Q4 2021 Aspen Technology Inc Earnings Call
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Good day, and thank you for standing by and welcome to the Q4.2021 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 to press star one on your telephone attached to them.
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I would now like to hand, the conference over to your first speaker today.
P S O schonfeld buying out. Thank you. Please go ahead with them.
Thank you good afternoon, everyone and thank you for joining us to discuss our financial results for the fourth quarter of fiscal 2021 ending June 30th 2021 I'm sure they'll write up CFO of Aspen Tech and with me on the call is Antonio Pietri, President and CEO.
Before we begin I will make the safe Harbor statement that during the course of this call we may make projections or other forward looking statements about the financial performance of the company that involve risks and uncertainties.
The company's actual results may differ materially from such projections or statements factors that might cause such differences include but are not limited to those discussed in today's call and contained in our most recently filed Form 10-Q.
Also please note that the following information relates to our current business conditions and our outlook as of today August 11th 2021.
Consistent with our prior practice, we expressly disclaim any obligation to update this information.
The structure of today's call will be as follows Antonio will discuss business highlights from the fourth quarter and then I will review our financial results and discuss our guidance for fiscal year 2022 with that let me turn the call over to Antonio Antonio.
Great. Thanks.
Thanks Chantelle.
And thanks to all of you for joining us today.
Before turning to the quarter I would like to acknowledge that tomorrow is the 40th anniversary of <unk> founding.
Some of the arena team for me and my team are at Aspen Tech to these days and I would like to congratulate congratulate them and all of our employees on this milestone.
I would also like to thank our customers and investors for their continued support over the years.
Now turning to the fourth quarter.
Overall.
Performance was in line with our expectations, while the macro environment has recovered considerably since our last earnings call the spending environment by our customers remains constrained.
However, we continue to have exciting strategic conversations with customers.
There is clear interest in expanding adoption of Aspen Tech solutions to meet the objectives of increasing operational efficiency and sustainability.
These conversations gives us continued confidence that we will return to double digit annual spend growth over time.
Macro environment continues to improve and the spending budgets normalize.
Looking quickly at our financial results, starting with the fourth quarter.
Revenue was $198 million GAAP EPS was $1.39 and non-GAAP EPS was $1.53.
Annual spend was $621 million.
One 9% in the quarter and four 8% year over year.
And free cash flow was $103.7 million.
For the full year.
Total revenue was $709.4 million, an increase of 18%.
GAAP EPS was $4.67 and non-GAAP EPS was $5.20 per cent.
Free cash flow was $277.5 million.
Looking at our fourth quarter results in more detail.
We had a seasonally stronger performance as you would expect.
The spending environment remains constrained.
Consistent with recent quarters.
There continues to be a great deal of a spending restrained in our core markets from the impact of the pandemic had on the operating environment of our customers.
As we have seen throughout fiscal year 2021 overall demand activity remained healthy with pipeline growth across all areas of the business.
Conversely, the more difficult dynamic around transaction approval processes that we discussed last quarter, we're still prevalent.
But we did start to see signs of normalization as the quarter went on.
Overall Asia Pacific North America, and our SMB business were strong in the fourth quarter from a new business standpoint.
At a high level the overall economic backdrop improved during the quarter as many markets began to reopen in end market demand for fuel and chemicals approach or exceed at pre COVID-19 levels.
However, this was not uniform across the world.
A very recent shutdowns in Australia, India, Singapore, and Japan illustrate.
Our positive outlook for consistent and sustained recovery from the pandemic, coupled with overall improvement in economic conditions should translate into greater confidence and readiness to deploy larger capex and opex budgets.
<unk> faster growth for Aspen too.
As a reminder, our customers are operating with budgets that were set late last year and a four more challenging and uncertain environment.
We're cautiously optimistic that budgets for calendar year 2022 would reflect the improved conditions, we see today.
As we all know the evolution of the pandemic and Covid infections is highly fluid.
From a vertical perspective.
Refining margins improved to pre pandemic levels in the U S. In the fourth quarter are moved higher in Europe, but remains under pressure in other parts of the world is still dealing with Covid waves.
Overall end market demand and therefore utilization rates and refining margins have been trending in the right direction in recent months.
Financial results for refining customers or the refining businesses of integrated oil companies in the most recent quarter of improved to varying degrees, reflecting the asymmetric cost recovery and evolving end market environment for these customers.
We were encouraged in the fourth quarter by the increasing the number and quality of conversations we're having with customers focused on more strategic discussions about their future investment priorities.
We believe this is a positive sign for future demand for Aspen stake.
Chemicals customers saw a record demand in some sectors in their most recent quarter with a strong margins supporting solid financial result overall.
The spending trends by customers in this sector are not back to pre COVID-19 levels, but remained healthy and were modestly better than the third quarter.
I spent that solutions are very well aligned to the chemicals customers need for greater operational efficiency and sustainability.
We expect chemicals will continue to be a source of strength for us going forward.
Looking at our E&C business, our performance was better than expected, even though say E&C industry continues to a process of adjustment as a result of the reduced capex spending by those customers.
Capex budgets remain tight and this has led to reductions in backlog on projects on which to utilize our solutions over the last 12 months, but we did see a slight pickup in project awards going into the quarter and expect a slight upward trend in project awards going forward.
We do not anticipate an accelerated improvement in this part of the market will continue to believe there's a longer term opportunity in this industry.
Especially as these customers continue to shift their focus to operations and maintenance activities and sustainability related capex.
Finally in APM, we saw some improvement during the quarter in our core markets, but the trend is largely the same as we saw throughout fiscal 2021 high and growing customer interest in the GI market, we continue to see more concrete purchasing decisions around Aspen Enfield.
As we have discussed previously APM has been an area, where core customers defer buying decisions to preserve capital given lower asset utilization rates and less need for maintenance.
We're confident this is a temporary phenomenon and that is the operating conditions require it customers will be will begin to budget for operations and maintenance spending that will support increased growth in the future.
A good example of the opportunity in APM was a low seven figure expansion transaction, we signed with a global mining customer.
And existing APM user discussed continues to expand its deployment of APM to other sites around the world.
Overall these customers now spending more than $3 million annually on APM, which we believe is great validation of the opportunity in this market.
Some other notable wins from the fourth quarter include first a global chemical company based in Asia.
Find an expanded renewal for Aspen until that extended its initial one year license for three more years.
After signing an initial contract for two of its plants based on the ease of use and the scalability of our solution. This customer will now be expanded its deployment to four sites due to landfills AI capabilities that enhance the safety and sustainability of their operations.
Second a global chemical company based in Asia, and one of Aspen Tech's first customers at <unk>.
Embarked in a transition of its business from bulk to specialty chemical production at.
At the same time. This customer has also undertaken a digital transformation to leverage more technology in its operations.
As part of the most recent renewal the customer expanded its commitment to Aspen Tech with added usage of Aspen AI model builder or some of the non linear as specialty chemical processes, which are difficult to model using first principles.
The customer is also increasing usage of Aspen DMC, three and will continue to deploy Aspen Enfield.
All of this resulted in a renewal with material growth with plans for expansion of usage in these and other technology areas.
And lastly on North American integrated oil company and long term customer of Aspen Tech decided to embark on a digital transformation of its petroleum supply chain from production to retail to capture the full potential of their value chain more than 15 vendors were invited to a rigorous evaluation of their.
<unk> technology and capabilities.
<unk> was ultimately selected as the leading technology partner for the comprehensive program that is expected to generate incremental free cash flow in the hundreds of millions of dollars for this customer.
I would now like to provide you with some additional details about our performance for the full year 2021.
All of which are quoted on an annual spend basis.
From a product perspective.
Engineering business grew annual spend three 3% for the year generating.
<unk> generated 40% of our overall annual spend growth.
Performance exceeded our expectations supported by stronger performance than expected in the E&C vertical.
Our manufacturing and supply chain or MSC business delivered annual spend growth of five 8%, representing 40% of our total annual spend growth.
MSC was the area most heavily impacted by Covid related disruptions and the related macro environment as customers pulled back on their opex budgets due to the significant deterioration in their operating environment.
The first time in many years, the MSC business did not grow more than 10%.
Additionally, MSC has been it's been a cyclical business and we.
Don't expect it to be in the future.
But the historic Covid related downturn impacted our owner operator customers in ways not experienced before.
The asset performance management or APM business generated total annual spend growth of 16, 2% or 13% of our total annual spend growth for the year contributing six points of annual spend growth.
As we discussed throughout the year.
<unk> performance reflected an increase in no decisions by customers looking to defer investment decisions until they had more visibility into their business outlook.
At the end of the year, our installed base of business was split 57% engineering, 39% MSC, 4% APM.
Our three core verticals of energy chemicals, and engineering and construction contributed 46%, 24% and 24% of our growth in annual spend during the year respectively.
Global economy industries all contributed.
<unk> contributed 6% of our annual spend growth for the year and grew four 7% in the year.
We are in the early base of our investment in Pharmaceuticals, we grew our business eight 6% in the year.
We expect this industry could be a more meaningful contributor to growth in this fiscal year and going forward. In addition to standing up an organization focused on this industry and increasing our R&D and marketing investments we have been building our pharma sales channel in Europe, and North America over the last six months with incremental investment planned in there.
This fiscal year.
We believe pharmaceuticals represent an important opportunity for us fintech FCC industry drives the digitalization of their business operations and increases the use of technology in manufacturing and for their sustainability ambitions.
We're also optimistic for the opportunity in the metals and mining industry, particularly with the APM suite.
We grew our business in this industry 12, 6% in the year. There is an increasing number of APM customers in this industry and they have expanded their use of our technology because preventive failure alerts create significant value, we will plan for increasing our investments as the opportunity evolves and our strategy is executed.
At the end of fiscal year 2021.
The energy vertical represented 41% of our business chemicals, 28% engineering, and construction and 25% in Gi, including pharma, 6%.
For the full year, our attrition rate was six 7%.
Is above the high end of the 5% to 6% range that we provided at the beginning of the year and guidance even in our most recent earnings call.
Most of the additional attrition was attributable to the divestiture of certain assets by a few customers. This impacts attrition since its assets rolled off those customers contracts, but it is offset by a corresponding increase in spend by the customer acquiring the assets.
By the challenges this year. It is important to note that we generated gross growth.
Growth prior to attrition.
Seven 4% in fiscal 2021.
This is a tremendous validation of how valuable our solutions are to customers.
During the fourth quarter, we held our biannual optimize conference.
Our first virtual customer conference. This year is to optimize was five times larger than our most recent in person event with more than 5400 participants representing over 2000 companies and 84 countries.
This year's optimize was entitled the future starts with industrial AI and their recurrent topic was how customers can generate new levels of operational excellence, while the <unk> simultaneously addressing their sustainability targets.
These dual challenge broadly means meeting the increasing demand for resources and higher standards of living from a growing population, while also addressing sustainability goals reductions in emissions and reductions in plastic waste in the environment.
Many of our existing customer share their progress on meeting the dual challenge using our products and solutions. One. Notable example was a customer in Japan, which is a producer of packaging materials derived from propylene and other restaurants.
This customer implemented our supply chain management solution in their distribution network, and we're able to achieve reductions in Seo to emissions of over 160000 metric tons per year.
Also as part of its supply chain distribution optimization of logistics the customer collected some of the waste being produced as a result of the use of their products and returned over 443000 metric tons per year to warehouses for recycling.
All simply through the use of supply chain management capabilities.
Customer received the 2020 Green supply chain award from the demand and supply executive publication in Japan.
They can be used to a higher level.
<unk> has estimated a collectively among our customers their use of our products and solutions generates $59 billion in profit per year through greater efficiencies and productivity at the same time, we have calculated that are more in our European refinery customers alone.
In total realized <unk> emission reductions of $2.3 million metric tons per year.
<unk> with $4.2 billion in efficiencies and productivity gains.
Our unmatched domain expertise and growing data science capabilities have resulted in our methodology and capabilities that we now refer to as hybrid products or hybrid modeling. This approach announced last year as part of Aspen. One version 12 enhances first principle through models with artificial intelligence capabilities.
Our latest product introduction in may as being one b $12 one.
Yields on the hybrid model approach and represent the next step in fulfilling our vision of the self optimizing plant.
With our version 12, one enhancements we have extended industrial AI.
Across our solutions to drive higher levels of profitability and sustainability in customers' operations.
One of the most important futures to come out of these new releases first principles driven hybrid models embedded within our products, which brings AI directly into our simulators.
With version 12, one we now have a library of sustainability application examples that customers can leverage that range from carbon capture and sequestration modeling to optimizing the reduction of carbon emissions in production operations also included biomass processing in hydrogen production model.
Over the next few quarters and years, you will see us release, more and more sustainability applications that will allow customers to not only model hydrogen production, both hydrogen transportation distribution and capture we will also introduce more capabilities around chemicals or advanced recycling and other processes that are of keen interest.
Two customers.
As I have said many times there is no trade off between safety sustainability reliability and profitability.
It is all intertwined and it is what we have been doing for our customers throughout our 40 years of existence.
As we look ahead to fiscal 2022.
We are optimistic we will deliver increased growth while there continues to be heightened levels of uncertainty.
We currently expect the year to be a tale of two halves.
First half we expect to look broadly similar to what we have experienced in the second half of fiscal year 2021, due to current customer budgets and.
In the second half to start showing an acceleration of growth as we expect customers budgets for calendar 2022 to increase given the improved business outlook.
It is important to note that there is caution in our expectations as we have seen repeatedly in the last 18 months the impact of COVID-19 is highly unpredictable and has led to an asymmetric recovery.
The global recovery has been uneven countries have come in and out of Lockdown and the emergence of the Delta Varian has added more uncertainty.
Our current expectation is for annual spend growth to be 5% to 7%.
There are several assumptions underpinning our guidance.
We expect the bulk of growth to come in the second half of the year.
As mentioned earlier, our baseline assumption is that our spending conditions improved in the second half of the fiscal year as customers as customers set their calendar 2022 budgets in the context of greater certainty and a better operate in a macro environment that they did last year.
An environment with greater certainty due to COVID-19 under Delta variants could influence budgetary decisions and result in an outcome towards that low end of the range.
From a suite perspective.
We expect engineering and MSC suite will contribute four to six points of growth in APM is expected to contribute approximately one point of growth.
And third attrition is expected to be approximately six 6% for the year.
Specifically, we expect attrition in the first quarter to be elevated due to the concentration of renewals and more challenged verticals like engineering, and construction and upstream which will lead to higher than normal attrition. This will dampen annual spend growth in the first quarter and it's factored into our outlook for the year.
I would like to finish by reiterating reiterating our optimism for the business in the midst of the most difficult environment. We have seen in decades, we generated almost 5% annual spend growth and $277 million in free cash flow, while helping our customers solve the two primary long term challenging space.
And their businesses operating efficiency and sustainability.
Fiscal year 2022 will represent the largest yearly increase in investments in 20 years in Aspen Tech demonstrating our belief in the opportunity available in our core markets and our conviction on the opportunity ahead of us and pharmaceuticals and in metals and mining.
The investment planned accelerates our product Roadmaps at new talent to the company and continues to enhance our go to market capabilities as we position Aspen that for the next three to five years.
We have demonstrated time and again, the resiliency and cash flow generating capacity of this business through a major in downturns and our ability to generate double digit annual spend growth during normal spending environment.
We're confident the same will be true this time as budgets returned to normal overtime. We're.
We're excited for the future and the opportunities ahead for us in tech.
Now, let me turn the call over to Chantelle Chantelle.
Thank you Antonio I will now review our financial results for the fourth quarter fiscal 2021.
As a reminder, these results are being reported under topic 606, which has a material impact on both the timing and method of our revenue recognition for our term license contracts.
Our license revenue is heavily impacted by the timing of bookings and more specifically renewal bookings.
Decrease or increase in bookings between fiscal periods, resulting from a change in the amount of term licenses 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 or fiscal years and this nonlinearity will have a significant impact on the timing of our revenue.
As a result, we believe our income statement will provide an inconsistent view into our financial performance, especially when comparing between fiscal periods.
Our view annual spend will continue to be the most important metric in assessing the growth of our business and annual free cash flow. The most important metric for assessing the overall value our business generates.
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 $621 million at the end of the fourth quarter.
This represented an increase of approximately four 8% on a year over year basis, and one 9% sequentially.
Total bookings, which we define as the total value of customer term license contracts signed in the current period less the value of our term license contracts signed in the current period.
But where the initial licenses are not yet deemed delivered under topic 606.
Plus term license contracts signed in a previous period for which the initial licenses are deemed delivered in the current period was $225.6 million or 5% decrease year over year.
Total revenue was $198 million for the fourth quarter, a 2% decrease from the prior year period.
Turning to profitability beginning on a GAAP basis.
Operating expenses for the quarter were $77 million compared to $75 million from the year ago period.
<unk> expenses, including cost of revenue were nine.
$2.1 million.
It was up from $85.6 million and a year ago period.
Operating income was $105.9 million and net income for the quarter was $95 million or $1.39 per share.
Turning to non-GAAP results, excluding the impact of stock based compensation expense amortization of intangibles associated with acquisitions and acquisition related fees we were.
Reported non-GAAP operating income for the fourth quarter of $118.4 million, representing a 59, 8% non-GAAP operating margin.
Non-GAAP operating income and margin of $125.5 million and 62, 2% respectively.
In the year ago period.
As a reminder, margins will fluctuate period to period due to the timing of customer renewals and therefore license revenue recognized during the quarter.
Non-GAAP net income was $105.3 million or $1.53 per share based on $68.6 million shares outstanding.
Turning to the balance sheet and cash flow, we ended the quarter with approximately $380 million of cash and cash equivalents and $292 million outstanding under our credit facility.
In the fourth quarter, we generated $103.2 million of cash from operations and wanted to $3.7 million of free cash flow after taking into consideration the net impact of capital expenditures capitalized software and acquisition related payments.
In the full year 2021, we generated $276.1 million of cash from operations.
Seven 5 million of free cash flow.
A reconciliation of GAAP to non-GAAP results is provided in the tables within our press release, which is also available on our website.
From a capital allocation perspective, we resumed our share repurchase activity in the fourth quarter buying 361000 shares for $50 million. In addition, we recently announced a new share repurchase program for fiscal 2022 to repurchase up to $300 million of stock.
That's part of the program, we entered into an accelerated share repurchase agreement for $150 million that we expect to complete later this quarter.
The remaining $150 million are expected to occur over the balance of the year.
Utilizing our balance sheet, whether it's through share repurchases or M&A to generate shareholder value is an important part of our strategy.
I would now like to close with guidance consistent with fiscal year 2021 and 2020, we will continue to provide guidance on an annual basis.
With respect to annual spend growth as Antonio mentioned, we are forecasting 5% to 7% annual spend growth.
We expect bookings in the range of $766 million to $819 million, which includes $486 million of contracts that are up for renewal in fiscal 2022.
This includes approximately $58 million of contracts up for renewal in the first quarter.
We expect revenue in the range of $702 million to $737 million, we expect license revenue in the range of $481 million to $515 million in.
Maintenance revenue and service and other revenue of approximately 192 and $30 million respectively.
From an expense perspective, we expect total GAAP expenses of $386 million to $291 million taken.
Taken together, we expect GAAP operating income in a range of $316 million to $346 million for fiscal 2022.
With GAAP net income of approximately <unk> $88 million to $314 million.
We expect GAAP net income per share to be in the range of $4.27 to $4.65.
From a non-GAAP perspective, we expect non-GAAP operating income of $361 million to $391 million and non-GAAP income per share in the range of $4.80 to $5.17.
From a free cash flow perspective, we expect free cash flow of $275 million to $285 million.
Our fiscal 'twenty 'twenty, two free free cash flow guidance assumes cash tax payments in the range of $60 million to $66 million.
To summarize we continue to produce growth and significant cash generation in a challenging environment.
We're investing in our solutions to increase the value we deliver for our customers and ensure we are in the best position to accelerate growth with our customers that they're likely to spend with us improve as.
We have been through these cycles before and are confident we will return to double digit annual spend growth over time.
With that operator, let's begin the Q&A. Please.
As a reminder to ask a question you will need to press star one on your telephone.
Draw your question Brett.
Our husky please stand by while we compile the Q&A roster.
Your first question comes from the line of babies Robinson from William Blair. Your line is now open.
Hi, David.
Hi, Thanks for taking my question.
The first question I had was about kind of a budget improvements that you're expecting.
For the next upcoming fiscal year.
Can you.
<unk> kind of how much you would expect the budgets to improve relative to 2021 and your guidance.
Customers markets.
But let.
Let me frame it in the following manner and of course it.
It will be up to customers to decide how much they are going to increase their budgets, but if you look at the.
That's sort of the.
Key metrics that we track for.
The performance of our customers.
Italy, all oil prices have been in a healthy range.
Over the last few months, if you look at chemicals demand.
Is back to pre COVID-19 or above pre COVID-19 levels.
If you look both at now as refining margins.
Back to pre COVID-19 levels at chemicals margins.
Have exceeded pre COVID-19 levels and.
And in a way or in some cases, it and setting records.
There is an expectation that capex investment will begin to grow perhaps in the low single digits, but nonetheless.
As well.
So if you take all of those metrics in and.
And as a group do you think that.
We will have a bit of a better budget and spending environment next year now at the same time look.
The COVID-19.
Pandemic and the Delta Varian certainly interviews.
Question Mark around.
Where the.
Outlook will be in the fall season, and that's something that.
No.
May or may not have an impact on budgets, but overall.
We feel that our customers will be increasing their budgets for calendar 2022.
Got it that's helpful. And then one other question I had around the attrition.
You said you kind of came in within your expectations for the year was that.
Kind of last customer that you referenced that disposal or disinvesting in some assets was that kind of built into your original attrition expectations I'm, just trying to get a sense of.
Kind of how that affected the overall rate for the rest of the year.
Yes.
Want to clarify we come in.
Above the range that we have given investors at the beginning of the year six seven versus a range of five to six.
What we saw in the last 12 months.
An increase in M&A activity by customers, especially in the in the oil sector.
We're there we're actually divesting assets refining assets.
And certainly led.
<unk>.
Greater attrition as a result of these divestitures.
This is not something that.
We had expected or planned for.
But it is a result of the.
Instead of a reassessment of our oil customers of their businesses going forward.
They sell a lot of other standalone refineries.
Reposition their portfolios.
For the refining portfolios to be more integrated petrochemical sites, but to answer to your question specifically no no. It was not something that we had expected.
Okay I appreciate the additional detail and Thats all the questions I had thanks for taking my question.
Thank you Dave.
Your next question comes from the line of Jackson Ader from Jpmorgan. Your line is now.
Hi, Jack and thanks for taking my question San Antonio.
Antonio recent for a long time.
When when your customers are under pressure or is that a lot of times that will drive some efficiency purchases or efficiency demand I'm. Just curious why do you think that didn't materialize. This year for your chemicals, our refinery customers.
We're particularly under pressure.
Yeah.
So to answer your question is why it will or even materialize.
Right.
<unk> did not materialize this past year in fiscal 'twenty, Okay, yes, well look at.
We've now been engaged with with customers both virtually and in the last few months finally had some in person meetings with customers which was great.
Luke.
As we said in the prepared remarks.
The structure that took place in the last 12 months was like nothing before especially.
Operating rates dropping into the low <unk> for refineries.
The impact that that had an operational stability.
And their margins.
Overall.
When youre operating at those rates.
Our ability to create value from driving greater efficiencies in your operations.
They're okay. Because you are just not processing as much crude oil or or feedstock for your naphtha crackers to produce ethylene.
So the need for technology to drive operational efficiencies is just isn't there.
Any more in such an environment and frankly in my entire career.
Ill get into towards the end of it.
We have not experienced.
Moments like this where you have refiners operating at such low rates that their decision is whether to keep these assets operating at the edge of operational stability or shutting them down which some of them had to do so so that incentive to drive more technology implementation just wasn't there are equal.
Live with chemical companies and our expectation going forward, though is that as operating rates are now coming back to that 85% 90% range.
If you if you listen to marathon Petroleum's earnings call.
See you all talked about their operating rates being at 94%.
That's all very healthy for them to start thinking about how to squeeze more efficiencies out of their operations, including chemicals. So.
Included in the chemical sector.
I do think that we're now back to.
A range of operations, where the incentives for technology adoption is back in play.
And we'll see what happens going forward.
Okay.
And then another kind of maybe strategic follow ups as well.
I mean is.
Is it fair to wonder whether the planned investments in pharma.
The other GE industries are.
Our warranted or Fort worth it I mean.
If theyre not necessarily growing much faster if at all than than core on a much smaller base.
I mean, I guess I, just would've expected that pharma pharma revenue would have grown a little bit faster than 8% and so.
If it's not growing that much faster at the moment do you think it's worth creating all this kind of sales and go to market investments around it.
Yeah look Ed.
That's a fair question.
From you, but look let me let me say the following.
Fiscal 'twenty, one certainly was a very difficult year from a sampling of our end markets, but at the same time.
There was a lot happening inside the company.
As we put our foot to the pedal on investments while fiscal 'twenty two will be the largest investment year in 20 years fiscal 'twenty one was the second largest.
We launched our AI Iot business unit on October one of last year, we launched our pharmaceuticals business unit on April 1st.
We hired a metals and mining executive that is now formulated in our strategy and we're beginning to execute.
Put the pieces in place for that strategy, we've been growing our Gi sales organization that is actually the one that's going to market and metals and mining we've been standing up our pharmaceutical sales organization as well so so in the context of from an operational standpoint.
Everything we were working on was really to set up for faster growth in fiscal 'twenty, two and going forward I am not disappointed in our results in pharma or metals and mining as a matter of fact I'm glad we had it but we do expect better results in fiscal 'twenty two on going forward.
Absolutely those investments will be Meredith.
Okay, Alright, great. Thank you Anthony.
Yes.
Your next question comes from the line of Andrew <unk> from Bank of America. Your line is now open.
Hi, Yes. Good afternoon can you hear me.
Yeah, Yeah, Hi, Alright, Hey, guys. How are you. So I completely appreciate having to guide on oil and gas projects as your customers have not even really started the planning process for calendar 'twenty two.
Having said that I think a couple of your competitors are identified you're talking about the fact that the.
Having good visibility.
<unk> to 'twenty, two and even 'twenty, three and I think our channel checks.
Indicate some of that as well can you just talk about this longer term visibility on what kind of conversations.
You are having with your customers that are giving you confidence.
Into 'twenty, two and 'twenty three.
Okay, well I mean look we.
<unk> and Aspen <unk> has been our philosophy to only guide one year at a time, so I will not talk about yes sure.
Hey.
Luca.
I think you also implying that that we were.
We are claiming not full visibility into our customers' budget for 'twenty, two but some of our competitors are.
I won't talk about our competitors, but what.
What I can tell you is.
That where we sit today and while we have experienced in the first half of this calendar year.
It gives us a certain sense for what the.
The second half of the calendar year, the first half of our fiscal year will be we believe the budgets will will will be the same.
Customers will maintain their.
Their fiscal discipline.
<unk> continued to spend through the budgets that they said.
Paul.
And then turning to look we do we do think that budgets will improve.
And we're having good conversations with customers.
We'd rather be.
More cautious with our guidance at this point.
And in the fiscal year end the calendar year and.
Yeah.
Then wait until what customers tell us they plan to do for calendar 'twenty two so.
No no what I meant to imply that it's I think it's easier for competitors to make more vague statements about 'twenty two without having to formally guide.
I was not implying that they have more visibility.
Okay.
No no no. It's okay. Another question yes.
Yeah.
Foster guidance.
Thanks.
Yeah.
I just wanted to understand as we think about annual spend.
Our for fiscal 'twenty, one and where you're guiding for fiscal 'twenty. Two as you think about longer term plans do you think that the curve has permanently shifted down or do you think theres going to be a catch up down the line to sort of to get back to you on this track of Ah I think 12.
In particular, if you were talking about at the February analyst day. Thank you.
Yeah, Yeah, well I mean look first of all we are very optimistic about our end market going forward.
If anything there's an expectation that capex investments in upstream will increase over the next two to three to five years.
Certainly the refining industry.
We'll probably be gone through sort of a.
Slow readjustment.
And that <unk> integrated refining and chemical sites will be more profitable going forward and youll see youll see some.
Refinery rationalization at the same time refining capacity in Asia, and the Middle East will continue to grow and on a net net basis refining capacity willing will continue to increase around the world now what.
What happens in 15.20 years from now.
We can have that debate.
And in a separate call, but we're very optimistic about the next five to 10 years look our job and Aspen technology is to help our customers be the best towards.
Resources in order to drive more sustainable businesses by reducing Seo to emissions and plastic waste in the environment.
It's what we've always done in Aspen Tech it was and how we position ourselves, but it is absolutely what our customers are now looking to do with this company on and therefore, we see a lot of positive going forward.
Thank you very much.
Yes.
Your next question comes from the line of Jason <unk> from Keybanc. Your line is now open.
Hi, Jason Antonio.
Thanks for taking my questions here.
Yes, it sounds like the approval processes that your customers are still elongated but it was interesting that you said that in the quarter. It kind of went on starting to improve a little bit but.
Help us understand the magnitude of that improvement and ended the quarter versus maybe the beginning.
Yeah, I think it's I think it's a tale of two.
Besides <unk>.
Jason one.
Larger the deal the certainly a scrutiny still there look we worked on on some seven figure deals in the quarter and certainly they were still a lot of scrutiny on that level of spend.
But as you got to smaller deals we saw a lot less friction and getting those deals approved so I think.
There is a greater degree of comfort on the on the environment.
All of these are oil and chemical companies have reported an incredible cash flow generation.
The last quarter and I think Thats also been leading to.
Loosening of some of the approval processes for smaller spend a larger spend is still there the approval processes. So I think I think.
We will continue to evolve over the next few months.
Okay and then.
When I look at the free cash flow guidance, it's basically flat year over year.
It's lower growth.
Annual spend that we thought that you're forecasting.
Maybe maybe why is that.
I'll, let you I'll, let John tell us dipping here. So yeah, Yeah, Hi, Hi, I think that there are two things.
Is that right.
I always have a prudent free cash flow guidance are the two things I would take into consideration are the investments that we're making.
The largest investments.
Tony referred to 20 years until those diverse set of industries and our core.
Two we have a we have a position on cash taxes that we're still working through that so.
Alright, thank cash tax assumptions and the investments are the two main factors, we're working through in that guidance.
Okay excellent that is quite helpful. And then maybe one quick follow up on the big investments here and how much is it head count related versus other development or product type investment.
Yeah, I would say, we I would say there's three main categories we have.
Go ahead, Tom I'd call it talent investments.
R&D investments.
And then the third one would be our go to market, especially in some of the geographies Antonio mentioned, so there's three main areas that we're focusing on.
Okay.
Thank you.
Yeah, Jason I mean that Luca.
As we go into these new interest.
Industries, we've been in pharmaceuticals for a while but certainly we need to raise the visibility of Aspen Tech in pharmaceuticals, our visibility and pharma and our brand recognition. So so some of those investments are onetime investments, but theres a lot of talent investment in there as well.
Okay. Thanks.
Your next question comes from the line of Mark Scheffel from Benchmark. Your line is now open.
Mark.
Hi, guys. Thanks for thanks for taking my question Antonio.
Last quarter, you called out a competitor that was giving away a software for free I think it's like a three year period could you continue to see that type of intense pricing.
From competitors this quarter.
No not that I'm aware.
<unk> raised or heard of us.
Something like that in our forecast goal during the quarter.
So.
So maybe maybe the competitor or heard me talked about it in the last earnings call and was a little embarrassed and stuff the practice.
Okay.
And then with respect to ESG products, you expect to launch in the coming year or so.
You did mention in detail the work Youre doing there to a hydrogen production I was wondering if you could give another example to some of the other ESG areas that your development.
Great. Thank.
Thank you for that question.
Mark because the fact of the matter is that there is so much functionality in our products today that ESG or sustainability related.
That in a way.
A lot of our customers are not familiar with it because they really never had a need for it but now of course this is front and center, but look.
Carbon capture and sequestration modeling some of the early pilot sites for carbon capture and sequestration, where model using our Aspen plus technology.
<unk> process and modeling.
You can talk about well look a hydrogen production, but also advance advanced chemicals or chemical recycling. So so there is there is a lot in our products look you can optimize a refinery from the standpoint of reducing the amount of cotwo emissions and we have customers that are now.
Enquiring about that functionality in a product that <unk> been using for 25 years.
But at the same time.
We're going to enhance the capabilities of our products around all of this.
Just so you know look at when I was in Asia based in Asia, one of the biggest users of our Aspen custom modeling technology, which is a layer product in Aspen, plus where Japanese automobile makers because they were modeling.
There were modeling electrical batteries for some of their hybrid automobiles back in the mid two thousands. So so so so we've had pockets of usage of these capabilities and now it's all at the forefront.
Probably we'll drive.
Some of our growth in over the next five to 10 years and beyond for sure.
Great. Thank you.
Yeah.
There are no further questions at this time I will turn the call over to your T. A L and filling up the entry.
Alright, well.
Thank you everyone for participating in today's call.
Look forward to.
Hopefully have some in person meetings here in the future, but nonetheless.
Thank you all.
This concludes today's conference call. Thank you for participating you may now disconnect.
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