Q2 2023 Aspen Technology Inc Earnings Call

January 25, 2023

The conference will begin shortly to raise them lower Johan during Q&A, you can dial star one one.

[music].

Yeah.

Good day, and thank you for standing by and welcome to the Q2 2023, Aspen Technology earnings Conference call. At this time all participants are in a listen only mode. After the speaker presentation there'll be a question and answer session.

Ask a question during this session you will need to press star one one on your telephone you will then hear an automated message advising your hand is raised to withdraw your question. Please press star one one again please.

Please be advised that today's conference is being recorded I would now like to hand, the conference over to your first speaker today to Brian <unk> ICR. Please go ahead.

Thank you good afternoon, everyone and thank you for joining us to discuss our financial results for the second quarter of fiscal 2023, I think December 31 2022.

With me on the call today are intelligent pantry after tax president and CEO , Chad celebrate Alphatec CFO before.

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 is about risks and uncertainties.

The company's actual results may differ materially from projections or statements.

That might cause such differences include but are not limited to those discussed in today's call as well as contained in our Form 10-Q, most recently filed with the SEC.

Also please note the following information relates to our current business conditions and our outlook as of today January 2012, 25 2023.

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

Please note that we have posted a financial update presentation on the Investor relations portion of our website.

The structure of today's call will be as follows Antonio will discuss business highlights from our second quarter.

Al will review, our financial results and discuss our guidance for fiscal year 2023.

That let me turn the Columbia Antonio Antonio.

Yes.

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

Aspen delivered solid second quarter results as we continued to benefit from a positive demand environment in many of our core end markets.

We're also seeing clear benefits from the combination of heritage adjustment Tech with the OSI and SSD businesses that were part of the Emerson transaction in go to market activities innovation and customer access.

As I mentioned last quarter, our primary focus in the first half of the year was executing on the integration transformation and change management plans to create unified consistent operating principles and a single business model across the entire organization.

We have made substantial progress and believe our initial integration plans are largely complete.

Transformation phase of the OSI NSE business is well underway.

Our primary focus is in the second quarter was instituted and standardizing best practices across our go to market organization.

<unk> transaction terms and conditions and the change management required to support these best practices.

While we have already on boarded the OSI in SCC sales teams in the first quarter and implemented a standardized methodology. We're now focused on driving the execution required to deliver high quality and long term duration license agreements that supported the financial predictability that investors are a cost.

Two from Heritage Aspen Tech.

This was a key area of reinforcement at our recent companywide sales meeting in Boston.

From which I came away very pleased with the progress we have made towards establishing a common set of transaction best practices across all businesses and the enthusiasm.

He demonstrated by the OSI and SSC sales teams.

There is still more work to do in this area.

Parents, but the progress to date.

Okay.

In terms of synergies.

Confident on our ability to meet or exceed the synergies expected in fiscal year 2023 based on the increasing pipeline across the different growth synergy categories.

Actual cost synergies achieved today, the alignment and execution between the Emerson on Aspen Tech teams and the completion of the key transformation requirements at capture growth in ACB.

In the OSI business.

Overall I am pleased with our performance in the first half of the year and confident in our ability to execute to achieve our full year financial targets.

The success, we expect each year, an integrated on transforming the business sets up.

And transforming the business sets up the new Aspen take well to deliver significant top and bottom line growth in the coming years I am highly optimistic about the opportunity ahead for Aspen Tech and our ability to generate significant value for our shareholders.

Now looking at our financial results for the second quarter.

Annual contract value or ACB was $833 $7 million up eight 7% year over year.

Revenue was $242 8 million.

GAAP loss per share was $1 <unk>.

And non-GAAP EPS was <unk> 35, and.

Free cash flow was $53 1 billion.

I wish to wish to provide further commentary on the quarter performance from oil site in SFC.

The OSI business closed significant transactions in the quarter in line with our expectations, but because of the bundled nature of the commercial arrangements in the quarter. They did not contribute to ACB growth.

In our last earnings call, we talked about the importance of achieving superability or they always had services business.

Key transformation milestone so that new agreement signed are able to be included in our ACB metric.

We're excited to announce that as expected with recently achieved this key milestone, which will allow us to begin including from OSI agreements. The DCM product term license component and the SMS component of perpetual license agreements in our ACB metric beginning this quarter.

This aligns OSI with how ACB is calculated for heritage Aspen Tech.

Chantel will go into more detail in her prepared remarks, we also continue to be very encouraged by the prospects of the FCC business and its contribution to ACB growth as demonstrated through its contribution of the two largest ACB growth transactions in the quarter.

We equally expect that as our execution in the OSI and SCC sales organizations evolve to be in line with heritage Aspen Tech, we will experience greater a more predictable ACB growth.

Yes.

Looking at the quarter in more detail the demand environment remains positive and was similar to trends we have seen in recent quarters.

We signed notable contracts in each of our key verticals and global markets and pipeline development continues to be robust.

Our continuous strong performance in the midst of uncertain and changing economic conditions is a testament to the relevance and resiliency of our customers' businesses and the mission criticality of new Aspen Tech solutions.

Aspen Tech has an essential role to play in helping our customers meet the demands for the product suite for greater global prosperity, while achieving their sustainability goals and ambitions.

Historically these two areas have been viewed as being the intention with one another and delivering on both goals is the core of our dual challenge mission.

Our customers have validated this value proposition and recognize our unique position to help them meet the dual challenge.

Refiners and chemical producers will need to meet the increasing demand for their products and significantly reduce their environmental impact while utilities will need to transform how electricity is generated and distributed to meet an unprecedented increase in demand.

These are complicated challenges that will required elevated levels of investment for decades to come and Aspen Tech is in a great position to benefit from these trends.

I would now like to spend a moment, providing details on what we're seeing in the market and our performance by vertical.

Refining continues to perform well around the world.

Refining margins are expected to remain solid through 2023.

Down from historical highs and overall end market demand for refined products will continue to grow, especially for diesel a middle distillate products.

The ongoing return of air travel.

<unk> <unk> band of refined product from Russia by the European Union and the increasing demand from the recent reopening in China are all expected to be ongoing catalyst for this market.

We feel very good about the opportunity for Aspen Tech to drive consistently strong growth with refining customers.

We had a very strong quarter I have great momentum momentum in the power transmission and distribution, our T&D market with the PGM solutions from our OSI.

We're very pleased with the performance of the GM in the first half of the year the.

The secular trends in this market are incredibly favorable given the expected vast increase in electricity demand and increasing number of energy sources that will power they create in the future.

The greater complexity from renewable power sources like wind and solar is creating more complex transmission and distribution networks, including commercial and industrial micro grids, which will require a wholesale rethink of how to manage them.

We expect this industry to have favorable investment trends for many years to come considering the investment that will be required to transform degree.

Capex spend in 2023% for power generation transmission and distribution is expected to be about $1 million to $3 million.

One of our key growth synergy opportunities with DCM is to leverage <unk> global footprint starting in Europe .

We have already had some exciting early wins with CGM in that market and continue to actively build out our sales capacity in that region.

In December we held the OSI user forum in Las Vegas.

The event was highly successful with 500 customer attendees, representing more than 150 utility utility companies from around the world.

This was the first time since the pandemic started that OSI customers to gather in person.

We felt great enthusiasm from customers about their future plans for the OSI business under Aspen Tech.

Specialty on the establishment of an ecosystem of third party implementers for the DG.

<unk>.

The oil and gas industry upstream and midstream had a banner year in 2022 supported by high oil prices and strong execution discipline.

Forecast indicate oil prices will remain elevated through 2023 at an average of 80 to $90 per barrel for Brent crude for the year based on various current projections.

The industry Capex is expected to increase by 12% to $485 billion in calendar 2023, According to energy intelligence projections.

With a significant portion of that increase coming coming from national oil companies.

And our business, we had another strong quarter of the combination of heritage just Fintech solutions and Sse's products has created an unmatched technology portfolio that can deliver far greater volume forecast.

We signed a number of quality wins with the Austrian customers in the quarter, including a significant contract with one of the largest oil producers in South America.

And we're also engaged with customers on the use of SSE capabilities for carbon capture and sequestration in various locations around the world.

The E&C vertical deep well in the second quarter has been an important source of our strength in the first half of the year.

Customers in this market are benefiting from two important trends.

First in the traditional business the investment in upstream oil and gas projects has increased notably in recent quarters.

Combination of our strong oil prices and tight supply after several years of below average capex investment in the oil and gas market is supportive of Emc's backlog and head count growth, which is positive for us been taken.

And second <unk> are aggressively investing in establishing engineering capabilities for sustainability investments that represent a new growth opportunity that is likely to be less cyclical than their traditional business.

The capex investment required to meet sustainability targets in our core owner operator markets will be substantial.

Present, E&C with sizable growth opportunities that haven't been impressive for several years.

We're very optimistic on the outlook in this market in fiscal year 2023 and beyond.

Finally, the chemical industry had a good quarter, but thus faced some challenges globally and regionally in Europe .

Now im going situation in Europe , and its impact on local energy supply and consumer demand continued to weigh on chemical customers in the region.

Globally chemical customers are also experiencing a slowing demand and margin pressure as the global economy has slowed its growth.

In conversations through the last quarter.

Many of our customers have told us they believe the currency tuition will recover in the second half of the calendar 2023 as economic activity picks up.

We remain optimistic on the opportunity that chemicals market, but would flag it as one of the area of our business that we are cautious on in the near term.

I would now like to share some customer wins from the quarter that demonstrate our success.

First.

An existing SSC inherits Aspen tech customer on one of the largest oil producers in South America is.

Let's look into short term by 65% and the time it takes to get a new oil field discovery to production.

As part of this initiative the customer evaluated multiple vendors on their known as automation and AI capabilities and elected to increase the span of SSE products due to the combination of capabilities in the SSC suite.

He has been and remains the largest incumbent in the exploration and production portfolio of software capabilities used by the customer.

Yes.

Second in international utility company headquarter in the U K owns and maintains the high voltage electricity transmission network in England and Wales.

These customers are investing heavily in its network of thousands of kilometers of overhead lines and underground cables are more than 300, substations to connect more and more low carbon electricity sources. Since that is crew shot since that is a crucial factor to meet a net zero carbon ambitions in that region.

After a careful and started to upgrade transmission management system and an extensive evaluation of multiple competitors the customer selected the OSI solution because of its more mature modern architecture and out of the box capabilities.

This win opens up the opportunity to expand their use of <unk> products into other operating areas and across other companies in the customers' group.

And third and final.

Amazon and Aspen Tech are having success in the market.

Emerson recently announced its selection as the main automation contractor.

Lafayette petrochemical complex, our LP joint venture between Qatar energy on Chevron Phillips chemical.

Our LP will be the largest ethylene plant in the region and one of the largest in the world.

Scope of work covers automation software and analytics capabilities, including various products from our spin tax engineering and MSC suites.

<unk> seat at the table in the very early phases of the competitive process for these major construction project accelerated Aspen Tech's visibility into this opportunity.

While I spent <unk> products and solutions contributed to Emerson overall quality to the customer.

We expect these wind will open many more opportunities for both companies in the future.

This win is also a good demonstration that the commercial relationship between Emerson on Aspen Tech is already benefiting both companies and the alignment between both commercial organizations will undoubtedly continue to grow that pipeline of pieces.

We expect that focus on targeted growth initiatives will result in increased long term growth and profitability for both companies through a strengthened go to market presence and offering.

Now turning to our innovation investments.

In November we launched our new software release I spend one version 14, which provides augmented intelligence guiding users to improve decision, making abilities and increased operational excellence.

Introducing over 100 sustainability models. This release will help customers accelerate progress in the areas of emissions management hydrogen economy carbon capture material circularity bio based feedstock and renewable energy.

<unk> is a great example of how <unk> will leverage our historical strength in modeling assimilation with new technologies like artificial intelligence to deliver greater value to customers through better profitability.

And improve sustainability.

A great example of collaborative innovation in product development is our recently announced strategic partnership and licensing agreement with Saudi Aramco.

As part of this agreement, we partner with <unk> to provide to the market a unique integrated modeling and optimization solution for the sourcing entity decision of Sidoti.

Through the solution, we expect to provide customers the ability to rapidly evaluate sources of seo to generation and potential opportunities for us or sequestration of the <unk> and hence the signed new innovative solutions that can reduce their carbon footprint, while ensuring profitability.

M&A is another important part of our innovative strategy.

And we continue to maintain a positive posture in this area.

We got off to a strong start with information, which has received fantastic early feedback from customers greatly accelerates, our AI Iot industrial data and connectivity product roadmap and will enable greater visibility and understanding of assets operating environment.

We're also proceeding on our integration planning with <unk> as we work towards the completion of the transaction. We expect this acquisition to close as soon as we obtain the last remaining regulatory approval.

We are actively working to secure.

We have become even more impressed with the macro mine team.

Products as we have got into northern better as this process has played out and look forward to welcoming them to us and tech.

Let me finish by providing our latest thoughts on fiscal year 2023 guidance and the second half of fiscal 2023.

We remain confident in our ability to deliver on the full year ACB growth target and our Maine and are maintaining the guidance range of 10, 5% to 13, 5%.

While also maintaining our free cash flow guidance of $347 million to $362 million.

Our confidence is based on our pipeline of business the momentum building from the integration and transformation activities undertaken in 2023, capex spend projections and economic outlook in our in our core industries.

Our success in achieving these outcomes will still depend in part on continuing to successfully execute on our integration and transformation initiatives across the company.

As a reminder, we have.

We suspect that the second half of the year to be a stronger contributor to growth and free cash flow given the historical buying patterns of heritage <unk> customers and the expected timing of <unk> and SFC contributions, including for the anticipated synergies.

We're pleased with the performance of PGM and SFC, so far and believe the operational progress. We have made in the first half of the year and our growing sales pipeline puts us on track to deliver four points of ACB growth from those businesses.

We also continue to be mindful of the macroeconomic environment coffee developments in China, and the challenges facing the chemicals market, which we have flagged at the key variables and how we performed within our ACB growth range for the year.

Before I turn it over to Chantelle I want to reiterate how much progress we have made in the first half of the year in bringing inherent to just mantech OSI and SFC together as one company we are.

Have created a world class industrial software company that is poised to accelerate growth and generate significant profitability as we execute on our long term strategy.

The new Aspen Tech team has done an amazing job getting us to this point and I want to I want to recognize their effort and commitment to our success.

So with that let me turn the call over to Chantal.

Thank you Antonio I will now review our financials for the second quarter fiscal 2023.

As a reminder, these results are being reported under topic 606.

The impact of both the timing and method of our revenue recognition for our term license contracts.

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

A decrease or increase in bookings between fiscal periods, resulting from a change in the amount of term license contracts up for renewal.

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 significant impact on the timing of our revenue.

As a reminder, we have transitioned from Danielle.

Annual contract value.

Primary Group Inc.

Define ACB.

The annual value of our term license and term and perpetual software maintenance and support or SMS agreements.

ACD provides insight into the annual growth and retention of our recurring revenue base.

<unk>, which is the majority of our overall revenue.

Recurring cash flow.

Annual contract value was $833 $7 million in the second quarter of fiscal 2023 up eight 7% year over year.

And then Tony mentioned, we are pleased to have recently achieved separability for TTM software, which will allow us to prospectively recognized the growth at PJM term license.

Businesses into our ACP metric on a standalone basis.

I think contributors to this go to market change.

The enablement of implementation service partners to operate autonomously and directly with our TTM customers.

The change to a signed commercial contracts, where the customers will be contracting for software licenses and professional services separately and.

Streamlining of tools and processes for implementation services to significantly reduce complexity.

See with our software.

We will begin to see the impact of this change of TTM beginning in the third quarter, which will have a meaningful benefit to <unk> in the second half of this fiscal year.

To note that achieving separability has multiple business benefits as well, including the general acceleration of revenue that free cash flow generation.

He will spend.

Which the company defines as the annualized value of our term license and maintenance contracts at the end of the quarter for the businesses other than OSI and FSC was approximately 697 $5 million at the end of the second quarter of fiscal 2023.

<unk>, 9% compared to the second quarter of fiscal year 2022, and two two.

Is that sequentially.

As a reminder, we intend to provide this annual spend disclosure for sure that Aspen Tech only for fiscal 2023 to provide investors comparability with historical disclosures.

Total bookings, which we define as the total value of customer term license in perpetual asset of contracts signed in the current period.

Term license and perpetual Fms contract signed in the current period, but where the initial licenses are not yet being delivered under topic 606.

Let's turn license in perpetual SMS contracts signed in a previous period for which the initial licenses are being delivered in the current period with $242 million, a 16, 3% increase year over year.

Total revenue, but do you like it.

$42 8 million for the second quarter as a reminder, as a result of the Emerson transaction. The subsidiary that included the OSI and SSE businesses became the surviving entity.

As a result, a year ago comparisons you see in our financial statements.

The OSI and SSD in the second quarter of fiscal 2022 and year over year comparisons are not strong.

Now turning to profitability beginning on a GAAP basis.

Operating expenses for the quarter were $209 1 billion.

Total expenses, including cost of revenue were $302 $2 million.

Operating loss was $59 $4 million and net loss for the quarter was $66 2 million.

<unk>.

<unk> per share.

Please note that the net loss in the quarter reflected approximately 34. Please.

Of a noncash gain related to the mark to market adjustment for the Australian dollar foreign currency derivative related to the pending microbiome acquisition.

Since the inception of this foreign currency derivatives.

Net unrealized loss would have incurred had stayed approximately $15 $3 million.

And we will continue to be fluctuations until the closing of the microbiome transaction.

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

And excluding the impact of the realized gain on foreign currency derivatives.

Reported non-GAAP operating income for the second quarter at $86 $6 million representing.

Representing a 35, 7% non-GAAP operating margin.

As a reminder, margins will fluctuate period to period due to the timing of customer renewals and front license revenue recognized during the quarter.

non-GAAP net income was $22 $8 million or <unk> 35 per share based on $64 6 million shares outstanding.

Turning to the balance sheet and cash flow, we ended the quarter with approximately $446 $1 million of cash and cash equivalents.

$264 million outstanding under our term loan agreement.

On December 22022, we entered into a credit agreement with Emerson for an aggregate commitment of $630 million.

We intend to use the proceeds from borrowings under the agreement to be in part the cash consideration for funding the pending microbiome acquisition.

Also in January we fully paid off our existing term loan balance.

In the second quarter, we generated $49 $5 million of cash from operations and $53 $1 billion of free cash flow after taking into consideration the net.

Impact of capital expenditures capitalized software and excluding acquisition and integration planning related.

We had solid cash generation quarter that was in line with our expectations, our free cash flow cadence will be more backend loaded than prior years due in part to business mix upfront integration expenses and the <unk>.

Many of the expected impact of our synergy initiatives.

In terms of synergies we made additional progress in each of our four synergy buckets gross business transformation cost in the commercial agreement with Emerson.

Most notable milestone was the dji separability that we discussed earlier.

We believe we are well positioned for the long term from both a growth and profitability perspective, and our ability to realize the $110 million adjusted EBITDA synergies by 2026.

I would now like to close with guidance.

Performed well in the first 2000.

<unk> 23, and have delivered on the business integration and transformation initiatives needed to position the business for faster ACD growth in the second half of the year.

We're encouraged by the overall demand trends across the business, while also being mindful of an uncertain economic outlook.

Account for this uncertainty we continue to believe maintaining a wider guidance range is prudent.

With respect to ECB, we are maintaining our target of 10, 5% to 13, 5% growth for the year, including four points of growth contribution from the DCM and FSC product portfolios. We are encouraged by the transformation and integration now comes with EQM Vanessa.

Trends in Heritage Aspen Tech.

We are maintaining our bookings bookings guidance in the range of $1.07 billion to 1.17.

The $1 billion, which includes $547 million of contracts that are up for renewal in fiscal 2023. This includes approximately $133 million of contracts up for renewal in the third quarter.

We continue to expect revenue in the range of $1, one four to $1 2 billion.

We expect license of solutions revenue in the range of $765 million to $826 million and maintenance revenue and service and other revenue of approximately 312 and $64 million respectively.

From an expense perspective, we expect total GAAP expenses of $1 207 to one point to one 7 billion.

Taken together.

GAAP operating income in a range of loss of 67 million kilowatts of $15 billion for fiscal 2023 with GAAP net income in the range of negative $7 5 million to positive $32 $5 million.

We expect GAAP net loss per share to be in the range of a loss of 11 <unk> positive <unk> 49.

non-GAAP perspective, we expect operating income of $503 million to $555 million.

non-GAAP income per share in the range of $6 83 to $7.

Okay.

From a free cash flow perspective, we continue to expect free cash flow of $347 million to $362 million.

Our fiscal 2023 free cash flow guidance assumes cash tax payments in the range of 94 to 100.

Which is unchanged.

We would expect the third quarter to be the largest free cash flow quarter of the year.

With regard to the timing of cash collections for Sse's renewable portfolio.

To wrap up Aspen Tech is performing at a high level generated solid growth and profitability in the first half of the year and we believe we are well positioned to deliver on our full year financial targets we are target.

With your large and expanding market opportunity that we believe can support significant levels of growth and profitability over time.

With that operator, we would now like to begin the Q&A.

Thank you.

As a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced to withdraw your question. Please press star one again.

Please standby, while we compile the Q&A roster.

Yes.

Yeah.

And I show. Our first question comes from the line of Rob Oliver from Baird. Please go ahead.

Great Hey, Rob Hey, Good afternoon, Hi, Antonio can you guys hear me okay.

Yes.

Hey, Great Hi, Chantal.

A couple of questions.

For me.

Just first.

Antonio you talked about the phases or maybe it's all of those as you talked about the phases of the integration of OSI and SFC and how you've gotten through the first phase can you remind us of what the milestones are and what needs to be done.

As we enter phase two.

But rough in a way.

A lot of the key transformation.

Millstones.

<unk> been achieved certainly Sip our ability was a key one.

For the OSI business because now it allows us to account for the growth in ACB from this transactions that we signed.

With customers.

The release of the SSC suite and tokens.

Or Microsoft was also a key milestone.

We achieved.

And then the Q1 quarter.

We're about to release the various ship for Linux and then later in the year in the fiscal year, we will be releasing.

Suite, our focus for the OSI PGM.

Suite there are many other smaller milestones if you will.

That are accomplished almost on a weekly basis, but fundamentally is as it's also about the transformation of.

Commercial agreements between customers and the new Aspen Tech for SSC is a significant set of.

Our steps to transform those agreements into.

What looks like a heritage as fintech providers out terms and conditions.

<unk> for the majority of it is and now introducing term licensing to these customers with you need a little bit of that in Q2 that will be a lot of that done in Q3.

Q4 and going forward.

But then look at some of the things that we talked about.

New sales methodology.

Standardizing on best practices, a lot of change management going on but I would say that the major milestones that we had hoped to achieve are in place now and Thats. What we have talked about Q3 Q4 being the quarter.

Thanks.

The results from all of this work we've done in the first six months of the year to shop.

I don't know if ive missed anything.

<unk>.

That's very helpful. Thanks, Antonio and I had one follow up for you just around.

The ACB guide for the full year.

Acknowledging that now having now reached every ability are you guys going to be able to start to book some of the new Emerson properties into AZZ, ECB, which is exciting.

I think under Heritage Aspen, you had traditionally given a fairly tight range and then you kind of broadened that out a little bit prior to the Emerson transaction into kind of a three point range. You are at the $3 range right now and I know earlier, you had been talking about being comfortable with the high end of that range and I didn't hear you say that on this call.

But at the same time I heard you say, you're real comfortable with the back half of the year. So I just wanted to get a sense for.

As you look at the end markets that you gave a lot of detail about how you feel about where we are within that range. Thank you.

Yes.

I appreciate the question and look there.

The fact is that.

We're very comfortable with where we are at this point in the year on our <unk>.

Growth in ACB trajectory.

We felt that.

It was prudent and cautious to maintain our guidance.

But I also feel a lot of confidence.

The outlook for <unk>.

The year.

And based on what I've seen so far and what we have accomplished and the outlook for our industry and customers.

I feel comfortable thinking that we could come in in that mid to upper part of our range and the bottom part of our branches just the conservative cautious expense.

Great very helpful. Thank you guys very much appreciate it.

Okay.

Thank you.

And I show. Our next question comes from the line of Andrew <unk> from Bank of America. Please go ahead.

Hi, Andrew.

Hey, how are you can you hear me.

Yes.

Yes, just so.

Looking at Heritage Aspen Tech spend showing nice acceleration or is this more on the engineering side or manufacturing and supply chain.

But look at typically the first half of the year, it's been a good year for engineering, we've seen an acceleration in what we're performing ahead of our of our planning and engineering.

With MSC I would I would say we're tracking.

MSC deals tend to be to have a longer sales cycle nine to 12 months and really.

Historically is in the Q3 Q4 quarters, while we see the big wave of MSC deals, but overall are performing according to expectations.

Got you.

Just a follow up question I think it's more of a big picture question.

Right now is sort of December January and one where you're getting really good view at the budget some of your customers for capital planning for 'twenty.

'twenty three now that you guys sort of have access to <unk>.

Morrison.

Channel et cetera et cetera.

The visibility for Aspen has changed.

The relationship you have with <unk>.

Emerson and what.

I am referring to.

Do you guys get better visibility.

With the relationship now versus before thank you.

But.

Certainly.

The companies are engaging in the market.

Good and increased visibility.

Do think it behooves us is separate.

Entities to develop our own point of view.

But we.

We do share.

What we hear in the market.

Our point of view on the on the on the macro outlook and budgets.

<unk> internally developed through multiple conversations at customers over a period of time.

And Thats, what you have in our guidance.

Thanks, so much.

Sure.

Yes, I think the only thing I would add Andrew if I can take that bigger picture down to more granular so not macro but I think where we do have more near term visibility is probably more at the <unk>.

Segment level working with Emerson, So we have probably more granular visibility into the customer accounts, but at the macro level as Antonio articulated.

Got it fair enough. This is very useful thank you.

Thank you.

And I show. Our next question comes from the line of Matthew Pfau from William Blair. Please go ahead.

Hi, Matt.

If you have your phone on mute please UN mute your line.

Yeah, Hey, Hey, Antonio Shanteau. Thanks for taking my questions I wanted to first follow up on on your chemicals commentary and is this is an area that I believe last quarter you sort of also called out that performance was good but you're maybe cautious on it and keeping a close eye in this quarter you had some.

Similar commentary, but just wondering if anything has changed versus last quarter, either in terms of pipeline or ability to close deals in the chemicals vertical.

No.

Perhaps what I would say.

Some customers in chemicals, we did see a little bit of longer conversations.

On deals.

There was perhaps one or two deal that moved from Q2 into into Q3 that we're now working to close.

But in general is it shows.

A lot of conversations a lot of maintenance with chemical customers.

A lot of time meeting customers in the Q2 quarter.

And then just express.

The reality of what they're facing which is slowing demand and more pressure on margins I think I think we all see that in the announced.

Announcements that they are making with our result and guidance forward looking guidance I've given so.

But look at the same time as we've said.

When when the economic environment becomes more difficult for these customers.

So look for ways to drive efficiencies in their businesses.

They've turned to Aspen tech historically for that as well so.

So.

Just being cautious about it I think especially this quarter.

As new budgets have to be.

Executed.

But we continue good engagement, we have good visibility into our pipeline of business and the quarter end and into Q4.

Just just being cautious about it.

Okay, Great and then.

On the revenue in the quarter.

Down sequentially from first quarter, and we don't have a lot of history of the combined business and heritage Aspen you typically would see a sequential increase from first Q second Q is that related to SSE and OSI and is this sort of some sort of seasonality that we should think about modeling going forward. Thanks.

Yes, definitely I would definitely take into account that the portfolio of business mix coming in.

And I'd be happy to follow up with you on that but it's definitely a seasonality based on the portfolio makes you take that business models coming of SSE historically, having one year terms in their calendar year and yet the OSI milestone completion, so youre going to see different mix definitely.

And it depends on the renewal cycle as well so theres quite a few there are quite a few dynamics.

Yes.

Matt.

Just to emphasize the point that one of the points that I've made remember the OSI revenue today as a percent of completion on projects on each driven by dynamics of our projects. So it has nothing to do with software sale.

Okay understood very helpful. Thank you I appreciate it.

Thank you.

And I show. Our next question comes from the line of Jason <unk> from Keybanc capital markets. Please go ahead Jason.

Jason Great.

Antonio Centel.

One question on the unbundling of the separability for LSI.

Alright that customers pay is it is there any difference between when it gets separated or is it or is it that equal from from the total.

Yes, well I think probably more to come in the sense of what's possible I would say just apples to apples answer Jason Thats, a separation of the pieces.

Lets it goes to third party services that will be their conversation to have but I would expect the apples to apples to be fairly similar.

With opportunities there as we work through to demonstrate our value to see where we can take that Tim.

Okay excellent and then maybe just.

Building off of <unk>.

Following up on Ron's guidance question can you just remind everyone what type of macro or business conditions.

Kind of baking in to the bookends of the range.

Yes, but I think at.

At the high end.

In a way is what we talked about.

A good budget solid budgets into 2023.

Economic conditions that support the industry that we're in.

Certainly the continued investment and expansion on an upgrade of the grid into utilities and more capex spend in upstream or midstream.

At that upper end also support.

Chemicals are spending.

The low end.

About it.

I'll proceed on the microenvironment on budgets, but also throw in targeted.

Throwing in regional conflict Europe .

So those are the bookends for those two.

We see China reopening from carve it in and while the conflict in Europe has created certainly difficult dynamics for chemical customers.

We've continued to see good business from customers in Europe , and refining and Epc's.

<unk> industry in general around the world as they open up.

Because it's a global business or what they might be headquartered in Europe .

Doing global projects. So so but those are those are the factors.

No.

Then on a half is worst case scenario of $30 a half is a great outcome.

Okay, Great Super helpful. Thank you.

Yeah.

Thank you.

And I show. Our next question comes from the line of Mark Scheffel from Loop capital. Please go ahead.

Mark.

Hi Antonio.

And.

So just starting with you in your prepared remarks, you mentioned some of the Emerson Aspen integration sales efforts and milestones I was wondering if you could speak to any early efforts with Emerson to sell your products into other markets that has been historically hasnt played in such as pulp and paper and wastewater.

Yes, well, let me look at those those efforts are ongoing of course.

Both Emerson on us, but they've got great familiarity with our core markets.

The big capital projects happening in oil and gas chemicals, even in refining in the middle East and Asia.

So it is natural that some of the first wins you would see.

In those four industries at the same time.

As you said MSR has presence in other industries.

<unk>.

We're we're enabling the sales people and teams in those industries.

We're also working to determine.

The value proposition for some of these industries.

Some of their applications.

And I would argue that's a longer term tail.

Business generation, but nonetheless.

It's an ongoing effort and as part of our targeted initiatives.

Especially with pharma, while <unk> has been in pharma.

MSR has a second first our second largest market share in that area.

See great opportunities for both companies with Emerson leadership in that space.

Okay, great. Thank you that's all for me.

Okay.

Thank you.

And I show. Our next question comes from the line of <unk> <unk> from Wolfe Research. Please go ahead.

Hi, This is <unk> onshore.

Joe.

Thanks for taking the question so with asking one FC suite for Linux go on development I was wondering whether when that comes when it becomes complete whether there'll be any incremental benefit from this because Linux operating systems generally tends to be used with larger corporations.

Because of better safety on various security parameters.

Relative to Windows, you guys released in fiscal Q1, and whether that could continue to drive large deals in SSA correspondingly strong contribution to <unk> growth in the year. Thank you.

One follow up after that.

Yes.

No doubt.

We've learned.

The leanest version of.

Of the operating.

Our operating system is is more common with <unk>.

Higher work.

Higher workload applications more sophisticated applications in the <unk> suite.

Perhaps applications that consume a lot more tokens as well.

That that suite will be released soon.

And we do expect to sort of capture that incremental use but.

The bulk of the FX.

<unk> suite use usage is with the Microsoft operating system.

I do want to.

Emphasize that.

Got it and then just.

On the guidance question, what has to happen I guess to improve relative to today to get towards that top end range of guidance is there any call outs in particular sectors that you would be to see performed better than what you currently seen in the first half.

Thank you.

But I mean look.

The recent win maintained 13, 5% at the high end of our guidance is because we have visibility we have a path into to that number.

And with that the pipe.

Pipeline of business.

And as supported by synergies and benefits from the transformation of OSI and SFC, So what needs to happen look its execution.

Sure.

And not being impacted by some of the things that.

I've mentioned corvid conflict in Europe .

So prices of our transformation.

The transformation of our business.

<unk>.

This is not linear per se, there's always surprises.

And you can always be tripped.

And your execution.

Yes.

We found some things in the last six months that we're not.

In our assumptions, but we've been able to overcome them.

And we don't know of anything that could trade for us in the second half of the year, but we also pull whether it'd be cautious because.

There is a lot of work.

We're lifting a lot of rocks and assuming that we're going to find what we think we're going to find that in some cases, we may not so so we're just being cautious about that but if we if we continue to execute on the transformation that we did in the first half than that past due $30 a half is there.

Great. Thank you very much.

We have been.

Thank you.

And I shared on our last question comes from the line of Clarke Jeffries from Piper Sandler. Please go ahead.

Okay perfect. Thank you for taking the question Hello.

Yes.

Antonio Emerson held its its analyst day in November and included two metrics that stood out to me on that has been business, one being thousands plus salespeople actively selling Aspen tech.

The second being 70% of Emerson control systems do not have a tech software.

The question is.

How do you expect those metrics to change in the coming calendar year end.

Which metric would you expect us to see the most progress in.

Soon and which is the most meaningful near term assets.

But I mean look certainly the look I think it's a combination the Emerson installed base is addressed by those thousands of salespeople.

Now they are.

Have to be trained enabled educated.

And so on.

So the goal here is not to try to boil the ocean.

In one year.

Because when you try to do that you dilute yourself and you end up not being successful I think.

We want to be very focused on the initiatives that we want to pursue to.

To deliver the synergies that we've outlined.

For our sales every year going forward and that have Antonio will turn into many many more salespeople sell an announcement that into a much greater installed base that has stalled basis is a huge opportunity for aspen.

Yes.

There are places, where Emerson has tremendous tremendous market position pharmaceuticals.

China.

Oil and gas midstream.

<unk>.

And some of these core industries, where they are in so so we'll we'll start.

Focusing in on working with them on in each of these areas.

Yes.

The fruit.

<unk>.

Our labor will show up over time.

Those thousands of salespeople or the installed base that you referred to.

Think of that the total addressable market.

We will start eating into that time.

<unk>.

Perfect. Thank you very much just a follow up <unk>.

Maybe I missed it but could you clarify what the raises to the high end of.

Net income is that primarily the fluctuation of the currency derivative or could you clarify what the changes there to the full year guidance on EPS.

Yes, I think it would be it would be.

<unk>.

Items that come in in the sense that there's some stock based compensation in there there is the derivatives.

I think those are the two moving pieces late with CMS and that change.

And drivers.

Alright, perfect. Thank you very much.

Thank you.

Thank you that.

That concludes our Q&A session for today at this time I would like to turn the conference back over to Antonio Pietri CEO for closing remarks.

Well.

Thank you everyone.

I know it's already.

As of January 25th, but Hey, happy new year, So everyone look forward to.

Dominion in person some of U S. As we engage in conferences.

And other activities so.

Thank you and have a good evening.

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

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The conference will begin shortly to raise and lower Johan during Q&A, you can dial star one one.

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The conference will begin shortly.

Nathan lower Johan during Q&A, you can dial star one one.

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Okay.

Good day and thank you for standing by welcome to the Q2 2023, Aspen Technology earnings Conference call. At this time all participants are in a listen only mode. After the speaker presentation there'll be a question and answer session.

Ask a question during this session you will need to press star one one on your telephone you then.

Inherent automated message advising your hand is raised to withdraw your question. Please press star one one again please.

Please be advised that today's conference is being recorded I would now like to hand, the conference over to your first speaker today, Brian Dan You ICR. Please go ahead.

Thank you good afternoon, everyone and thank you for joining us to discuss our financial results for the second quarter of fiscal 2023, I think December 31, 2022 lets.

With me on the call today are Tony Repatriate asset tax President and CEO , Chet, Alberta, Alphatec CFO before.

The company's actual results may differ materially from plus projections or statements.

That might cause such differences include but are not limited to those discussed in today's call as well as those contained in our Form 10-Q, most recently filed with the SEC.

Also please note that the following information relates to our current business conditions.

Our outlook as of today January 2012, 25 2023.

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

Please note that we have posted a financial update presentation on the Investor relations portion of our website.

The structure of today's call will be as follows Antonio will discuss business highlights from our second quarter and Shantou will review, our financial results and discuss our guidance for fiscal year 2023.

With that let me turn the Columbia Antonio Antonio.

Yes.

Thanks, Brian .

Thanks to all of you for joining us today.

Aspen take deliver solid second quarter result, as we continue to benefit from a positive demand environment in many of our core end markets.

We're also seeing clear benefits from the combination of heritage adjustment Tech with the OSI and SSE businesses that were part of the Emerson transaction in go to market activities innovation and customer access.

As I mentioned last quarter.

Our primary focus in the first half of the year was executing on the integration transformation and change management plans to create unified consistent operating principles and a single business model across the entire organization.

We have made substantial progress and believe our initial integration plans are largely complete.

And the transformation phase of the OSI and SSE businesses is well underway.

Our primary focus is in the second quarter was instituted and standardizing on best practices across our go to market organization.

Including transaction terms and conditions and they change management required to support these best practices.

While we have already on boarded the OSI and HFC sales teams in the first quarter and implemented a standardized sales methodology. We're now focused on driving the execution required to deliver high quality and long term duration license agreements that supported the financial predictability that investors are a costumed.

Two from Heritage Aspen Tech.

This was a key area of reinforcement at our recent companywide sales meeting in Boston.

From which I came away very pleased with the progress we have made towards establishing a common set of transaction best practices across all businesses and the enthusiasm.

He demonstrated by the OSI and <unk> sales teams.

There is still more work to do in this area, but I am encouraged by the progress to date.

Okay.

In terms of synergies.

Confident on our ability to meet or exceed the synergies expected in fiscal year 2023 based on the increasing pipeline across the different growth synergy categories. The actual cost synergies achieved today, the alignment and execution between the Emerson on Aspen Tech teams and the completion of the key transformation requirements at capture grow.

An ACB.

In the OSI business.

Overall I am pleased with our performance in the first half of the year and confident in our ability to execute to achieve our full year financial targets.

The success, we expect each year, an integrated on transforming the business sets up.

And transforming the business picks up the new Aspen take well to deliver significant top and bottom line growth in the coming years.

I am highly optimistic about the opportunity ahead for Aspen Tech and our ability to generate significant value for our shareholders.

Now looking at our financial results for the second quarter.

Neural contract value for ACB was $833 $7 billion up eight 7% year over year revenue was $242 8 million GAAP loss per share was $1 <unk> and non-GAAP EPS was <unk> 35.

And free cash flow was $53 $1 billion.

I wish to wish to provide further commentary on the quarter performance from oil site in SFC.

In our last earnings call, we talked about the importance of achieving superability or they always had a services business.

Key transformational milestone so that new agreement signed are able to be included in our ACB metric.

We're excited to announce that as expected. We recently achieved this key milestone, which will allow us to begin including from OSI agreements. The PGM product term license component and the SMS component of perpetual license agreements in our ACB metric beginning this quarter.

This aligns OSI with how ACB is calculated for heritage Aspen Tech.

Chantel will go into more detail in her prepared remarks. We also continued to be very encouraged by the prospects of the FCC business and its contribution to ACB growth as demonstrated through its contribution of the two largest ACB growth transactions in the quarter.

We equally expect that as our execution in the OSI and FCC sales organizations evolve to be in line with heritage Aspen Tech we will.

<unk> greater and more predictable ACB growth.

Looking at the quarter in more detail the demand environment remains positive and was similar to trends we have seen in recent quarters.

We signed notable contracts in each of our key verticals and global markets and pipeline development continues to be robust.

Our continued strong performance in the midst of uncertain and changing economic conditions is a testament to the relevance and resiliency of our customers' businesses and the mission criticality of new Aspen tax solutions.

Aspen Tech has been essential role to play in helping our customers meet the demand for the products that support greater global prosperity, while achieving their sustainability goals and ambitions.

Currently these two areas have been viewed as being intention with one another.

Delivering on both goals is the core of our dual challenge mission.

Our customers have validated the value proposition and recognize our unique position to help them meet the dual challenge.

Refining and chemical producers will need to meet the increasing demand for their products and significantly reduce their environmental impact while utilities will need to transform how electricity is generated and distributed to meet an unprecedented increase in demand.

Complicated challenges that will required elevated levels of investment for decades to come and Aspen Tech is in a great position to benefit from these trends.

I would now like to spend a moment, providing details of what we're seeing in the market and our performance by vertical.

Refining continues to perform well around the world.

Finding margins are expected to remain solid through 2023.

Down from historical highs.

Overall end market demand for refined products will continue to grow, especially for diesel a middle distillates products.

The ongoing return of our travel the upcoming E band of refined product from Russia by the European Union and the increasing demand from the recent reopening in China are all expected to be ongoing catalyst for these market we.

We feel very good about the opportunity for Aspen Tech to drive consistently strong growth with refining customers.

We had a very strong quarter I have great momentum momentum in the power transmission and distribution, our PND market with the PGM solutions from our OSI distance.

We're very pleased with the performance of the GM in the first half of the year.

The secular trends in this market are incredibly favorable given the expected vast increase in electricity demand and increasing number of energy sources that will power they create in the future.

We expect this industry to have favorable investment trends for many years to come considering the investment that will be required to transform degree.

Capex spend in 2023 or four power generation transmission and distribution is expected to be above $1 million to $3 million.

One of our key growth synergy opportunities with DCM is to leverage <unk> global footprint starting in Europe .

We have already had some exciting early wins with CGM in that market and continue to actively build out our sales capacity in that region.

In December we held the OSI user forum in Las Vegas.

The event was highly successful with 500 customer attendees, representing more than 150 utility utility companies from around the world.

We felt great enthusiasm from customers about their future plans for the OSI business under Aspen Tech, especially on the staff Ishman of an ecosystem of third party implementers for their <unk> solutions.

The oil and gas industry upstream and midstream had a banner year in 2022 supported by high oil prices and strong execution.

Forecast indicate oil prices will remain elevated through 2023 at an average of 80 to $90 per barrel for Brent crude for the year based on various current projections.

The industry Capex is expected to increase by 12% to $485 billion in calendar 2023, According to energy intelligence projections.

With a significant portion of that increase chromium kamin from national oil companies.

And our business, we had another strong quarter of the combination of heritage as Fintech solutions and Sse's product has created an unmatched technology portfolio that can deliver far greater volume forecast.

We signed a number of quality wins with the Austrian customers in the quarter, including a significant contract with one of the largest oil producers in South America.

And we're also engaged with customers on the use of SSE capabilities for carbon capture and sequestration in various locations around the world.

The E&C vertical deep wells in the second quarter and has been an important source of our strength in the first half of the year.

Customers in this market are benefiting from two important trends.

First the traditional business the investment in upstream oil and gas projects has increased notably in recent quarters.

The capex investment required to meet sustainability targets in our core owner operator markets will be substantial.

Ascent enc's with sizable growth opportunities that haven't been impressive for several years.

We're very optimistic on the outlook in this market in fiscal year 2023 and beyond.

Finally, the chemicals industry had a good quarter, but thus faced some challenges globally and regionally in Europe .

The ongoing situation in Europe , and its impact on local energy supply and consumer demand continued to weigh on chemical customers in the region.

Globally chemical customers are also experiencing a slowing demand and margin pressure at the global economy has slowed its growth.

In conversations through the last quarter.

Many of our customers have told us they believe that currency tuition will recover in the second half of the calendar 2023 as economic activity picks up we remain.

Optimistic on the opportunity that chemicals market, but would flag it as one of the area of our business that we are cautious on in the near term.

I would now like to share some customer wins from the quarter that demonstrate our success.

First.

An existing SSC inherit yourself Aspen tech customer and one of the largest oil producers in South America.

It's looking to shorten by 65% and the time it takes to get a new oil field discovery to production.

As part of this initiative the customer evaluated multiple vendors on their known as automation and AI capabilities and elected to increase the spend of SSE products due to the combination of capabilities in the SFC suite.

<unk> has been and remains the largest incumbent in the exploration and production portfolio of software capabilities used by the customer.

Okay.

And international utility company headquarter in the U K owns and maintains the high voltage electricity transmission network in England and Wales.

These customers are investing heavily in its network of thousands of kilometers of overhead lines and underground cables are more than 300 substations to connect more are more low carbon electricity sources. Since that is crucial to that is a crucial factor to meet a net zero carbon ambitions in the region.

This win opens up the opportunity to expand their use of <unk> products into other operating areas and across other companies in the customers' group.

And third and final.

Emerson in Aspen Tech are having success in the market.

Emerson recently announced its selection as the main automation contractor footnote RASK Lafayette petrochemical complex, our LP joint venture between Qatar energy on Chevron Phillips chemical.

Our LP will be the largest ethylene plant in the region of one of the largest in the world.

Scope of work covers automation software and analytics capabilities, including various products from Aspen tax engineering and MSC suites.

Marathons seat at the table in the very early phases of the competitive process for these major construction project accelerated Aspen, thanks visibility into this opportunity while.

While Aspen Tech's products and solutions contributed to Emerson overall quality to the cost.

We expect this win will open many more opportunities for both companies in the future.

This win is also a good demonstration that the commercial relationship between Emerson on Aspen Tech is already benefiting both companies and the alignment between both commercial organization will undoubtedly continue to grow that pipeline of business.

We expect a focus on targeted growth initiatives will result in increased long term growth and profitability for both companies through a strengthened go to market presence and offering.

Now turning to our innovation investments.

In November we launched our new software release has been one version 14, which provides augmented intelligence guiding users to improve decision, making abilities and increased operational excellence.

And improve sustainability.

A great example of collaborative innovation in product development is our recently announced strategic partnership and licensing agreement with Saudi Aramco.

Part of this agreement with partner with Aramco to provide to the market a unique integrated modeling and optimization solution for the sourcing entity decision of seal too.

Through this solution, we expect to provide customers the ability to rapidly evaluate sources of seo to generation and potential opportunities for us or sequestration of the <unk> and hence the signed new innovative solutions that can reduce their carbon footprint, while ensuring profitability.

M&A is another important part of our innovative strategy.

We continue to maintain a positive posture in this area.

We got off to a strong start with information, which has received fantastic early feedback from customers.

Greatly accelerates, our AI Iot industrial data and connectivity product roadmap and will enable greater visibility and understanding of assets operating environment.

We're also proceeding on our integration planning with Mike remind as we work towards the completion of the transaction. We expect this acquisition to close as soon as we obtain the last remaining regulatory approval, which we are actively working to secure we have become even more impressed with the macro mine team.

Im products as we have gotten to know them better as this process has played out and look forward to welcoming them to us <unk>.

Let me finish by providing our latest thoughts on fiscal year 2020 through guidance and the second half of fiscal 2023.

We remain confident in our ability to deliver on the full year ACB growth target and our and are maintaining the guidance range of 10, 5% to 13, 5%.

While also maintaining our free cash flow guidance of $347 million to $362 million.

Our success in achieving these outcomes will still depend in part on continuing to successfully execute on our integration and transformation initiatives.

As a company.

As a reminder.

We have always suspected the second half of the year to be a stronger contributor to growth and free cash flow given the historical buying patterns of heritage <unk> customers and the expected timing of PGM and assessing contributions including for the anticipated synergies.

Before I turn it over to Chantelle I want to reiterate how much progress we have made in the first half of the year in bringing inherent adjustment tech OSI and SSE together as one company.

We have created a world class industrial software company that is poised to accelerate growth and generate significant profitability as we execute on our long term strategy.

The new Aspen Tech team has done an amazing job getting us to this point and I want to I want to recognize their effort and commitment to our success.

So with that let me turn the call over to Chantelle. Thank.

Thank you Antonio who will now review our financials for the second quarter fiscal 2023.

As a reminder, these results are being reported under topic 606, the material impact of both the timing and method of our revenue recognition for our term license contracts.

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

A decrease or increase in bookings between fiscal periods, resulting from a change in the amount of term license contracts up for renewal, but rather an.

Indicator of the health of our growth of our business.

Timing of renewals is not linear between quarters or fiscal years and this nonlinearity will have significant impact on the timing of our revenue.

As a reminder, we have transitioned from annual ACB annual contract value is our primary group shrank.

ACD had system.

Our portfolio of term license and term to perpetual software maintenance and support for SMS agreements.

ACB provides insight into the annual growth and retention of our recurring revenue base, which is the majority of our overall revenue recurring cash flow.

Annual contract value was $833 $7 million in the second quarter of fiscal 2023 up eight 7% year over year.

Tony mentioned, we are pleased to have recently achieved separability for TTM software, which will allow us to prospectively recognized the growth of CGM term license and thats in those businesses into our ACD metric on a standalone basis.

The contributors to this go to market change our enablement of implementation service partners to operate autonomously and directly with our TTM customers.

Change to OSI commercial contracts, where the customers will be contracting for software licenses and professional services separately.

And the streamlining of tools and processes for implementation services to significantly reduce complexity and interdependency with our software.

We will begin to see the impact of this change of TTM beginning in the third quarter, which will have a meaningful benefit to <unk> in the second half of this fiscal year. It is important to note that achieving separability has multiple business benefits as well, including the general acceleration of revenue and free cash flow generation.

You'll spend.

Which the company defines as the annualized value of all term license and maintenance contracts at the end of the quarter for the businesses other than OSI and FSC was approximately $697 million at the end of the second quarter of fiscal 2023.

<unk>, 9% compared to the second quarter fiscal year, 2022, and 2% sequentially.

As a reminder, we intend to provide this annual spend disclosure for sure that Aspen Tech only for fiscal 2023 to provide investors comparability with historical disclosures.

Total bookings, which we define as the total value of customer term license perpetual SMS contracts signed in the current period.

Term license and perpetual estimates contract.

In the current period, but where the initial licenses, but not yet delivered under topic 606.

Let's turn license in perpetual SMS contracts signed in a previous period for which the initial licenses are being delivered in the current period with $242 million, a 16, 3% increase year over year.

Total revenue, but do you like it.

$42 8 million for the second quarter as a reminder, as a result of the Emerson transaction. The subsidiary that included the OSI and SSE businesses became the surviving entity as.

As a result, a year ago comparisons you see in our financial statements.

OSI and SFC in the second quarter of fiscal 2022 and year over year comparisons are not meaningful.

Now turning to profitability beginning on a GAAP basis.

Operating expenses for the quarter were $209 1 billion.

Total expenses, including cost of revenue were $302 2 million.

Operating loss was 59 $4 million and net loss for the quarter was $66 2 million or one please.

Sure.

Please note that the net loss in the quarter reflected approximately 334. Please.

As of a noncash gain related to the mark to market Justman for the Australian dollar foreign currency derivative related to the pending microcline acquisition.

Since the inception of this foreign currency derivative. The total net unrealized loss would have been incurred has been approximately $15 $3 million.

And we will continue to be fluctuations until the closing of the microbiome transaction.

Reported non-GAAP operating income for the second quarter of $86 $6 million.

Representing a 35, 7% non-GAAP operating margin.

non-GAAP net income was $22 8 million or <unk> 35 per share based on $64 6 million shares outstanding.

Turning to the balance sheet and cash flow, we ended the quarter with approximately $446 $1 million of cash and cash equivalents.

$64 million outstanding under our term loan agreement.

On December 20, <unk> 2022, we entered into a credit agreement with Emerson for an aggregate commitment of $630 million.

Tend to use the proceeds from borrowings under the agreement to be in part the cash consideration for funding the pending microbiome acquisition.

Also in January we fully paid off our existing term loan balance.

In the second quarter, we generated $49 $5 million of cash from operations and $53 $1 billion of free cash flow after taking into consideration the net impact of capital expenditures capitalized software and excluding acquisition and integration planning related.

In terms of synergies we've made additional progress in each of our four synergy buckets gross business transformation cost in the commercial agreement with Emerson Emerson.

The most notable milestone was the dji separability that we discussed earlier.

We believe we are well positioned for the long term from both a growth and profitability perspective, and our ability to realize the 110 billion adjusted EBIT of synergies by 2026.

I would now like to close with guidance.

Performed well in the first.

23, and have delivered on the business integration and transformation initiatives needed to position the business for faster ACD growth in the second half of the year.

Encouraged by the overall demand trends across the business, while also being mindful of an uncertain economic outlook.

Count for this uncertainty we continue to believe maintaining a wider guidance range is prudent.

With respect to ECB, we are maintaining our target of 10, 5% to 13, 5% growth for the year, including four points of growth contribution from the <unk> and SFC product portfolios.

We are encouraged by the transformation and integration now comes with EQM Vanessa.

Trends in Heritage Aspen Tech.

We are maintaining our bucket bookings guidance in the range of $1.07 billion to $1 one seven.

$1 billion, which includes $547 million of contracts that are up for renewal in fiscal 2023. This includes approximately $133 million of contracts up for renewal in the third quarter.

We continue to expect revenue in the range of $1. One four to one 2 billion, we expect licensing solutions revenue in the range of $765 million to $826 million.

Maintenance revenue and service and other revenue of approximately 312 and $64 million respectively.

From an expense perspective, we expect total GAAP expenses of $1, 207%, one point to one 7 billion.

Taken together.

GAAP operating income in a range of loss of 67 million kilowatts of $15 billion for fiscal 2023 with GAAP net income in the range of negative $7 5 million to positive $32 $5 million.

The GAAP net loss per share to be in the range of a loss of 11 <unk> positive.

The non-GAAP perspective, we expect operating income of $503 million to $555 million.

non-GAAP income per share in the range of $6 83 to $7.

Okay.

From a free cash flow perspective, we continue to expect free cash flow of $347 million to $362 million.

Our fiscal 2023 free cash flow guidance assumes cash tax payments in the range of 94 to 104 million.

<unk>, which is unchanged.

We would expect the third quarter to be the largest free cash flow quarter from here.

With regard to the timing and cash collections for Sse's renewable portfolio.

To wrap up Aspen Tech is performing at a high level, we generated solid growth and profitability in the first half of the year and we believe we are well positioned to deliver on our full year financial targets. We are targeting the large and expanding market opportunity that we believe can support significant levels of growth and profitability overtime.

With that operator, we would now like to begin the Q&A.

Thank you.

As a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced to withdraw your question. Please press star one again.

Please standby, while we compile the Q&A roster.

Okay.

Yes.

Okay.

And I show. Our first question comes from the line of Rob Oliver from Baird. Please go ahead.

Great Hey, good afternoon, Hi, Antonio can you guys hear me okay.

Yes, okay.

Hey, Great Hi, Chantal.

A couple of questions.

From me.

Just first.

Rob in a way.

For the OSI business because now it allows us to account for the growth in ACB from this transactions that we signed.

With customers.

The release of the SSE suite and tokens for Microsoft was also a key milestone.

We're about to release the various ship for Linux and then later in the year in the fiscal year, we will be releasing.

Suite, our focus for the OSI PGM suite.

Suite there are many other smaller milestones if you will.

That are accomplished almost on a weekly basis, but fundamentally is is it's also about the transformation of <unk>.

Commercial agreements between customers and the new Aspen Tech.

For SSC is a significant set up.

Our steps to transform those agreements into.

What looks like a Harris adjustment tech commercial terms or conditions.

OSI for.

The majority of it is us and now introducing term license in to these customers with you need a little bit of that in Q2 that would have been a lot of that done in Q3 and Q.

Q4 and going forward.

Then look at some of the things that we talked about.

New sales methodology.

Standardizing on best practices, a lot of change management going on but I would say that the major milestones that we had hoped to achieve are in place now and Thats, what we have talked about Q3 and Q4 being the quarter.

Thanks.

The results from all of this work we've done in the first six months of the year to shock.

I don't know if ive missed anything.

Okay.

That's very helpful. Thanks, Antonio and I had one follow up for you just around.

The ACB guide for the full year.

Acknowledging that now having now reached every ability you guys going to be able to start to book some of the new Emerson properties into AZZ, ECB, which is exciting.

I think under Heritage Aspen, you had traditionally given a fairly tight range and then you kind of broadened that out a little bit prior to the Emerson transaction into kind of a three point range youre at the $3 range right now and I know earlier, you had been talking about being comfortable with the high end of that range and I didn't hear you say that on this.

Call so but at the same time I heard you say, you're real comfortable with the back half of the year. So just wanted to get a sense for.

As you look at the end markets that you gave a lot of detail about how you feel about where we are within that range. Thank you.

Yes, Rob.

I appreciate the question and then Luke.

The fact is that.

We're very comfortable with where we are at this point in the year on our.

Growth in ACB trajectory.

We felt that.

It was prudent and cautious to maintain our guidance.

The outlook for.

For the year.

And based on what I've seen so far and what we have accomplished.

Outlook for our industry and customers.

I feel comfortable thinking that we could come in in the mid to upper part of our of our range and the bottom part of our branches just the conservative cautious stance.

Great very helpful. Thank you guys very much I appreciate it.

Okay.

Thank you.

Our next question comes from the line of Andrew <unk> from Bank of America. Please go ahead.

Yes, Andrew.

Hey, how are you can you hear me.

Yes.

Yes, Jeff.

So.

Looking at Heritage Aspen Tech spend showing nice acceleration or is this more on the engineering side or manufacturing suite.

Supply chain.

But look at typically the first half of the year, it's been a good year for engineer and we've seen an acceleration in what we're performing ahead of our of our planning and engineering.

With MSC.

They weren't tracking MSC deals tend to be to have a longer sales cycle nine to 12 months and really.

Historically is in the Q3 Q4 quarters, while we see a big wave of MSC deals, but overall are performing according to expectations.

Got you and just a follow up question I think it's more of a big picture question.

Right now is sort of December January and one where you're getting really good view at the budget some of your customers for capital planning for <unk>.

<unk> now that you guys sort of have access to.

Emerson.

Channel et cetera et cetera.

The visibility for Aspen has changed.

Through the relationship you have with <unk>.

Emerson.

I am referring to.

Do you guys get better visibility.

With the relationship now versus before thank you.

But.

Certainly.

Two companies are engaging in the market.

Good and increase visibility.

Or do think it behooves us as as separate.

Entities to develop our own point of view.

But we.

We do share.

What we hear in the market.

Our point of view on the on the on the macro outlook and budgets.

Developed internally developed through multiple conversations at customers over a period of time.

And Thats, what you have in our guidance.

Thanks, so much.

Got it.

Yes, I think the only thing I would add Andrew if I can take that bigger picture down to more granular so not macro but I think where we do have more near term visibility is probably more.

Account segment level working with Emerson, So we have probably more granular visibility into the customer accounts, but at the macro level as Antonio, particularly bad.

Got it you know this is very useful thank you.

Thank you.

And I show. Our next question comes from the line of Matthew Pfau from William Blair. Please go ahead.

Hi, Matt.

If you have your phone on mute please UN mute your line.

Yes.

Tony I'm Shanteau. Thanks for taking my questions I wanted to first follow up on on your chemicals commentary.

And is this is an area that I believe last quarter, you sort of also called out that performance was good but you're maybe cautious on it and keeping a close eye in this quarter you had somewhat similar commentary, but just wondering if anything has changed versus last quarter, either in terms of pipeline or ability to close deals in the.

Chemicals vertical.

No.

Perhaps what I would say with some customers in chemicals, we did see a little bit of longer conversations.

On deals.

There.

Was perhaps one or two deal that moved from Q2 into into Q3 that we're now working to close.

But in general is it shows.

A lot of conversations a lot of maintenance with chemical customers.

Spent a lot of time meeting customers in the Q2 quarter.

And then just express.

No.

The reality of what they're facing which is a slowing demand in a more pressure on margins I think I think we all see that in the and the announcements that they're making with our result and guidance forward looking guidance <unk> given so.

But look at the same time as we've said.

When when the economic environment becomes more difficult for these customers.

So look for ways to drive efficiencies in their businesses.

They've turned to Aspen think historically for that as well so so so.

Just being cautious about it I think especially this quarter as.

New budgets have to be.

Executed.

But we continue good engagement, we have good visibility into our pipeline of business and the quarter end and into Q4.

Just just being cautious about it.

Okay, Great and then.

The revenue in the quarter. It was down sequentially from first quarter and we don't have a lot of history of the combined business, but inherited Aspen you typically would see a sequential increase from first Q second Q is that related to FSC and OSI and is this sort of some sort of seasonality that we should think about modeling.

Going forward. Thanks.

Yes, definitely I would definitely take into account that the portfolio of business mix coming in.

And I'll be happy to follow up with you on that but it's definitely a seasonality based on the portfolio makes you take that business models coming of SSE historically, having one year terms in their calendar year and yesterday OSI milestone completion, so youre going to see a different mix definitely.

And it depends on the renewal cycle as well so there's quite a few there are quite a few dynamics.

Yes.

And just to emphasize the point that one of the points that I've made remember the OSI if revenue today as a percent of completion on projects and it's driven by dynamics of our projects. So it has nothing to do with software sales.

Okay understood very helpful. Thank you I appreciate it.

Okay.

Thank you.

And I show. Our next question comes from the line of Jason <unk> from Keybanc capital markets. Please go ahead Jason.

Jason Great.

Antonio somehow.

One question on the unbundling of the separability for overtime.

Alright that customers pay is it is there any difference between when it gets separated or is it or is it not equal from from the total.

Yes, well I think probably more to come in the sense of what's possible I would say just the apples to apples answer Jason.

One of the pieces.

Once it goes to third party services that will be their conversation to have but I would expect the apples to apples to be fairly similar.

With opportunities there as we work through to demonstrate our value to see where we can take that Tim.

Okay excellent and then maybe just on.

Building off of our following up with Rob guidance question can you just remind everyone what type of macro or business conditions.

Kind of baking into the bookends of the range.

Yes, I think.

At the high end.

In a way is what we talked about.

A good budget solid budgets into 2023.

Macroeconomic conditions that support the industries that we're in.

Certainly the continued investment and expansion on an upgrade of the grid and into utilities and more cap expand in upstream and midstream.

At that upper end also support.

So I'll need chemicals are spending.

The low end.

Think about it.

The opposite on the microenvironment on budget, but also throw in targeted drawing.

Drawing in regional conflict.

Europe .

So those are the bookends for those two.

We see China reopening from carve it in.

And while the conflict in Europe has created certainly difficult dynamics for chemical customers.

We've continued to see good business from customers in Europe in refining and <unk>.

<unk> industry in general around the world as they open up.

Because it is a global business or what they might be headquartered in Europe .

Doing global projects. So so but those are those are the factors.

Yes.

10, and a half is worst case scenario of $30 a half is.

Great outcome.

Okay, Great Super helpful. Thank you.

Yes.

Thank you.

And I show. Our next question comes from the line of Mark Schappell from Loop capital. Please go ahead.

Mark.

Hi Antonio.

Paul.

Starting with you in your prepared remarks, you mentioned some of the Emerson Aspen integration sales efforts and milestones I was wondering if you could speak to any early efforts with Emerson to sell your products into other markets that Aspen historically hasnt played in such as pulp and paper and wastewater.

Yes, well, let me look.

Those efforts are ongoing of course.

Yes.

Both Emerson on us, but they've got great familiarity with our core markets.

There are big capital projects happening.

And oil and gas chemicals, even in refining in the middle East and Asia.

So it is natural that some of the first wins you would see.

In those four industries at the same time.

As you said MSR has presence in other industries.

Hey.

We're we're enabling the sales people and teams in those industries.

We're also working to determine.

The value proposition for some of these industries.

Some of the applications.

And I would argue that's a longer term tail.

Business generation, but nonetheless.

It's an ongoing effort and as part of our targeted initiatives.

Especially with pharma, while ASP I think has been in pharma.

MSR has a second first our second largest market share in that area.

We see great opportunities for <unk> for both companies with Emerson leadership in that space.

Okay, great. Thank you that's all for me.

Yes.

Thank you.

And I show. Our next question comes from the line of <unk> <unk> from Wolfe Research. Please go ahead.

Hi, This is <unk> onshore.

Because of better safety and greater security parameters.

Relative to Windows, you guys released in fiscal Q1.

Whether that could continue to drive large deals in SSA correspondingly strong contribution to <unk> growth in the year. Thank you.

Just one follow up after that.

Yes Sandy.

No doubt.

What we've learned is that the leanest version of.

The operating.

Our operating system is is more common with.

Higher work.

Higher workload applications more sophisticated applications in the <unk> suite.

Perhaps applications that consume a lot more tokens as well.

That that suite will be released soon.

And we do expect to sort of capture that incremental use but.

The bulk of the SSC suite use usage is with the Microsoft operating system I do want to.

Emphasize that.

Got it and then just.

Follow up on the guidance question, what has to happen I guess to improve relative to today to get towards that top end range of guidance is there any call outs in particular sectors that you would be you could see performed better than what you currently seen in the first half.

Thank you Sir thank you.

But I mean look.

The ratio will maintain 13, 5% at the high end of our guidance is because we have visibility we have a path into to that number.

That the pipeline of business.

And as supported by synergies and benefits from the transformation of OSI and SFC. So.

What needs to happen look its execution.

Yes.

And not being impacted by some of the things that.

I've mentioned, the corvid conflict in Europe .

It also prices of our transformation.

The transformation of our business.

Sure.

It is not linear per se, there's always surprises.

And you can always be tripped.

And your execution.

Yes.

We found some things in the last six months that we're in.

Not in our assumptions, but we have been able to overcome them.

And we don't know of anything that could trade for us in the second half of the year, but we also want to be cautious because.

There is a lot of work.

Lift and a lot of rocks and assuming that we're going to find what we think we're going to find that in some cases, we may not so so we're just being cautious about that but if we if we continue to execute on the transformation that we did in the first half than that past due $30 a half is there.

Great. Thank you very much.

Okay.

Thank you.

And I shared on our last question comes from the line of Clarke Jeffries from Piper Sandler. Please go ahead.

Okay perfect. Thank you for taking the question Hello.

Yes.

Antonio Emerson held it at the Analyst day in November and included two metrics that stood out to me on the Aspen business, one being thousands plus salespeople actively selling Aspen tech.

The second being 70% of Emerson control systems do not have the tech software.

The question is.

How do you expect those metrics to change in the coming calendar year end.

Which metric would you expect us to see the most progress in.

Soon in which is the most meaningful near term asset.

Yeah.

Well, let me look at certainly the look I think it's a combination the Emerson installed base is addressed by those thousands of salespeople.

Now they have to be trained enabled educated.

And so on.

So the goal here is not to try to boil the ocean.

In one year.

Because when you try to do that you dilute yourself and you end up not being successful I think we want to be very focused on on the initiatives that we want to pursue.

Deliver the synergies that we've outlined for.

For our sales every year going forward and that of Antonio will turn into many many more salespeople selling announcement that into a much greater installed base that installed base is a huge opportunity for aspen.

There are places, where Emerson has tremendous tremendous market position pharmaceuticals.

China.

Oil and gas midstream.

And some of these core industries, where they are in so so we'll start.

Focusing on and working with them on in each of these areas.

Yes.

The throne.

Fruits of our labor will chalk overtime.

Those thousands of salespeople or they installed base as you refer to think of that the total addressable market.

I will start eating into that Tam.

As time passes.

Perfect. Thank you very much just a follow up chantelle.

Maybe I missed it but could you clarify what the raises to the high end of <unk>.

Net income is that primarily the fluctuation of the currency derivative or could you clarify what the changes there to the full year guidance on EPS.

Yes, I think it would be it would be good.

Items that come in in the sense that there are some.

Stock based compensation in there.

Evidence.

I think those are the two moving pieces late with C&I and that change.

Rivers.

Alright, perfect. Thank you very much.

Yes.

Thank you.

That concludes our Q&A session for today at this time I would like to turn the conference back over to Antonio Pietri CEO for closing remarks.

Well.

Thank you everyone.

I know it is already.

As of January 25th, but Hey, happy new year, So everyone look forward to.

At the meeting in person some of U S. As we engage in conferences on.

Another activity so.

And have a good evening.

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

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