Q3 2023 Aspen Technology Inc. Earnings Call
Speaker 2: Thank you for standing by and welcome to the third quarter 2023 Aspen Technology Earnings Conference call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 1 1 on your telephone.
Speaker 3: Good afternoon everyone and thank you for joining us to discuss our financial results for the third quarter of fiscal 2023 ending March 31, 2023. With me on the call today are Antonio Petri, Aspen Tech's President and CEO , and Chantelle Brightup, Aspen Tech's CFO .
Speaker 3: Before we begin, I will make the safe harbor statement that during the course of this call, we may make projections or other forward-looking statements about the financial performance of the company that involve risks and uncertainties.
Speaker 3: It copies actual results made different materially from such projections or statements.
Speaker 3: The factors that might cause such differences include but are not limited to those discussed in today's call, as well as those contained in our periodic reports for the SEC, including our most recently filed Form 10-K T with the SEC.
Speaker 3: Also, please note that the following information relates to our current business conditions and our outlet as of today, April 26, 2023.
Speaker 3: Consisting with our prior practice, we expressly disclaim any obligation to update this information.
Speaker 3: Please note that we have posted a financial update presentation on the investor relations portion of our website.
Speaker 3: The structure of today's call will be as follows. Antonio will discuss business results and highlights from the third quarter, followed by Chantelle, who will review our quarterly financials and guidance for the remainder of fiscal year 2023. With that, let me turn the call over to Antonio. Antonio?
Speaker 4: Thanks Brian , and thanks to all of you for joining us today.
Speaker 4: As Pentec's third quarter performance was solid despite an uncertain microenvironment with a strong demand in many of our end markets and a return to double-digit ACB growth.
Speaker 4: While we did see the macro environment have a more pronounced impact on sales during the quarter, primarily in chemicals, we're glad to be reporting double digit growth for the last 12 months and are on track to deliver against our initial guidance range for the full year.
Speaker 4: As we know the last quarter, chemical customers have been reporting weakness in the demand environment starting in their September calendar quarter.
Speaker 4: with the drop in demand being significant in their December quarter as reported in the related earnings announcements.
Speaker 4: As a result of these dynamics, we believe their calendar year 2023 budgets reflect tighter OPEX budgets, which resulted in a material pullback on software spending in the quarter for AspenTech led by bulk chemical producers.
Speaker 4: We will remain cautious about the software spending outlook from this industry for the remainder of the calendar year.
Speaker 4: Overall, we're pleased with the progress of many of our key strategic priorities through the third quarter. A key focus for us this year has been the transformation of the OSI and SSC businesses and successfully integrating them with Heritage Aspen Tech.
Speaker 4: to create a much larger, diversified, and faster growing industrial software leader.
Speaker 4: diversified and faster growing industrial software leader. Now
Speaker 4: Looking at our financial results for the third quarter.
Speaker 4: Annual contract value, or ACB, was $854.6 million, up 11.2% year-over-year.
Speaker 4: revenue was $229.9 million.
Speaker 4: Gap loss per share was 89 cents and non-gap EPS was $1.06.
Speaker 4: Please note there were some short-term timing dynamics this quarter that Chantelle will discuss later. Looking at the quarter in more detail, we continue to see a strong demand environment in most of our
Speaker 4: commodity prices and capics on open-spotage remain constructed and we're seeing continued growth in our self-pipeline across all three businesses.
Speaker 4: Aspectec is in an enviable market position where our solutions directly address the overlapping need for increased production of energy, chemicals, and electricity in a sustainable manner.
Speaker 4: We're encouraged to see that customers' investment in sustainability and their interest to invest in aspect solutions to meet the dual challenge remains robust despite the uncertain micro-embarium. We believe our diversified portfolio across traditional energy sources, chemicals, power, transmission and distribution.
Speaker 4: and emerging sustainability areas like carbon tax administration and hydrogen give aspect a numerous ways to benefit from this transfer of foreseeable future.
Speaker 4: I would now like to spend a moment providing details on what we're seeing in the market and our performance by vertical.
Speaker 4: Refining remains a source of strength in our business, as it has been historically. While micro uncertainty exists, a strong global demand for refined products is expected to keep refining margins healthy through calendar 2023. Additionally, caused by the new global watt Won.
Speaker 4: We're seeing many refiners continue to increase investments to meet the stringent emissions standards put in place by many countries globally, including the use mandate for a 55% reduction in greenhouse gas emissions by 2030 and net zero by 2050.
Speaker 4: As the event of the past 12 to 18 months has shown, having consistent and reliable sources of energy is a security imperative that increases the need for traditional energy products until the transition is achieved.
Speaker 4: With respect to the upstream and midstream industry, the strong short and medium-term outlook for oil and gas demand is helping to drive double-pigot increases in cap-ex-budgets in 2023. This projection is reinforced by the International Energy Agency's full test of record demand for oil in 2023.
Speaker 4: among other factors. We're seeing excellent traction with our end-to-end set of solutions for this market. The combination of heritage adjustment expertise in above-surface upstream energy production with SSEs, market leading sub surface modeling solutions, gives customers the ability to manage and optimize the entire exploration and production
Speaker 4: and ultimately optimize the entire oil and gas battery chain using our solutions.
Speaker 4: from the ground to the pump and across into chemicals.
Speaker 4: on an ACB basis here today.
Speaker 4: and it is seeing very positive customer demand trends. This strong and market demand is being complemented by the transition of SSE's commercial agreements to align more closely with her inter-justment tech, which was one of the key transformation priorities for this business.
Speaker 4: For example, the recent introduction of the token-based SSE suite has received excellent feedback from customers and is contributing to growth in our pipeline.
Speaker 4: We signed several notable wins in the third quarter, including being selected by one of the lead and international oil companies to be the engineering model in the simulation technology that will standardize on for facility design in their nation carbon capture and sequestration business, which they predict could generate billions in future revenue for their company.
Speaker 4: This customer selected after evaluating multiple competitors of us but taking the market, this win is a great example of how the SSE suite combined with our engineering suite will support customers' sustainability. The growing investment in all of gas projects also continues to positively impact the E&C industry.
Speaker 4: that a significant number of our E&C customers are materially benefiting from sustainability cap excellence by way of improved backlog growth, which in turn is supporting greater use of our engineering products.
Speaker 4: We believe current trends in both traditional oil and gas projects as well as new sustainability projects represent a more durable and diversified opportunity for our aspect tech in this market going forward.
Speaker 4: Shifting to the power transmission and distribution or TND industry, this industry continues to benefit from significant investment in TND infrastructure, critical to meet the sustainability goals of the future, making this market one of the most attractive long-term infrastructure opportunities in the world.
Speaker 4: Electrification of the global economy is driving rapid growth in demand for electricity and for our DGM solutions.
Speaker 4: Utilities recognized grid needs to expand and become more reliable to handle the increased demand for electricity and additional complexity introduced by the growing mix of renewable sources of power generation. All these compounded by the rising rate of out-of-outages resulting from unpredictable storms.
Speaker 4: Additionally, hardening the security of the grid against the threat of cyber attacks is a national security issue and a top priority for these customers.
Speaker 4: We believe the only way to do this efficiently at scale is to broader adoption of software technology.
Speaker 4: We recently validated these teaches at the Industry Conference DistributeTech, where we witnessed firsthand the high level of interest and demand for DGM product demos from many of the world leading utility operators.
Speaker 4: We're making good progress on the ongoing transformation of the OSI business and go to market efforts for our DGM products.
Speaker 4: One key pillar of the transformation of OSI and its go-to market activities has been educating utility customers on the benefits of adopting the terms of tour license model, which is happening faster than we expected.
Speaker 4: Customers are embracing the benefits of the model, such as access to term license only, software capabilities, and for some customers the opportunity to leverage cap expo to fund these projects.
Speaker 4: This is a great outcome that will accelerate the long-term transformation of the OSI business.
Speaker 4: The introduction of the DGM token suite will soon make the full range of benefits from this licensing model available to customers, which we believe will lead to broader deployment of the solutions in the DGM suite.
Speaker 4: While we're on track to achieve our growth target for term software ACV from new DGM product transactions for the year, we have also identified two items during the integration and transformation process that will have an impact on OSI's financial performance by reducing expectations.
Speaker 4: for its ACB and revenue growth in the year.
Speaker 4: First, we identify several areas for improvement in oesites' project delivery organization, impacting the impact in similar contracts that were signed prior to the Emerson Aspen Dectrine Sections.
Speaker 4: This project will take longer than expected to complete and thus delay achievement of project milestones for revenue recognition.
Speaker 4: The delays also present headwinds for the recognition time in a perpetual SMS-ACD, both as part of this bond on deals.
Speaker 4: And second, he has also become clear that our assumption that we would have to generate a TND market sales cycle to bring it closer to heritage as maintained was overly optimistic.
Speaker 4: So, while we're pleased with the amount of demand generation activity we're seeing in this market, we also now expect that the G&T transactions will likely take 12 to 24 months on average to complete versus heritage aspect traditional 9 to 12 months. It is important to note that both dynamics will be sure term in the next...
Speaker 4: including higher energy cost and persistence to pledging challenges have led to significant destocking and declining demand for these companies, resulting in a material impact on these customers margins.
Speaker 4: This was most vulnerable in the bulk chemicals market, which historically is more sensitive to macro environment and specialty chemicals.
Speaker 4: This resulted in a pullback in customers' open software spending in the quarter that was more pronounced than we anticipated.
Speaker 4: For the first time this fiscal year we so sell cycled elongate in all regions with an increased number of deal postponement and a push-up of the existing pipeline.
Know that software spending from chemical customers is a primary driver of growth for our MSE suite.
Despite these new term challenges, we continue to be positive on the long-term prospects for the chemical market and expected to be a meaningful contributor to our growth over time.
Finally, while we continue to work through the demand environment for our APM business, I would like to highlight its performance during the third quarter. APM closed a handful of meaningful transactions globally, with one existing customer signing at 7 figure transactions.
and a long-term user of our engineering suite increase their token entitlement by more than 10%.
This customer is benefiting from sustainability capital investments for carbon-catalytic administration and hydrogen projects. As such, they are seeking to meet their engineers' usage needs for their current backlog, as well as their expectations for backlog growth in calendar year 2024.
Second, a national oil company formed a new entity to take control of exploration and production assets from their former international oil company partner. As part of this process, these new companies signed an agreement with us to take to maintain and expand its access to our SSE products.
with expectations to significantly increase exploration drilling activities over the next two to three years. This customer more than triple, its number of employees who now have access to SSE products. Future expansion opportunities with this customer involve signing an enterprise agreement to consolidate and expand access.
This customer issued an RFP to replace or exist in real-time data historian, which was end of life by one of our industrial company competitors.
After evaluating our B-person's data over competitors recently at Guarhistory and Product, the customer chose OSI's Cronus product.
In addition, this customer had already agreed to deploy our security investigator open-half product by November 2024. But because of a control center upgrade, we're now accelerating its deployment to the spring of 2024. Furthermore,
This customer is currently fulfilling a grant with the Department of Energy for a future application funded by the Department to implement advanced distribution management solution capabilities, which were also awarded.
This series of wins by OSI with a long-standing customer speaks to the strength of our DGM products with significant T&D end-market demand and our ability to help customers accelerate outcomes to better manage the growing complexity of the grid.
Turn it or innovation investments, we were proud to release our new emissions management solution during the quarter.
This new solution combines OSI technology with our traditional software expertise to consolidate customer's emissions data alongside class, enterprise, and value chain OT application data into a single pane of class view.
With a holistic view of their emissions, abatement targets, and margins, customers can now make real decisions of the most meaningful and cost-effective way to reduce emissions in their operations.
This is an exciting example of how Aspen Tech can help directly reduce our customers carbon footprint. It is also an important example of product synergies from the Emerson transaction, as we will be bringing what was originally an OSI product to our energy and chemical customers.
We also announced a recent partnership between Aspen Tech, Amazon and Microsoft that demonstrate a successful evolution of our relationship with Amazon as well as our commitment to helping energy and industrial companies advance their sustainability goals, including reaching their net zero targets.
The three companies partnered to install a demo of their joint hydrogen value chain solution that helps optimize capital investment, life cycle operating cost of production, supply chain and storage infrastructure to expedite a speed to market. In a new exhibit at the Microsoft Energy Transition Center of Excellence.
which was launched at a grand opening on March 7th.
During the exhibit, customers were excited to see a real, palpable demonstration of a solution that will help to accelerate their sustainability journeys.
I would like to briefly mention our ongoing efforts to leverage generative AI capabilities in our products.
It is early days, but we have identified many use cases where this capability can help improve the workflow and time to value for our customers. We will provide more details on this exciting area in future calls.
I would now like to provide our latest thoughts on our outlook for fiscal 2023, we are tightening our ACB growth range to 11-12% comprised of approximately 4 points of growth contributed by DGM and SSE and the remaining 7-2A point from Heritage Aspen Tech.
This compares to our prior guidance of 10.5 to 13.5%. Our updated outlook reflects the following. First, we expected the man environment and business dynamics that our customers experience in the third quarter of fiscal 2023 to continue in the fourth quarter.
Second, the change in the high end of our updated range is predominantly attributable to the pullback in chemical customer software spending, as well as other geopolitical considerations now impacting growth.
We do not anticipate any improvements in these two areas in the fourth quarter. Third, DGM and SSE are still tracking to deliver approximately four points of growth for the year. However,
The relative contribution will be different than we anticipate. SSE has minimally outperformed our expectations this year and is now expected to deliver the majority of the ACV growth for these two businesses.
Conversely, extended implementation timelines for certain projects and longer self-cycles in DGM will reduce its near term contribution to ACB growth in fiscal 2023, relative to our initial expectations. To be clear,
We expect this to be only a short-term issue and is primarily a function of timing. We are very optimistic on OSI's market opportunity and expected to be a significant growth driver over time.
As we have discussed throughout fiscal 2023, we intentionally constructed our guidance with a wider range to account for the number of variables facing the business this year, including our efforts on the integration and transformation of OSI and SSC, the potential volatility in the economy and uncertainty around some of our end markets.
and your political uncertainty.
Finally, we're making some changes to realign our senior leadership team to bring greater focus to our execution and especially our transformation activities.
Effective today, our current head of global sales, Felipe Suarez Pinto, will now report directly to me. Felipe is a 20-year veteran of aspect tech and has been running our global sales organization for the last two years.
Our current CRO, Manish Ola, will be transitioning to a new role focused on all aspects of customer success, including professional services, customer support, and partners.
We believe these changes will better position Aspen Tech to meet our future goals and objectives.
Let me finish by saying that we continue to be incredibly bullish on the opportunities ahead for Aspen Tech. We have successfully brought Heritage, Aspen Tech, OSI, and SSE together and laid the foundation for long-term, durable, highly profitable growth. We are aligned with several highly attractive market trends that provide numerous opportunities for success.
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 is not an indicator of the health or growth of our business.
The timing of renewals is not linear between quarters or fiscal years, and this non-linearity will have a significant impact on the timing of our revenue. We use ACB, which we define as an estimate of the annual value of our portfolio of term license and term and perpetual software maintenance and support our SMS agreements, as our primary growth metric. ACB provides insight into the annual growth and retention of our recurring revenue base.
fiscal 2022 and year-over-year comparisons are not meaningful. Annual contract value was $854.6 million in the third quarter of fiscal 2023, up 11.2% year-over-year. Quarterly ACV was impacted by the weaker chemicals demand, the impact of certain BGM services projects that extended beyond their completion date.
We published a presentation on DGM's effortability today aftermarket close to provide investors with a more detailed overview of the topic and what it means for our business going forward. This can be found on the presentation section of our IR website. Annual spend for Heritage Aspects, which the company defines as the annualized value of all-term license and maintenance contracts at the end of the quarter.
2023 to provide investors comparability with their historical disclosures.
Total bookings was $231.3 million, a 15.4% decrease over here. As a reminder, bookings are impacted by the timing of renewals with your down-ear over here. These refer to slide 11 of our third quarter earnings presentation, now available on our website for a complete description of how to find bookings.
Total revenue was $229.9 million for the third quarter. In addition to the lower bookings in the quarter, there were two other items that weighed on our quarterly revenue performance. First, while we are seeing accelerated demand from customers for SSE solutions, we have not yet started to extend SSE contract duration meaningfully beyond its average historical length of one year.
due to customer uncertainty from the macro environment. As a reminder under Topic 606, contract duration impacts the amount of revenue recognized. Secondly, several OSI services projects that have extended beyond their completion date are ahead went to revenue under OSI's historical percentage of completion accounting. We have taken several steps to avoid this outcome in the future.
As such, we are confident about the ability to grow from this new baseline going forward. While the OSI services business did face some headwinds in the corner, we are excited to see the accelerated conversion of BTM customers to term from perpetual license transactions in the pipeline, which is more in line with our core business model and value proposition.
Now, turning to profitability to gain on the gap basis, operating expenses for the quarter were $214.6 million. To total expenses, including cost of revenue, were $308.4 million. Operating loss was 78.5 million dollars, and that loss for the quarter was $57.6 million or 89 cents per share.
Please note that net loss includes the impact of two Australian dollar foreign currency derivatives related to the pending by-provide acquisition. Namely, a realising a 10.3 million dollars upon settling up the first derivative, and secondly, a non-cash loss of approximately $25.1 million related to the market adjustment from the new derivative entered into our third quarter.
The total unlawed loss we have incurred relating to this derivative activity has been approximately $40.5 million here today. As an update on my remind, we continue to work to secure the final remaining international regulatory approval in order to complete this acquisition. We remain committed to completing this transaction. We are very excited to bring this team and solutions into our protect.
Turning to non-GAAP results, excluding the impact of stock-based compensation expense, amortization of intangibles, and acquisition and integration planning related fees, we reported non-GAAP operating income of $66.8 million in the third quarter, representing a 29.1% non-GAAP operating margin.
As a reminder, margins will fluctuate period to period due to the timing of customer renewals and the resulting impact on licensed revenue recognition in a given quarter. Net Gap Net Income, Non-Gap Net Income was $69.1 million in the quarter or $1.06 per share based on 65.2 million shares outstanding.
Turning to the Valishing cash flow, we ended the quarter with approximately 286.7 million dollars in cash and cash of equivalent. We also fully paid down the $264 million that was outstanding on our term flow balance in the quarter.
We generated $131 million of cash from operations and $129.3 million of free cash flow in the quarter after taking into consideration the net impact of capital expenditures and capitalized software to pay on payments. On that note, I would like to highlight two factors regarding free cash flow.
First, we saw a meaningful impact to cash collections at the end of the quarter due to the Silicon Valley bank crisis. SBB was one of the primary banks used by our Treasury operations to accept customer payments, and it took time to direct customers to other financial institutions. This is entirely a matter of timing, and as of speaking, more than half of this cash has already been collected.
change. For the third quarter of year to date, this change in methodology impacted free cash flow by approximately 0.8% and 6.9% respectively. I would now like to close with guidance. As a reminder, we expect the current environment from our third quarter to continue through our final fiscal 2020 during quarter.
Additionally, we are providing these updates and consideration of our progress and learning so far and transforming in and integrating the OSI and SSC.
For ACV, we are now targeting 11 to 12 percent growth for the year. We maintain expectations for approximately 4 points of growth from DGM and SSE, with the main impact coming from the slowdown chemical industry software spending and other deals political considerations impact in the jostentide. We now expect bookings to be between
$1.03 and $1.06 billion. This includes $547 million of contracts that are up for renewal in fiscal 2023, and approximately $210 million of contracts up for renewal in the fourth quarter. Total revenues are expected to be between $1.04, $1.06 billion. This includes $670 to $690 million in licensing solutions.
and tech business.
As a reminder, revenue in our model can be volatile due to topic 606. One of the drivers of that variability is the outside impact of contract duration, as revenue recognition is based on TCE total contract value. For heritage aspect, texturations is approximately 4 to 5 years on average.
And for SSE, well, duration of its remain consistent that approximately one year, our plan is in that it would begin to lengthen in fiscal 2023 as part of our transformation efforts. This is why SSE revenue contribution will be lower than expected in our fiscal year, even though it is tracking ahead of plans based to be based, which is the key metric for how we manage and evaluate our business.
Moving to expenses for fiscal 2023, we expect a total gas expense range of 1.219 to 1.224 billion dollars and gas operating loss range of 179 million to 160 million dollars. Gas net loss is expected to be between 110 to 97 million dollars. For gas net loss per share between $1.68 to $1.48.
From a non-gap perspective, we expect operating income to be between $398 to $413 million. For non-gap income per share between $5.63 to $5.83. From a free cash flow perspective, we expect to generate an minimum of $315 million in the fourth quarter being our largest free cash flow.
The change in calculation methodology does not represent a change in our expectations. For context, your to date acquisition and integration planning related payments represents 4.1 percent of the Sunlover fiscal 2023 free cash flow guide in these year-to-date payments.
We estimate that this change in methodology is responsible for roughly 35% of the total decrease in our fiscal 2023 free cash flow forecast using the midpoint of our prior range presented on January 25, 2023. In addition, our free cash flow guidance for fiscal 2023 assumes cash tax payments and $75 million. Finally, in terms of synergies.
While there are certain objectives that are taking longer than anticipated, as Antonio and I have touched on today, we have made significant progress this year in aggregate. We believe we are well positioned for the long term, from both a growth and profitability perspective, as well as our ability to realize the $110 million of adjusted EBITS synergies by 2026. To wrap up, Asmentech can...
that is with a strong foundation for accelerated growth and expanding profitability in the years to come. With that operator we would now like to begin the Q&A please. Certainly one moment for our first question and our first question comes from a line of Matthew Thou from William Blair your question please.
All right. All right. Hey. All right. Great. Thank you. I wanted to first ask on DGM and maybe just a little bit more explanation in terms of what's going on with the sales cycles there. Are they lengthening or are they just ended up being longer than you had originally anticipated when you're doing your due diligence on the business? Yes.
Yes, they are not lengthening. In our due diligence and our model, we assume that we can bring the cell cycle for the DGM solutions to match or be similar to those of Heritage as Pentec.
And as we've gotten into that business, we've recognized that a significant portion of their business is tied to government entities, whether it's municipality, county, state, or national government. And therefore, they have very rigorous...
procurement processes that include request for information, request for proposals, evaluations and lengthy negotiations. So we are realizing that he will take time to bring.
those cell cycles closer or be similar to aspect tech. This is something that many years ago inherent to just protect, we experience where we do business with a lot of government-owned companies and over time as the volume of applications or the install base of applications in this company.
So the fundamental issue that we determine is that this isn't going to happen as fast as we thought it could, and therefore we're readjusting our expectations on how long it's going to take to close business with DGM. What I just want to say is that that impacts really the outcome that we're seeing in fiscal 2030.
for fiscal 24, we expect to then be in the range of the South Cycle of 12 to 24 months and start to realize in a faster, faster closing rates and business in the year.
Got it. And just one more for me on what you're seeing in the chemicals market. So that's an area that you've called out as potential area of weakness over the past several quarters. Maybe just help frame what changed this quarter? What did you see this quarter? Is it a material deceleration there versus what you had been seeing?
that while chemical customers back in the middle of 2022 calendar were having a good macro environment, they started to see a deterioration of their demand environment in the September quarter, certainly in the December quarter. We believe that impacted their thinking around their operating budgets for
actions which we will envision a reflection of much tighter operating budgets for software spending. Okay. Got it. Thank you.
which we will evisiot a reflection of much tighter operating budgets for software spending. Okay, got it. Thank you. Appreciate it. Thank you.
Thank you one moment for our next question. And our next question comes from the line of Jason Felino from Keybank. Your question please. Jason. Antonio, patient cell. Maybe just for it sounds like the guidance is changing on the ACV.
How should we think about the Heritage annual plan metric? I know you'll only give it for one more quarter, but what are you providing updated guidance for that? You're talking about the Aspen Tech guidance? …
comes each quarter for this year. The guidance for Heritage Aspen Tech is in the 11 to 12 with the three to with the approximately four being OSI and SSE, the remainder of the Heritage Aspen Tech for ACB basis.
Okay, perfect. And then this quarter specifically, we've got a receptability on homo type DM. How much of that contributed to the eight? It's important.
Jason, we're having a hard time hearing you. That's kind of how much of, we can barely hear you is asking us how much of the DGM's of ability to see.
here to date for so far this corner. That was your question, right? Yes, that is. Yeah, that is. Yeah, no, that was better. Thank you. Yeah, but so look, and I know that the variability was a big win and achievement early January and we reported.
project services work. Achieving the project milestones is what then leads to our ability to recognize revenue and separate services revenue from the software revenue that is bundled in that project as those milestones got pushed out and in some of these projects
Okay, great. Thank you. Appreciate it. Thank you. One moment for our next question.
And our next question comes from the line.
of Andrew Oben from Bank of America. Your question, please.
Hi, good afternoon. You guys sort of highlighted geopolitical risk as one of the factors, and I was just wondering what that meant, because I think it's sort of highlighted, but it's not clear to me what that refers to. Thank you.
Yes, as we've stated in the past, we continue to operate our business in Russia. We've also stated in previous opportunities in investor conferences and meetings that the environment there is getting more difficult for us to transact in.
because of increasing sanctions on banks primarily, which is constraining the availability to get payments. But also there's a more specific push by the...
local government there to start using more local software or local software. So the combination of those factors is creating less, is leading to less growth and greater attrition in that business.
which was reflected as growth in our guidance. So that's also an impact that we're seeing in our growth rate. I got you, that makes sense. And just another question, how should we think, and sort of I appreciate what happened this year, and I think you've made it very clear what happened.
So as we think about the path of ACV acceleration and just thinking beyond this year, you did say that it sounds like the DJM sales cycle will come in line with your expectations, assuming chemical, OPEX.
We'll get better and probably the consequences are going to get easier, but what should we think about ACV growth Accelerating all the next two years. What does today's changing outlook means for sort of longer term Outlook for ACV acceleration. Thank you So and thank you for that question and so so first of all look
is for the Heritage Adjustment and Business to perform the ways it has performed historically in a normal environment which is really double-digit growth. We believe that the OSI business is a high-growth business in this environment of...
huge investments in transmission and distribution infrastructure and upgrades of their technology capabilities and the SSC business while is surprised us on the upside this year we would expect that business to return back to a more normal rate of growth but nonetheless
as a year where we're basically building the foundation to launch an unbelievable business and I think we've made great progress on building that foundation. We've uncovered a lot of things that we were not expecting. We've tested.
Our assumptions, some of them have turned out to be correct, others have not, but on the whole, there's no doubt that we are now much better informed about all the different levels that we have in these two businesses.
to build and accelerate the growth going forward supported by what we think is a sustained positive environment for TND, a sustained positive environment for chemicals. What we think in the medium to short to medium term will be a strong environment for oil and gas.
and also refining and then eventually with the closing of the micromine acquisition sustain positive environment in the mining area as well.
mining and then eventually with the closing of the micro-mine acquisition, a sustained positive environment in the mining area as well. Thanks so much.
Thank you. Thank you. One moment for our next question. And our next question comes from the line of Rob Oliver from R.W. Baird. Great. Hi. Good evening guys. I apologize in advance. I'll first move a little there, a giant cheers.
back towards the core aspects. So just wanted to dig in a little bit more on that. What gives you the confidence given we're kind of in Q4 right now. And then I just had a quick follow up for Chantal. Okay, and thank you for that opportunity because it gives me, for that question, because it gives me the opportunity to clarify.
12 months of pipeline building and execution on deals. So another 12 months in fiscal 24 puts us in that range of 12 to 24 months. So we'll start to benefit from the pipeline that we've been building in fiscal 23. I hope that's clear. Okay, no, great. Thank you. I appreciate the
know, Aspen and I get that that's going to be a bit of a question today given what's happening with OSI. But my questions for you around, you know, the margin side, because I know one of the things you talked about doing to address the potential issues around staffing and projects is to make sure you're accelerating hiring and staff and what is the potential
The implications for margins of variability and how can we get comfortable around that variability on the large-hand side? Thank you guys. Again.
Yeah, I think Robin, sorry about your laryngitis, I think there are a few things we're working on that and we continue to, our agenda is still clear on what we want to do in that area. So, I think the majority of what allows that margin expansion. So, if you look at a services business now versus Heritage Aspen Tech, a gross margin of, you know, 90 plus percent, what allows that is the evolution of moving to a partner ecosystem where they take on the services information delivery. We get.
that's good. Right. Okay. Thank you. One moment for our next question. And our next question comes from the line of Clarke Jeffries from Piper's Amplere. Your question, please. Car Disney's Lristin Martin Gmail, with Anderson and Dore Catholic,
Thank you for taking the question. Just a finer point on guidance and I really appreciate that you're giving a split between how the revenue impacts flow through, but specifically on the ACV, if DGM and SSE are still on track to four points of contribution of growth, I'm thinking about heritage as the sort of...
clarify chemical contribution to the ACV movement, you know, given that we're still on track for four points with the BGM and SSC. I'm going to have one for all. Yeah, look, so we set it in the very remarks.
The chemicals owner operators are one of the primary contributors to growth in the MSC suite because that's where the MSC suite is really used. In Heritage Hospital, chemicals represented, I believe, about 28% of the total annual spend.
I believe today on an ACV basis is about 23% of the total ACV. And as such, a slowdown with our chemicals customers, those have an impact on the rate of growth of MSC. If you go back to the previous guidance, the initial guidance for the year.
If you convert it to annual spend to its previous baseline, it will still be assuming that we perform the way we expect to perform in Q4. MSC will probably still be at all the digital business by the end of the fiscal year. So there's been an impact not out about it, but nonetheless that business is still performing well.
I believe that that business will find ways to also accelerate into fiscal 24 and I will continue to execute. Really appreciate it. Yeah, that's the color that I was certainly living for and then you don't know just maybe stepping back. I mean.
you had mentioned input costs as well as supply chain disruptions as maybe some of the things that were affecting those customers. But for us, maybe outsiders looking in, is there anything that you particularly point to as maybe the main touch point with customers in terms of why they're...
they're considering a conservative outlook. Anything that we should be monitoring in terms of the main input to their confidence or their business looking forward? Yeah, well, and one of the main drivers for the drop in demand has been these token in their, in these customers, customers.
things these customers have pulled back and purchasing and are consuming their inventory that the D-Stoking part of it. What I hear from chemical customers as we attend a conference and meet with them is that they believe that D-Stoking
probably most likely towards the middle of this year and they expect to start seeing a growth in the man towards the middle of this calendar year.
All right, perfect. Thank you very much. You're welcome. Thank you.
And one moment for our next question. And our final question for today comes from the line Mark Shabble from Loop Capital. Your question, please.
Hi Mark. Hi. Hi. Thanks for taking my question. Shintel, a question for you. I only think you just review the factors impacting free cash flow that you mentioned you were prepared at marks once again.
Yeah, absolutely. They're very specific and very actionable. The free cash flow has three components. One is the change and if we're taking the change from guidance, it's the change in the methodology. So that's about 35% of the change, Mark. The other two, roughly half and half, so a third, a third.
It's OSI and SSC and they're two different drivers for OSI. It's really the movement of those completion milestones out. So that delays the collections and the invoicing and the funds expected from that perspective and from SSC. It's actually just pure execution on collections that we're working through as we break rigor to the team and working with our customers to get them to the heritage affin tech kind of cadence.
So those are the three drivers, a third, a third, and a third with three different actions to come up from there. Okay, great. Thanks. And then I was wondering if you'd just review one more time the factors impacting bookings in the quarter that I think you discussed in your prepared remarks.
I had, I had the bookings would be impacted by the renewals amount of for renewal and contract duration term length for SSE and most of my remarks were around the revenue change in the guide. I don't know if you're looking for bookings or revenue but revenue is mostly the renewals up for discussion and the SSE contract term length that we mentioned.
I had the bookings would be impacted by the renewals amount of for renewal and contract duration term length for SSE and most of my remarks were around the revenue change in the guide. I don't know if you're looking for bookings or revenue but revenue is mostly the renewals up for discussion and the SSE contract term length that we mentioned.
Okay, thank you. That's all for me. Yeah, you're welcome. Thank you. Thank you. This does conclude the question and answer session of today's program. I'd like to hand the program back to Antonio Petri for any further remarks. I want to thank everyone for joining the call today, and I look forward to meeting you all as we get on the road over the next few days and weeks. Thank you. Thank you, ladies and gentlemen, for your participation at today's conference. This does conclude the program.