Q4 2022 Aspen Technology Inc Earnings Call
Good afternoon. My name is Rex and I will be your conference operator today at this time I would like to welcome everyone to the first quarter 'twenty to Aspen Tech earnings call.
All lines have been placed on mute to prevent any background noise.
The speaker's remarks, there will be a question and answer session.
He would like to ask a question. During this time simply press star followed by on your telephone keypad.
If you would like to withdraw your question again press Star one thank you.
At this time I would like to introduce Brian Daniels of ICR.
Okay.
Thank you.
Good afternoon, everyone and thank you for joining us to discuss our financial results for the fourth quarter of fiscal 2022 at June 32022.
With me on the call today are Antonio PHA, as a tax president and CEO and chaparral bright up assets at CFO .
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.
Financial performance of the company that involve risks and uncertainties.
Company's actual results may differ materially from such projections or statements.
By class I shares also include but are not limited to those discussed in today's call as.
As well as those contained in our most recently filed Form 10-Q, and then amendment number four to the registration statement on form S. Four.
On April 14th 2022 by <unk> incorporated with the SEC.
Also please note that the following information relates to our current business conditions and our outlook as of today August eight 2022.
And certainly with our prior practice, we expressly disclaim any obligation to update this information.
Please note that we have posted our fourth quarter earnings presentation as well as the presentation to provide more detail on the introduction of ACB as our primary growth metric on the Investor relations portions of our website.
The structure of today's call will be as follows.
Tony will discuss business highlights from the fourth quarter and fiscal year include the completion of our transaction with Emerson and our pending acquisition of Micron lines.
And then <unk> will review, our financial results and discuss our guidance for fiscal year 2023.
With that let me turn the call over to Antonio Antonio.
Thanks, Brian and thanks to all of you for joining us today.
I am excited to welcome you to our first earnings call as the new Aspen Tech.
We're thrilled to have successfully completed our transaction with Emerson during the fourth quarter and to welcome the talented teams of OSI and their digital grid management portfolio of products.
Or the GM and the subsurface science and engineering team and their portfolio of products or SSC into ASP intake.
This transformative transaction generated significant value for our shareholders and created a leading industrial software company with multiple paths through future long term value creation for our customers and shareholders.
I would like to start by providing an overview of the breadth and scale of our business today before reviewing our fourth quarter and fiscal year 2022 performance and our outlook for fiscal year 2023.
Today, the new Aspen Tech is one of the world's leading industrial software companies and well position to generate double digit top and bottom line growth at scale.
We now generate more than $1 billion in annual revenue and nearly $800 million in annual contract value for ACB.
New business growth metric, we are introducing this quarter and four week Chantelle, we'll provide more details later in the call.
The two businesses contributed by Amazon had leading software solution that significantly diversified Aspen Tech's operations and increase our opportunities for growth in new industries and from sustainability investment trends.
The <unk> portfolio of software solutions and services for the power transmission and distribution or PND market provides aspen tech a market leading position in a fourth vertical.
CGM will benefit from three Mike macro drivers in the PND market.
First the ongoing upgrading and expansion of the grid as part of global electrification to achieve net zero carbon emissions.
The growing complexity of the grid, resulting from the introduction of renewable power and third the need for improved cyber security is the greatest critical infrastructure.
These three drivers are catalyst for greater digitalization of the Greek to manage larger systems of greater complexity.
SSE, formerly known as GSS is a leading portfolio of software solutions that are highly complementary to our existing up upstream business. Aspen Tech can now provide a set of solutions that add value to the entire lifecycle of an upstream customers operation by integrating subsurface.
And above surplus modeling and simulation capabilities to unlock additional value in operations.
<unk> also expands our reach into sustainability areas of the market like carbon capture and sequestration or Ccs and geothermal energy.
The employees from each company are a strong cultural fit with our heritage business with the same passion for innovation and desire to solve their most complex operational challenges facing our customers.
Ticketed leadership team and I have spent significant time with many of the employees of both businesses in Brazil in recent months and have become even more impressed that we have gotten to know them better.
From an integration and transformation perspective, we're tracking well against our plan. We have detailed integration plans for each functional area and for each of the synergy streams, including the cross selling initiatives between each of the businesses and those associated with the Emerson commercial.
Agreement.
We're also making progress took a nice in the DCM and SEC product portfolios and converting the DG portfolio towards term license structure.
As we know from our own experience the token term licensing model will unlock value for our customers and lead to broader and faster adoption of the products in the suite over time.
We're pleased with the progress to date and feel very good that we will deliver on our target of $110 million of adjusted EBITDA.
And are used by fiscal year 2026, driven through a combination of HCV growth and cost synergies over time.
The benefits of the Emerson transaction extend beyond the PGM and ACC product portfolios.
We also formalized our new commercial agreement with Emerson that will make us protect solutions available to sell into markets, where we have limited presence today, such as pharmaceuticals, and pulp and paper.
<unk> has created a dedicated sales team focused on accelerating adoption of Aspen Tech products and solutions across a range of these targeted industries and we have establish a corresponding team within Aspen tech to support and enable Amazon to ensure we capitalize on the significant opportunities.
Over time, we will realize additional benefits us more of our products and solutions are integrated into Emerson industrial assistance and at the two organizations identify opportunities for joint innovation that will begin to transform our solutions are delivered to and adopted by customers.
In addition, our increased scale and the support of Amazon have expanded our capacity and ability to pursue M&A opportunities.
The recent announcement of our definitive agreement to acquire micro mine is a great example.
<unk> has developed a great set of software solutions that help metal and mining companies improve their safety sustainability reliability and efficiency of their operations the metals and mining industry will play a critical role in the in the energy transition and is at the very early stages of investing in the <unk>.
Utilization initiatives that will enable them to meet that need.
We look forward to completing this transaction in our fiscal second quarter subject to regulatory approval.
Finally, the scale of the new Aspen Tech and its critical role in the capital intensive industries is attracting talent of quality expertise and diversity to the company as proven by the members of our new board of directors.
This injection of new talent will materially benefit the trajectory of this company over many years to come in addition, as a company as scales, we're enhancing our specific organizational capabilities and systems. For example in our go to market area. We have created an organization focused on the newly expanded set of key.
Industry to sharpen our strategy messaging and go to market execution in each of these industries.
We have also expanded our partners' organization with the intent to increase our market relationships at a leverage point for market penetration and adoption of our products and solutions.
I could not be more excited at what we have built at Aspen Tech and the opportunity ahead of us.
We have assembled one of the most comprehensive set of solutions in the industrial software market.
And are well positioned to help our customers address the dual challenge.
Meaning the increasing global demand for resources in a sustainable manner.
The dual challenge is central to the continuation of global prosperity prosperity.
That is why we have made it our mission.
As the global population grows by another 2 billion people by 2050.
As more and more people expect a better standard of living and.
And our society expects companies in capital intensive industries to sustainably produce their resources to meet the future needs of the global population and investment over the next 20 to 30 years of a magnitude there hasnt been seen before in the history of humanity will be required to achieve the complete.
Transformation of the global economy to meet the dual challenge.
This investment will focus not only on climate change, but also until clarity.
Eliminating plastic waste in the environment and will drive the innovation and deployment of technologies and digital capabilities to achieve these environmental imperatives.
We believe the new Aspen Tech is uniquely positioned to help companies in capital intensive industries meet the dual challenge.
With that backdrop, I would like to turn to our fourth quarter and fiscal year results.
Since the Amazon transaction closed in mid May and June 30 is our fiscal year end.
I'll focus my commentary primarily on the heritage Aspen Tech business.
Annual spend for the full year for the heritage has been tech business was $674 million.
Up two 8% in the quarter and eight 5% year over year, which was above the high end of our guidance range.
And free cash flow for the full year for the heritage <unk> business was approximately $286 million.
Please note that this excludes discrete tax payment associated with the Emerson transaction that Chantel will discuss in more detail later.
We're pleased with our performance in the fourth quarter, which was strong across each of our key verticals and regions Importantly, we did not see any impact from the worsening economic environment in Q4 the.
The spending environment in our core markets continue to improve as the business and financial performance of our customers is a strength.
After a couple of years of muted investment in their operational excellence and sustainability initiatives. It is clear from trucks from transactions closed in the fourth quarter empty skull year that customers are pursuing more of strategic engagements with us and continue the process of standardizing across their operations on our <unk>.
Products and solutions to drive greater efficiencies and sustainability gains.
Overall fiscal year 2022 played out much as we hoped it would which provides us confidence as we enter fiscal year 2023.
An important trend that we see.
So acceleration across our business in fiscal year 2000, 22022 is how the sustainability imperative is influencing sales activity.
Customers across all of our end markets are recognizing the need to step up their focus on sustainability and are putting in place initiatives around emissions reduction the carbonization and some clarity that will fundamentally change the design operation and reliability of their assets in order to meet their sustainability ambitions.
Our newly expanded set of solutions will support our customers strive to meet these targets, although set by government agencies as a result of the growing regulatory push towards greater environmental disclosure and compliance.
As a point of note at recent webinar held by Aspen Tech on carbon capture and sequestration Gardner a record amount of interest with over 1900 registrants are clear.
Indication of the growing focus of our customers on the carbonization and sustainability.
Looking at our performance by vertical in the year.
Refining had another strong quarter that was the best of the fiscal year crack spreads during the fourth quarter were at all time highs and while they have cooled off in recent weeks. They remain in the upper quartile of their historical range.
Optimistic about the profitability in demand environment for the refining industry and the growth that it will support for us.
Energy Security is also leading to a rethink of the medium to long term need for refining capacity in certain parts of the world.
Chemicals.
He needs to be a source of strength for our business chemical customers recognize that driving greater efficiencies in their operations and mitigating their environmental impact through digitalization is critical to their future business performance.
We're also confident about the long term growth of the industry as global chemicals demand is expected to increase 300% by 2050. According to the World Energy Forum place in the industry at the center of meeting the dual challenge.
As previously discussed.
The E&C vertical continues on its transformation path as more customers focus on sustainability investments such as renewable power hydrogen carbon capture and sequestration and other technologies.
This along with improved medium term outlook for oil capex spend and unexpected increase in LNG facilities investments to drive backlog growth for the E&C industry.
We're optimistic this vertical will show improvement going forward as it reopens repositions itself towards sustainability and the associated Capex trends.
I would now like to say a few words about the industries in which OSI and SSC operate.
Digitalized in the transmission and distribution industry is critical to transforming how this industry operates to support global sustainability.
With the <unk> portfolio of products perfectly position in this regard.
It is estimated that energy demand will grow by 50% by 2050 as the global population increases and achieved a better standard of living.
Which means that to reach net zero carbon emissions in that timeframe, 75% of the increase in energy demand will need to be supplied by electricity and 90% of it will need to come from renewable sources.
This means the electrical grids will lead to expand significantly and will become more complex, which will require greater and more sophisticated digital capabilities to manage and optimize their operations.
This is where OSI and PGM products play a central role the CGM product portfolio was developed to meet the increasing complexity of the grid, including advanced capabilities, such as advanced distribution management systems.
For electricity distribution and distributed energy resource management systems terms, which address the complexity introduced by intermittent sources of electricity to the grid from renewable sources.
OSI has also developed capabilities to manage micro grids found in industrial facilities commercial buildings and other assets or systems that cannot afford the loss of power from public utilities.
We also see this application as an important cross cross sell opportunity into the heritage Aspen take industrial customer base, and Furthermore into macro minds customer base once the transaction closes.
Looking ahead, we expect a significant capex spend will be dedicated to upgrading and expanding the grid increasing the demand for <unk> solutions for many years to come through all phases of the business cycle.
It is important to note that our size businesses lever to capex budgets in the highly regulated utility industry and not tied to the traditional capex investment drivers in oil and gas and chemicals behaving more like Opex investments.
We're also very excited about the <unk> product portfolio in the oil and gas exploration and production area.
Integration of the SSC subsurface capabilities with our engineering suite above surface capabilities will create a unique offering in the market. We're already seeing strong customer interest in this combined offering and its ability to drive innovation in this space.
We believe that capex budgets in the upstream sector will grow over the next three to five years in order to maintain an increased supply of oil and gas.
This is a trend that we already see overtime, we will create a new path for growth for this portfolio of products focused on de carbonization capabilities and renewable sources of energy such as Ccs and geothermal energy respectively.
In addition, existing SEC product capabilities will complement the micro <unk> suite of products to further differentiate the performance of that future product suite.
Finally, we're now the only company.
To provide a comprehensive solution to model the entire petroleum value chain from the rock and the reservoir to the distribution of fuel to the corner gas station and into the chemical supply chain.
As we typically do on our year end earnings call I would now like to provide you with some additional details about our performance for the full year 2022.
All of which are on an annual spend basis.
I will start from a product perspective, and focus specifically on the performance of the heritage Aspen Tech businesses.
The engineering business grew annual spend five 5% for the year generating 38% of our overall annual spend growth. This was stronger than we initially expected and driven in large part by by better performance by owner operators, which resulted in lower attrition and higher gross growth.
Our manufacturing and supply chain, our MSC business delivered annual spend growth of 12, 1%, representing 55% of our total annual spend growth.
We saw a significant improvement in MSC performance throughout the year as our owner operator customers, particularly refiners, so business conditions improve as COVID-19 related disruptions abated.
The asset performance management or APM business generated total annual spend growth of 14% or 7% of our total annual spend growth for the year contributing six points of annual spend growth.
The performance of the APM suite was impacted by headwinds from attrition mainly in two areas. One we had several E&C is that purchase APM entitlement in the last couple of years as part of their business initiatives to generate revenue growth from operations and maintenance activities in brownfield site there.
Specter of revenue growth from this activity did not materialize as a result of depressed demand due to COVID-19. So these agreements were not renewed.
And to select customers in Asia, and other regions that lacked the onsite support during coffee lockdowns required for the successful deployment of the product.
The APM gross growth in the fourth quarter was one of the strongest in the history of the suite total gross growth for the suite in fiscal year 2022 equated to $1 one point of growth.
The outlook for APM attrition in fiscal year 'twenty three is much improved as a result of most D&C contract renewals have been already a cure.
More mature customer success process, including remote support and the expectation of improved demand for this with going forward.
Customer interest remains very high and we continue to have a sizable and growing pipeline of opportunities.
Shifting to our verticals.
Energy chemicals, and engineering and construction verticals contributed 54%, 32% and 7% of our growth in annual spend during the year respectively.
Global economy industries, or Gis contributed 7% of our annual spend growth for the year and grew 9% in the year.
For the full year the attrition rate for heritage has been tape was 5% deceleration in annual spend growth. This year was split between lower attrition and higher gross growth.
We generated 13.
13, 4% gross growth in fiscal year, 'twenty, two which was approximately at 200 basis point improvement from last year.
We're pleased with our growth performance during the year and believe it sets the stage for further improvement in the years to come.
As you can see we had a strong fiscal year 2022, and enter fiscal year 2023, with a great deal of momentum the trends in each of our end markets are positive and the addition of the <unk> and SSD product portfolio provide exposure to new markets that are also trend favor.
At the same time, we're mindful of the evolving macro environment and its potential to weigh on economic activity in the coming quarters. While also remaining vigilant about future <unk> developments and geopolitical considerations.
So while we're optimistic about our performance performance in fiscal year 'twenty. Three we think it's prudent to assume a wider range of potential outcomes sema.
Similar to recent years, we expect fiscal year 'twenty three to be a tale of two halves.
We currently have greater visibility and confidence into the first half of the year given the ongoing strength in our end markets and as customers look to utilize their calendar 2022 budget commitments. Conversely, we see several potential scenarios for customers calendar 2023 budgets, depending on how the macro environment.
<unk> evolves in the next two quarters.
Putting all this together our current expectation is for ACB growth in fiscal year 'twenty three to be 10, five to 13, 5% for new Aspen Tech.
There are several assumptions underpinning our guidance.
First CGM and SFC are expected to contribute approximately four points of growth in total this year the.
The PGM product portfolio has had a good start in the fiscal year, especially considering the sale acquire divest processes involving the OSI business for the better part of the last two years. We're also seeing notable market strength from the SSD product portfolio.
Ported by improved Capex spend are better positioned business. After the completion of its restructuring under Amazon ownership.
The potential value creation from the integration of their capabilities with our engineering suite of Heritage Aspen Tech.
We're bullish about the outlook for these two product portfolio going forward.
Second.
We currently expect growth in the first half of fiscal 'twenty three to build upon the momentum in recent quarters.
The current operating outlook for our customers in calendar 'twenty, two is very healthy and support the budget and current spend rate in place.
Based on today's macro outlook for oil demand and supply and market dynamics, we expect calendar 'twenty three budget to support a continuation of this spend experienced this year.
But we prefer to take a prudent approach to our ACB growth range.
To put a finer point in the range.
High end of our range assumes that the PGM and SSD product portfolio will perform as projected in our guidance given their respective market dynamics and the heritage Aspen Tech product suites will see a continuation of improvement in the spend experienced so far in calendar 'twenty two into calendar 'twenty three.
This outcome assumes little or no impact from any economic deceleration.
And the low end of the range assumes the macro outlook get materially worse due to economic conditions cognitive elements and geopolitical considerations result, resulting in reduced customer spend for the heritage <unk> suites with owner operators supporting our growth outcome for those suites seeming.
For fiscal year, 'twenty, two while the PGM and ACC product portfolio deliver a performance as projected in our guidance.
It is important to note that in any of these scenarios. We're confident that we will deliver a year of double digit growth in ACB.
Third from a suite perspective, we expect the engineering and MSC suites will contribute six to eight points of growth CGM will contribute three points SSC, one point and APM is expected to contribute approximately <unk>.
5% to one five points of growth.
Lastly.
Attrition is expected to be approximately 7% to 8% for the year. The heritage has been take attrition is expected to show continued improvement to 3% to 4% for the year. The SSC suite attrition is expected to be approximately 4% for the year, which we would expect to improve in the coming years.
<unk> is not expected to have any material attrition.
While the economic outlook is unclear at the moment what is clear is that Aspen Tech is performing at a high level and well positioned for the future.
We meaningfully accelerated growth over the course over the course of fiscal year 'twenty, two and have laid the foundation for durable double digit growth in the future.
OSI and SSE businesses, and the pending acquisition of micro mind provide exciting new growth opportunity opportunities and meaningfully diversified our end market exposure.
Fiscal year 'twenty two was the most transformative year in the history of the company, we delivered excellent operational and financial result, while signing and executing our transaction with Emerson.
This is the most exciting time in the 40 plus year history of Aspen Tech and we're well positioned to deliver greater value than ever before for our customers and shareholders.
I want to conclude by recognizing the extraordinary work done by the heritage Aspen Tech team to deliver the exceptional operational and financial results achieved in fiscal year 2022, and also thank the new Aspen Tech team for their outstanding effort to continue to make our transformation possible.
Broadly believe the best is yet to come and efforts will result in significant value creation for all stakeholders of the company.
With that let me turn the call over to Chantelle Chantelle.
Thank you Antonio I have several different topics to cover today, so let's jump right in.
Let me start with our reported GAAP financial results for the fourth quarter and the full year fiscal 2022.
Not comparable to the guidance here Jonathan provided on its fiscal third quarter earnings call in April due to the completion of the Emerson transaction and the associated accounting.
As previously reported Emerson acquired a 55% stake in the new Aspen Tech on May 16, 2020.
Such the Pittsburgh area Emerson put up as part of the transaction <unk> subsea.
Which included the PGM and SSD businesses became Mr mining entity once the transaction was completed.
Therefore under accounting rules. The GAAP results you see in our press release today reflect the full quarter's results from PGM and SFC and 45 days of results from Heritage Aspen Tech, reflecting the periods from May 16 to June 30.
In addition, as part of Emerson Emerson CX was on a September 30 fiscal year end, which changed the June 30th to align with the heritage Aspen Tech's fiscal yearend as a result, you will see that the yearend results shown in our financial tables for the nine month period of October one 2021 to June 30 of 2022.
And then includes the nine month fiscal period of Dji SEC financials, 45 days of Heritage Aspen Tech.
As a result of these adjustments our income statement and statement of cash flows this quarter and for the full period are not indicative of the financial performance of either heritage Aspen Tech Fintech.
However, since the balance sheet at this snapshot in time as of June 30th It provides a useful view for investors of our underlying financial strength.
One item I would like to provide further context for is free cash flow in the quarter.
<unk> transaction and the resulting change in control required a short period U S. Federal consolidated tax return for the period May 17, 2022 through June 32022.
This period was considered a separate tax year and resulted in the recognition of taxable income associated with a contract asset balances.
Resulted in a pull forward of approximately $65 million of cash tax payments into the month of June .
Adjusting for this discrete tax payment and the additional transaction related items free cash flow for the heritage Aspen Tech business was approximately $286 million in line with our prior outlook.
Due to these unusual circumstances, which will only apply to the fourth quarter is up by 22 since that is when the transaction closed as well as the dynamics of revenue recognition that our model, which I will discuss next we believe it is more helpful for investors to focus on the key metrics we provide.
Now on to revenue recognition.
Term license financial results are 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.
We define bookings as the total value of customer term license perpetual contracts delivered in the current period.
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.
A decrease or increase in bookings between fiscal periods, resulting from the change in the amount of term license contracts up for renewal is not an indicator of the health or growth of our business.
As is common in the software industry. Our bookings are typically backend weighted towards the end of the quarter and the fourth quarters, typically but not always our largest bookings quarter.
As a result, it is not unusual to see resulting revenue decline sequentially in the first fiscal quarter.
So unless I, specifically license and professional services revenue once altogether and the customer arrangement.
Generally recognized overtime, it's one performance obligation using percentage of completion accounting Rev.
Revenue recognition and related to license and professional services revenue when implementation is complete.
Maintenance revenue is recognized ratably for OSI arrangements over the underlying maintenance term commencing once implemented implementation is complete.
As those who have followed us in the past now we provide supplemental metrics to help investors get a clearer sense of the underlying growth of the business.
Starting this quarter, we will be transitioning from annual spend to ACB annual contract value as our primary growth metric we have.
Posted a slide deck in video presentation on the Investor Relations section of our website to provide greater detail on this change.
Historical ACD results going back to the first quarter of fiscal 2020 can be found in our earnings presentation.
Encourage all of you to take a look at those.
I will not review all the information in that deck on this call, but here are a few key takeaways.
We define ACD is an estimate of the annual value of our portfolio of term license and term and perpetual software maintenance and support agreements.
Great.
ACB provides insight into the annual growth and retention of our recurring revenue base, which is the large majority of our overall revenue as well as recurring cash flow.
ACB is how we manage the business internally on a day to day basis and is the primary corporate performance call, we used to incentivize and compensate our management and sales teams.
ACB is functionally very similar to Hertz Aspen Tech's annual spend metric the only difference between the two metrics is the inclusion of perpetual SMS into ACB.
And the near term perpetual SMS will continue to increase due to the completion of existing OSI projects underway and the factor with I will continue to sell some perp license.
As we transition OSI and SSD businesses to our term license token model, we would expect perpetual SMS ACD to decline. In addition, the small residual amount of perpetual estimates to Harrington Jasmine Tech business will continue to decline.
The projected ACD growth guidance is inclusive of this dynamic.
For <unk> products ACB currently only captures a fraction apparel business relates to term license perpetual estimates due to the <unk>.
Revenue accounting associated with the selling of bundled licenses.
Scott.
It does not capture Dbm's perpetual license.
Mhm services, our hardware revenue.
The proportion of PGM revenue that will be represented in the ECB is expected to.
To continue to grow over time as we execute on our strategy.
The transition to ICD sort of lucky purposes.
Vision of perpetual SMS provides greater visibility into PJM and FERC current current recurring revenue streams.
It will also provide insight into the ongoing transformation of BD M&A proceeds perspective business model.
<unk> took a nice term license model.
And ACB is a commonly used metric across the software industry and this transition may provide greater comparability for asking checked with other companies.
With that as background I would like to spend a moment reviewing ACD in more detail.
Growth rates referenced our year over year basis.
ACD, which is a snapshot in time and unaffected by the tightening of the Emerson transaction with $791 million at the end of the fourth quarter up seven 8% year over year breaking that down further.
Engineering, ACB was $373 million up five 5% MSC ACB was $275 million up 11, 5%.
PM ACB was $30 million up 14%.
The ECB was $70 million down, 1% and PGM ACD was $43 million up 19%.
Taken together heritage Aspen Tech ACB, which includes engineering, MSC and APM the $670 million.
$78 million up eight 2%.
Difference between that growth rate and the eight 5% annual spend growth rate is the inclusion of approximately $4 million over many perpetual FNF and ECB that.
This is slowly declining at the long tail of customers move away from the very old perpetual licenses.
Overall, the German SSC demonstrated solid performance, despite working through sizeable integration activities and the distraction of the pending transaction with Aspen Tech. They have both entered fiscal year 'twenty three.
These challenges.
Overall, we are pleased with the performance of the business and a significant improvement and growth generated in fiscal year 2023.
Antonio noted.
Underlying trends in our core markets are favorable and we are well positioned to deliver faster growth over time as we execute on our strategic objectives.
I would now like to provide some more detail on the progress we have made on the integration of the German SSD and how we are tracking to our synergy targets.
To build on Antonio's earlier discussion I am pleased with our integration and synergy planning process for fiscal year 2023.
We've delivered on the critical success criteria for day, one readiness plan.
Our fiscal year 2023 plans incorporate the specific contribution from synergy initiatives from both topline growth and expense product.
We do not plan on providing quarterly updates on our synergy progress, but we do plan on reporting our performance at the end of the fiscal year.
Before I turn to guidance I would like to discuss our balance sheet and the pending acquisition with Michael <unk>.
We ended the quarter with 449.
$7 million of cash and cash equivalents and trying to set the $3 6 million total debt.
Our strong balance sheet as a strategic asset for the company and is underpinned by our highly profitable business model with multiyear contracts that are paid annually in advance with.
With Joes predictable and sustained cash flow generation.
As we highlighted as part of the Emerson transaction, the increased scale and capabilities of the new Aspen Tech provides a great opportunity to pursue additional acquisitions that broaden our capabilities and market reach.
Our recent announcement of our proposed acquisition of micro mine is a great example, Mike remind has developed a set of world class software solutions for the metals and mining industry.
<unk> solutions enable miners to digitalize their operations and significantly improved safety sustainability reliability and efficiency.
Mike remind as a great strategic fit for Aspen Tech and is well aligned with our focus on the dual challenge.
Metals and mining industry will be a key strategic enabler of electrification, which will require substantial investments.
We are paying $900 million Australian dollars are.
$623 million for micro mines, which we expect to close in the second fiscal quarter subject to regulatory approval.
We are intending to finance the acquisition through a combination of cash on hand, and a nuc.
$475 million <unk> term loan at the time of closing.
Very comfortable operating with that level of debt on our balance sheet, and we will still have available capacity to pursue additional M&A opportunities.
I would now like to close with guidance for fiscal year 2023.
As Antonio mentioned, our outlook reflects both the strong underlying demand trends, we see across the business.
As well as a wider range of potential outcomes to reflect the growing uncertainty in the economy.
And we are targeting $10 five to 13, 5% ACB growth for fiscal 2023.
From a suite perspective, we expect the engineering MSC suites will contribute six to eight points of growth CGM will contribute three points SSC, one point and APM is expected to contribute Xbox claim to one five points of growth.
Attrition is expected to be between 7%, 8% for the year.
Note that we do continue expected improvement in heritage. We do expect continued improvement inherited Aspen tech attrition trends in fiscal year, 'twenty, three and estimate approximately three to four points of attrition.
We expect an additional four points of attrition from SFC during the fiscal year, we expect minimal attrition from DBM. This fiscal 'twenty three.
We expect total bookings in the range of $1 $7 billion to $1 $1 7 billion, which includes $547 million of contracts that are up for renewal in fiscal 2023.
We expect revenue in the range of $1, one four to $1 $2 billion.
The expense perspective, we expect total GAAP expenses of $1.
One six to $1 $196 billion.
Together, we expect GAAP operating income in a range of loss of $46 million to positive $6 million.
GAAP net income Albert a range of negative $8 million to positive $24 million, we expect GAAP net income per share to be in the range of a loss of 12 to positive 36.
From a non-GAAP perspective, we expect total non-GAAP expenses of 637640 $7 million non-GAAP operating income of $503 million to $555 million.
non-GAAP income per share in the range of $6 40 to $6 89 from <unk>.
As a reminder, our non-GAAP results exclude the impact of stock based compensation expense amortization of intangibles associated with acquisitions and acquisition and integration planning for latent TB.
Note that as a result of the Emerson transaction and the estimated purchase price allocation to intangible assets physical.
Fiscal year 2023 results will include a significant increase in expense related to the amortization of intangibles.
This will impact our GAAP profitability.
From a free cash flow perspective, we expect free cash flow of $347 million to $262 million, our fiscal 2023 free cash flow guidance assumes cash tax payments in the range of $94 million to $104 million.
Wrap up our business is performing at a high level and is well positioned for the future. We are incredibly excited about the new Aspen tech it and our ability to deliver even more value for our customers as we help them solve the dual challenge operator, we are now ready to take questions.
At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.
We'll pause for just a moment to compile the Q&A roster.
Okay.
Your first question comes from the line of Matthew Pfau. Your line is open.
Hi, Matt.
Okay, great. Thanks for taking my questions I. Appreciate it guys wanted to ask on the guidance for the ACB growth related to the heritage.
Aspen business it seems like under the Bull case assumption there there would only be a slight acceleration from what you saw in fiscal 'twenty. Two so so maybe just help us understand why under that Bull case, where the momentum continues into fiscal 'twenty three we wouldn't see more of an acceleration in the ACB growth.
Heritage Aspen business.
Yes.
If you break down the guidance that we gave.
<unk>, which is basically at <unk>.
Top of the range is eight points for Harris adjustment.
Our engineering and MSC.
Is three points for the GM, one for FCC and <unk> five to one five points for APM.
The growth of heritage has been take on an annual spend basis.
It's about 11%.
<unk>.
The thing is is denominated youre looking at a different denominator as well.
We ended the year at $672 million of annual spend.
ACB.
Base is now 791.
Numbers are shifting so it makes it a little harder to estimate but.
If you have used the same basis for Harris adjustment. They were project in our Harris adjustment that business to grow about 11% in fiscal 'twenty three.
Yes.
Got it really really helpful. And then just one follow up on the micro <unk> acquisition, maybe you can just talk about your ability to integrate that acquisition. While it is still at the same time still working through the Emerson integration. Thanks.
Yes.
I'd like to think that one of our core expertise in Aspen TEG and old heritage has been a nuance beneath this execution.
We have a very detailed plan around integration and transformation activities, including capturing the synergies.
Sure.
Well into into those that execution.
<unk> is an ongoing business.
Full blown business with its own organization structure and so on.
Once that transaction closes.
That business will be able to.
To run on its own.
Its current management structure is our expectation.
And we will take time to fully integrate it into Aspen Tech as a business.
Is accelerating their term licensing business and growth into into mining on a global basis. So so so while we will work on integrating some of the administrative functions and systems.
We'll leave it to run on its own for a period of time.
Great. Thanks, guys.
Thank you.
Your next question comes from the line of Andrew <unk>. Your line is open.
Hi, Andrew.
Hi, Andrew.
Andrew you might be on mute.
I am on mute can you hear me now.
Yes.
Yes apologies.
Can you just give us more color on micro mine.
What was the timeline of the acquisition what was Emerson team's involvement and how those micro mine if it all integrates was Emerson.
Troll offering.
Well, let me look.
So.
It is an asset we've known about for a while.
Of course.
It's owned by private equity.
<unk>.
And it.
It was it was at that point the potential private equity firm.
Decided to.
Kick off a process to determine the interest in the asset that we got engaged.
It was a fast moving process.
Certainly Amazon has capabilities and expertise.
Contributed to our ability to execute as fast and successfully on this.
<unk> was fully involved in determining the adequate value.
And also.
Consent into their funding for the for the transaction.
And then look as far as.
This is pure software technologies.
Eventually how it integrates into <unk>.
<unk> systems will have to take a look at that like we are.
And we will about some of our solutions today and the MSC suite So Budd.
<unk> has an existing business and a couple of areas and regions.
Mining.
And we believe that it will be certainly there will be synergies for us to Aspen Tech and eventually Amazon as a channel for those for that software as well.
Thanks, a lot and since closing the deal could you just give us color on how.
The commercial agreement with Emerson is working in real life and for Heritage Aspen Tech what kind of impact are you seeing from this commercial agreement. Thanks a lot.
So Tony would you like to tackle that first yeah, yeah, I can I can just give some color to it Andrew.
Okay.
Sure.
I'd say, we're off to a fantastic start you know we have the organization in place, we're calling rules of engagement. We've had some local meetings, we have geographical trips planned way of account planning underway.
Think of that off to an amazing start and I think we're clear with kratos targets on both sides of the relationship so quite.
Quite excited personally by the speed that we've been moving up.
I think that so now we have all that Andrew I think the results will be more of a Q1 conversation as we're just getting started I think I can tell you that the joined the account team are knowing each other they're very interested in how they can help each other.
That relationship I think it's off to a great start in Q1.
Yes.
Okay.
Thanks, a lot.
Great. Thank you.
Your next question comes from the line of Jason Celaeno. Your line is open.
Hi, Jason.
They're probably a mirror as well Jason.
Hey, sorry, this is Ashley <unk> on for Jason.
Thanks for taking my question first one I have is on the APM.
Curious to hear from some of your recent customer wins.
And maybe any sort of update you can provide on the number of pilots you implemented during quarter one.
Hum.
And any sort of color you can provide on whats, giving you the confidence.
That growth range in fiscal 'twenty three.
Yes.
So.
As we stated in the call.
In the prepared remarks.
We saw we saw strong demand for APM in fiscal 'twenty, two about $1. One point of gross growth. Unfortunately, we did have the set of customers.
Did not realize the benefit from the use of that software to deliver on projects and then other customers that were under very strict lockdowns.
Over the last 12 to 18 months at the.
Ended up successfully deploying the solution but.
Having said that we believe that most of that is beyond us.
We have.
A strong pipeline.
In fiscal 'twenty through 'twenty three for APM.
And in addition, Amazon.
Will be taken to market, our APM suite there already.
They have already identified a pipeline of opportunities for APM in different markets.
Yeah.
Some of them, we hope will close this quarter as well so overall.
We feel good about about that switch.
Certainly carve it created different dynamics, but but now that we're moving beyond carve it into a more normal environment.
Okay.
We believe that.
That range that we gave for guidance is is a comfortable one for that suite.
Great. Thanks for the color and maybe just one more on micro mind. It seems like a great fit to new asthma attack could you maybe provide some color on the competitive landscape the competitors.
That business. Thank you.
Yes look as we move into new areas.
Were taken on a new set of new set of competitors.
While with the OSI.
When more of the traditional.
Industrials.
In <unk> in the transmission and distribution business.
And ABB and Siemens and so on.
Four Mitra mine is more pure software players companies like Bentley Veeva. So.
And a couple of other ones.
We're looking forward to engaging in competitive situations with these software companies.
Yes.
Jason or sorry, you might be on mute again.
Thank you for the color.
Yes, no problem. Thank you.
Okay.
Your next question comes from the line of Mark Shuffle. Your line is open.
Mark.
Hey, Thanks for taking my question and so I was wondering if you just provide some additional color around micro mines.
Just building off some.
Question. So this would be around things such as how much revenue do they generate annually whats the revenue growth rate, which is there.
Our profitability profile looks like.
Yes look.
<unk>.
We will come up once the transaction closes.
With a basically a new set of projections for the combined.
New Aspen Tech with Micra mine, but the revenue.
We'll certainly be material.
We've always said.
Anything that we acquire needs to support or be accretive to our double digit growth ambitions and best in class profitability.
You can assume that is the case in this instance in both metrics they are accretive to our profitability and double digit growth ambitions.
Okay, Great and then.
Of.
A question around your customers' sustainability initiatives I know in the past I believe a few if not a few more customers set up separate sustainability budgets.
I know youre, hoping or intended to sell into I was wondering if you just comment on what youre seeing with respect to that trend, whether youre seeing more companies or customers set up separate sustainability budgets.
But.
Look Ed.
At the end of the day and by the way, we have an initiative internal internally to be able to identify.
Opportunities.
We're driven specifically for sustainability reasons for profitability reasons or both because some times. Most times is one of the same.
We can make up our customers profitable and sustainable at the same time with the same products Budd, but look what it is absolutely true.
That.
Almost every conversation with our customers now involves sustainability.
Areas, whether it is.
How do we reduce emissions hydro track emissions, whether it is chemical recycling.
Clarity hydrogen carbon capture and sequestration as I've mentioned in the call I mean, we held a seminar two weeks ago I've been in this company for 26 five years and I was blown away to here that we had 1900 people register for that webinar.
Which is unbelievable so so.
Look there is no doubt.
The sustainability imperative is real.
Now so.
The U S Senate approved big sustainability.
Investment and we believe that this will continue to be a trend more and more.
The company is involved in.
And.
The carbonization, Eric carbon capture electrical batteries today, Google and Facebook are customers of Aspen Tech new customers, but they are they're using our engineering suite to model energy consumption and some others.
Data farms or server farms, so theres a lot going on in the space and what we're seeing is a new category of customers that are driven mainly by their by their.
Innovation around sustainability.
Yeah, I think the other thing I would add too.
I think theres going to be a convergence between the markets and our customer sells breakthrough with plenty of set from a customer perspective, Allison I would add is the markets.
Changing if you read some of the reason.
Articles from some of the banks on Green Capex.
Talk about Capex with Green, Capex, and categorize them into sustainability things such as <unk>.
Electrification emissions.
So I think those things will start to converge as our customers decide their inner workings and the Francis who owns those and how they configure it.
So I would just offer that additional content.
Great. Thank you.
Thank you Mark.
And it comes from the line of Patrick Scholes.
Your line is open.
Patrick Congrats on congrats on the quarter and thanks for taking my question.
Could you talk a little more about the early receptivity you are getting from Emerson customers as they move on to the asset until we can model and then can you also remind us on what the contract durations look like and how long you think it will take to get the new customers moved over to the token model.
Well, so so I assume youre, referring to the SFC and OSI businesses. So.
There's also the <unk>.
Commercial agreement and Amazon going to market on their own resale in our products and solutions eventually Emerson will find new customers through the commercial agreement, where they will sign up to the suites of Harrods adjustment <expletive> and those those will be token licensing entitlement.
And that should happen even this quarter on over the next few quarters and years.
It takes it takes a few months.
<unk>.
To.
Set up token ice products meeting set up the license management systems.
The products so that they can tap into the license management system, that's ongoing work for.
Both.
And OSI.
So our expectation is there.
Really impact from from took an insertion will be felt in fiscal 'twenty four and beyond.
But in the meantime.
We're taking those products to market.
Our term products, meaning we're trying to sell them on a term basis product by product.
And eventually we will also convert those customers to full token customers, but.
Our focus right now is is on getting everything ready so that late this year fiscal year and into fiscal 'twenty four we're in full mode of selling token token licenses on.
<unk>.
And really having a business, where we've already the bundled services and license with OSI and we're now.
Already with a lot of momentum and the transformation of these two businesses.
Great. Thank you.
Thank you.
Yes.
There are no further questions at this time, Mr. <unk> I'll turn the call back over to you.
Well I want to thank everyone again this is our.
This is Mike.
My 40th.
Earnings call as CEO of Aspen day, but it is my first call as <unk>.
Of the new Aspen Tech.
Very glad to have had this call we're incredibly excited about the future.
And what lies ahead for new Aspen Tech and look forward to engaging you all and with Chantelle as well in future investor conferences and Roadshows. So thank you everyone.
Thank you.
Okay.
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