Q3 2021 Aspen Technology Inc Earnings Call

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Ladies and gentlemen, todays conference will begin shortly until that time realize again, because it's on hold and thank you for patients.

Again, ladies and gentlemen, todays conference scheduled for beginning sharply until that time and lots of it can be placed on hold and thank you for patients.

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Good day and thank you for standing by welcome to the Q3, 2021 and 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 will need suppressor.

And one on your telephone please be advised that today's conference is being recorded if you require any further assistance. Please press star zero and I would now like to hand, the conference over Chimps help Writeup CFO. Please go ahead.

Thank you good afternoon, everyone and thank you for joining us to discuss our financial results for the third quarter of fiscal 2021 and at March 31, 2021 and I'm sure until bright up CFO of Aspen Tech and with me on the call is Antonio Pietri, President and CEO.

Before we begin and I'll 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 on today's call and contained and I. Most recently filed form 10-Q.

So please note that the following information relates to our current business conditions and our outlook as of today April 28 2021.

Consistent with 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 third quarter and then I will review, our financial results and discuss our updated guidance for fiscal year 2021.

With that let me turn it the call over to Antonio Antonio.

Thanks, and too and thanks to all of you for joining us today.

And once you start by welcoming chantelle to us.

Sure.

At significant experience to the senior management team and.

And I've been impressed by her financial and operational acumen and energy. She has brought to the company and the weeks since you joined us.

Let's start by looking quickly at our financial results for the quarter.

Revenue was $162 $7 million.

GAAP EPS was <unk> 91, and non-GAAP EPS was $1 on pricing.

And you'll spend was 609 $9 million.

1% in the quarter and six per se and year over year.

And free cash flow was $100 million.

Overall.

And our third quarter performance was below our expectations. While we continue to have a meaningful pipeline of business. It remains a challenging environment to complete transactions and.

We had expected purchasing dynamics with customers to improve modestly and the third quarter. However, it was broadly consistent with what we experienced in the second quarter.

Our assessment of growth and Q3 was predicated on the quality of conversations with customers and their commitment to a sequence of events that have historically indicated a high likelihood of closing these transactions.

The quarter closed many of these transactions did not received final approval at the highest level of our customers' organizations and approval step that is new or has been historically a predictable final step.

We believe there were several factors that played a role in the quarter.

First.

The unexpected polar vortex weather event in February and the United States, and specifically in Texas and many of the key energy producing states forced the shutdown of approximately one third of U S refining capacity as well as approximately 75% of ethylene capacity and 80.

And 285% of polypropylene capacity equally impacting other chemical production capacity.

Understandably this emergency shifted customer attention towards shutdowns and repair and restart of these assets with the last few plans finally, returning to operations only in the past few weeks.

These weather events caused refining and chemicals industry billions of dollars and revenue and incremental expenses as being reported by these companies one refining company reported taken on accounting charge in the quarter of between 520 and $535 million due to higher electricity.

And natural gas cost alone.

We believe the economic impact from the storms placed additional pressure on budget and made it very difficult for customers to commit to and you're spending at this time.

Second continued COVID-19 related lockdowns around the world, particularly in Europe, and India are delaying the economic recovery in these regions and creating a significant stress for the local refining industry as higher oil prices and tepid fuel demand.

Refining margins.

This was sold to other case until recently and the United States, but as economic activity has accelerated here margins have improved and the last few weeks and third these dynamics combined with calendar 2021 and budgets that are reflective of the uncertain macro environment and mid $40 oil price.

At the time when they were said late in calendar 2020 created a difficult spending environment.

In light of our recent performance and the current market outlook, we're not taken on a more cautious outlook on growth in fiscal 2021.

It is important to note that although we did noticed spear into any significant losses in the third quarter. Our updated outlook is based mostly in the decision making pattern by some customers.

Although we continue to have significant customer engagements and demand generation activity at the top of our sales funnel that support our pipeline of business that is broadly consistent with pre pandemic levels. We believe it is prudent and prudent to assume that the elevated level of late no decisions by customers and recent quarters.

Could persist until at least the end of this fiscal year.

As a result, we're adjusting the range for annual spend growth to four to five 5%.

Our initial guidance for the year laid out a wider than normal range of potential outcomes and our updated outlook reflects first lower gross growth driven by curtailed spending and refining and chemicals, which has impacted our MSC business and lower growth contribution from APM.

And with the powder and experienced in the fiscal year and take on attrition that will come in at approximately 6%.

I would like to spend a few minutes, providing more color on what we're seeing and the market.

As we discussed in depth at our Investor Day earlier this year digitalization and sustainability are two of the most important investment and investment priorities and the process and capital intensive industries.

Customers recognize that Aspen Tech solutions are critically important to successfully executed and in these areas and meeting their goal up or on an assets safer greener and longer faster and more profitably.

Our overall pipeline of opportunities has continued to grow each quarter since the pandemic began and.

In particular, we're seeing growing engagement with customers for sustainability related activities.

We're excited by the conversations we're having with customers and they give us confidence and our long term double digit annual spend growth prospects. Despite the short term challenges we're facing.

And macro environment has remained less predictable than originally anticipated.

And difficult for customers to commit to new spending and the near term. We believe there are ways for our sales organization to adapt to this new environment, but this will likely only have a modest impact until macro conditions improve and normalize.

The end market and most impacted by macro conditions relative to our expectations as refining.

Although customer engagement remains high refining utilization rates and margins remain below historical trends, even if that they have shown improvement from last years lows and the United States.

Fuel demand continues to be well below pre pandemic levels and during the quarter Lockdowns and during the quarter Lockdowns persisted and certain key regions, most notably Europe and India.

The cumulative impact of the past year has weighed on operating budget and refiners ability to make incremental investments and their operations.

We believe this is a temporary dynamic that will reverse itself as macro conditions improve across the world.

However, and the near term, we would characterize business conditions with refiners as amongst the most challenging and the last 10 to 15 years and a notable difference from the last market cycle five years ago.

Conversely.

And we've discussed on recent calls.

Chemical customers have shown good resiliency, but spending soft and in the quarter.

Which could be a transitory issue, reflecting the factors mentioned earlier in my remarks.

These customers are focused on the long longer term needs of their businesses and recognize the critical value Aspen that provides by enabling access to operate and a more efficient and environmentally sustainable manner.

Turning to the E&P market, our performance was largely as expected.

And the industry continues to adjust to current capex spending, which is leading to higher attrition levels and lower and you spend activity.

As a reminder, these customers continue to use and deploy Aspen Tech solutions extensively across their operations and changes and their spending levels are a result of having fewer projects and backlog.

We continue to have very close and active engagements with our E&C customers and understand the near term challenges as well as exciting long term opportunities and this market.

And APM, we continue to see significant interest from customers as pilot activity remains at record levels and a combination of reduced operating rates and this assets and lower spending on maintenance has had a pronounced impact on close rates and APM and we saw a continuation of the trend towards no decisions and.

Many of our sales cycles.

The increase and customer interest and successful pilot deployment of created a significant pipeline of bad debt transactions that are available to be signed once market conditions improve.

We have made important progress and improving out the value proposition for APM for many customers and our core industries and GE.

Which is which gives us confidence that APM can grow significantly faster over the long term.

We did close a number of transactions for APM, and the mining and pulp and paper industries, including some minor transactions and our core industries and most notably expanded the use of Aspen Entel for an integrated oil company in Europe to one of their biofuel refineries.

Finally, we have made good progress and building out our dedicated pharma unit, including the go to market teams and we believe that pharma market represents a significant growth opportunity for us and tech and it's an area and which we plan to continue to invest.

Following our highlights of a couple of transactions, we closed in the quarter.

First a global chemical company headquarter and Europe, and long term user of our engineering and MSC suites was offered by and Aspen Tech competitor or the opportunity to replace our engineering suite by granting a free no cost license to their technology for three years.

After a careful evaluation by the customer of the capabilities of both solutions.

Customer proceeded to renew the agreement for our engineering suite as well as gross spend by expanded use to sites in Asia and other recently acquired locations.

And.

Longer term European customer of Aspen Tech selected Aspen <unk> to expand use of the multi unit optimization technology to a second refinery.

Aspen <unk> was selected as the customer concluded a competitive tender process for regionally kicked off in April 2020, and postpone multiple times due to the pandemic the.

And the customer is looking to increase profitability at the second refinery by improving operational performance.

Third and final and new customers to us and tech and mid tier mining company, and Australia signed the transaction to deploy Aspen and.

Two mining sites and Australia after conducting a pilot for the technology.

The pilot was kicked off during the first quarter of our fiscal year 'twenty one.

The value of Aspen <unk> predictive capability was proven during the second quarter and debt transaction was signed this past quarter.

And as financial was selected for being a commercially available software application industrial equipment agnostic fast to deploy and for providing a clear value proposition to reduce operational downtime.

<unk> success will lead to further rollout of us financial to other mining sites and the future and create opportunity for other Aspen Tech products with this company.

As we look forward, we're focused on managing and executing and executing against the things that are in our control to ensure we're best positioned to benefit from and improved macro environment as quickly as possible and particular, we continued to make excellent progress and building out and expanding our.

Our market leading product portfolio.

The market is responding to our vision of the self optimizing plant and how we can leverage artificial intelligence across our solutions for.

Feedback on both the Aspen <unk> 12, and the Iot hub has been very positive for example, our U S. Chemical manufacturer has been drawn to our <unk> offering as a way to the multis AI access and utilization and their business.

And they have noted that our AI powered model building workflow is a very user friendly way to build artificial intelligence models without having existing resources trained and advanced computer science.

For them it would put AI functionality directly into the hands of the manufacturing and technical personnel, where it is needed most.

We believe our recently introduced innovations combined with our existing technology and 40 years of domain expertise reflect the compelling product market fit that meets our customers' strategic priorities of improved efficiency and reduced environmental impact we have introduced a tremendous amount of innovation of the past over the past year.

<unk>, which provides for a number of different opportunities for faster growth over time.

Other it is hybrid engineering models Aspen <unk>.

Iot hub Aspen enterprise insights for any of our other recent innovations we have more ways to deliver value for customers than at any point in our history.

We will continue to make significant investments and our product portfolio and go to market efforts to best position. The company for the long term, we have great confidence in our business and believe our ability to invest through all the stages of the economic cycle and strengthened our market position and ability to deliver on our long term objectives were.

Hosting our biannual optimized conference on May 18th through the 'twenty, one where we will continue to engage customers across all the innovation. We have released on our long term historical products.

This will be our first virtual comp virtual customer conference and it is generating significant interest with thousands of customers and our register.

We have a strong lineup positions and speakers with a technical sessions being oversubscribed from customers' interest, 2%, how our solutions are being leveraged to create value and improve sustainability and their operations.

We look forward for your participation as well.

From a capital allocation perspective, we did not repurchase any shares and the first three quarters of fiscal year 2021, and we anticipate that it is on likely that we will meet our previously stated intent of repurchasing 200 million of stock and fiscal year 2021 day.

And the lack of share repurchase activity in recent quarters was driven in large part by practical limitations, namely a lack of available open windows to reinstitute our buyback.

We have a demonstrated track record of deploying capital to drive shareholder value throughout prior business cycles, our capital allocation framework and philosophy has remained the same.

We invest organically and our business inorganically with acquisitions, and where business and market conditions allow us return excess cash to shareholders via share repurchases.

Finally, I would like to welcome the two newest members of Aspen Tech's board of directors carrying goals and Jill Smith.

Karen is a retired.

And John partner, who held a number of senior positions and her 40 year career with the company, including as global Vice Chair of E on why Japan, and its proficient on practice and professional ethics and independents, we're excited to add karen's expertise and experience to Aspen Tech's Board.

Jill has more than 20 years of international business leadership in diverse industries. Most recently, serving as president and CEO of Allied mines, and IP commercialization company for technology, and life Sciences, and and they're on earlier in her career as CEO and president of digital Globe and a partner at <unk>.

Jane and company, we're excited to add the diverse expertise and experience of care and NGL to us and thanks for.

Before I turn the call over to Chantelle I.

I want to reiterate in here and the strength of our business and our continued confidence and its long term growth opportunities.

Even as many of our customers face a challenging environment. We believe we will grow our business for 255% and fiscal 2021 and generate industry, leading margins as the impact of the pandemic phase and economic conditions improve we expect our business will begin to realize the customer demand.

<unk> built up over the past year, we are well positioned to benefit from our investment priorities that we believe will sustain double digit annual spend growth for years to come.

Now, let me turn the call over to share sale Chantelle.

Thank you Antonio I appreciate those kind words and.

Thrilled to be here at Aspen Tech to hope for.

The company for its next stage of growth I am impressed by what I've seen and my few weeks with the company and the incredible passion that we have to deliver value for customers and I look forward to getting to know many of you and the weeks and months ahead on.

I'll start today with a review of our financial results for the third 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 for revenue recognition for our term license contracts.

License revenue is heavily impacted by the timing of bookings and more specifically renewal bookings.

A decrease or increase in bookings between fiscal periods, resulting from a change and the amount of term license contracts up for renewal is not an indicator of the health or growth of our business.

The timing of renewals is not linear between quarters for fiscal years and this non linearity will have a significant impact on the timing of our revenue.

And the result.

Believe our income statement will provide an inconsistent view into our financial performance, especially when comparing between fiscal periods.

Our view and we will spend will continue to be the most important metric and assessing the growth from our business and annual free cash flow and the most important metric for assessing the overall value our business generates.

And youll spend which represents the accumulated value of all the current invoices for our term license agreements at the end of each period was $609 $9 million at the end for third quarter.

Represented an increase of approximately 6% on a year over year basis, and 1% sequentially.

Total bookings, which we define as the total value of customer term license contracts signed and the current period less the value of term license contracts signed and the current period, but where the initial licenses and we're not yet deemed delivered under topic 606, plus term license contracts signed and the previous period for <unk>.

What's the initial licenses are deemed delivered and the current period was $175 $6 million with 39% increase year over year.

Gross on bookings was heavily influenced by the timing of renewals, which represent the majority of our bookings and again from period.

Total revenue was $162 7 million for the third quarter, a 25% increase from the prior year period for.

And year over year increase and revenue was the result of the increase and total bookings discussed above.

Turning to profitability beginning on a GAAP basis.

Operating expenses for the quarter was $77 8 million compared to $71 million from a year ago period total expenses, including cost of revenue for $93 $8 million, which was up from $85 $9 million from the year ago period.

Operating income was $68 $9 million and net income for the quarter was $62.5 million or 91 cents per share.

Turning to non-GAAP results, excluding the impact of stock based compensation expense and amortization of intangibles associated with acquisitions and acquisition related fees.

We reported non-GAAP operating income for the third quarter on $89 million, representing a 49, 7% and non-GAAP operating margin.

Compared to non-GAAP operating income and margin of $53 9 million and 41, 3%, respectively from a year ago period.

As a reminder, margins will fluctuate period to period due to the timing of customer renewals and no for license revenue recognized during the quarter.

Non-GAAP net income was $72 million or $1 five Chris sharp based on 68 6 million shares outstanding.

Turning to the balance sheet and cash flow, we ended the quarter with approximately $317 million of cash and cash equivalents and $300 million outstanding under our credit facility and the.

Third quarter, we generated $98 $7 million of cash from operations and $100 million of free cash flow after taking into consideration the net impact of capital expenditures and capitalized software and acquisition related payments we.

We are pleased with our cash flow performance, so far and fiscal 'twenty, 'twenty, one which demonstrates the consistent profitability of our business and good performance by our collections team.

A reconciliation of GAAP to non-GAAP results is provided and the tables within our press release, which is also available on our website.

I would now like to close with guidance.

With respect to annual spend growth as Antonio mentioned, and now forecasting 4% to 5.5% annual spend growth.

We now expect bookings and the range of $771 million to $809 million, which includes $519 million of contracts that are up for renewal and fiscal 2021.

This includes approximately $146 million of contracts up for renewal and the fourth quarter.

We now expect revenue and the range of $705 million to $729 million, we expect license revenue and the range of $492 million to $516 million and maintenance revenue and service and other revenue of approximately 187 and $26 million respectively.

And the change and our bookings and revenue outlook reflects the impact of our mountain view debt annual spend growth outlook.

From an expense perspective, we expect total GAAP expenses of $355 million to $360 million.

And together, we expect GAAP operating income and a range of $350 million to $369 million for fiscal 2021.

With GAAP net income of approximately 306 to three and $21 million.

We expect GAAP net income per share to be on the range of $4.46 for $4 and 70 sites.

From a non-GAAP perspective, we expect non-GAAP operating income of $395 million to $415 million and non-GAAP income per share and the range of $4.98 to $5.22.

From a free cash flow perspective, we continue to target free cash flow of $265 million to $275 million.

2021 free cash flow guidance assumes cash tax payments on the range of $60 million to $70 million.

As a reminder, the fourth quarter is typically our largest invoicing quarter with a significant number of our quarterly invoices due on June 30th.

To summarize we are managing through some extraordinary dynamics and our core markets. The fact that we continue to grow and generate substantial free cash flow is a reflection of the value we deliver to customers and demonstrates the strength of our business model.

We are confident that we will begin to see a meaningful improvement and growth rates as the market conditions normalize with that operator, let's begin the Q&A. Please.

Thank you at this.

Tom If you would like to ask a question simple.

Press Star one on your telephone keypad again to ask a question. Please press star one on your telephone keypad.

Your first question comes from the line of Matt Pfau from William Blair. Your line is now open.

Hey, guys.

Hey, guys. Thanks for taking my questions just to start off Antonio just sort of want to understand that change and in town and and guidance a bit better you listed several reasons there.

But it would seem that you know really the new dynamic that was probably on anticipated. When you guided last time would be the cold weather events and in Texas and and the South.

With with COVID-19, probably being <unk>.

Somewhat similar in terms of and impact from the second quarter, but how do we sort of think about what's the sort of bigger dynamic there that has shifted.

And you know some of the close close rates and customer sentiment.

Yeah, and they look good.

Say that perhaps the other.

And I make debt is that he is new and this cycle that we certainly didn't see and.

And did not have and the last cycle in 16 and 17.

And is.

With our refining customers clearly.

Since last April.

And the significant drop in fuel demand.

And has had on the impact on their business.

But I think more importantly, or equally important.

And as oil prices have increased later in the year in 2020 and into 'twenty one their margin.

Really compressed in some cases experiencing negative margins and I think it does.

And that's led to a pullback in spending.

And I discussed tumors, now and the United States and.

Refining margins have actually improved quite a bit and the last few weeks as the economy has opened up on.

And and travel and has picked up.

So and so we see that but but they remain depressed and in Europe and parts of Asia.

And they'll probably continue until until economic activity and recover. So so that's that's primarily the new dynamic and that impact and.

And the MSC business in particular on <unk>.

Also engineering.

And then you're doing business out of out of those customers. We believe that the softening of demand from our chemicals customer and Q3 more to do and in the U S with.

And the weather event, they experienced and over at Texas, and other states, but but I think it's a refined and businesses.

And the new dynamic that we're seeing.

Yeah.

Got it and so I mean is this sort of a situation what's the refiners, specifically, where we're just waiting for their businesses and improve before demand returns.

More robustly and close rates and improved or do we sort of need to wait for the calendar year flips over and budgets reset how should we think about the drivers to get back to better close rates there.

Yes.

And certainly we do think that.

Budgets that were set late and late last year, where we're sort of disciplined budget. If you will.

At the same time.

I do think the dynamics in Europe with continuation of Lockdowns in India for example, going on right now and.

And then the weather event.

Does this appear certainly the weather event only less than the duration of it was very short term, but the impact was longer term only and the last few weeks.

Some of those assets have returned to operation, but well look I think I think the second half of this year this customers on <unk>.

Global basis, we'll probably have a better.

Better financial performance.

How does that translate into.

And to spend and in the second half of the year.

And time time will tell and we'll win.

Of course, we will be engaged with those customers.

And I.

And then again.

And later in the year they'll be looking at new budgets with a completely different.

Macro environment. So so so we'll see what happens at that point.

Okay, great guys. Thanks for taking my questions I'll pass it on.

Thank you.

Thank you. Your next question comes from the line of Jackson Ader from Jpmorgan.

And now Youre down life.

Great. Thanks for taking.

My question Antonio.

First one on between no decisions from some customers and and I think you mentioned a competitor.

Giving their software away for them for three years.

Competing hard on price.

How are you guarding against.

And the pressure right net salespeople will ultimately feel to maybe discount or take down the <unk>.

Contract values here at the end of the fiscal year, just to try and get something across the finish line.

Well look.

First of all we have to do and rigorous approval processes for deals.

And.

And I can tell you.

The one of the largest deals that we had in our Q2 quarter.

We did not give the sales team the approval and we're looking for to close the deal in Q2 that day.

And it came over to Q3, and we finally managed to get through and agreement with the customer. It turned now that what normally is a customer that is very reliable.

Once we have an agreement with procurement to sign the deal.

But the deal.

And it was sent to the CEO, which is never the case, but this time around was sent to the CEO for final approval and the seal held it along with other agreements that were negotiating with other providers. So soon.

We monitor the health of our business and of course, we have escalation levels for approval to internally.

We will walk away from deals. If we don't think is the right deal to be had with a customer where on.

Also not conduct and Ah.

Fire sale of our products here, but we do find Luca do you have a smaller pie of opportunities at the moment and the market.

The weaker competitors.

And are being very aggressive just like they were in 16, and 17 and absolutely the same behavior.

And look.

And if in it.

And it is strengthens our commitment to the value proposition from our products. When you have a customer that has an offer on the table to use their software of a competitor for three years at no charge and they still decided to go with us and take on and expand spend so I understand your point, but at the same.

Time.

We do see the pressure on pricing, but I like to think that.

We run a business where we.

We understand the value from our solutions.

And will occur we will make accommodations, if we believe it makes sense and the context of the macro but in general.

Customers have.

Pre negotiated future still comprises and there are agreements that were had been negotiated over the last five years and that is what's used for their purchases if they want to expand entitlement during this downturn.

Okay.

Great that's helpful and then.

Shantou and maybe a clarifying question for you on the APM suite.

How much has the APM contributed to annual customer spend growth.

So far in fiscal 'twenty, one and then.

What are we expecting the ATM contribution for the full year on customers and thank you.

Yeah, I think I think.

Jackson, Great. So that's and I will I will defer attempt Tony and for that specific question on Thats helpful regarding suites.

Yes. Thank.

Thank you Chantelle and Luca Jackson.

And the APM suite.

We continue to be very excited about it. The fact is that the use cases continue to expand.

And into other industries.

Now it is being deployed and at <unk>.

<unk> fuels refinery.

And as well.

But the contribution was not what we expected in the quarter again.

Lower guidance also means lower contribution from APM.

And we believe that now APM will probably come below the one point of contribution now we have.

A wide range of outcomes for APM and Q4.

And.

And if we get us a price on the op side and there could be a lot of strength and APM, but we're not going to rely on that and and.

The guidance overall guidance we've given.

For the business also reflects.

And the lowering of our guidance for for APM or expectations are on APM.

Okay, alright, thanks for the clarification.

Yeah no problem. Thank you.

Your next question comes from Rob Oliver from Baird. Your line is now open.

And Ralph Great Great. Good evening Iron Antonio harsh on so welcome to you.

As well.

On a two questions one for you Antonio to start just.

I appreciate some of the color on on the margin on sort of what changed relative to your forecast and I know you talked a little bit about and markets and just.

Obviously, you touched on APM their response to Jackson's question, which I think is on everyone's mind I wanted to ask about other particular products.

Are you seeing particular products or product suites.

And where youre seeing the most pushback.

And does that concern you want and any particular renewals and you know and.

And how does that sort of match up with what you've seen in previous.

On the down cycles is this unique or does it look different and just curious for any product and related color and then I had a quick follow up.

Yeah, No look I mean.

And actually.

A lot other dynamics that we're seeing in this cycle, we saw five years ago.

And if anything.

Our footprint and the market has strengthened.

Across the board.

And our engineering suite.

At the moment, we believe will actually probably be a little bit ahead of our growth projections for the year.

We do expect our MSC suite now too.

To be and.

Not to be a double digit grower this year.

And the impact from refining and.

It is much more pronounced on the on the on the MSC suite.

And then our APM suite.

No.

We've communicated what were seeing with that switch Budd.

But luca.

If not IC for we're losing on APM is and all decisions MSC is just Tim.

Temporary lull and spending on refining and.

And also a softening and chemicals, which to me.

Says that we had some dynamics and Q3.

Perhaps were very specific to the chemicals two two.

The macro environment for chemicals, and then the engineering and so it is doing.

Head of our expectations a little bit so.

But no look.

We're doing well from a competitive standpoint.

Good Okay. Thanks, Antonio appreciate that and then shut for a one for you and on.

Just on attrition and I know this was before you had joined but last quarter the thought was debt.

Patricia and wood wood.

It would be would be lower in the back half for the year now.

And now you guys I think we're talking about about 6%. So I just wanted to kind of.

Focus on that a little bit and get your sense for what what's that what that is reflective of around particular renewals and.

And how you guys feel is that or is that a range or is that six just for the final quarter.

I'm here for you guys for the year. Thank you Yeah, Hi, nice to meet you Rob. Thank you I think that we are still within the range and we have some guiding them what I would say to be fair, it's where we see and bumping up for higher I know that range as Megan and thank you for Rob to your question, so still the range, but probably more towards the higher part of that range as we get.

And as Antonio mentioned during Q4 and so far.

For that.

And so as your question in regard to the range of maintaining and we see pressure and to get to the higher putting on that range and not moving above that range at this time.

Okay.

And Rob what I would what I would add too.

<unk> and <unk>.

Or.

<unk>.

For for the first time, we did see.

A couple of important customers on the generic side and owner operators.

And.

There are renewals expired on and then renew them into this quarter.

And to us that was a sign of a little bit of this organization and their own organizations.

And they've renewed but the way we account for attrition is attrition if it doesn't get renew on if it comes back.

It's growth.

So so we expect those those.

Those deals to renew so.

Or to get sign new new business, but.

Look there's a lot of dynamics and the marketplace at the moment.

And and around the world and.

And in some cases, we've seen a little bit of this organization and our and our customers for businesses as well.

Okay. Thank you guys very much.

And that's all very welcome.

Thank you moving on your next question comes from gum window from bearing Burke. Your line is now open.

Hi, everyone and.

Thanks for taking my questions and I'll be quick and I appreciate the time the first line.

Antonio.

And I'm thinking just expanding a little bit on the last thing you said.

And when you think about the slip deals effectively debt and that didn't get sign on.

And how much of that related to.

The pure.

Cadence of renewal bookings that you had in the quarter and the heart.

What proportion of them were kind of new activity and expenditures potentially stuff that you thought might might add to debt to the current.

Bookings that you had up on top of renewal.

Yes.

And I guess just to clarify that.

And I don't know if your question is specific to maybe on and over performance on the book and side versus expectations.

But luca yes, so if we look at we renew in the quarter what's available to us.

And the fact is that.

And I'm, not aware and necessarily of any any material renewals that we accelerated into the quarter I think that over performance that you're seeing has to do with the way we are.

Yes.

And we account for bookings supersedes on other stuff that where there are some parts of book and as I get recognized in the quarter from past quarter or so.

And then maybe Sean can add more color for that.

Yeah, I think debt.

And nice to meet you at all I think that.

And I understand your question correctly. Your question was if we are seeing.

On more slipped through the quarter during this environment if I understand your question correctly, if I heard it.

And basically on a.

And let's say year and a five year deals.

Sales for new like did you had instances between just the normal renewal catered for the bill would have kind of been disrupted and slipped into the quarter. We're doing a little kind of new deals that didn't get flow because they didnt get approved.

Were there any issues with the renewal deals that were supposed to be just dramatically programmatically and kind of renewed.

Got pushed out so those probably carry a lower risk and.

And the subsequent quarters.

Yeah, I don't I don't think that you know I think Antonio said, there could be one or two during this time period that that slipped and became a new deal because of the timing on their side or if you think about what some of our customers are going through right now just the organization and the capabilities to put that altogether on time for the renewal.

Say that theres anything, indicating there's a trend for that to happen and therefore, you know the new the new deals for likely more of the new deals and not slipped renewal deals for the majority I don't see and increase trends and that's that's my question.

That makes sense.

And then my second question is what do we kind of looked at our Mt.

Maybe on from you for you and when it kind of look at debt targets that you've talked about them and.

And the middle of February and.

And and you were and are good.

Trajectory for that.

And that closer to that how far away. You think you are today to be able to deliver on that kind of a low teens growth from the annual spend is that kind of a twin without guiding but it looked like and and you.

And did you see for environment, improving kind of in the near term or do you believe that the end market has improved a little bit better.

And as well to help you get there.

Well look like.

Like I said in my and my prepared remarks.

And we were still have a lot of conviction about the ability to.

To deliver a double digit growth and in the longer term.

And the trajectory to get there.

And I will.

And we'll give you an update on.

On on on what we think we're going to be able to do and fiscal 'twenty two.

Later in the year, when we do our earnings calls or post fiscal 'twenty one.

But.

Luca.

In general.

The engagement with our customers.

Only continues to strengthen their cash.

Conversations around sustainability.

Are becoming more and more frequent.

How our customers are viewing us as a strategic supplier of capability to help them navigate.

This environment on their businesses and.

Transform their businesses for the future.

And I confused too.

The strength and so so I think overall on average.

And said it before.

I've never been as excited about the future of this company as I am today.

We are.

And our way, we we'd be spread day environment that our customers were facing especially on the refiners.

I do think that.

And Q3, there were very specific advantage that played a role and our performance.

But the other.

And change our conviction.

About our ability to drive double digit growth and the future and and.

That's what we're working here to do include and put it to work the investments that we've put the work flow.

And.

And reaping the benefits of those investments over the next two to three year for three to five years and that's what we're playing for.

Right, that's exactly what I was thinking in terms of.

For the.

Reasons for Q3 kind of underperformed and seems to have been.

And one off impact so what you see if you look kind of on site.

And I didn't see any lasting changes that would make that.

It would make debt traject trajectory and probably the mid tier Midtown and any different so I just wanted to confirm that and I guess, that's very helpful. Thank you.

And not at all not at all and and I would just add debt.

And we continue to as we continue to see even greater interest from.

And third parties and potential partners.

To work with us and going to market to discuss tumors, because they they understand and roll that we play and this market plays and our core industries.

And that's also to us.

And indication.

How were being perceived and the market by customers on.

And on third parties.

I think youre thinking there right.

Away from the zone.

Thank you Antonio Thank you can from big thing.

Yes.

Again, if you have any question simply press star one on your telephone keypad to ask a question. Please press star one on your telephone keypad.

And your next question comes from the line of Blake Gendron from Wolfe Research. Your line is for open.

Yes, thanks for the time, obviously and the guys.

So I understand on the one off impacts on the quarter and and really there's nothing you can do about competition outside of just.

Bolstering the value proposition and and I definitely subscribe, obviously for the MSC tailwind and digital transformation over time, but if we were to.

And maybe frame the conversation and more so for engineering.

Oil and gas prices are up but there is a notion that.

And the entire value chain is just going to be more disciplined from a capex perspective, moving forward. This would be somewhat of a big structural change versus what we've seen in past cycles.

Is this factored into your outlook for engineering suite growth moving forward and have you seen any impact to the EPC customer base in terms of E&C companies, maybe even going away or cutting engineering heads and things that are a little bit more drastic to deal with the structurally lower outlook for specifically capex.

And oil and gas.

Yeah.

So let me say the following.

And the surface.

Certainly there is a few and generic companies that have reduced head count.

Nothing at all like what we saw five years ago, I think engineering companies have been very disciplined about hiring.

And they've been managing their backlogs and a way that.

Allows us to sustain their businesses even through this downturn.

And so.

And I would say that.

The other point.

Beginning of your question.

Around.

And.

Sort of on.

And reduced Capex environment.

Actually I think and a way that debt.

And that provides.

Provides a counter driver for more focused and technology.

And you engage owner operators.

And refining and chemicals, they all recognize.

They are and a lower capex environment.

For a number of years here.

And as such they need to focus on their existing assets and.

And improve their performance improve on the reliability of these assets.

General and continue to drive greater operational excellence and.

And every customer that I meet with.

At the executive level. The first thing they show US is their list of 40 or 50 or 60 initiatives as part of and operational excellence program that they are focusing on and to drive more value out of their existing assets and on those range from certainly digital star.

Abilities and their.

Offices and personnel too.

And with the asset.

Maintenance.

And of those are for the at least on 10 or 15 that and a weighted belong to Aspen Tech.

And Theres a lot of actually assignment and our customer base about the next two to three three to five years.

And what I find on and I believe I saw.

And my Board. This last week, there was a tremendous dichotomy.

Between what you hear.

And in the news in general about what's going to happen to these industries and then what do you hear from customers.

Above what they view as their outlook for their businesses and chemicals.

Refine and over the next two to three years certainly there are parts of the world, where there is going to be some challenges, especially in refining.

Rod.

Luke.

I think I think greater economic activity.

Coming out of the pandemic will will rise.

All votes.

And on.

These companies provide.

The energy chemicals, and plastics that improve our standards of living and drive economic activity and so.

And as time will tell what what what happens here.

But.

We're also very excited about the futures.

That's helpful insight so it sounds like any incremental frictions as a real opportunity for both MFC and and obviously APM and and.

Regard I won't want to switch focus to M&A.

I guess just more comments on the for.

And you didn't.

Follow through with the buybacks. So youre building cash here a little bit on diversification is very important and farm is one area of focus for you as those metals and mining.

Is it possible that you may be gearing up for.

More than just tuck in M&A and to make a more concerted shift into either one of those verticals.

Well, let me look at.

We would never discuss potential M&A.

But what I'll tell you is we've certainly.

Put a food for the pedal on organic investment in fiscal 'twenty one.

You will see some of that.

Coming out of our Q4 quarter into fiscal 'twenty two because.

Because we believe that.

Telerate and investment.

Over the last six to nine months.

Allow us to increase our lead on the competition as we come out of all day, so so and making.

Investments as we speak.

And communicating to all of you over the last.

12 months and the different areas as we've talked about.

Certainly.

Got it came on as is always part of our future.

We've always said that.

We're interested in doing.

And the bigger acquisitions, especially and introduce new industries that we've talked about.

But they would have to.

They would have to sort of fit within that filter.

And we put on them for.

And so thats reported any M&A, we do even if it's bigger it has to be.

<unk> are accretive to our profitability on.

And double digit growth ambition.

So so look.

We're constantly looking at things but.

And I won't make any specific comments, but.

Just know that.

Part of our thesis is that and.

And investing during downturns.

It provides a significant return.

The road, so and that's what that's what we're doing and we'll be doing.

That's totally fair the framework is very helpful. Thanks, a lot for the time.

And thank you.

Your next question comes from the line of Jason <unk> from Keybanc capital markets. Your line is now open.

Jason Hello, Hi.

Thanks for fitting me and maybe just two quick ones.

And when I look at the Q for annual spend guidance for the implied Q4 annual spend guidance.

And it seems very weak sequential increase.

Much more subdued than a typical Q4 is this more of a reflection of the added dynamic around the uncertainty on customer purchasing decisions.

Yeah Yeah.

We've had a well.

Be very careful about Q4.

Had two quarters, where we came in.

And for the very end of the quarter thinking that we're going to deliver.

Good solid quarters, and and they did not materialize. So so you would expect us to be more cautious about.

The Q4 performance.

And what I'll tell you is we came into the quarter with a.

A very sizable pipeline of business.

But.

At the same time.

With me and beef and twice by expectation, so we're being more cautious.

Okay and then.

Before we were thinking on annual spend growth could possibly trough over the next couple of quarters.

This framework still apply but maybe a deeper.

A deeper trough and what we expected.

And then we'll talk about FY 'twenty two but.

No.

I think and a way and we've set up and established a pattern of growth and three quarters in a row.

We'll see what Q for the dos.

And our.

Our.

Our Q4 last year was a very strong quarter.

And I don't necessarily think that customers on this too.

And what was ahead of all of us with the pandemic.

But.

But we'll see.

The Q1 and Q2 quarters this year.

I think are representative of a full impact of that on them and get everything that what's going on and uncertainty. So.

I think.

And if there is a continuation of some other issues around the world with the pandemic.

And you could be seen and similar quarters, and Q1 and Q2 above but we'll talk about more specifically.

Other.

Later in the year.

Okay excellent well I appreciate the time thank you.

And he says.

Thank you Darrin no further question at this time I'll now hand, it back for our CEO Antonio Pietri for any closing remarks.

Alright, Thank you operator, and I looked at I want to thank everyone for joining the call today I know specie times during earnings season.

And look forward to.

Doing cold box with all of you on and.

And I am fully vaccinated, so hopefully meeting in person at some point here and the future. Thank you everyone.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.

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On.

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Yeah.

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Good day and thank you for standing by welcome to the Q3, 2021 Aspen Technology earnings Conference call.

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 will need to press star one on your telephone. Please be advised that today's conference is being recorded.

And you require any further assistance. Please press star zero and I would now like to hand, the conference over and sell bright up CFO. Please go ahead.

Thank you good afternoon, everyone and thank you for joining us to discuss our financial results for the third quarter of fiscal 2021 ending March 31, 2021 and I'm sure until bright up CFO of Aspen Tech and with me on the call is Antonio Pietri, President and CEO.

Before we begin and I'll make the safe Harbor statement that during the course of this call and they 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.

That was discussed on today's call and contained in our most recently filed form 10-Q.

So please note that the following information relates to our current business conditions and our outlook as of today April 28 2021.

Consistent with 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 third quarter and then I will review, our financial results and discuss our updated guidance for fiscal year 2021.

With that let me turn on the call over to Antonio Antonio.

Thanks, Chantelle and thanks to all of you for joining us today.

I want to start by welcoming chantelle to Aspen Tech.

And until at significant experience to the senior management team and I.

And I've been impressed by her financial and operational acumen and energy. She has brought to the company and the weeks since she joined us.

Let's start by looking quickly at our financial results for the quarter.

Revenue was $162 $7 million GAAP.

GAAP EPS was <unk> 91.

And non-GAAP EPS was $1 on <unk>.

And you'll spend was 609 $9 million up.

1% and the quarter and six per se and year over year.

And free cash flow was $100 million.

Overall.

Our third quarter performance was below our expectations, while we continue to have a meaningful pipeline of business. It remains a challenging environment to complete transactions.

We had expected purchasing dynamics with customers to improve modestly and the third quarter.

However, it was broadly consistent with what we experienced in the second quarter.

Our assessment of growth and Q3 was predicated on the quality of conversations with customers and their commitment to a sequence of events that have historically indicated a high likelihood of closing these transactions.

As the quarter closed many of these transactions did not received final approval at the highest level of our customers' organizations and approval step that is new.

Or has been historically a predictable final step.

We believe there were several factors that played a role and the quarter.

First.

The unexpected polar vortex weather event in February and the United States and it's specifically in Texas and many of the key energy producing states forced the shutdown of approximately one third of U S refining capacity.

Well as approximately 75% of ethylene capacity and 80% to 85% of polypropylene capacity equally impacting other chemical production capacity.

Understandably this emergency shifted customer attention towards shutdowns repair and restart of these assets with the last few plans finally, returning to operations only and the past few weeks.

These weather events caused refining and chemicals industry billions of dollars and revenue and incremental expenses as being reported by these companies.

Non refining company reported taken on accounting charge in the quarter of between 520 and $535 million due to higher electricity and natural gas cost alone.

We believe the economic impact from the storms placed additional pressure on budget and made it very difficult for customers to commit to new spending at this time.

Second continued COVID-19 related lockdowns around the world, particularly in Europe, and India are delaying the economic recovery and this regions and creating a significant stress for the local refining industry as higher oil prices and therapy fuel demand has depressed refining margins. This.

So for the case until recently and the United States, but as economic activity has accelerated here margins have improved and the last few weeks and third these dynamics combined with calendar 2021 budgets that are reflective of the uncertain macro environment and mid $40 oil price at that.

Time, when they were said late in calendar 2020 created a difficult spending environment.

In light of our recent performance and the current market outlook, we're not taken on a more cautious outlook on growth and fiscal 2021.

It is important to note that although we did notice periods and significant losses in the third quarter. Our updated outlook is based mostly in the decision making pattern by some customers.

Although we continue to have significant customer engagements and demand generation activity at the top of our sales funnel that support our pipeline of business that is broadly consistent with pre pandemic levels. We believe it is prudent and prudent to assume that the elevated level of late no decisions by customers and recent quarters.

Could persist until at least the end of this fiscal year.

As a result.

We're adjusting the range for annual spend growth to four to five 5%.

Our initial guidance for the year laid out a wider than normal range of potential outcomes and our updated outlook reflects first lower gross growth driven by core curtailed spending and refining and chemicals, which has impacted our MSC business and lower growth contribution from APM consisted.

And with the pattern experienced in the fiscal year and take on attrition that will come in at approximately 6%.

I would like to spend a few minutes, providing more color on what we're seeing and the market.

As we discussed in depth at our Investor Day earlier this year digitalization and sustainability are two of the most important investment and investment priorities and the process and capital intensive industries.

Customers recognize that Aspen Tech solutions are critically important to successfully executing in these areas and meeting their goal up Ron and assets safer greener and longer faster and more profitably.

Our overall pipeline of opportunities has continued to grow each quarter since the pandemic began and in particular, we're seeing growing engagement with customers for sustainability related activities.

Excited by the conversations, we're having with customers and they give us confidence and our long term double digit annual spend growth prospects. Despite the short term challenges we're facing.

<unk>.

The macro environment has remained less predictable than originally anticipated proving difficult for customers to commit to new spending and the near term. We believe there are ways for our sales organization to adapt to this new environment, but this will likely only have a modest impact until macro conditions improve and normalize.

The end market and most impacted by macro conditions relative to our expectations as refining.

Although customer engagement remains high refinery utilization rates and margins remain below historical trends, even as they have shown improvement from last years lows and the United States.

Fuel demand continues to be well below pre pandemic levels and during the quarter Lockdowns and during the quarter Lockdown persisted and certain key regions, most notably Europe and India.

The cumulative impact of the past year has weighed on operating budget and refiners ability to make incremental investments and their operations.

We believe this is a temporary dynamic that will reverse itself as macro conditions improve across the world.

However, and the near term, we would characterize business conditions with refiners as amongst the most challenging and the last 10 to 15 years and a notable difference from the last market cycle five years ago.

Conversely.

And we've discussed on recent calls.

Chemical customers have shown good resiliency for our spending soft and in the quarter.

Which could be a transitory issue, reflecting the factors mentioned earlier and my remarks.

These customers are focused on the long longer term needs of their businesses and recognize the critical value Aspen day provides by enabling access to operate and a more efficient and environmentally sustainable manner.

Turning to the E&P market, our performance was largely as expected.

The industry continues to adjust to current cap ex spending which is leading to higher attrition levels and lower new spend activity.

As a reminder, these customers continue to use and deploy Aspen Tech solutions extensively across our operations and changes in their spending levels are a result of having fewer projects and backlog.

We continue to have very close and active engagements with our E&C customers and understand the near term challenges as well as exciting long term opportunities in this market.

And APM, we continue to see significant interest from customers as pilot activity remains at record levels and a combination of reduced operating rates and this assets and lower spending on maintenance has had a pronounced impact on close rates and APM and we saw a continuation of the trend towards no decisions and.

Many of our sales cycles.

The increase and customer interest and successful pilot deployment of created a significant pipeline of transactions that are available to be signed once market conditions improve.

We have made important progress and improving the value proposition for APM for many customers and our core industries and GE is which is which gives us confidence that APM can grow significantly faster over the long term.

We did close a number of transactions for APM in the mining and pulp and paper industries, including some minor transactions and our core industries and most notably expanded their use of Aspen and fell for an integrated oil company in Europe to one of their biofuel refineries.

Finally, we have made good progress and building out our dedicated pharma unit, including the go to market teams. We believe the pharma market represents a significant growth opportunity for Aspen Tech and it's an area and which we plan to continue to invest.

Following our highlights of a couple of transactions, we closed in the quarter.

First a global chemical company headquarter and Europe, and long term user of our engineering and MSC suites was offered by and Aspen Tech competitor or the opportunity to replace our engineering suite by granting a free no cost license to their technology for three years.

After a careful evaluation by the customer of the capabilities of both solutions the customer proceeded to renew the agreement for our engineering suite as well as grow spend by expanding and used two sites in Asia and other recently acquired locations.

Our longer term European customer of Aspen Tech selected Aspen <unk> to expand use of the multi unit optimization technology to a second refinery.

And that's been Ddos was selected as the customer concluded a competitive tender process for originally kicked off in April 2020, and postpone multiple times due to the pandemic.

And that customer is looking to increase profitability at the second refinery by improving operational performance.

And third and final and new customers to us and tech and mid tier mining company, and Australia signed debt transaction to deploy Aspen and at two mining sites and Australia after conducting a pilot for the technology.

The pilot was kicked off during the first quarter of our fiscal year 'twenty one.

The value of Aspen <unk> predictive capability was proven during the second quarter and the transaction was signed this past quarter.

And as financial was selected for being a commercially available software application industrial equipment agnostic fast to deploy and for providing a clear value proposition to reduce operational downtime.

This success will lead to further rollout of Aspen <unk> to other mining sites and the future and create opportunity for other Aspen Tech products with this company.

As we look forward, we're focused on managing and executing and executing against the things that are in our control to ensure we're best positioned to benefit from and improved macro environment as quickly as possible and particular, we continued to make excellent progress and building out and expanding on.

Our market leading product portfolio.

The market is responding to our vision of the self optimizing plant and how we can leverage artificial intelligence across our solutions for.

Feedback on both the Aspen $1 12, and the Iot hub has been very positive for example, U S. Chemical manufacturer has been drawn to our <unk> offering as a way to the micro size AI access and utilization in their business.

They have noted that our AI power model building workflow is a very user friendly way to build artificial intelligence models without having existing resources trained and advanced computer science.

And for them it would put AI functionality directly into the hands on the manufacturing technical personnel, where it is needed most.

We believe our recently introduced innovations combined with our existing technology and 40 years of domain expertise reflect a compelling product market fit that meet our customers and strategic priorities of improved efficiency and reduced environmental impact we have introduced a tremendous amount of innovation of the past over the past year.

<unk>, which provides for a number of different opportunities for faster growth over time, whether it is hybrid engineering models Aspen <unk>, the Iot hub Aspen enterprise insights for any of our other recent innovations we have more ways to deliver value for customers than at any point in our history.

We will continue to make significant investments and our product portfolio and go to market efforts to best position the company for the long term.

We have great confidence in our business and believe our ability to invest through all stages of the economic cycle and strengthen our market position and ability to deliver on our long term objectives. We're also hosting our biannual optimize conference on may 18th through the 21.

We will continue to engage customers across all of the innovation, we have released on our long term historical products.

This will be our first virtual comp virtual customer conference and it is generating significant interest with thousands of customers now Register.

We have a strong lineup of sessions and speakers with a technical sessions being oversubscribed from customers' interest, 2%, how our solutions are being leveraged to create value and improve sustainability and their operations.

We look forward for your participation as well.

From a capital allocation perspective, we did not repurchase any shares and the first three quarters of fiscal year 2021, and we anticipate that it is on likely that we will meet our previously stated intent of repurchasing $200 million of stock and fiscal year 2021 day.

And the lack of share repurchase activity in recent quarters was driven in large part by practical limitations, namely a lack of available open windows to range due to our buyback.

We have a demonstrated track record of deploying capital to drive shareholder value through our prior business cycles, our capital allocation framework and philosophy remains the same and.

And invest organically and our business inorganically with acquisitions, and where business and market conditions allow us return excess cash to shareholders via share repurchases.

Finally, I would like to welcome the two newest members of Aspen to explore a directors carrying goals and Jill Smith.

Karen is a retired.

And you're on partner, who held a number of senior positions and have 40 year career with the company, including as global Vice Chair of E on why Japan, and its proficient on practice and professional ethics and independents, we're excited to add karen's expertise and experience to Aspen Tech's Board.

Jill has more than 20 years of international business leadership in diverse industries. Most recently, serving as president and CEO of Allied mines, and IP commercialization company for technology, and life Sciences, and and they're on earlier in her career as CEO and president of digital Globe and a partner at <unk>.

Jane and company, we're excited to add the diverse expertise and experience of care and NGL to us and thanks for.

Before I turn the call over to Chantelle.

I want to reiterate the inherent strength of our business and our continued confidence in its long term growth opportunities.

Even as many of our customers face a challenging environment. We believe we will grow our business for 255% and fiscal 2021 and generate industry, leading margins as the impact of the pandemic phase and economic conditions improve we expect our business will begin to realize the customer demand.

<unk> built up over the past year, we are well positioned to benefit from our investment priorities that we believe will sustain double digit annual spend growth for years to come.

Now, let me turn the call over to <unk> tail Chantelle.

Thank you Antonio I appreciate those kind words and.

Thrilled to be here at Aspen Tech.

The company for its next stage of growth I am impressed by what I've seen on my few weeks with the company and the incredible passion that we have to deliver value for customers and I look forward to getting to know many of you on the weeks and months ahead.

I'll start today with a review of our financial results for the third 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 for revenue recognition for our term license contracts.

License revenue is heavily impacted by the timing of bookings and more specifically renewal bookings.

A decrease or increase in bookings between fiscal periods, resulting from a change and the amount of term license contracts up for renewal is not an indicator of the health or growth of our business.

The timing of renewals is not linear between quarters for fiscal years and Thats non linearity will have a significant impact on the timing of our revenue.

As a result, we believe our income statement will provide and inconsistent and to our financial performance, especially when comparing between fiscal periods and all.

And our view and we will spend will continue to be the most important metric and assessing the growth of our business and annual free cash flow and the most important metric for assessing the overall value our business generates and.

And youll spend which represents the accumulated value of all the current invoices for our term license agreements at the end of each period with $609 $9 million at the and for third quarter. This for.

Represented an increase of approximately 6% on a year over year basis, and 1% sequentially.

Total bookings, which we define as the total volume customer term license contracts signed and the current period less debt.

And I have term license contracts signed and the current period, but where the initial licenses were not yet deemed delivered under topic 606, plus term license contracts signed and the previous period for <unk>.

The initial licenses are deemed delivered and the current period was $175 $6 million with 39% increase year over year.

Growth in bookings was heavily influenced by the timing of renewals, which represent the majority of our bookings and again for the period.

Total revenue was $162 7 million for the third quarter, a 25% increase from the prior year period.

Year over year increase and revenue was the result of the increase and total bookings discussed above.

Turning to profitability beginning on a GAAP basis.

Operating expenses for the quarter were $77 8 million compared to $70 $1 million from a year ago period total expenses, including cost of revenue for $93 $8 million, which was up from $85 $9 million from the year ago period.

Operating income was $68 $9 million and net income for the quarter was 62 $5 million for 91 cents per share.

Turning to non-GAAP results, excluding the impact of stock based compensation expense and amortization of intangibles associated with acquisitions and acquisition related fees. We reported non-GAAP operating income for the third quarter on $89 million, representing a 49.7% non-GAAP operating margin.

Non-GAAP operating income and margin of $53 9 million and 41, 3%, respectively from a year ago period.

As a reminder, margins will fluctuate period to period due to that.

Timing of customer renewals, and therefore license revenue recognized during the quarter.

Non-GAAP net income was $72 million or $1.05 per share based on 68 6 million shares outstanding.

Turning to the balance sheet and cash flow, we ended the quarter with approximately $317 million of cash and cash equivalents and $300 million outstanding under our credit facility and the <unk>.

Third quarter, we generated $98 $7 million of cash from operations and $100 million of free cash flow after taking into consideration the net impact of capital expenditures and capitalized software and acquisition related payments we.

We are pleased with our cash flow performance, so far and fiscal 2021, which demonstrates the consistent profitability of our business and good performance by our collections team.

A reconciliation of GAAP to non-GAAP results is provided and the tables within our press release, which is also available on our website.

I would now like to close with guidance.

With respect to annual spend growth as Antonio mentioned, we're now forecasting four to five 5% annual spend growth.

We now expect bookings and the range of $771 million to $809 million, which includes $519 million of contracts that are up for renewal and fiscal 2021.

This includes approximately $146 million of contracts up for renewal and the fourth quarter.

We now expect revenue and the range of 705 to seven and $29 million. We ex next license revenue and the range of $492 million to $516 million and maintenance revenue and service and other revenue of approximately 187 and $26 million respectively.

And change in our bookings and revenue outlook reflect the impact of our view debt annual spend growth outlook.

From an expense perspective, we expect total GAAP expenses of $355 million to $360 million share.

And together, we expect GAAP operating income and a range of 350 to 306 $9 million for fiscal 2021 with.

With GAAP net income of approximately $306 million to $321 million.

We expect GAAP net income per share to be on the range of $4.46 for $4 and 70%.

From a non-GAAP perspective, we expect non-GAAP operating income of $395 million to $415 million and non-GAAP income per share and the range of $4 98 to $5 22.

From a free cash flow perspective, we continue to target free cash flow of $265 million to $275 million, our fiscal 2020, one free cash flow guidance assumes cash tax payments on the range of $60 million to $70 million.

As a reminder, the fourth quarter is typically our largest invoicing quarter with a significant number of our quarterly invoices due on June 30th.

To summarize we are managing through some extraordinary dynamics and our core markets. The fact that we continue to grow and generate substantial free cash flow is a reflection of the value we deliver to customers and demonstrates the strength of our business model.

And we're confident that we will begin to see a meaningful improvement and growth rates as the market conditions normalize with that operator, let's begin the Q&A. Please.

Thank you at this time, if you would like to ask a question.

Simply press Star one on your telephone keypad again to ask a question. Please press star one on your telephone keypad.

Your first question comes from the line of Matt Pfau from William Blair. Your line is now open.

Hey, guys, Hey, guys. Thanks for taking my questions.

And just to start off Antonio just sort of want to understand that change and town and guidance a bit better you listed several reasons there.

But it would seem that you know really the new dynamic that was probably on anticipated. When you guided last time would be the cold weather events, and Texas and in the South.

And with COVID-19, and probably you know being.

Somewhat similar in terms of and impact from the second quarter, but how do we sort of think about what's the sort of bigger dynamic there that has shifted.

On some of the close close rates and customer sentiment.

Yes.

And I'd say that perhaps the other.

And I make that is that is new in this cycle that we certainly didn't see and.

<unk> did not have and the last cycle in 16 and 17.

Yes.

With our refining customers clearly see.

Since last April.

The significant drop in fuel demand.

And has had on the impact on their business.

But I think more importantly, or equally important.

And as oil prices have increased later in the year in 2020 and into 'twenty one.

Their margin.

And the compressed in some cases experiencing negative margins and <unk>.

And as.

And that's led to a pullback in spending.

<unk> discussed tumors, now and the United States and refining margins have actually improved quite a bit and the last few weeks as the economy has opened up on and.

And and travel and has picked up.

So so we see that but they remain depressed and in Europe and parts of Asia.

And they will probably continue until until economic activity and recover so that's primarily the new dynamic and that impact and.

And the MSC business in particular and all.

Also engineering.

And the engineering business out of those customers, we believe that the softening of demand from our chemicals customer and Q3.

More to do and the U S with.

The weather event, they experienced and overtakes as in other states, but but I think it's a refining business.

The new dynamic that we're seeing.

Got it and so I mean is this sort of a situation what's the refiners, specifically, where we're just waiting for their businesses and improve before demand returns.

More robustly and close rates and improved or do we sort of need to wait for the calendar year flips over and budgets reset how should we think about the drivers to get back to better close rates there.

Yes.

And certainly we do think that.

Budgets that were set late late last year, we were sort of disciplined budget. If you will.

At the same time.

I do think the dynamics in Europe with continuation of Lockdowns in India for example, going on right now and.

And then the weather event.

Does this appear certainly the weather event only less.

The duration of it was very short term, but the impact was longer term only and the last few weeks some.

Some of those assets have returned to operation, but well look I think I think and the second half of this year this customers on our <unk>.

Global basis, we'll probably have a better.

Better financial performance.

How does that translate into.

And to spend and in the second half of the year.

Time, and time will tell and we will have.

Of course, we will be engaged with those customers.

But I and.

And then again come later in the year they'll be looking at new budgets with a completely different.

The macro environment. So so so we'll see what happens at that point.

Okay, great guys. Thanks for taking my questions I'll pass it on.

Thank you.

Thank you. Your next question comes from the line of Jackson Ader from Jpmorgan. You are now you are now live.

Great. Thanks for taking my questions for Antonio.

First one on between no decisions from some customers and and I think you mentioned a competitor.

Giving their software away for for three years.

Competing hard on price.

How are you guarding against.

The pressure right net salespeople will ultimately feel to maybe discount or take down the call.

Contract values here at the end of the fiscal year, just to try and get something across the finish line.

Well look.

First of all we have treated and rigorous approval processes for deals.

And.

And I can tell you.

The one of the largest deals that we had in our Q2 quarter.

We did not give the sales team the approval and we're looking for to close the deal in Q2.

Sales came over to Q3 and.

And we finally managed to get to an agreement with the customer. It turned now that one normally is a customer that is very reliable.

And once we have an agreement with procurement to sign the deal.

But the deal.

Was sent to the CEO, which is never the case, but somewhere around with us into the CEO for final approval and the seal held it along with other agreements that we're negotiating with other providers. So soon.

And we monitor the health of our business and of course, we have escalation levels for approvals internally.

We will walk away from deals that we don't think is the right deal to be had with our customer.

We're also not conduct and a fire sale of our products here, but we do find look you have a smaller pie of opportunities at the moment and the market.

On the weaker competitors.

And are being very aggressive just like they were in 16, and 17 and absolutely the same behavior.

And look if anything it is strengthens our commitment to the value proposition from our products and then you'd have a customer that has an offer on the table too.

To use the software of a competitor for three years at no charge and they still decided to go with us and take on and expand spend so I understand your point, but at the same time.

We do see the pressure on pricing.

I'd like to think that.

And we run our business.

We understand the value from our solutions, we will have we will make accommodations. If we believe it makes sense and the context of the macro Bud and general.

Our customers have.

Pre negotiated future token prices and there are agreements and what had been negotiated over the last five years and that is what's used for their purchases if they want to expand entitlement during this downturn.

Okay.

Great that's helpful and then.

Michele maybe a clarifying question for you on the APM suite.

How much hope for APM contributed to annual customer spend growth.

So far in fiscal 'twenty, one and then.

What are we expecting the ATM contribution for the full year on customer stuff. Thank you.

Yeah, I think I think Jackson.

Jackson grapes and get to know you.

I will defer attempts on you for that specific question on thoughts I'll call regarding sleep.

Yes. Thank.

Thank you Chantelle and Luke.

Jackson.

On the APM suite.

We continue to be very excited about it.

These are the use cases continue to expand.

And into other industries.

And now is being deployed and at <unk>.

Biofuels refinery.

And as well.

But the contribution was no what we expected in the quarter again.

The lower guidance ultra means lower contribution from APM.

And we believe that now APM will probably come below the one point of contribution now we have a <unk>.

Wide range of outcomes for APM and Q4.

And.

If we get us a price on the op side and there could be a lot of strength and APM, but we're not going to rely on that on and on the guidance overall guidance we've given.

For the business also reflects.

Lower and of our guidance for for APM or expectations are on APM.

Okay, alright, thanks for the clarification.

No problem. Thank you.

Your next question comes from Rob Oliver from Baird. Your line is now open.

And Ralph Great Great. Good evening Iron Antonio harsh on so welcome to you.

As well.

Ive two questions one for you Antonio to start just.

I appreciate some of the color on on the margin on sort of what changed relative to your forecast and I know you talked a little bit about and markets and just.

Obviously touched on AP on their response to Jackson's question, which I think is on everyone's mind I wanted to ask about other particular products.

Are you seeing particular products or product suites.

Where you're seeing the most pushback.

And does that concern you want and any particular renewals and and.

How does that sort of match up with what you've seen in previous.

Down cycles is this unique or does it look different and just curious for any product related color and then I had a quick follow up.

Yeah, no look them and actually.

A lot of the dynamics that we're seeing and this cycle, we saw five years ago.

And if anything.

And our footprint and the market has strengthened.

Across the board.

Our engineering suite.

At the moment, we believe will actually probably be a little bit ahead of our growth projections for the year.

We do expect our MSC suite now too.

To be not to be a double digit grower this year.

The impact from refining and.

Is much more pronounced on the on the on the MSC suite.

And then our APM suite.

And we've communicated what were seeing with that switch but.

But luca.

And if not IC for we're loosing on APM is no decisions MSC is just.

Temporary lull and spending on refining and.

And also are soft and in and chemicals, which to me.

Says that we had some dynamics and Q3.

Perhaps were very specific to the chemicals two two.

The macro environment for chemicals, and then the engineering suite is doing.

Head of our expectations a little bit so.

But look.

We're doing well from a competitive standpoint.

Good Okay. Thanks, Antonio appreciate that and then Shunto one for you and on.

Just on attrition and I know this was before you had joined but last quarter the thought was debt.

Tricia and wood.

It would be would be lower in the back half for the year.

And now you guys I think we're talking about about 6%. So I just wanted to kind of.

Our focus on that a little bit and get your sense for it.

What's that what that is reflective of around particular renewals and and <unk>.

How you guys feel is that or is that a range or is that six just for the final quarter.

And here for you guys for the year. Thank you Yeah, Hi, nice to meet you Rob. Thank you I think.

We are still within the range that we have some guiding.

And what I would say to be ferrous, what we see and something at the higher point of that range and again Q for Rob to your question, so still the range, but probably more towards the higher part of that range as we get the pressures and Antonio mentioned during Q4.

And so for that and.

And as your question in regard to the range of maintaining and we see pressure to get to the higher putting on that range and not moving above that range at this time.

Yeah, Okay, and then as well.

And Rob what I would what I would add to that.

And so shouldn't tell the answer.

For for the first time.

Did see.

A couple of important customers on the generic side and owner operators and.

And let.

And let there.

On the walls expired on and then renew them into this quarter and to other was a sign of a little bit of this organization and their own organizations.

They've renewed but the way we account for our attrition is attrition if it doesn't get renew on if it comes back.

It's growth.

So so we expect those those.

Those sales to renew so.

Or to get sign new new business, so but.

Look there's a lot of dynamics and the marketplace at the moment.

And and around the world and and in some cases, we've seen a little bit of this organization and our and our customers' businesses as well as zone.

Okay. Thank you guys very much.

That's all very welcome.

Thank you moving on your next question comes from golf on.

And Linda from bearing Burke Your line is now open.

Hi, everyone and.

Thanks for taking my questions and I'll be quick and I appreciate the time.

And as far as just.

And if I'm thinking just expanding a little bit on the last thing you said.

And when you think about the slip sales effectively debt and that didn't get signed.

And how much of that related to.

The pure.

Cadence of renewals bookings that you had in the quarter and hot.

What proportion of them were kind of new activity and expansions potentially something that you thought might add to that for the current.

Bookings that you had on on top of renewal.

Yes.

And.

And I guess just to clarify that.

And I don't know for your questions is just specific to <unk> and over performance on the book and side versus expectations.

But luca.

Yes, so no we look at we renew in the quarter, what's available to us.

And the fact is that.

I'm not aware and necessarily of any any material renewal that we accelerated into the quarter I think that over performance and youre seeing and has to do with the way we.

And we account for bookings supersedes on other stuff that were there some part of bookings that get recognized in the quarter from past quarter or so.

And maybe I shouldn't tell can add more color to that.

Yeah, I think that and nice to meet you at all I think that if I understand your question correctly. Your question was if we are seeing.

On more slips through the quarter during this environment, if I understand your question correctly.

Yes, yes.

You're basically on a.

Let's say year and a five year deals.

It was not for and you did you had instances with just a normal renewal catered for for Bill would have kind of been disrupted and slipped into the quarter were dose a little kind of new deals that didn't get flow because they didnt get approved.

Were there any issues with the renewal deals that were supposed to be just a dramatically a programmatic and kind of renewed.

Got pushed out so those probably carry lower risk and.

And the subsequent quarters.

Yeah, I don't I don't think that you know I think Antonio.

And Tony you said, there could be one or two during this time period debt.

Slipped and became a new deal because of the timing on their side or if you think about what some of our customers are going through right now just the organization and the capabilities to put that all together on time for other renewal.

And I Wouldnt say that theres anything, indicating there's a trend for that to happen and therefore, the new the new deals for likely Laurent the new deals and not so much when you obl's for the majority I don't see and increased trends and that's that's my question.

That makes sense.

And then my second question is when we kind of looked at AR.

Maybe on for you for you and when you kind of look at the targets that you've talked about back in the middle of February.

And and you were at a good kind of.

Trajectories.

Got closer to that how far away. You think you are today to be able to deliver on that kind of a low teens growth on the annual spend is that kind of a 'twenty without guiding but there's a bike and and you.

And did you see very environment, improving kind of and the new.

Near term or do you believe that data and market has to improve a little bit better and as well as to help you get there.

Well look like.

Like I said in my and my prepared remarks.

And we were still have a lot of conviction about the ability to.

To deliver a double digit growth and the longer term.

And the trajectory to get there.

And I will.

And we'll give you an update.

And on on.

And what we think we're going to be able to do and fiscal 'twenty two.

Later in the year, when we do our earnings calls or for fiscal 'twenty one.

But.

Luca.

And in general.

The engagement with our customers.

Only continues to strengthen their conversations around sustainability.

Are becoming more and more frequent.

How our customers are viewing us as a strategic supplier of capabilities to help them navigate.

And.

And this environment on their businesses.

Transform their businesses for the future.

<unk> continues to two two.

Strength and so so I think overall on average.

Said it before.

I've never been as excited about the future of this company as I am today.

We are.

And our way, we witnessed shred the environment that our customers were facing especially on the refiners.

I do think that.

And Q3, there were very specific events that played a role and our performance.

But the other.

Those and change our conviction.

About our ability to drive double digit growth and the future and and that's what we're working here to do include and put into work and investments.

The work is severe and.

And reaping the benefits of those investments over the next two to three year for three to five years and that's.

And that's what we're playing for.

Right, that's exactly what I was thinking in terms of.

For the reasons for Q3 kind of underperformance seems to have been.

On one off impact so if you look kind of outside of that.

Didn't see any lasting changes that would make.

That would make that.

Traject trajectory over the mid to mid term any different so I just wanted to confirm that figure and that's very helpful. Thank you.

Not at all not at all and and I would just add debt.

We continue to assist and.

We continue to see even greater interest from.

And third parties potential partners.

To work with us and going to market to these customers because.

And they understand the role that we play and this market plays and our core industries.

And that's also.

<unk>.

And the indication.

And how were being perceived and the market by customers.

Third party so.

Thank you.

And we're thinking the right takeaway from this.

Thank you Antonio.

And then.

Thank you.

Again, if you have any question simply press star one on your telephone keypad to ask a question. Please press star one on your telephone keypad.

And your next question comes from the line of breakdowns on from Wolfe Research. Your line is now open.

Yeah. Thanks for the time guys.

And so I understand the one off impacts on the quarter and really there is nothing you can do about competition outside of just.

Bolstering the value proposition and and.

And I definitely subscribe, obviously for the MSC tailwind and digital transformation over time, but if we were to.

And maybe frame the conversation and more so for engineering.

Oil and gas prices are up but there is a notion that.

And the entire value chain and so it's going to be more disciplined from a capex perspective, moving forward. This would be somewhat of a big structural change versus what we've seen in past cycles.

Is this factored into your outlook for engineering suite growth moving forward and have you seen any impact to the EPC customer base and in terms of E&C companies, maybe even going away or cutting engineering heads you know.

Things that are a little bit more drastic to deal with the structurally lower outlook for specifically capex and oil and gas.

Yeah.

So let me say the following.

And the.

And certainly there's a few engineering companies that have reduced head count.

Nothing at all like what we saw five years ago, I think engineering companies have been very disciplined about hiring.

And they've been managing their backlogs and a way that.

Allows us to sustain their businesses even through this downturn.

So I'll say that.

The other point.

Beginning of your question.

Around.

And sort of.

And reduced Capex environment.

Look I actually I think and a way that.

<unk> provides.

Provides that counter driver for more focused and technology.

And you engage on our operators.

And refining and chemicals, they all recognize.

They are and a lower capex environment for.

For a number of years here.

And as such debt.

I need to focus on their existing assets.

And improve their performance and improve on the reliability of these assets.

General and continue to drive greater operational excellence and.

And every customer that on mid with.

At the executive level. The first thing they show US is their list of 40 or 50 or 60 initiatives as part of on operational Excellence program that they are focusing on to drive more value out of their existing asset and those range from certainly digital.

Abilities and their offices and personnel through.

The asset maintenance.

And of those are for at least a 10 or 15 that and a weighted belong to Aspen Tech.

And there is a lot of accurately assignment and our customer base about the next two to three three to five years.

And what I find on and I believe I saw.

And my Board. This last week, there is a tremendous dichotomy.

Between what you hear.

And the news and in general about what's going to happen to this industry and doing what you hear from customers.

About what they view as their outlook for their businesses and chemicals.

And refine and over the next two to three years certainly there as part of the World, where there is going to be some challenges, especially in refining but.

Luke.

I think I think.

Greater economic activity.

Coming out of the pandemic.

And we'll will rise.

All boats and.

And these companies provide.

The energy chemicals, and plastics that improve standards of living and drive economic activity and so.

Time will tell what happens here.

But.

We're also very excited about the future.

That's helpful insight so it sounds like any incremental frictions as a real opportunity for both MFC and obviously APM and in that regard I want wanted to switch focus to M&A.

Yes, just more comments on for Phil.

You didn't.

Follow through with the buyback so youre building cash here a little bit diversification is very important and farm is one area of focus for you as those metals and mining.

Is it possible that you may be gearing up for.

More than just tuck in M&A to make a more concerted shift into either one of those verticals.

Well, let me look now.

And we'll never discuss potential M&A.

But what I will tell you is we've certainly put a food for the panel on organic investments in fiscal 'twenty one.

You will see some of that.

Coming out of our Q4 quarter into fiscal 'twenty two.

Because we believe that accelerating investment.

Over the last six to nine months.

Allow us to increase our lead on the competition from other holidays, so so and making.

Investments as we speak.

And communicated to all of you over the last.

12 months and the different areas as we've talked about.

Certainly.

<unk> came on as is always part of our future.

We've always said that.

We're interested in doing.

And the bigger acquisitions, especially.

For this new industry that we've talked about.

But they would have to.

They would have to sort of fade within debt deals there.

And we've put on them for.

And so those are supportive and M&A, we do even if it's bigger has to be.

For two of our accretive to our profitability and.

And on double digit growth ambition.

So Luke.

We're constantly looking at things but.

And I won't make any specific comments, but.

Just know that.

Part of our thesis.

And investing during downturns.

Provides a significant return on.

The road and debt.

That's what we're doing and we'll be doing.

Yes, that's totally fair the framework is very helpful. Thanks, a lot for the time.

Thank you.

Your next question comes from the line of Jason <unk> from Keybanc capital markets. Your line is now open.

Hi, Jason Hello, Hi, Thanks for fitting me and maybe just two quick ones.

And I look at for Q4, and I won't spend guidance for the implied Q4 annual spend guidance and it.

And it's very weak sequential increase.

Much more subdued than a typical Q4 is this more of a reflection of the added dynamic around the uncertainty on customer purchasing decisions.

Yeah look we've.

We've had.

Be very careful about Q4.

Had two quarters, where we came.

And to the very end of the quarter thinking that we're going to deliver.

Good solid quarters, and and they did not materialize. So so you would expect us to be more cautious about.

The Q4 performance.

What I'll tell you is we came into the quarter with.

A very sizable pipeline of business.

But at the same time.

With me and patient wise by expectation, so we're being more cautious.

Okay and then.

On.

Before we were thinking that annual spend growth could possibly trough over the next couple of quarters.

And this framework still apply but maybe a day.

A deeper trough and what we expected.

And then we'll talk about FY 'twenty two Budd.

Yeah.

I think and a wave we have set up and established a pattern of growth and three quarters in a row.

And we'll see what Q for the Dos.

And our Q.

Q4 last year was a very strong quarter, but.

But I don't necessarily think thats customers understood. What was ahead of all of us for the pandemic.

But for.

But we'll see.

The Q1 and Q2 quarters this year.

I think our representative of for the impact of debt on them and get other than that whats going on and uncertainty so.

I think.

Got it.

There is a continuation of some other issues around the world with the pandemic.

And you could be seen and similar quarters and Q1 on free to above, but we'll talk about more specifically.

Other.

Later in the year.

Okay, excellent and well I appreciate the time thank you.

Services.

Thank you Darrin no further question at this time I'll now hand, it back to our CEO Antonio Pietri for any closing remarks.

Alright, Thank you operator, and I look I want to thank everyone for joining the call today on those species times during earnings season.

And look forward to.

Doing cold box with all of you on and I am fully vaccinated. So hopefully meeting in first and at some point here and the future. Thank you everyone.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.