Q3 2022 Aspen Technology Inc Earnings Call

April 27, 2022

Today's conference is scheduled to begin shortly please continue to standby. Thank you for your patience.

[music].

Yeah.

Good day.

And thank you for standing by welcome to the Aspen Technology fiscal quarter 2022 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.

Please be advised that today's conference is being recorded to ask a question. During the session you will need to press Star then one on your telephone if you require any assistance. Please press.

Star Zero I would now like to hand, the conference over to your Speaker today, Mr. Bryan Donohue you may begin.

Thank you good afternoon, everyone and thank you for joining us to discuss our financial results for the third quarter fiscal 'twenty two 2022 ending in March 31 2022.

With me on the call today are Antonio Pietri asset <unk>, President and CEO and Chantelle, Brian the CFO of asthma attack.

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.

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 April 27 2022.

Consistent with our prior practice, we expressly disclaim any obligation to update this information.

The structure of today's call will be as follows and turnover discuss business highlights from the third quarter and our pending transaction with Emerson and I'm sure. Tom will review, our financial results and discuss our guidance for fiscal year 2022.

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

Yes.

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

Aspen takes a strong third quarter results were driven by further improvement in.

Our key end markets and continued strong execution.

Our sales team with the support of the rest of the organization.

As we have mentioned previously we expected the new budget year for our customers to lead to a better spending environment for Aspen Tech considering the positive macro indicators coming into the year.

I am pleased to say that this is Walter Kerr during the third quarter.

We also remain optimistic about our ability to drive further improvement in annual spend growth over time, considering the continued positive macro environment and the growing strategic importance of operational efficiency and sustainability.

<unk>.

We're also excited to be approaching the completion of our proposed transaction with Emerson.

Our registration statement on form S. Four has been declared effective by the SEC and we have filed our proxy statement and said Ah may 16th date for the special meeting of <unk>.

Stockholders to approve the transaction.

We believe the combination of our current solutions with innovation and expertise of OSI and geological simulation software will position the new Aspen tech to create greater value for our customers as we help them solve the dual challenge of meeting the increasing global demand for resources.

Sustainable manner.

We believe our customers can operate sustainably and profitably at the same time, there doesn't need to be a trade off when you use the right technology.

Looking quickly at our financial results in the third quarter.

Revenue was 187 $8 million.

GAAP EPS was $1 12.

And non-GAAP EPS was $1 38.

Annual spend was $655 million up two 4% in the quarter and seven 4% year over year.

And free cash flow was $89 $2 million.

Looking at our third quarter results in more detail we experienced this trend.

Each of our key verticals and regions.

As I mentioned the biggest change in the quarter was a notable improvement in customer spending.

Our customers' calendar 2022 budgets are much improved.

Reflecting our expectations after the uncertainty and challenging conditions of the prior two years.

We have already seen a positive impact to our sales cycles as a consequence of the ability of customers to engage in more strategic conversations with us and execute on them.

We're optimistic this will have a positive impact across all areas of our business as the year progresses.

Looking at our performance by vertical.

Refining had a particularly strong quarter and its best performance since the pandemic began.

Refineries margins improved throughout the quarter.

We're at the high end of their historical range.

As expected and normalization of the transportation markets drove up the demand for fuels and push refinery operating rates to historical high levels.

The performance in refining over the last two quarters has returned us to the double digit annual spend growth in the Aspen, one MSC suite that we generated consistent view.

For many years pre Colby.

Chemicals continues to generate solid growth and it's an exciting market for us.

The industry is increasingly embracing sustainability as an impetus to improve its operational performance, while also substantially reducing its environmental footprint.

In our conversations with customers. It has become clear that forward thinking companies that recognize greater investment in digitalization can increase our competitive advantage.

Better financial performance.

Also to their sustainability goals.

The strong performance of chemicals during the pandemic and the multiple <unk> wins benefiting this market gives us confidence in the durability of growth from these customers.

The Enc vertical continued to show improvement and deliver positive growth for the second consecutive quarter.

Tight supply demand balance for oil, resulting in high oil prices along with increased commitment to emissions reductions in the last few years has started to have a positive impact on global energy and sustainability Capex budgets respectively.

The improved macro outlook for this industry is benefiting Aspen tech through improvement in attrition rates, which we now expect to come in modestly better than our previously revised range of five to five 5%.

Longer term there are three factors that we believe can have a positive impact on our E&C business.

The first is expected op cycle in upstream capex budgets over the next three to five years necessary to increase oil supply to address future expected growth in demand.

The second is the expected a celebration of sustainability capex investments and the people that mainly enc firms are making towards executing projects in low carbon energy areas like hydrogen carbon capture and sequestration or Ccs.

<unk> fuels wind solar and other areas.

We're beginning to see more activity in these areas amongst <unk> and believe it will become an increasingly significant part of their overall businesses in the coming years.

And the third is the growing importance of energy security rooted in oil and gas.

Specifically in the short to medium term.

Recent events have caused a broader reexamination of our energy is being sourced.

In source from and the need for diversification of suppliers.

We expect this to be a significant catalyst for the global LNG industry in the coming years and a key source of incremental capex spend.

The improved budgets in refining and chemicals and positive trajectory for <unk> is resulting in a performance above expectations for the year for our for our Aspen, One engineering suite.

We also remain optimistic about the outlook for our APM business because of the quality and quantity of our pipeline, especially as we focus on closing the year.

Following our references to a few of the customer transactions closed in the quarter.

First a global chemical company and long term customer of Aspen Tech renewed its agreement for all three suites of our products and solutions.

These new agreement increase their annual spend by 15% for a total booking value in excess of $70 million, making it one of our largest customers.

The customer further standardized on additional products such as Aspen capital cost estimation for the design of new facilities. This company users Aspen Tech solutions to run their operations safer greener longer and faster, including for the required reporting on emissions to regulatory authorities.

Second a leading independent player in the European energy and refining industry signed a new agreement to expand its use of our MSC and APM applications.

This customer which operates one of the largest refineries in Europe and the most advanced in terms of planned complexity decided to increase its usage. After a standby Aspen tech personnel identified tens of millions of dollars in incremental profitability through operational performance.

<unk> and energy savings and the related reduction in emissions.

The deployment of the Aspen, <unk> controller and optimization solutions in the refinery, including Cotwo emissions dashboard, coupled with expansion of <unk> to our second recently acquired wind farm will be key solutions to help these customers meet its sustainability and profitability.

Objectives.

And third and final and North American electrical vehicles company that manufacturers fleet commercial vehicles, and Suvs increase its use of the Aspen, One engineering suite to drive collaboration and standardization across production lines in the modeling and mono.

Factor of electrical cell batteries by the chemical engineers in these teams ecolab.

The collaboration capabilities of the suite will drive alignment and knowledge sharing across the teams in the multiple production lines as they ramp up vehicle output.

In addition to the examples I've reviewed for this quarter.

Our latest ESG report released in Q3 and available on our website.

Over several more longer term examples of our customers are implementing our solutions for sustainability.

Lighting the roles that digitalization plays in helping companies across diverse industries reduce waste and energy use and meet their emission targets.

Stepping back and looking at our business more broadly our recent results reflect the positive impact from an increased customer focus on operational efficiency and sustainability.

As we have discussed in the past the drive towards automation and digitalization of assets to run them more efficiently and sustainably is still in the relatively early stages and is a top investment priority for our customers.

In a world of growing demand rising in flash inflationary pressures and greater scrutiny of the environmental impact of their operations, our customers recognize that being able to do more with less strategic imperatives.

This was evident in the customer and industry conversations I've had while attending cera week recently.

We're a week is which is run by IHS Markit and now part of S&P Global is the worlds Premier Energy Conference.

Been attending this conference for years and this year the focus on the need to increase the use of technology to drive efficiency and sustainability was greater than I've ever seen.

This is particularly true as it relates to sustainability.

Conversations with customers about sustainability are hitting an inflection point and.

And it is now part of nearly every meeting we have in.

In particular the.

The increased activity by regulatory agencies, most notably in Europe , but more recently by the SEC here in the United States about sustainability reporting requirements is driving customers to take a comprehensive view at their strategy in this area.

<unk> is in a great position to benefit from this trend in two ways driving material amounts of emissions out of customers' operations, while also making it possible to track their progress in a holistic way.

While we're pleased about our performance year to date and see the conviction from customers globally about transacting in the current quarter. We also recognize that a degree of uncertainty exist in certain markets for Aspen Tech.

Russia and related sanctions and China, and the spread of Covid related lockdowns, which could dampen the growth in the quarter.

Main concern being this customer's ability to get existing business done before the end of the quarter.

This leads us to maintain our current annual spend guidance for fiscal 2022 at 7% to 8%.

In addition, we're adjusting our fiscal year guidance for attrition to $4, 525% compared to $5 to five 5% previously.

We're also adjusting the guidance for our APM business to <unk> 75 to one point of growth compared to approximately one point of growth previously.

And finally, we expect to deliver the best in class profitability outcome that we guided to for the year and that investors have come to expect from Aspen Tech.

The growing market focus on sustainability, especially exciting and we look ahead to the opportunities for the new Aspen Tech and the capabilities that they always say in geological simulation software businesses that are being contributed by Emerson will bring.

This industry, leading solutions are incredibly well positioned to benefit from the expected increase in capital investments in electrification and <unk> around the world.

We believe our expanded product portfolio will give new Aspen tech our unique ability to benefit from the coming Decarbonisation transition.

Enabling existing energy and chemical suppliers to operate with higher levels of efficiency and lower emissions than they ever have before to meet current energy and chemicals demand. While also capturing the emissions they produce in Ccs systems to further the carbonized their production.

In addition, we will enable the design of hydrogen production facilities, and we will optimize their operation once built as countries around the world ramp up on the utilization of hydrogen as a clean energy source over the coming years and decades.

And finally, we will enable the transition to global electrification from clean energy sources by supporting the dramatic increase in power transmission and distribution capacity that is required to meet many of the ambitious sustainability targets that concho. Some companies have committed themselves to over the next 10 to 30 years.

It is important to note that this sustainability imperative is kicking off a massive capex investment cycle that will need to continue and increase for the next 30 to 40 years.

For example, according to S&P global the total Capex spending in the global energy sector supply side in 2021 was $1 five trillion dollars.

About 30% or $450 billion is spent on low carbon power, which includes hydrogen Ccs wind solar and other forms of renewables.

83% of that figure or 104 billion is in transmission and distribution infrastructure.

22% or $99 billion is spent in each of the upstream and non hydro renewable sectors.

And 33% or approximately $150 billion on solar photovoltaic power systems.

Furthermore, carbon capture and sequestration is estimated to be four trillion dollars market by 2050, According to exxonmobil as compared to the $6 five trillion dollar market for oil and gas today that they estimate.

While all of these SaaS is that going forward Aspen Tech will benefit from a major capex investment cycle, where the products of the new Aspen take will be uniquely positioned to enable our customers to design operate and maintain these new facilities.

We're excited about the future for us.

Plans to integrate the OSI and geological simulation software into the new Aspen Tech and the commercial agreement that will deepen our partnership with Emerson have grown our conviction for an exciting future.

We remain confident in <unk> ability to be a consistent mid teens grower with high recurring revenue best in class margin and substantial free cash flow. We're looking forward to completing the transaction as soon as possible and getting to work executing on our on our strategic plan.

Before turning it over to Chantelle.

I would like to formally welcome managed sharla.

Who recently joined <unk> in the newly created position of Chief revenue Officer.

Where he will lead all revenue generating functions of the company.

<unk> joins <unk> after spending the past 14 years at IBM, where he was most recently the global general manager of the industrial sector.

He has led ibm's airports around the energy transition sustainability and industry four <unk>.

Manish will be assuming the leadership of our operations team from John Hague.

<unk> will remain an Aspen tech until October 1st supporting the integration efforts of OSI and GSS and leading the commercial team that will support the Amazon sales team taken Aspen Tech solutions into a number of their key markets.

John has been an important and valued leader at Aspen Tech in a number of roles over the years. Most recently as EVP of operations on behalf of everybody at Aspen Tech I want to thank John for all he has done for the company and wish him all the best in his future retirement.

I would like to finish by just reiterating how pleased we are with our performance so far in fiscal 2020 twos.

We're delivering better than expected growth high profitability and free cash flow and have made significant progress preparing for the completion of our transaction with Emerson.

We believe market trends are clearly in our favor and provide a favorable setup for us to deliver on our long term financial targets and generate significant value for our shareholders.

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

Thank you Antonio I will now review our financial results for the third quarter fiscal 2022.

A reminder, these results are being reported under topic 606.

Which has a material impact on both the timing and method of revenue recognition for our term license contracts.

<unk> revenue is heavily impacted by the timing of bookings and more specifically renewal bucket.

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

The timing of renewals is not linear between quarters or fiscal years and this nonlinearity will have a significant.

Any 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.

In our view annual spend will continue to be the most important metric in assessing the growth of our business.

Annual free cash flow the most important metric for assessing Neil brown value our business generates.

Annual spend which represents the accumulated value of all the currently expired.

License agreements at the end of each period.

And then the $55 million at the end of the third quarter. This represented an increase of approximately seven 4% on a year over year basis, and two 4% sequentially.

Total bookings, which are defined as the total value of customer term license contracts.

The term licenses are being deliberate in linked quarter under topic 606.

With $207 million in 18 increase year over year, 18% increase year over year.

Total revenue was $187 8 million for the third quarter.

Turning to profitability beginning on a GAAP basis.

Operating expenses for the quarter were $93 4 million compared to $77 $8 million in the year ago period, the year over year.

The increase in GAAP operating expenses were primarily primarily driven by acquisition and integration planning related expenses associated with our pending transaction with Emerson.

<unk> expenses, including cost of revenue were $107 million, which was up from $92 8 million in the year ago period.

Operating income was $80 $8 million and net income for the quarter was $75 1 million or.

Our $1 12 per share.

Turning to non-GAAP results.

Excluding the impact of stock based compensation expense amortization of intangibles associated with acquisitions and integration planning related piece.

non-GAAP operating income for the third quarter of $102 5 million, representing a 54, 6% non-GAAP operating margin compared to a non-GAAP operating income margin of $89 million and 49, 7% 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 $92 $8 million or $1 38 per share based on 67 million shares outstanding.

Turning to the balance sheet and cash flow, we ended the quarter with approximately $285 million of cash and cash equivalents.

$79 million outstanding under our credit facility.

And the third quarter, we generated 81 $1 million of cash from operations and $89 $2 million of free cash flow after taking into consideration the net impact of capital expenditures capitalized software acquisition and integration planning related payments.

Before turning to guidance I would like to provide an update on our preparations by the closing of the Emerson transaction and the integration of OSI and geological simulation software.

<unk> made significant progress in recent months developing a comprehensive integration plan with detailed timelines and action plans to realize our targeted synergies.

We are confident in our ability.

Hey, Brian the $110 million of synergies, we announced at the time of the transaction.

I would now like to close with guidance our updated outlook reflects the strong performance year to date and improving demand trends in many areas of our business.

We believe the importance of asset optimization and sustainability, our durable growth drivers that will benefit our business for years to come.

With respect to annual spend as Antonio mentioned, we are maintaining our outlook for the year to seven 7% to 8% growth.

We are maintaining our bookings guidance range to $814 million to $848 million, which includes $186 million of contracts that are up for renewal in fiscal 2022. This includes approximately $191 million of contracts up for renewal in the fourth quarter.

Our expected revenue range is now $737 million to $754 million. We now expect license revenue in the range of 513 $530 million.

Maintenance revenue and service and other revenue of approximately 196 and $28 million respectively.

From an expense perspective, we now expect total GAAP expenses of $410 million to $415 million.

Outlook continues to incorporate ongoing investments in our go to market organization product development and business units, including APM Iot in Pharmaceuticals, we expect GAAP operating income in the range of in a range of 302000 $7 million to $339 million for fiscal 2020 with GAAP net income of approximately two.

$299 million to $310 million we.

GAAP net income per share to be in the range of $4 43 to $4 59.

From a non-GAAP perspective, we now have that.

non-GAAP operating income at $404 million to $416 million.

And now expect non-GAAP income per share in the range of $5 33 to $5 57.

From a free cash flow perspective, we're now targeting free cash flow is $285 million.

Our updated fiscal 2022 free cash flow guidance still assumes cash tax payments in the range of 60% to $66 million.

Free cash flow outlook is equivalent to between 42, and 43% of annual spend and highlights our predictable and sustained cash generation.

Wrap up Aspen Tech delivered strong third quarter results and performing well and capitalizing on the market opportunities to generate faster consistent growth. We look forward to completing our transaction with Emerson later this quarter, which we believe will expand our capabilities to create even greater value for our customers and shareholders.

Operator, we would now like to begin the Q&A.

As a reminder to ask a question when you give crestar one on your Touchtone telephone to withdraw your question. Please press the pound key.

And our first question comes from Jason <unk> with Keybanc. Your line is open.

Good morning, gentlemen, good afternoon, Jason.

Yes.

Antonio Thanks for taking my question, maybe just a quick clarification.

On the guidance because I think you are leaving the full year.

You'll spend range the same but I think attrition is a little bit better, but it sounds like APM.

Maybe it nominally a little lower can you just walk us through kind of the moving pieces there.

Well I mean look certainly.

What we've.

Gotcha.

So some of the benefit from.

The improvement in attrition through Q3 quarter.

Attrition in Q4 will be in line with the expectations.

Fundamentally.

The combination we still believe that.

The high end of the range is very achievable.

Possibly north of that.

And that is through the combination of our ongoing performance MSC engineering.

<unk> been at the high end of that range at the same time lag.

The numerator in the in the prepared remarks.

Yes.

While.

We closed some business in Russia in Q3.

There is increasing difficulty from the implementation of sanctions and that could provide.

A little bit of downside in the quarter.

And it's not that the business isn't there it just would take longer to close.

And then we're monitoring the lockdowns rollout of Lockdowns in China.

Now that the business will disappear Budd as we experienced over the last two years.

When people are not able to come out of their homes.

They are not able to then work on the on the contracting of the.

<unk>.

Transactions.

And they've been already very bureaucratic as it is so so we're just taking a cautious approach here with regards to.

Changing the range, meaning we're not changing it we're leaving it at seven to eight but at the same time.

We.

The same trends we saw in Q3, we're still seeing in Q4 and for.

For the reason, we decided to maintain.

Our guidance at seven to eight.

Okay, perfect that seems fair and then maybe one last just housekeeping question.

Just so.

We all have it but it is the vote in May is that the last kind of hurdle before the deal closes or is there anything else there.

Thanks.

Hey, good.

Sure Tommy Thanks.

Nice to hear from you.

What I would say in response to that Jason is it's one of the steps required.

I'll go through all the steps required before we.

Okay perfect. Thank you I'll pass it on.

Youre welcome.

Thank you.

Okay.

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

Hi, Rob.

Great Hi, Antonio Hi, Chantal.

Just a couple from me first Antonio you mentioned that sales cycles are.

Shortening a bit and I just wanted to probe for a little bit more color on that.

I know you listed some of the drivers for the strong annual spend but is it emerging from the pandemic. We're seeing more activity levels is it people just reacting more briskly to some of the geopolitical <unk> price issues and better budgets and then how do those sales cycles compare to.

What you've seen historically and then I had a quick follow up.

Yes.

And Thats exactly the point, Rob the sales cycles are going back to their historical cycle pre pandemic.

The elongated during the pandemic and now.

There is one.

Going back to their historical level or lands, but also there are more predictable.

And to us from the <unk>. The fundamental difference is the predictability and our ability to close business. When we believe it can be closed on and Thats been a significant difference in end of Q2 Q3 quarters here. So.

I do think in the spending environment has completely changed.

I also think theres been a little bit of pent up demand of course in Q3. After two years of suppressed to spending and we also saw.

A little bit of business from Q4 move to move into Q3.

Which is certainly deliver a very strong Q3, Florida for us but overall.

Much easier environment to be doing business in.

Got it that's great and the follow up for me and you mentioned.

Russia, and how that along with China contributed to your thinking relative to maintaining the annual spend guidance.

Q4, even with the better attrition. So I just wanted to ask on that so I mean, we've seen.

Have a longstanding presence in Russia with a lot of strong relationships.

How does this play out I mean, we're seeing companies like S&P that are abandoning Russia altogether. There also mission critical for a lot of the companies that they serve I know you guys are as well how should we think about.

The ultimate risk relative to Russia for you guys. I know you said you haven't closed the deal there in Q3, but just help us contextualize that if you can thank you.

Well, we'll start with look at less than 5% of our annual spend is in Russia and these are five six year contract. So so the 5% is spread over the next five years.

I look at the.

<unk>.

While our technology is not sanctioned today.

We are still doing business there.

The environment to do the business has become increasingly more difficult as a result of sanctions in banks that our customers have used for business.

<unk> set our own employees have been used to for us to pay the refund their business expenses.

In some cases, a little bit of the issue around collections and that's why you see also our.

Free cash flow projection for the year at the midpoint being.

Being cautious about potential collection issues in Russia, but having said all of that.

In a way in Q3, we did was we thought we could do.

In the quarter and.

We're just being cautious about it we don't want to get out ahead of our skis with respect to Russia, or China, Beijing is starting to get into Lockdowns in China. Most of the headquarters of the companies we deal with in China are in Beijing, and if these employees are not able to leave their homes than they are in.

I'll be able to.

Press the button on the SAP system, so to get those agreement done so just being cautious about it.

We haven't really seen any any change yet in those.

But just being cautious.

Great. Thanks very much.

Thanks.

And our next question comes from.

Andrew Open bank of American Marco.

<unk> Your line is open yes.

Yes, Hi, hi.

Hi, Anton Hie Shantou congratulations.

Okay.

So one of the questions we got a lot today.

How should we think about your cost inflation and what's the dialogue with your customers on pricing.

<unk>.

The business model, if you could just comment on that.

And clearly if you're looking at the results you margins seem to be okay.

Yes, correct our margins are very healthy.

Let me take the last point.

Luke.

As you are well aware Andrew.

Our contracts on average have 2% to 3% price escalation.

Historically, we've talked to customers is being tied to CPI.

Over a five or six year.

Contract.

Our prices move up 15% to 18%.

For those customers so.

In a way every year, we are increasing prices on our customers.

And it's allowed allows us to maintain on in that regard the gross margins and profitability for our software business.

With regards to.

Personnel inflation, if you will cost inflation of salaries look at something that of course, we're keeping a very close eye on and.

We believe.

Our our our financial discipline, which is also tied to the different levers that we use in the company to compensate on creator.

An attractive rewards program for our employees will allow us to manage through this.

We've hired one hundreds of people over the last 12 months into into the company.

We continue to bring them in at.

The price points the salary points.

That are in line with the profitability that we will deliver in the future.

So overall, we're very confident about our ability to manage through through this inflationary period at the moment.

And thank you.

Just a follow up.

You are having your sort of in this unique position.

You do report do you have a midyear year, but as youre thinking about.

Conversations with your customers for remainder of calendar 'twenty.

22 can you just tell us give us more color as to right because they are on a calendar year budget and year on year fiscal year budget.

How does it look to things accelerate into the calendar year and more importantly.

Does the nature of your conversation with your customers changing right because of going forward youre going to be closely aligned with <unk> and do the sort of hardware capabilities change how you interact with your customers.

Conversations youre starting to have thank you.

Well, let me look at first of all.

Since our customers fiscal year as the calendar year and the budget is for the calendar or fiscal year.

The outlook for the rest of the calendar year supported by strong budgets that they put in place for this calendar year. So so we would expect Q4 Q1 and Q2.

In the June September and December quarters are still going to reflect the strength.

In spending that we saw in this march quarter.

Yeah.

And depending on the macro situation towards the end of this calendar year, new budgets for calendar 'twenty three will will dictate.

Spending environment then.

Look our conversation let me just for say the following.

We're absolutely convinced.

The focus on sustainability.

And investments in that area are changing the conversations with our customers.

Material manner.

Now is not only we need Aspen Tech solutions.

For profitability purposes, we need Aspen Tech solutions for profitability and sustainability reasons.

And this is <unk>.

Significant shift.

By our customers, we started to see it in Europe , a year and a half ago is now showing up in the United States.

And in Asia, as well and we're very bullish about these with respect to Amazon absolutely you see customers that are both users of Amazon in Aspen Tech and they themselves are saying or.

Our thinking about the possibilities from combined solutions between Emerson on Aspen Tech.

How the synergies from from the two relationships into into the customer.

In other areas of collaboration so including co innovation between customer Amazon on Aspen Tech to help them address the sustainability of our operational excellence issue. So so we're all very excited about this and Thats. What we also put it in the prepared remarks.

<unk>.

I think it's a very exciting time for <unk> and the new Aspen Tech going forward.

Chantelle. Thank you so much for fitting me in.

Alright. Thank you. Thank you Brian .

And our next question comes from Matt Pfau.

Al.

William Blair Your line is open.

Hi, Matt.

Hey, great. Thanks, guys appreciate it.

Yes, Antonio it seems like the engineering and MSC suites are certainly performing ahead of your expectations, but APN, maybe a bit below what you were expecting why is APM not seen the same sort of increase in our improvement in traction that MSC and engineering.

Yes.

I mean look first of all.

Im, particularly very excited about the quality and quantity of our APM pipeline frankly, I don't think we've had a better quality pipeline since the beginning of that business, so and the quantity. It's all there.

Probably.

I'll now probably certainly more than one.

What we need to deliver on the on the guidance.

We gave you.

So having said that look.

I said that there is a little bit in my opinion, there was a little bit of pent up demand in the March quarter, because of a lack of spending over the last two years.

And the easiest thing to do when you want to spend in Europe .

Really haven't you've fallen behind on your automation and digitalization plans is to go with what you know on the in the low hanging fruit, which is advanced process control optimization plan and schedule an historian and so on and then you start to focus on new technologies and new area. So.

Of technology spending.

And I think Thats APM. So so we have a pipeline in Q4 that we're very excited about and.

We're working to close it at the same time looked some of that pipeline is in a couple of the places that we've referred to on the call, Russia and China. So, we're just being cautious about it as well.

Makes sense and then you sort of called out one.

Positive trend going forward could be as people look to diversify their energy suppliers. How do we think about that mechanically in terms of how that impacts Aspen is that something thats fairly long term and are there any specific areas.

Within your product suite that that benefits more than others.

Yes.

Matt.

In 2019 really towards the end of 2019, beginning of 2020 I was talking to you guys and investors about this.

These wave of Capex spending in LNG.

Our own gas.

And that and that Capex wave, which was estimated to be about $125 billion over five years sort of dissipated with the pandemic in 2020 and a lot of those.

A lot of that investment was put on hold.

We believe that.

Certainly the geopolitical situation in.

In Europe around Ukraine.

Is refocusing countries and customers on LNG.

As an alternative.

Fueled both low carbon but also diversification of supplies.

We expect to see.

That capex spend around LNG too to get.

Started again and provide lift for our E&C customers initially.

Does he said these.

These plants and terminals has to be designed for so so that.

That would be the main driver initially of course.

Oil will continue Capex and all will probably continue to increase.

Low to mid single digit.

A result of the need for more oil supply over the next three to five years and.

We will also be a benefit but more importantly.

LNG Capex, which in 2019, we were talking about $125 billion over a five year period.

Great. Thanks, guys I appreciate it.

Thank you.

As a reminder to ask a question Chris Star one on your telephone to withdraw your question. Please press the pound key.

And our next question comes from Mark Chapelle of Loop capital. Your line is open.

Hi, Thank you hi, guys. Thanks for thanks for taking my question with respect to your prepared remarks Antonio around customers in China I'm wondering if you could just remind us how much of your annual spend comes out of China.

Yes, Similarly to Russia, just about 5%.

The 5% great Okay and then.

Switching gears a little bit here.

With respect to the pharma business, it's been about a year now since <unk>.

New General manager was hired are appointed to that business. I was wondering if you just give us an update.

What youre seeing there.

Yes, I mean look.

Pharma certainly.

It's an opportunity for us and.

Okay.

A lot of the work that was put in place when he first join in but this time last year was an investment in R&D.

That will start to bear fruit.

Later this year or in our next release of software in November .

And then.

Our go to market activities sort of organically around that.

We continue to execute.

Again pharma.

Materially to our overall result is not there yet.

But we're still optimistic but we've also said that we.

We would like to make.

Over an acquisition to have an anchor tenant in pharma as well in and Thats something that we haven't been able to execute on but we continue to see what opportunities are in the market, but yes no.

Pharma continues in its trajectory and its something that.

We're still focused on soon.

Great. Thank you.

Mhm.

Again, ladies and gentlemen.

I'm showing no further questions at this time I would now like to turn the conference back over to CEO Antonio Pietri for closing remarks.

Alright, well, thank you operator and thanks.

Thank you to everyone for joining the call today.

We look forward to.

I believe I attended and a few of the investor conferences in person this quarter and meeting with some of you as well in person in the cold box that we will have thank you to everyone.

This concludes today's conference. Thank you for participating you may now disconnect.

Yes.

[music].

Sure.

Yes.

[music].

Yes.

[music].

Yes.

Okay.

Yes.

[music].

Good day.

And thank you for standing by welcome to the Aspen Technology third quarter 2022 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.

Please be advised that today's conference is being recorded to ask a question. During the session you will need to press Star then one on your telephone if you require any assistance. Please press.

The Star Zero I would now like to hand, the conference over to your Speaker today, Mr. Brian done you you may begin.

Thank you good afternoon, everyone and thank you for joining us to discuss our financial results for the third quarter of fiscal 'twenty to 2022, ending March 31 2022.

With me on the call today are Antonio Pietri asset tax President and CEO and Chantelle Brian .

CFO of asthma attacks.

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 April 27th 2022.

Consistent with our prior practice, we expressly disclaim any obligation to update this information.

The structure of today's call will be as follows.

I will discuss business highlights from the third quarter and our pending transaction with Emerson and then Tom will review, our financial results and discuss our guidance for fiscal year 2022.

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

Okay. Thanks, Brian .

Thanks to all of you for joining us today.

<unk> strong third quarter results were driven by further improvement in our key end markets and continued strong execution by our sales team with the support of the rest of the organization.

As we have mentioned previously we expect that the new budget year for our customers to lead to a better spending environment for Aspen Tech <unk>.

<unk> the positive macro indicators coming into the year.

I am pleased to say that this is Walter Kerr during the third quarter.

We're also excited to be approaching the completion of our proposed transaction with Emerson.

The registration statement on form S. Four has been declared effective by the SEC and we have filed our proxy statement and said Ah may 16th date for the special meeting.

Stockholders to approve the transaction.

Sustainable manner.

We believe our customers can operate sustainably and profitably at the same time, there doesn't need to be a trade off when you use the right technology.

Looking quickly at our financial results in the third quarter.

Revenue was 187 8 million.

GAAP EPS was $1 12.

non-GAAP EPS was $1 38.

Annual spend was $655 million up two 4% in the quarter and seven 4% year over year.

And free cash flow was $89 $2 million.

Looking at our third quarter results in more detail, we experienced this trends across each of our key verticals and regions as I mentioned the biggest change in the quarter was a notable improvement in customer spending.

Our customers calendar 2022 budgets are much improved.

Selecting our expectations after the uncertainty and challenging conditions of the prior two years.

We have already seen a positive impact to our sales cycles as a consequence of the ability of customers to engage in more strategic conversations with us and execute on them.

We are optimistic this will have a positive impact across all areas of our business as the year progresses.

Looking at our performance by vertical.

Refining had a particularly strong quarter and its best performance since the pandemic began.

Refineries margins improved throughout the quarter and were at the high end of their historical range as.

The expected normalization of the transportation market drove up the demand for fuels and push refinery operating rates to historical high levels.

The performance in refining over the last two quarters has returned us to the double digit annual spend growth in the Aspen, one MSC suite that we generated consistently for many years pre colby.

Chemicals continues to generate solid growth and it's an exciting market for us.

The industry is increasingly embracing sustainability as an impetus to improve its operational performance, while also substantially reducing its environmental footprint.

In our conversations with customers. It has become clear that forward thinking companies that recognize greater investment in digitalization can increase our competitive advantage and drive better financial performance.

Closer to their sustainability goals.

The strong performance of chemicals during the pandemic and the multiple tailwind benefit in this market gives us confidence in the durability of growth from these posters.

The E&C vertical continued to show improvement and deliver positive growth for the second consecutive quarter.

The tight supply demand balance for oil, resulting in high oil prices along with increased commitment to emissions reductions in the last few years has started to have a positive impact on global energy and sustainability Capex budgets respectively.

Longer term there are three factors that we believe can have a positive impact on our E&C business.

The first is expected upcycle in upstream capex budgets over the next three to five years necessary to increase oil supply to address future expected growth in demand.

The second is the expected acceleration of sustainability capex investments in the period, mainly enc firms are making towards executing projects in low carbon energy areas like hydrogen carbon capture and sequestration or Ccs Biofuels wind.

Solar and other areas.

We're beginning to see more activity in these areas amongst e&ps and believe it will become an increasingly significant part of their overall businesses in the coming years.

And the third is the growing importance of energy security rooted in oil and gas specifically in the short to medium term.

Recent events have caused a broader reexamination of our energy is being sourced is being sourced from and the need for diversification of suppliers.

We expect this to be a significant catalyst for the global LNG industry in the coming years and a key source of incremental capex spend.

The improved budgets in refining and chemicals and positive trajectory for <unk> is resulting in a performance above expectations for the year for our for our Aspen, One engineering suite.

We also remain optimistic about the outlook for our APM business because of the quality and quantity of our pipeline, especially as we focus on closing this year.

Following our references to a few of the customer transactions closed in the quarter.

First a global chemical company and long term customer of Aspen Tech renewed its agreement for all three suites of our products and solutions. These new agreement increase their annual spend by 15% for a total booking value in excess of $70 million, making it one of our largest cost.

Others.

The customer further standardized on additional products such as Aspen capital cost estimation for the design of new facilities. This company uses Aspen Tech solutions to run their operations safer greener longer and faster, including further required reporting on emissions to regulatory authorities.

Second a leading independent player in the European energy and refining industry signed a new agreement to expand its use of our MSC and <unk>.

<unk> applications.

This customer which operates one of the largest refineries in Europe and the most advanced in terms of plant complexity decided to increase its usage after a steady by Aspen Tech personnel identified tens of millions of dollars in incremental profitability through operational performance improve.

<unk> and energy savings and the related reduction in emissions.

The deployment of the Aspen Tech control and optimization solutions in the refinery, including Cotwo emissions dashboard, coupled with expansion of <unk> financial to our second recently acquired wind farm.

Will be key solutions to help this customer made its sustainability and profitability objectives.

At a factor of electrical cell batteries by the chemical engineers in these teams.

The collaboration capabilities of the suite will drive alignment and knowledge sharing across the teams in the multiple production lines as they ramp up vehicle output.

In addition to the examples I've reviewed for this quarter.

Our latest ESG report released in Q3 and available on our website.

Over several more longer term examples of our customers are implementing our solutions for sustainability.

<unk> the role that digitalization plays in helping companies across diverse industries reduce waste and energy use and meet their emission targets.

Stepping back and looking at our business more broadly our recent results reflect the positive impact from an increased customer focus on operational efficiency and sustainability.

This was evident in the customer and industry conversations I've had while attending cera week recently.

We're a week is which is run by IHS Markit and now part of S&P Global is the worlds Premier Energy Conference.

Been attending this conference for years and this year the focus on the need to increase their use of technology to drive efficiency and sustainability was greater than I've ever seen.

This is particularly true as it relates to sustainability.

Conversations with customers about sustainability are hitting an inflection point.

And it is now part of nearly every meeting we have in.

In particular the.

While we are pleased about our performance year to date and see the conviction from customers globally about transacting in the current quarter. We also recognize that a degree of uncertainty exist in certain markets for Aspen Tech, such as Russia and related sanctions and China.

And the spread of Covid related lockdowns, which could dampen the growth in the quarter.

The main concern being this customer's ability to get existing business done before the end of the quarter.

This leads us to maintain our current annual spend guidance for fiscal 2022 at 7% to 8%.

In addition, we're adjusting our fiscal year guidance for attrition to four 5% to 5% compared to $5 to five 5% previously.

We're also adjusting the guidance for our APM business to <unk> 75 to one point of growth compared to approximately one point of growth previously.

Finally, we expect to deliver the best in class profitability outcome that we guided to for the year and that investors have come to expect from Aspen Tech.

The growing market focus on sustainability, especially exciting and we look ahead to the opportunities for the new Aspen Tech and the capabilities that they OSI and geological simulation software businesses that are being contributed by Emerson will bring.

This industry, leading solutions are incredibly well positioned to benefit from the expected increase in capital investments in electrification and Ccs around the world.

We believe our expanded product portfolio will give new Aspen tech our unique ability to benefit from becoming de carbonization transition by enabling existing energy and chemical suppliers to operate with higher levels of efficiency and lower emissions than they ever have.

Before to meet current energy and chemicals demand, while also capturing the emissions. They produced in Ccs systems to further decarbonize their production.

In addition, we will enable the design of hydrogen production facilities and will optimize their operation once built as countries around the world ramp up on the utilization of hydrogen as a clean energy source over the coming years and decades.

And finally, we will enable the transition to global electrification from clean energy sources by supporting the dramatic increase in power transmission and distribution capacity that is required to meet many of the ambitious sustainability targets that contour. Some companies have committed themselves to over the next 10 to 30 years.

It is important to note that this sustainability imperative is kicking off a massive capex investment cycle that will need to continue and increase for the next 30 to 40 years.

For example, according to S&P global the total Capex spending in the global energy sector supply side in 2021 was one five trillion.

About 30% or $450 billion is spent on low carbon power, which includes hydrogen Ccs wind solar and other forms of renewables 20.

23% of that figure or 104 billion is in transmission and distribution infrastructure.

2% or $99 billion of spend in each of the upstream and non hydro renewable sectors.

And 33% or approximately $150 billion on solar or photovoltaic power systems.

Furthermore, carbon capture and sequestration is estimated to be at $4 trillion market by 2050, According to exxonmobil as compared to the $6 five trillion dollar market for oil and gas today that they estimate.

While all of these SaaS is that going forward Aspen Tech will benefit from a major capex investment cycle, where the products of the new Aspen Tech will be uniquely positioned to enable our customers to design operate and maintain these new facilities.

We're excited about the future for Aspen Tech.

The plans to integrate the OSI and geological simulation software into their new Aspen Tech and the commercial agreement that will deepen our partnership with Emerson have grown our conviction for an exciting future.

Before turning it over to Chantelle.

I would like to formally welcome managed Sharla, who recently joined <unk> in the newly created position of Chief revenue Officer.

Where he will lead all revenue generating functions of the company.

<unk> joins <unk> after spending the past 14 years at IBM, where he was most recently the global general manager of the industrial sector.

He has led ibm's airports around the energy transition sustainability and industry four <unk>.

<unk> has extensive experience of scale in large global organizations.

I am thrilled to welcome Manish to Aspen Tech's senior leadership team and look forward to his contributions to our success.

Manish will be assuming the leadership of our operations team from John Haley.

Who has decided to retire after 27 years with Aspen Tech.

John will remain in Aspen Tech until October one supporting the integration efforts of OSI and GSS and leading the commercial team that will support the Amazon sales team taken Aspen Tech solutions into a number of their key markets.

John has been an important and valued leader at Aspen Tech in a number of roles over the years, most recently as EVP of operations.

On behalf of everybody at Aspen Tech I want to thank John for all he has done for the company and wish him all the best in his future retirement.

I would like to finish by just reiterating how pleased we are with our performance so far in fiscal 2020 twos.

While delivering better than expected growth high profitability and free cash flow and have made significant progress preparing for the completion of our transaction with Emerson we.

We believe market trends are clearly in our favor and provide a favorable setup for us to deliver on our long term financial targets and generate significant value for our shareholders.

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

Thank you Antonio I will now review our financial results for the third quarter of fiscal 2022. As a reminder, these results are being reported under topic 606, which has a material impact on both the timing and method of revenue recognition for our term license contracts.

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

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

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.

In 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 Neil brown value our business generates.

Annual spend which represents the accumulated value of all the currently for our term license agreements at the end of each period.

<unk> hundred $55 million at the end of the third quarter. This represented an increase of approximately seven 4% on a year over year basis, and two 4% sequentially.

Total bookings, which are defined as the total value of customer term license contracts.

<unk> is the term licenses for team delivered in the quarter under topic 606 was $207 million in 18 increase year over year, 18% increase year fair.

Total revenue was $187 8 million for the third quarter.

Turning to profitability beginning on a GAAP basis.

Operating expenses for the quarter were $93 4 million compared to $77 million in the year ago period, the year over year.

The increase in GAAP operating expenses were primarily primarily driven by acquisition and integration planning related expenses associated with our pending transaction with Emerson.

Total expenses, including cost of revenue or $107 million, which was up from $19 8 million in the year ago period.

Operating income was $80 $8 million and net income for the quarter was $75 1 million or $1 12 per share.

Turning to non-GAAP results.

Excluding the impact of stock based compensation expense amortization of intangibles associated with acquisitions and integration planning related piece we were.

Reported non-GAAP operating income for the third quarter of $102 5 million, representing a 54, 6% non-GAAP operating margin compared to a non-GAAP operating income margin of $89 million and 49, 7% 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 $92 8 million or $1 38 per share based on 67 million shares outstanding.

Turning to the balance sheet and cash flow, we ended the quarter with approximately $285 million of cash and cash equivalents.

So $9 million outstanding under our credit facility.

Before turning to guidance I would like to provide an update on our preparations by the closing of the Emerson transaction and the integration of OSI and geological simulation software.

<unk> made significant progress in recent months developing a comprehensive integration plan with detailed timelines and action plans to realize our targeted synergies.

We are confident in our ability.

On the $110 million of synergies, we announced at the time of the transaction.

I would now like to close with guidance our updated outlook reflects the strong performance year to date and improving demand trends within many areas of our business.

We believe the importance of asset optimization and sustainability, our durable growth drivers that will benefit our business for years to come.

With respect to annual spend as Antonio mentioned, we are maintaining our outlook for the year to seven at 7% to 8% growth.

We are maintaining our bookings guidance range to $814 million to $848 million, which includes $486 million of contracts that are up for renewal in fiscal 2022.

This includes approximately $191 million of contracts up for renewal in the fourth quarter.

Our expected revenue range is now 737% to $754 million. We now expect license revenue in the range of $513 million to $530 million and maintenance revenue and service and other revenue of approximately 196 and $28 million respectively.

From an expense perspective, we now expect total GAAP expenses of $410 million to $415 million.

Outlook continues to incorporate ongoing investments in our go to market organization product development and business units, including APM Iot in Pharmaceuticals, we expect GAAP operating income in the range of in a range of $327 million to $339 million for fiscal 2020 with GAAP net income of approximately two <unk>.

<unk> $99 million to $310 million, we expect GAAP net income per share to be in the range of $4 43 to $4 59.

From a non-GAAP perspective, we now expect non-GAAP operating income of $404 million to $416 million and now expect non-GAAP income per share in the range of $5.33 to $5 57.

From a free cash flow perspective, we're now targeting free cash flow of at least $285 million. Our updated fiscal 2022 free cash flow guidance still assumes cash tax payments in the range of $60 million to $66 million or free cash flow outlook is equivalent to between 42 and 43% of annual spend.

And highlights our predictable and sustained cash generation.

To wrap up Aspen Tech delivered strong third quarter results and performing well in capitalizing on market opportunities to generate faster consistent growth.

Look forward to completing our transaction with Emerson later, this quarter, which we believe will expand our capabilities to create even greater value for our customers and shareholders.

Operator, we would now like to begin the Q&A.

Yes.

Certainly as a reminder to ask a question.

Star one on your Touchtone telephone to withdraw your question. Please press the pound key and.

And our first question comes from Jason <unk> with Keybanc. Your line is open.

Good morning, and good afternoon, Jason.

Yes.

Antonio Thanks for taking my question, maybe just a quick clarification.

On the guidance because I think you are leaving our full year annual spend range. The same but I think attrition is a little bit better, but it sounds like <unk>.

Maybe it nominally although lower can you just walk us through kind of the moving pieces there.

Well I mean look certainly.

With card capture.

So some of the benefit from.

The improvement in attrition through.

Q3 quarter.

Attrition in Q4 will be in line with the expectations.

Fundamentally.

The combination.

We still believe that.

The high end of the range is very achievable.

Possibly north of that.

And that is through the combination of our ongoing performance MSC engineering and APM being at the high end of that range at the same time leg.

Numerator in the in the prepared remarks.

No.

While our we've we closed some business in Russia in Q3.

There is increase in difficulty from the implementation of sanctions and that could provide.

A little bit of downside in the quarter.

That is not that the business isn't there it just would take longer to close.

And then we're monitoring the lockdowns rollout of Lockdowns in China.

Now that the business will disappear Budd as we experienced over the last two years.

When people are not able to come out of their homes.

They are not able to then work on the on the contracting of these trans.

Transactions.

And they've been already very bureaucratic as it is so so we're just taking a cautious approach here with regards to.

Changing the range, meaning we're not changing and we're leaving it at seven to eight but at the same time.

The same trends we saw in Q3, we're still seeing in Q4.

For the reason, we decided to maintain.

Our guidance at seven to eight.

Okay, perfect that seems fair and then maybe one last just housekeeping question.

Just so.

We all have it.

Is the vote.

In May is that the last kind of hurdle before the deal closes or is there anything else there.

Okay.

Thanks.

Hey, guys. Thanks, Shantallow, Mr Nice to hear from you.

I'd say in response to that Jason is it's one of the steps required.

And we'll go through all the steps required before we.

Yes.

Okay perfect. Thank you I'll pass it on.

Youre welcome.

Thank you.

Okay.

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

Hi, Rob.

Great Hi, Antonio.

So.

Just a couple from me first Antonio you mentioned that sales cycles.

Or shortened.

Shortening a bit and I just wanted to probe for a little bit more color on that.

I know you listed some of the drivers for the strong annual spend but is it emerging from the pandemic. We are seeing more activity levels is it people just reacting more briskly to some of the geopolitical <unk> price issues and better budgets and then how do those sales cycles compare to.

What you've seen historically and then I had a quick follow up.

Yes.

And Thats exactly the point, Rob the sales cycles are going back to their historical cycle pre pandemic.

The elongated during the pandemic and now.

There is one.

Going back to the historical level.

Orlando, but also there are more predictable.

And to us from the <unk> the.

Fundamental difference is the predictability and our ability to close business. When we believe it can be closed on and Thats been a significant difference in end of Q2 Q3 quarters here. So.

I do think.

Pending environment has completely changed.

I also think theres been a little bit of pent up demand of course in Q3. After two years of suppressed our spending and we also saw.

A little bit of business from Q4 move to move into Q3, which certainly deliver a very strong Q3 quarter for us but overall.

Much easier environment to be doing business in.

Got it that's great and the follow up for me and you mentioned.

Russia, and how that along with China contributed to your thinking.

Relative to maintaining the annual spend guidance.

Q4, even with the better attrition. So I just wanted to ask on that so I mean, we've seen you guys have a long standing presence in Russia with a lot of strong relationships.

How does this play out I mean, we're seeing companies like SAP that are pending Russia altogether. There also mission critical for a lot of the companies that they serve.

So you guys are as well how should we think about.

The ultimate risk relative to Russia for you guys. I know you said you even closed the deal there in Q3, but just help us contextualize that if you can thank you.

Well, we'll start with look at less than 5% of our annual spend is in Russia and these are five six year contract. So that 5% is spread over the next five years.

I look at that.

Sure.

While our technology is not sanctioned today.

We are still doing business there.

The environment to do that business has become increasingly more difficult as a result of sanctions in banks that our customers have used for business.

<unk> set our own employees have been used to for us to pay the refund their business expenses.

In some cases, a little bit of the issue around collections and Thats why you see also our free cash flow projection for the year at the midpoint being.

Being cautious about potential collection.

Collection issues in Russia, but having said all of that.

In a way in Q3, we did was we thought we could do.

In the quarter.

And.

They're not going to be able to.

Press the button on the SAP system, so to get those agreements done so so just being cautious about it.

We haven't really seen any any change yet in those markets, but just being cautious.

Great. Thanks very much.

Thanks.

And our next question comes from.

Andrew Open bank of American.

<unk> Your line is open yes.

Yes, Hi, Hi, Hi.

Hi, Anton Hie Shantou congratulations.

Okay.

So one of the questions we got a lot today.

How should we think about your cost inflation and what's the dialogue with your customers on pricing.

And your regular business model, if you could just comment on that.

Clearly if you're looking at the results your margins seem to be okay.

Yes, correct our margins are very healthy.

Let me take the last point.

Hey, Luke.

As you are well aware Andrew.

Our contracts on average have 2% to 3% price escalation.

Historically, we've talked to customers is being tied to CPI.

Over a five or six year contract.

Our prices move up 15% to 18%.

For those customers so.

In a way every year, we are increasing prices on our customers.

And Thats allowed allows us to maintain in that regard the gross margins and profitability for our software business.

With regards to.

<unk>.

Sure.

Personnel inflation, if you will cost inflation of salaries look at something that of course, we're keeping a very close eye on and.

We believe.

Our our our financial discipline, which is also tied to the different levers that we use in the company to compensate on creator.

An attractive rewards program for our employees will allow us to manage through this.

We've hired hundreds of people over the last 12 months into into the company, we continue to bring them in at.

The price points the salary points.

That are in line with the profitability that we will deliver in the future.

So overall, we're very confident about our ability to manage through through this inflationary period at the moment.

And thank you and just a follow up as you are having and youre sort of in this unique position.

You do report do you have a midyear year, but as youre thinking about.

Conversations with your customers for remainder of calendar.

22 can you just tell us give us more color as to.

Because they are on a calendar year budget and you're on your fiscal year budget.

How does it look to things accelerate into the calendar year and more importantly.

Does the nature of your conversation with your customers changing right because of going forward youre going to be closely aligned with Emerson and do these sort of hardware capabilities change how you interact with your customers and the kind of conversations you are starting to have thank you.

Well, let me look at first of all.

Since our customers fiscal year as the calendar year and the budget is for the calendar or fiscal year.

The outlook for the rest of the calendar year supported by this strong budgets that they have put in place for this calendar year. So so we would expect that Q4 Q1 and Q2.

In the June September and December quarters are still going to reflect the strength.

In spending that we saw in this march quarter.

Sure.

Dependent on the macro situation towards the end of this calendar year new budgets for.

Calendar 'twenty three.

<unk> will dictate the spending environment then.

Look our conversation let me just first say the following.

We're absolutely convinced.

The focus on sustainability.

And investments in that area are changing the conversations with our customers in a material manner.

Now is not only we need Aspen Tech solutions floor profitability purposes, we made Aspen Tech solutions for profitability and sustainability reasons.

And this is.

A significant shift.

By our customers, we started to see it in Europe , a year and a half ago is now showing up in the United States and in Asia, as well and we're very bullish about this with respect to Amazon absolutely you see customers that are both users of Amazon in Aspen Tech and data <unk>.

Sales or are thinking about the possibilities from combined solutions between Emerson on Aspen Tech.

Now the synergies from from the two relationships into into the customer.

In other areas of collaboration so including co innovation between customer Emerson on Aspen Tech to help them address the sustainability of our operational excellence issue. So so we're all very excited about this and Thats why we also put it in the prepared remarks.

<unk>.

I think it's a very exciting time for <unk> and the new Aspen take going forward.

I'm, Tony Ostrom Pal. Thanks, so much for fitting me in.

Alright. Thank you. Thank you.

And our next question comes from Matt Pfau.

Al.

William Blair Your line is open.

Hi, Matt.

Okay, great. Thanks, guys I appreciate it.

Yes, Antonio it seems like the.

<unk> engineering and MSC suites are certainly performing ahead of your expectations, but.

Maybe a bit below what you were.

<unk> why is APM not seen the same sort of increase in our improvement in traction that MSC and engineering.

Yes.

Well I mean look first of all.

And probably well not probably certainly more than what we've done.

What we need to deliver on the on the guidance.

But we gave you.

So having said that look.

Said that there is a little bit in my opinion, there was a little bit of pent up demand in the March quarter, because of a lack of spending over the last two years.

And the easiest thing to do when you want to spend in Europe , you really haven't you've fallen behind on your automation and digitalization plans is to go with what you know on the in the low hanging fruit, which is advanced process control optimization plan and schedule, an historian and so on and then you start.

Two to focus on new technologies, and new areas of technology spending.

And I think Thats APM. So so we have a pipeline in Q4 that we're very excited about.

We're working to close it at the same time look some of that pipeline is in a couple of the places that we'll refer to on the call, Russia and China. So we're just being cautious about it as well.

Makes sense and then.

You sort of called out one.

Positive trend going forward could be as people look to diversify their energy suppliers, how do we think about that mechanically in terms of how that.

Impacts Aspen is that something thats fairly long term and are there any specific areas.

Within your product suite that that benefits more than others.

Yes.

Right.

In 2019 really towards the end of 2019, beginning of 2020 I was talking to to to you guys and investors about this.

Wave of Capex spending in LNG.

Around gas.

And that and those that Capex wave, which was estimated to be about $125 billion over five years sort of dissipated with the pandemic in 2020 and a lot of those.

Lot of that investment was put on hold.

We believe that.

Certainly the geopolitical situation in <unk>.

In Europe around Ukraine.

Is refocus in countries and customers on LNG.

As an alternative.

Both low carbon, but also diversification of supplies and we expect to see.

That capex spend around LNG too to get.

Started again and provide lift for our E&C customers initially.

Because he said these.

These plants and terminals have to be designed first so so that.

That would be the main driver initially of course.

Oil will continue Capex and all will probably continue to increase.

Low to mid single digit.

A result of the need for more oil supply over the next three to five years and.

And we will also be a benefit but more importantly.

LNG Capex, which in 2019, we were talking about $125 billion over a five year period.

Great. Thanks, guys I appreciate it.

Thank you.

As a reminder to ask a question. Please press one on your telephone to withdraw your question. Please press the pound key.

And our next question comes from Mark Chapelle of Loop capital. Your line is open.

Hi, Thank you hi, guys. Thanks for thanks for taking my question with respect to your prepared remarks Antonio around customers in China was wondering if you could just remind us how much of your annual spend comes out of China.

Yes, Similarly to Russia, just about 5%.

Great, Okay and then.

Switching gears, a little bit here with respect to the pharma business, it's been about a year now since <unk>.

New General manager was hired are appointed to that business. I was wondering if you just give us an update.

What youre seeing there.

Yes, I mean look.

Pharma certainly.

It's an opportunity for us and.

Okay.

A lot of the work that was put in place when he first join in but this time last year was an investment in R&D.

That will start to bear fruit.

Later this year or in our next release of software in November .

And then.

Our go to market activities sort of organically around that.

We continue to execute.

Again pharma.

Materially to our overall results is not there yet.

But we're still optimistic but we've also said that we.

We would like to make.

Of an acquisition to have an anchor tenant in pharma as well in and Thats something that we haven't been able to execute on but we continue to see what opportunities are in the market, but yes no.

Pharma continues in its trajectory and it's something that we're still focused on soon.

Great. Thank you.

Mhm.

Again, ladies and gentlemen.

Okay.

I am showing no further questions at this time I would now like to turn the conference back over to CEO Antonio Pietri for closing remarks.

Alright, well, thank you operator and.

Thank you to everyone for joining the call today.

We look forward to I believe attended and a few of the investor conferences in person this quarter.

And meeting with some of you as well in person in the cold box that we will have thank you to everyone.

This concludes today's conference. Thank you for participating you may now disconnect.

Q3 2022 Aspen Technology Inc Earnings Call

Request a DemoDemo

AZPN

Aspen Technology

Earnings