Aspen Technology Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
February 6, 2024

There are 10 speakers on the call.

Operator

Good day and thank you for standing by. Fiscal Q2 2024 Aspen Technology Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded.

Operator

I would now like to hand the conference over to your speaker today, Brian Denue from ICR. Please go ahead.

Speaker 1

Thank you, Justin. Good afternoon, everyone, and thank you for joining us to discuss our financial results for the Q2 of fiscal 2024 ending December 31, 2023. With me on the call today are Antonio Pietri, AspenTech's President and CEO and Chris Dagnon, AspenTech's Interim CFO. Please note, we have posted earnings presentation on our IR website and we ask that investors refer to this presentation in conjunction with today's call. Starting on Slide 2, I would like to take this opportunity to remind you that our remarks today will include forward looking statements.

Speaker 1

Actual results might differ materially from those contemplated by these forward looking Factors that could cause these results to differ materially are set forth in today's press release and in our annual report on Form 10 ks and other subsequent filings made with the SEC. Any forward looking statements that we make on this call are based on assumptions as of today, and we undertake no obligation to update these statements as a result of new information or future events. During this presentation, we present both GAAP and certain non GAAP financial measures. A reconciliation of GAAP to non GAAP measures is included in today's earnings press release and Investor Presentation, both of which are available on our Investor Relations website. With that, let me turn the call over to Antonio.

Speaker 1

Antonio?

Speaker 2

Thanks, Brian, and welcome to everyone joining us today. Let me start by reiterating that I've never been as excited about the future of AspenTech as I am today. The AspenTech team has done an excellent job working through a dynamic macro environment to deliver solid results in the 2nd quarter. With an expanded portfolio and team, We're uniquely positioned to capture and benefit from the numerous opportunities available in the energy transition from efficiencies and sustainability use cases. Now starting on Slide 3 with our quarterly results.

Speaker 2

In Q2, We saw solid demand for our products and solutions. Annual contract value or ACV was $914,000,000 increasing 9.6% year over year, while free cash flow was $29,000,000 These results reflect the delay in renewing a large customer agreement that was scheduled to be renewed in Q2 and reduced ACV growth by approximately 0.6 points. We now expect to close this customer agreement in Q3 with a corresponding benefit to Q3 ACP growth. In addition to this, I would like to highlight 4 key takeaways regarding our Q2 results. First, our overall term software pipeline has continued to increase.

Speaker 2

We're seeing growth in the number and size of opportunities across our businesses, which is in line with our sales channel investments over the past several quarters and the contribution from the DGM and SSE suites resulting from the transformation of those two businesses. We will start converting more of this pipeline to sales in the second half of fiscal year twenty twenty four. 2nd, The macro environment and demand for our products and solutions has remained strong in most end markets, consistent with our commentary from the last couple of quarters. 3rd, we made significant advances in upgrading our product portfolio and advancing new sustainability related use cases in Q2. With the successful launch of our V14 software update, we have introduced enhancements to our products that we believe will drive incremental growth in the second half of fiscal year twenty twenty four and longer term.

Speaker 2

4th and final, taking all these factors into consideration, We remain confident in our ability to deliver on our ACV growth target of at least 11.5% for the full fiscal year. We recognize that we need to have 2 strong quarters of growth in the second half to achieve this target, and we continue to believe that we're in good position to deliver on this outlook. Turning to Slide 4, I will now provide an update on our end markets and suites Starting with Digital Grid Management, our Utility Solutions business. DGM has enjoyed an excellent first half of the year as it continues to benefit from the mission critical nature of its products and solutions alongside a robust demand environment. Importantly, today's utilities are in the early stages of an unprecedented investment cycle to expand the electrical grid, introduce renewable energy and enhanced cybersecurity capabilities to meet the growth in electricity demand driven by the energy transition and the energy security requirements of countries around the world.

Speaker 2

Our transformation initiative to align the DGM business with the heritage AspenTech model over the past 18 months are also producing their expected results. These initiatives have included launching and growing DGM's term software licensing model, expanding its sales channel and global footprint to capitalize on the growth opportunities we're seeing and ramping up its ISP network. For example, in Q2, we won several large term license deals, including one with a leading North American power utility, where we displace the competition as part of their holding company's vendor standardization program. Our Energy Management Solutions proven track record of delivering value as well as our long standing relationships with other utilities in this holding company's portfolio were key catalysts for us in this win. Both in the U.

Speaker 2

S. And internationally, DGM's product strength, hardware agnostic stance and ability to form a strategic long term partnership with customers are driving growth. We expect to see continuous strength from this suite in the second half of fiscal twenty twenty four and believe this will be a high growth business for AspenTech going forward. Now turning to our subsurface science and engineering suite. SSE performed to expectations in the first half of the fiscal year, benefiting from a strong CapEx spending environment and new use cases driven by sustainability, especially in carbon capture and sequestration.

Speaker 2

SSE has long been the upstream industry's most comprehensive offering and the AspenTech go to market model is serving as a catalyst to help fully unleash its potential. In Q2, for example, SSE gained further momentum as we closed a large deal with a national oil company in Asia. While many vendors competed for this opportunity, the strength of our subsurface formation evaluation and geological modeling capabilities Combined with the strength of our relationships across organization allowed us to ultimately win this deal. We continue to work closely with this customer and see clear pathways to expand this strategic relationship at additional sites with more solutions. SSE is also benefiting from synergies with our engineering suite and the positive momentum from its tokenization rollout.

Speaker 2

As with our other suites, we continue to see that the combination of a term license model and tokenized suite is a true win win situation, allowing our customers to benefit from our latest innovation and supporting faster product uptake. Overall, we expect CapEx budgets in calendar 24 to remain consistent with last year's, supporting the demand for SSE products the second half of fiscal twenty twenty four in line with our expectations. Now moving to Slide 5, Let's review our heritage AspenTech business starting with our engineering suite. Strong CapEx trends in traditional upstream markets and newer sustainability related use cases are driving greater usage by EPCs and our owner operators. On the back of this favorable spending environment, our engineering suite's modeling, simulation and analysis capabilities have remained in high demand, Supporting the strongest growth this suite has seen in many years in the first half of fiscal twenty twenty four.

Speaker 2

In Q2, for example, We won a large scale deal with a new EPC logo that is executing several projects for a large energy company in the Middle East. Prior to working with AspenTech, this customer was using a variety of tools from different vendors to manage its process engineering workflows. The customer was interested in standardizing their engineering software solutions toolset and conducted a competitive evaluation process resulting in the selection of AspenTech due to the breadth of capabilities. By engaging with AspenTech, they are now able to leverage our full portfolio of innovation and product synergies to execute on their project backlog. Separately, our engineering suite has continued to see solid traction with the small to medium business segment of the market through our high velocity sales organization.

Speaker 2

During the quarter, this business continued to win engineering deals with customers in non traditional industries for AspenTech that are looking to decarbonize our operations or see a business opportunity in sustainability, including such areas as aviation biofuels, hydrogen, ammonia, LNG, director carbon capture or DAC and more. Now Turning to our manufacturing and supply chain suite, the MSC results in the first half of twenty twenty four reflected the ongoing weakness in the chemicals market as well as the delayed renewal that I referenced earlier. Nevertheless, given this business has typical seasonality, strong pipeline and expected closing of the delayed renewal agreement as well as the continuation of solid refining demand and our ongoing innovation efforts, We expect a stronger performance in the second half of this year. As part of our recent V14 software update, We have made substantial improvement to our new Aspen Unified Platform environment for asset planning and scheduling in MSC. Specifically, We have introduced tighter and better model integration, improved data management capabilities, deeper AI capabilities and a more scalable architecture.

Speaker 2

This represents a most significant update to our unified platform planning and scheduling solutions in over a decade. While we're still in the early phases of this rollout, customers are already responding positively to this improvement. For example, in Q2, we received a green light from 1 of the world's largest integrated energy companies to implement our updated Aspen Unified and scheduling solution across their asset base. This customer highly values the strength of our latest innovations and ultimately our ability to support better operational decision making across their global teams. We're excited to work with them on this project over the next several months and see additional opportunities to support their digitalization initiatives going forward.

Speaker 2

Finally, our asset performance suite continues to gain industry recognition and grow its customer base. For example, in Q2, Our APM team closed an exciting win with a large global pharmaceutical company to implement our EmCell product at one of its European manufacturing plants. This deal was supported by our commercial agreement with Emerson, who also has a strong relationship with the customer via their offerings, including the Delta V control system. While this deal was for one initial site, the customer has shown strong interest in rolling out the solution across its entire manufacturing base to drive further operational and sustainability excellence. Turning to Slide 6, we will discuss our sustainability initiatives.

Speaker 2

As I highlighted previously, sustainability related CapEx contributed to accelerated engineering suite growth in Q2. We believe that the strong tailwind we're seeing in sustainability is being driven by the energy transition and the alignment of corporate with government policy and funding. This was further validated to me at COP28, The United Nations Climate Change Conference. As part of this event, public and private organizations alike made pledges to reduce carbon emissions by increasing renewable energy production and usage and driving higher energy efficiency. To do this, Companies must not only accelerate their digitalization journeys, but also leverage the potential of new and existing asset optimization technologies.

Speaker 2

We remain focused on partnering and co innovating with customers in these areas in Q2 to accelerate their use case development. For example, we advanced our collaboration with a large global player in renewable wind energy that aims to also secure leadership in the production of green hydrogen and ammonia. While this customer currently leverages our modeling and DMC3 process capabilities to drive efficiency, we're now also partnering to improve their electrolyzer modeling capability. Additionally, We've built on our existing relationship with a refining company in Europe to implement our emissions management solution for better CO2 tracking, reporting and modeling. This customer already relies on our solutions to run its assets more efficiently and sustainably and is excited about the potential to leverage our emissions management solution to better manage its carbon footprint going forward.

Speaker 2

As an organization, we also recognize that the challenges presented by the prevailing energy megatrends are considerable and we remain committed to doing our part. To that end, I'm proud to announce that we made a formal commitment last week to achieve net 0 emissions as an organization by 2,045. As part of this commitment, we will build a decarbonization plan over the next to 24 months to achieve net 0 for scope 1 and 2 emissions by 2,030 and across scope 1 to 3 by 2,045 in line with the science based targets initiative. Now turning to Slide 7 For our innovation initiatives, in November, we successfully launched enhancements to our version 14 and a new version 14.2 Aspen 1 software. This update included enhanced industrial AI, further OT data integration and additional sustainability capabilities with more than 140 sustainability models now available to customers.

Speaker 2

As mentioned previously, This latest rollout is garnering positive customer response and helping us to win additional business. We look forward to showcasing the full range of at our optimized 2024 conference in Houston this May. I would also like to take a moment to speak about How our latest V14 update incorporates artificial intelligence. While we have been using industrial AI in our products for years, This latest update leverages the technology in ways that are new, innovative and represent exciting growth drivers for us. For example, with this latest release, we have integrated additional AI capabilities, including neural networks into Aspen Unified and Aspen Hygiene Dynamics hybrid models.

Speaker 2

These AI enhancements extend and build upon our ability to employ nonlinear hybrid modeling in both traditional and sustainability related use cases to improve modeling accuracy. We have also incorporated generative AI based assistant into our strategic planning capabilities for sustainability pathways. This innovation helps to solve the cold start problem for users by using their queries or prompts to automatically create a new superstructure workflow, saving them time and allowing them to focus on more creative and high value of tasks. These are just a few examples of the way AspenTech is leveraging AI across our portfolio today. As always, our ability to leverage these innovations alongside the business to expertise and first principles know how remains a competitive differentiator for us and highly valued by our customers.

Speaker 2

In closing, on Slide 8, we remain confident in in our ability to deliver ACV growth of at least 11.5% year over year in fiscal 2024. Our confidence in reaffirming this guidance is primarily based on the following factors. 1st, is the strength of our pipeline resulting from a macro environment, resilient demand and sales channel expansion. 2nd, the adoption of the DGM suite licensing model is accelerating in the market and contributing to increasing growth. 3rd, the SSE suite and its tokenization continues to gain momentum in the market.

Speaker 2

4th is the continued demand strength for our engineering suite driven by upstream and sustainability CapEx. And 5th and final, an expanded sales channel will have a greater impact on pipeline conversion in the second half of the fiscal year. Specifically, on Q3, we now expect sequential ACV growth in the mid to high 3% range. This accounts for the closing of the delayed renewal agreement mentioned earlier as well as the factors just referenced in support of our fiscal year guidance. A stronger Q3 and Q4 quarters are in line with our historical cadence as AspenTech's results have traditionally been more weighted the second half of our fiscal year.

Speaker 2

With that, I would now like to turn the call over to Chris for a discussion of our Q2 financial results. Chris?

Speaker 3

Thank you, Antonio, and hello, everyone. I'm excited to be with you here today and to help lead AspenTech through the CFO transition process. Turning to our Q2 performance. I will start out by highlighting that our earnings presentation includes explanations regarding the impact of ASC Topic 6 6 on our financial results. We have also included definitions of annual contract value or CV, bookings and free cash flow among other metrics in our earnings presentation now available on our IR website.

Speaker 3

We ask that investors refer to these definitions together with today's call. Starting on Slide 9, Annual contract value was $914,000,000 in the Q2 of fiscal 2024, up 9.6% year over year and 1.8% quarter over quarter. As Antonio mentioned, we had one large renewal of approximately $5,400,000 or 0.6 points of growth that we expected to close in the 2nd quarter, but was delayed. We now expect to close this deal in Q3. Total bookings were $233,400,000 in the 2nd quarter, decreasing 3.9% year over year consistent with our expectations.

Speaker 3

Total revenue was $257,000,000 for the 2nd quarter, up 5.9% on a year over year basis. Please note that revenue in our model is heavily impacted by contract renewal timing and variability under ASC Topic 606. This includes the impact of the larger deal that was pushed out of Q2. Now turning to profitability. On a non GAAP basis, we reported operating income of $89,000,000 in Q2, representing a 34% non GAAP operating margin.

Speaker 3

This compares to non GAAP operating income of $87,000,000 for a non GAAP operating margin of 36% a year ago. The year over year increase in expenses was driven by increased headcount and compensation costs, consistent with our sales expansion efforts and other business initiatives. As a reminder, margins will fluctuate period to period due to the timing of customer renewals and the resulting impact on license revenue recognition in a given quarter. Non GAAP net income was $88,000,000 in the quarter or $1.37 per share compared to non GAAP net income of $23,000,000 or $0.35 per share. Please note that the difference in non GAAP net income between periods mainly due to the change in computing our tax provision, which initially incurred in the Q2 of fiscal 2023.

Speaker 3

Turning to our balance sheet. We ended the quarter with approximately $131,000,000 of cash and cash equivalents, reflecting the impact of share repurchases under a $300,000,000 share repurchase authorization and $197,000,000 available under our revolving credit facility. During the quarter, we repurchased approximately 375,000 shares for $72,000,000 under our $300,000,000 share repurchase authorization for fiscal year 2024. Year to date, we have repurchased approximately 955,000 shares for $186,000,000 under the same authorization. On cash flows, we generated $30,000,000 of cash flow from operations and $29,000,000 of free cash flow in Q2 compared to $50,000,000 in cash flow from operations and $48,000,000 of free cash flow a year ago, mainly due to higher cash tax and the variability of contract cycle renewals and billings between.

Speaker 3

Turning to Slide 10, I would now like to close with guidance. For the full year of fiscal 2024, we are reiterating our outlook across all metrics. We continue to expect ACV growth of at least 11.5% in fiscal 2024. As Antonio mentioned, we are seeing pipeline strength, a healthy demand environment, several other notable tailwinds across our business that support our conviction as we move into the second half of our fiscal year. In addition, our non GAAP EPS range has increased by $0.02 from our prior guide to reflect the impact of our share repurchase activity in the 2nd quarter.

Speaker 3

There was no impact to GAAP EBS. Now turning to Slide 11 for linearity. As Antonio noted, We now expect to deliver sequential ACV growth in the mid to high 3% range in the 3rd quarter. On free cash flow, We expect Q4 to come in slightly above Q3. On revenue, we continue to expect our fiscal 2024 revenue linearity to similar to that of fiscal 2023.

Speaker 3

This includes expectations for bookings up for renewal of $580,000,000 in fiscal 20 24, with $173,000,000 up for renewal in Q3 and $195,000,000 up for renewal in Q4. For a complete overview of our fiscal year 'twenty four guidance and linearity commentary, please refer to our earnings presentation slides now available on our IR website. In closing, we delivered a solid Q2 performance to close out the first half of our fiscal twenty twenty. With a strong foundation in place, We continue to make investments in those areas that can support growth, while also remaining disciplined in our execution turn to our historical profitability levels over time. Looking ahead, we are excited about the opportunities we are seeing across our end markets and confident in our ability to deliver on our fiscal 2024 financial targets.

Speaker 3

With that, I will turn it back over to Antonio for closing comments.

Speaker 2

Thanks, Chris. As I mentioned earlier, we recognize that we need 2 strong quarters of growth in the second half to achieve our fiscal 2024 guidance targets. We believe that we're in a good position to deliver on this outcome. Our confidence is supported by the factors we laid out today. We're also excited by the growth potential of our innovation efforts.

Speaker 2

Across our portfolio, we continue to roll out new and enhanced capabilities to help our customers better meet their efficiency and sustainability objectives. As global leaders in industrial software, AspenTech has a long track record of partnering closely with customers to understand their needs, support their digitalization efforts and drive positive business outcomes. We remain fully committed to this work going forward. With that, we will open it up for Q and A. Operator?

Operator

And thank And our first question comes from Rob Oliver from Baird. Your line is now open.

Speaker 2

Hi, Rob.

Speaker 4

Great. Hi, Antonio. Good afternoon. Thanks for taking my questions. I had 2.

Speaker 4

My first one is just I know you've called out the sort of back half weighted nature of the ACV guide and you provided some details around that. I think even With the deal that slipped, at least in our model, it shows up as something markedly more back end loaded than historically you guys were. So just some of the things you mentioned pipeline, channel expansions, I guess maybe if you could just hone in on kind of 1 or 2 things that gives you the most Comfort here as we look at that sort of big ramp you guys need in the second half. And then typically in the past you guys provided a range and This year you guys said that that would be sort of the minimum. Is that now the goal?

Speaker 4

In other words, chance of kind of beating that number and that being the minimum kind of off the table now? And then I just had a quick follow-up. Thank you.

Speaker 2

Well, I mean, look, First of all, we remain to our guidance, which it's always been at least 11.5% And that is the goal and time will tell what that means, but at least 11.5% Over that number. Look, with regards to the how weighted This year is to the second half. First of all, of course, that delayed renewal, which is about 0.6 points of growth. And unfortunately through complications and internal alignment and administrative issues with that customer that deal didn't get renewed on time. This isn't the first time that something like this happens.

Speaker 2

This is certainly the largest deal that we've had to experience that with. Normally, it's much smaller transactions, but it's not unusual. And is a first time that we probably have to disclose something like this. With regards to our confidence on the second half, look, It starts with the volume of the pipeline. Our pipeline over the last 12 months, January to January, our total pipeline for the company has grown over 30% and this is certainly supported by the channels of expansion, but also by The macro environment that we see, the demand from our customer and certainly the market leadership position of our products.

Speaker 2

But more specifically, look, we're very excited about the fact that now after 18 months, Some of the transformation initiatives that we started working at the beginning of fiscal 2023 are starting to bear fruit. The outcome for DGM on term software licensing in the first half of the year was a great outcome. The term software pipeline for the GM is expanding very rapidly. As a matter of fact, it's grown by almost 500% in the last 12 months and the majority of our customers are now accepting term software. So we're very excited about that and we have a positive outlook for the DGM suite for the full year.

Speaker 2

Equally, the transformation of the SSE suite into a token suite, they used to do term deals mostly 1 year, 1 year deals now is tokens and we're expanding the duration of those deals continues to gain momentum. This is gaining the attention of our customers, but look, I also believe it's catching the attention of our competition because it is starting to eat into the market position of some of our competitors. So we're also very excited about SSE and we also have a positive outlook for that suite for the full year. Look, equally, the growth that we're seeing on the engineering suite that started last year, last fiscal year, but has continued this year and we to continue through the full fiscal year is very exciting. It's driven by both the CapEx spend, but also sustainability CapEx spend.

Speaker 2

And we expect that suite to perform very well for the full fiscal year and most likely above plan. And then look, we now have an expanded sales team that's in place for the most part, that is now familiar with our motion and cadences and we expect them be very, very engaged converting that pipeline here in Q3, Q4. But I also want to say the following because In a way, with Heritage AspenTech, after 40 years of taking those products to market, We relied on volume to deliver our results in the past and once in a while we had deals of significant size. What we are now seeing with DGM and SSE is that we have A larger number of more sizable deals in our pipeline that come through as a result of The spend that utilities have to put in place in order to upgrade their systems, These are very large systems that required a lot of software and technology. Therefore, the size of these deals is 7 figures and sometimes deep into 7 figures.

Speaker 2

And with SSC, we're also seeing deals that are larger than historically had field. So when we look at our pipeline, it's not only volume, but also size, especially as we talk specifically Q3 and Q4. So there are many reasons for this. As I said, Very excited about what I see going forward. And of course, we know that we need to hit on all cylinders to deliver Q3 and Q4, my expectation is that we will.

Speaker 4

I appreciate all the detail, Antonio. Thank you. Just Quickly as a follow-up, if you could just comment because the question we've been getting from investors is around your relationship with Aramco and I know that you guys do have a co innovation model with Aramco and they're an important customer. Could you just comment on what the recent production cut from Aramco could mean in terms of their CapEx and if that might have any impact at all on Aspen? I know you do a lot with them.

Speaker 4

Thank you very much.

Speaker 2

Yes. Aramco is one of our most important customers. We've been doing business with Aramco for probably 30 years. Certainly, with SSC, our relationship has expanded with Aramco. But look, it's a relationship that Existed and spend that existed before they announced that we're going to expand their production from $12,000,000 to $30,000,000 sorry, 1,000,000 barrels.

Speaker 2

And now that they've announced that they're going to not do it and stay at 12,000,000 barrels, I don't think it changes Our outlook for Aramco, as a matter of fact Aramco has been a heavy user of our engineering suite. And in my prepared remarks, I talked about the opportunities or advantages that our customers are seeing from leveraging the synergies around the engineering suite and the SSE suite. So we're engaged with Aramco. And furthermore, what I will say is that on a global basis, oil and gas companies have to replace 4000000 to 5000000 barrels of oil production every year because of depletion in their reservoirs. So there's a lot of CapEx that has to be put to work to just maintain production, let alone increase it.

Speaker 2

So we're still very optimistic about our outlook in the Middle East overall.

Speaker 5

Great. Thanks again, Antonio. Appreciate it.

Speaker 2

Thank you, Rob.

Operator

And thank you. And one moment for our next question. And our next question comes from Matthew Powell from William Blair. Your line is now open.

Speaker 6

Hey, Matt. Hey, great. Hey, guys. Thanks for taking my question. Just wanted to first ask a follow-up in terms of the back half ramp for ACV.

Speaker 6

So if we exclude The deal, the renewal that got delayed, is the back half ramp still in line with your expectations from the previous quarter? Or did it get more back end loaded the impact of that renewal?

Speaker 2

Just slightly higher in the second half if you were to put that deal back into Q2. It's just a few percentages points higher at the second half, but nothing That material.

Speaker 6

Okay, great. And then on TGM, good to hear the commentary on that pipeline being up 500 over the past 12 months for term deals. What about in terms of implementation capacity there? I know that Building out the ecosystem has been a focus. Do you feel you have enough implementation capacity to implement those deals?

Speaker 2

Yes. Look, I think this is something that we remain very focused on. This is the reason why we continue to progress building the implementation services partner network that we talked about already 12 months, 18 months ago. But also equally, part of that demand is new we're generating in other regions of the world and we're setting up teams in those regions as well, including developing these partnerships. So we're confident in our ability to meet the demand, working closely and collaborating with these customers as these agreements get signed and implementation plans get defined.

Speaker 6

Great. Appreciate it guys.

Speaker 2

Yes. Thank you.

Operator

And our next question comes from Mark Schappel from Loop Capital Markets. Your line is now open.

Speaker 7

Hi, Marty. Hi, guys. Thanks for taking my question here. Anthony, I was wondering if you could just provide some additional details around that Slipped renewal contract in terms of say industry or geography? And also too, I mean, what's giving you confidence that that slip renewal will close in Q3?

Speaker 2

Yes. Well, so, Maher, just for reasons of confidentiality And considering that our friendly competitors may always be listening, we won't talk about geography, what Technologies or products, this is about, as we said, it's about it's a renewal that got delayed. It's about 5 point $4,000,000 in value. We expect that it will close in Q3. We have a very detailed sequence of events and we are about quarters through that sequence of event already.

Speaker 2

So we expect that transaction to close in Q3.

Speaker 7

Okay, that's fair. Thanks. And then regarding your joint commercial agreement with Emerson, is there an immediate Or maybe a near term industry focus around that agreement. So for example, you did a Pulp and Paper joint deal with them last quarter. It looks a nice pharma deal this quarter.

Speaker 7

It appears that the commercial agreement is focused more on process manufacturing industries outside of the core oil and gas business. I was wondering if you could just comment on that?

Speaker 2

Yes. Look, I think in the 1st 12 months of the commercial agreement, Mostly fiscal 2023. As we learned about each other, it became clear that Focus was going to be very important in succeeding initially in the partnership. So we have we are targeting very specific areas of engagement, both areas like pharma, but also areas where Emerson has a lot of strength in their businesses, whether it is geographies, Whether it's types of projects that they pursue and other areas where Emerson has a very strong presence and also nontraditional industries for AspenTech. We've been very focused on that this fiscal year.

Speaker 2

Our efforts are very targeted in that regard. And we believe that this is paying off and will pay off more handsomely in the future as we ramp up those go to market activities.

Speaker 7

Great. Thank you. That's all for me.

Speaker 2

Thank you, Mark.

Operator

And thank you. And our next question comes from Jason Celino from KeyBanc Capital Markets. Your line is now open.

Speaker 8

Hi, Jason. Thanks. Yes. Hey, Antonio. Now that we've well, not we've, but now that most of your customers have kind of set their budgets for the year, How are global CapEx rates looking for this year?

Speaker 8

And then how does that maybe compare to last year?

Speaker 2

Yes. Look, actually, we're very excited about what we're hearing and seeing. Oil and Gas CapEx More or less in line to last year or up depending on the customer segment or geography. And by that I mean probably 5% to 10%, but mostly in line with last year, which was healthy and good for our business. Refining customers equally, CapEx spending in line with what they've traditionally done and what they did last year.

Speaker 2

Chemicals is more of the same. So we don't expect a recovery in the spend OpEx spend by chemical customers In calendar 2024, the fact is that their sort of soft patch that they are going through will probably extend through the full calendar year. And then utilities, look, the utilities, more and more CapEx is being targeted at Global Electrification and in that utilities, but part of that CapEx in global electrification is going into renewables, whether it's solar and wind. But that renewable that electricity produced from renewables have to be put into or connected into the grid. And therefore, utilities then have to spend to upgrade their systems, deal with the complexity of more and more renewable energy, electricity into their networks.

Speaker 2

And this is one of the main drivers for them to have to spend to upgrade their systems. We're very excited about what we're hearing from utilities. And look, It used to be a very sort of a steady state industry 30, 40 years ago. Today is an incredibly exciting industry. It's an industry that absolutely will have to rely on technology To deal with the complexity of the grid to maintain the grid imbalance and an operation, but also to cyber security and our conversations Not only about delivering our software to these customers, but also co innovating and accelerating co innovation Because part of the part of one of the challenges that if you talk to utilities customers is, They feel that there needs to be an acceleration of innovation for them to keep up with the complexity that they're having to manage.

Speaker 2

So we're very excited about this. Over the last 12 months, 18 months and especially the last 6 months of last calendar year, I travel to meet utility customers around the world. Not only am I excited about what I just mentioned, But also about the role that now new AspenTech with the DGM suite plays around global electrification and global infrastructure, AspenTech and the Monarch SCADA system in the DGM suite is responsible not only for managing, but keeping The electrical grid imbalance for the entire country of India, for example, but also the entire country of Vietnam, That also for Southern California, the lights in Southern California are kept on through the use of our Also, technology and systems, 40% of utilities in the United States are using now the DGM products and solutions and AspenTech is key to them, but also we've made great progress moving into Europe. And now we're going to be basically the foundation technology for multiple countries in Europe and certainly In the Netherlands, tenant, that's a well known installation that's been going on for 2, 3 years now. But we've also won business in 2 or 3 other countries where our technology is going to be the base technology to run the grid in those countries.

Speaker 2

And I will mention them because just recently signed agreements, but equally our expansion into Latin America, we run the largest Transmission network in Latin America, using our technology, the entire gas distribution network in Spain is run using The Monarch's KITA system in the DGM suite. So and look, every time we win a deal, we're displacing the competition. We're displacing industrials that have been in the market for many years, but now their solutions having kept up with the needs of the industry and this is then where OSI and now AspenTech are stepping into the bridge and being very successful. So we're very excited about what we're seeing with GGM. I think this is a game changing suite for us.

Speaker 2

And as I said, it's not only the volume, but also the size of deals. And I think that's part of what gives us confidence about the success we're going to have in Q3 and Q4.

Speaker 8

Okay, awesome. Good stuff on DGM. Maybe to follow-up on Matt's earlier question. Apologies, but if we strip out that chemicals deal slipping And you think about the pipeline moving a little bit more back half weighted, what area moved back? If it was a specific vertical or was it chemicals?

Speaker 8

Curious on how you would kind of characterize it.

Speaker 2

Look, I don't want to confirm or deny that deal that slipped is a chemical deal. We haven't mentioned or said anything about What vertical it is in, but putting that aside, look, as we said, certainly the MSC suite, What we'll say is that deal certainly is a transaction that is all MSC software. So that impacted the performance of the MSC suite in the first half of the year. Chemicals was a little flat. So we do expect a stronger performance for MSC in the second half of the year.

Speaker 2

APM has continued to behave in the same manner that it has now for a couple of years. But we're also excited about the over performance in engineering because we do think that we'll be able to make up, if necessary for any shortfall that we may see around MSC or APM. But our goal is to get certainly the MSC suite to plan and if possible also APM. And look, what we're seeing with DGM and SSC is also exciting. So overall, we were confident there's work to do here.

Speaker 2

We're going to Execute and we have 2 quarters to do at least 11.5%.

Speaker 8

Okay, great. Thank you. I'll get back in queue.

Operator

And our next question comes from Naso Nang from Berenberg. Your line is now open. Hi, everyone. Thank you for taking my question. I actually have 2 parts, if I may.

Operator

Just on the development

Speaker 2

You're breaking up. You're not coming through. Operator, I think we lost Nathan.

Operator

One moment please. And our next question comes from Arsenji Mattek from Wolfe Research. Your line is now open.

Speaker 2

Hi,

Speaker 9

Anthony. Hi, Antonio. How are you? This is Arsenio on for Josh. Thanks for taking my question.

Speaker 9

So Seeing that this delayed renewal impacted about $5,400,000 of ACV in the quarter, what gives you more confidence in the visibility to ramp in the second half? Was this idiosyncratic to the company up for renewal? Or could this maybe show more weakness in their respective end market than was initially expected for the second half of twenty twenty four? Then I have a brief follow-up on DGM. Thanks.

Speaker 2

No, Luca, Senio, the specifics around this deal that didn't renew Have nothing to do with macro environment or demand. It's just some internal issues and administrative issues With this customer, we thought the deal was going to get renewed and it didn't. So it will happen now in Q3. So nothing to do with demand at all. Look, what gives us confidence, we've said it, the pipeline, The strength that we're seeing in DGM, SSC, Engineering, a bigger sales organization that is now in place to convert that pipeline.

Speaker 2

So overall, those are the factors that we think will get us there.

Speaker 9

Got it. Thanks for that. And then given the traction you're seeing in DGM, is the 2.5 percentage point Starting point for the contribution ACV that you expected for growth, conservative, can that be a stronger contribution to growth? And then just very briefly on the renewal impact, was the specific impact to free cash flow in the quarter from the renewal? Thank you.

Speaker 2

Yes. Let me first address The question on DGM and then I'll have Chris talk about that impact, but if any. Look, 2.5 points is the goal. 2.5 points of growth contribution is the goal for DGM. Hopefully, we'll exceed it, We'll keep that as a goal for the moment.

Speaker 2

The pipeline looks solid, but let's see where

Speaker 1

we get to at the end of Q4.

Speaker 3

Yes. And then as it relates to free cash flow, there was an impact as it related to that renewal being pushed out. It was the ACV amount that quoted of about $5,400,000 We do expect that, like Antonio said, the deal will close in the Q3 and that we'd collect that in the second half of the year. Thank you.

Operator

And thank you. And our next question comes from Clark Jefferies from Piper Sandler. Your line is now open.

Speaker 5

Hello. Thank you for taking the question. Antonio, it sounds like The growth in the pipeline is broad based, but I wanted to specifically ask around the sales capacity expansion and the sales capacity that seems to be coming online in the second half. Can you remind us is that broad based across the business, is that weighted to DGM? Is that really the primary driver even in first half in terms of the pipeline growth?

Speaker 5

And any assumptions around close rates based off of that expansion of capacity coming on in the second half? Trying to understand if this is a particular product category or all rounds of business getting a capacity increase? Thank

Speaker 2

you. Yes. Look, as you would expect, certainly A significant portion of the sales investment went into DGM, expansion of the sales organization in DGM in to medium sales team, because we're seeing accelerated growth in that team. So that team also benefited from an important expansion in the headcount. That team is pursuing mostly engineering business that comes through consulting engineering consulting companies or companies that are First customers of Aspen first time customers of AspenTech, this is the team that has obtained Companies like Tesla, Meta, Google to be customers of AspenTech.

Speaker 2

So It's a very active team and a team that is grown materially for us over the last 2, 3 years. But also we added a specialty solution consultants in our heritage adjustment team As we focus also on driving more enterprise type deals with our customers in that area, considering the critical mass of business that we already have with some of these customers. We believe there's an opportunity there for us to do more with those customers. And a little bit of as we reorganize SSE into our head sales organization, we've also made a little bit of investments in to the SSE team as well.

Speaker 5

Perfect. And just one follow-up on that. You mean at this point, I mean imagine there's A lag between the hiring and the actual capacity, the reps being ready. But are you at the point where you're still On the upswing in terms of hiring ambitions or growing headcount or is this all about maturity of kind of previously hired individuals? Trying to understand if there's further ramps coming even beyond fiscal 2024?

Speaker 2

Yes. Well, I mean, look, we're pretty much done with expansion in fiscal 2024, this investment cycle started in Q4 of fiscal 2020 3, so last April, 9 months ago, we're done. Most of the sales headcount is in place. It's been in place for a number of months. So this is why we expect to see we're seeing the benefit on the pipeline and we expect to see the benefit on the conversion.

Speaker 2

Now having said that, now for fiscal 2025 coming up, we'll look at what investments we need to make around expanding the DGM sales organization into other parts of the world and what other sort of tweak investments we have to make in other parts of the sales organization, but this was an important ramp up in headcount And now we also want to see that additional headcount increase our productivity. So good investment, a little bit more investment in fiscal 2025 around DGM and a few other areas. And look, now that I talked about pipeline and conversion, there was a question just before about the conversion rate for our pipeline. Look, we track certainly the conversion rate for our pipeline quarter to quarter year to year. We expect The historical range of conversion that we've seen in order to deliver our goals is what we need to have in Q3, Q4 to achieve at least 11.5%.

Speaker 2

So we do the team does a good job of tracking the performance against historical and as a fore bearer of what's going to come.

Speaker 5

Really appreciate the color. Thank you very much.

Operator

And I'm showing no further questions. I would now like to turn the call back over CEO, Antonio Petri. [SPEAKER ANTONIO PETRIEN DE MONTESSUS:]

Speaker 2

Thank you, operator, and thank you everyone for joining the call today. Over the coming months, we will attend 2 investor conferences. In February, we're going to attend the Wolf Investor Conference and in March, We will attend the KeyBanc Emerging Technology Summit. So please reach out to our Investor Relations team for more information on these two events And we look forward to catching up with many of you soon. Thank you everyone for joining and we will see you on the road.

Speaker 2

Thank you.

Operator

This concludes today's conference call. Thank you

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Key Takeaways

  • In Q2 AspenTech delivered ACV of $914 million, up 9.6% year-over-year, and generated $29 million in free cash flow, though ACV growth was reduced by ~0.6 points due to a large renewal that slipped into Q3.
  • The company’s overall term software pipeline continues to expand—led by a 500% year-over-year increase in Digital Grid Management (DGM) opportunities and growing momentum in Subsurface Science & Engineering (SSE) tokenized suites—with conversion expected to accelerate in H2.
  • With the launch of its V14 software update and Aspen 1 enhancements, AspenTech introduced new AI-driven and sustainability models (over 140 now available), earning positive customer feedback and fueling new wins.
  • Demand across end markets remained robust: DGM is capitalizing on the global grid-upgrade cycle, SSE is benefiting from upstream and carbon-capture CapEx, and the Engineering suite saw its strongest growth in years, while Manufacturing & Supply Chain (MSC) expects a H2 rebound after a soft chemicals segment.
  • AspenTech reaffirmed its full-year target of at least 11.5% ACV growth and increased its non-GAAP EPS range by $0.02 to account for share repurchases, citing a strong pipeline, expanded sales capacity, and product-suite tailwinds as drivers for a H2 ramp.
A.I. generated. May contain errors.
Earnings Conference Call
Aspen Technology Q2 2024
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