models, which combined data collection from across the enterprise with artificial intelligence and Aspen takes 40 years of domain expertise and extensive engineering for sprint.
For modeling to create a first on most accurate set of hybrid models for the process industries.
With <unk> and Aspen hybrid models, we're able to solve very complex problems faster and more accurately than ever before one example of customer enthusiasm for V. 12 was a renewal with increased annual spend commitment by one of the by one of our largest E&C customers based in Europe.
This customer quickly realize the potential value from using the hybrid model and a multi case capabilities now available on the B 12 engineering suite.
Another important part of our growth strategy is building up on our success in the global economy industries to further diversified our business in this vertical we had a solid first half of the year in mining in pharmaceuticals, and see significant opportunities for future growth in this market.
We recently hired David liked them to a new role in the company as senior Vice President and General manager of our Pharmaceuticals business. David is a 25 year pharma industry veteran, including most recently 18 years of Thermo Fisher scientific.
Where he led a team that generated consistent double digit software revenue growth.
In this new role David will be responsible for shaping Aspen <unk> product and solutions strategy for the pharma market and leading our go to market efforts.
We believe that pharma industry is going is undergoing structural changes that make it on increasingly attractive market for current and future Aspen Tech solutions.
During the quarter, we made a small but strategically important acquisition targeted at the pharma market.
Kamal analytics has developed highly sophisticated technology that applies analytical science to address process and product quality challenges that enabled customers to meet compliance requirements, while reducing waste.
<unk> of chemo will strengthen.
<unk>, our analytics capabilities and better enabled users to analyze large and complex data sets quickly easily and accurately.
At our upcoming Investor Day on Friday February 12, we will.
We'll provide an in depth update on our beef 12 release, new product innovation and long term growth strategy, including our point of view on the tailwind that sustainability on the utilization will play in our future.
As companies in our core and D. I industries manage their transition to lower emission operations on less plastic waste. We believe we will be uniquely positioned to support them.
We're very proud of the investments we have made to increase the value of Aspen. They can deliver for our customers on we look forward to explaining them in more detail to the investment community in a few weeks.
As we have made meaningful investments in our product portfolio and go to market efforts. We also continued to generate high levels of profitability and free cash flow in the second quarter, we generated $38 million of free cash flow driven by better than expected collections disciplined expense management and COVID-19 related savings.
From a capital allocation perspective, we did not repurchase any shares during the first half of the fiscal year. It is it is our intention to meet our original goal for the year and repurchase up to $200 million of stock in the second half of fiscal 2020, given business on market conditions.
As a reminder, we.
Allocate our capital based on driving shareholder value, our strong balance sheet and cash generation are competitive advantages for Aspen Tech that allows us to invest in the business during periods of uncertainty when many of our competitors cannot.
We have demonstrated this through prior economic downturns, and we intend to do so again with investments in the Iot hub I spend $1 12, and expanding our capabilities in pharma that I referenced earlier.
Our disciplined capital allocation strategy has a demonstrated track record of producing attractive returns for shareholders in multiple ways.
Before I turn the call over to Carl I would like to end by emphasizing the enduring strength of our business in the midst of the most significant economic contraction in our lifetimes Aspen Tech remains on pace to deliver mid to high single digit annual spend and double digit free cash flow per share growth in fiscal 2021.
On.
We believe this reinforces the unique qualities of Aspen Tech that we have highlighted to investors for years. The combination of mission critical products deep on long term customer relationships and a continued focus on operational excellence, we remain focused on supporting our customers on executing in our strategic priorities.
We're incredibly excited about the opportunities ahead for Aspen Tech and are confident in our ability to deliver sustainable double digit growth once economic conditions normalize.
Now, let me turn the call over to Tom.
Carl.
Thanks, Antonio I will now review our financial results for the second quarter fiscal 2021.
As a reminder, these results are being reported under topic 606, which has a material impact on both the timing and method of our revenue recognition for our term license contracts.
Our license revenue is heavily impacted by the timing of bookings and more specifically renewal book.
A decrease or increase in bookings between fiscal periods, resulting from a change in the amount of term license contracts up for renewal is not an indicator of the health or growth of our business.
Timing of renewals is not linear between quarters or fiscal years and this nonlinearity will have a significant impact on the timing of our revenue as a result, we believe our income statement will provide an inconsistent view into our financial performance, especially when comparing between fiscal periods.
Our view annual spend will continue to be the most important metric in assessing the growth of our business and annual free cash flow. The most important metric for assessing the overall value our business generates.
Annual spend which represents the accumulated value of all the current invoices for our term license agreements at the end of each period was approximately $604 million at the end of the second quarter.
This represented an increase of approximately 7% on a year over year basis, and one 3% sequentially.
Total bookings, which we define as the total value of customer term license contracts signed in the current period, what's the value of term license contracts signed in the current period, but where the initial licenses are not yet deemed delivered under topic 606.
Plus term license contracts signed in a previous period for which the initial licenses are deemed delivered in the current period was $274 $4 million a <unk>.
144% increase year over year.
The growth in bookings was heavily influenced by the timing of renewals, including the large renewal with an energy customer that and Tony referenced earlier.
Total revenue was $233 $7 million for the second quarter.
85% increase from the prior year period.
Year over year increase in revenue was the result of the increase in total bookings discussed above.
Turning to profitability beginning on a GAAP basis operating expenses for the quarter were $70 million compared to $67 5 million in the year ago period total.
Other expenses, including cost of revenue were $84 3 million, which was up from $83 1 million in the year ago period.
Operating income was $149 $5 million and net income for the quarter was $129 2 million.
For $1 89 per share.
Turning to non-GAAP results.
Excluding the impact of stock based compensation expense amortization of intangibles associated with acquisitions and acquisition related fees, We reported non-GAAP operating income for the second quarter of $162 2 million.
Representing a 69, 4% non-GAAP operating margin compared to non-GAAP operating income and margin of $52 1 million and 41, 4% respectively in the year ago period.
As a reminder, margins will fluctuate period to period due to the timing of customer renewals and therefore license revenue recognized during the quarter.
Non-GAAP net income was $139 3 million or $2 <unk> per share based on 68 4 million shares outstanding.
Turning to the balance sheet and cash flow, we ended the quarter with $217 $5 million of cash and cash equivalents and $304 million outstanding under our term loan and revolving credit facility during.
During the quarter, we paid down approximately $119 $2 million on the outstanding balance on our revolving credit facility.
In the second quarter, we generated $37 $8 million of cash from operations and $38 million for free cash flow after taking into consideration the net impact of capital expenditures capitalized software and acquisition related payments were.
We are pleased with our cash flow performance in the second quarter and the first half of the year, which has benefited from better than expected cash collections and reduced expense levels.
A reconciliation of GAAP to non-GAAP results is provided in the tables within our press release, which is also available on our website.
I would now like to close with guidance, we now expect bookings in the range of $805 million to $850 million, which includes $519 million of contracts that are up for renewal in fiscal 2021.
This includes $122 million of contracts up for renewal in the third quarter.
With respect to annual spend growth as Antonio mentioned, we're now forecasting 6% to 8% annual spend growth in terms of timing, we would expect the linearity of the sequential growth to be similar to recent years.
The fourth quarter, we will have more growth than the third quarter.
We now expect revenue in the range of $731 million to $760 million, we expect license revenue in the range of 513 $542 million.
And maintenance revenue and service and other revenue of approximately 191 and $27 million.
Respectively.
From an expense perspective, we expect total GAAP expenses of $356 million to $361 million.
Taken together, we expect GAAP operating income in the range of $375 million to $399 million for fiscal 2021.
GAAP net income of approximately $328 million to $347 million, we expect GAAP net income per share to be in the range of $4 80.
For $5 and <unk>.
From a non-GAAP perspective, we expect non-GAAP operating income of $418 million to $442 million non-GAAP income per share in the range of $5 29.
For $5 58.
From a free cash flow perspective, as Antonio mentioned, we're taking up our free cash flow guidance to $265 million to $275 million compared to $260 million to $270 million previously.
Our fiscal 2021 free cash flow guidance assumes cash tax payments in the range of $60 million to $70 million.
To wrap up our second quarter performance in the context of a challenging environment demonstrates the resilience and scalability of our business. We remain focused on executing on the things we can control and ensuring we are best positioned to benefit from any improvement in economic conditions.
With that operator, let's begin the Q&A.
Okay.
Thank you.
I wanted to ask a question you will need to press Star then one on your telephone to withdraw your question. Please press the pound key.
Our first question comes from the line of Rob Oliver with Baird. Your line is now open.
Rob Hi, Hi, Antonio Carlos Hi, guys. Thank you very much for taking my question and happy new year.
Just just one on <unk>.
And then a follow up on the APM side I just want to understand if if there are particular verticals.
For you guys are seeing.
More of debt.
I think Antonio as you put it seeking to preserve cash rather than proceed with these.
With these projects.
Looking broadly at some of your end markets they appear.
To be recovering a bit certainly chemicals and some.
Some of the commodity prices to just.
Wondering about what the Delta is on the change relative to your guidance on APM and where we shake out right now and then I had one quick follow up.
Okay, well, let me look.
Certainly.
The refining the refining industry.
<unk> is very focused on managing their cash flows considering the macro the other fit they've been facing.
Secondly, upstream its another area.
Yeah.
Chemicals.
While we had a solid quarter.
We've also.
Had a little bit of a pullback in chemicals, but at the same time look we signed.
Deals in outside of our core industries in mining.
On.
A couple of other industries as well for them.
<unk> actually as well so so we think we think this is temporary in the quarter.
What it was it wasn't a record quarter for a number of pilots for the second largest quarter of pilots. We've done just just behind the Q1 quarter.
And we're projecting that.
Q3 will probably be a record quarter again for a number of pilots. So so so we remain confident.
I'll just add.
We're seeing.
Our conservative approach for from some customers with regards to spending.
Okay. Great. That's helpful. Thank you and then just one follow up I know you mentioned you had that debt, let's take one of your largest renewals out forever.
For 75 million with that large oil company and this is obviously a very.
Big Big renewal year for you guys and just wondering if we can get some more color on that particular renewal and it sounds like your comments also relative to.
To the rest of the year insurance.
Insurance team.
Positive, but just wanted to get a sense for how customers are looking at these renewals.
And if you have an opportunity to.
Talk a P M with your customers at renewal time to show them that product. Thanks, guys.
Yeah, No look first of all.
12 months to 18 12 to 18 months 24 months before any renewal, we're already engaged with that customer making sure that.
Not only are they using the entitlement that they have but we can also do.
Dry bulk entitlement.
This is one of the largest oil companies in the world.
Our largest.
<unk> license bookings transaction ever.
A lot goes into into.
Doing a renewal like that.
Budd we highlighted just just to give you all a sense for or.
For the magnitude of the business that we have with our customers.
The volume of business that we were renewing.
In Q2 and certainly.
How relevant our technology has continued to be to these companies.
That are managing through a very difficult macro environment, but also are focusing on.
Energy transition.
<unk> ability on how they can leverage our solutions going forward. So we're very happy with.
<unk>.
With the outcome of that renewal and actually in the out years of that contract.
It gets even more interesting. So so so just just signal in that.
Despite the macro environment.
There are significant business happening.
For us for them.
Thank you guys. Thank you.
Yeah.
Thank you. Our next question comes from the line of Jackson <unk> with J P. Morgan. Your line is now open.
Okay, great. Thanks for taking my questions guys How're you doing.
Alright.
No.
First question just.
Just sticking with APM.
No I understand APM below plan and kind of lowering the expectations for the for this year, but.
Even if I.
Compare it to it.
Also.
Tough.
Calendar first half from 2020 debt the expectations for for APM or actually slightly worse than what you guys added last year. So.
I mean is the conservative spending really that much worse or is it also maybe the pipeline just isn't filling up as you expected.
Well I mean look on our pipeline remains.
Our pipeline business has remained flat basically through Q1 and Q2, it hasnt gone on op Hasnt gone down but the.
The volume of that pipeline that is related to each slide pilots for completed pilots has increased.
And the only thing that I would tell you about Q1 on Q2 FY 'twenty one is that.
It is a couple of quarters that are impacted by the pandemic as opposed to.
Q1, Q2 2020.
Our Q3 on Q4 quarters in 2020 were impacted by the pandemic, but no Q1 on Q2.
So I think the comp is a little bit different and now we've seen the <unk>.
Impact of basically the macro and in 2020.
So that's what I can say about our budget.
By data.
Okay, Alright, that's helpful and then.
Karl just a metric question what were the bookings up for renewal in.
In the second quarter in the December quarter.
Yes, it was about $170 million.
Alright, perfect. Thanks, guys.
Thank you.
Thank you. Our next question comes from the line of Jason <unk> with Keybanc capital markets. Your line is now open.
Great. Thanks, Ken.
One.
One question on the corner.
With the backdrop on this very big renewal quarter second quarter annual spend increased sequentially by that 1.3 points that you mentioned.
That's lower on a sequential basis compared to previous to <unk> over the last couple of years.
Was this mainly just driven by the by the APM business or how should we think about it given it was such a big renewal year corner.
Yes, Budd I mean look I.
I think what we said.
Our attrition attrition is tracking to our expectations for the first half of the year now we had we have perfect visibility into the.
Dollar amount of renewals in the first half of the year and the size of our of the Q2 quarter renewals on a dollar basis. So so.
Our assumptions for attrition in the first half core related to the volume of business.
Now.
We've also said that our engineering and MSC business.
Perform according to expectations on APM is down and then the last thing I'll say, Jason is that again.
Our overall performance in Q1 on Q2 of 'twenty one.
Yeah.
Has the impact of the pandemic on on oil prices on all of that while Q1 Q2 2021.
We're not impacted by the pandemic. So the comp is very different.
Gotcha, Okay, and then one more question I think last quarter, you talked about on one customer renewing with a shorter duration have you seen any of that.
In the most recent quarter or has that activity.
Come up much.
No look we had a.
We had.
Uh huh.
Let me make sure. It is the right word a solid quarter of duration and renewals. So we saw no impact whatsoever.
Okay, Great I appreciate the color. Thank you.
Great. Thanks.
Thank you our net.
Question comes from the line of Matt Pfau with William Blair. Your line is now open.
On that.
Hey, guys. Thanks for taking my questions.
First wanted to ask on the cautious spending environment and maybe some detail on.
That has a larger impact on the ATM business versus engineering and MSC.
Yeah, Yeah, I mean look at it.
Again, I think it has to do with the fact that each new technology.
Matt is.
And on.
It's probably CNS discretionary spending.
The five day is that.
These organizations have maintenance processes in place and they continue to.
Execute those.
You know.
Our engineering and MSC solutions have a long history of creating value and we continue to see the spend in that area.
We've had.
We've come to the end of quarters on.
And customers have pulled back I do think we're worse.
I mean somewhat on lucky and debt towards December we started everyone. We all started to hear a lot about <unk>.
Increasing cases of Covid on Lockdowns on.
And perhaps a deteriorating economic environment on.
On perhaps as what happened in the last two in the last two weeks of the quarter for us with some other transactions that.
Did not close.
But look.
On the other hand.
No.
The fact that.
Throughout the quarter.
We continue to execute our high level of pilots.
We expect to have a record number of pilots completed in the Q3 quarter.
Also signals to us.
A lot of interest in the technology on what it can do.
And so.
Certainly we had these.
Sort of a dichotomy between a number of pilots being executed on business that is closing.
And this isn't a way encourage us to us day in that.
This is probably a temporary.
Issue on.
Once.
The macro environment gets back to more normal.
<unk> will start to see some of this.
Pent up demand that we see in our pipeline.
Got it and then wanted to ask on the pharma business.
Any other significant investments that you need to make there whether from a sales perspective or potentially acquiring some more industry specific functionality and then I guess what would be next on your list or are there any other verticals that makes sense to target more directly like for like what youre doing with the pharma.
Yes, yes.
Yes.
We're standing up we've been standing up a sales organization in pharma now for.
A couple of quarters.
One other investments that we've targeted.
At the beginning of the fiscal year.
We've also made some.
Decisions are running additional investments too.
Incorporate <unk>.
Pharma additional pharma specific capabilities and some other products that are relevant for the pharma.
The industry. So so those are investments that will start to happen.
This quarter.
Under the guidance on.
On oversight of David.
Came on analytics is certainly on acquisition.
We.
Brings on installed base on.
And we're excited about.
But ultimately we've always said that.
And any and any industry that we that we operate in we would not be number one number two in the in the segment the product segments on solution segments that we're in.
And on in the case for pharma.
If we find the right acquisition.
And I won't go into what we mean by that I've explained that to investors.
All the time.
We would be open to that Budd.
We have our criteria around best in class profitability on double digit growth in the other lands that we look at anything through <unk>.
Included in pharma look a metals and mining it's another industry that.
We believe it's interesting.
As well.
There is an opportunity to create value, we are creating significant value and already metals and mining for some customers with our APM solution.
The Iot hub on our debt a historian could play a big role in that industry as well.
How about identical to a whole software ecosystem in metals and mining the debt.
That's also attractive.
And beyond that you have put on beverage and other industries.
Great. Thanks, guys I appreciate it thank.
Thank you Matt.
Thank you as a reminder to ask a question you will need to press Star then one on your telephone.
Our next question comes from the line of Monday with Bamberg Capital. Your line is now open.
Yes, hi, thanks for taking my questions.
The first one is just a little bit.
Wrong.
One of the largest deals you've signed to date, you're talking about the 75 million in total contract value.
I wanted to kind of just.
Think about.
When you think about the last time debt deal kind of renewed.
Can you give us any sort of comparator and what that would be in terms of the ACB or you're seeing a significant uplift maybe.
Maybe in terms of what the ACD uplift could've been compared to the previous contract and where is it coming from is it mainly from new modules.
I don't know.
That you've introduced in the past or is it just higher consumption.
And the customer.
Yes.
What I can say.
About the historical.
Origins.
Of that contract then and our relationship with that customer first of all it's a relationship that goes back.
A very long time.
This is.
This is a customer that.
This contract has a day.
Standard duration, we talked about five to six years.
On over that period when we.
First signed a renewal and there has been a continuous uptake of technology by the customer and standardization on our solutions across their entire.
Operational ecosystem.
In refining in some cases in upstream.
Some cases in chemicals as well.
So the contract has inc.
<unk> significantly.
Over over the since the last.
Renewal.
And.
Our expectation is that that relationship will will also continue to grow in the future.
Yes.
<unk>.
Take up some of our new solutions and incorporate hybrid modeling capabilities.
The Aspen <unk> product and the new generation of solutions that we're introducing into the market. So.
But very encouraged by by that transaction in the midst of.
Everything.
Going on last year.
Absolutely I mean, it's a lot of time and then just as a follow up.
You were referring to.
To your ambition to return to the double digit annual spend growth.
Which is a very very nice to hear but.
If I'm thinking about in the context for this year guiding for six 8% increase.
What makes you return to that double digit growth.
Is it on one side higher contribution from better contribution from APM, maybe a couple of percentage points or is it also lowered attrition or a combination of that did you guys here.
Well I mean, I think I think it got so so this is first of all.
I invite you all to attend our Investor day, because we will talk about our growth drivers.
Going forward and how we see some of these major trends.
Around sustainability and the utilization supporting our business going forward. So I will tell you that first.
But look.
In a way.
You have to look at the last five years.
And the trough.
In 2017.
Around sort of.
No.
Low to mid single digit growth the level of attrition, how attrition and the glide path of attrition over the following three for years.
You could see that between 2018 in 2019 fiscal.
Our growth rate jumped from six 4% to 10 six so so I do believe.
And recent history tells us that these these periods of macro disruption do hold back spending by our customers.
And once they are.
Macro normalizes budgets normalize and there is pent up demand that gets released into better spending on our technologies.
So going from $66 for growth to $10 six I mean, that's a big jump in one year.
So so.
And I'll tell you Aspen technology today is not the same company that was five years ago and I will guarantee you that Aspen technology will not be the same company in three years on five years that it is today.
We've put towards significant investment them on.
Including introducing a new generation of capabilities that did not exist up until early October when we released them and we're going to be released in a lot more of those capabilities. The Iot hub was introduced late at the beginning of Q2 fiscal <unk>.
Our.
<unk> and pharma are new as well.
So my expectation on the expectation of everyone in the company is at.
Over the next three to five years the organization will go into will be transformed again.
Furthermore.
Our technology is in general.
We'll be very relevant.
During this energy transition and transitioning the chemical industries, Inc to a more to a circular economy and and plastic waste elimination. So.
We'll talk about all of these are on Investor day, but but we're very encouraged by what we're seeing.
From from our customers the involvement that they expect from Aspen Tech and in this transition the debt.
They are planning on and are experiencing and on.
And also the role that we've played over $35 39 years now in reducing emissions through better efficiencies, reducing waste through better optimization and in general contributing to what over the last 35 years has been consider efficiencies to drive profitability.
On today's consider efficiencies to drive reductions in emissions, which also equates to two better profitability. So so I'm very encouraged by our future and we just have to we just have to manage through this rough patch in the macro environment.
And then come out on debt on the other side.
With.
With all guns blazing figurative speech.
That is very very.
Yes, So I guess I guess, it's both Doug.
Does it does not mean 10 per cent I got it. Thank you so much I appreciate it I appreciate the color on that.
Thank you.
Great.
Thank you. Our next question comes from the line of Mark Schappell with benchmark. Your line is now open.
Hi, guys. Thank.
Thank you for taking my quick alright, thanks for taking my question.
Antonio with sustainability, becoming an increase from focus with process for manufacturers.
What are some of the internal initiatives or youre doing or what are some of the internal initiatives are taking place on the company too.
Kind of a line with your customers on our sustainability goals.
Well, let me look.
So first of all a lot of what we do today.
Yeah.
Our technologies can be leveraged to model.
Well, starting with research new types of compounds and I'm proud of that are more sustainable.
More degradable.
Better recyclable.
And with that then you have to be sign at research and design to.
The process technologies that go into our design and then.
Our built to produce these new compounds at scale.
When you think about carbon capture use and sequestration.
Our technology is already being used to model.
Processes.
When you think about.
<unk> recycling on chemical recycling, our technologies are being used in those cases as well.
When you think about our highest hydrogen economy.
We're being asked by.
One of our customers that are thinking about building on entire hydrogen supply chain.
To work with them and what that would mean.
Yeah.
Some of these oil companies that have announced.
Net zero carbon emission targets are asking us to participate in an advisory panels external advisory panels to help them understand what are those technology that will contribute to.
Not only continued to produce the amount of energy that will be required to sustain and improve the standard of livings of the of the world population over the over the next 2030 years, but do that in a sustainable manner producing less emissions on so on so what are we doing internally look.
We have a lot already in flight on.
Based on our history, we actually think that hybrid models will play an increasing role interest and ability because we'll be able to model.
The reactions that debt.
On our hard commodity lesion first principles on a lot of that has to do with sustainability.
So so so luca.
We're building and so having said all that just like we did with.
On our capabilities around data science, and and came on <unk> and so on over the last five years.
We're on now is starting to put together.
Teams that will be exclusively focused on on sustainability technology is because they are certainly a lot more than we can do.
And Youll hear you'll hear more from us during the Investor day about these.
Look we were very encouraged.
By what we're hearing from our customers in this whole area of sustainability and how it has been accelerated and the role that they expect us to play as well.
Great. Thank you that's all for me.
For you.
Thank you. Our last question comes from the line of Blake Gendron with Wolfe Research. Your line is now open.
Hey, yes. Thanks for thanks for your time. This evening wanted to circle back on ATM and not to pile on here, but trying to get an understanding of the customers that are in trial with ATM right now.
How many are existing MSC customers on some of the larger customers in your core end markets versus potentially.
Potentially new customers and in new markets for you I guess I'm just trying to understand how much of the cash conservatism or users of MSC that just don't want to.
Maybe spend on APM at this time versus I would imagine some logistical.
Hurdles getting into the facilities with Covid or is there something competitively that we should be aware of are you waiting for opportunities to maybe displace a competitor in some of these APM opportunity.
Yes, well, let me look at historically.
Is that about.
10, 15, really about 15% of our total pipeline.
Is outside of our core industries the process industries.
Into into mining into pharma into into other industries.
Probably gone up a little bit over the last.
For quarter, so as we focus more on pharmaceuticals on mining, but it's still call it in that 15% range.
And Thats it look at we had a solid quarter.
On a solid for first half of the year and pharmaceuticals on mining.
And really it's a reflection of.
Our performance with the APM.
And those areas. So so so we see the the.
Difference in decision making.
Between the industries.
And Luke.
It's what leads us to believe that this is something temporary but.
We're also we're look.
That this is now two quarters in a row with this story, we were hoping for a better quarter in December.
We thought we were going to have it didn't materialize at the end.
But.
Customers continue to ask to do pilots on prove their value. So so I think I think we're building up a significant pent up demand.
Should materialize.
So, yes, it's a challenging environment for sure.
In terms of the free cash flow guide encouraging on the profitability front. It sounds like in this subdued annual spend growth environment that you are able to streamline cost a little bit and take some cost out I'm. Just wondering how we should think about cost add back as sales efforts normalize and youre able to do business travel shall we.
Think about it as cash conversion versus annual spend or as a percentage of annual spend growth.
With respect to cost add back.
But let me look certainly.
<unk>.
Some of the expense benefits of we've seen are of course travel.
Uh huh.
On travel and entertainment.
In person marketing.
Vince.
And.
Those are those are the two main areas now.
Fiscal.
Look everyone has a point of view about what's happening what's going to happen here over the next 11 months now.
And when people will start traveling and so on.
Considering the fact that our fiscal year, our fiscal year crossover calendar years.
We think that even if we start traveling.
And we started doing in person events that would probably be impact only start impacting is fiscal year 'twenty, two possibly only half of fiscal year 'twenty. Two so so that add back on expenses.
We will not be as pronounced as perhaps for other companies that operate on a calendar fiscal year.
Well look.
Let's just say that.
Our discipline in this company around expenses on delivering profitability will continue to come through even as we transition back to a normal economy, Let me just say that.
That makes sense appreciate the time thank you.
Thank you.
Thank you.
There are no further questions at this time I would now like to turn the call back to.
Antonio Pietri for closing remarks.
Yes.
Well look I want to thank everyone for joining this evening's call.
Look forward to.
Talking to some of you all of you.
As the quarter progresses here on hopefully.
Get to start having some in person meetings in the future. Thank you everyone have a good evening.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
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